<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997
REGISTRATION NO. 333-36069
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-11/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
APEX MORTGAGE CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
---------------
865 SOUTH FIGUEROA STREET, SUITE 1800, LOS ANGELES, CALIFORNIA 90017; (213)
244-0440
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
PHILIP A. BARACH
CHIEF EXECUTIVE OFFICER
APEX MORTGAGE CAPITAL, INC.
865 SOUTH FIGUEROA STREET, SUITE 1800
LOS ANGELES, CALIFORNIA 90017
(213) 244-0000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
PETER T. HEALY, ESQ. KENNETH T. COTE, ESQ.
O'MELVENY & MYERS LLP JONATHAN B. MILLER, ESQ.
EMBARCADERO CENTER WEST BROWN & WOOD LLP
275 BATTERY STREET, SUITE 2600 ONE WORLD TRADE CENTER
SAN FRANCISCO, CALIFORNIA 94111 NEW YORK, NEW YORK 10048
TELEPHONE: (415) 984-8833 TELEPHONE: (212) 839-5300
FACSIMILE: (415) 984-8701 FACSIMILE: (212) 839-5599
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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, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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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, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
The Registration Statement contains two forms of prospectus, one to be used
in connection with a United States underwritten offering (the "U.S.
Prospectus"), and one to be used in connection with a concurrent international
underwritten offering (the "International Prospectus" and, together with the
U.S. Prospectus, the "Prospectuses"). The Prospectuses will be identical in
all respects except for the front cover page, the section entitled
"Underwriting" and the outside back cover page.
The form of the U.S. Prospectus is included herein and the form of the front
cover page, "Underwriting" section and outside back of the International
Prospectus are included following the back cover page of the U.S. Prospectus
as pages X-1 through X-6.
1
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 21, 1997
PROSPECTUS
10,000,000 SHARES
APEX MORTGAGE CAPITAL, INC.
COMMON STOCK
-----------
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Apex Mortgage Capital, Inc. (the "Company"). Of the 10,000,000
shares of Common Stock offered hereby, 8,000,000 shares of Common Stock are
being offered initially in the United States by the U.S. Underwriters (the
"U.S. Offering") and the remaining 2,000,000 shares of Common Stock are being
offered concurrently by the International Managers initially outside of the
United States (the "International Offering" and, collectively, the "Offering").
The initial public offering price and the underwriting discount per share are
identical for each Offering. At the request of the Company, the U.S.
Underwriters have reserved an aggregate of up to 500,000 shares of Common Stock
for sale at the initial public offering price to directors, officers and
employees of the Company, The TCW Group, Inc. and its affiliates. Prior to the
Offering, there has been no public market for the Common Stock. It is currently
estimated that the initial public offering price for the Common Stock will be
between $14.00 and $16.00 per share. See "Underwriting" for information
relating to the determination of the initial public offering price. The Common
Stock has been approved for listing, subject to official notice of issuance, on
the New York Stock Exchange under the symbol "AXM."
LOGO
-----------
SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE
RISKS INCLUDE:
. The lack of prior
experience in managing . The Manager may be
and operating a REIT entitled to a
could adversely affect significant termination
the Company's results fee which, if paid,
of operations. would materially
adversely affect the
cash available for
distribution to the
Company's stockholders.
. The Company does not
currently have any
borrowing arrangements
or commitments from any
lenders and may
therefore be unable to
implement its business
strategy.
. The Company is recently
formed and its current
assets consist of
$1,500 in cash.
. The Company's policies . Interest rate
and strategies may be fluctuations may
changed without the decrease net interest
consent of income from Mortgage
stockholders. Assets.
. The Company has no
identified Mortgage . The Company intends to
Assets to purchase and significantly leverage
may be unable to its Mortgage Assets,
acquire Mortgage Assets which may result in
on favorable terms. operating losses.
. Failure to maintain
REIT status would
substantially reduce
the amount of cash
available for
distribution to the
Company's stockholders.
-----------
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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............ $ $ $
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Total(3)............. $ $ $
</TABLE>
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(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 estimated expenses of $750,000, payable by the Company.
(3) The Company has granted to the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to 1,200,000 and 300,000 additional shares of Common Stock,
respectively, solely to cover over-allotments, if any. If such over-
allotment options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by the
Underwriters and subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about December , 1997.
-----------
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY
INCORPORATED
SUTRO & CO. INCORPORATED
-----------
The date of this Prospectus is , 1997.
<PAGE>
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing the purchase of shares of Common
Stock to cover syndicate short positions and the imposition of penalty bids.
For a description of these activities, see "Underwriting."
----------------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "INTEND,"
"CONTINUE," OR "BELIEVES" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON
OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS. SOME IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENTS INCLUDE CHANGES IN
INTEREST RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR LEGAL
CONDITIONS; DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF THE COMPANY
FROM THOSE ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED AND THE
EFFECTIVENESS OF THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE OF RISK WILL
BE INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS.
THE COMPANY HAS PROVIDED HYPOTHETICAL EXAMPLES OF THE MAGNITUDE OF THE
COMPENSATION PAYABLE TO THE MANAGER AND THE SIGNIFICANCE OF THE FEE PAYABLE TO
THE MANAGER UPON TERMINATION OR NON-RENEWAL OF THE MANAGEMENT AGREEMENT BY THE
COMPANY WITHOUT CAUSE. EXAMPLES RELATING TO COMPENSATION PAYABLE TO THE
MANAGER ARE SET FORTH ON PAGE 53 OF THIS PROSPECTUS. EXAMPLES RELATING TO THE
FEE PAYABLE TO THE MANAGER UPON TERMINATION OR NON-RENEWAL OF THE MANAGEMENT
AGREEMENT ARE SET FORTH ON PAGES 16 AND 51 OF THIS PROSPECTUS. THESE ARE
HYPOTHETICAL EXAMPLES ONLY AND ARE NOT PROJECTIONS. SUCH EXAMPLES ALSO
CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE BASED UPON CERTAIN ASSUMPTIONS.
ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE MATERIALLY DIFFERENT FROM
THOSE ASSUMED.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 4
The Company.............................................................. 4
Summary Risk Factors..................................................... 5
The Manager.............................................................. 8
Industry Trends.......................................................... 10
Business and Strategy.................................................... 11
Mortgage Assets.......................................................... 11
Management Policies and Programs......................................... 12
Asset Acquisition Policy................................................. 12
Capital and Leverage Policy.............................................. 12
Credit Risk Management Policy............................................ 13
Asset/Liability Management Policies...................................... 13
Interest Rate Risk Management Policy.................................... 13
Prepayment Risk Management Policy....................................... 14
Dividend Policy and Distributions........................................ 14
The Offering............................................................. 15
RISK FACTORS.............................................................. 16
Lack of Prior Experience................................................. 16
No Current Borrowing Arrangements........................................ 16
Control by the Company's Board of Directors of the Company's Operating
Policies and Investment Strategies...................................... 17
No Current Mortgage Assets............................................... 17
Possible Significant Termination Fee Payable to the Manager.............. 17
Nominal Capitalization................................................... 18
Interest Rate Fluctuations May Decrease Net Interest Income.............. 18
Failure to Successfully Manage Interest Rate Risk May Adversely Affect
Results of Operations................................................... 18
Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings.............................................. 19
Failure to Maintain REIT Status Would Result in the Company Being Subject
to Tax as a Regular Corporation and Substantially Reduce Cash Available
for Distribution to Stockholders........................................ 20
Increased Levels of Prepayments from Mortgage Assets May Adversely Affect
Net Interest Income..................................................... 21
Dependence on the Manager and Its Personnel for Successful Operations.... 21
Conflicts of Interest Between the Company and the Manager and Its
Affiliates.............................................................. 21
Investment in Short-Term Investments Pending Acquisition of Mortgage
Assets May Initially Adversely Affect Results of Operations............. 22
Failure to Maintain An Exemption from the Investment Company Act Would
Adversely Affect Results of Operations.................................. 22
Absence of Public Market and No Assurance That a Public Market Will
Develop................................................................. 23
Interest Rate Fluctuations May Adversely Affect the Market Price of the
Common Stock............................................................ 23
Value of Mortgage Assets May Be Adversely Affected by Defaults on
Underlying Mortgage Obligations......................................... 23
Active Formation and Operation of Competing Mortgage REITs May Adversely
Affect the Market Price of the Common Stock............................. 23
Adverse Tax Treatment of Excess Inclusion Income......................... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Value of Mortgage Loans May Be Adversely Affected by Characteristics of
Underlying Property and Borrower Credit................................. 24
Effect of Future Offerings of Debt and Equity on Market Price of the
Common Stock............................................................ 25
Restrictions on Ownership of the Common Stock............................ 25
USE OF PROCEEDS........................................................... 27
DIVIDEND AND DISTRIBUTION POLICY.......................................... 27
CAPITALIZATION............................................................ 28
LIQUIDITY AND CAPITAL RESOURCES........................................... 28
BUSINESS AND STRATEGY..................................................... 29
General.................................................................. 29
Strategy................................................................. 29
Competition for Mortgage Assets.......................................... 31
Description of Mortgage Assets........................................... 32
Management Policies and Programs......................................... 38
Asset Acquisition Policy................................................. 38
Capital and Leverage Policy.............................................. 38
Credit Risk Management Policy............................................ 41
Asset/Liability Management Policies...................................... 42
Interest Rate Risk Management Policy.................................... 42
Prepayment Risk Management Policy....................................... 43
Mortgage Loan Securitization Techniques.................................. 43
Other Policies........................................................... 44
Future Revisions in Policies and Strategies.............................. 44
Legal Proceedings........................................................ 44
MANAGEMENT OF THE COMPANY................................................. 45
Directors and Executive Officers ........................................ 45
Executive Compensation................................................... 48
Stock Options............................................................ 48
Stock Options Outstanding................................................ 49
THE MANAGER............................................................... 50
The Management Agreement................................................. 52
Manager Compensation..................................................... 54
Expenses................................................................. 55
Certain Relationships; Conflicts of Interest............................. 57
Limits of Responsibility................................................. 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 59
FEDERAL INCOME TAX CONSEQUENCES........................................... 60
ERISA CONSIDERATIONS...................................................... 69
DESCRIPTION OF CAPITAL STOCK.............................................. 69
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS................................................................... 72
UNDERWRITING.............................................................. 75
LEGAL MATTERS............................................................. 78
EXPERTS................................................................... 78
ADDITIONAL INFORMATION.................................................... 78
GLOSSARY.................................................................. 79
AUDITORS' REPORT.......................................................... F-1
BALANCE SHEET............................................................. F-2
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with and is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus. Certain capitalized and other terms used herein shall have the
meanings assigned to them in the Glossary beginning on page 79. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment options are not exercised.
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 the
information set forth under the heading "Risk Factors" and within the
Prospectus generally.
THE COMPANY
Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was
formed on September 15, 1997, primarily to acquire United States agency and
other highly rated, adjustable-rate, single-family real estate mortgage
securities and mortgage loans. The Company intends to structure its portfolio
to maintain a minimum weighted average rating (including deemed comparable
ratings for unrated mortgage assets based on a comparison to rated mortgage
assets with like characteristics) of at least AA or Aa by Standard & Poor's
Ratings Services ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's"), respectively (collectively, the "Rating Agencies"). The Company
will use its equity capital and borrowed funds to seek to generate income based
on the difference between the yield on its mortgage assets and the cost of its
borrowings. The Company will elect to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). The Company will not generally be subject to federal taxes on its
income to the extent that it distributes its net income to its stockholders and
maintains its qualification as a REIT. See "Federal Income Tax Consequences--
Requirements for Qualification as a REIT--Distribution Requirement."
The goal of the Company is to be an efficient investor in mortgage assets.
The Company anticipates that it will acquire mortgage assets primarily in the
secondary mortgage market through the operational experience and market
relationships of TCW Investment Management Company (the "Manager") and its
Affiliates. See "Business and Strategy--Management Policies and Programs--Asset
Acquisition Policy" and "The Manager."
The day-to-day operations of the Company will be managed by the Manager
subject to the direction and oversight of the Company's Board of Directors, a
majority of whom will be unaffiliated with The TCW Group, Inc. ("TCW" and,
together with its subsidiaries and Affiliates, the "TCW Group") or the Manager.
The Manager is a wholly-owned subsidiary of TCW. The Manager was established in
1992 and the TCW Group began operations in 1971 through one of its affiliates.
The Company's investment management team will be selected members of the TCW
Group's Mortgage-Backed Securities Group (the "MBS Group"), all of whom have
over ten years of experience in raising and managing mortgage capital. See
"Management of the Company--Directors and Executive Officers" and "The
Manager." The Company has elected to be externally managed by the Manager,
which has not previously managed a REIT, to take advantage of the existing
operational systems, expertise and economies of scale associated with the
Manager's current business operations. In addition, the TCW Group, which is the
existing stockholder of the Company, currently owns the Manager and will
benefit from any management fees payable to the Manager. There can be no
assurance that the past experience of the executive officers of the Company and
the Manager will be appropriate to the business of the Company. Further, the
experience of the Manager and the TCW Group should not be viewed as a reliable
gauge of the potential success of the Company. See "Risk Factors--Lack of Prior
Experience." The Company has no ownership interest in the Manager.
The Company's mortgage assets will consist primarily of adjustable-rate
mortgage securities ("Mortgage Securities"), including adjustable-rate
collateralized mortgage obligations ("CMOs"), bearing interest rates that
adjust periodically based on changes in short-term market interest rates.
However, fixed-rate mortgage assets may also be acquired generally in
combination with hedging instruments, including interest rate derivative
instruments, to obtain investment characteristics similar to adjustable-rate
Mortgage Securities. The Company
4
<PAGE>
generally intends to hold its mortgage assets to maturity. In addition, the
Company may from time to time, depending on market conditions, acquire whole
loans ("Mortgage Loans") from mortgage conduits and mortgage loan originators,
which the Company may use as collateral to create its own Mortgage Securities.
Pending full investment in the desired mix of Mortgage Securities and Mortgage
Loans, funds will be committed to certain short-term investments ("Short-Term
Investments" and, together with Mortgage Securities and Mortgage Loans,
"Mortgage Assets").
The Company will finance the purchase of its Mortgage Assets with the net
proceeds of the Offering and short-term borrowings (primarily reverse
repurchase agreements) of up to 92% of total Mortgage Assets. The Company will
attempt to structure its borrowings to have interest rate indices and interest
rate adjustment periods that generally correspond (in the aggregate for the
entire portfolio, and not on an asset-by-asset basis) to the interest rate
adjustment indices and interest rate adjustment periods of its Mortgage Assets.
In general, the Company intends to hedge the lifetime cap risk associated
with its adjustable-rate Mortgage Assets. The Company's policy initially will
be to seek to limit the effective interest rate on substantially all of its
liabilities to a rate equal to the weighted average lifetime cap of its
adjustable-rate Mortgage Assets. Under current market conditions, the Company
does not intend to enter into transactions to hedge its periodic cap risk. The
Company currently intends to manage the periodic cap risk through its leverage
and asset/liability policies. This may negatively impact earnings during
periods of rapidly rising short-term interest rates. However, the Company
believes this is the most cost-efficient hedging strategy in the current market
environment. See "Risk Factors--Interest Rate Fluctuations May Decrease Net
Interest Income."
SUMMARY RISK FACTORS
Each prospective purchaser of the Common Stock offered hereby should review
"Risk Factors" beginning on page 16 for a discussion of material risks that
should be considered before investing in the Common Stock, including the
following:
. Lack of Prior Experience. The lack of prior experience of the Company
and the Manager in managing and operating a REIT could adversely affect
the Company's business, financial condition and results of operations.
. No Current Borrowing Arrangements. The Company does not currently have
any borrowing arrangements or commitments from any lenders. If the
Company does not obtain financing arrangements on terms and conditions
satisfactory to the Company, the Company will not have access to
sufficient capital to finance the Company's business strategy as
described herein.
. Control by the Company's Board of Directors of the Company's Operating
Policies and Investment Strategies. The Company's investment, financing
and operating policies and strategies will be determined by the
Company's Board of Directors and may be changed at any time without the
consent or approval of the Company's stockholders. Such changes may
adversely affect the Company's results of operations.
. No Current Mortgage Assets. The Company has not identified any Mortgage
Assets to purchase with the net proceeds of the Offering. The Company's
Net Income will depend on the Manager's ability to acquire Mortgage
Assets on acceptable terms and at favorable spreads over the Company's
borrowing costs. If the Manager is unable to acquire Mortgage Assets on
favorable terms and conditions, the Company's results of operations will
be adversely affected.
. Possible Significant Termination Fee Payable to the Manager. The Manager
may be entitled to a significant termination fee if the Company does not
renew, or elects to terminate, the Management Agreement which, if paid,
would materially adversely affect the cash available for distribution to
the Company's stockholders and may result in material net operating
losses for the period. See "The Manager--Management Agreement."
5
<PAGE>
. Nominal Capitalization. The Company is recently formed and currently has
only nominal capitalization, consisting of $1,500 in cash. Consequently,
the Company's operations are dependent on the net proceeds of the
Offering and borrowings in order to commence its business operations.
See "Capitalization."
. Interest Rate Fluctuations May Decrease Net Interest Income. The
Company's operations will be affected substantially 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 and the Manager. To the extent the Company's cost of borrowings
rise more rapidly than the yields on its Mortgage Assets funded by such
borrowings, the Company's net interest income may be reduced or a net
loss may result.
. Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings. The Company intends to increase the size of
its Mortgage Asset portfolio by employing a leveraging strategy of
borrowing up to 92% against its total Mortgage Asset portfolio to
finance the acquisition of additional Mortgage Assets. The Company will
experience negative cash flow and incur losses if borrowing costs exceed
the income on its Mortgage Assets.
. Failure to Maintain REIT Status Would Result in Company Being Subject to
Tax as a Regular Corporation. The Company must at all times maintain
substantially all of its investments in, and otherwise conduct its
business in a manner consistent with, the REIT Provisions of the Code.
If the Company fails to qualify as a REIT, it would be treated as a
regular corporation and would be subject to income tax that would result
in a substantial reduction of cash available for distribution to
stockholders of the Company.
. Litigation. A mortgage company with a similar name recently sent a
demand to the Company requesting that the Company not operate under the
name "Apex Mortgage Capital." Such demand threatened litigation if the
Company did not change its name. If any litigation is commenced, the
Company may be required to change its name and thereby incur expenses,
may be required to pay damages or may incur substantial litigation costs
even if the Company is successful. As a result of such threatened
litigation, the Company's results of operations may be adversely
affected.
. Failure to Successfully Manage Interest Rate Risks May Adversely Affect
Results of Operations. Developing an objective interest rate risk
strategy is complex and no strategy can completely insulate the Company
from risks associated with interest rate changes. Hedging strategies
involve risk and may not be successful in reducing the Company's
exposure to changing interest rates.
. Increased Levels of Prepayments from Mortgage Assets May Adversely
Affect Net Interest Income. In the event that the Company's Mortgage
Assets are prepaid prior to maturity, the Company may (i) have held the
Mortgage Assets while it was less profitable and lost the opportunity to
receive interest at the fully-indexed rate, (ii) need to write-off
capitalized premium amounts, and (iii) be unable to acquire new Mortgage
Assets to replace the prepaid Mortgage Assets. Mortgage prepayment rates
vary depending on market interest rates. Changes in prepayments could
cause declines in the Company's Net Income.
. Dependence on the Manager and Its Personnel for Successful
Operations. The Company will be dependent on the Manager, and its
operations will depend initially entirely upon the contributions of
Philip Barach, Jeffrey Gundlach, Daniel Osborne, Joseph Galligan and
other key personnel of the Manager. The loss of any key person could
have a material adverse effect on the Company's business.
. Conflicts of Interest Between the Company and the Manager and Its
Affiliates. Affiliates of the Manager invest and will continue to invest
in Mortgage Securities on behalf of their clients. As a
6
<PAGE>
consequence, there may be a conflict of interest between the operations
of the Manager and the operations of its Affiliates in the acquisition
and disposition of Mortgage Securities. Such conflicts may result in
decisions and/or allocations of Mortgage Securities by Affiliates of the
Manager that are not in the best interests of the Company. In addition,
the Manager may advise other mortgage-related entities unaffiliated with
the Company.
. Initial Investment in Short-Term Investments. Following the closing of
the Offering, the Company will initially invest a substantial portion of
the net proceeds from the Offering in Short-Term Investments pending
acquisition of other Mortgage Assets. The Company's results of
operations initially may be adversely affected pending purchase of
Mortgage Securities and Mortgage Loans and implementation of its Capital
and Leverage Policy. The Company anticipates that it may take up to 15
months to fully implement its leveraging strategy.
7
<PAGE>
THE MANAGER
The Manager will be responsible for the day-to-day operations of the Company
and will perform such services and activities relating to the Mortgage Assets
and operations of the Company as may be appropriate. At all times, the Manager
will be subject to the direction and oversight of the Company's Board of
Directors and will have only such functions and authority as the Company may
delegate to it. The Manager will be primarily involved in two activities: (i)
asset/liability management--acquisition, financing, hedging, management and
disposition of Mortgage Assets, including credit and prepayment risk
management; and (ii) capital management--structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the Manager
will formulate operating strategies for the Company, arrange for the
acquisition of Mortgage Assets by the Company, arrange for various types of
financing for the Company, monitor the performance of the Company's Mortgage
Assets and provide certain administrative and managerial services in connection
with the operation of the Company. The Manager will be required to manage the
business affairs of the Company in conformity with the policies that are
approved and monitored by the Company's Board of Directors. The Manager will be
required to prepare regular reports for the Company's Board of Directors, which
will review the Company's acquisitions of Mortgage Assets, portfolio
composition and characteristics, credit quality, performance and compliance
with policies previously approved by the Company's Board of Directors. See "The
Manager--The Management Agreement" and "Business and Strategy--Management
Policies and Programs."
The Manager has not previously managed a REIT. In particular, the Manager has
not previously managed a highly-leveraged pool of Mortgage Assets nor does the
Manager have experience in complying with the asset limitations imposed by the
REIT Provisions of the Code. Although management of the Company and the Manager
have experience in managing mortgage capital, there can be no assurance that
the past experience of the executive officers of the Company and the Manager
will be appropriate to the business of the Company. Further, the experience of
the Manager and the TCW Group should not be viewed as a reliable gauge of the
potential success of the Company. See "Risk Factors--Lack of Prior Experience."
Pursuant to a management agreement (the "Management Agreement") between the
Company and the Manager, the Company will pay the Manager annual base
management compensation based on Average Net Invested Capital, payable monthly
in arrears, equal to 3/4 of 1% of the Average Net Invested Capital of the
Company. "Average Net Invested Capital" means for any period (i) the arithmetic
average of the sum of the gross proceeds of the offerings of its equity
securities by the Company, after deducting any underwriting discounts and
commissions and other expenses and costs relating to such offerings, plus the
Company's retained earnings (taking into account any losses incurred) and any
non-cash charges or reserves, including depreciation, mark-to-market
adjustments and unrealized credit loss, computed by taking the average of such
values at the end of each month during such period, plus (ii) any unsecured
debt approved by the Unaffiliated Directors (defined as directors who are not
affiliated with, employed by, or officers or directors of the Manager or the
TCW Group or employed by or officers of the Company) to be included in Average
Net Invested Capital. Accordingly, incurring collateralized debt to finance
specific investment purchases does not increase Average Net Invested Capital.
The Company will also pay the Manager, as incentive compensation for each
fiscal quarter, an amount equal to 30% of the Net Income of the Company, before
incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate (average
of weekly average yield to maturity for U.S. Treasury securities (adjusted to a
constant maturity of 10 years), as published weekly by the Federal Reserve
Board during a quarter) plus 1%. A deduction for the Company's interest
expenses for borrowed funds is taken into account in calculating Net Income.
"Return on Equity" is computed for any quarter by dividing the Company's Net
Income for the quarter by its Average Net Worth for the quarter and has no
necessary correlation with the actual distributions received by stockholders or
with an individual investor's actual return on investment. The incentive
compensation calculation and payment to the Manager will be made quarterly in
arrears, and will be subject to an annual adjustment commencing in the second
full calendar year of the operations of the Company. See "The Manager--Manager
Compensation" for a more detailed explanation
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of the management compensation arrangements and the "Glossary" for definitions
of the terms "Average Net Worth," "Net Income" and "Return on Equity." The
Company believes that this compensation arrangement benefits stockholders
because it ties the Manager's compensation to Return on Equity and, in periods
of low earnings, the Manager's incentive compensation is reduced or eliminated,
thereby lowering the Company's operating expenses.
The Company will enter into the Management Agreement with the Manager at the
closing of the Offering for an initial term of two years. Thereafter, the
Management Agreement may be renewed for additional one-year terms at the
discretion of the Unaffiliated Directors, unless terminated by the Manager upon
written notice. Except in the case of a termination or non-renewal by the
Company for cause, upon termination or non-renewal of the Management Agreement
by the Company, the Company is obligated to pay the Manager a termination or
non-renewal fee equal to the fair market value of the Management Agreement
without regard to the Company's termination or non-renewal right as determined
by an independent appraisal. The selection of the independent appraiser shall
be subject to the approval of the Unaffiliated Directors. The payment of such a
termination or non-renewal fee by the Company would adversely affect the cash
available for distribution to the Company's stockholders and may have a
material adverse effect on the Company's operations. See "The Manager--The
Management Agreement" and "Risk Factors--Possible Significant Termination Fee
Payable to the Manager."
Prior to the Offering, the structure and relationships of the Company, the
Manager and their respective shareholders is as follows:
LOGO
(1) TCW Asset Management Company ("TAMCO") is the owner of the initial 100
shares of Common Stock of the Company currently outstanding. See "Security
Ownership of Certain Beneficial Owners and Management." Following the
completion of the Offering, TAMCO will continue to own only 100 shares of
Common Stock of the Company. The remaining 10,000,000 shares of Common
Stock will be acquired in the Offering.
(2) TAMCO is a direct subsidiary of The TCW Group, Inc.
(3) TCW Investment Management Company is a direct subsidiary of The TCW Group,
Inc.
(4) Upon the closing of the Offering, the Company will enter into a Management
Agreement with TCW Investment Management Company. See "The Manager--The
Management Agreement."
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<PAGE>
INDUSTRY TRENDS
The Company believes that there is a shift of investment capital and Mortgage
Assets out of traditional lending and savings institutions and into the
development and growth of new forms of mortgage banking and investment
companies, including those that qualify as REITs under the Code. The Company
believes that traditional mortgage investment companies, such as banks, thrifts
and insurance companies, provide less attractive investment structures for
investing in Mortgage Assets because of the costs associated with regulation
and corporate level taxation. Additionally, with the development of highly
competitive national mortgage markets (which the Company believes is partly due
to the expansion of government-sponsored enterprises such as Fannie Mae, FHLMC
and GNMA), local and regional mortgage originators have lost market share to
more efficient mortgage originators who compete nationally. The growth of the
secondary mortgage market, including new securitization techniques, has also
resulted in financing structures that can be utilized efficiently to fund
leveraged mortgage portfolios and better manage interest rate risk. As a REIT,
the Company can generally pass- through earnings to stockholders without
incurring an entity-level federal income tax, thereby potentially allowing the
Company to pay higher dividends than traditional financial institutions and
mortgage banking competitors that are subject to federal income tax on their
earnings. See "Federal Income Tax Consequences--Taxation of the Company."
The residential mortgage market has experienced considerable growth over the
past 15 years with total residential mortgage debt outstanding growing from
approximately $965 billion in 1980 to approximately $3.9 trillion in 1996,
according to the Mortgage Market Statistical Annual for 1997. In addition, the
total residential mortgage debt securitized into Mortgage Securities has grown
from approximately $110 billion in 1980 to approximately $1.9 trillion in 1996,
according to the same source. The Company believes that the current size of the
residential mortgage market will provide it with significant opportunities with
respect to the purchase of Mortgage Assets.
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BUSINESS AND STRATEGY
The Company's principal business objective is to produce net interest income
on its Mortgage Assets while maintaining a cost efficient organizational
structure in order to generate Net Income for distribution to its stockholders.
To achieve its business objective and generate dividend yields that provide a
competitive rate of return for stockholders, the Company's strategy is to:
. purchase primarily single-family Mortgage Assets, the majority of which
are currently expected to have adjustable interest rates based on
changes in short-term market interest rates;
. manage the credit risk of its Mortgage Assets through, among other
activities, (i) carefully selecting Mortgage Assets to be acquired, (ii)
complying with the Company's policies with respect to credit risk
concentration which, among other things, will require the Company to
maintain a Mortgage Asset portfolio with a weighted average rating
generally equivalent to AA (or a comparable rating) or better, (iii)
actively monitoring the ongoing credit quality and servicing of its
Mortgage Assets, and (iv) maintaining appropriate capital levels and
allowances for possible credit losses;
. finance purchases of Mortgage Assets with the net proceeds of equity
offerings and, to the extent permitted by the Company's Capital and
Leverage Policy, to utilize leverage to increase potential returns to
stockholders through borrowings (primarily reverse repurchase
agreements) with interest rates that will also reflect changes in short-
term market interest rates;
. seek to structure its borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate
hedged basis, generally correspond to the interest rate adjustment
indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets;
. utilize interest rate caps, swaps and similar financial instruments to
mitigate the risk of the cost of its variable-rate liabilities exceeding
the earnings on its Mortgage Assets during a period of rising interest
rates;
. seek to minimize prepayment risk primarily by structuring a diversified
portfolio with a variety of prepayment characteristics; and
. apply securitization techniques designed to enhance the value and
liquidity of the Company's Mortgage Assets acquired in the form of
Mortgage Loans by securitizing them into Mortgage Securities tailored to
the Company's investment objectives.
See "Business and Strategy--Management Policies and Programs" below for
further discussion of the Company's strategies. There can be no assurance that
the Company will successfully implement its strategies. See "Risk Factors" for
a discussion of factors that could adversely affect the Company's ability to
successfully implement its strategies.
MORTGAGE ASSETS
The Company will primarily acquire United States agency and other High
Quality adjustable-rate Mortgage Assets. "High Quality" shall mean either (i)
Mortgage Securities that are rated A or above by at least one of the Rating
Agencies or (ii) Mortgage Securities that are unrated, but are either
obligations of the United States or obligations guaranteed by the United States
government or an agency or instrumentality of the United States government. The
Company intends to acquire Mortgage Assets in the secondary mortgage market
through the operational experience and market relationships of the Manager and
its Affiliates.
The Mortgage Assets to be purchased by the Company will consist primarily of
Mortgage Securities and Mortgage Loans secured by single-family residential
real estate. The Company expects that primarily all of its Mortgage Assets will
bear interest at adjustable rates. However, fixed-rate Mortgage Assets may also
be acquired
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generally in combination with hedging instruments to obtain investment
characteristics similar to adjustable-rate Mortgage Assets. The Company
anticipates that a significant portion of the Mortgage Assets it acquires will
not be fully indexed (i.e., will bear interest at initial "teaser" rates).
The Company will generally not acquire Inverse Floaters, REMIC Residuals or
First Loss Subordinated Bonds. The Company may acquire mortgage derivative
securities, including, but not limited to, interest only, principal only or
other Mortgage Securities that receive a disproportionate share of interest
income, or principal, either as an independent stand-alone investment
opportunity or to assist in the management of prepayment and other risks
(collectively, "Mortgage Derivative Securities"), but only on a limited basis
due to the greater risk of loss associated with Mortgage Derivative Securities.
See "Risk Factors--Failure to Successfully Manage Interest Rate Risks May
Adversely Affect Results of Operations."
MANAGEMENT POLICIES AND PROGRAMS
ASSET ACQUISITION POLICY
The Company will only acquire Mortgage Assets that are consistent with its
balance sheet guidelines and risk management objectives. Since the intention of
the Company is generally to hold its Mortgage Assets until maturity, the
Company generally will not seek to acquire Mortgage Assets with investment
returns that are attractive only in a limited range of scenarios. The Company
believes that future interest rates and mortgage prepayment rates are very
difficult to predict. Therefore, the Company will seek to acquire Mortgage
Assets that it believes will provide competitive returns over a broad range of
interest rate and prepayment scenarios.
The Company will acquire Mortgage Assets that it believes will maximize
returns on capital invested, after considering (i) the amount and nature of the
anticipated cash flow from the Mortgage Assets, (ii) the Company's ability to
pledge Mortgage Assets to secure collateralized borrowings, (iii) the increase
in the Company's capital requirement determined by the Company's Capital and
Leverage Policy resulting from the purchase and financing of Mortgage Assets,
(iv) the costs of financing, hedging, managing, securitizing and reserving for
Mortgage Assets, and (v) the Company's credit risk management policy. Prior to
acquisition of a Mortgage Asset, potential returns on capital employed are
assessed over the life of the Mortgage Asset and in a variety of interest rate,
yield spread, financing cost, credit loss and prepayment scenarios.
CAPITAL AND LEVERAGE POLICY
The Company's goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the over-
utilization of leverage, which could reduce the Company's ability to meet its
obligations during periods of adverse market conditions. The Company has
established a Capital and Leverage Policy that limits its ability to acquire
additional Mortgage Assets during times when the capital base of the Company is
less than a required amount defined in the Capital and Leverage Policy. In this
way, the use of balance sheet leverage is better controlled. The capital base
required for the purpose of the Capital and Leverage Policy is equal to the
market value of the Company's total Mortgage Assets less the book value of
total collateralized borrowings. The actual capital base, as so defined,
represents the approximate liquidation value of the Company and approximates
the market value of the Mortgage Assets that can be pledged or sold to meet
over-collateralization requirements for the Company's borrowings. The unpledged
portion of the Company's actual capital base is available to be pledged or sold
as necessary to maintain over-collateralization levels for the Company's
borrowings. Under current market conditions, the Company will seek to maintain
a capital base of at least 10% of Mortgage Assets as an operating policy; if
the capital base falls below 8%, the Company will not acquire net additional
Mortgage Assets. In addition, in the event the Company's capital base falls
below 8%, the Manager will present a plan to the Company's Board of Directors
designed to bring the Company back to its target capital-to-assets ratio. It is
anticipated that in many circumstances this goal will be achieved over time
without active management through the natural process of mortgage principal
repayments and increases in the market values of Mortgage Assets as their
coupon rates adjust upwards to market levels.
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CREDIT RISK MANAGEMENT POLICY
The Company will review credit risk and other risks of loss associated with
each Mortgage Asset acquisition that is not guaranteed by Fannie Mae, FHLMC or
GNMA and determine the appropriate allocation of capital to apply to such
investment. In addition, the Company will attempt to diversify its Mortgage
Asset portfolio to avoid undue geographic, insurer and other types of
concentrations. The Company's Board of Directors will monitor the overall risk
of the Mortgage Asset portfolio and determine appropriate levels of provision
for loss.
The Company anticipates that at least 75% of its Mortgage Assets will be
comprised of High Quality adjustable-rate Mortgage Securities. In addition, the
Company anticipates further that at least 50% of its Mortgage Assets will be
invested in Mortgage Securities that are either rated AAA or have a comparable
rating by at least one of the Rating Agencies or are obligations of or are
guaranteed by the United States government or an agency or instrumentality
thereof. The Company anticipates that its investment in Mortgage Loans or other
Mortgage Securities that are not High Quality under the criteria set forth
above ("Other Mortgage Assets") will be limited to 25% of its Mortgage Assets.
However, the Company's investment in Other Mortgage Assets will be restricted
to Mortgage Assets that are unrated or whose ratings have not been updated, but
are determined by the Manager to be of comparable quality to a High Quality
Mortgage Security. This determination will be made on the basis of credit or
other enhancement features that meet the High Quality credit criteria as
determined by the Manager and approved by the Company's Board of Directors,
including approval by a majority of the Unaffiliated Directors. The Company
intends to structure its Mortgage Asset portfolio to maintain a minimum
weighted average rating (including the Manager's deemed comparable ratings for
unrated Mortgage Assets based on a comparison to rated Mortgage Securities with
like characteristics) of at least AA (or a comparable rating) by at least one
of the Rating Agencies. However, there can be no assurance that such structure
will be achieved. The Company will not be obligated to liquidate any Mortgage
Assets to achieve its desired weighted average rating.
Compliance with the credit risk management policy guidelines shall be
determined at the time of purchase of Mortgage Assets (based on the most recent
valuation utilized by the Company) and will not be affected by events
subsequent to such purchase, including, without limitation, changes in
characterization, value or rating of any specific Mortgage Assets or economic
conditions or events generally affecting any Mortgage Assets of the type held
by the Company.
ASSET/LIABILITY MANAGEMENT POLICIES
Interest Rate Risk Management Policy
To the extent consistent with its election to qualify as a REIT, the Company
will follow an interest rate risk management policy intended to mitigate the
negative effects of major interest rate changes. The Company intends to
minimize its interest rate risk from borrowings by attempting to match the
maturity of its borrowings to the interest rate adjustment periods on its
Mortgage Assets. Under normal market conditions, the Company will attempt to
keep the difference between the weighted average time to "reset" on its
Mortgage Assets to the weighted average time to reset on its borrowings to 90
days or less, taking into account all hedging transactions, although there can
be no assurance that the Company will be able to so limit such "reset" periods.
This interest rate risk management policy will be reviewed by the Company's
Board of Directors if the Company incurs long-term non-callable borrowings and
as market conditions change. In addition to "reset" periods, the Company also
intends to manage differences in interest rate indices between its Mortgage
Assets and borrowings. See "Risk Factors--Failure to Successfully Manage
Interest Rate Risks May Adversely Affect Results of Operations."
The Company's interest rate risk management policy is formulated with the
intent to offset the potential adverse effects resulting from rate adjustment
limitations on its Mortgage Assets and the differences between interest rate
adjustment indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets and
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related borrowings. The Company anticipates being able to adjust the average
maturity period of such borrowings on an ongoing basis by changing the mix of
maturities and interest rate adjustment periods as borrowings come due and are
renewed. Through use of these procedures, the Company will seek to minimize
differences between interest rate adjustment periods of adjustable-rate
Mortgage Assets and related borrowings that may occur.
In general, the Company intends to mitigate the lifetime cap risk associated
with its adjustable-rate Mortgage Assets. The policy will be to attempt to
limit the effective interest rate on substantially all of the Company's
liabilities as a whole to a rate equal to the weighted average lifetime cap of
its adjustable-rate Mortgage Assets. Under current market conditions, the
Company does not intend to enter into transactions to mitigate its periodic cap
risk. The Company intends to manage this risk through its leverage and
asset/liability policies.
In all of its interest rate risk management transactions, the Company will
follow certain procedures designed to limit credit exposure to Counter-parties,
including entering into contracts only with Counter-parties rated investment
grade by a nationally recognized rating service. See "Business and Strategy--
Management Policies and Programs--Asset/Liability Management Policies" and "--
Interest Rate Risk Management Policy." In addition, all hedging transactions
will be monitored for compliance with the REIT Provisions of the Code and other
applicable laws.
Prepayment Risk Management Policy
The Company's prepayment risk management policy is formulated with the
purpose of mitigating the potential adverse effects resulting from faster than
anticipated prepayment rates on its Mortgage Assets. The Company intends to
invest in Mortgage Assets that on a portfolio basis do not have significant
purchase price premiums. Under normal market conditions, the Company will seek
to keep the aggregate capitalized purchase premium of the Mortgage Assets
portfolio to 3% or less.
Although the Company believes that it has developed a cost-effective set of
asset/liability management policies to help mitigate interest rate and
prepayment risks, no strategy can completely insulate the Company from the
effects of interest rate changes, prepayments and defaults by Counter-parties.
Further, certain of the federal income tax requirements that the Company must
satisfy to qualify as a REIT limit its ability to fully hedge its interest rate
and prepayment risks. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Gross Income Tests."
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, the Company intends to make annual
distributions to its stockholders of at least 95% of Taxable Income (which does
not necessarily equal net income as calculated in accordance with generally
accepted accounting principals ("GAAP")), determined without regard to the
deduction for dividends paid and by excluding any net capital gains. Any
Taxable Income remaining after the distribution of regular quarterly dividends
will be distributed annually in a special dividend on or prior to the date of
the first regular quarterly dividend payment of the following taxable year. The
dividend policy is subject to revision at the discretion of the Company's Board
of Directors. 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 Directors and will depend on the taxable earnings of the Company, its
financial condition and such other factors as the Board of Directors deems
relevant. The Company's Board of Directors has not established a minimum
dividend level.
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THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered:
U.S. Offering.................... 8,000,000(1)
International Offering........... 2,000,000(1)
Total........................ 10,000,000(1)
Common Stock to be Outstanding After
the Offering....................... 10,000,100 shares(1)(2)
Purchase of the Company's initial
Use of Net Proceeds................. portfolio of Mortgage Assets(3)
Proposed NYSE Symbol................ "AXM"
</TABLE>
- --------
(1) Assumes that the Underwriters' options to purchase up to an additional
1,500,000 shares to cover over-allotments are not exercised. See
"Underwriting."
(2) Includes 100 shares of Common Stock issued to TCW Capital Investment
Corporation (and subsequently transferred to TAMCO) in connection with the
initial organization of the Company. Excludes 1,000,000 shares of Common
Stock reserved for issuance under the Company's 1997 Stock Option Plan.
Options to acquire 300,000 shares of Common Stock have been granted to the
executive officers of the Company and employees of the TCW Group and
options to acquire 100,000 shares of Common Stock have been granted to the
Unaffiliated Directors. See "Management of the Company--Stock Options."
(3) The Company may require up to six months to have the net proceeds of the
Offering fully invested in Mortgage Assets and up to an additional nine
months to fully implement the leveraging strategy to increase the Mortgage
Asset investments to its desired level. Pending full investment in the
desired mix of Mortgage Assets, funds will be committed to Short-Term
Investments that are expected to provide a lower net return than the
Company hopes to achieve from its intended primary Mortgage Asset
investments. See "Risk Factors--Investment in Short-Term Investments
Pending Acquisition of Mortgage Assets May Initially Adversely Affect
Results of Operations."
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RISK FACTORS
Before investing in the shares of Common Stock offered hereby, prospective
investors should give special consideration to the information set forth
below, in addition to the information set forth elsewhere in this Prospectus.
The following risk factors are interrelated and, consequently, investors
should treat such risk factors as a whole. This Prospectus may contain
forward-looking statements that may be identified by the use of forward-
looking terminology such as "may," "will," "should," "expect," "anticipate,"
"estimate," "intend," "continue," or "believes" or the negative thereof or
other variations thereon or comparable terminology. The matters set forth
under "Risk Factors" constitute cautionary statements identifying important
factors with respect to any forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.
An investment in the Company involves various risks, including the risk that
an investor can lose capital. There is no guarantee that the Company can
successfully implement its business strategy, reach its investment objectives
or achieve a positive return for stockholders. In addition to the information
set forth elsewhere in this Prospectus, the following risk factors should be
considered.
LACK OF PRIOR EXPERIENCE
Neither the Company nor the Manager have previously managed or operated a
REIT or other public company. In particular, the Manager has not previously
managed a highly-leveraged pool of Mortgage Assets nor does the Manager have
experience in complying with the asset limitations imposed by the REIT
Provisions of the Code. This lack of prior experience could adversely affect
the Company's business, financial conditions and results of operations. The
Company will commence substantive operations upon the closing of the Offering
and, accordingly, has not yet developed any financial or operating history or
experienced interest rate fluctuations or market conditions.
NO CURRENT BORROWING ARRANGEMENTS
The Company does not currently have any borrowing arrangements or
commitments from any lenders. If the Company does not obtain financing
arrangements, it will not have access to sufficient capital to finance its
business strategy.
The Company will rely on short-term borrowings to fund acquisitions of
Mortgage Assets. Accordingly, the ability of the Company to achieve its
investment objectives depends on its ability to borrow money in sufficient
amounts and on favorable terms and on its ability to renew or replace on a
continuous basis maturing short-term borrowings. In addition, the Company may
be dependent upon a few lenders to provide the primary credit facilities for
its Mortgage Asset purchases. Any failure to obtain or renew adequate funding
under these facilities or other financings on favorable terms could have a
material adverse effect on the Company's operations.
In the event the Company is not able to renew or replace maturing
borrowings, it could be required to sell Mortgage Assets under adverse market
conditions and could incur permanent capital losses as a result. In addition,
in such event, the Company may be required to terminate hedge positions, which
could result in further losses. Any 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 Assets in which the Company's Mortgage Asset
portfolio is concentrated will reduce the market value of the Mortgage Assets,
which would likely cause lenders to require additional collateral. A number of
such factors in combination may cause difficulties for the Company, including
a possible liquidation of a major portion of its Mortgage Assets at
disadvantageous prices with consequent losses, which would have a material
adverse effect on the Company and could render it insolvent.
Substantially all of the Company's Mortgage Assets can be expected to be
pledged to secure reverse repurchase agreements, bank borrowings or other
credit arrangements. Therefore, such Mortgage Assets may not
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be available to the stockholders in the event of the liquidation of the
Company, except to the extent that the market value thereof exceeds the
amounts due to the Company's creditors. The market value of the Mortgage
Assets will fluctuate as a result of numerous market factors (including
interest rates and prepayment rates) as well as the supply of and demand for
such Mortgage Assets. In the event of the bankruptcy of a counter-party with
whom the Company has a reverse repurchase agreement, the Company might
experience difficulty recovering its pledged Mortgage Assets, which may
adversely affect the Company's results of operations.
CONTROL BY THE COMPANY'S BOARD OF DIRECTORS OF THE COMPANY'S OPERATING
POLICIES AND INVESTMENT STRATEGIES
The Company has established the operating policies and strategies set forth
in this Prospectus as the operating policies and strategies of the Company.
However, these policies and strategies may be modified or waived by the Board
of Directors without the consent or approval of the Company's stockholders.
The ultimate effect of any such changes is uncertain. See "Business and
Strategy."
NO CURRENT MORTGAGE ASSETS
The Company has not identified any Mortgage Assets to purchase with the net
proceeds of the Offering. The Company's Net Income will depend on its ability
to acquire Mortgage Assets on acceptable terms and at favorable spreads over
the Company's borrowing costs. If the Company is unable to acquire Mortgage
Assets, its results of operations will be adversely affected.
In acquiring Mortgage Assets, the Company will compete with other REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, Fannie Mae, FHLMC,
GNMA and other entities purchasing Mortgage Assets, some of which have greater
financial resources than the Company. In addition, there are several 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.
Increased competition for the acquisition of eligible Mortgage Assets or a
diminution in the supply could result in higher prices and, thus, lower yields
on such Mortgage Assets that could further narrow the yield spread over
borrowing costs.
The availability of Mortgage Assets meeting the Company's criteria is
dependent upon, among other things, the size of and level of activity in the
residential real estate lending market, which depend on various factors,
including the level of interest rates, regional and national economic
conditions and inflation and deflation in residential real estate values. To
the extent the Company is unable to acquire a sufficient volume of Mortgage
Assets meeting its criteria, the Company's results of operations would be
adversely affected.
POSSIBLE SIGNIFICANT TERMINATION FEE AVAILABLE TO THE MANAGER
The Manager may be entitled to a significant termination fee if the Company
does not renew, or elects to terminate, the Management Agreement, which, if
paid, would materially adversely affect the cash available for distribution to
the Company's stockholders and may result in material net operating losses for
the period. Based on certain estimates and assumptions, the termination fee
may be as high as $28 million. See "The Manager--The Management Agreement."
Since the fair market value of the Management Agreement would be determined
by an independent appraiser at a future date based upon then applicable facts
and circumstances, no such termination or non-renewal fee can be estimated
with mathematical certainty. Any termination or non-renewal fee paid may be
materially greater than the hypothetical example set forth above and the
Company can provide no assurance at this time as to the amount of any such
fee. See "Risk Factors--Possible Significant Termination Fee Payable to the
Manager."
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NOMINAL CAPITALIZATION
The Company was recently organized and currently has only nominal
capitalization, currently equal to $1,500 in cash. Consequently, the Company's
operations are dependent on the net proceeds of the Offering in order to
commence its business operations. Because the Company is only nominally
capitalized, it will not be able to withstand a period of adverse earnings as
well as more established and better capitalized companies. See
"Capitalization."
INTEREST RATE FLUCTUATIONS MAY DECREASE NET INTEREST INCOME
Adjustable-rate Mortgage Assets are typically subject to periodic and
lifetime interest rate caps that limit the amount an adjustable-rate Mortgage
Asset's interest rate can change during any given period, as well as the
minimum rate payable. The Company's borrowings will not be subject to similar
restrictions. Hence, in a period of increasing interest rates, interest rates
on its borrowings could increase without limitation by caps, while the
interest rates on its Mortgage Assets could be so limited. This problem will
be magnified to the extent the Company acquires Mortgage Assets that are not
fully indexed. Further, some adjustable-rate Mortgage Assets may be subject to
periodic payment caps that result in some portion of the interest being
deferred and added to the principal outstanding. This could result in receipt
by the Company of less cash income on its adjustable-rate Mortgage Assets than
is required to pay interest on the related borrowings. These factors could
lower the Company's net interest income or cause a net loss during periods of
rising interest rates, which would negatively impact the Company's financial
condition, cash flows and results of operations.
The Company intends to fund a substantial portion of its acquisitions of
adjustable-rate Mortgage Assets with borrowings that have interest rates based
on indices and repricing terms similar to, but of somewhat shorter maturities
than, the interest rate indices and repricing terms of the Mortgage Assets.
Thus, the Company anticipates that in most cases the interest rate indices and
repricing terms of its Mortgage Assets and its funding sources will not be
identical, thereby creating an interest rate mismatch between assets and
liabilities. While the historical spread between relevant short-term interest
rate indices has been relatively stable, there have been periods, especially
during the 1979-1982 and 1994 interest rate environments, when the spread
between such indices was volatile. During periods of changing interest rates,
such interest rate mismatches could negatively impact the Company's Net
Income, dividend yield and the market price of the Common Stock.
SUBSTANTIAL LEVERAGE AND POTENTIAL NET INTEREST AND OPERATING LOSSES IN
CONNECTION WITH BORROWINGS
The Company intends to employ a leveraging strategy of increasing the size
of its Mortgage Asset portfolio by borrowing against its existing Mortgage
Assets to acquire additional Mortgage Assets. By leveraging its Mortgage
Assets in this manner, the Company expects that 90% of its total Mortgage
Assets typically may be financed with borrowed funds. If the ratio of the
Company's borrowings to total Mortgage Assets exceeds 92%, then, except as
limited by the sources of income tests applicable to the Company as a REIT,
the Company will not acquire net additional Mortgage Assets until the capital
base exceeds 8%. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Gross Income Tests." The Company is also permitted
under its Bylaws to have unsecured borrowings of up to 300% of its net assets.
If the returns on the Mortgage Assets purchased with borrowed funds fail to
cover the cost of the borrowings, the Company's results of operations would be
adversely affected.
A majority of the Company's borrowings are expected to be in the form of
collateralized borrowings, primarily reverse repurchase agreements, which will
be "marked to market" based on the market value of the Mortgage Assets pledged
to secure the specific borrowings at a given time. Certain of the Company's
Mortgage Assets may be cross-collateralized to secure multiple borrowing
obligations of the Company to a particular lender. The Company's leveraging
strategy may create instability in the Company's operations. A decline in the
market value of such Mortgage Assets could limit the Company's ability to
borrow or result in lenders initiating margin calls. The Company could be
required to sell Mortgage Assets under adverse market conditions in order to
maintain liquidity. If these sales were made at prices lower than the carrying
value of the Mortgage Assets,
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the Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the
collateral, including any cross-collateralized Mortgage Assets, and resulting
loss of the difference between the value of the collateral and the amount
borrowed. To the extent the Company is compelled to liquidate Mortgage Assets
qualifying as Qualified REIT Real Estate Assets to repay borrowings, its
compliance with the REIT rules regarding asset and sources of income
requirements could be negatively affected, ultimately jeopardizing the
Company's status as a REIT. See "Federal Income Tax Consequences--Requirements
for Qualification as a REIT."
FAILURE TO MAINTAIN REIT STATUS WOULD RESULT IN THE COMPANY BEING SUBJECT TO
TAX AS A REGULAR CORPORATION AND SUBSTANTIALLY REDUCE CASH AVAILABLE FOR
DISTRIBUTION TO STOCKHOLDERS
Limitation on Mortgage Assets to Comply with REIT Requirements. In order to
maintain its qualification as a REIT for federal income tax purposes, the
Company must continually satisfy certain tests with respect to the sources of
its income, the nature and diversification of its Mortgage Assets, the amount
of its distributions to stockholders and the ownership of its stock. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT."
Among other things, these restrictions may limit the Company's ability to
acquire certain types of assets that it otherwise would consider desirable,
limit the ability of the Company to securitize Mortgage Loans for sale to
third parties, and require the Company to make distributions to its
stockholders at times when it may deem it more advantageous to utilize the
funds available for distribution for other corporate purposes (such as the
purchase of additional assets or the repayment of debt) or at times that the
Company may not have funds readily available for distribution. Even if the
Company qualifies for taxation as a REIT, it may be subject to certain federal
taxes based on certain activities, which could result in decreased cash
available for distribution to stockholders. See "Federal Income Tax
Consequences--Taxation of the Company."
Limitations Imposed by REIT Requirements on Hedging and Investments May
Limit Company's Ability to Hedge. The REIT Provisions of the Code may
substantially limit the ability of the Company to hedge its Mortgage Assets
and the related Company borrowings. The Company must limit its income in each
year from "Qualified Hedges" (together with any other income generated from
other than Qualified REIT Real Estate Assets) to less than 25% of the
Company's gross income. In addition, the Company must limit its aggregate
income from hedging and services from all sources (other than from Qualified
REIT Real Estate Assets or Qualified Hedges) to less than 5% of the Company's
gross income each year. As a result, the Company may have to limit its use of
certain hedging techniques that might otherwise have been advantageous. Any
limitation on the Company's use of hedging techniques may result in greater
interest rate risk. If the Company were to receive income in excess of the 25%
or 5% limitation, it could incur payment of a penalty tax equal to the amount
of income in excess of those limitations, or in the case of a willful
violation, loss of REIT status for federal income tax purposes. See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT--Gross
Income Tests."
The Company must also ensure that at the end of each calendar quarter at
least 75% of the value of its assets consists of cash, cash items, government
securities and Qualified REIT Real Estate Assets, and of the investments in
securities not included in the foregoing, the Company does not hold more than
10% of the outstanding voting securities of any one issuer and no more than 5%
by value of the Company's assets consists of the securities of any one issuer.
Failure to comply with any of the foregoing tests would require the Company to
dispose of a portion of its assets within 30 days after the end of the
calendar quarter or face loss of REIT status and adverse tax consequences. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT--
Asset Tests."
Distribution Requirements to Maintain REIT Status May Require the Company to
Borrow Funds to Make Distributions. The Company's operations may from time to
time generate Taxable Income in excess of its Net Income for financial
reporting purposes (such as from amortization of capitalized purchase
premiums). The Company may also experience circumstances in which its Taxable
Income is in excess of cash flow available for distribution to stockholders.
To the extent that the Company does not otherwise have funds available, either
situation could result in the Company's inability to distribute substantially
all of its Taxable Income as required to maintain
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its REIT status. In either situation, the Company could be required to borrow
funds in order to make the required distributions that could increase
borrowing costs and reduce the yield to stockholders, to sell a portion of its
Mortgage Assets at disadvantageous prices in order to raise cash for
distributions, or make a distribution in the form of a return of capital,
which would have the effect of reducing the equity of the Company. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT--
Distribution Requirement."
Disqualification as a REIT May Result in Substantial Tax Liability. If the
Company should not qualify as a REIT in any tax year, it would be taxed as a
regular domestic corporation and, among other consequences, distributions to
the Company's stockholders would not be deductible by it in computing its
taxable income. Any resulting tax liability could be substantial and would
reduce the amount of cash available for distribution to the Company's
stockholders. In addition, the unremedied failure of the Company to be treated
as a REIT for any one year would disqualify the Company from being treated as
a REIT for four subsequent years. See "Federal Income Tax Consequences--
Termination or Revocation of REIT Status."
LITIGATION
A mortgage company with a similar name recently sent a demand to the Company
requesting that the Company not operate under the name "Apex Mortgage
Capital." Such demand threatened litigation if the Company did not change its
name. The Company is currently considering the merits of such claim and no
decision has been made as to how the Company will respond. If any litigation
is commenced, the Company may be required to change its name and thereby incur
expenses, may be required to pay damages or may incur substantial litigation
costs even if the Company is successful. As a result of such threatened
litigation the Company's results of operations may be adversely affected.
FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE RISKS MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS
The Company will follow a policy intended to minimize the impact of interest
rate changes. However, developing an objective interest rate risk strategy is
complex and no strategy can completely insulate the Company from risks
associated with interest rate changes. In addition, hedging strategies
typically involve transaction costs that increase dramatically as the period
covered by the hedging transaction increases and that also increase during
periods of rising and fluctuating interest rates. The REIT Provisions of the
Code may substantially limit the Company's ability to engage in these hedging
transactions, and may prevent the Company from effectively implementing
hedging strategies that it determines, absent such restrictions, would best
insulate it from the risks associated with changing interest rates.
In the event that the Company purchases interest rate caps or other interest
rate derivatives to hedge against lifetime and periodic rate or payment caps,
and the provider of interest rate derivatives becomes financially unsound or
insolvent, the Company may be forced to unwind its interest rate derivatives
with such provider and may take a loss on such interest rate derivatives.
Further, the Company could suffer the adverse consequences that the hedging
transaction was intended to protect against.
The adjustable-rate Mortgage Assets that the Company intends to acquire are
generally subject to periodic and lifetime interest rate caps. The Company may
purchase Mortgage Derivative Securities to seek to mitigate the negative
impacts of those interest-rate caps in a rising interest rate environment.
Hedging techniques will be based, in part, on assumed levels of prepayments of
the Company's Mortgage Assets. If prepayments are slower than assumed, the
life of Mortgage Assets will be longer and the effectiveness of the Company's
hedging techniques will be reduced. Hedging techniques involving the use of
Mortgage Derivative Securities are highly complex and may produce volatile
returns. The hedging activity of the Company will also be limited by the asset
and sources of income requirements applicable to the Company as a REIT. See
"Federal Income Tax Consequences--Asset Tests" and "--Gross Income Tests." The
financial futures contracts and options thereon in which the Company may
invest are subject to periodic margin calls that would result in additional
costs to the
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Company. Financial futures held at fiscal year end are also required to be
"marked to market" and valued for tax purposes, which could result in taxable
income to the Company with no corresponding cash available for distribution.
There can be no assurance that these hedging techniques will have a beneficial
impact on the Net Income of the Company and the dividend yield of the Common
Stock.
INCREASED LEVELS OF PREPAYMENTS FROM MORTGAGE ASSETS MAY ADVERSELY AFFECT NET
INTEREST INCOME
Prepayments of Mortgage Assets could adversely affect the Company's results
of operations in several ways. The Company anticipates that a substantial
portion of its adjustable-rate Mortgage Assets may bear initial "teaser"
interest rates that are lower than their "fully indexed" rates (the applicable
index plus a margin). In the event that such an adjustable-rate Mortgage Asset
is prepaid prior to or soon after the time of adjustment to a fully indexed
rate, the Company will have held the Mortgage Asset while it was less
profitable and lost the opportunity to receive interest at the fully indexed
rate over the expected life of the adjustable-rate Mortgage Asset. In
addition, the prepayment of any Mortgage Asset that had been purchased at a
premium by the Company would result in the immediate write-off of any
remaining capitalized premium amount and consequent reduction of the Company's
net interest income by such amount. Finally, in the event that the Company is
unable to acquire new Mortgage Assets to replace the prepaid Mortgage Assets,
its financial condition, cash flow and results of operations could be
materially adversely affected.
Prepayment rates generally increase when prevailing interest rates fall
below the interest rates on existing Mortgage Assets. Prepayment experience
also may be affected by the geographic location of the real estate securing
the Mortgage Assets, the assumability of the Mortgage Assets, the ability of
the borrower to obtain or convert to a fixed-rate Mortgage Loan, conditions in
the housing and financial markets, and general economic conditions. The level
of prepayments is also subject to the same seasonal influences as the
residential real estate industry, with prepayments generally being greatest in
the summer months and lower in the winter months.
DEPENDENCE ON THE MANAGER AND ITS PERSONNEL FOR SUCCESSFUL OPERATIONS
The Company will be wholly dependent for the selection, structuring and
monitoring of its Mortgage Assets and associated borrowings on the diligence
and skill of its officers and the officers and employees of the Manager,
primarily Messrs. Barach, Gundlach, Galligan and Osborne. The Company does not
anticipate having employment agreements with its senior officers, or requiring
the Manager to employ specific personnel or dedicate employees solely to the
Company and there are no restrictions on any competing business activities of
such individuals if they are no longer employed by the TCW Group. 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, cash flow and results of operations. See "Management of the
Company--Directors and Executive Officers" and "The Manager."
CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE MANAGER AND ITS AFFILIATES
Affiliates of Manager Will Continue to Invest in Mortgage Securities. The
TCW Group has informed the Company that it has, and expects to continue to
purchase and manage Mortgage Securities in the future for third-party
accounts. The TCW Group will have no obligation to make investment
opportunities available to the Company. As a result, there may be a conflict
of interest between the operations of the Manager and the operations of its
Affiliates in the acquisition and disposition of Mortgage Securities. In
addition, the TCW Group may from time to time purchase Mortgage Securities for
its own account. Such conflicts may result in decisions and/or allocations of
Mortgage Securities by Affiliates of the Manager that are not in the best
interests of the Company.
Affiliates of the Manager Will Invest in Competing Entities. The TCW Group
has informed the Company that it has purchased, and expects to continue to
purchase, equity securities in companies organized for purposes substantially
similar to those of the Company, including competing mortgage REITs, in the
normal course of its investment management business. Any investment by the TCW
Group in competing entities may adversely affect the market price of the
Common Stock.
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Manager May Try to Maximize Incentive Compensation and Thereby Increase Risk
to the Company's Mortgage Portfolio. In addition to its base management
compensation, the Manager will have the opportunity to earn incentive
compensation under the Management Agreement for each fiscal quarter in an
amount equal to 30% of the Net Income of the Company (before payment of such
incentive compensation) in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
See "The Manager--Manager Compensation." The Company's ability to achieve the
performance level required for the Manager to earn the incentive compensation
is dependent upon the level and volatility of interest rates, the Company's
ability to react to changes in interest rates and to utilize successfully the
operating strategies described herein, and other factors, many of which are
not within the Manager's control. In evaluating Mortgage Assets for investment
and in other management strategies, an undue emphasis on the maximization of
income at the expense of other criteria, such as preservation of capital, in
order to achieve a higher incentive compensation could result in increased
risk to the value of the Company's Mortgage Asset portfolio.
Conflicts Relating to the Manager Rendering Services to Others. The
Management Agreement does not limit or restrict the right of the Manager or
any of its officers, directors, employees or Affiliates from engaging in any
business or rendering services of any kind to any other person, including,
without limitation, the purchase of, or rendering advice to others purchasing
Mortgage Assets that meet the Company's policies and criteria. Notwithstanding
the foregoing, members of the MBS Group of the TCW Group, or any equivalent or
successor group of the TCW Group, during their employment by the TCW Group
will not provide any active management services to a residential mortgage
REIT, other than the Company, that invests primarily in high quality Mortgage
Securities comparable to the Mortgage Securities in which the Company will
invest. In addition, the Management Agreement does not impose a minimum time
commitment that the Manager and its personnel must devote to providing
services to the Company. The Manager may also advise other mortgage-related
entities, including REITs, that invest in residential or commercial mortgages
or other residential and non-residential mortgage securities. The ability of
the Manager and its employees to engage in other business activities could
reduce the time and effort spent by the Manager and its employees on the
management of the Company. See "The Manager--The Management Agreement."
INVESTMENT IN SHORT-TERM INVESTMENTS PENDING ACQUISITION OF MORTGAGE ASSETS
MAY INITIALLY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's results of operations initially may be adversely affected
pending purchase of Mortgage Assets and implementation of its Capital and
Leverage Policy, particularly in the several-month period following the
closing of the Offering during which time the Company will be primarily
invested in short-term government securities and other Short-Term Investments.
The Company anticipates that it may take up to 15 months to fully implement
its Capital and Leverage Policy.
FAILURE TO MAINTAIN AN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD
ADVERSELY AFFECT RESULTS OF OPERATIONS
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 in Real Estate"). Under the current interpretation of
the staff of the Commission, in order to qualify for this exemption, the
Company must, among other things, 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 Mortgage Loans, such Mortgage Securities may be treated as securities
separate from the underlying Mortgage Loans and, thus, may not qualify as
Qualifying Interests in Real Estate 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. However, 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.
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ABSENCE OF PUBLIC MARKET AND NO ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP
Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that a regular trading market for the
shares of Common Stock 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 its investment in the Company. The initial
public offering price will be determined by the Company and representatives of
the Underwriters. There can be no assurance that the price at which the shares
of Common Stock will sell in the public market after the closing of the
Offering will not be lower than the price at which they are sold by the
Underwriters. See "Underwriting."
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON
STOCK
In the event that a public market for the Common Stock exists, it is likely
that the market price of the shares of the Common Stock will be influenced by
any variation between the net yield on the Company's Mortgage Assets and
prevailing market interest rates. The Company's earnings will be derived
primarily from any positive spread between the yield on its Mortgage Assets
and the cost of its borrowings. Such positive spread will not necessarily be
larger in high interest rate environments than in low interest rate
environments. However, in periods of high interest rates, the Net Income of
the Company and, therefore, the dividend yield on the Common Stock, may be
less attractive compared with alternative investments, which could negatively
impact the price of the Common Stock. If the anticipated or actual net yield
on the Company's Mortgage Assets declines or if prevailing market interest
rates rise, thereby decreasing the positive spread between the net yield on
its Mortgage Assets and the cost of its borrowings, the market price of the
Common Stock may be adversely affected.
VALUE OF MORTGAGE ASSETS MAY BE ADVERSELY AFFECTED BY DEFAULTS ON UNDERLYING
MORTGAGE OBLIGATIONS
The Company will bear the risk of loss on any Mortgage Securities it
purchases in the secondary mortgage market or otherwise. However, such
Mortgage Securities will generally be structured with one or more types of
credit enhancement. Such forms of credit enhancement are intended to provide
protection against risk of loss due to default on the underlying Mortgage
Loan, or bankruptcy, fraud and special hazard losses. To the extent third
parties have been contracted to insure against these types of losses, the
Company would be dependent in part upon the creditworthiness and claims-paying
ability of the insurer and the timeliness of reimbursement in the event of a
default on the underlying obligations. Further, the insurance coverage for
various types of losses is limited in amount, and losses in excess of the
limitation would be borne by the Company.
ACTIVE FORMATION AND OPERATION OF COMPETING MORTGAGE REITS MAY ADVERSELY
AFFECT THE MARKET PRICE OF THE COMMON STOCK
In addition to existing companies, other companies may be organized for
purposes similar to that of the Company, including companies organized as
REITs focused on purchasing High Quality Mortgage Assets. A proliferation of
such companies may increase the competition for equity capital and thereby
adversely affect the market price of the Common Stock. In addition, adverse
publicity affecting this sector of the capital market or significant operating
failures of a competitor may adversely affect the market price of the Common
Stock.
ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME
In general, dividend income that a Tax-Exempt Entity receives from the
Company should not constitute unrelated trade or business income as defined in
Section 512 of the Code ("UBTI"). If, however, excess inclusion income were
realized by the Company and allocated to stockholders, such income cannot be
offset by net operating losses and, if the stockholder is a Tax-Exempt Entity,
is fully taxable as UBTI under Section 512 of the Code and, as to foreign
stockholders, would be subject to federal income tax withholding without
reduction pursuant to any otherwise applicable income tax treaty. See "Federal
Income Tax Consequences--Taxation of Stockholders" and "--Taxation of Tax-
Exempt Entities" for discussions of the treatment of excess inclusion income.
Excess inclusion income would be generated if the Company were to issue debt
obligations with two or
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more maturities and the terms of the payments on such obligations bore a
relationship to the payments that the Company received on its Mortgage Assets
securing those debt obligations. The Company intends to arrange its borrowings
in a manner to avoid generating significant amounts of excess inclusion
income. The Company does, however, intend to enter into one or more master
reverse repurchase agreements (i) pursuant to which the Company will issue
various reverse repurchase agreements that will have differing maturity dates,
and (ii) that will afford the counter-party lender the right to sell any of
the Company's Mortgage Securities that have been pledged to the counter-party
if the Company were to default on its obligations to that counter-party
lender. There can be no assurance that the Service might not successfully
maintain that any such borrowing arrangements would give rise to excess
inclusion income that would be allocated among stockholders in some
appropriate fashion. See "Federal Income Tax Consequences--Taxation of
Stockholders." Furthermore, certain types of Tax-Exempt Entities, such as
voluntary employee benefit associations and entities that have borrowed to
acquire their shares of Common Stock, may be required to treat a portion of or
all of the dividends they may receive from the Company as UBTI. See "Federal
Income Tax Consequences--Taxation of Tax-Exempt Entities."
VALUE OF MORTGAGE LOANS MAY BE ADVERSELY AFFECTED BY CHARACTERISTICS OF
UNDERLYING PROPERTY AND BORROWER CREDIT
Mortgage Loan Credit Risks. A portion of the Company's Mortgage Assets
(subject to the 25% policy on Other Mortgage Assets) may consist of Mortgage
Loans. During the time it holds any Mortgage Loans, the Company will be
subject to increased credit risks, including risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from earthquakes or floods). In the event
of a default on any Mortgage Loan held by the Company, the Company will bear
the risk of loss of principal to the extent of any deficiency between the
value of the secured property, less any payments from an insurer or guarantor,
and the amount owing on the Mortgage Loan. Mortgage Loans in default will also
cease to be eligible collateral for borrowings, and will have to be financed
by the Company out of other funds until ultimately liquidated. Although the
Company intends to establish reserves in amounts it believes are adequate to
cover these risks, in view of the Company's lack of operating history, there
can be no assurance that reserves that are established will be sufficient to
offset losses on Mortgage Loans in the future.
Even assuming that properties secured by any Mortgage Loans held by the
Company provide adequate security for such Mortgage Loans, substantial delays
could be encountered in connection with the foreclosure of defaulted Mortgage
Loans, with corresponding delays in the receipt of related proceeds by the
Company. State and local statutes and rules may delay or prevent the Company's
foreclosure on or sale of the mortgaged property and may prevent it from
receiving proceeds sufficient to repay all amounts due on the related Mortgage
Loan. Some properties that may collateralize the Company's Mortgage Loans may
have unique characteristics or may be subject to seasonal factors that could
materially prolong the time period required to resell the property.
Inability to Securitize Mortgage Loans May Result in Additional Risk
Respecting Borrower Defaults. The Company may acquire and accumulate (subject
to the 25% limitation on Other Mortgage Assets) Mortgage Loans as part of its
investment strategy until a sufficient quantity has been acquired for
securitization into Mortgage Securities. There can be no assurance that the
Company will be successful in securitizing the Mortgage Loans. During the
accumulation period, the Company will be subject to risks of borrower defaults
and bankruptcies, fraud losses and special hazard losses. In the event of any
default under Mortgage Loans held by the Company, the Company will bear the
risk of loss of principal to the extent of any deficiency between the value of
the mortgage collateral and the principal amount of the Mortgage Loan. Also
during the accumulation period, the costs of financing the Mortgage Loans
through reverse repurchase agreements and other borrowings and lines of credit
with warehouse lenders could exceed the interest income on the Mortgage Loans.
It may not be possible or economical for the Company to complete the
securitization of all Mortgage Loans that it acquires, in which case the
Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults and special hazard losses.
Possible Limitation of Remedies for Sellers' Breach of Representations and
Warranties with Respect to Mortgage Loans. It is expected that when the
Company acquires Mortgage Loans, the seller will represent and
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warrant to the Company that there has been no fraud or misrepresentation
during the origination of the Mortgage Loans and will agree to repurchase any
Mortgage Loan with respect to which there is fraud or misrepresentation.
Although the Company expects that it will generally have recourse to the
seller based on the seller's representations and warranties to the Company,
the Company will be at risk for loss to the extent the seller does not perform
its repurchase obligations.
EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE COMMON
STOCK
The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, Common Stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities, and other borrowings, and
classes of preferred stock will be senior to the Common Stock in a liquidation
of the Company. The effect of additional equity offerings may be the dilution
of the equity of stockholders of the Company or the reduction of the price of
shares of the Common Stock, or both. The Company is unable to estimate the
amount, timing or nature of additional offerings as they will depend upon
market conditions and other factors.
RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK
Ability to Issue Preferred Stock May Limit Dividend Rights to Holders of the
Common Stock. The authorized capital stock of the Company includes preferred
stock issuable in one or more series. The issuance of preferred stock could
have the effect of making an attempt to gain control of the Company more
difficult by means of a merger, tender offer, proxy contest or otherwise. The
preferred stock, if issued, would have a preference on dividend payments that
could affect the ability of the Company to make dividend distributions to the
common stockholders. See "Description of Capital Stock."
9.8% Ownership Restriction May Limit Market Activity. In order that the
Company may meet the requirements for qualification as a REIT at all times,
the Charter prohibits any person from acquiring or holding, directly or
indirectly, shares of capital stock in excess of 9.8% in value of the
aggregate of the outstanding shares of capital stock or in excess of 9.8% (in
value or in number of shares, whichever is more restrictive) of the aggregate
of the outstanding shares of capital stock of the Company. The Charter further
prohibits (i) any person from beneficially or constructively owning shares of
capital stock that would result in the Company being "closely held" under
Section 856(h) of the Code or otherwise cause the Company to fail to qualify
as a REIT, and (ii) any person from transferring shares of capital stock if
such transfer would result in shares of capital stock being owned by fewer
than 100 persons. If any transfer of shares of capital stock occurs which, if
effective, would result in any transfer or ownership limitations, then that
number of shares of capital stock in excess or in violation of the above
transfer or ownership limitations, the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded
to the nearest whole shares) shall be automatically transferred to a Trustee
of a Trust for the exclusive benefit of one or more Charitable Beneficiaries,
and the intended transferee shall not acquire any rights in such shares.
Subject to certain limitations, the Company's Board of Directors may increase
or decrease the ownership limitations or waive the limitations for individual
investors. See "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer."
Requirement That Stockholders Give Notice of 5% Ownership May Limit Market
Activity. Every owner of more than 5% (or such lower percentage as required by
the Code or the regulations promulgated thereunder) of all classes or series
of the Company's capital stock, within 30 days after the end of each taxable
year, is required to give written notice to the Company stating the name and
address of such owner, the number of shares of each class and series of stock
beneficially owned and a description of the manner in which such shares are
held. Each such owner shall provide to the Company such additional information
as the Company may request in order to determine the effect, if any, of such
beneficial ownership on the Company's status as a REIT and to ensure
compliance with the ownership limitations.
The foregoing provisions may inhibit market activity and the resulting
opportunity for the holders of the Common Stock to receive a premium for their
Common Stock that might otherwise exist in the absence of such provisions.
Such provisions also may make the Company an unsuitable investment vehicle for
any person seeking to obtain ownership of more than 9.8% of the outstanding
shares of the Company's Common Stock.
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<PAGE>
Provisions of Maryland Law Restricting Takeovers May Limit Takeover Attempts
That May Be Beneficial to Stockholders. Certain provisions of the Maryland
General Corporation Law relating to "business combinations" and a "control
share acquisition" and of the Charter and Bylaws of the Company may also have
the effect of delaying, deterring or preventing a takeover attempt or other
change in control of the Company that would be beneficial to stockholders and
might otherwise result in a premium over then prevailing market prices.
Although the Bylaws of the Company contain a provision exempting the
acquisition of Common Stock by any person from the control share acquisition
statute, there can be no assurance that such provision will not be amended or
eliminated at any time in the future. See "Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws."
26
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately
$ ($ if the Underwriters' over-allotment options are
exercised in full), assuming an initial public offering price of $15.00 per
share of Common Stock. The net proceeds from the Offering will be used by the
Company to purchase its initial portfolio of Mortgage Assets.
The Company may require up to six months to have the net proceeds of the
Offering fully invested in Mortgage Assets and up to an additional nine months
to fully implement the Capital and Leverage Policy to increase the Mortgage
Asset investments to its desired level. Pending full investment in the desired
mix of Mortgage Assets, funds will be committed to Short-Term Investments that
are expected to provide a lower net return than the Company hopes to achieve
from its intended primary Mortgage Asset investments.
DIVIDEND AND DISTRIBUTION POLICY
The Company intends to distribute substantially all of its net Taxable
Income (which does not ordinarily equal net income as calculated in accordance
with GAAP) to stockholders in each year. The Company intends to declare four
regular quarterly dividends. In addition, Taxable Income, if any, not
distributed through regular quarterly dividends will be distributed annually,
at or near year end, in a special dividend. The dividend policy is subject to
revision at the discretion of its Board of Directors. All distributions will
be made by the Company at the discretion of its Board of Directors and will
depend on the earnings and financial condition of the Company, maintenance of
REIT status and such other factors as the Company's Board of Directors deems
relevant. See "Federal Income Tax Consequences--Requirements for Qualification
as a REIT--Distribution Requirement."
In order to qualify as a REIT under the Code, the Company must make
distributions to its stockholders each year in an amount at least equal to (i)
95% of its Taxable Income (before deduction of dividends paid less any net
capital gain), plus (ii) 95% of the excess of the net income from Foreclosure
Property over the tax imposed on such income by the Code, minus (iii) any
excess non-cash income. The "Taxable Income" of the Company for any year means
the taxable income of the Company for such year (excluding any net income
derived either from property held primarily for sale to customers or from
Foreclosure Property) subject to certain adjustments provided in the REIT
Provisions of the Code. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Distribution Requirement."
It is anticipated that distributions generally will be taxable as ordinary
income to stockholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain or may
constitute a return of capital. The Company will furnish annually to each of
its stockholders a statement setting forth distributions paid during the
preceding year and their characterization as ordinary income, return of
capital or capital gains. For a discussion of the federal income tax treatment
of distributions by the Company, see "Federal Income Tax Consequences--
Taxation of Stockholders."
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<PAGE>
CAPITALIZATION
The capitalization of the Company, as of September 15, 1997 and as adjusted
to reflect the sale of the shares of Common Stock offered hereby at an assumed
initial public offering price per share at the mid-point of the offering range
set forth on the cover page of this Prospectus, is as follows:
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)(2)
------ --------------
<S> <C> <C>
Preferred Stock, par value $.01
Authorized--50,000,000 shares--no shares issued and
outstanding........................................... $ -- $ --
Common Stock, par value $.01
Authorized--100,000,000 shares--100 shares issued and
outstanding
(as adjusted, 10,000,100 shares issued)............... 1
Additional Paid-in Capital............................. 1,499
------ -----
Total.................................................. $1,500 $
====== =====
</TABLE>
- --------
(1) Before deducting offering expenses estimated to be $750,000, payable by
the Company, and assuming no exercise of the Underwriters' over-allotment
options to purchase up to an additional 1,500,000 shares of Common Stock.
(2) Does not include 1,000,000 shares of Common Stock reserved for issuance
upon exercise of options granted under the Company's 1997 Stock Option
Plan. See "Management of the Company--Stock Options."
LIQUIDITY AND CAPITAL RESOURCES
The Company has been organized to operate so as to qualify as a REIT under
Sections 856 through 860 of the Code and, as such, anticipates distributing
annually at least 95% of its Taxable Income. Cash for such distributions will
be generated from the Company's operations. See "Dividend and Distribution
Policy" and "Federal Income Tax Consequences--Gross Income Tests--Distribution
Requirement."
The principal sources of funds will be the net proceeds of the Offering and
borrowings (primarily reverse repurchase agreements) or the issuance of debt
or additional equity securities. The Company anticipates that it will incur
short-term borrowings immediately after the net proceeds of the Offering have
been invested in the portfolio of Mortgage Assets. The Company's income will
consist primarily of interest and other revenues from its investments in
Mortgage Assets. The Company believes that the net proceeds of the Offering,
combined with the cash flow from operations and the utilization of borrowings,
will be sufficient to enable the Company to meet anticipated liquidity
requirements. If the Company's cash resources are at any time insufficient to
satisfy the Company's liquidity requirements, the Company may be required to
liquidate Mortgage Assets or sell debt or additional equity securities. There
is no assurance that financing will be available to the Company on favorable
terms, or at all. See "Risk Factors--No Current Borrowing Arrangements."
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<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company was incorporated in Maryland on September 15, 1997 and, upon the
closing of the Offering, will commence its business of purchasing and holding
a portfolio of adjustable-rate Mortgage Assets. The Company intends to
generate income for distribution to its stockholders primarily from the Net
Income on its Mortgage Assets qualifying as Qualified REIT Real Estate Assets.
The Company's Net Income will result primarily from the difference between (i)
the interest income on its Mortgage Asset investments and (ii) the borrowing
and financing costs of the Mortgage Assets. The Company's principal executive
offices are located at 865 South Figueroa Street, Suite 1800, Los Angeles,
California 90017, and its telephone number is (213) 244-0440.
STRATEGY
To achieve its business objective and generate dividend yields that provide
a competitive rate of return for its stockholders, the Company's strategy is
to:
. purchase primarily single-family Mortgage Assets, the majority of which
are currently expected to have adjustable interest rates based on
changes in short-term market interest rates;
. manage the credit risk of its Mortgage Assets through, among other
activities (i) carefully selecting Mortgage Assets to be acquired, (ii)
complying with the Company's policies with respect to credit risk
concentration which, among other things, require the Company to maintain
a Mortgage Asset portfolio with a weighted average rating generally
equivalent to AA (or a comparable rating) or better, (iii) actively
monitoring the ongoing credit quality and servicing of its Mortgage
Assets, and (iv) maintaining appropriate capital levels and allowances
for possible credit losses;
. finance purchases of Mortgage Assets with the net proceeds of equity
offerings and, to the extent permitted by the Company's Capital and
Leverage Policy, to utilize leverage to increase potential returns to
stockholders through borrowings (primarily reverse repurchase
agreements) with interest rates that will also reflect changes in short-
term market interest rates;
. seek to structure its borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate
hedged basis, generally correspond to the interest rate adjustment
indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets;
. utilize interest rate caps, swaps and similar financial instruments to
mitigate the risk of the cost of its variable-rate liabilities exceeding
the earnings on its Mortgage Assets during a period of rising interest
rates;
. seek to minimize prepayment risk primarily by structuring a diversified
portfolio with a variety of prepayment characteristics; and
. apply securitization techniques designed to enhance the value and
liquidity of the Company's Mortgage Assets acquired in the form of
Mortgage Loans by securitizing them into Mortgage Securities that are
tailored to the Company's objectives.
There can be no assurance that the Company will successfully implement its
strategies. See "Risk Factors" for a discussion of factors that could
adversely affect the Company's ability to successfully implement its
strategies.
Although there can be no assurance, the Company believes that it will be
able to generate competitive earnings and dividends while holding Mortgage
Assets of high credit quality and maintaining a disciplined risk- control
profile. The Company will also strive to increase its return to stockholders
over time by: (i) seeking to raise additional capital in order to increase its
ability to invest in additional Mortgage Assets; (ii) striving to lower its
effective borrowing costs through seeking direct funding with collateralized
lenders, in addition to using Wall Street intermediaries, and investigating
the possibility of using collateralized commercial paper and medium-term note
programs; and (iii) improving the efficiency of its balance sheet structure by
investigating the issuance of uncollateralized subordinated debt and other
forms of capital.
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<PAGE>
Investment Policy. The Company's investment strategy will be to create a
diversified portfolio primarily of High Quality adjustable-rate Mortgage
Securities that, in the aggregate, will preserve the capital base of the
Company and generate income for distribution to its stockholders. The
Company's Mortgage Assets will be held primarily for investment. The Company
intends generally to buy and hold Mortgage Assets to maturity and, therefore,
will seek to have a low portfolio turnover rate. The Company's ability to sell
Mortgage Assets for gain is restricted by the REIT Provisions of the Code and
the rules, regulations and interpretations of the Service thereunder. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT--
Gross Income Tests."
The Company anticipates that at least 75% of total Mortgage Assets will be
High Quality adjustable-rate Mortgage Securities and Short-Term Investments.
The Mortgage Securities will consist of (i) privately issued mortgage Pass-
Through Certificates as well as Agency Certificates, (ii) certain CMOs and
(iii) Other Mortgage Securities, including certain Mortgage Derivative
Securities. The Company further anticipates that at least 50% of the Company's
total Mortgage Assets will be Agency Certificates or carry a AAA or comparable
rating from at least one of the Rating Agencies. The Company will generally
not acquire Inverse Floaters, REMIC Residuals or First Loss Subordinated
Bonds. The Company may acquire interest only, principal only or other Mortgage
Derivative Securities that receive a disproportionate share of interest income
or principal, either as an independent stand-alone investment opportunity or
to assist in the management of prepayment and other risks, but only on a
limited basis due to the greater risk of loss associated with Mortgage
Derivative Securities. See "Risk Factors--Failure to Successfully Manage
Interest Rate Risks May Adversely Affect Results of Operations."
The remainder of the Company's investment portfolio, composing not more than
25% of its total Mortgage Assets, may consist of unrated or rated Mortgage
Assets that are determined by the Manager to be of comparable quality to High
Quality Mortgage Securities, including (i) adjustable-rate Mortgage Loans
secured by first liens on single-family (one-to-four units) residential
properties, (ii) Pass-Through Certificates or CMOs backed by Mortgage Loans on
single-family properties and (iii) Other Mortgage Securities. The Company
intends to securitize substantially all Mortgage Loans it acquires into High
Quality Mortgage Securities that are Qualified REIT Real Estate Assets that
will then be held for investment. Substantially all of the Company's Mortgage
Assets will constitute Qualified REIT Real Estate Assets.
The Company intends to purchase Mortgage Assets from broker-dealers and
banks that regularly make markets in Mortgage Securities. The Company also
intends to purchase Mortgage Securities from a variety of Suppliers of
Mortgage Assets (typically mortgage bankers, savings and loans, investment
banking firms, home builders and other firms involved in originating and
packaging Mortgage Loans). In acquiring Mortgage Assets, the Company will
compete with other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
other lenders, Fannie Mae, FHLMC, GNMA and other entities purchasing Mortgage
Assets, some of which have greater financial resources than the Company. There
are several 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. There can be no assurance that the Company will be able to
acquire sufficient Mortgage Assets from Suppliers of Mortgage Assets at
spreads above the Company's cost of funds.
The Company's Board of Directors has adopted the investment policies set
forth in this Prospectus as its initial investment policies. The policies may
be changed at any time by the Board of Directors (subject to approval by a
majority of Unaffiliated Directors) without the consent of stockholders. See
"Risk Factors--Control by the Company's Board of Directors of the Company's
Operating Policies and Investment Strategies." The Company's Board of
Directors will establish and approve (including approval by a majority of
Unaffiliated Directors) at least annually the investment policies of the
Company, which will include investment criteria that each Mortgage Asset must
satisfy to be eligible for investment by the Company. The Manager must use
such criteria in determining whether to acquire Mortgage Assets on behalf of
the Company. The Company will not purchase any Mortgage Assets from its
Affiliates other than Mortgage Securities that may be purchased from a taxable
subsidiary of the Company that may be formed in connection with the
securitization of Mortgage Loans.
30
<PAGE>
The Company does not intend to enter into any servicing or administrative
agreements (other than the Management Agreement) with the Manager or any
entities affiliated with the Manager. Any changes in this policy would be
subject to approval by the Company's Board of Directors, including by a
majority of the Unaffiliated Directors. See "Risk Factors--Control by the
Board of Directors of the Company's Operating Policies and Investment
Strategies."
Financing Policy. The Company intends to finance its purchase of Mortgage
Assets initially through equity from the net proceeds of the Offering and,
thereafter, primarily by borrowing against existing Mortgage Assets and using
the net proceeds to acquire additional Mortgage Assets. See "Use of Proceeds"
and "Management Policies and Programs--Capital and Leverage Policy." The
borrowings are expected to be in the form of reverse repurchase agreements (a
borrowing device evidenced by an agreement to sell securities or other
Mortgage Assets to a third-party and a simultaneous agreement to repurchase
them at a specified future date and price, the price difference constituting
interest on the borrowing), loan agreements, Dollar-Roll Agreements (an
agreement to sell a security for delivery on a specified future date and a
simultaneous agreement to repurchase the same or a substantially similar
security on a specified future date), warehouse lines of credit and other
credit facilities. The Company's borrowings generally will be secured by its
Mortgage Assets. The Company's income will be increased through the use of
such borrowings if the cost of the borrowings is less than the interest earned
on the Mortgage Assets purchased with or securing the borrowed funds. However,
during any periods in which this spread is negative, and the Company's
borrowing costs exceed its interest income on Mortgage Assets purchased with
or securing the borrowed funds, the Company could experience losses. See "Risk
Factors--Substantial Leverage and Potential Net Interest and Operating Losses
in Connection with Borrowings" and "--Interest Rate Fluctuations May Decrease
Net Interest Income."
Hedging Policy. The Company intends to enter into hedging transactions to
mitigate the effects of interest rate fluctuations on its portfolio of
Mortgage Assets and related debt. See "Business and Strategy--Asset/Liability
Management Policies--Interest Rate Risk Management Policy." These transactions
may include interest rate swaps, the purchase of interest rate caps and
futures contracts and options on futures contracts and the trading of forward
contracts to mitigate the effects of fluctuations in interest rates. The
Company may also purchase Mortgage Derivative Securities and Excess Servicing
Rights secured by interests in real property as a hedging strategy. The
Company will not acquire any Mortgage Derivative Securities or Excess
Servicing Rights that do not qualify as Qualified REIT Real Estate Assets.
Accordingly, income from Mortgage Derivative Securities and Excess Servicing
Rights acquired by the Company will be qualifying income under the 75% and 95%
sources of income tests applicable to the Company as a REIT. The Company
intends to carefully monitor its income from hedging activity in Mortgage
Assets that are not Qualified REIT Real Estate Assets, and may have to limit
such activity in order to comply with the REIT Provisions of the Code and to
ensure that it does not realize excessive hedging income that could result in
the Company's disqualification as a REIT. See "Federal Income Tax
Consequences--Requirements for Qualification as a REIT--Gross Income Tests."
The Manager. The Manager will manage the day-to-day operations of the
Company, subject to the direction and oversight of the Company's Board of
Directors. The Manager's key officers have experience in raising and managing
mortgage capital, mortgage finance and the purchase and administration of
Mortgage Assets, however, the Manager has not previously managed or operated a
REIT. See "Management of the Company-- Directors and Executive Officers" and
"The Manager" for biographies and a description of the prior business
experience of the executive officers of the Manager, and "Risk Factors--Lack
of Prior Experience" and "--Dependence on the Manager and Its Personnel for
Successful Operations."
COMPETITION FOR MORTGAGE ASSETS
The Company believes that the principal competition in the business of
acquiring and holding Mortgage Assets are financial institutions such as
banks, savings and loans, life insurance companies, institutional investors
such as mutual funds and pension funds, and certain other mortgage REITs. The
Company anticipates that it
31
<PAGE>
will be able to compete effectively and generate competitive rates of return
for stockholders due to the Manager's experience in managing mortgage capital,
access to and experience in secondary mortgage markets, relative freedom to
securitize its Mortgage Assets, relatively low level of operating costs,
ability to utilize prudent amounts of leverage through accessing the wholesale
market for collateralized borrowings, freedom from certain forms of regulation
and the tax advantages of its REIT status.
DESCRIPTION OF MORTGAGE ASSETS
The Company intends to invest principally in the following types of Mortgage
Assets subject to the operating restrictions described in "--Management
Policies and Programs" below.
Pass-Through Certificates
General. The Company's investments in Mortgage Assets are expected to be
concentrated in Pass-Through Certificates. The Pass-Through Certificates to be
acquired by the Company will consist primarily of Pass-Through Certificates
issued by Fannie Mae, FHLMC and GNMA, as well as High Quality privately issued
adjustable-rate mortgage pass-through certificates. The Pass-Through
Certificates to be acquired by the Company will represent interests in
mortgages that will be secured primarily by liens on single-family (one-to-
four units) residential properties. The Company may also acquire, within the
25% investment limitation on Other Mortgage Assets, unrated or rated Pass-
Through Certificates that represent interests in mortgages secured by liens on
single-family properties that are determined by the Manager and the Board of
Directors to be of comparable quality to High Quality Mortgage Securities.
Pass-Through Certificates backed by adjustable-rate Mortgage Loans are
subject to lifetime interest rate caps and to periodic interest rate caps that
limit the amount an interest rate can change during any given period. The
Company's borrowings are generally not subject to similar restrictions. In a
period of increasing interest rates, the Company could experience a decrease
in Net Income or incur losses because the interest rates on its borrowings
could exceed the interest rates on ARM Pass-Through Certificates owned by the
Company. The impact on Net Income of such interest rate changes will depend on
the adjustments features of the Mortgage Assets owned by the Company, the
maturity schedules of the Company's borrowings and related hedging.
Privately Issued ARM Pass-Through Certificates. Privately issued ARM Pass-
Through Certificates are structured similarly to the Fannie Mae, FHLMC and
GNMA pass-through certificates discussed below and are issued by originators
of and investors in Mortgage Loans, including savings and loan associations,
savings banks, commercial banks, mortgage banks and special purpose
subsidiaries of such institutions. Privately issued ARM Pass-Through
Certificates are usually backed by a pool of conventional adjustable-rate
Mortgage Loans and are generally structured with credit enhancement such as
pool insurance or subordination. However, privately issued ARM Pass-Through
Certificates are typically not guaranteed by an entity having the credit
status of Fannie Mae, FHLMC or GNMA guaranteed obligations.
Existing Fannie Mae ARM Programs. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (12 U.S.C. (S) 1716 et seq.). Fannie Mae
provides funds to the mortgage market primarily by purchasing Mortgage Loans
on homes from local lenders, thereby replenishing their funds for additional
lending. Fannie Mae established its first ARM programs in 1982 and currently
has several ARM programs under which ARM certificates may be issued, including
programs for the issuance of securities through REMICs under the Code.
Each Fannie Mae ARM Pass-Through Certificate issued to date has been issued
in the form of a Pass-Through Certificate representing a fractional undivided
interest in a pool of ARMs formed by Fannie Mae. The ARMs included in each
pool are fully amortizing conventional Mortgage Loans secured by a first lien
on either one-to-four family residential properties or multifamily properties.
The original terms to maturities of the Mortgage Loans generally do not exceed
40 years. Currently, Fannie Mae has issued several different series of ARMs.
All of Fannie Mae's series of ARMs are in its lender (or "swap"), mortgage-
backed securities program
where individual lenders swap pools of Mortgage Loans that they originated or
purchased for a Fannie Mae
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<PAGE>
security backed by those same Mortgage Loans. Each series bears an initial
interest rate and a margin tied to an index based on all Mortgage Loans in the
related pool, less a fixed percentage representing servicing compensation and
Fannie Mae's guarantee fee. The specified index used in each series has
included the One-Year U.S. Treasury Rate published by the Federal Reserve
Board, the 11th District Cost of Funds Index published by the Federal Home
Loan Bank of San Francisco and other indices. In addition, the majority of
series of Fannie Mae ARMs issued to date have had a monthly, semi-annual or
annual interest rate adjustment.
Adjustments to the interest rates on Fannie Mae ARMs are typically subject
to lifetime caps. In addition, some pools contain ARMs that are subject to
semi-annual or annual interest rate change limitations, frequently 1% to 2%,
respectively. Some pools contain ARMs that provide for limitations on the
amount by which monthly payments may be increased, but have no limitation on
the frequency or magnitude of changes to the mortgage interest rate of the ARM
except for the lifetime cap. In cases where an increase in the rate cannot be
covered by the amount of the scheduled payment, the uncollected portion of
interest is deferred and added to the principal amount of the ARM. In such
cases, interest paid on the Fannie Mae Certificates is a monthly pass-through
of the amount of interest on each ARM rather than a weighted average pass-
through rate of interest.
Fannie Mae guarantees to the registered holder of a Fannie Mae Certificate
that it will distribute amounts representing scheduled principal and interest
(at the rate provided by the Fannie Mae Certificate) on the Mortgage Loans in
the pool underlying the Fannie Mae 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 Fannie Mae under its guarantees are solely those of Fannie
Mae and are not backed by the full faith and credit of the United States. If
Fannie Mae were unable to satisfy such obligations, distributions to holders
of Fannie Mae Certificates would consist solely of payments and other
recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such Mortgage Loans.
Existing FHLMC ARM Programs. The Federal Home Loan Mortgage Corporation is a
corporate instrumentality of the United States created pursuant to an Act of
Congress (Title III of the Emergency Home Finance Act of 1970, as amended, 12
U.S.C. (S) 1451-1459), on July 24, 1970. The principal activity of FHLMC
currently consists of the purchase of 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 established
its first regular ARM program in 1986 and currently has several regular ARM
programs available for the issuance of ARM certificates and a number of
special programs that may be offered to Mortgage Loan sellers. All of the
Mortgage Loans evidenced by FHLMC Certificates are conventional Mortgage
Loans, and therefore are not guaranteed or insured by, and are not obligations
of, the United States or any agency or instrumentality thereof, other than
FHLMC.
Each FHLMC Certificate issued to date has been issued in the form of a Pass-
Through Certificate representing an undivided interest in a pool of ARMs
purchased by FHLMC. The ARMs included in each pool are fully amortizing,
conventional Mortgage Loans with original terms to maturity of up to 40 years
secured by first liens on one-to-four unit family residential properties or
multi-family properties. An ARM certificate issued by FHLMC may be issued
under one of two 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.) The interest rate
paid on FHLMC Certificates adjusts annually on the first day of the month
following the month in which the interest rates on the underlying Mortgage
Loans adjust. The interest rates paid on ARM certificates issued under FHLMC's
standard ARM programs adjust annually in relation to the One-Year U.S.
Treasury Rate published by the Federal Reserve Board. The specified index used
in each FHLMC series has also included the 11th District Cost of Funds Index
published by the Federal Home Loan Bank of San Francisco and other indices.
Interest rates paid on FHLMC Certificates equal the applicable index rate plus
a specified number of basis points ranging typically from 125 to 250 basis
points. In addition, the majority of series of FHLMC Mortgage Securities
issued to date have had a monthly, semi-annual or annual interest adjustment.
Adjustments in the interest rates paid are generally limited to an annual
increase or decrease of either 1% or 2% and to a lifetime cap of 5% or 6% over
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<PAGE>
the initial interest rate. Certain FHLMC programs include Mortgage Loans that
allow the borrower to convert the adjustable mortgage interest rate of his ARM
to a fixed rate. ARMs that are converted into fixed-rate Mortgage Loans are
repurchased by FHLMC or by the seller of such Mortgage Loans to FHLMC, at the
unpaid principal balance thereof, plus accrued interest to the due date of the
last adjustable rate interest payment.
Some FHLMC pools contain ARMs that provide for limitations on the amount by
which monthly payments may be increased but have no limitation on the
frequency or magnitude of changes to the mortgage interest rate of the ARM
except for the lifetime cap. In cases where an increase in the rate cannot be
covered by the amount of the scheduled payment, the uncollected portion of
interest is deferred and added to the principal amount of the ARM. In such
cases, interest paid on the FHLMC Certificates is a monthly pass-through of
the amount of interest on each ARM rather than a weighted average pass-through
rate of interest.
FHLMC guarantees to each holder of its ARM 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 ARMs, but does not guarantee the timely payment of scheduled
principal of the underlying Mortgage Loans. The obligations of FHLMC under its
guarantees are solely those of FHLMC and are not backed by the full faith and
credit of the United States. If FHLMC were unable to satisfy such obligations,
distributions to holders of FHLMC Certificates would consist solely of
payments and other recoveries on the underlying Mortgage Loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such Mortgage Loans.
Existing GNMA ARM Programs. 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 an interest in
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
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code and other loans eligible for inclusion in mortgage pools
underlying GNMA Certificates. Section 306(g) of the Housing Act provides that
"the full faith and credit of the United States is pledged to the payment of
all amounts which may be required to be paid under any guaranty under this
subsection." An opinion, dated December 12, 1969, of an Assistant Attorney
General of the United States, states that such guarantees under Section 306(g)
of mortgage-backed certificates of the type that may be purchased by the
Company or pledged as security for a series of Mortgage Securities are
authorized to be made by GNMA and "would constitute general obligations of the
United States backed by its full faith and credit."
The interest rate paid on the certificates issued under GNMA's standard ARM
program adjusts annually in relation to the One-Year U.S. Treasury Rate
published by the Federal Reserve Board. Interest rates paid on GNMA
Certificates typically equal the index rate plus 150 basis points. Adjustments
in the interest rate are generally limited to an annual increase or decrease
of 1% and to a lifetime cap of 5%.
CMOs
The Company may, from time to time, invest in variable-rate and short-term
fixed-rate CMOs. CMOs ordinarily are issued in series, each of which consists
of several serially maturing classes ratably secured by a single pool of
Mortgage Loans or Pass-Through Certificates. Generally, principal payments
received on the mortgage-related assets securing a series of CMOs, including
prepayments on such mortgage-related assets, are applied to principal payments
on one or more classes of the CMOs of such series on each principal payment
date for such CMOs. Scheduled payments of principal of and interest on the
mortgage-related assets and other collateral securing a series of CMOs are
intended to be sufficient to make timely payments of interest on such CMOs and
to retire each class of such CMOs by its stated maturity.
CMOs may be subject to certain rights of issuers thereof to redeem such CMOs
prior to their stated maturity dates, which may have the effect of diminishing
the Company's anticipated return on its investment. The Company will not
acquire any CMOs that do not qualify as Qualified REIT Real Estate Assets.
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Mortgage Warehouse Participations
The Company also may from time to time acquire Mortgage Warehouse
Participations as an additional means of diversifying its sources of income.
The Company anticipates that such investments, together with its investments
in Other Mortgage Assets, will not in the aggregate exceed 25% of its total
Mortgage Assets. These investments are participations in lines of credit to
Mortgage Loan originators that are secured by recently originated Mortgage
Loans that are in the process of being sold to investors. Mortgage Warehouse
Participations do not qualify as Qualified REIT Real Estate Assets.
Accordingly, this activity will be limited by the REIT Provisions of the Code.
See "Federal Income Tax Consequences--Requirements for Qualification as a
REIT."
Other Mortgage Securities
General. The Company may acquire Other Mortgage Securities or interests
therein if it determines that it will be beneficial to do so and it will not
adversely affect qualification of the Company as a REIT. Such Other Mortgage
Securities may include non-High Quality Mortgage Assets and other Mortgage
Securities collateralized by single-family Mortgage Loans, Mortgage Warehouse
Participations, Mortgage Derivative Securities, Subordinated Interests and
other mortgage-backed and mortgage-collateralized obligations, other than
Pass-Through Certificates and CMOs.
Mortgage Derivative Securities. The Company may acquire Mortgage Derivative
Securities on a limited basis as market conditions warrant, either as an
independent stand-alone investment opportunity or to assist in the management
of prepayment and other risks. Mortgage Derivative Securities provide for the
holder to receive interest only, principal only, or interest and principal in
amounts that are disproportionate to those payable on the underlying Mortgage
Loans. Payments on Mortgage Derivative Securities are highly sensitive to the
rate of prepayments on the underlying Mortgage Loans. In the event of more
rapid than anticipated prepayments on such Mortgage Loans, the rates of return
on interests in Mortgage Derivative Securities representing the right to
receive interest only or a disproportionately large amount of interest
("Interest Only Derivatives") would be likely to decline. Conversely, the
rates of return on Mortgage Derivative Securities representing the right to
receive principal only or a disproportionate amount of principal ("Principal
Only Derivatives") would be likely to increase in the event of rapid
prepayments.
The Company presently intends to acquire Mortgage Derivative Securities,
including Principal and Interest Only Derivatives. Interest Only Derivatives
may be an effective hedging device since they generally increase in value as
Mortgage Securities representing interests in adjustable-rate mortgages
decrease in value. The Company also may invest in other types of floating-rate
derivatives that are currently available in the market. The Company also may
invest in other Mortgage Derivative Securities that may in the future be
developed if the Board of Directors, including a majority of Unaffiliated
Directors, determines that such investments would be advantageous to the
Company.
The Company will generally not acquire Inverse Floaters, First Loss
Subordinated Bonds, REMIC Residuals or other CMO Residuals. However, the
Company may retain residual interests in its own securitizations of Mortgage
Loans. Moreover, the Company will not purchase any Mortgage Derivative
Securities that do not qualify as Qualified REIT Real Estate Assets.
Subordinated Interests. The Company also may acquire Subordinated Interests,
which are classes of Mortgage Securities that are junior to other classes of
such series of Mortgage Securities in the right to receive payments from the
underlying Mortgage Loans. The subordination may be for all payment failures
on the Mortgage Loans securing or underlying such series of Mortgage
Securities. The subordination will not be limited to those resulting from
certain types of risks, such as those resulting from war, earthquake or flood,
or the bankruptcy of a borrower. The subordination may be for the entire
amount of the series of Mortgage Securities or may be limited in amount.
Any Subordinated Interests acquired by the Company will be limited in amount
and bear yields that the Company believes are commensurate with the risks
involved. The market for Subordinated Interests is not
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extensive and may be illiquid. In addition, the Company's ability to sell
Subordinated Interests will be limited by the REIT Provisions of the Code.
Accordingly, the Company intends to purchase Subordinated Interests for
investment purposes only. Although publicly offered Subordinated Interests
generally will be rated, the risks of ownership will be substantially the same
as the ownership of unrated Subordinated Interests because the rating does not
address the possibility that the Company might suffer a lower than anticipated
yield or fail to recover its initial investment. The Company will only
purchase Subordinated Interests that are consistent with its credit risk
management policy and will not purchase any Subordinated Interests that do not
qualify as Qualified REIT Real Estate Assets.
Mortgage Loans
General. The Company intends to acquire and accumulate Mortgage Loans as
part of its investment strategy until a sufficient quantity has been
accumulated for securitization into High Quality Mortgage Securities. The
Company anticipates that the Mortgage Loans acquired by it and not yet
securitized, together with its investments in Other Mortgage Assets, will not
constitute more than 25% of the Company's total Mortgage Assets at any time.
All Mortgage Loans will be acquired with the intention of securitizing them
into High Quality Mortgage Securities. However, there can be no assurance that
the Company will be successful in securitizing the Mortgage Loans. After a
pool of Mortgage Loans has been securitized, the Mortgage Loans will no longer
be considered Other Mortgage Assets. To meet the Company's investment
criteria, the Mortgage Loans to be acquired by the Company will generally
conform to the underwriting guidelines established by Fannie Mae, FHLMC or
other credit insurers. Applicable banking laws generally require that an
appraisal be obtained in connection with the original issuance of Mortgage
Loans by the lending institution. The Company does not intend to obtain
additional appraisals at the time of acquiring Mortgage Loans.
The Mortgage Loans may be originated by or purchased from various Suppliers
of Mortgage Assets throughout the United States, such as savings and loan
associations, banks, mortgage bankers, home builders, insurance companies and
other mortgage lenders. The Company may acquire Mortgage Loans directly from
originators and from entities holding Mortgage Loans originated by others. The
Board of Directors of the Company has not established any limits upon the
geographic concentration of Mortgage Loans to be acquired by the Company or
the credit quality of Suppliers of Mortgage Assets. See "Risk Factors--
Interest Rate Fluctuations May Decrease Net Interest Income" and "--No Current
Mortgage Assets."
The Company anticipates that it will acquire primarily ARMs. The interest
rate on ARMs is typically tied to an index (such as the One-Year U.S. Treasury
Rate published by the Federal Reserve Board, the 11th District Cost of Funds
Index published by the Federal Home Loan Bank of San Francisco or LIBOR) and
is adjustable periodically at various intervals. Such Mortgage Loans may be
subject to lifetime or periodic interest rate or payment caps.
Conforming and Nonconforming Mortgage Loans. The Company may acquire both
Conforming and Nonconforming Mortgage Loans for securitization. Conforming
Mortgage Loans comply with the requirements for inclusion in a loan guarantee
program sponsored by Fannie Mae, FHLMC or GNMA. Under current regulations, the
maximum principal balance allowed on Conforming Mortgage Loans ranges from
$214,600 for one-unit residential loans ($321,000 for such residential loans
secured by mortgage properties located in either Alaska or Hawaii) to $412,450
for four-unit residential loans ($618,875 for such residential loans secured
by mortgaged properties located in either Alaska or Hawaii). Nonconforming
Mortgage Loans are Mortgage Loans that do not qualify in one or more respects
for purchase by Fannie Mae or FHLMC under their standard programs. The Company
expects that a majority of Nonconforming Mortgage Loans it purchases will be
nonconforming primarily because they have original principal balances which
exceed the requirements for FHLMC or Fannie Mae programs.
Commitments to Mortgage Loan Sellers. The Company may issue commitments
("Commitments") to originators and other sellers of Mortgage Loans who follow
policies and procedures that generally comply with Fannie Mae and FHLMC
regulations and guidelines and that comply with all applicable federal and
state laws
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and regulations for Mortgage Loans secured by single-family (one-to-four
units) residential properties. In addition, Commitments may be issued for
Agency Certificates as well as privately issued Pass-Through Certificates and
Mortgage Loans. Commitments will obligate the Company to purchase Mortgage
Assets from the holders of the Commitments for a specific period of time, in a
specific aggregate principal amount and at a specified price and margin over
an index. Although the Company may commit to acquire Mortgage Loans prior to
funding, all Mortgage Loans are to be fully funded prior to their acquisition
by the Company. Following the issuance of Commitments, the Company will be
exposed to risks of interest rate fluctuations similar to those risks on its
adjustable-rate Mortgage Assets.
Securitization of Mortgage Loans. The Mortgage Loans will be acquired by the
Company and held until a sufficient quantity has been accumulated for
securitization. During the accumulation period, the Company will be subject to
risks of borrower defaults and bankruptcies, fraud losses and special hazard
losses (such as those occurring from earthquakes or floods) that are not
covered by standard hazard insurance. In the event of a default on any
Mortgage Loan held by the Company, the Company will bear the risk of loss of
principal to the extent of any deficiency between the value of the collateral
underlying the Mortgage Loan and the principal amount of the Mortgage Loan. No
assurance can be given that any such mortgage, fraud or hazard insurance will
adequately cover a loss suffered by the Company. Also during the accumulation
period, the costs of financing the Mortgage Loans through reverse repurchase
agreements and other borrowings and lines of credit with warehouse lenders
could exceed the interest income on the Mortgage Loans. It may not be possible
or economical for the Company to complete the securitization for all Mortgage
Loans that the Company acquires, in which case the Company will continue to
bear the risks of borrower defaults and special hazard losses.
Protection Against Mortgage Loan Risks. It is anticipated that each Mortgage
Loan purchased will have a commitment for mortgage pool insurance from a
mortgage insurance company with a claims-paying ability in one of the two
highest rating categories by either of the Rating Agencies. Mortgage pool
insurance insures the payment of certain portions of the principal and
interest on Mortgage Loans. In lieu of mortgage pool insurance, the Company
may arrange for other forms of credit enhancement such as letters of credit,
subordination of cash flows, corporate guaranties, establishment of reserve
accounts or over-collateralization. The Company expects that all Mortgage
Loans to be acquired will be reviewed by a mortgage pool insurer or other
qualified Mortgage Loan underwriter to ensure that the credit quality of the
Mortgage Loans meets the insurer's guidelines. The Company intends to rely
primarily upon the credit evaluation of such third-party mortgage pool insurer
or underwriter issuing the commitment rather than make its own independent
credit review in determining whether to purchase a Mortgage Loan. Credit
losses covered by the pool insurance policies or other forms of credit
enhancement are restricted to the limits of their contractual obligations and
may be lower than the principal amount of the Mortgage Loan. The pool
insurance or credit enhancement will be issued when the Mortgage Loan is
subsequently securitized, and the Company will be at risk for credit losses on
that Mortgage Loan prior to its securitization.
In addition to credit enhancement, the Company anticipates that it will also
obtain a commitment for special hazard insurance on the Mortgage Loans, if
available at a reasonable cost, to mitigate casualty losses that are not
usually covered by standard hazard insurance, such as vandalism, war,
earthquake and floods. This special hazard insurance is not in force during
the accumulation period, but is activated instead at the time the Mortgage
Loans are pledged as collateral for the Mortgage Securities.
It is expected that when the Company acquires Mortgage Loans, the seller
will generally represent and warrant to the Company that there has been no
fraud or misrepresentation during the origination of the Mortgage Loans and
generally agree to repurchase any Mortgage Loan with respect to which there is
fraud or misrepresentation. The Company will provide similar representations
and warranties when the Company sells or pledges the Mortgage Loans as
collateral for Mortgage Securities. If a Mortgage Loan becomes delinquent and
the pool insurer is able to prove that there was a fraud or misrepresentation
in connection with the origination of the Mortgage Loan, the pool insurer will
not be liable for the portion of the loss attributable to such fraud or
misrepresentation. Although the Company will generally have recourse to the
seller based on the seller's
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representations and warranties to the Company, the Company will generally be
at risk for loss to the extent the seller does not perform its repurchase
obligations.
MANAGEMENT POLICIES AND PROGRAMS
Asset Acquisition Policy
The Company will only acquire those Mortgage Assets that are consistent with
the Company's balance sheet guidelines and risk management objectives. Since
the intention of the Company is generally to hold its Mortgage Assets until
maturity, the Company will generally not seek to acquire Mortgage Assets with
investment returns that are attractive only in a limited range of scenarios.
The Company believes that future interest rates and mortgage prepayment rates
are very difficult to predict. Therefore, the Company will seek to acquire
Mortgage Assets that it believes will provide competitive returns over a broad
range of interest rate and prepayment scenarios.
The Company will acquire Mortgage Assets that it believes will maximize
returns on capital invested, after considering (i) the amount and nature of
the anticipated cash flow from the Mortgage Assets, (ii) the Company's ability
to pledge Mortgage Assets to secure collateralized borrowings, (iii) the
increase in the Company's capital requirement determined by the Company's
Capital and Leverage Policy resulting from the purchase and financing of
Mortgage Assets, (iv) the costs of financing, hedging, managing, securitizing
and reserving for Mortgage Assets, and (v) the Company's credit risk
management policy. Prior to acquisition of a Mortgage Asset, potential returns
on capital employed are assessed over the life of the Mortgage Asset and in a
variety of interest rate, yield spread, financing cost, credit loss and
prepayment scenarios.
The Company will also give consideration to balance sheet management and
risk diversification issues. A specific Mortgage Asset that is being evaluated
for potential acquisition is deemed more or less valuable to the Company to
the extent it serves to increase or decrease certain interest rate or
prepayment risks that may exist in the balance sheet, to diversify or
concentrate credit risk, and to meet the cash flow and liquidity objectives
the Company may establish for the balance sheet from time to time. The Company
will evaluate the addition of a potential Mortgage Asset and its associated
borrowings and hedges to the balance sheet and the impact that the potential
Mortgage Asset would have on the risk in, and returns generated by, the
Company's balance sheet as a whole over a variety of scenarios.
The Company will focus primarily on the acquisition of adjustable-rate
Mortgage Assets, and believes that currently such products are more attractive
for the Company's purposes than are fixed-rate Mortgage Assets. Although the
cost of hedging a fixed-rate Mortgage Asset to meet the Company's
asset/liability management goals is usually significant, the Company may
purchase fixed-rate Mortgage Assets (generally in combination with hedging
instruments) in the future should the potential returns on capital invested,
after hedging and all other costs, exceed the returns available from other
Mortgage Assets or if the purchase of such Mortgage Assets would serve to
reduce or diversify the risks of the Company's balance sheet.
The Company may also purchase the stock of other mortgage REITs or similar
companies when it believes that such purchase will yield relatively attractive
returns on capital employed. When the stock market valuations of such
companies are low in relation to the market value of their assets, such stock
purchases can be a way for the Company to acquire an interest in a pool of
Mortgage Assets at an attractive price. The Company does not, however,
presently intend to invest in the securities of other issuers for the purpose
of exercising control or to underwrite securities of other issuers.
The Company intends to acquire new Mortgage Assets, and will also seek to
expand its capital base in order to further increase the Company's ability to
acquire new Mortgage Assets, when the potential returns from new Mortgage
Assets appear attractive relative to the return expectations of stockholders
(as expressed principally by the effective dividend yield of the Common
Stock). The Company may in the future acquire Mortgage Assets by offering its
debt or equity securities in order to acquire such Mortgage Assets.
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The Company generally intends to hold Mortgage Assets to maturity. In
addition, the REIT Provisions of the Code limit in certain respects the
ability of the Company to sell Mortgage Assets. See "Federal Income Tax
Consequences--Taxation of the Company." The Company may decide to sell
Mortgage Assets from time to time, however, for a number of reasons including,
without limitation, to dispose of a Mortgage Asset as to which credit risk
concerns have arisen, to reduce interest rate risk, to substitute one type of
Mortgage Asset for another to improve yield or to maintain compliance with the
55% requirement under the Investment Company Act, and generally to restructure
the balance sheet when the Company deems such action advisable. The Company
will select any Mortgage Assets to be sold according to the particular purpose
such sale will serve. The Company's Board of Directors has not adopted a
policy that would restrict the Company's authority to determine the timing of
sales or the selection of Mortgage Assets to be sold.
As a requirement for maintaining REIT status, the Company must distribute to
stockholders annually aggregate dividends equaling at least 95% of its Taxable
income. See "Federal Income Tax Consequences-- Distribution Requirement." The
Company will make additional distributions of capital when the return
expectations of the stockholders (as expressed principally by the effective
dividend yield of its Common Stock) appear to exceed returns potentially
available to the Company through making new investments in Mortgage Assets.
Subject to the limitations of applicable securities and state laws, the
Company can distribute capital by making purchases of its own Common Stock,
through paying down or repurchasing any outstanding uncollateralized debt
obligations, or through increasing the Company's dividend to include a return
of capital.
Capital and Leverage Policy
General. The Company's goal is to strike a balance between the under-
utilization of leverage, which reduces potential returns to stockholders, and
the over-utilization of leverage, which could reduce the Company's ability to
meet its obligations during adverse market conditions. As described below, the
Company has established a Capital and Leverage Policy that limits its ability
to acquire additional Mortgage Assets during times when the actual capital
base of the Company is less than a required amount defined in such Policy,
currently an 8% equity ratio. In this way, the use of balance sheet leverage
is better controlled. The actual capital base for the purpose of the Capital
and Leverage Policy is equal to the market value of total Mortgage Assets less
the book value of total collateralized borrowings. The actual capital base, as
so defined, represents the approximate liquidation value of the Company and
approximates the market value of Mortgage Assets less the book value of total
collateralized borrowings. The actual capital base, as so defined, represents
the approximate liquidation value of the Company and approximates the market
value of Mortgage Assets that can be pledged or sold to meet over-
collateralization requirements for the Company's borrowings. The unpledged
portion of the Company's actual capital base is available to be pledged or
sold as necessary to maintain over-collateralization levels for the Company's
borrowings.
Acquisition of Mortgage Assets. The Company is prohibited from acquiring net
additional Mortgage Assets during periods when the actual capital base of the
Company is less than the minimum amount required under the Capital and
Leverage Policy (except when such asset acquisitions may be necessary to
maintain REIT status or the Company's exemption from the Investment Company
Act). In addition, if the actual capital base falls below the requirement of
the Capital and Leverage Policy, the Manager is required to submit to the
Company's Board of Directors a plan designed to bring the Company back to its
target capital-to-assets ratio. It is anticipated that in many circumstances
this goal will be achieved over time without active management through the
natural process of mortgage principal repayments and increases in the market
values of Mortgage Assets as their coupon rates adjust upwards to market
levels. The Company anticipates that the actual capital base is likely to
temporarily exceed the capital requirement during periods following new equity
offerings, including the Offering, and during periods of falling interest
rates and that the actual capital base is likely to fall below the Capital and
Leverage Policy requirements during periods of rising interest rates.
The first component of the Company's Capital and Leverage Policy
requirements is the current aggregate overcollateralization amount, or
"haircut," lenders will require the Company to hold as capital. The haircut
for each Mortgage Asset is determined by the lender based on the risk
characteristics and liquidity of the particular
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Mortgage Asset. Haircut levels on individual borrowings generally range from
3% for Agency Certificates to 20% for certain Privately Issued Certificates,
and are likely to average between 3% and 10% for the Company as a whole.
Should the market value of the pledged Mortgage Assets decline, the Company
will be required to deliver additional collateral to the lenders in order to
maintain a constant over-collateralization level on its borrowings.
The second component of the Company's Capital and Leverage Policy
requirements is the "liquidity capital cushion." The liquidity capital cushion
is an additional amount of capital in excess of the haircut maintained by the
Company in order to help it meet the demands of the lenders for additional
collateral should the market value of its Mortgage Assets decline. The
liquidity capital cushions assigned to the Company's portfolio of Mortgage
Assets are based on the Company's assessment of each Mortgage Asset's market
price volatility, credit risk, liquidity and attractiveness for use as
collateral by lenders. This process relies on the Company's ability to
identify and weigh the relative importance of these and other factors.
Consideration is also given to hedges associated with the Mortgage Assets and
any effect such hedges may have on reducing net market price volatility,
concentration or diversification of credit and other risks in the balance
sheet as a whole and the net cash flows that can be expected to arise from the
interaction of the various components of the Company's balance sheet. The
Company anticipates that at least 50% of the Mortgage Assets shall be invested
in Agency Certificates, AAA (or comparably) rated adjustable-rate Mortgage
Securities or Mortgage Assets with similar liquidity characteristics. The
Company's Board of Directors will review on a periodic basis various analyses
by the Manager of the risks inherent in the Company's balance sheet, including
an analysis of the effects of various scenarios on the Company's net cash
flows, earnings, dividends, liquidity and net market value. Should the
Company's Board of Directors determine that the minimum required capital base
set by the Capital and Leverage Policy is either too low or too high, the
Board of Directors will raise or lower the capital requirement accordingly.
Under current market conditions, the Company will seek to maintain its
aggregate minimum capital base at approximately 10% of the market value of its
Mortgage Assets. This percentage will fluctuate over time as the composition
of the balance sheet changes, haircut levels required by lenders change, the
market value of the Mortgage Assets change and as liquidity capital cushion
percentages set by the Company's Board of Directors are adjusted over time.
However, the Company's aggregate minimum capital requirement will not fall
below 8% of its Mortgage Assets, taking into account callable debt such as
repurchase agreements subject to margin calls. The Company's policy for
aggregate minimum capital requirements will be reviewed by its Board of
Directors upon issuance of any non-callable debt and as market conditions
change.
The Company's Borrowings. Pursuant to the Company's overall business
strategy, a substantial portion of the Company's borrowings will be short-term
or adjustable-rate. The Company's borrowings are expected to be primarily
reverse repurchase agreements, but in the future may also be obtained through
loan agreements, warehouse lines of credit, Dollar-Roll Agreements, and other
credit facilities with institutional lenders and issuance of debt securities
such as commercial paper, medium-term notes, CMOs and senior or subordinated
notes. The Company intends to enter into financing transactions only with
institutions that it believes are sound credit risks and to follow other
internal policies designed to limit its credit and other exposure to financing
institutions. The Company will only enter into repurchase agreements
transactions with counter-parties rated investment grade by a nationally
recognized rating service.
The Company anticipates that, upon repayment of each borrowing in the form
of a reverse repurchase agreement, the collateral will immediately be used for
borrowing in the form of a new reverse repurchase agreement. The Company has
not at the present time entered into any commitment agreements under which a
lender would be required to enter into any reverse repurchase agreements
during a specified period of time, nor does the Company presently plan to have
liquidity facilities with commercial banks. See "Risk Factors--No Current
Borrowing Arrangements." The Company, however, may enter into such commitment
agreements in the future if deemed favorable to the Company. The Company will
enter into reverse repurchase agreements primarily with national broker-
dealers, commercial banks and other lenders that typically offer such
financing. The Company will enter into collateralized borrowings only with
financial institutions meeting credit standards approved by the Company's
Board of Directors, including a majority of Unaffiliated Directors, and
monitor the financial condition of such institutions on a regular basis.
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A reverse repurchase agreement, although structured as a sale and repurchase
obligation, acts as a financing under which the Company effectively pledges
its Mortgage Assets 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. While used as collateral,
Mortgage Assets continue to pay principal and interest that inure to the
benefit of the Company. In the event of the insolvency or bankruptcy of the
Company, certain reverse repurchase agreements may qualify for special
treatment under the Bankruptcy Code, the effect of which would be, among other
things, to allow the creditor under such agreements to avoid the automatic
stay provisions of the Bankruptcy Code and to foreclose on the collateral
agreements without delay. In the event of the insolvency or bankruptcy of a
lender during the term of a reverse repurchase agreement, the lender may be
permitted under applicable insolvency laws, to repudiate the contract, and the
Company's claim against the lender for damages therefrom may be treated simply
as one of an unsecured creditor. In addition, if the lender is a broker or
dealer subject to the Securities Investor Protection Act of 1970, or an
insured depositary institution subject to the Federal Deposit Insurance Act,
the Company's ability to exercise its rights to recover its securities under a
reverse repurchase agreement or to be compensated for any damages resulting
from the lender's insolvency may be further limited by those statutes. These
claims would be subject to significant delay and, if and when received, may be
substantially less than the damages actually suffered by the Company.
The Company expects that substantially all of its borrowing agreements will
require the Company to deposit additional collateral in the event the market
value of existing collateral declines, which may require the Company to sell
Mortgage Assets to reduce the borrowings. The Company liquidity management
policy is designed to maintain a cushion of equity sufficient to provide
required liquidity to respond to the effects under its borrowing arrangements
of interest rate movements and changes in market value of its Mortgage Assets,
as described above. However, a major disruption of the reverse repurchase or
other market relied on by the Company for short-term borrowings would have a
material adverse effect on the Company unless the Company were able to arrange
alternative sources of financing on comparable terms. See "Risk Factors--
Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings" and "--Interest Rate Fluctuations May Decrease Net
Interest Income."
CREDIT RISK MANAGEMENT POLICY
The Company will review credit risk and other risks of loss associated with
each investment. In addition, the Company will seek to diversify the Company's
portfolio of Mortgage Assets to avoid undue geographic, insurer, industry and
certain other types of concentrations. The Company's Board of Directors will
monitor the overall portfolio risk and determine appropriate levels of
provision for loss.
With respect to its Mortgage Securities, the Company will be exposed to
various levels of credit and special hazard risk, depending on the nature of
the underlying Mortgage Assets and the nature level of credit enhancements
supporting such securities. Each of the Mortgage Assets acquired by the
Company will have some degree of protection from normal credit losses. Agency
Certificates are covered by credit protection in the form of a 100% guarantee
from a government sponsored entity (Fannie Mae, FHLMC or GNMA). Privately
Issued Certificates represent interests in pools of residential mortgage loans
with partial credit enhancement. Credit loss protection for Privately Issued
Certificates is achieved through the subordination of other interests in the
pool to the interest held by the Company, through pool insurance or through
other means. The degree of credit protection varies substantially among
Privately Issued Certificates.
The Company anticipates that at least 50% of the Company's total Mortgage
Assets will be Agency Certificates or carry a AAA or have a comparable rating
from one of the Rating Agencies. The Company further anticipates that at least
75% of the Company's total Mortgage Assets will be comprised of Agency
Certificates or have at least an A rating from one of the Rating Agencies. The
Company anticipates that Other Mortgage Assets will not constitute more than
25% of the Mortgage Asset portfolio's value; such investments will not be
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made by the Company unless they are determined by the Manager to be of
comparable quality to a High Quality Mortgage Security. The Company intends to
structure its portfolio to maintain a minimum weighted average rating
(including the Manager's deemed comparable ratings for unrated Mortgage Assets
based on a comparison to rated Mortgage Securities with like characteristics)
of at least AA (or a comparable rating) by at least one of the Rating
Agencies. However, there can be no assurance that such structure will be
achieved and the Company is not obligated to liquidate any assets to achieve
its desired weighted average rating.
The Company will review the quality of the Mortgage Loans at the time of
acquisition and on an ongoing basis. During the time it holds Mortgage Loans,
the Company will be subject to risks of borrower defaults and bankruptcies and
special hazard losses (such as those occurring from earthquakes or floods)
that are not covered by standard hazard insurance. However, the Company will
generally obtain credit enhancements such as mortgage pool or special hazard
insurance for its Mortgage Loans, and individual Mortgage Loans may be covered
by FHA insurance, VA guarantees or private mortgage insurance and, to the
extent securitized into Agency Certificates, by such government sponsored
entity obligations or guarantees.
Compliance with the credit risk management policy guidelines shall be
determined at the time of purchase of Mortgage Assets (based on the most
recent valuation utilized by the Company) and will not be affected by events
subsequent to such purchase, including, without limitation, changes in
characterization, value or rating of any specific Mortgage Assets or economic
conditions or events generally affecting any Mortgage Assets of the type held
by the Company.
ASSET/LIABILITY MANAGEMENT POLICIES
Interest Rate Risk Management Policy. To the extent consistent with its
election to qualify as a REIT, the Company will follow an interest rate risk
management policy intended to mitigate the negative effects of major interest
rate changes. The Company intends to minimize its interest rate risk from
borrowings by attempting to match the maturity of its debts to the interest
rate adjustment periods on its Mortgage Assets. Under normal market
conditions, the Company will attempt to keep the difference between the
weighted average time to "reset" on its Mortgage Assets to the weighted
average time to reset on its debts to 90 days or less, taking into account all
hedging transactions, although there can be no assurance that the Company will
be able to limit such "reset" periods. This policy will be reviewed by the
Company's Board of Directors if the Company incurs long-term non-callable
borrowings and as market conditions change. In addition to "reset" periods,
the Company also intends to manage differences in interest rate indices
between its Mortgage Assets and borrowings. See "Risk Factors--Failure to
Successfully Manage Interest Rate Risks May Adversely Affect Results of
Operations."
The Company's interest rate risk management policy is formulated with the
intent to offset the potential adverse effects resulting from rate adjustment
limitations on its Mortgage Assets and the differences between interest rate
adjustment indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets and related borrowings. The Company's anticipates being able
to adjust the average maturity period of such borrowings on an ongoing basis
by changing the mix of maturities and interest rate adjustment periods as
borrowings come due and are renewed. Through use of these procedures, the
Company will seek to minimize any differences between interest rate adjustment
periods of adjustable-rate Mortgage Assets and related borrowings that may
occur.
In general, the Company intends to mitigate lifetime cap risk associated
with its adjustable-rate Mortgage Assets. The policy will be to attempt to
limit the effective interest rate on substantially all of the Company's
liabilities as a whole to a rate equal to the weighted average lifetime cap of
its adjustable-rate Mortgage Assets. Under current market conditions, the
Company does not intend to enter into transactions to mitigate its periodic
cap risk. The Company will manage this risk through its leverage and
asset/liability policies.
The Company intends to purchase from time to time interest rate caps,
interest rate swaps and similar instruments to attempt to mitigate the risk of
the cost of its variable-rate liabilities increasing at a faster rate than the
earnings on its Mortgage Assets during a period of rising rates. In this way,
the Company intends generally
42
<PAGE>
to hedge as much of the interest rate risk as is in its best interests, given
the cost of such hedging transactions and the need to maintain the Company's
status as a REIT. This determination may result in the Company bearing a level
of interest rate risk that could otherwise be hedged when the Company
believes, based on all relevant facts, that bearing such risk is advisable.
The Company may also, to the extent consistent with its compliance with the
REIT Provisions of the Code and Maryland law, utilize financial futures
contracts, options and forward contracts as a hedge against future interest
rate changes. The Company will not invest in financial futures contracts or
options thereon that would cause the Manager or the Company to have to
register under the Commodities Exchange Act. The Company's hedging strategy
may lower the earnings and dividends of the Company in the short-term in order
to further the objective of maintaining competitive levels of earnings and
dividends over the long-term. The Company does not intend to hedge for
speculative purposes.
The Company may elect to conduct a portion of its hedging operations through
one or more subsidiary corporations that would not be a Qualified REIT
Subsidiary and would be subject to federal and state income taxes. In order to
comply with the nature of asset tests applicable to the Company as a REIT, the
value of the securities of any such subsidiary held by the Company must be
limited to less than 5% of the value of the Company's total Mortgage Assets as
of the end of each calendar quarter and no more than 10% of the voting
securities of any such subsidiary may be owned by the Company. See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT--Asset
Tests." A taxable subsidiary would not elect REIT status and would distribute
any net profit after taxes to the Company and its other stockholders. Any
dividend income received by the Company from any such taxable subsidiary
(combined with all other income generated from the Company's Mortgage Assets,
other than Qualified REIT Real Estate Assets) must not exceed 25% of the gross
income of the Company. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Gross Income Tests."
Prepayment Risk Management Policy. The Company will seek to minimize the
effects of faster or slower than anticipated prepayment rates through
structuring a diversified portfolio with a variety of prepayment
characteristics, investing in Mortgage Assets with prepayment prohibitions and
penalties, investing in certain Mortgage Security structures that have
prepayment protections, and balancing Mortgage Assets purchased at a premium
with Mortgage Assets purchased at a discount. The Company intends to invest in
Mortgage Assets that on a portfolio basis do not have significant purchase
price premiums. Under normal market conditions, the Company will seek to keep
the aggregate capitalized purchase premium of the portfolio to 3% or less. In
addition, the Company may in the future purchase Principal Only Derivatives to
a limited extent as a hedge against prepayment risks. Prepayment risk will be
monitored by the Manager and the Company's Board of Directors through periodic
review of the impact of a variety of prepayment scenarios on the Company's
revenues, net earnings, dividends, cash flows and net balance sheet market
value.
The Company believes that it has developed a cost-effective asset/liability
management program to mitigate interest rate and prepayment risks. However, no
strategy can completely insulate the Company from interest rate changes,
prepayment risks and defaults by Counter-parties. Further, as noted above,
certain of the federal income tax requirements that the Company must satisfy
to qualify as a REIT limit the Company's ability to fully hedge its interest
and prepayment risks. The Company will monitor carefully, and may have to
limit, its asset/liability management program to assure that it does not
realize excessive hedging income, or hold hedging Mortgage Assets having
excess value in relation to total Mortgage Assets, which would result in the
Company's disqualification as a REIT or, in the case of excess hedging income,
the payment of a penalty tax for failure to satisfy certain REIT income tests
under the Code, provided such failure was for reasonable cause. See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT." In
addition, asset/liability management involves transaction costs that increase
dramatically as the period covered by the hedging protection increases.
Therefore, the Company may be prevented from effectively hedging its interest
rate and prepayment risks.
MORTGAGE LOAN SECURITIZATION TECHNIQUES
The Company will seek to contract with conduits, financial institutions,
mortgage bankers, investment banks and others to purchase Mortgage Loans that
they are originating. The Company anticipates that it will have
43
<PAGE>
sufficient purchasing power in some circumstances to induce origination firms
to originate Mortgage Loans to the Company's specifications. The Company
intends to enhance the value and liquidity of all the Mortgage Loans it
acquires by securitizing the Mortgage Loans into Mortgage Securities in the
manner which will best meet its own needs.
In addition to creating Mortgage Securities from the Mortgage Loans in its
portfolio, the Company may also from time to time "re-securitize" portions of
its Mortgage Securities portfolio. In a resecuritization transaction, Mortgage
Securities rather than Mortgage Loans are used as collateral to create new
Mortgage Securities. This would typically be done as the Mortgage Loans
underlying the securities improve in credit quality through seasoning, as
values rise on the underlying properties or when the credit quality of a
junior class of Mortgage Security improves due to prepayment of more senior
classes. Such transactions can result in improved credit ratings, higher
market values and lowered borrowing costs.
The Company may conduct its securitization activities through one or more
taxable or Qualified REIT Subsidiaries formed for such purpose. The Company
does not intend to conduct its securitization activities through the Manager
or the Manager's Affiliates.
OTHER POLICIES
The Company may purchase stock in other mortgage REITs or stock in similar
companies when the Company believes that such purchases will yield relatively
attractive returns on capital employed. When the stock market valuations of
such companies are low in relation to the market value of their assets, the
Company believes that such stock purchases can be a way for the Company to
acquire an interest in a pool of Mortgage Assets at an attractive price. The
Company does not, however, presently intend to invest in the securities of
other issuers for the purpose of exercising control or to underwrite
securities of other issuers.
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act. The Company does not currently
intend to (i) originate Mortgage Loans or (ii) offer securities in exchange
for real property.
FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Company's Board of Directors has established the investment policies,
the operating policies and the strategies set forth in this Prospectus. The
Board of Directors has the power to modify or waive such policies and
strategies without the consent of the stockholders to the extent that the
Board of Directors (including a majority of the Unaffiliated Directors)
determines that such modification or waiver is in the best interests of
stockholders. Among other factors, developments in the market that affect the
policies and strategies mentioned herein or which change the Company's
assessment of the market may cause the Company's Board of Directors to revise
its policies and strategies. However, if such modification or waiver relates
to the relationship of, or any transaction between, the Company and the
Manager or any Affiliate of the Manager, the approval of a majority of the
Unaffiliated Directors is also required.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or the
Manager is a party or to which any property of the Company or the Manager is
subject. The Company recently received a demand from a company with a similar
name requesting that the Company not operate under the name "Apex Mortgage
Capital." See "Risk Factors--Litigation".
From time to time the TCW Group is involved in litigation in connection with
its operations, including litigation involving the operations of the MBS
Group. Such litigation has included certain senior officers of the TCW Group,
including certain of the officers of the Company and the Manager, as
defendants. The Company believes that there are no legal proceedings that
would materially adversely affect the Manager's or the Company's executive
officers' ability to manage the Company.
44
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Philip A. Barach............ 45 President and Chief Executive Officer
Vice Chairman of the Board, Chief Invest-
Jeffrey E. Gundlach......... 39 ment Officer
Daniel K. Osborne........... 32 Executive Vice President, Chief Operating
Officer and Chief Financial Officer
Joseph J. Galligan.......... 38 Senior Vice President
Michael E. Cahill........... 46 Secretary
</TABLE>
Philip A. Barach. Mr. Barach is President, Chief Executive Officer and a
Director of the Company. Mr. Barach is also a Group Managing Director and
Chief Investment Officer of Investment Grade Fixed Income of the TCW Group and
the Manager. Mr. Barach is a member of the TCW Group's MBS Group. Mr. Barach
joined TCW in 1987 after being employed by Sun Life Insurance Company, where
he was Senior Vice President and Chief of Investments. Previously, Mr. Barach
served as head of Fixed Income Investments for the State of California
Retirement System. Mr. Barach attended the Hebrew University of Jerusalem,
where he received a B.A. degree in International Relations and an M.B.A.
degree in Finance.
Jeffrey E. Gundlach. Mr. Gundlach is Chief Investment Officer and Vice
Chairman of the Board of the Company. Mr. Gundlach is also a Group Managing
Director of the TCW Group and the Manager. Mr. Gundlach has been with the TCW
Group since 1985. Previously, Mr. Gundlach was employed by Transamerica
Corporation's Property/Casualty Insurance division, where he was a Senior Loss
Reserve Analyst responsible for investment discount and funding strategies.
Mr. Gundlach is also a member of the TCW Group's MBS Group. Mr. Gundlach is a
graduate of Dartmouth College, holding B.A. degrees in Mathematics and
Philosophy (summa cum laude). He also attended Yale University as a Ph.D.
candidate in Mathematics.
Daniel K. Osborne. Mr. Osborne is Executive Vice President, Chief Operating
Officer and Chief Financial Officer of the Company. Mr. Osborne is also a
Senior Vice President of the TCW Group and the Manager. Mr. Osborne joined the
TCW Group in 1994 as part of the MBS Group, managing fixed income mutual
funds. Prior to joining TCW, from 1992 to 1994, Mr. Osborne was a Vice
President of ASR Investments Corporation ("ASR"), a publicly held REIT
investing in Mortgage Assets. At ASR, Mr. Osborne was responsible for
asset/liability management and the supervision and preparation of public
reporting. Prior to his employment with ASR, Mr. Osborne was a Certified
Public Accountant with Deloitte & Touche LLP specializing in REITs, mortgage
securities and publicly held companies. He holds a B.S. degree in Accounting
from Arizona State University.
Joseph J. Galligan. Mr. Galligan is Senior Vice President of the Company.
Prior to joining the TCW Group in 1991, Mr. Galligan was a Vice President at
Smith Barney in the Mortgage-Backed Specialist Group. Prior to that, he spent
five years at First Boston as Vice President in the same area. In addition,
Mr. Galligan spent over three years at Scudder Stevens & Clark as a Portfolio
Manager/Trader. He holds a B.S. degree in Economics with a concentration in
Finance from the Wharton School of Business at the University of Pennsylvania.
Mr. Galligan is a Chartered Financial Analyst.
Michael E. Cahill. Mr. Cahill is the Secretary of the Company. Mr. Cahill is
a Managing Director and General Counsel of the Manager, TCW and certain of its
Affiliates. Prior to joining the TCW Group in 1991, Mr. Cahill was Senior Vice
President and General Counsel of Act III Communications. Previously, he was in
private corporate law practice with O'Melveny & Myers and, prior to that, with
Shenas, Robbins, Shenas & Shaw in San Diego. He is a member of the State Bar
of California and of the Province of Ontario and is admitted to various
courts, including the U.S. Supreme Court. Mr. Cahill holds B.A. degrees in
Mathematics and Philosophy from Bishops University, Quebec, an LL.M. degree
from Harvard University and an LL.B. degree from Osgoode Hall Law School, York
University, Toronto.
45
<PAGE>
The directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Marc I. Stern............... 53 Chairman of the Board
Jeffrey E. Gundlach(1)...... 39 Vice Chairman of the Board
Philip A. Barach(1)......... 45 Director
John C. Argue............... 65 Proposed Director
Carl C. Gregory, III........ 49 Proposed Director
Peter G. Allen.............. 39 Proposed Director
John A. Gavin............... 65 Proposed Director
</TABLE>
- --------
(1) See above for certain biographical information regarding Messrs. Barach
and Gundlach.
Marc I. Stern. Mr. Stern is Chairman of the Board of Directors of the
Company. Mr. Stern is Vice Chairman of the Board of Directors of the Manager
and TCW Asset Management Company and a Director of TCW, Trust Company of the
West and TCW Funds Management, Inc. ("TFMI"). Mr. Stern is also President of
TCW and TFMI and Executive Vice President and Group Managing Director of Trust
Company of the West. Mr. Stern is responsible for the TCW Group's
international operations and is Chairman of TCW Americas Development, Inc.,
TCW Asia, Ltd. and TCW London International, Limited. Mr. Stern joined the TCW
Group in 1990. Previously, Mr. Stern was President of Broad, Inc., Managing
Director and Chief Administrative Officer of the Henley Group, Inc. and Senior
Vice President of Allied-Signal, Inc. and related entities. Prior to holding
such positions, Mr. Stern was associated with the law firm of Debevoise &
Plimpton. Mr. Stern is also Director of Qualcomm, Inc. and the Los Angeles
Music Center Opera, and a member of the Board of Trustees of The Salk
Institute and Dickinson College. Mr. Stern is a member of the State Bars of
New York and New Hampshire. Mr. Stern received a B.A. degree in Political
Science from Dickinson College, an M.A. degree in Political Science from the
Columbia University School of Public Law and Government, and a J.D. degree
from the Columbia University School of Law.
John C. Argue. Mr. Argue has consented to become a Director of the Company
upon completion of the Offering. Mr. Argue is Of Counsel to the law firm of
Argue Pearson Harbison & Myers. Mr. Argue is also a Director of Avery Dennison
Corporation, CalMat Company, Coast Savings Financial Inc. and Coast Federal
Bank. He is an advisory director of LAACO Ltd. Mr. Argue is a Trustee of the
TCW Galileo Family of Funds, the TCW Convertible Securities Fund, Inc. and the
TCW/DW Family of Funds. He is Chairman of the Rose Hills Foundation.
Carl C. Gregory, III. Mr. Gregory has consented to become a Director of the
Company upon completion of the Offering. Mr. Gregory has been Managing Partner
of American Western Partners since 1995. He was Chairman, Chief Executive
Officer and a Director of MIP Properties, Inc. from 1991 through 1995. Prior
to 1991, Mr. Gregory was President of American Western Realty Corporation. Mr.
Gregory has been Chairman of the Board of Directors of West Capital Financial
Services Corp. since 1996, a Director of Pacific Gulf Properties, Inc. since
1997 and a Director of House of Fabrics since 1996. Mr. Gregory received a
B.A. degree in Accounting from Southern Methodist University and an M.B.A.
degree in Finance from the University of Southern California.
Peter G. Allen. Mr. Allen has consented to become a Director of the Company
upon completion of the Offering. Mr. Allen is an investment banker who now
works as an independent investor and advisor. Previously, he worked at Morgan
Stanley & Co. Incorporated for 15 years where he was the Managing Director
responsible for the firm's investment banking operations in the southwestern
United States. During his tenure at Morgan Stanley, Mr. Allen advised a number
of companies in a wide variety of strategic and financial transactions. Mr.
Allen was also the Managing Partner at Chartwell Partners from January 1997
through July 1997. Mr. Allen received his B.A. degree in economics, summa cum
laude, at Yale University in 1980 and his M.B.A. degree at Stanford University
in 1984.
46
<PAGE>
John A. Gavin. Mr. Gavin has consented to become a Director of the Company
upon completion of the Offering. Mr. Gavin is founder and chairman of Gamma
Services Corporation and a principal of Gavin, Dailey and Partners, both
international capital and consulting firms. Since 1995, he has been affiliated
with Hicks, Muse, Tate & Furst (Latin America) as Managing Director. Mr. Gavin
is a member of the board of directors of Atlantic Richfield Company (ARCO);
Dresser Industries; Pinkerton's, Inc.; International Wire Group; Fedco, Inc;
and KAP Resources. Mr. Gavin is also a trustee of Hotchkis & Wiley Funds. From
1981 to 1986, Mr. Gavin was the United States Ambassador to Mexico. Mr. Gavin
graduated from Stanford University with a degree in Economic History of Latin
America.
After the completion of the Offering, the Board of Directors of the Company
will be divided into three classes, with the number of directors in each class
as nearly equal in number as possible. Each class of directors will contain at
least one affiliated director and at least one Unaffiliated Director. After
the initial staggering period, each director shall serve for a term ending on
the date of the third annual meeting of stockholders following the annual
meeting at which such director was elected. All officers serve at the
discretion of the Company's Board of Directors. Although the Company may have
salaried employees, it currently has no such employees. The Company will pay
an annual director's fee to each Unaffiliated Director of $10,000, a fee of
$1,250 for each meeting of the Board of Directors attended by each
Unaffiliated Director and reimbursement of costs and expenses of all directors
for attending such meetings. Affiliated directors will not be separately
compensated by the Company.
The Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company. Therefore, the
officers of the Company, in their capacities as such, are not expected to
devote substantial portions of their time to the affairs of the Company.
However, in their capacities as officers or employees of the Manager, or its
Affiliates, they will devote such portion of their time to the affairs of the
Manager as is required for the performance of the duties of the Manager under
the Management Agreement. See "Risk Factors--Conflicts of Interest Between the
Company and the Manager and Its Affiliates--Conflicts Relating to the Manager
Rendering Services to Others."
The Bylaws of the Company provide that the Board of Directors shall have not
less than three or more than nine members, as determined from time to time by
the existing Board of Directors. The Board of Directors will initially have
seven members consisting of three directors affiliated with the TCW Group and
four Unaffiliated Directors. The Bylaws further provide that except in the
case of a vacancy, the majority of the members of the Board of Directors and
of any committee of the Board of Directors will at all times after the
issuance of the shares of Common Stock in this Offering be Unaffiliated
Directors. Vacancies occurring on the Board of Directors among the
Unaffiliated Directors will be filled by the vote of a majority of the
directors, including a majority of the Unaffiliated Directors.
The Charter of the Company provides for the indemnification of the directors
and officers of the Company to the fullest extent permitted by Maryland law.
Maryland law generally permits indemnification of directors and officers
against certain costs, liabilities and expenses that any such person may incur
by reason of serving in such positions unless it is proved that: (i) the act
or omission of the director or officer was material to the cause of action
adjudicated in the proceeding and was committed in bad faith or was the result
of active and deliberate dishonesty; (ii) the director or officer actually
received an improper personal benefit in money, property or services; or (iii)
in the case of criminal proceedings, the director or officer had reasonable
cause to believe that the act or omission was unlawful. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
The Charter of the Company provides that the personal liability of any
director or officer of the Company to the Company or its stockholders for
money damages is limited to the fullest extent allowed by the statutory or
decisional law of the State of Maryland as amended or interpreted. Maryland
law authorizes the limitation of liability of directors and officers to
corporations and their stockholders for money damages except (i) to the extent
that it is proved that the person actually received an improper benefit in
money, property, or services for
47
<PAGE>
the amount of the benefit or profit in money, property or services actually
received, or (ii) to the extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated.
EXECUTIVE COMPENSATION
The Company has not paid, and does not intend to pay, any annual
compensation to the Company's executive officers for their services as
executive officers. However, the Company may from time to time, in the
discretion of the Board of Directors, grant options to purchase shares of the
Company's Common Stock to the Manager, executive officers and directors of the
Company pursuant to the Company's 1997 Stock Option Plan. See "--Stock
Options" below.
STOCK OPTIONS
The Company has adopted a stock option plan (the "1997 Stock Option Plan")
that provides for the grant of both qualified incentive stock options ("ISOs")
that meet the requirements of Section 422 of the Code, and non-qualified stock
options, stock appreciation rights and dividend equivalent rights. ISOs may be
granted to the officers and key employees of the Company, if any. Non-
qualified stock options may be granted to the Manager, directors, officers and
any key employees of the Company and to the directors, officers and key
employees of the Manager. The exercise price for any option granted under the
1997 Stock Option Plan may not be less than 100% of the fair market value of
the shares of Common Stock at the time the option is granted. The purpose of
the 1997 Stock Option Plan is to provide a means of performance-based
compensation to the Manager in order to attract and retain qualified personnel
and to provide an incentive to others whose job performance affects the
Company. The 1997 Stock Option Plan will become effective upon the closing of
the Offering.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the 1997 Stock Option Plan authorizes the grant of options to
purchase an aggregate of up to 10% of the outstanding shares of the Company's
Common Stock, but not more than 1,000,000 shares of Common Stock. If an option
granted under the 1997 Stock Option Plan expires or terminates, the shares
subject to any unexercised portion of that option will again become available
for the issuance of further options under the 1997 Stock Option Plan. Unless
previously terminated by the Board of Directors, the 1997 Stock Option Plan
will terminate ten years from its effective date, and no options may be
granted under the 1997 Stock Option Plan thereafter.
The 1997 Stock Option Plan will be administered by a committee of the Board
of Directors comprised entirely of Unaffiliated Directors (the "Compensation
Committee"). Except for the grant of options issuable upon completion of the
Offering described below, options granted under the 1997 Stock Option Plan
will become exercisable in accordance with the terms of the grant made by the
Compensation Committee. The Compensation Committee has discretionary authority
to determine at the time an option is granted whether it is intended to be an
ISO or a non-qualified option, and when and in what increments shares of
Common Stock covered by the option may be purchased.
Under current law, ISOs may not be granted to any director of the Company
who is not also a full-time employee or to directors, officers and other
employees of entities unrelated to the Company. In addition, no options may be
granted under the 1997 Stock Option Plan to any person who, assuming exercise
of all options held by such person, would own or be deemed to own more than
9.8% of the outstanding shares of Common Stock of the Company.
Each option must terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be
exercisable in whole or in part at any time or times during their respective
terms, or only in specified percentages at stated time periods or intervals
during the term of the option.
The exercise price of any option granted under the 1997 Stock Option Plan is
payable in full (i) by cash, (ii) by surrender of shares of the Company's
Common Stock having a market value equal to the aggregate
48
<PAGE>
exercise price of all shares to be purchased, (iii) by any combination of the
foregoing, or (iv) by a full recourse promissory note executed by the
optionholder. The terms of the promissory note may be changed from time to
time by the Company's Board of Directors to comply with applicable regulations
or other relevant pronouncements of the Service or the Commission.
The Company's Board of Directors may, without affecting any outstanding
options, from time to time revise or amend the 1997 Stock Option Plan, and may
suspend or discontinue it at any time. However, no such revision or amendment
may increase the number of shares of Common Stock subject to the 1997 Stock
Option Plan (with the exception of adjustments resulting from changes in
capitalization), change the class of participants eligible to receive options
granted under the 1997 Stock Option Plan or modify the period within which or
the terms upon which the options may be exercised without stockholder
approval.
STOCK OPTIONS OUTSTANDING
The following table sets forth the stock options granted under the 1997
Stock Option Plan effective on the closing of the Offering.
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
--------------------- ---------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE(2) EXPIRATION
NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Philip A. Barach........ 40,000 25.8% $15.00(4) (5) $ 377,337 $ 956,247
Jeffrey E. Gundlach..... 40,000 25.8% 15.00(4) (5) 377,337 956,247
Daniel K. Osborne....... 35,000 22.6% 15.00(4) (5) 330,170 836,715
Joseph J. Galligan...... 25,000 16.1% 15.00(4) (5) 235,835 597,653
Michael E. Cahill....... 15,000 10.0% 15.00(4) (5) 141,501 358,593
Marc I. Stern........... 30,000 -- 15.00(4) (5) 283,003 717,184
Other(6)................ 115,000 -- 15.00(4) (5) 1,084,843 2,749,206
</TABLE>
- --------
(1) The options granted are exercisable starting 14 months after the date of
grant.
(2) The exercise price and tax withholding obligations incurred upon exercise
of the options may be paid by the option holder by delivering already
owned shares of Company Common Stock, including those which are issuable
upon exercise of the options.
(3) The dollar amounts under these columns are the result of calculations at
5% and 10% compounded annual rates set by the Commission, and therefore
are not intended to forecast future appreciation, if any, in the price of
Common Stock.
(4) Based on an assumed initial public offering price of $15.00. See
"Underwriting."
(5) Options will expire ten years after the closing of the Offering.
(6) These options will be granted to officers and employees of the Manager.
In addition, upon the closing of the Offering, each Unaffiliated Director
will receive an initial grant of options to purchase up to 25,000 shares of
Common Stock at the initial public offering price. These options will expire
ten years from the effective date of the 1997 Stock Option Plan. Any
Unaffiliated Director newly elected to the Board of Directors thereafter may
receive an identical initial grant at the fair market value on the date of
grant.
49
<PAGE>
THE MANAGER
The Company has no ownership interest in the Manager. The Manager, a
California corporation, is a wholly-owned subsidiary of TCW. The Manager was
established in 1992 and the TCW Group began operating in 1971 through one of
its affiliates.
The Manager will be responsible for the day-to-day operations of the Company
and will perform such services and activities relating to the Mortgage Assets
and operations of the Company as may be appropriate. At all times, the Manager
will be subject to the direction and oversight of the Company's Board of
Directors and will have only such functions and authority as the Company may
delegate to it. The Manager will be primarily involved in two activities: (i)
asset/liability management--acquisition, financing, hedging, management and
disposition of Mortgage Assets, including credit and prepayment risk
management; and (ii) capital management--structuring, analysis, capital
raising and investor relations activities. In conducting these activities, the
Manager will formulate operating strategies for the Company, arrange for the
acquisition of Mortgage Assets by the Company, arrange for various types of
financing for the Company, monitor the performance of the Company's Mortgage
Assets and provide certain administrative and managerial services in
connection with the operation of the Company. The Manager will be required to
manage the business affairs of the Company in conformity with the policies
that are approved and monitored by the Company's Board of Directors. The
Manager will be required to prepare regular reports for the Company's Board of
Directors, which will review the Company's acquisitions of Mortgage Assets,
portfolio composition and characteristics, credit quality, performance and
compliance with policies previously approved by the Company's Board of
Directors. See "--The Management Agreement" below and "Business and Strategy--
Management Policies and Programs."
The Manager has not previously managed a REIT. In particular, the Manager
has not previously managed a highly-leveraged pool of Mortgage Assets nor does
the Manager have experience in complying with the asset limitations imposed by
the REIT Provisions of the Code. Although management of the Company and the
Manager have experience in managing mortgage capital, there can be no
assurance that the past experience of the executive officers of the Company
and the Manager will be appropriate to the business of the Company. Further,
the experience of the Manager and the TCW Group should not be viewed as a
reliable gauge of the potential success of the Company. See "Risk Factors--
Lack of Prior Experience."
The directors and senior executive officers of the Manager are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Chairman of the Board and Chief Executive
Robert A. Day............... 53 Officer
Thomas E. Larkin, Jr. ...... 57 Vice Chairman of the Board
Marc I. Stern(1)............ 53 Vice Chairman of the Board
Alvin R. Albe, Jr. ......... 44 Director, Executive Vice President--
Finance and Administration
Managing Director and General Counsel,
Michael E. Cahill(1)........ 46 Secretary
David K. Sandie............. 42 Chief Financial Officer and Managing
Director, Assistant Secretary
Hilary G. D. Lord........... 41 Chief Compliance Officer and Managing
Director, Assistant Secretary
Philip A. Barach(1)......... 45 Group Managing Director
Jeffrey E. Gundlach(1)...... 39 Group Managing Director
Daniel K. Osborne(1)........ 32 Senior Vice President
</TABLE>
- --------
(1) See "Management of the Company--Directors and Executive Officers" for
certain biographical information regarding Messrs. Stern, Cahill, Barach,
Gundlach and Osborne.
50
<PAGE>
Robert A. Day. Mr. Day has served as Chairman of the Board and Chief
Executive Officer of the Manager since its inception in 1992. Mr. Day is also
Chairman of the Board and Chief Executive Officer of TCW, Trust Company of the
West and TAMCO, as well as Chairman of the Board of the Oakmont Corporation.
Mr. Day founded Trust Company of the West in 1971. Prior to 1971, Mr. Day was
associated with the investment banking firm of White, Weld & Company in New
York for three years and then formed Cypress Partners. He is Chairman and
President of the W.M. Keck Foundation, a Director of Freeport, McMoRan, Inc.,
and a member of the Board of Trustees of Claremont McKenna College. Mr. Day
received a B.A. degree from Claremont McKenna College.
Thomas E. Larkin, Jr. Mr. Larkin has served as a Vice Chairman of the Board
of the Manager since 1992. Mr. Larkin is also Chairman of the Board of TFMI
(since 1987), Vice Chairman of TAMCO, Director and President of Trust Company
of the West, and Director, Executive Vice President and Group Managing
Director of TCW (all since 1977). Prior to joining the TCW Group in 1977, Mr.
Larkin was Vice President and Director of Client Relations for Crocker
Investment Management Corporation. Prior to that, he was Senior Vice President
and Director of Marketing of Bernstein-Macaulay, Inc. with responsibility for
marketing investment management services. He was previously with Blyth Eastman
Dillon as a New Business Representative in the Employee Benefit Plan
Department. Mr. Larkin is a member of the Board of Trustees of the University
of Notre Dame and Mount Saint Mary's College, is a member of the Board of
Directors of the California Pediatric & Family Medical Center Foundation, the
Los Angeles Orthopaedic Hospital, the Los Angeles Music Center Operating
Company, the Heart & Lung Surgery Foundation, the Los Angeles Sports Council,
and the Board of Regents of Children's Hospital of Los Angeles. He also serves
as a member of the Finance Council of the Archdiocese of Los Angeles and is a
member of the Investment Committees of the Archdiocese of Los Angeles and
Loyola Marymount University. Mr. Larkin received a B.A. degree in Economics
from the University of Notre Dame.
Alvin R. Albe, Jr. Mr. Albe has served as a Director and Executive Vice
President--Finance and Administration of the Manager and TFMI since 1992, and
has held the same positions with TAMCO and Trust Company of the West since
1991. Mr. Albe has also been Executive Vice President--Finance and
Administration of TCW since 1991. Prior to joining the TCW Group in 1991, Mr.
Albe was President of Oakmont Corporation, a privately held corporation which
administers and manages assets for several families and individuals. Mr. Albe
was associated with Oakmont Corporation from 1982 to 1991. Before that, he was
Manager of Accounting at McMoRan Oil and Gas Co., and a Certified Public
Accountant with Arthur Andersen & Co. in New Orleans. Mr. Albe received a B.S.
degree in Accounting from the University of New Orleans.
David K. Sandie. Mr. Sandie has served as Managing Director, Chief Financial
Officer and Assistant Secretary of the Manager since 1992. Mr. Sandie has held
similar positions with TFMI since 1987, TCW since 1986, and TAMCO and Trust
Company of the West since 1984. Prior to joining the TCW Group in 1984, Mr.
Sandie was an Audit Manager with Price Waterhouse & Company, where a
significant portion of his audit experience was with financial service
organizations. Mr. Sandie is a Certified Public Accountant. Mr Sandie received
a B.A. degree in Political Science from the University of California at Los
Angeles and an M.B.A. degree from the University of Southern California.
Hilary G.D. Lord. Ms. Lord has served as a Managing Director, Chief
Compliance Officer and Assistant Secretary of the Manager since 1992. Ms. Lord
also holds such positions with TFMI, TAMCO and Trust Company of the West. Ms.
Lord joined the TCW Group in 1987, having previously been a corporate and
securities attorney with O'Melveny & Myers. Ms. Lord is a member of the Board
of Governors of the Investment Counsel Association of America ("ICAA"), is a
member of the Legal and Regulatory Committee of the ICAA and is a member of
the National Association of Compliance Professionals. Ms. Lord is a member of
the State Bar of California. Ms. Lord received a B.S. degree in Accounting and
Finance from the University of California at Berkeley and an M.B.A. degree and
a J.D. degree from the University of Chicago.
The address of the Manager is 865 South Figueroa Street, Suite 1800, Los
Angeles, California 90017.
51
<PAGE>
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager at the
closing of the Offering for an initial term of two years. The Manager will be
primarily involved in two activities: (i) asset/liability management--
acquisition, financing, hedging, management and disposition of Mortgage
Assets, including credit and prepayment risk management; and (ii) capital
management--oversight of the Company's structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the Manager
will formulate operating strategies for the Company, arrange for the
acquisition of Mortgage Assets by the Company, arrange for various types of
financing for the Company, monitor the performance of the Company's Mortgage
Assets and provide certain administrative and managerial services in
connection with the operation of the Company. The Manager will be required to
manage the business affairs of the Company in conformity with the policies
that are approved and monitored by the Company's Board of Directors. The
Manager will be required to prepare regular reports for the Company's Board of
Directors that will review the Company's acquisitions of Mortgage Assets,
portfolio composition and characteristics, credit quality, performance and
compliance with the policies approved by the Company's Board of Directors.
At all times, the Manager will be subject to the direction and oversight of
the Company's Board of Directors and will have only such functions and
authority as the Company may delegate to it. The Manager will be responsible
for the day-to-day operations of the Company and the Company anticipates that
the Manager will perform such services and activities relating to the Mortgage
Assets and operations of the Company as may be appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Company's
Board of Directors;
(ii) assisting the Company in developing criteria for Mortgage Asset
purchase commitments that are specifically tailored to the Company's long-
term investment objectives and making available to the Company its
knowledge and experience with respect to Mortgage Assets;
(iii) representing the Company in connection with the purchase and
commitment to purchase or sell Mortgage Assets, including the accumulation
of Mortgage Loans for securitization and the incurrence of debt;
(iv) arranging for the issuance of Mortgage Securities from a pool of
Mortgage Loans;
(v) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(vi) monitoring and providing to the Company's Board of Directors on an
ongoing basis price information and other data, obtained from certain
nationally recognized dealers that maintain markets in Mortgage Assets
identified by the Board of Directors from time to time, and providing data
and advice to the Board of Directors in connection with the identification
of such dealers;
(vii) investing or reinvesting any money of the Company in accordance
with its policies and procedures;
(viii) providing the executive and administrative personnel, office space
and services required in rendering services to the Company;
(ix) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Company's Board of Directors, including the
collection of revenues and the payment of the Company's debts and
obligations and maintenance of appropriate computer systems to perform such
administrative functions;
(x) providing the Company with general data processing, legal and
administrative services to the extent required to implement the business
strategy of the Company;
52
<PAGE>
(xi) counseling the Company in connection with policy decisions made by
the Board of Directors;
(xii) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;
(xiii) evaluating and recommending hedging strategies to the Company's
Board of Directors and, upon approval by the Board of Directors, engaging
in hedging activities on behalf of the Company, consistent with the
Company's status as a REIT;
(xiv) supervising compliance with the REIT Provisions of the Code and
maintenance of an exemption from the Investment Company Act;
(xv) qualifying and causing the Company to qualify to do business in all
applicable jurisdictions;
(xvi) causing the Company to retain qualified accountants and tax experts
to assist in developing appropriate accounting procedures and testing
systems and to conduct quarterly compliance reviews;
(xvii) providing all actions necessary for compliance by the Company with
all federal, state and local regulatory requirements applicable to the
Company in respect of its business activities, including preparing or
causing to be prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and documents, if
any, required under the Exchange Act;
(xviii) providing all actions necessary to enable the Company to make
required federal, state and local tax filings and reports and generally
enable the Company to maintain its status as a REIT, including soliciting
stockholders for required information to the extent provided in the REIT
Provisions of the Code;
(xix) performing such other services as may be required from time to time
for management and other activities relating to the assets of the Company
as the Board of Directors shall reasonably request or the Manager shall
deem appropriate under the particular circumstances; and
(xx) complying with and using commercially reasonable efforts to cause
the Company to comply with all applicable laws.
Following the initial two-year term, the Management Agreement may be renewed
for additional one-year terms at the discretion of the Unaffiliated Directors,
unless terminated by the Manager upon written notice. Except in the case of a
termination or non-renewal by the Company for cause, upon termination or non-
renewal of the Management Agreement by the Company, the Company is obligated
to pay the Manager a termination or non-renewal fee, which may be significant.
The termination or non-renewal fee shall be equal to the fair market value of
the Management Agreement without regard to the Company's termination right, as
determined by an independent appraisal. The selection of the independent
appraiser shall be subject to the approval of the Unaffiliated Directors.
Neither the fair market value of the Management Agreement nor the various
factors which the appraiser may find relevant in its determination of the fair
market value can be determined at this time.
The fair market value of the Management Agreement will be affected by
significant variables, including (i) the historical management fees paid to
the Manager, (ii) any projections of future management fees to be paid to the
Manager determined by the independent appraiser, (iii) the relative valuations
of agreements similar to the Management Agreement and (iv) other factors, all
of which may be unrelated to the performance of the Manager.
For illustrative purposes only, if the Company terminated or did not renew
the Management Agreement without cause immediately following a full year of
operations in which the Company paid to the Manager total annual compensation
equal to $3,500,000, the termination or non-renewal fee could potentially
equal between four and eight times the total annual compensation paid to the
Manager, or $14,000,000 and $28,000,000, depending on the valuation of the
independent appraiser at the time of the termination or non-renewal, which the
Company and the Manager expect will be influenced by the valuation of
similarly-situated transactions occurring at or about the same time. If the
total annual compensation amount or the valuation multiple used by the
independent appraiser is higher or lower, the termination or non-renewal fee
would be higher or lower, respectively, than the amounts set forth above.
53
<PAGE>
Since the fair market value of the Management Agreement would be determined by
an independent appraiser at a future date based upon then applicable facts and
circumstances, no such termination or non-renewal fee can be estimated with
mathematical certainty. Any termination or non-renewal fee paid may be
materially greater than the hypothetical examples above and the Company can
provide no assurance at this time as to the amount of any such fee. The
payment of a significant termination or non-renewal fee by the Company to the
Manager would materially adversely affect the cash available for distribution
to the Company's stockholders and may result in material net operating losses
for the period. See "Risk Factors--Possible Significant Termination Fee
Payable to the Manager."
The Management Agreement may be assigned by the Manager to an Affiliate of
TCW without the consent of the Company. The Management Agreement may be
assigned to a non-Affiliate of TCW only with the approval of a majority of the
Unaffiliated Directors.
MANAGER COMPENSATION
The Manager will receive annual base management compensation based on the
Average Net Invested Capital of the Company, payable monthly in arrears, equal
to 3/4 of 1% of Average Net Invested Capital. The term "Average Net Invested
Capital" means for any period (i) the arithmetic average of the sum of the
gross proceeds of the offerings of its equity securities by the Company, after
deducting any underwriting discounts and commissions and other expenses and
costs relating to such offerings, plus the Company's retained earnings (taking
into account any losses incurred) and any non-cash charges or reserves,
including depreciation, mark-to-market adjustments and unrealized credit loss,
computed by taking the average of such values at the end of each month during
such period, plus (ii) any unsecured debt approved by the Unaffiliated
Directors to be included in Average Net Invested Capital. Accordingly,
incurring collateralized debt to finance specific investment purchases does
not necessarily increase Average Net Invested Capital.
The Manager shall also be entitled to receive as incentive compensation for
each fiscal quarter, an amount equal to 30% of the Net Income of the Company,
before incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
The incentive compensation calculation and payment will be made quarterly in
arrears. The term "Return on Equity" is calculated for any quarter by dividing
the Company's Net Income for the quarter by its Average Net Worth for the
quarter. For purposes of calculating the incentive compensation payable, the
definition "Return on Equity" is not related to the actual distributions
received by stockholders or to an individual investor's actual return on
investment. For such calculations, the "Net Income" of the Company means the
taxable income of the Company (including net capital gains, if any) before the
Manager's incentive compensation, net operating loss deductions arising from
losses in prior periods and deductions permitted by the Code in calculating
taxable income for a REIT plus the effects of adjustments, if any, necessary
to record hedging and interest transactions in accordance with GAAP. A
deduction for all of the Company's interest expenses for borrowed funds is
taken into account in calculating Net Income. "Average Net Worth" for any
period means the arithmetic average of the sum of the gross proceeds from any
offering of its equity securities by the Company, before deducting any
underwriting discounts and commissions and other expenses and costs relating
to the offerings, plus the Company's retained earnings (without taking into
account any losses incurred in prior periods) computed by taking the average
of such values at the end of each month during such period.
The ability of the Company to achieve an annualized Return on Equity in
excess of the Ten-Year U.S. Treasury Rate plus 1%, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is dependent
upon the level and volatility of interest rates, the Company's ability to
react to changes in interest rates and to utilize successfully the operating
strategies described herein, and other factors, many of which are not within
the Company's or the Manager's control. The Manager's base compensation shall
be calculated by the Manager within 15 days after the end of each month, and
such calculation shall be promptly delivered to the Company. The Company is
obligated to pay the base compensation within 30 days after the end of each
month. The Manager shall compute the quarterly incentive compensation within
45 days after the end of each fiscal quarter, and the Company shall pay the
incentive compensation with respect to each fiscal quarter within 15 days
following the delivery to the Company of the Manager's written statement
setting forth the
54
<PAGE>
computation of the incentive compensation for such quarter. The Company's
Board of Directors shall review and approve the calculation of base and
incentive compensations paid to the Manager quarterly, one quarter in arrears,
during each scheduled quarterly Board of Directors meeting. Quarterly
incentive compensation will be subject to an annual adjustment commencing in
the second full year of the Company's operation. The Company believes that
this compensation arrangement benefits its stockholders because it ties the
Manager's compensation to Return on Equity and, in periods of low earnings,
the Manager's incentive compensation is reduced or eliminated, thereby
lowering the Company's operating expenses.
Although no management fees will be payable to the Manager solely as a
result of the Offering, the net proceeds of the Offering will result in an
increase in the Company's Average Net Invested Capital, and thus, an increase
in the management fees paid to the Manager. See "Risk Factors--Conflicts of
Interest Between the Company and the Manager and Its Affiliates."
Set forth below for illustrative purposes only is a breakdown of management
fees that might be paid to the Manager under hypothetical circumstances. For
purposes of this illustration, the following is assumed: (i) the net proceeds
from the Offering, after all underwriting discounts and other Offering costs,
are $138,750,000 and (ii) the Company's Net Income (after payment of base
compensation and operating expenses, but prior to the deduction of incentive
compensation) exceeded by $1,000,000, $8,000,000 and $12,000,000,
respectively, the annualized Return on Equity equal to the average Ten-Year
U.S. Treasury Rate plus 1%.
ANNUAL MANAGER COMPENSATION
<TABLE>
<CAPTION>
INCENTIVE TOTAL
BASE COMPENSATION COMPENSATION COMPENSATION
----------------- ------------ ------------
<S> <C> <C>
$1,100,000...................................... $ 300,000 $1,400,000
1,100,000...................................... 2,400,000 3,500,000
1,100,000...................................... 3,600,000 4,700,000
</TABLE>
The Company emphasizes that the foregoing information is provided for
illustrative purposes only. There will be differences between the Company's
actual Net Income and the compensation paid to the Manager, on the one hand,
and the Net Income and compensation figures set forth above, on the other, and
those differences may be material. There are significant variables in the
determination of actual compensation paid to the Manager, including (i) the
Company's actual Net Income, which will be affected by the Company's ability
to execute its leveraging strategy and interest rate fluctuations, plus other
factors and (ii) fluctuations in the average Ten-Year U.S. Treasury Rate, all
of which may be affected by factors unrelated to the performance of the
Manager.
The Company has adopted a 1997 Stock Option Plan. The Manager and the
directors, officers and any employees of the Company may be granted options
under the Company's 1997 Stock Option Plan. See "Management of the Company--
Stock Options."
Except as set forth in this Prospectus, the Company does not currently
anticipate paying any other fees or compensation to any Affiliate of the
Manager. See "--Certain Relationships; Conflicts of Interest" below.
EXPENSES
The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, personnel, filing and other expenses)
incurred by the Company, the Manager or its Affiliates on behalf of the
Company in connection with the Offering, estimated at $750,000. This payment
will not be subject to the limitation on expenses to be borne by the Company
as described in the paragraph below.
55
<PAGE>
Subject to the limitations set forth below, the Company will also pay all
operating expenses, except those specifically required to be borne by the
Manager under the Management Agreement, incurred by the Manager under the
Management Agreement. The operating expenses required to be borne by the
Manager include the compensation of the Company's officers and the cost of
office space, equipment and other personnel required for the Company's day-to-
day operations. The expenses that will be paid by the Company will include
(but not necessarily be limited to) the cost of money borrowed by the Company
(including interest), taxes and license fees, issuance and transaction costs
incident to the acquisition, disposition and financing of investments, costs
related to hedging transactions, legal, investigatory, accounting and auditing
fees and expenses, consultants' advisory services with respect to REIT and
other compliance matters, the compensation and expenses of the Company's
Unaffiliated Directors, the costs of making distributions and printing and
mailing proxies and reports to stockholders, costs incurred by employees of
the Manager for travel on behalf of the Company, costs incident to the
issuance of Mortgage Securities, costs incident to the accumulation and
servicing of Mortgage Loans, costs associated with any computer software or
hardware that is used solely for the Company, costs to obtain liability
insurance to indemnify the Manager, the Company's directors and officers and
the Underwriters, the compensations and expenses of the Company's custodian,
transfer agent and registrar, and any extraordinary or non-recurring costs or
charges incurred by the Company, if any. The following expenses required to be
paid by the Company that are attributable to its operations shall be limited
to an amount per year equal to the greater of 2% of the Average Net Invested
Capital of the Company or 25% of its Net Income for that year:
(i) all insurance costs incurred by the Company or any subsidiary of the
Company, including any costs to obtain liability or other insurance to
indemnify the Manager and underwriters of any securities of the Company;
(ii) expenses connected with payments of dividends or interest or
distributions in any other form made or caused to be made by the Board of
Directors to holders of the securities of the Company or any subsidiary of
the Company;
(iii) all expenses of third-parties pertaining to communications to
holders of equity securities or debt securities of the Company or any
subsidiary of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of
governmental bodies or agencies, including any costs of computer services
in connection with this function, the cost of printing and mailing
certificates for such securities and proxy solicitation materials and
reports to holders of the Company's or any subsidiary's securities and
reports to third-parties required under any indenture to which the Company
or any subsidiary of the Company is a party;
(iv) custodian's, transfer agent's and registrar's fees and charges;
(v) compensation, fees and expenses paid to Unaffiliated Directors of the
Company or any subsidiary of the Company, the cost of director and officer
liability insurance and premiums for fidelity and errors and omissions
insurance;
(vi) legal, accounting and auditing fees and expenses relating to the
Company's or any subsidiary's operations (excluding litigation-related fees
and expenses);
(vii) expenses relating to any office or office facilities maintained by
the Company or any subsidiary of the Company, exclusive of the office of
the Manager;
(viii) travel and related expenses of directors, officers and employees
of the Manager and of directors, officers and employees of the Company or
any subsidiary of the Company who are also directors, officers or employees
of the Manager, incurred in connection with attending meetings of the Board
of Directors or holders of securities of the Company or any subsidiary of
the Company or performing other business activities that relate to the
Company or any subsidiary of the Company, including expenses allocable to
such meetings or business activities;
56
<PAGE>
(ix) costs associated with computer hardware and software, third-party
information services and office expenses that relate solely to the business
activities of the Company; and
(x) all other expenses regarded as ordinary operating expenses in
accordance with GAAP, exclusive of certain specifically excluded expenses
as described below .
Expenses excluded from the expense limitation and wholly payable by the
Company are (but are not limited to) those incurred in connection with the
accumulation and servicing of Mortgage Loans, the issuance and administration
of Mortgage Securities from pools of Mortgage Loans, the raising of capital,
the acquisition of Mortgage Assets, interest and hedging expenses, taxes and
license fees, non-cash costs, litigation, investigations in connection with
litigation or threatened litigation, base and incentive management
compensation and extraordinary and non-recurring expenses. The determination
of Net Income for purposes of calculating the expense limitation will be the
same as for calculating the Manager's incentive compensation except that it
will include any incentive compensation payable for such period.
Expenses in excess of the expense limitation will be paid and shall not be
recoverable (by reclassification as compensation or otherwise) by the Manager,
unless the Unaffiliated Directors determine that, based upon unusual or non-
recurring factors, a higher level of expenses is justified for such fiscal
year. In that event, such expenses may be recovered by the Manager in
succeeding years to the extent that expenses in succeeding quarters are below
the limitation of expenses. Expense reimbursement will be made monthly,
subject to adjustment at the end of each year.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
In addition to its base management compensation under the Management
Agreement, the Manager will have the opportunity to earn incentive
compensation for each fiscal quarter in an amount equal to 30% of the Net
Income of the Company (before payment of such incentive compensation) in
excess of the amount that would produce on annualized Return on Equity equal
to the Ten-Year U.S. Treasury Rate plus 1%. Quarterly incentive compensation
will be subject to an annual adjustment commencing in the second full year of
the Company's operation. See "--Management Compensation" above. In evaluating
Mortgage Assets for investment and in other operating strategies, an undue
emphasis on the maximization of income at the expense of other criteria, such
as preservation of capital, in order to achieve a higher incentive fee could
result in increased risk to the value of the Company's Mortgage Asset
portfolio. However, the Bylaws of the Company provide that the Board of
Directors shall evaluate the performance of the Manager before entering into
or renewing any management arrangement and that the Unaffiliated Directors
shall determine at least annually that the Manager's compensation is
reasonable in relation to the nature and quality of services performed. Any
changes in the Company's investment and operating policies are required to be
approved by the Board of Directors, including a majority of the Unaffiliated
Directors. See "Risk Factors--Conflicts of Interest Between the Company and
the Manager and Its Affiliates" and "--Control by the Company's Board of
Directors of the Company's Operating Policies and Investment Strategies."
The Company, on the one hand, and the Manager and its Affiliates, on the
other, do not presently expect to, but may in the future, enter into a number
of relationships other than those governed by the Management Agreement, some
of which may give rise to conflicts of interest between the Manager and its
Affiliates and the Company. The market in which the Company will seek to
purchase Mortgage Assets is characterized by rapid evolution of products and
services and, thus, there may in the future be relationships between the
Company and the Manager and its Affiliates in addition to those described
herein. Any such relationships or transactions will require the approval of
the Company's Board of Directors, including a majority of the Unaffiliated
Directors. See "Risk Factors--Conflicts of Interest Between the Company and
the Manager and Its Affiliates."
Pursuant to the terms of the Management Agreement, the Manager and its
Affiliates will agree on the allocation of Mortgage Securities between the
Company and other accounts over which the Manager and its
Affiliates have control. Pursuant to such allocation, the Manager will base
allocation decisions on the procedures the Manager considers fair and
equitable, including, without limitation, such considerations as investment
objectives, restrictions and time horizon, availability of cash and the amount
of existing holdings.
57
<PAGE>
As of the date of this Prospectus, the Company's 100 shares of Common Stock
outstanding are held by TAMCO, an Affiliate of the Manager and TCW. The shares
of Common Stock were issued for $1,500 cash in the aggregate. TAMCO has
represented to the Company that the shares of Common Stock were purchased for
investment purposes only and undertaken that they will be sold only pursuant
to a registration statement under the Securities Act, or an applicable
exemption from the registration requirements thereof. TCW may be deemed to
control the Company prior to the closing of the Offering.
Directors, officers and employees of the Company, TCW and its Affiliates are
expected to purchase up to 500,000 shares of Common Stock at the closing of
the Offering at a price equal to the initial public offering price. This will
result in directors, officers and employees of TCW and its Affiliates owning
up to 500,100 shares of Common Stock, or up to approximately 5.0% of the total
shares offered hereby, exclusive of the Underwriters' over-allotment options.
The foregoing parties have agreed not to sell any shares of Common Stock or
any rights to acquire Common Stock for at least 180 days after the Company's
initial public offering of shares of Common Stock without the consent of
Merrill Lynch & Co., but may dispose of the shares of Common Stock any time
thereafter. See "Underwriting." The Manager and its employees and the
Unaffiliated Directors may also receive stock options pursuant to the
Company's 1997 Stock Option Plan. See "Management of the Company--Stock
Options."
TCW Brokerage Services, an Affiliate of the Manager and TCW, will act as a
dealer in connection with the Offering and will receive compensation from the
Underwriters for the shares of Common Stock sold by it. TCW Brokerage Services
has not participated in any negotiations of the Underwriters' compensation or
the terms of the Offering.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to undertake the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors and its officers will not be liable to the Company, any issuer
of Mortgage Securities, any subsidiary of the Company, the Unaffiliated
Directors, the Company's stockholders or any subsidiary's stockholders for
acts performed in accordance with and pursuant to the Management Agreement,
except by reason of acts constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under the Management
Agreement. The Manager does not have significant assets and may not have
significant assets in the future. Consequently, there can be no assurance that
the Company would be able to recover any damages for claims it may have
against the Manager.
The Company has agreed to indemnify the Manager, its directors and its
officers with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from any acts or omissions of the Manager made in
good faith in the performance of its duties under the Management Agreement.
The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or Affiliates from engaging in
any business or rendering services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing Mortgage Assets that
meet the Company's policies and criteria. Notwithstanding the foregoing,
members of the MBS Group of the TCW Group, or any equivalent or successor
group of the TCW Group, during their employment by the TCW Group will not
provide any active management services to a residential mortgage REIT, other
than the Company, that invests primarily in high quality Mortgage Securities
comparable to the Mortgage Securities in which the Company will invest. The
Manager may also advise or manage other mortgage-related entities, including
REITs, that invest in residential and commercial mortgages and other
residential and non-residential mortgage securities. The ability of the
Manager and its officers and employees to engage in other business activities
could reduce the time and effort spent on the Company. The Management
Agreement does not specify a minimum amount of time or attention that the
Manager or its officers or employees must devote to the Company's business.
See "Risk Factors--Conflicts of Interest Between the Company and the Manager
and Its Affiliates--Conflicts Relating to the Manager Rendering Services to
Others."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 30, 1997,
relating to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to beneficially own more than 5% of the
outstanding shares of the Company's Common Stock, (ii) each director of the
Company, and (iii) all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
NUMBER OF OWNED
SHARES -----------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1)(2)(3) OWNED OFFERING OFFERING
------------------------- ------------ -------- --------
<S> <C> <C> <C>
TCW Asset Management Company (4)............ 100 shares 100% *
Officers and Directors as a group (10
persons)................................... -- -- -- (5)
</TABLE>
- --------
*Less than 1%.
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares of
Common Stock owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date of this Prospectus have
been exercised. None of the outstanding options to acquire Common Stock of
the Company are exercisable within 60 days of this Prospectus.
(3) Does not include shares of Common Stock that may be purchased by
directors, officers and employees of the Company, TCW and its Affiliates
in the Offering. See "The Manager--Certain Relationships; Conflicts of
Interest" and "Underwriting."
(4) Address is: 865 South Figueroa Street, Suite 1800, Los Angeles, California
90017.
(5) Does not include the shares of Common Stock that officers and directors
may purchase in the Offering.
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FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY BE RELEVANT TO A PROSPECTIVE HOLDER OF SHARES OF COMMON
STOCK OF THE COMPANY. THIS DISCUSSION IS BASED ON CURRENT LAW. THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSIDERATIONS. IT DOES NOT
GIVE A DETAILED DISCUSSION OF ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS,
NOR DOES IT DISCUSS ALL OF THE ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE
RELEVANT TO A PROSPECTIVE STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S
PARTICULAR CIRCUMSTANCES OR TO CERTAIN TYPES OF STOCKHOLDERS (INCLUDING
INSURANCE COMPANIES, CERTAIN TAX-EXEMPT ENTITIES, FINANCIAL INSTITUTIONS,
BROKER/DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL
INCOME TAX LAWS.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK OF THE COMPANY IS URGED TO
CONSULT WITH HIS OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OF
THE PURCHASE, OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS
A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND THE
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion below summarizes the material
provisions applicable to the Company as a REIT for federal income tax purposes
and to its stockholders in connection with their ownership of shares of Common
Stock. However, it is impractical to set forth in this Prospectus all aspects
of federal, state, local and foreign tax law that may have tax consequences
with respect to an investor's purchase of the Common Stock. The discussion of
various aspects of federal taxation contained herein is based on the Code,
administrative regulations, judicial decisions, administrative rulings and
practice, all of which are subject to change. In brief, if certain detailed
conditions imposed by the Code are met, entities that invest primarily in real
estate assets, including Mortgage Loans, and that otherwise would be taxed as
corporations are, with certain limited exceptions, not taxed at the corporate
level on their taxable income that is currently distributed to their
stockholders. This treatment eliminates most of the "double taxation" (at the
corporate level and then again at the stockholder level when the income is
distributed) that typically results from the use of corporate investment
vehicles. A qualifying REIT, however, may be subject to certain excise and
other taxes, as well as normal corporate tax, on Taxable Income that is not
currently distributed to its stockholders. See "--Taxation of the Company"
below.
The Company plans to make an election to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1997.
OPINION OF SPECIAL COUNSEL
O'Melveny & Myers LLP, special tax counsel ("Counsel") to the Company, has
advised the Company in connection with the Offering of the Common Stock and
its election to be taxed as a REIT. Based on existing law and certain
representations made to Counsel by the Company, including (without limitation)
that this Prospectus accurately reflects the proposed method of operation of
the Company, and assuming that the Company operates in the manner described in
this Prospectus, in the opinion of Counsel, commencing with the Company's
taxable year ending December 31, 1997, the Company has been organized in
conformity with the requirements for qualification as a REIT under the Code
and the Company's actual and proposed method of operation described in this
Prospectus and as represented by the Company to Counsel will enable the
Company to qualify as a REIT. However, whether the Company will in fact so
qualify will depend on actual operating
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results and compliance with the various tests for qualification as a REIT
relating to its income, assets, distributions, ownership and certain
administrative matters, the results of which may not be reviewed by Counsel.
Moreover, certain aspects of the Company's method of operations have not been
considered by the courts or the Service. There can be no assurance that the
courts or the Service will agree with this opinion. In addition, qualification
as a REIT depends on future transactions and events that cannot be known at
this time. Accordingly, Counsel is unable to opine whether the Company will in
fact qualify as a REIT under the Code in all events. In the opinion of
Counsel, the section of the Prospectus entitled "Federal Income Tax
Consequences" identifies and fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Common Stock
and to the extent such summaries involve matters of law, such statements of
law are correct under the Code. Counsel's opinions are based on various
assumptions and on the factual representations of the Company concerning its
business and assets. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy such
requirements. See "--Termination or Revocation of REIT Status" below.
The opinions of Counsel are based upon existing law including the Internal
Revenue Code of 1986, as amended, existing Treasury Regulations, Revenue
Rulings, Revenue Procedures and case law, all of which is subject to change
either prospectively or retroactively. Moreover, relevant laws or other legal
authorities may change in a manner that could adversely affect the Company or
its stockholders. Counsel's opinions also are based in part on the opinion of
special Maryland counsel, Ballard Spahr Andrews & Ingersoll, that the Company
is duly organized and existing under Maryland law.
In the event that the Company does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that the Company would, as a consequence, be
subject to potentially significant tax liabilities, the amount of earnings and
cash available for distribution to its stockholders would be reduced. See "--
Termination or Revocation of REIT Status" below.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must meet
certain tests which are described immediately below.
Stock Ownership Tests. For all taxable years after the first taxable year
for which a REIT election is made, the Company's shares of Common Stock must
be transferable and must be held by a minimum of 100 persons for at least 335
days of a 12 month year (or a proportionate part of a short tax year). The
Company must also use the calendar year as its taxable year. In addition, at
all times during the second half of each taxable year, no more than 50% in
value of the shares of any class of the stock of the Company may be owned
directly or indirectly by five or fewer individuals. If, for any taxable year,
the Company complies with regulations requiring the maintenance of records to
ascertain ownership of its outstanding stock and the Company does not know or
have reason to know that it failed to satisfy this test, it will be treated as
satisfying this test for any such taxable year. In determining whether the
Company's shares are held by five or fewer individuals, the attribution rules
of Sections 544 of the Code apply. For a description of these attribution
rules, see "Description of Capital Stock." The Company's Charter imposes
certain repurchase provisions and transfer restrictions to avoid more than
50% by value of any class of the Company's stock being held by five or fewer
individuals (directly or constructively) at any time during the last half of
any taxable year. Such repurchase and transfer restrictions will not adversely
affect the status of the shares of stock as "transferable shares" for purposes
of qualification as a REIT. The Company intends to satisfy both the 100
stockholder and 50%/5 stockholder individual ownership limitations described
above for as long as it seeks qualification as a REIT. See "Description of
Capital Stock." The Company uses the calendar year as its taxable year for
income tax purposes.
Asset Tests. On the last day of each calendar quarter at least 75% of the
value of the Company's assets must consist of Qualified REIT Real Estate
Assets, government securities, cash and cash items (the "75% of Assets Test").
The Company expects that substantially all of its assets will be Qualified
REIT Real Estate Assets.
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Qualified REIT Real Estate Assets include Pass-Through Certificates, interests
in real property, interests in Mortgage Loans secured by real property and
interests in REMICs.
On the last day of each calendar quarter, of the investments in securities
not included in the 75% of Assets Test, the value of any one issuer's
securities may not exceed 5% by value of the Company's total assets and the
Company may not own more than 10% of any one issuer's outstanding voting
securities. Hedging contracts (other than those which are Qualified REIT Real
Estate Assets), and certain types of other Mortgage Assets may be treated as
securities of the entity issuing such agreements or interests. The Company
will take measures to prevent the value of such contracts, interests or assets
issued by any one entity from exceeding 5% of the value of the Company's
assets as of the end of each calendar quarter. Moreover, pursuant to its
compliance guidelines, the Company intends to monitor closely (on not less
than a quarterly basis) the purchase and holding of the Company's assets in
order to comply with the above assets tests. In particular, as of the end of
each calendar quarter the Company intends to limit and diversify its ownership
of hedging contracts and other Mortgage Securities that do not constitute
Qualified REIT Real Estate Assets to less than 25%, in the aggregate, by value
of its portfolio, to less than 5% by value as to any single issuer, and to
less than 10% of the voting stock of any single issuer (collectively the "25%
of Assets Test"). If such limits are ever exceeded, the Company intends to
take appropriate remedial action to dispose of such excess assets within the
30-day period after the end of the calendar quarter, as permitted under the
Code.
When purchasing Mortgage Securities, the Company may rely on opinions of
counsel for the issuer or sponsor of such securities given in connection with
the offering of such securities, or statements made in related offering
documents, for purposes of determining whether and to what extent those
securities (and the income therefrom) constitute Qualified REIT Real Estate
Assets (and income) for purposes of the 75% of Assets Test (and the source of
income tests discussed below). If the Company invests in a partnership for
purposes of the asset tests and the gross income tests, it will be treated as
receiving its share of the income and loss of the partnership and owning a
proportionate share of the assets of the partnership and any income from the
partnership will retain the character that it had in the hands of the
partnership. If the Company forms a taxable affiliate to conduct mortgage
origination and other activities, it will obtain an opinion of counsel that
the proposed organization and ownership of an interest in the taxable
affiliate will not adversely affect the Company's status as a REIT.
Where a failure to satisfy any of the asset tests discussed above results
from an acquisition of securities or other property during a quarter, the
failure can be cured by disposition of sufficient non- qualifying assets
within 30 days after the close of such quarter. The Company intends to
maintain adequate records of the value of its assets to determine its
compliance with the asset tests, and intends to take such action as may be
required to cure any failure to satisfy the test within 30 days after the
close of any quarter.
Gross Income Tests. The Company must meet two separate income-based tests
for each year in order to qualify as a REIT.
1. The 75% Test. At least 75% of the Company's gross income (the "75% of
Income Test") for the taxable year must be derived from the following sources:
(i) rents from real property; (ii) interest (other than interest based in
whole or in part on the income or profits of any person) on obligations
secured by mortgages on real property or on interests in real property; (iii)
gains from the sale or other disposition of interests in real property and
real estate mortgages other than gain from stock in trade, inventory or
property held primarily for sale to customers in the ordinary course of the
Company's trade or business ("Dealer Property"); (iv) dividends or other
distributions on shares in other REITs and, provided such shares are not
Dealer Property, gain from the sale of such shares; (v) abatements and refunds
of real property taxes; (vi) income from the operation, and gain from the
sale, of property acquired at or in lieu of a foreclosure of the mortgage
secured by such property or as a result of a default under a lease of such
property ("Foreclosure Property"); (vii) income received as consideration for
entering into agreements to make loans secured by real property or to purchase
or lease real property (including interests in real property and interests in
mortgages on real property) (for example, commitment fees); and (viii) income
attributable to stock or debt instruments acquired with the proceeds from
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the sale of stock or certain debt obligations ("New Capital") of the Company
received during the one-year period beginning on the day such proceeds were
received ("Qualified Temporary Investment Income"). The investments that the
Company intends to make (as described under "Business and Strategy--
Description of Mortgage Assets") will give rise primarily to mortgage interest
qualifying under the 75% of Income Test.
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of the Company's gross income
for the taxable year must be derived from those sources, or from dividends,
interest or gains from the sale or disposition of stock or other securities
that are not Dealer Property (the "95% of Income Test"). Income attributable
to Mortgage Warehouse Participations, Mortgage Securities (other than
Qualified REIT Real Estate Assets) that the Company holds directly, dividends
on stock interest on any other obligations not secured by real property, and
gains from the sale or disposition of stock or other securities that are not
Qualified REIT Real Estate Assets will constitute qualified income for
purposes of the 95% of Income Test only, but will not be qualified income for
purposes of the 75% of Income Test. Income from mortgage servicing contracts,
loan guarantee fees (or other contracts under which the Company would earn
fees for performing services) and hedging (other than from Qualified REIT Real
Estate Assets) will not qualify for either the 95% or 75% of Income Tests. The
Company intends to severely limit its acquisition of any assets or investments
the income from which does not qualify for purposes of the 95% of Income Test.
Moreover, in order to help ensure compliance with the 95% of Income Test and
the 75% of Income Test, the Company intends to limit substantially all of the
assets that it acquires to Qualified REIT Real Estate Assets. The policy of
the Company to maintain REIT status may limit the type of assets, including
hedging contracts, that the Company otherwise might acquire.
For purposes of determining whether the Company complies with the 75% of
Income Test and the 95% of Income Test detailed above, gross income does not
include gross income from Prohibited Transactions. A "Prohibited Transaction"
is one involving a sale of Dealer Property, other than Foreclosure Property.
Net income from Prohibited Transactions is subject to a 100% tax. See "--
Taxation of the Company" below.
The Company intends to maintain its REIT status by carefully monitoring its
income, including income from hedging transactions, futures contracts and
sales of Mortgage Assets to comply with the 75% of Income Test and the 95% of
Income Test. See "--Taxation of the Company" below for a discussion of the
potential tax cost of the Company's selling certain Mortgage Securities on a
regular basis. In order to help insure its compliance with the REIT Provisions
of the Code, the Company will adopt guidelines the effect of which will be to
limit its ability to earn certain types of income, including income from
hedging, other than hedging income from Qualified REIT Real Estate Assets. See
"Business and Strategy--Asset/Liability Management--Interest Rate Risk
Management Policy." If the Company fails to satisfy one or both of the 75% or
95% of Income Tests for any year, it may face either (a) assuming such failure
was for reasonable cause and not willful neglect, a 100% tax on the greater of
the amounts of income by which it failed to comply with the 75% of Income Test
or the 95% of Income Test, reduced by estimated related expenses or (b) loss
of REIT status. There can be no assurance that the Company will always be able
to maintain compliance with the gross income tests for REIT qualification
despite its periodic monitoring procedures. Moreover, there is no assurance
that the relief provisions for a failure to satisfy either the 95% or the 75%
of Income Tests will be available in any particular circumstance.
Distribution Requirement. The Company must distribute to its stockholders on
a pro rata basis each year an amount equal to (i) 95% of its Taxable Income
before deduction of dividends paid and excluding net capital gain, plus (ii)
95% of the excess of the net income from Foreclosure Property over the tax
imposed on such income by the Code, less (iii) any "excess noncash income"
(the "95% Distribution Test"). See "Dividend Policy and Distributions." The
Company intends to make distributions to its stockholders in amounts
sufficient to meet this 95% distribution requirement. Such distributions must
be made in the taxable year to which they relate or, if declared before the
timely filing of the Company's tax return for such year and paid not later
than the first regular dividend payment after such declaration, in the
following taxable year. A nondeductible excise tax, equal to 4% of the excess
of such required distributions over the amounts actually distributed will be
imposed on the Company for each calendar year to the extent that dividends
paid during the year (or declared during the last quarter of the year and paid
during January of the succeeding year) are less than the sum of
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(i) 85% of the Company's "ordinary income," (ii) 95% of the Company's capital
gain net income, and (iii) income not distributed in earlier years.
If the Company fails to meet the 95% Distribution Test as a result of an
adjustment to the Company's tax returns by the Service, the Company by
following certain requirements set forth in the Code, may pay a deficiency
dividend within a specified period that will be permitted as a deduction in
the taxable year to which the adjustment is made. The Company would be liable
for interest based on the amount of the deficiency dividend. A deficiency
dividend is not permitted if the deficiency is due to fraud with intent to
evade tax or to a willful failure to file timely tax return.
Recordkeeping Requirements. A REIT is required to maintain records regarding
the actual and constructive ownership of its shares, and other information,
and within 30 days after the end of its taxable year, to demand statements
from persons owning above a specified level of the REIT's shares (e.g., if the
Company has over 200 but fewer than 2,000 stockholders of record, from persons
holding 1% or more of the Company's outstanding shares of stock and if the
Company has 200 or fewer stockholders of record, from persons holding 1/2% or
more of the stock) regarding their ownership of shares. The Company must
maintain, as part of its records, a list of those persons failing or refusing
to comply with this demand. Stockholders who fail or refuse to comply with the
demand must submit a statement with their tax returns setting forth the actual
stock ownership and other information. The Company also is required to
maintain permanent records of its assets as of the last day of each calendar
quarter. The Company intends to maintain the records and demand statements as
required by these regulations.
TERMINATION OR REVOCATION OF REIT STATUS
The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet the requirements described above. In that
event, the Company will not be eligible again to elect REIT status until the
fifth taxable year that begins after the year for which its election was
terminated unless all of the following relief provisions apply: (i) the
Company did not willfully fail to file a timely return with respect to the
termination taxable year; (ii) inclusion of incorrect information in such
return was not due to fraud with intent to evade tax; and (iii) the Company
establishes that failure to meet requirements was due to reasonable cause and
not willful neglect. The Company may also voluntarily revoke its election,
although it has no intention of doing so, in which event it will be
prohibited, without exception, from electing REIT status for the year to which
the revocation relates and the following four taxable years.
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders of the Company with
respect to any year in which it fails to qualify as a REIT would not be
deductible by the Company nor would they be required to be made. Failure to
qualify as a REIT would result in the Company's reduction of its distributions
to stockholders in order to pay the resulting taxes. If, after forfeiting REIT
status, the Company later qualifies and elects to be taxed as a REIT again,
the Company could face significant adverse tax consequences.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it generally will not
be subject to federal income tax on that portion of its Taxable Income or net
capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any Net Income or
net capital gain not distributed. The Company intends to distribute
substantially all of its Taxable Income to its stockholders on a pro rata
basis in each year. See "Dividend and Distribution Policy."
In addition, the Company will also be subject to a tax of 100% of net income
from any prohibited transaction and will be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% of Income Tests,
reduced by approximated expenses, if the failure to satisfy such tests is due
to reasonable
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cause and not willful neglect and if certain other requirements are met. The
Company may be subject to the alternative minimum tax on certain items of tax
preference.
If the Company acquires any real property as a result of foreclosure, or by
a deed in lieu of foreclosure, it may elect to treat such real properly as
Foreclosure Property. Net income from the sale of Foreclosure Property is
taxable at the maximum federal corporate rate, currently 35%. Income from
Foreclosure Property will not be subject to the 100% tax on prohibited
transactions. The Company will determine whether to treat such real property
as Foreclosure Property on the tax return for the fiscal year in which such
property is acquired.
The Company may securitize Mortgage Loans and sell such Mortgage Securities
through a taxable subsidiary. However, if the Company itself were to sell such
Mortgage Securities on a regular basis, there is a substantial risk that they
would be deemed Dealer Property and that all of the profits from such sales
would be subject to tax at the rate of 100% as income from Prohibited
Transactions. The Company therefore, intends to make any such sales through a
taxable subsidiary. The taxable subsidiary will form mortgage pools and create
mortgage-backed securities. See "--Taxable Subsidiaries" below. The taxable
subsidiary will not be subject to this 100% tax on income from Prohibited
Transactions, which is only applicable to REITs.
The Company may elect to retain and pay income tax on all or a portion of
its net long-term capital gains for any taxable year, in which case the
Company's stockholders would include in their income as long-term capital
gains their proportionate share of such undistributed capital gains. The
stockholders would be treated as having paid their proportionate share of the
capital gains tax paid by the Company, which amounts would be credited or
refunded to the stockholders.
The Company will also be subject to a nondeductible 4% excise tax if it
fails to make timely dividend distributions for each calendar year. See "--
Requirements for Qualification as a REIT--Distribution Requirement" above. The
Company intends to declare its fourth regular annual dividend during the final
quarter of the year and to make such dividend distribution no later than 31
days after the end of the year in order to avoid imposition of the excise tax.
Such a distribution would be taxed to the stockholders in the year that the
distribution was declared, not in the year paid. Imposition of the excise tax
on the Company would reduce the amount of cash available for distribution to
its stockholders.
TAXABLE SUBSIDIARIES
The Company may, in the future, cause the creation and sale of Mortgage
Securities through a taxable corporation. The Company and one or more persons
or entities will own all of the capital stock of that taxable corporation,
sometimes referred to as a "taxable subsidiary." In order to ensure that the
Company will not violate the prohibition on ownership of more than 10% of the
voting stock of a single issuer and the prohibition on investing more than 5%
of the value of its assets in the stock or securities of a single issuer, the
Company will own only shares of nonvoting preferred stock of that taxable
subsidiary corporation and will not own any of the taxable subsidiary's common
stock. The Company will monitor the value of its investment in the taxable
subsidiary on a quarterly basis to limit the risk of violating any of the
tests that comprise the 25% of Assets Test. In addition, the dividends that
the taxable subsidiary pays to the Company will not qualify as income from
Qualified REIT Real Estate Assets for purposes of the 75% of Income Test, and
in all events would have to be limited, along with the Company's other
interest, dividends, gains on the sale of securities, hedging income, and
other income not derived from Qualified REIT Real Estate Assets to less than
25% of the Company's gross revenues in each year. The taxable subsidiary will
not elect REIT status, will be subject to income taxation on its net earnings
and will generally be able to distribute only its net after-tax earnings to
its stockholders, including the Company, as dividend distributions. If the
taxable subsidiary creates a taxable mortgage pool, such pool itself will
constitute a separate taxable subsidiary of the taxable subsidiary. The
taxable subsidiary would be unable to offset the income derived from such a
taxable mortgage pool with losses derived from any other activities.
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TAXATION OF STOCKHOLDERS
For any taxable year in which the Company is treated as a REIT for federal
income purposes, amounts distributed by the Company to its stockholders out of
current or accumulated earnings and profits will be includable by the
stockholders as ordinary income for federal income tax purposes unless
properly designated by it as capital gain dividends. In the latter case, the
distributions will be taxable to the stockholders as long-term capital gains.
Distributions of the Company will not be eligible for the dividends received
deduction for corporations. Stockholders may not deduct any net operating
losses or capital losses of the Company.
Any loss on the sale or exchange of shares of the Common Stock held by a
stockholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividend received on the Common Stock held
by such stockholders.
If the Company makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in excess
of the tax basis will be taxable as gain realized from the sale of the
Company's stock.
The Company does not expect to acquire Residual interests issued by REMICs.
Such Residual interests, if acquired by a REIT, may generate excess inclusion
income. Excess inclusion income cannot be offset by net operating losses of a
stockholder. If the stockholder is a Tax-Exempt Entity, the excess inclusion
income is fully taxable as UBTI. If allocated to a foreign stockholder, the
excess inclusion income is subject to federal income tax withholding without
reduction pursuant to any otherwise applicable tax treaty. Potential
investors, and in particular Tax-Exempt Entities, are urged to consult with
their tax advisors concerning this issue.
The Company intends to finance the acquisition of Mortgage Assets by
entering into reverse repurchase agreements, which are essentially loans
secured by the Company's Mortgage Assets. The Company will seek to enter into
master repurchase agreements with secured lenders known as "counter-parties."
Typically, such master repurchase agreements have cross-collateralization
provisions that afford the counter-party the right to foreclose on the
Mortgage Assets pledged as collateral. If the Service were to successfully
take the position that the cross-collateralization provisions of the master
repurchase agreements result in the Company having issued debt instruments
(the reverse repurchase agreements) with differing maturity dates secured by a
pool of Mortgage Loans, a portion of its income could be characterized as
"excess inclusion income." See "Risk Factors--Adverse Tax Treatment of Excess
Inclusion Income."
The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute ordinary
income, return of capital and capital gain. Dividends and distributions
declared in the last quarter of any year payable to stockholders of record on
a specified date in such month will be deemed to have been received by the
stockholders and paid by the Company on December 31 of the record year,
provided that such dividends are paid before February 1 of the following year.
TAXATION OF TAX-EXEMPT ENTITIES
In general, a Tax-Exempt Entity that is a stockholder of the Company is not
subject to tax on distributions. The Service has ruled that amounts
distributed by a REIT to an exempt employees' pension trust do not constitute
UBTI and thus should be nontaxable to such a Tax-Exempt Entity. Based on that
ruling, but subject to the discussion of excess inclusion income set forth
under "--Taxation of Stockholders" above, indebtedness incurred by the Company
in connection with the acquisition of real estate assets such as Mortgage
Loans will not cause dividends of the Company paid to a stockholder that is a
Tax-Exempt Entity to be UBTI. However, if a Tax-Exempt Entity has financed the
acquisition of any of its stock in the Company with "acquisition indebtedness"
within the meaning of the Code, distributions on such stock could be treated
as UBTI. Under certain conditions, if a tax-exempt employee pension or profit
sharing trust were to acquire more than 10% of the Company's stock, a portion
of the dividends on such stock could be treated as UBTI.
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For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17)
and (c)(20), respectively, income from an investment in the Company will
constitute UBTI unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the UBTI
generated by its investment in the Company. Such entities should review Code
Section 512(a)(3) and should consult their own tax advisors concerning these
"set aside" and reserve requirements.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Common Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States tax consequences
of the acquisition, ownership and disposition of the Common Stock by an
initial purchaser of the Common Stock that, for United States income tax
purposes, is not a "United States person" (a "Foreign Holder"). For purposes
of discussion, a "United States person" means: a citizen or resident of the
United States; a corporation, partnership, or other entity created or
organized in the United States or under the laws of the United States or of
any political subdivision thereof (unless, in the case of a partnership, the
Service provides otherwise by regulations); an estate whose income is
includable in gross income for United States income tax purposes regardless of
its source; or, a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. This discussion does not consider any specific facts
or circumstances that may apply to a particular Foreign Holder. Prospective
investors are urged to consult their tax advisors regarding the United States
tax consequences of acquiring, holding and disposing of Common Stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local or other taxing jurisdiction.
Dividends. Dividends paid by the Company out of earnings and profits, as
determined for United States income tax purposes, to a Foreign Holder will
generally be subject to withholding of United States federal income tax at the
rate of 30%, unless reduced or eliminated by an applicable tax treaty or
unless such dividends are treated as effectively connected with a United
States trade or business conducted by the Foreign Holder. A Foreign Holder
eligible for a reduction in withholding under an applicable treaty must so
notify the Company by completing the appropriate IRS form. Distributions paid
by the Company in excess of its earnings and profits will be treated as a tax-
free return of capital to the extent of the holder's adjusted basis in his
Common Stock, and thereafter as gain from the sale or exchange of a capital
asset as described below. If it cannot be determined at the time a
distribution is made whether such distribution will exceed the Company's
earnings and profits (which, under most circumstances, will correspond to the
Company's Net Income before the deduction for dividends paid), the
distribution will be subject to withholding at the same rate as dividends.
Amounts so withheld, however, will be refundable or creditable against the
Foreign Holder's United States tax liability if the Company subsequently
determines that such distribution was, in fact, in excess of the earnings and
profits of the Company. If the receipt of the dividend is treated as being
effectively connected with the conduct of a trade or business within the
United States by a Foreign Holder, the dividend received by such holder will
be subject to the United States federal income tax on net income that applies
to United States persons generally (and, in addition with respect to foreign
corporate holders and under certain circumstances, the 30% branch profits
tax).
For any year in which the Company qualifies as a REIT, distributions to a
Foreign Holder that are attributable to gain from the sales or exchanges by
the Company of "United States real property interests" will be treated as if
such gain were effectively connected with a United States business and will
thus be subject to tax at the normal capital gain rates applicable to United
States stockholders (subject to applicable alternative
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minimum tax) under the provisions of the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to a treaty exemption. The Company is required to
withhold 35% of any distribution that could be designated by the Company as a
capital gains dividend. This amount may be credited against the Foreign
Holder's FIRPTA tax liability.
Gain on Disposition. A Foreign Holder will generally not be subject to
United States federal income tax on gain recognized on a sale or other
disposition of the Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the
Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident
alien individual and holds the Common Stock as a capital asset, such holder is
present in the United States for 183 or more days (computed in part by
reference to days present in the 2 prior years) in the taxable year and
certain other requirements are met, or (iii) the Foreign Holder is subject to
tax under the FIRPTA rules discussed below. Gain that is effectively connected
with the conduct of a United States Holder will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will
not be subject to withholding. Foreign Holders should consult applicable
treaties, which may provide for different rules.
Gain recognized by a Foreign Holder upon a sale of its Common Stock will
generally not be subject to tax under FIRPTA if the Company is a "domestically
controlled REIT," which is defined generally as a REIT in which at all times
during a specified testing period less than 50% in value of its shares were
held directly or indirectly by non-U.S. persons. Because only a minority of
the Company's stockholders are expected to be Foreign Holders, the Company
anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Foreign Holder should not be subject to U.S. tax from gains
recognized upon disposition of the Common Stock. However, because the Common
Stock will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT."
Information Reporting and Backup Withholding. Under temporary United States
Treasury regulations, United States information reporting requirements and
backup withholding tax will generally not apply to dividends paid on the
Common Stock to a Foreign Holder at an address outside the United States.
Payments by a United States office of a broker of the proceeds of a sale of
the Common Stock is subject to both backup withholding at a rate of 31% and
information reporting unless the holder certifies its Foreign Holder status
under penalties of perjury or otherwise establishes an exemption. Information
reporting requirements (but not backup withholding) will also apply to
payments of the proceeds of sales of the Common Stock by foreign offices of
United States brokers, or foreign brokers with certain types of relationships
to the United States, unless the broker has documentary evidence in its
records that the holder is a Foreign Holder and certain other conditions are
met, or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Foreign
Holder's United States federal income tax liability, provided that the
required information is furnished to the Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations.
RECENT TAX LEGISLATION
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (the "1997 Act"). Effective for taxable years beginning after the date
of the enactment of the 1997 Act, the 1997 Act, among other things, (i)
extends the current two-year period during which property acquired at or in
lieu of foreclosure of the mortgage secured by such property (or as a result
of a default under a lease of such property) may be treated as Foreclosure
Property to the close of the third taxable year following the taxable year
during which such property was acquired, (ii) expands the types of interest
rate hedges that may be treated as Qualified Hedges, and (iii) reduces the
maximum federal long-term capital gains rate applicable to individuals to 20%.
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ERISA CONSIDERATIONS
In considering an investment in the Common Stock, a fiduciary of a profit-
sharing, pension stock bonus plan or individual retirement account ("IRA"),
including a plan for self-employed individuals and their employees or any
other employee benefit plan subject to Prohibited Transaction provisions of
the Code or the fiduciary responsibility provisions of ERISA (an "ERISA Plan")
should consider (a) whether the ownership of Common Stock is in accordance
with the documents and instruments governing such ERISA Plan, (b) whether the
ownership of Common Stock is consistent with the fiduciary's responsibilities
and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in
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 of duty by another fiduciary and (d) the need to value the assets
of the ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c) above, Counsel is
of the opinion that, effective as of the date of the closing of the Offering
and the listing of the shares of Common Stock on the New York Stock Exchange,
and based on certain representations of the Company, the Common Stock should
qualify as a "publicly offered security," and, therefore, the acquisition of
such Common Stock by ERISA Plans should not cause the Company's assets to be
treated as assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely
upon their own advisors in evaluating the consequences under the fiduciary
provisions of ERISA and the Code of an investment in Common Stock in light of
their own circumstances.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100 million shares
of Common Stock, par value $.01 per share, and 50 million shares of preferred
stock, par value $.01 per share, issuable in one or more classes. Each share
of Common Stock is entitled to participate equally in dividends when and as
declared by the Board of Directors and in the distribution of assets of the
Company upon liquidation. Each share of Common Stock is entitled to one vote
and will be fully paid and non-assessable by the Company upon issuance. Shares
of the Common Stock of the Company have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized capital stock of the
Company may be increased and altered from time to time as permitted by
Maryland law.
The preferred stock may be issued from time to time in one or more classes
or series, with such distinctive designations, rights and preferences as shall
be determined by the Company's Board of Directors. Preferred stock would be
available for possible future financings of, or acquisitions by, the Company
and for general corporate purposes without any legal requirement that further
stockholder authorization for issuance be obtained. The issuance of preferred
stock could have the effect of making an attempt to gain control of the
Company more difficult by means of a merger, tender offer, proxy contest or
otherwise. The preferred stock, if issued, would have a preference on dividend
payments that could affect the ability of the Company to make dividend
distributions to the common stockholders.
The Bylaws provide that meetings of the stockholders of the Company are to
be held annually and special meetings may be called by the Board of Directors,
the Chairman of the Board, the President, a majority of the Unaffiliated
Directors or the stockholders.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements of qualification for the tax benefits accorded by
the REIT Provisions of the Code are that (1) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals (the "50%/5 stockholder
test") and (2) there must be at least 100 stockholders on 335 days of each
taxable year of 12 months.
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In order that the Company may meet these requirements at all times, the
Charter prohibits any person from acquiring or holding, directly or
indirectly, shares of Common Stock in excess of 9.8% (in value or in number of
shares, whichever is more restrictive) of the aggregate of the outstanding
shares of Common Stock or in excess of 9.8% (in value or in number of shares,
whichever is more restrictive) of the aggregate of the outstanding shares of
preferred stock of the Company. For this purpose, the term "ownership" is
defined in accordance with the REIT Provisions of the Code and the
constructive ownership provisions of Section 544 of the Code, as modified by
Section 856(h)(1)(B) of the Code. Subject to certain limitations, the
Company's Board of Directors may increase or decrease the ownership
limitations or waive the limitations for individual investors.
For purposes of the 50%/5 stockholder test, the constructive ownership
provisions applicable under Section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust
proportionately to its stockholders, partners or beneficiaries, attribute
ownership of securities owned by family members and partners to other members
of the same family, treat securities with respect to which a person has an
option to purchase as actually owned by that person, and set forth application
of such attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds shares of Common Stock in violation of the
ownership limitations set forth in the Charter, many types of entities may own
directly more than the 9.8% limit because such entities' shares are attributed
to its individual stockholders. On the other hand, a person will be treated as
owning not only shares of Common Stock actually or beneficially owned, but
also any shares of Common Stock attributed to such person under the
attribution rules described above. Accordingly, under certain circumstances,
shares of Common Stock owned by a person who individually owns less than 9.8%
of the shares outstanding may nevertheless be in violation of the ownership
limitations set forth in the Charter. Ownership of shares of Common Stock
through such attribution is generally referred to as constructive ownership.
The 100 stockholder test is determined by actual, and not constructive,
ownership. The Company will have greater than 100 stockholders of record.
The Charter further provides that if any transfer of shares of Common Stock
which, if effective, would result in any person beneficially or constructively
owning shares of Common Stock in excess or in violation of the above transfer
or ownership limitations, then that number of shares of Common Stock the
beneficial or constructive ownership of which otherwise would cause such
person to violate such limitations (rounded to the nearest whole shares) shall
be automatically transferred to a trustee (the "Trustee") as trustee of a
trust (the "Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the intended transferee
shall not acquire any rights in such shares. Shares of Common Stock held by
the Trustee shall be issued and outstanding shares of Common Stock. The
intended transferee shall not benefit economically from ownership of any
shares held in the Trust, shall have no rights to dividends, and shall not
possess any rights to vote or other rights attributable to the shares held in
the Trust. The Trustee shall have all voting rights and rights to dividends or
other distributions with respect to shares held in the Trust, which rights
shall be exercised for the exclusive benefit of the Charitable Beneficiary.
Any dividend or other distribution paid to the intended transferee prior to
the discovery by the Company that shares of Common Stock have been transferred
to the Trustee shall be paid with respect to such shares to the Trustee by the
intended transferee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Trustee. The Board of
Directors of the Company may, in its discretion, waive these requirements on
owning shares in excess of the ownership limitations.
Within 20 days of receiving notice from the Company that shares of Common
Stock have been transferred to the Trust, the Trustee shall sell the shares
held in the Trust to a person, designated by the Trustee, whose ownership of
the shares will not violate the ownership limitations set forth in the
Charter. 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 intended transferee and to the Charitable Beneficiary as
follows. The intended transferee shall receive the lesser of (1) the price
paid by the intended transferee for the shares or, if the intended transferee
did not give value for the shares in connection with the event causing the
shares to be held in the Trust (e.g., in the case of a gift, devise or other
such transaction), the Market Price (as defined below) of the shares on the
day of the event causing the shares to be held in the Trust, and (2) the price
per share received by the Trustee from the sale or other disposition of the
shares held in the Trust. Any net sales proceeds in excess of
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the amount payable to the intended transferee shall be immediately paid to the
Charitable Beneficiary. In addition, shares of Common Stock transferred to the
Trustee shall 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 resulted in such transfer to the 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 Company, or its designee,
accepts such offer. The Company shall have the right to accept such offer
until the Trustee has sold shares held in the Trust. Upon such a sale to the
Company, 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
intended transferee.
The term "Market Price" on any date shall mean, with respect to any class or
series of outstanding shares of the Company's stock, the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such 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 shares, 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 such
shares are not listed or admitted to trading on the New York Stock Exchange,
as reported on the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which such shares are listed or admitted to trading or, if such 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 Systems, or, if
such system is no longer in use, the principal other automated quotation
system that may then be in use or, if such 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 shares selected by the
Company's Board of Directors or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined
in good faith by the Company's Board of Directors.
All persons who own, directly or indirectly, more than 5%, in the case of
2,000 or more stockholders of record and 1% in the case of more than 200 but
fewer than 2,000 stockholders of record, of all classes or series of the
Company's stock, within 30 days after the end of each taxable year, are
required to give written notice to the Company stating the name and address of
such direct or indirect owner, the number of shares of each class and series
of stock of the Company directly or indirectly owned and a description of the
manner in which such shares are held. Each such direct or indirect owner 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 limitations.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the Maryland General
Corporation Law, as amended from time to time (the "MGCL"), and of the Charter
and the Bylaws of the Company does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the
Charter and the Bylaws of the Company, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information." For a description of additional restrictions on
transfer of the Common Stock, see "Description of Capital Stock--Repurchase of
Shares and Restrictions on Transfer."
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed from office at any time
but only by the affirmative vote of the holders of at least two-thirds of the
votes of the shares entitled to be cast in the election of directors.
BUSINESS COMBINATIONS
Under the MGCL, 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
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders 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 Stockholder for
its shares. The MGCL does not apply, however, to business combinations that
are approved or exempted by the board of directors of the corporation prior to
the time that the Interested Stockholder becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
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 directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder 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 directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
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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 corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
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
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the 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 (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or (ii) to acquisitions approved or exempted by the charter
or bylaws of the corporation.
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 shares of Common Stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
INTERESTED PARTY TRANSACTIONS
Pursuant to the Company's Bylaws, the Company will not enter into any
transactions or agreements with any director, officer or Affiliate of the
Company except as approved by a majority of the Company's Board of Directors,
including a majority of the Unaffiliated Directors. The Company has no
restrictions on any director, officer or Affiliate of the Company from
engaging for their own account in business activities of the types conducted
or to be conducted by the Company and its Affiliates.
AMENDMENT TO THE CHARTER
The Company reserves the right from time to time to make any amendment to
its Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in the Charter, of any
shares of outstanding stock. The Charter may be amended only by the
affirmative vote of holders of shares entitled to cast not less than a
majority of all the votes entitled to be cast on the matter; provided,
however, that provisions on removal of directors and certain other provisions
may be amended only by the affirmative vote of holders of shares entitled to
cast not less than two-thirds of all the votes entitled to be cast in the
election of directors.
DURATION OF THE COMPANY
The Company's Charter provides that the Company shall have a perpetual
duration.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
holders of shares entitled to cast not less than two-thirds of all the votes
entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(1) pursuant to the Company's notice of the meeting, (2) by the Board of
Directors or, (3) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws, and
(b) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to
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the Board of Directors or (c) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the .
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on removal of directors and the advance notice
provisions of the 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 Stock or otherwise be in their best interest.
TRANSFER AGENT AND REGISTRAR
The Company intends to appoint The Bank of New York as its transfer agent
and registrar for the Common Stock.
REPORTS TO STOCKHOLDERS
The Company will furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as it may
determine to furnish or as may be required by law.
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UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch & Co."), PaineWebber Incorporated, Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated are acting as representatives (the
"U.S. Representatives"), has severally agreed to purchase from the Company the
number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith...........................
Incorporated
PaineWebber Incorporated........................................
Stifel, Nicolaus & Company, Incorporated........................
Sutro & Co. Incorporated........................................
---------
Total...................................................... 8,000,000
=========
</TABLE>
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with Merrill Lynch International,
PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated (the "International Managers" and,
together with the U.S. Underwriters, the "Underwriters") Subject to the terms
and conditions set forth in the International Purchase Agreement, the Company
has agreed to sell to the International Managers, and the International
Managers have severally agreed to purchase, an aggregate of 2,000,000 shares
of Common Stock. The initial public offering price per share and the
underwriting discount per share are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to such Purchase Agreement if any
of the shares of Common Stock are purchased. In the event of a default by one
or more of the Underwriters, the commitments of the non-defaulting U.S.
Underwriters or International Managers, as the case may be, may be increased
or the U.S. Purchase Agreement or the International Purchase Agreement, as the
case may be, may be terminated.
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose to offer the shares of Common Stock offered hereby to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share of Common Stock, and that the U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
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<PAGE>
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted
to sell shares of Common Stock to each other for purposes of resale at the
initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-United
States persons or to persons they believe intend to resell to persons who are
non-United States persons, and the International Managers and any dealer to
whom they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to persons who are United States persons or to persons they
believe intend to resell to persons who are United States persons, except in
each case for transactions pursuant to the Intersyndicate Agreement.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days after the date hereof, to purchase up to an aggregate of 1,200,000
additional shares of Common Stock and to the International Managers an option,
exercisable for 30 days after the date hereof, to purchase up to 300,000
additional shares of Common Stock, in each case solely to cover over-
allotments, if any, at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent that the U.S. Underwriters exercise their option, each of the U.S.
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the foregoing table is of the
number of shares of Common Stock initially purchased by the U.S. Underwriters.
The Company, the Manager, their respective officers and directors and
certain officers, employees and directors of TCW Group and its Affiliates have
agreed not to offer, sell, agree or offer to sell, grant any option to
purchase or otherwise dispose of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for shares of Common Stock
directly or indirectly, for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch & Co. acting on
behalf of the Underwriters, except that the Company may, without such consent,
grant options or issue shares of Common Stock pursuant to the Company's 1997
Stock Option Plan.
At the request of the Company, the U.S. Underwriters have reserved up to
500,000 shares of Common Stock for sale (at the initial public offering price)
to directors, officers and employees of the Company, TCW and its Affiliates,
who have expressed an interest in purchasing such shares. There is no
obligation, however, on the part of any such individuals to purchase any
shares of Common Stock. Each such person has agreed to the restrictions on
transfer of the shares of Common Stock that are described in the preceding
paragraph. The number of shares
of Common Stock available for sale to the general public will be reduced to
the extent such persons purchase such reserved shares. Any reserved shares of
Common Stock not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares of Common Stock offered
hereby.
The U.S. Representatives and the International Managers have advised the
Company that the Underwriters do not intend to confirm sales to any account
over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Underwriters. Among the factors
considered in such negotiations, in addition to prevailing market conditions,
are the Company's future prospects, the experience of its management, the
economic condition of the financial services industry in general, the demand
for similar securities of companies considered comparable to the Company and
other relevant factors. The initial public offering price set forth on the
cover page of this Prospectus should not, however, be considered an indication
of the actual value of the Common Stock. Such price will be subject to change
as a result of market conditions and other factors. There can be no assurance
that an active trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to the Offering at or
above the initial public offering price.
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<PAGE>
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, Merrill Lynch & Co. is permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), Merrill Lynch & Co.
may reduce that short position by purchasing Common Stock in the open market.
Merrill Lynch & Co. may also elect to reduce any short position through the
exercise of all or part of the over-allotment options described above.
Merrill Lynch & Co. may also impose a penalty bid on certain Underwriters
and selling group members. This means that if Merrill Lynch & Co. purchases
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that Merrill Lynch & Co. will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company and the Manager, subject to certain limitations, have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof. The Company intends
to purchase insurance that, among other things, provides coverage for the
Company and the Manager with respect to the foregoing indemnification and
contribution agreement. See "The Manager--Expenses."
Certain of the Underwriters have performed, and may continue to perform,
investment banking, broker-dealer and financial advisory services for certain
Affiliates of the Company and have received and will receive customary
compensation therefor.
The Underwriters undertake that the minimum distribution, issuance and
aggregate market value requirements for listing on the New York Stock Exchange
will be achieved in the Offering.
In addition, TCW Brokerage Services, an affiliate of the Manager, will act
as a dealer in connection with the U.S. Offering and receive compensation from
the Underwriters in connection with the shares of Common Stock it sells. See
"Risk Factors--Conflicts of Interest Between the Company and the Manager and
Its Affiliates."
77
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and
certain legal matters will be passed upon for the Underwriters by Brown & Wood
llp, New York, New York. O'Melveny & Myers LLP and Brown & Wood llp, will rely
as to certain matters of Maryland law on the opinion of Ballard Spahr Andrews
& Ingersoll, Baltimore, Maryland. In addition, the description of federal
income tax consequences contained in this Prospectus entitled "Federal Income
Tax Consequences" is based upon the opinion of O'Melveny & Myers LLP.
EXPERTS
The balance sheet of Apex Mortgage Capital, Inc. as of September 15, 1997,
included in this Prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and is
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission
upon request to the Commission and inspected, without charge, at the offices
of the Commission. The Company will be subject to the informational
requirements of the Exchange Act, and in accordance therewith, will
periodically file reports and other information with the Commission. Such
reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Commission at prescribed rates through its Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respect by such reference. The Commission maintains a Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.
The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
78
<PAGE>
GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"Affiliate" means, when used with reference to a specified person, any
person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with the specified
person.
"Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and
FHLMC Certificates.
"ARM" means either a (i) a Mortgage Security as to which the underlying
mortgage loans feature adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an establish index or (ii) a
Mortgage Loan or any mortgage loan underlying a Mortgage Security that
features adjustments of the underlying interest rate at predetermined times
based on an agreed margin to an established index. An ARM is usually subject
to periodic and lifetime interest rate and/or payment caps.
"ASR" means ASR Investments Corporation.
"Average Net Invested Capital" means for any period (i) the arithmetic
average of the sum of the gross proceeds of the offerings of its equity
securities by the Company, after deducting any underwriting discounts and
commissions and other expenses and costs relating to such offerings, plus (A)
the Company's retained earnings (taking into account any losses incurred) and
(B) any non-cash charges or reserves, including depreciation, mark-to-market
adjustments and unrealized credit loss, computed by taking the average of such
values at the end of each month during such period, plus (ii) any unsecured
debt approved by the Unaffiliated Directors to be included in Average Net
Invested Capital.
"Average Net Worth" means for any period the arithmetic average of the sum
of the gross proceeds from the offerings of its equity securities by the
Company, before deducting any underwriting discounts and commissions and other
expenses and costs relating to the offerings, plus the Company's retained
earnings (without taking into account any losses incurred in prior periods)
computed by taking the average of such values at the end of each month during
such period.
"Bankruptcy Code" means Title 11 of the United States Code, as amended.
"Capital and Leverage Policy" means the policy of the Company that limits
its ability to acquire additional Mortgage Assets during times when the
capital base of the Company is less than a required amount, as described in
this Prospectus.
"Charitable Beneficiary" means a charitable beneficiary of a Trust.
"Charter" means the Company's Articles of Incorporation, as amended.
"Closing Price" on any date shall mean the last sale price for such 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 shares, 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 such shares are not listed or admitted to trading on the New
York Stock Exchange, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such shares are listed or admitted to trading or,
if such 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 Systems, or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such 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
shares selected by the Company's Board of Directors or, in the event that no
trading price is available for such shares, the fair market value of the
shares, as determined in good faith by the Company's Board of Directors.
79
<PAGE>
"CMOs" means debt obligations (bonds) that are collateralized by mortgage
loans or mortgage certificates other than Mortgage Derivative Securities and
Subordinated Interests. CMOs are structured so that principal and interest
payments received on the collateral are sufficient to make principal and
interest payments on the bonds. Such bonds may be issued by United States
government agencies or private issuers in one or more classes with fixed or
variable interest rates, maturities and degrees of subordination that are
characteristics designed for the investment objectives of different bond
purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitments" means commitments issued by the Company that will obligate the
Company to purchase Mortgage Assets from or sell them to the holders of the
commitment for a specified period of time, in a specified aggregate principal
amount and at a specified price.
"Common Stock" means the Company's shares of Common Stock, $0.01 par value
per share.
"Company" means Apex Mortgage Capital, Inc., a Maryland corporation.
"Compensation Committee" means the committee of the Company's Board of
Directors comprised entirely of Unaffiliated Directors that will administer
the 1997 Stock Option Plan.
"Conforming Mortgage Loans" means conventional Mortgage Loans that either
comply with requirements for inclusion in credit support programs sponsored by
Fannie Mae, FHLMC, or GNMA or are FHA or VA Loans, all of which are secured by
first mortgages or deeds of trust on single-family (one to four units)
residences.
"Control Shares" means voting shares of stock which, if aggregated with all
other shares of stock 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 directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval.
"Control Share Acquisition" means the acquisition of control shares, subject
to certain exceptions.
"Counsel" means O'Melveny & Myers LLP.
"Counter-party" means a third-party financial institution with which the
Company enters into an interest rate cap agreement or similar agreement.
"Dealer Property" means real property and real estate mortgages other than
stock in trade, inventory or property held primarily for sale to customers in
the ordinary course of the Company's trade or business.
"Dollar-Roll Agreement" means an agreement to sell a security for delivery
on a specified future date and a simultaneous agreement to repurchase the same
or substantially similar security on a specified future date.
"11th District Cost of Funds Index" means the index made available monthly
by the Federal Home Loan Bank Board of the cost of funds to members of the
Federal Home Loan Bank 11th District.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan that is subject to ERISA.
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<PAGE>
"Excess Servicing Rights" means contractual rights to receive a portion of
monthly mortgage payments of interest remaining after those payments of
interest have already been applied, to the extent required, to Pass-Through
Certificates and the administration of mortgage servicing. The mortgage
interest payments are secured by an interest in real property.
"Excess Shares" means the number of shares of capital stock held by any
person or group of persons in excess of 9.8% of the outstanding shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fannie Mae" means the federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C., (S) 1716 et seq.), formerly known as the Federal National
Mortgage Association.
"Fannie Mae Certificates" means guaranteed mortgage Pass-Through
Certificates issued by Fannie Mae either in certified or book-entry form.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"FHA" means the United States Federal Housing Administration.
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form.
"50%/5 Stockholder Test" means the requirement for qualification as a REIT
that during the last half of each taxable year not more than 50% in value of
the outstanding shares may be owned directly or indirectly by five or fewer
individuals.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"First Loss Subordinated Bonds" means any bonds that bear the "first loss"
from losses incurred in respect of Mortgage Assets upon foreclosure sales and
other liquidations of underlying mortgaged properties that result in failure
to recover all amounts due on the loans secured thereby.
"Foreclosure Property" means property acquired at or in lieu of foreclosure
of the mortgage secured by such property or a result of a default under a
lease of such property.
"Foreign Holder" means an initial purchaser of the Common Stock that, for
United States income tax purposes, is not a United States person.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means fully modified pass-through mortgage-backed
certificates guaranteed by GNMA and issued either in certificated or book-
entry form.
"High Quality" means either (i) securities that are rated A or above by at
least one of the Rating Agencies, or (ii) securities that are unrated but are
obligations of the United States or obligations guaranteed by the United
States government or an agency or instrumentality thereof.
"Housing Act" means the National Housing Act of 1934, as amended.
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<PAGE>
"HUD" means the Department of Housing and Urban Development.
"ICAA" means the Investment Counsel Association of America.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an affiliate of a corporation
who, at any time within the ten-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then
outstanding voting stock of the corporation.
"Interest Only Derivatives" means Mortgage Derivative Securities
representing the right to receive interest only or a disproportionately large
amount of interest.
"International Purchase Agreement" means the agreement by and between the
Company, the Manager and the International Managers whereby the International
Managers agree to purchase all of the shares of Common Stock being sold
thereunder if any of such shares are purchased, subject to the terms and
conditions set forth therein.
"Inverse Floaters" means a class of CMOs with a coupon rate that moves
inversely to a designated index, such as LIBOR or the 11th District Cost of
Funds Index. Income floaters have coupon rates that typically change at a
multiple of the changes at the relevant index rate. Any rise in the index rate
(as a consequence of an increase in interest rates) causes a drop in the
coupon rate of an Inverse Floater while any drop in the index rate causes an
increase in the coupon of an Inverse Floater.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"International Managers" means Merrill Lynch International, PaineWebber
International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated and Sutro
& Co. Incorporated..
"Intersyndicate Agreement" means the agreement by and between the U.S.
Underwriters and the International Managers that provides for the coordination
of their activities.
"IRAs" means Individual Retirement Accounts.
"ISOs" means qualified incentive stock options granted under the 1997 Stock
Option Plan that meet the requirements of Section 422 of the Code.
"Issuers" means those entities that issue Mortgage Securities, including
trusts or subsidiaries organized by the Company and Affiliates of the Manager.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means London-Inter-Bank Offered Rate.
"MGCL" means the Maryland General Corporation Law.
"Management Agreement" means the agreement by and between the Company and
the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.
"Manager" means TCW Investment Management Company, a California corporation.
"Market Price" on any date shall mean, with respect to a class or series of
outstanding shares of the Company's stock, the Closing Price for such stock on
such date.
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<PAGE>
"MBS Group" means the TCW Group's Mortgage-Backed Securities Group.
"Merrill Lynch & Co." means Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans and
(iii) Short-Term Investments.
"Mortgage Derivative Securities" means Mortgage Securities that are Interest
Only Derivatives or Principal Only Derivatives and may include other
derivative instruments.
"Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA
Loans and VA Loans.
"Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs and
(iii) Other Mortgage Securities.
"Mortgage Warehouse Participations" means participations in lines of credit
to mortgage originators that are secured by recently originated Mortgage Loans
that are in the process of being either securitized or sold to permanent
investors.
"Net Income" means the taxable income of the Company before the Manager's
incentive compensation, net operating loss deductions arising from losses in
prior periods and deductions permitted by the Code in calculating taxable
income for a REIT, including a deduction for the Company's interest expenses
for borrowed funds, plus the effects of adjustments, if any, necessary to
record hedging and interest transactions in accordance with GAAP.
"New Capital" means the proceeds from the sale of stock or certain debt
obligations.
"95% Distribution Test" means the stockholder distribution requirement
described in "Federal Income Tax Consequences--Requirements for Qualification
as a REIT--Distribution Requirement."
"95% of Income Test" means the income-based test that the Company must meet
to qualify as a REIT described in paragraph 2 of "Federal Income Tax
Consequences--Requirements for Qualification as a REIT-- Gross Income Tests."
"Nonconforming Mortgage Loans" means conventional Mortgage Loans that do not
conform to one or more requirements of Fannie Mae, FHA, FHLMC, GNMA or VA for
participation in one or more of such agencies' mortgage loan credit support
programs, such as the principal amounts financed or the underwriting
guidelines used in making the loan.
"Offering" means the 10,000,000 shares of Common Stock offered through the
Underwriters in connection with this Prospectus.
"One-Year U.S. Treasury Rate" means the average of the weekly average yield
to maturity for U.S. Treasury securities (adjusted to a constant maturity of
one year) as published weekly by the Federal Reserve Board during a yearly
period.
"Other Mortgage Assets" means Mortgage Assets that are unrated or whose
ratings have not been updated, including (i) Mortgage Loans, (ii) Pass-Through
Certificates and CMOs that are not High Quality but are backed by single-
family residential mortgage loans, and (iii) Other Mortgage Securities, that,
in each case, are determined to be comparable to a High Quality Mortgage
Security (by the standards of at least one of the Rating Agencies) on the
basis of credit or other enhancement features that meet the High Quality
Credit criteria as determined by the Manager and approved by the Company's
Board of Directors, including approval by a majority of the Unaffiliated
Directors
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<PAGE>
"Other Mortgage Securities" means securities representing interests in, or
secured by mortgages on real property other than Pass-Through Certificates and
CMOs and may include non-High Quality certificates and other securities
collateralized by single-family loans, Mortgage Warehouse Participations,
Mortgage Derivative Securities, Subordinated Interests and other mortgage-
backed and mortgage-collateralized obligations.
"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinated Interests evidencing
undivided ownership interests in a pool of mortgage loans, the holders of
which receive a "pass-through" of the principal and interest paid in
connection with the underlying mortgage loans in accordance with the holders'
respective, undivided interests in the pool. Pass-Through Certificates include
Agency Certificates, as well as other certificates evidencing interests in
loans secured by single-family properties.
"Principal Only Derivatives" means Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal.
"Privately Issued Certificates" means mortgage participation certificates
issued by certain private institutions. These securities entitle the holder to
receive a pass-through of principal and interest payments in the underlying
pool of Mortgage Loans and are issued or guaranteed by the private
institution.
"Prohibited Transaction" means a transaction involving a sale of Dealer
Property, other than Foreclosure Property.
"Purchase Agreements" means the U.S. Purchase Agreement and International
Purchase Agreement.
"Qualified Hedges" means bona fide interest rate swap or cap agreements
entered into by the Company to hedge variable-rate indebtedness only that the
Company incurred to acquire or carry Qualified REIT Real Estate Assets and any
futures and options, or other investments (other than Qualified REIT Real
Estate Assets) made by the Company to hedge its Mortgage Assets or borrowings
that have been determined by the Company to generate qualified income for
purposes of the 95% of Income Test applicable to REITs.
"Qualifying Interests in Real Estate" means "mortgages and other liens on
and interests in real estate," as defined in Section 3(c)(5)(C) under the
Investment Company Act.
"Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates, and other assets of the type described in
Section 856(c)(6)(B) of the Code.
"Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by the REIT at all times during such corporation's existence.
"Qualified Temporary Investment Income" means income attributable to stock
or debt instruments acquired with new capital of the Company received during
the one-year period beginning on the day such proceeds were received.
"Rating Agencies" means Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies, and Moody's Investors Service, Inc.
"REIT" means a real estate investment trust as defined under Section 856 of
the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code.
"REMIC" means a real estate mortgage investment conduit.
"Residuals" means the right to receive the remaining or residual cash flows
from a pool of Mortgage Loans or Mortgage Securities after distributing
required amounts to the holders of interests in or obligations backed by such
loans or securities and after payment of any required pool expenses.
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"Return on Equity" means an amount calculated for any quarter by dividing
the Company's Net Income for the quarter by its Average Net Worth for the
quarter.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans or Excess Servicing Rights owned by the Company.
"Standard & Poor's" means Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies.
"75% of Assets Test" means the asset-based test requiring that on the last
day of each calendar quarter at least 75% of the Company's assets must consist
of Qualified REIT Real Estate Assets, government securities, cash and cash
items, as described in "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Asset Tests."
"75% of Income Test" means the income-based test that the Company must meet
to qualify as a REIT described in paragraph 1 of "Federal Income Tax
Consequences--Requirements for Qualification as a REIT-- Gross Income Tests."
"Short-Term Investments" means short-term bank certificates of deposit,
short-term United States Treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements, short-
term CMOs, short-term asset-backed securities and other similar types of
short-term investment instruments, all of which will have maturities or
average lives of less than one (1) year.
"1997 Stock Option Plan" means the stock option plan adopted by the Company.
"Subordinated Interests" means a class of Mortgage Securities that is
subordinated to one or more other classes of Mortgage Securities, all of which
classes share the same collateral.
"Suppliers of Mortgage Assets" means mortgage bankers, savings and loan
associations, investment banking firms, banks, home builders, insurance
companies and other concerns or lenders involved in mortgage finance or
originating and packaging mortgage loans, and their Affiliates.
"TAMCO" means TCW Asset Management Company.
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh plans, bank commingled trust funds
for such plans, and IRAs, and other similar entities intended to be exempt
from federal income taxation.
"Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held
primarily for sale to customers or from Foreclosure Property) subject to
certain adjustments provided in the REIT Provisions of the Code.
"TCW" means The TCW Group, Inc.
"TCW Group" means TCW and its subsidiaries and Affiliates.
"Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury
fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is
not published by the Federal Reserve Board, any Federal Reserve Bank or agency
or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot
be calculated as provided above, then the rate shall be the arithmetic average
of the per annum average yields to maturities,
85
<PAGE>
based upon closing asked prices on each business day during a quarter, for
each actively traded marketable U.S. Treasury fixed interest rate security
with a final maturity date not less than eight nor more than twelve years from
the date of the closing asked prices as chosen and quoted for each business
day in each such quarter in New York City by at least three recognized dealers
in U.S. government securities selected by the Company.
"TFMI" means TCW Funds Management, Inc.
"Trust" means a trust that is the transferee of that number of shares of
Common Stock the beneficial or constructive ownership of which otherwise would
cause a person to acquire or hold, directly or indirectly, shares of Common
Stock in an amount that violates the Company's Charter, which trust shall be
for the exclusive benefit of one or more Charitable Beneficiaries.
"Trustee" means a trustee of a Trust for the exclusive benefit of a
Charitable Beneficiary.
"25% of Assets Test" means the asset-based tests described in "Federal
Income Tax Consequences-- Requirements for Qualification as a REIT--Asset
Tests."
"UBTI" means "unrelated trade or business income" as defined in Section 512
of the Code.
"Unaffiliated Directors" means those directors that are not affiliated,
directly or indirectly, with the Manager or the TCW Group, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of the
Manager or the TCW Group, and are not employed by or officers of the Company.
"Underwriters" means the U.S. Underwriters and the International Managers.
"United States Holder" means an initial purchaser of the Common Stock that,
for United States income tax purposes, is a United States person (i.e., is not
a Foreign Holder).
"U.S. Purchase Agreement" means the agreement by and between the Company,
the Manager and the Underwriters whereby the Underwriters agree to purchase
all of the shares of Common Stock being sold thereunder if any of such shares
are purchased, subject to the terms and conditions set forth therein.
"U.S. Representatives" means Merrill Lynch & Co., PaineWebber Incorporated,
Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated.
"U.S. Underwriters" means each of the underwriters listed in the U.S.
Purchase Agreement.
"VA" means the United States Veterans Administration.
"VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended.
86
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Apex Mortgage Capital, Inc.
We have audited the accompanying balance sheet of Apex Mortgage Capital,
Inc. (the "Company") as of September 15, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit 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, such balance sheet presents fairly, in all material
respects, the financial position of Apex Mortgage Capital, Inc. as of
September 15, 1997, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Los Angeles, California
September 16, 1997
F-1
<PAGE>
APEX MORTGAGE CAPITAL, INC.
BALANCE SHEET
SEPTEMBER 15, 1997
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Cash ................................................................... $1,500
======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
STOCKHOLDER'S EQUITY
Preferred Stock, par value $0.01 per share; 50,000,000 shares
authorized; Common Stock,
par value $0.01 per share; 100,000,000 shares authorized; 100 Common
Stock shares
issued and outstanding................................................. $ 1
Additional paid-in-capital.............................................. 1,499
------
Total Stockholder's Equity............................................ $1,500
======
</TABLE>
See accompanying notes to balance sheet.
F-2
<PAGE>
APEX MORTGAGE CAPITAL, INC.
NOTES TO BALANCE SHEET
SEPTEMBER 15, 1997
NOTE 1--THE COMPANY
Apex Mortgage Capital, Inc. (the "Company") was incorporated in Maryland and
was initially capitalized through the sale of 100 shares of Common Stock for
$1,500 on September 15, 1997. The Company will seek to acquire primarily
mortgage-backed securities and mortgage loans.
The Company has had no operations to date other than matters relating to the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
Cash includes cash on hand and deposits in banks. The Company has no cash
equivalents.
FEDERAL AND STATE INCOME TAXES
The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code of 1986, as amended, and generally will not be
subject to federal and state taxes on its income to the extent it distributes
annually 95% of its predistribution taxable income to stockholders and
maintains its qualification as a real estate investment trust.
INCOME RECOGNITION
Income and expenses are to be recorded on the accrual basis of accounting.
STOCK OPTIONS
The Company accounts for stock options to employees and directors of the
Company using the intrinsic value method. All other stock options are
accounted for using the fair value method.
NOTE 3--TRANSACTIONS WITH AFFILIATES
The Company intends to enter into a Management Agreement (the "Management
Agreement") with TCW Investment Management Company (the "Manager"), a wholly-
owned subsidiary of The TCW Group, Inc., under which the Manager will manage
its day-to-day operations, subject to the direction and oversight of the
Company's Board of Directors. The Company will pay the Manager annual base
management compensation, payable quarterly, equal to 3/4 of 1% of the Average
Net Invested Capital, as defined in the Management Agreement. The Company will
also pay the Manager, as incentive compensation, an amount equal to 30% of the
Net Income of the Company, before incentive compensation, in excess of the
amount that would produce an annualized Return on Equity equal to the Ten-Year
U.S. Treasury Rate plus 1%, as defined in the Management Agreement.
NOTE 4--PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement for the
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-3
<PAGE>
APEX MORTGAGE CAPITAL, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
NOTE 5--STOCK OPTION PLAN
The Company has adopted a stock option plan (the "1997 Stock Option Plan")
that provides for qualified incentive stock options, non-qualified stock
options, stock appreciation rights and dividend equivalent rights. Directors,
officers and key employees of the Company and the Manager are eligible to
participate in the 1997 Stock Option Plan. The exercise price for any option
granted under the 1997 Stock Option Plan may not be less than 100% of the fair
market value of the shares of the Company's Common Stock at the time the
option is granted. The 1997 Stock Option Plan authorizes the grant of options
to purchase an aggregate of up to 10% of the outstanding shares of the
Company's common stock, but not more than 1,000,000 shares.
No options or rights have yet been granted under the 1997 Stock Option Plan.
The Company intends to grant options to purchase 400,000 shares of Common
Stock, effective on the closing of the public offering of Common Stock. The
options will be exercisable starting one year after the date of grant. The
fair value of the options cannot be determined until the closing of the public
offering.
F-4
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 25
Dividend and Distribution Policy.......................................... 25
Capitalization............................................................ 26
Liquidity and Capital Resources........................................... 26
Business and Strategy..................................................... 27
Management of the Company................................................. 43
The Manager............................................................... 48
Security Ownership of Certain Beneficial Owners and Management............ 57
Federal Income Tax Consequences .......................................... 58
ERISA Considerations...................................................... 67
Description of Capital Stock.............................................. 67
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 70
Underwriting.............................................................. 73
Legal Matters............................................................. 76
Experts................................................................... 76
Additional Information.................................................... 76
Glossary.................................................................. 77
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 SHARES
LOGO
APEX MORTGAGE
CAPITAL, INC.
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY
INCORPORATED
SUTRO & CO. INCORPORATED
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 21, 1997
PROSPECTUS
10,000,000 SHARES
APEX MORTGAGE CAPITAL, INC.
COMMON STOCK
-----------
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Apex Mortgage Capital, Inc. (the "Company"). Of the 10,000,000
shares of Common Stock offered hereby, 2,000,000 shares of Common Stock are
being offered initially outside of the United States by the International
Managers (the "International Offering") and the remaining 8,000,000 shares of
Common Stock are being offered concurrently by the U.S. Underwriters initially
in the United States (the "U.S. Offering" and, collectively, the "Offering").
The initial public offering price and the underwriting discount per share are
identical for each Offering. At the request of the Company, the Underwriters
have reserved an aggregate of up to 500,000 shares of Common Stock for sale at
the initial public offering price to directors, officers and employees of the
Company, The TCW Group, Inc. and its affiliates. Prior to the Offering, there
has been no public market for the Common Stock. It is currently estimated that
the initial public offering price for the Common Stock will be between $14.00
and $16.00 per share. See "Underwriting" for information relating to the
determination of the initial public offering price. The Common Stock has been
approved for listing, subject to official notice of issuance, on the New York
Stock Exchange under the symbol "AXM."
LOGO
-----------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE
RISKS INCLUDE:
. The lack of prior . The Manager may be
experience in managing entitled to a
and operating a REIT significant termination
could adversely affect fee which, if paid,
the Company's results would materially
of operations. adversely affect the
cash available for
distribution to the
Company's stockholders.
. The Company does not
currently have any
borrowing arrangements
or commitments from any
lenders and may
therefore be unable to
implement its business
strategy.
. The Company is recently
formed and its current
assets consist of
$1,500 in cash.
. Interest rate
fluctuations may
decrease net interest
income from Mortgage
Assets.
. The Company's policies
and strategies may be
changed without the
consent of
stockholders.
. The Company has no . The Company intends to
identified Mortgage significantly leverage
Assets to purchase and its Mortgage Assets,
may be unable to which may result in
acquire Mortgage Assets operating losses.
on favorable terms.
. Failure to maintain
REIT status would
substantially reduce
the amount of cash
available for
distribution to the
Company's stockholders.
-----------
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 estimated expenses of $750,000, payable by the Company.
(3) The Company has granted to the International Managers and the U.S.
Underwriters options, exercisable within 30 days of the date hereof, to
purchase up to 300,000 and 1,200,000 additional shares of Common Stock,
respectively, solely to cover over-allotments, if any. If such over-
allotment options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by the
Underwriters and subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about December , 1997.
-----------
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL
STIFEL, NICOLAUS & COMPANY
INCORPORATED
SUTRO & CO. INCORPORATED
-----------
The date of this Prospectus is , 1997.
X-1
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement"), the Company has agreed to
sell to each of the underwriters named below (the "International Managers"),
and each of the International Managers has severally agreed to purchase from
the Company the number of shares of Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International......................................
PaineWebber International (U.K.) Ltd.............................
Stifel, Nicolaus & Company, Incorporated.........................
Sutro & Co. Incorporated.........................................
Total.......................................................... 2,000,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States (the
"U.S. Underwriters" and, together with the International Managers, the
"Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch & Co."), PaineWebber Incorporated, Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated are acting as representatives (the
"U.S. Representatives"). Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, the Company has agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters have severally agreed to purchase, an
aggregate of 8,000,000 shares of Common Stock. The initial public offering
price per share and the underwriting discount per share are identical under
the International Purchase Agreement and the U.S. Purchase Agreement.
In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to such Purchase Agreement if any
of the shares of Common Stock are purchased. In the event of a default by one
or more of the Underwriters, the commitments of the non-defaulting
International Managers or U.S. Underwriters, as the case may be, may be
increased or the International Purchase Agreement or the U.S. Purchase
Agreement, as the case may be, may be terminated.
The International Managers have advised the Company that they propose to
offer the shares of Common Stock offered hereby to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share of Common Stock, and that the International Managers may allow, and such
dealers may reallow, a discount not in excess of $ per share of Common
Stock on sales to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the International Managers and the U.S. Underwriters are permitted
to sell shares of Common Stock to each other for purposes of resale at the
initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the International
Managers and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are United States
persons or to persons they believe intend to resell to persons who are United
States persons, and the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock
to persons who are non-United States persons or to persons they believe intend
to resell to persons who are non-United States persons, except in each case
for transactions pursuant to the Intersyndicate Agreement.
Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months from the closing date of the Offering
offer to sell, in the United Kingdom, directly or indirectly, by means of any
document, any shares of Common Stock offered hereby, other than to persons
whose ordinary [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
X-2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that has not resulted and will not result in an
offer to the public within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the shares of Common Stock in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in
connection with the issue of the shares of Common Stock to a person who is of
a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a
person to whom the document may otherwise lawfully be issued or passed on.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
their country of purchase, in addition to the offering price set forth on the
cover page hereof.
The Company has granted to the International Managers an option, exercisable
for 30 days after the date hereof, to purchase up to an aggregate of 300,000
additional shares of Common Stock and to the U.S. Underwriters an option,
exercisable for 30 days after the date hereof, to purchase up to 1,200,000
additional shares of Common Stock solely to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount set forth on
the cover page of this Prospectus. To the extent that the International
Managers exercise their option, each of the International Managers will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the number of shares of
Common Stock initially purchased by the International Managers.
The Company, the Manager, their respective officers and directors and
certain officers, employees and directors of TCW Group and its Affiliates have
agreed not to offer, sell, agree or offer to sell, grant any option to
purchase or otherwise dispose of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for shares of Common Stock
directly or indirectly, for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch & Co. acting on
behalf of the Underwriters, except that the Company may, without such consent,
grant options or issue shares of Common Stock pursuant to the Company's 1997
Stock Option Plan.
At the request of the Company, the U.S. Underwriters have reserved up to
500,000 shares of Common Stock for sale (at the initial public offering price)
to directors, officers and employees of the Company, TCW and its Affiliates,
who have expressed an interest in purchasing such shares. There is no
obligation, however, on the part of any such individuals to purchase any
shares of Common Stock. Each such person has agreed to the restrictions on
transfer of the shares of Common Stock that are described in the preceding
paragraph. The number of shares
of Common Stock available for sale to the general public will be reduced to
the extent such persons purchase
such reserved shares. Any reserved shares of Common Stock not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares of Common Stock offered hereby.
The International Managers and the U.S. Representatives have advised the
Company that the Underwriters do not intend to confirm sales to any account
over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Underwriters. Among the factors
considered in such negotiations, in addition to prevailing market conditions,
are the Company's future prospects, the experience of its management, the
economic condition of the financial services industry in general, the demand
for similar securities of companies considered comparable to the Company and
other relevant factors. The initial public offering price set forth on the
cover page of this Prospectus should not, however, be considered an indication
of the actual value of the Common Stock. Such price will be subject to change
as a result of market conditions and other factors. There can be no assurance
that an active trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to the Offering at or
above the initial public offering price.
X-3
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, Merrill Lynch & Co. is permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), Merrill Lynch & Co.
may reduce that short position by purchasing Common Stock in the open market.
Merrill Lynch & Co. may also elect to reduce any short position through the
exercise of all or part of the over-allotment options described above.
Merrill Lynch & Co. may also impose a penalty bid on certain Underwriters
and selling group members. This means that if Merrill Lynch & Co. purchases
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that Merrill Lynch & Co. will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company and the Manager, subject to certain limitations, have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof. The Company intends
to purchase insurance that, among other things, provides coverage for the
Company and the Manager with respect to the foregoing indemnification and
contribution agreement. See "The Manager--Expenses."
Certain of the Underwriters have performed, and may continue to perform,
investment banking, broker-dealer and financial advisory services for the
Company and certain of its Affiliates and have received and will receive
customary compensation therefor.
The Underwriters undertake that the minimum distribution, issuance and
aggregate market value requirements for listing on the New York Stock Exchange
will be achieved in the Offering.
In addition, TCW Brokerage Services, an affiliate of the Manager, will act
as a dealer in connection with the U.S. Offering and receive compensation from
the Underwriters in connection with the shares of Common Stock it sells. See
"Risk Factors--Conflicts of Interest Between the Company and the Manager and
Its Affiliates."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and
certain legal matters will be passed upon for the Underwriters by Brown & Wood
llp, New York, New York. O'Melveny & Myers LLP and Brown & Wood [ALTERNATE
PAGE FOR INTERNATIONAL PROSPECTUS]
X-4
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
llp, will rely as to certain matters of Maryland law on the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the description
of federal income tax consequences contained in this Prospectus entitled
"Federal Income Tax Consequences" is based upon the opinion of O'Melveny &
Myers LLP.
EXPERTS
The balance sheet of Apex Mortgage Capital, Inc. as of September 15, 1997,
included in this Prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and is
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission
upon request to the Commission and inspected, without charge, at the offices
of the Commission. The Company will be subject to the informational
requirements of the Exchange Act, and in accordance therewith, will
periodically file reports and other information with the Commission. Such
reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Commission at prescribed rates through its Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respect by such reference. The Commission maintains a Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.
The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.
X-5
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 25
Dividend and Distribution Policy.......................................... 25
Capitalization............................................................ 26
Liquidity and Capital Resources........................................... 26
Business and Strategy..................................................... 27
Management of the Company................................................. 43
The Manager............................................................... 48
Security Ownership of Certain Beneficial Owners and Management............ 57
Federal Income Tax Consequences .......................................... 58
ERISA Considerations...................................................... 67
Description of Capital Stock.............................................. 67
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 70
Underwriting.............................................................. 73
Legal Matters............................................................. 76
Experts................................................................... 76
Additional Information.................................................... 76
Glossary.................................................................. 77
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
LOGO
[LOGO OF APEX MORTGAGE CAPITAL, INC.]
APEX MORTGAGE
CAPITAL, INC.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL
STIFEL, NICOLAUS & COMPANY
INCORPORATED
SUTRO & CO. INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
X-6
<PAGE>
PART II
[INFORMATION NOT REQUIRED IN PROSPECTUS]
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
SEC Registration Fee............................................. $ 55,758
NYSE listing fee................................................. 110,850
NASD filing fee.................................................. 18,900
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 300,000
Accounting fees and expenses..................................... 25,000
Transfer agent and custodian fees................................ 2,500
Miscellaneous.................................................... 55,892
--------
Total ....................................................... $750,000
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
The securities described in Item 33(a) were initially issued to TCW Capital
Investment Corporation in exchange for cash. These shares have been
transferred to TCW Asset Management Company.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to the exemption provided by Section 4(2) of the Securities Act, on
September 15, 1997 the Company issued 100 shares of Common Stock for an
aggregate purchase price of $1,500 to TCW Capital Investment Corporation.
These shares have been transferred to TCW Asset Management Company.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the MGCL, the Company's Charter obligates the Company to
indemnify its present and former directors and officers and to pay or
reimburse reasonable expenses for such individuals in advance of the final
disposition of a proceeding to the maximum extent permitted from time to time
by Maryland law. The 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 such 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. The Bylaws
implement the provisions relating to indemnification contained in the
Company's Charter. The MGCL permits the charter of a Maryland corporation to
include a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages, except to the
II-1
<PAGE>
extent that (i) the person actually received an improper benefit or profit in
money, property or services, or (ii) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. The Company's
Charter contains a provision providing for elimination of the liability of its
directors or officers to the Company or its stockholders for money damages to
the maximum extent permitted by Maryland law from time to time. In addition,
the officers, directors, and controlling persons of the Company are
indemnified against certain liabilities by the Company under the Purchase
Agreement relating to this Offering. The Company's Charter and Bylaws provide,
in effect, for the indemnification by the Company of its officers and
directors to the fullest extent permitted by applicable law. The Company will
maintain for the benefit of its officers and directors, officers' and
directors' insurance.
The U.S. Purchase Agreement (Exhibit 1.1) and the International Purchase
Agreement (Exhibit 1.2) also provide for the indemnification by the
Underwriters of the Company, its directors and officers and persons who
control the Company within the meaning of Section 15 of the Securities Act
with respect to certain liabilities, including liabilities arising under the
Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in the Prospectus are:
Balance sheet at September 15, 1997
Notes to financial statements
All other schedules have been omitted because they are not
applicable.
(b) Exhibits
<TABLE>
<C> <S>
1.1 Form of U.S. Purchase Agreement
1.2 Form of International Purchase Agreement
3.1 Articles of Amendment and Restatement of the Registrant
3.2 Bylaws of the Registrant
5.1 Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Opinion of O'Melveny & Myers LLP
10.1 Form of Management Agreement between the Registrant and TCW Investment
Management Company
10.6 1997 Stock Option Plan
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.1)
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 8.1)
*24.1 Power of Attorney (included on page II-4)
99.1 Consents to be named as a director pursuant to Rule 438
</TABLE>
- --------
* Previously filed
II-2
<PAGE>
ITEM 37. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing of the Offering certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification by Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions referenced in Item 34 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act, the information omitted from the 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, 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, as amended, 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. 3 to the Registration Statement to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Los Angeles, State of
California, on the 20th day of November, 1997.
APEX MORTGAGE CAPITAL, INC.
/s/ Philip A. Barach
By: _________________________________
Philip A. Barach
President and Chief Executive
Officer
PURSUANT TO REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 3
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board November 20, 1997
____________________________________
Marc I. Stern
/s/ Philip A. Barach President, Chief Executive November 20, 1997
____________________________________ Officer and Director
Philip A. Barach (Principal Executive
Officer)
* Vice Chairman of the Board November 20, 1997
___________________________________ and Chief Investment
Jeffrey E. Gundlach Officer
* Executive Vice President and November 20, 1997
____________________________________ Chief Operating Officer and
Daniel K. Osborne Chief Financial Officer
(Principal Financial
Officer and Accounting
Officer)
</TABLE>
*By/s/ Philip A. Barach
----------------------------
Philip A. Barach
(POWER OF ATTORNEY)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of U.S. Purchase Agreement
1.2 Form of International Purchase Agreement
3.1 Articles of Amendment and Restatement of the Registrant
3.2 Bylaws of the Registrant
5.1 Opinion of Ballard Spahr Andrews & Ingersoll
8.1 Opinion of O'Melveny & Myers LLP
10.1 Form of Management Agreement between the Registrant and TCW Investment
Management Company
10.6 1997 Stock Option Plan
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.1)
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 8.1)
*24.1 Power of Attorney (included on page II-4)
99.1 Consents to be named as a director pursuant to Rule 438
</TABLE>
- --------
* Previously filed.
<PAGE>
______________________________________________________________________________
APEX MORTGAGE CAPITAL, INC.
(a Maryland corporation)
8,000,000 Shares of Common Stock
U.S. PURCHASE AGREEMENT
-----------------------
Dated: November __, 1997
______________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
U.S. PURCHASE AGREEMENT.................................................. 1
SECTION 1. Representations and Warranties........................ 4
------------------------------
(a) Representations and Warranties by the Company......... 4
(i) Compliance with Registration Requirements...... 4
(ii) Independent Accountants........................ 5
(iii) Financial Statements........................... 5
(iv) No Material Adverse Change in Business......... 5
(v) Good Standing of the Company................... 5
(vi) Qualification as a REIT........................ 5
(vii) Capitalization................................. 5
(viii) Authorization of Agreement..................... 6
(ix) Management Agreement........................... 6
(x) Authorization and Description of Securities.... 6
(xi) Absence of Defaults and Conflicts.............. 6
(xii) Absence of Proceedings......................... 7
(xiii) Accuracy of Exhibits........................... 7
(xiv) Possession of Intellectual Property............ 7
(xv) Absence of Further Requirements................ 8
(xvi) Possession of Licenses and Permits............. 8
(xvii) Title to Property.............................. 8
(xviii)Investment Company Act......................... 8
(xix) Accounting Controls............................ 9
(xx) Registration Rights............................ 9
(b) Representations and Warranties by the Manager......... 9
(i) No Material Misstatements or Omissions......... 9
(ii) Good Standing.................................. 9
(iii) Authorization of Agreements.................... 10
(iv) No Material Adverse Change in Business......... 10
(v) Absence of Defaults and Conflicts.............. 10
(vi) Absence of Proceedings......................... 11
(vii) Absence of Further Requirements................ 11
(viii) Possession of Licenses and Permits............. 11
(ix) Investment Adviser............................. 11
(x) Financial Resources............................ 11
(c) Officer's Certificates................................ 12
SECTION 2. Sale and Delivery to Underwriters; Closing............ 12
(a) Initial Securities.................................... 12
(b) Option Securities..................................... 12
(c) Payment............................................... 12
(d) Denominations; Registration........................... 13
SECTION 3. Covenants............................................. 13
(a) Covenants of the Company.............................. 13
(b) Covenant of the Manager............................... 17
SECTION 4. Payment of Expenses................................... 17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(a) Expenses.............................................. 17
(b) Termination of Agreement.............................. 18
SECTION 5. Conditions of U.S. Underwriters' Obligations.......... 18
(a) Effectiveness of Registration Statement............... 18
(b) Opinions of Counsel for Company and the Manager....... 18
(c) Opinion of Maryland Counsel for the Company........... 18
(d) Opinion of Counsel for U.S. Underwriters.............. 18
(e) Officers' Certificate of the Company.................. 19
(f) Officers' Certificate of the Manager.................. 19
(g) Accountant's Comfort Letter........................... 19
(h) Bring-down Comfort Letter............................. 20
(i) Approval of Listing................................... 20
(j) No Objection.......................................... 20
(k) Lock-up Agreements.................................... 20
(l) Insurance Policy...................................... 20
(m) Conditions to Purchase of U.S. Option Securities...... 20
(n) Additional Documents.................................. 21
(o) Termination of Agreement.............................. 21
SECTION 6. Indemnification....................................... 22
(a) Indemnification of U.S. Underwriters by the
Company and the Manager............................... 22
(b) Indemnification of the Company and the Manager,
and their Respective Directors and Officers........... 23
(c) Actions against Parties; Notification................. 23
(d) Settlement without Consent if Failure to Reimburse.... 24
SECTION 7. Contribution.......................................... 24
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery...................................... 26
SECTION 9. Termination of Agreement.............................. 26
(a) Termination; General.................................. 26
(b) Liabilities........................................... 26
SECTION 10. Default by One or More of the U.S. Underwriters....... 26
SECTION 11. Notices............................................... 27
SECTION 12. Parties............................................... 27
SECTION 13. GOVERNING LAW AND TIME................................ 28
SECTION 14. Effect of Headings.................................... 28
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SCHEDULES
Schedule A - List of Underwriters............................... Sch A-1
Schedule B - Pricing Information................................ Sch B-1
Schedule C - List of Persons Subject to Lock-up................. Sch B-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.................... A-1
Exhibit B - Form of Opinion of Maryland Counsel..................... B-1
Exhibit C - Form of Lock-Up Letter.................................. C-1
</TABLE>
1
<PAGE>
APEX MORTGAGE CAPITAL, INC.
(a Maryland corporation)
8,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
-----------------------
November __, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
PaineWebber Incorporated
Stifel, Nicolaus & Company, Incorporated
Sutro & Co. Incorporated
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Apex Mortgage Capital, Inc., a Maryland corporation (the "Company") and TCW
Investment Management Company, a California corporation (the "Manager"), confirm
their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), PaineWebber Incorporated, Stifel,
Nicolaus & Company, Incorporated, Sutro & Co. Incorporated and each of the other
Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters",
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch, PaineWebber
Incorporated, Stifel, Nicolaus & Company, Incorporated and Sutro & Co.
Incorporated are acting as representatives (in such capacity, the "U.S.
Representatives"), with respect to the issue and sale by the Company and the
purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the U.S. Underwriters, acting severally and not jointly,
of the option described in Section 2(b) hereof to purchase all or any part of
1,200,000 additional shares of Common Stock to cover over-allotments, if any.
The aforesaid 8,000,000 shares of Common Stock (the "Initial
1
<PAGE>
U.S. Securities") to be purchased by the U.S. Underwriters and all or any part
of the 1,200,000 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called,
collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of 2,000,000 shares of
Common Stock (the "Initial International Securities") through arrangements with
certain underwriters outside the United States (the "International Managers")
for which Merrill Lynch International, PaineWebber International, Stifel,
Nicolaus & Company, Incorporated and Sutro & Co. Incorporated are acting as lead
managers (the "Lead Managers") and the grant by the Company to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to 300,000 shares of
additional Common Stock solely to cover overallotments, if any (the
"International Option Securities" and, together with the U.S. Option Securities,
the "Option Securities"). The Initial International Securities and the
International Option Securities are hereinafter called the "International
Securities".
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company and the Underwriters agree that up to 500,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to directors, officers and employees of
the Company, The TCW Group, Inc. ("TCW") and its affiliates as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
laws, rules and regulations. To the extent that such Reserved Securities are
not so purchased by such persons, such Reserved Securities may be offered to the
public as part of the public offering contemplated hereby.
In consideration of the Underwriters entering into this Agreement and as a
condition to their obligations hereunder, TCW has entered into a representation
letter (the "Representation Letter") dated the date hereof with the
Underwriters.
The Company understands that the U.S. Underwriters propose to make a public
offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
2
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-11 (No. 333-36069) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b).
Two forms of prospectus are to be used in connection with the offering and sale
of the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical
to the Form of U.S. Prospectus, except for the front cover and back cover pages
and the information under the caption "Underwriting". The information included
in any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of U.S. Prospectus and Form of International
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto and
schedules thereto at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of U.S.
Prospectus and final Form of International Prospectus in the forms first
furnished to the Underwriters for use in connection with the offering of the
Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary prospectus dated November 10, 1997 and the preliminary
International Prospectus dated November 10, 1997, respectively, each together
with the applicable Term Sheet and all references in this Agreement to the date
of such Prospectuses shall mean the date of the applicable Term Sheet. For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the U.S. Prospectus, the International Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company represents
and warrants to each U.S. Underwriter as of the date hereof, as of the Closing
Time referred to in
3
<PAGE>
Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in
Section 2(b) hereof, and agrees with each U.S. Underwriter, as follows:
(i) Compliance with Registration Requirements. The Company meets
-----------------------------------------
the requirements for use of Form S-11 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any written request to the
Company or counsel to the Company, or any oral request to their knowledge,
on the part of the Commission for additional information has been complied
with or satisfied.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any such amendment or
supplement was issued and at the Closing Time (and, if any U.S. Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of Rule
434 and the Prospectuses shall not be "materially different", as such term
is used in Rule 434, from the prospectuses included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or omissions
from the Registration Statement or U.S. Prospectus made in reliance upon
and in conformity with information furnished to the Company in writing by
any U.S. Underwriter through the U.S. Representatives expressly for use in
the Registration Statement or U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and, each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
4
<PAGE>
(ii) Independent Accountants. The accountants who certified the
-----------------------
balance sheet included in the Registration Statement are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The balance sheet included in the
--------------------
Registration Statement and the Prospectuses, together with the related
notes, presents fairly the financial position of the Company at the date
indicated; said balance sheet has been prepared in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent
basis.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material
with respect to the Company, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock.
(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Maryland and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement and the International Purchase Agreement; and the
Company is duly qualified as a foreign corporation to transact business and
is in good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect. The Company
has no subsidiaries.
(vi) Qualification as a REIT. The Company is organized in
-----------------------
accordance with the requirements for qualification as a real estate
investment trust under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code") and the rules and
regulations thereunder. The contemplated method of operation of the
Company's business as described in the Registration Statement will allow
the Company to satisfy the operational requirements for qualification as a
real estate investment trust under Sections 856 through 860 of the Internal
Revenue Code, and the rules and regulations thereunder.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or
pursuant to the exercise of options referred to in the Prospectuses). The
shares of issued and outstanding capital stock of the Company have been
duly
5
<PAGE>
authorized and validly issued and are fully paid and non-assessable; none
of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any security holder
of the Company.
(viii) Authorization of Agreement. This Agreement and the
--------------------------
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) Management Agreement. The Management Agreement (the
--------------------
"Management Agreement") dated as of November __, 1997 between the Company
and the Manager has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding agreement of the Company
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization or other laws relating to or affecting enforcement of
creditors' rights or by general equity principles.
(x) Authorization and Description of Securities. The Securities to
-------------------------------------------
be purchased by the U.S. Underwriters and the International Managers from
the Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and in the International Purchase Agreement,
respectively, will be validly issued and fully paid and non-assessable;
the Common Stock conforms to all statements relating thereto contained in
the Prospectuses and such description conforms in all material respects to
the rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities is not subject to the preemptive
or other similar rights of any security holder of the Company.
(xi) Absence of Defaults and Conflicts. The Company is not in
---------------------------------
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company is a
party or by which it may be bound, or to which any of the property or
assets of the Company is subject (collectively, for purposes of this
paragraph, "Agreements and Instruments") except for such defaults that
would not result in a Material Adverse Effect; and the execution, delivery
and performance of this Agreement, the International Purchase Agreement and
the Management Agreement and the consummation of the transactions
contemplated in this Agreement, the International Purchase Agreement and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use of Proceeds") and
compliance by the Company with its obligations under this Agreement, the
International Purchase Agreement and the Management Agreement have been
duly authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or
6
<PAGE>
Repayment Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not reasonably be expected to result in a Material Adverse Effect),
nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any of its assets, properties or operations, except for such
violations, which singly or in the aggregate, would not reasonably be
expected to result in a Material Adverse Effect. As used in this Section,
a "Repayment Event" means any event or condition which gives the holder of
any note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company, which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement, the
International Purchase Agreement, or the Management Agreement or the
performance by the Company of its obligations hereunder or thereunder; the
aggregate of all pending legal or governmental proceedings to which the
Company is a party or of which any of its property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, could not reasonably be
expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company owns or
-----------------------------------
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names
or other intellectual property (collectively, "Intellectual Property")
necessary to carry on its business as contemplated in the Prospectuses, and
the Company has not received any notice and is not otherwise aware of any
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.
7
<PAGE>
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement, the International Purchase Agreement or the Management
Agreement, except such as have been already obtained or as may be required
under the 1933 Act or the 1933 Act Regulations or state securities laws or
the regulations of the NASD.
(xvi) Possession of Licenses and Permits. The Company possesses such
----------------------------------
permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
its business as contemplated in the Prospectus, the Company is in
compliance with the terms and conditions of all such Governmental Licenses,
except where the failure so to possess or comply would not, singly or in
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except when the invalidity
of such Governmental Licenses or the failure of such Governmental Licenses
to be in full force and effect would not have a Material Adverse Effect;
and the Company has not received any written notice, or any oral notice to
its knowledge, of proceedings relating to the revocation or modification of
any such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would reasonably be
expected to result in a Material Adverse Effect.
(xvii) Title to Property. The Company owns no real property. The
-----------------
Company has good and marketable title to all other properties owned by it,
in each case, free and clear of all mortgages, pledges, liens, security
interests, claims, restrictions or encumbrances of any kind except such as
(a) are described in the Prospectuses or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company; and all of the leases and subleases material to the business of
the Company and under which the Company holds properties described in the
Prospectuses, are in full force and effect, and the Company does not have
notice of any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company to
the continued possession of the leased or subleased premises under any such
lease or sublease.
(xviii) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as contemplated herein and in the
International Purchase Agreement and the application of the net proceeds
from the sale of the Securities substantially as described in the
Prospectuses will not be, an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
8
<PAGE>
(xix) Accounting Controls. As of the Closing Time, the Company has
-------------------
or will maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (A) transactions are executed in
accordance with transaction's general or specific authorization and (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for
assets.
(xx) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act.
(b) Representations and Warranties by the Manager. As an inducement to
each U.S. Underwriter and to the Company to enter into this Agreement and to
complete the transactions contemplated hereby in connection with the
consummation of the issuance, sale and delivery of the U.S. Securities, the
Manager hereby represents and warrants to each U.S. Underwriter and to the
Company as follows:
(i) No Material Misstatements or Omissions. At the respective
--------------------------------------
times the Registration Statement, any Rule 462(b) Registration Statement
and any post-effective amendments thereto became effective and at the
Closing Time (and, if any U.S. Option Securities are purchased, at the Date
of Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto, did not and will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and neither the Prospectuses, nor any amendments of
supplements thereto, at the time the Prospectuses or any such amendment or
supplement thereto was issued and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery) did not and will
not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company or the Manager in writing by any U.S. Underwriter
through the U.S. Representatives expressly for use in the Registration
Statement or U.S. Prospectus.
(ii) Good Standing. The Manager has been duly organized and is
-------------
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement, the International Purchase Agreement and the
Management Agreement; the Manager is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, except where the
failure to so qualify or be in good standing would not result in a Material
Adverse Effect. All of the issued and outstanding capital stock of the
Manager has been duly authorized and validly issued, is fully paid and
9
<PAGE>
non-assessable and is owned by TCW, directly or through subsidiaries, free
and clear of any security interest, mortgage, pledge, lien, encumbrance,
claim or equity.
(iii) Authorization of Agreements. This Agreement, the International
---------------------------
Purchase Agreement and the Management Agreement have each been duly
authorized, executed and delivered by the Manager. The Management
Agreement constitutes the valid and binding agreement of the Manager,
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency or other laws
relating to or affecting enforcement of creditors' rights or by general
equity principles.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Manager, whether or
not arising in the ordinary course of business and (B) there have been no
transactions entered into by the Manager, other than those in the ordinary
course of business, which are material in the context of the transactions
contemplated in this Agreement, the International Purchase Agreement or the
Management Agreement.
(v) Absence of Defaults and Conflicts. The Manager is not in
---------------------------------
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which it is a party or by
which it may be bound, or to which any of its property or assets is subject
(collectively, for purposes of this paragraph, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement, the International Purchase Agreement and the Management
Agreement and the consummation of the transactions contemplated herein, in
the International Purchase Agreement, in the Management Agreement and in
the Registration Statement, and compliance by the Manager with its
obligations hereunder and under the International Purchase Agreement and
the Management Agreement, have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Manager pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions of
the charter or by-laws of the Manager or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Manager or any of its assets, properties or operations, except for such
violations which, singly or in the aggregate, would result in a Material
Adverse Effect. As used in this Section, a "Repayment Event" means any
event or condition which gives the holder of
10
<PAGE>
any note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Manager.
(vi) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Manager, threatened against or affecting the Manager, which is required
to be disclosed in the Registration Statement (other than as disclosed
therein), or which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of
the transactions contemplated in this Agreement, the International Purchase
Agreement or the Management Agreement or the performance by the Manager of
its obligations hereunder or under the International Purchase Agreement or
the Management Agreement; the aggregate of all pending legal or
governmental proceedings to which the Manager is a party or of which any of
its property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, could not reasonably be expected to result in a Material
Adverse Effect.
(vii) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Manager of its
obligations hereunder or under the International Purchase Agreement or the
Management Agreement.
(viii) Possession of Licenses and Permits. The Manager possesses
----------------------------------
such permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
its business as contemplated in the Prospectuses; the Manager is in
compliance with the terms and conditions of all such Governmental Licenses,
except where the failure so to comply would not, singly or in the
aggregate, have a Material Adverse Effect; all of the Governmental Licenses
are valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect would not have a Material Adverse Effect; and the
Manager has not received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(ix) Investment Adviser. The Manager is not prohibited by the
------------------
Investment Advisers Act of 1940, as amended (the "Advisers Act"), or the
rules and regulations thereunder, from acting under the Management
Agreement as contemplated by the Prospectuses.
11
<PAGE>
(x) Financial Resources. The Manager has the financial resources
-------------------
available to it necessary for the performance of its services and
obligations as contemplated in the Prospectuses.
(c) Officer's Certificates. Any certificate signed by any officer of the
Company or the Manager delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company or the Manager to each U.S.
Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each U.S. Underwriter, severally and not
jointly, and each U.S. Underwriter, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial U.S. Securities set forth in Schedule A opposite the name of
such U.S. Underwriter, plus any additional number of Initial Securities which
such U.S. Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof bears to the total number of Initial U.S.
Securities, subject, in each case, to such adjustments among the U.S.
Underwriters as the Global Coordinator in its sole discretion shall make to
eliminate any sales or purchases of fractional securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional 1,200,000 shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and delivery for such U.S. Option Securities. Any such
time and date of delivery for the U.S. Option Securities (a "Date of Delivery")
shall be determined by the Global Coordinator, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the U.S. Option Securities, each of the U.S. Underwriters,
acting severally and not jointly, will purchase that proportion of the total
number of U.S. Option Securities then being purchased which the number of
Initial U.S. Securities set forth in Schedule A opposite the name of such U.S.
Underwriter bears to the total number of Initial U.S. Securities, subject in
each case to such adjustments as the Global Coordinator in its discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
[O'Melveny & Myers LLP, Embarcadero Center
12
<PAGE>
West, 275 Battery Street, Suite 2600, San Francisco, California 94111, or at
such other place as shall be agreed upon by the Global Coordinator and the
Company, at 7:00 A.M.] (California time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities are
purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants.
---------
(a) Covenants of the Company. The Company covenants with each U.S.
Underwriter as follows:
(i) Compliance with Securities Regulations and Commission
-----------------------------------------------------
Requests. The Company, subject to Section 3(a)(ii), will comply with the
--------
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator as soon as reasonably practicable, and confirm the
notice in writing, (A) when any post-effective amendment to the
Registration Statement, shall become effective, or any supplement to
13
<PAGE>
the Prospectuses or any amended Prospectuses shall have been filed, (B) of
the receipt of any comments from the Commission, (C) of any request by the
Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectuses or for additional information, and (D) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the U.S. Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and,
in the event that it was not, it will promptly file such prospectus. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest possible moment.
(ii) Filing of Amendments. The Company will give the Global
--------------------
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectuses
included in the Registration Statement at the time it became effective or
to the Prospectuses and will furnish the U.S. Representatives with copies
of any such documents a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file or use any such
document to which the U.S. Representatives or counsel for the U.S.
Underwriters shall reasonably object.
(iii) Delivery of Registration Statements. The Company has
-----------------------------------
furnished or will deliver to the U.S. Representatives and counsel for the
U.S. Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith) and signed copies of all consents and
certificates of experts, and will also deliver to the U.S. Representatives,
without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the U.S. Underwriters. The copies of the Registration Statement and
each amendment thereto furnished to the U.S. Underwriters will be identical
to the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(iv) Delivery of Prospectuses. The Company has delivered to
------------------------
each U.S. Underwriter, without charge, as many copies of each preliminary
prospectus as such U.S. Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each U.S. Underwriter, without
charge, during the period when the U.S. Prospectus is required to be
delivered under the 1933 Act or the Securities Exchange Act of 1934 (the
"1934 Act"), such number of copies of the U.S. Prospectus (as amended or
supplemented) as such U.S. Underwriter may reasonably request. The U.S.
Prospectus and any amendments or supplements thereto furnished to the U.S.
Underwriters will be
14
<PAGE>
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
(v) Continued Compliance with Securities Laws. The Company
-----------------------------------------
will comply with the 1933 Act and the 1933 Act Regulations so as to permit
the completion of the distribution of the Securities as contemplated in
this Agreement, the International Purchase Agreement and in the
Prospectuses. If at any time when a prospectus is required by the 1933 Act
to be delivered in connection with sales of the Securities, any event shall
occur or condition shall exist as a result of which it is necessary, in the
reasonable opinion of counsel for the U.S. Underwriters or for the Company,
to amend the Registration Statement or amend or supplement any Prospectus
in order that the Prospectuses will not include any untrue statements of a
material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in light of the circumstances
existing at the time it is delivered to a purchaser, or if it shall be
necessary, in the reasonable opinion of such counsel, at any such time to
amend the Registration Statement or amend or supplement any Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 3(a)(ii), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such requirements,
and the Company will furnish to the U.S. Underwriters such number of copies
of such amendment or supplement as the U.S. Underwriters may reasonably
request.
(vi) Blue Sky Qualifications. The Company will use its
-----------------------
commercially reasonable efforts, in cooperation with the U.S. Underwriters,
to take such action as the Global Coordinator may reasonably request to
qualify the Securities for offering and sale under the applicable
securities laws of such states and other jurisdictions (domestic or
foreign) as the Global Coordinator may designate in writing to the Company
and to maintain such qualifications in effect for a period of not less than
one year from the later of the effective date of the Registration Statement
and any Rule 462(b) Registration Statement; provided, however, that the
Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is
not otherwise so subject. In each jurisdiction in which the Securities
have been so qualified, the Company will file such statements and reports
as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(vii) Rule 158. The Company will timely file such reports
--------
pursuant to the 1934 Act as are necessary in order to make generally
available to its security holders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated by,
the last paragraph of Section 11(a) of the 1933 Act.
15
<PAGE>
(viii) Use of Proceeds. The Company will use the net proceeds
---------------
received by it from the sale of the Securities substantially in the manner
specified in the Prospectuses under "Use of Proceeds".
(ix) Listing. The Company will use its best efforts to effect
-------
the listing of the Common Stock (including the Securities) on the New York
Stock Exchange.
(x) Restriction on Sale of Securities. During a period of 180
---------------------------------
days from the date of the Prospectuses, the Company will not, without the
prior written consent of the Global Coordinator, in its discretion
reasonably exercised, (A) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
or file any registration statement under the 1933 Act with respect to any
of the foregoing or (B) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction described in clause (A) or (B) above is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to (A) the Securities to be sold
hereunder or under the International Purchase Agreement, (B) any shares of
Common Stock issued by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and
referred to in the Prospectuses, (C) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to existing employee
benefit plans of the Company referred to in the Prospectuses or (D) any
shares of Common Stock issued pursuant to any non-employee director stock
plan or dividend reinvestment plan.
(xi) Reporting Requirements. The Company, during the period
----------------------
when the Prospectuses are required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by the
1934 Act and the rules and regulations of the Commission thereunder.
(xii) REIT Qualification. The Company will use its best efforts
------------------
to meet the requirements to qualify, commencing with its taxable year
ending December 31, 1997, as a "real estate investment trust" under the
Code and will continue to meet such requirements unless and until the Board
of Directors of the Company determines that revocation of such election is
in the best interest of the Company.
(xiii) Compliance with NASD Rules. The Company hereby agrees
--------------------------
that it will require that the holders of Reserved Securities execute lock-
up agreements that provide that such securities will be restricted as
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date of
this Agreement. The U.S. Underwriters will notify the Company in writing
as to which persons will need to be so restricted. At the request of
16
<PAGE>
the U.S. Underwriters, the Company will direct the transfer agent to place
a stop transfer restrictions upon such securities for such period of time.
(xiv) Insurance Policy. The Company agrees to provide, without
----------------
expense to the Underwriters, not later than the Closing Date, an insurance
policy (the "Insurance Policy") providing for coverage, among other things,
of the Company's and the Manager's indemnity and contribution obligations
pursuant to Section 6 and Section 7 of this Agreement and the International
Purchase Agreement. The form of such policy shall be in the form
previously provided to the Underwriters and approved by Merrill Lynch.
Such policy shall be for a minimum of three years and shall be prepaid.
[The Company and the Manager acknowledge and agree that they shall not
change, or permit to be changed, any provision of such policy affecting the
Underwriters without the prior written authorization of Merrill Lynch.]
[under discussion]
(b) Covenant of the Manager. The Manager covenants with each U.S.
Underwriter and with the Company that, during the period when the U.S.
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, it
shall notify you and the Company of the occurrence of any material events
respecting its activities, affairs or condition, financial or otherwise, and, if
as a result of any such event it is necessary, in the opinion of counsel, to
amend or supplement the Prospectuses in order to make the Prospectuses not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, the Manager will forthwith supply such information to
the Company as shall be necessary for the Company to prepare an amendment or
supplement to the Prospectuses so that, as so amended or supplemented, the
Prospectuses will not contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time it is delivered to a purchaser,
not misleading.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the U.S.
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the U.S. Securities to the U.S. Underwriters,
including any stock or other transfer taxes and any stamp or other duties
payable upon the sale, issuance or delivery of the U.S. Securities to the U.S.
Underwriters and the transfer of the U.S. Securities between the U.S.
Underwriters and the International Managers, (iv) the fees and disbursements of
the Company's counsel, accountants and other advisors, (v) the qualification of
the U.S. Securities under securities laws in accordance with the provisions of
Section 3(a)(vi) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the U.S. Underwriters in connection therewith and
in connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the U.S. Underwriters of copies of
each preliminary prospectus, any Term Sheets and of the U.S. Prospectus and any
amendments or supplements thereto, (vii) the cost of the Insurance Policy,
(viii) the preparation, printing and delivery to the U.S. Underwriters of copies
of the Blue Sky Survey and any supplement thereto, (ix) the fees and
17
<PAGE>
expenses of any transfer agent or registrar for the Securities and (x) the
filing fees incident to, and the reasonable fees and disbursements actually
incurred by counsel to the U.S. Underwriters in connection with, the review by
the NASD of the terms of the sale of the Securities and (xi) the fees and
expenses incurred in connection with the listing of the Securities on the New
York Stock Exchange and (xii) all costs and expenses of the U.S. Underwriters,
including the reasonable fees and disbursements of counsel for the U.S.
Underwriters, in connection with matters related to the Reserved Securities
which are designated by the Company for sale to directors, officers and
employees of the Company, TCW and its affiliates.
(b) Termination of Agreement. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company or the Manager shall reimburse the U.S. Underwriters
for all of their out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations
--------------------------------------------
of the several U.S. Underwriters hereunder are subject to the accuracy in all
material respects of the representations and warranties of the Company and the
Manager contained in Section 1 hereof or in certificates of any officer of the
Company or the Manager delivered pursuant to the provisions hereof, to the
performance by each of the Company or the Manager of its respective covenants
and other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the U.S.
Underwriters. A prospectus containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a post-
effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if
the Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinions of Counsel for Company and the Manager. At Closing
Time, the U.S. Representatives shall have received the favorable opinions,
dated as of Closing Time, of O'Melveny & Myers LLP, as counsel for the
Company and of O'Melveny & Myers LLP or _________________, as counsel for
the Manager, in form and substance reasonably satisfactory to counsel for
the U.S. Underwriters, together with signed or reproduced copies of each
such letter for each of the other U.S. Underwriters to the effect set forth
in Exhibit A hereto.
(c) Opinion of Maryland Counsel for the Company. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Ballard Spahr Andrews & Ingersoll, special Maryland
counsel for the Company, in form and substance reasonably satisfactory to
counsel for the U.S.
18
<PAGE>
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters to the effect set forth in Exhibit B
hereto.
(d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Brown & Wood llp, counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the
other U.S. Underwriters with respect to the matters set forth in clauses
(i), (ii), (v), (vi) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by-laws of the
Company), (vii) through (x), inclusive (xii), (xiv) (solely as to the
information in the Prospectuses under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto. In giving such
opinion Brown & Wood llp may rely, as to all matters governed by the laws
of jurisdictions other than the law of the State of New York and the
federal law of the United States, upon the opinions of counsel satisfactory
to the U.S. Representatives. Such counsel may also state that, insofar as
such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and the Manager
and certificates of public officials.
(e) Officers' Certificate of the Company. At Closing Time, there
shall not have been, since the date hereof or since the respective dates as
of which information is given in the Prospectuses, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company, whether or not
arising in the ordinary course of business, and the U.S. Representatives
shall have received a certificate of the President or a Vice President of
the Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has been no
such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct in all material respects with the
same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has, in all material respects, complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or, to such persons'
knowledge, are pending or are contemplated by the Commission.
(f) Officers' Certificate of the Manager. At Closing Time, there
shall not have been, since the date hereof or since the respective dates of
which information is given in the Prospectuses, any material adverse change
in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Manager, whether or not arising in the
ordinary course of business, and the U.S. Representatives shall have
received a certificate of the President or a Vice President of the Manager
and of the chief financial or chief accounting officer of the Manager,
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) the representations and warranties of the
Manager contained in Section 1(b) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time, and
(iii) the Manager has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the
Closing Time.
19
<PAGE>
(g) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the U.S. Representatives shall have received from Deloitte
& Touche LLP a letter dated such date, in form and substance reasonably
satisfactory to the U.S. Representatives, together with signed or
reproduced copies of such letter for each of the other U.S. Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the U.S.
Representatives shall have received from Deloitte & Touche LLP a letter,
dated as of Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (h) of this Section,
except that the specified date referred to shall be a date not more than
three business days prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement in the form of Exhibit C
hereto signed by the persons listed on Schedule C hereto.
(l) Insurance Policy. At Closing Time, the Insurance Policy shall be
in full force and effect upon the terms and conditions agreed to by the
Underwriters prior to the date hereof.
(m) Conditions to Purchase of U.S. Option Securities. In the event
that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company and the Manager contained
herein and the statements in any certificates furnished by the Company or
the Manager hereunder shall be true and correct in all material respects as
of each Date of Delivery and, at the relevant Date of Delivery, the U.S.
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(f) hereof remains true and correct as of such Date of
Delivery.
20
<PAGE>
(ii) Officers' Certificates. A certificate, dated such Date of
----------------------
Delivery, of the President or a Vice President of the Manager and of
the chief financial or chief accounting officer of the Manager
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(g) hereof remains true and correct as of such Date of
Delivery.
(iii) Opinions of Counsel for Company and the Manager. The favorable
------------------------------------------------
opinion of O'Melveny & Myers LLP, as counsel for the Company and
O'Melveny & Myers LLP or__________, as counsel for the Manager, in
form and substance satisfactory to counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option Securities to
be purchased on such Date of Delivery and otherwise to the same effect
as the opinions required by Section 5(b) hereof.
(iv) Opinion of Maryland Counsel for the Company. The favorable
-------------------------------------------
opinion of Ballard Spahr Andrews & Ingersoll, special Maryland counsel
for the Company, in form and substance satisfactory to counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinions required by Section 5(c)
hereof.
(v) Opinion of Counsel for Underwriters. The favorable opinion of
-----------------------------------
Brown & Wood llp, counsel for the U.S. Underwriters, dated such Date
of Delivery, relating to the U.S. Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(d) hereof.
(vi) Bring-down Comfort Letter. A letter from Deloitte & Touche
-------------------------
LLP, in form and substance satisfactory to the U.S. Representatives
and dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the U.S. Representatives pursuant
to Section 5(g) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished with
such documents and opinions as they may reasonably require for the purpose
of enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained [(provided, however, that neither the Company, the Manager
nor their counsel shall be required to provide any further information,
documents, assurances or opinions with respect to the Insurance Policy not
specified herein)] ; and all proceedings taken by the Company or the
Manager in connection with the issuance and sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and substance
to the U.S. Representatives and counsel for the U.S. Underwriters.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case
21
<PAGE>
of any condition to the purchase of U.S. Option Securities, on a Date of
Delivery which is after the Closing Time, the obligations of the several
U.S. Underwriters to purchase the relevant U.S. Option Securities, may be
terminated by the U.S. Representatives by notice to the Company at any time
at or prior to Closing Time or such Date of Delivery, as the case may be,
and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and
8 shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of U.S. Underwriters by the Company and the Manager.
The Company and the Manager (subject to Section 6(e) below), jointly and
severally, agree to indemnify and hold harmless each U.S. Underwriter and each
person, if any, who controls any U.S. Underwriter within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company;
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
(iv) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of the failure of directors, officers
and employees of the Company, TCW and its affiliates to pay for and accept
delivery of Reserved Securities,
22
<PAGE>
which by the end of the first business day following the date of this
Agreement, were subject to a properly confirmed agreement to purchase; and
(v) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement of a material
fact included in the supplemental material distributed in connection with
the reservation and sale of the Reserved Securities to directors, officers
and employees of the Company, TCW and its affiliates or the omission or
alleged omission therefrom of a material fact necessary to make the
statements therein, when considered in conjunction with the Prospectuses or
preliminary prospectuses, not misleading.
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense (A) to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto) or (B)
that results solely from an untrue statement of a material fact contained in, or
the omission of a material fact from, the preliminary prospectus, which untrue
statement or omission was corrected in its entirety in the Prospectuses (as then
amended or supplemented).
(b) Indemnification of the Company and the Manager, and their Respective
Directors and Officers. Each U.S. Underwriter severally agrees to indemnify and
hold harmless the Company and the Manager, and their respective directors, each
of the Company's officers who signed the Registration Statement, and each
person, if any, who controls the Company or the Manager within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such U.S. Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectuses (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An
23
<PAGE>
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested in writing an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement. Notwithstanding the immediately preceding
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, an indemnifying party shall not be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its consent if such
indemnifying party (i) reimburses such indemnified party in accordance with such
request to the extent it considers such request to be reasonable and (ii)
provides written notice to the indemnified party substantiating the unpaid
balance as unreasonable, in each case prior to the date of such settlement.
(e) Recourse Against the Manager. Notwithstanding anything herein to the
contrary, the U.S. Underwriters' recourse against the Manager with respect to
(i) the matters set forth in this Agreement (including, without limitation,
Sections 6 and 7 of this Agreement), (ii) any matters in the Registration
Statement, (iii) any matters arising as a matter of law, or (iv) any other
matters whatsoever, shall be expressly limited as follows:
(i) first, the U.S. Underwriters shall have fully and finally
exhausted all of their rights and remedies under the Insurance Policy;
(ii) second, the U.S. Underwriters, as their sole and exclusive
remedy, may thereafter assert any claims they may have against the Manager
directly against the Manager to the limited extent of the gross compensation
(not reimbursement of expenses) paid (not payable)
24
<PAGE>
by the Company to the Manager solely in respect of the three-year period
commencing at the Closing Time;
(iii) the Manager shall have no other liability to the U.S.
Underwriters whatsoever; and
(iv) the U.S. Underwriters' shall have no rights, remedies or claims
whatsoever against the Manager, directly or indirectly.
provided, however, that the foregoing limitations set forth in this subsection
- -------- -------
(e) shall not apply to any claim that the U.S. Underwriters may have against the
Manager as to which there is a final adjudication of actual, intentional and
deliberate fraud on the part of the Manager.
SECTION 7. Contribution.
------------
If the indemnification provided for in Section 6 hereof is for any reason
unavailable to or insufficient to hold harmless an indemnified party in respect
of any losses, liabilities, claims, damages or expenses referred to therein,
then each indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such indemnified
party, as incurred, (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Manager (collectively, the
"Company Parties"), on the one hand and the U.S. Underwriters, on the other
hand, from the offering of the U.S. Securities pursuant to this Agreement or
(ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company Parties, on the one hand, and of the U.S. Underwriters on the other
hand, in connection with the statements or omissions.
The relative benefits received by the Company Parties, on the one hand, and
the U.S. Underwriters, on the other hand, in connection with the offering of the
U.S. Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or,
if Rule 434 is used, the corresponding location on the Term Sheet, bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.
The relative fault of the Company Parties, on the one hand, and the U.S.
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by the Company Parties, on the one hand, or by the U.S.
Underwriters, on the other hand, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company, the Manager and the U.S. Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation
25
<PAGE>
(even if the U.S. Underwriters were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to above in this Section 7. The aggregate amount of
losses, liabilities, claims, damages and expenses incurred by an indemnified
party and referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the U.S. Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
U.S. Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company or the Manager, each officer of
the Company who signed the Registration Statement, and each person, if any, who
controls the Company or the Manager within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act shall have the same rights to contribution as
the Company and the Manager, respectively. The U.S. Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the number of Initial U.S. Securities set forth opposite their respective
names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or the Manager submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any U.S. Underwriter or controlling
person, or by or on behalf of the Company or the Manager, and shall survive
delivery of the Securities to the U.S. Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by written notice to the Company, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the U.S.
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company, whether or not arising in the ordinary course of business, or any such
adverse change with respect to the Manager which is material in the context of
the transactions contemplated by this Agreement, or (ii) if there has occurred
any material adverse change in the financial markets in
26
<PAGE>
the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the U.S. Representatives, impracticable
to market the Securities or to enforce contracts for the sale of the Securities,
or (iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the New York Stock Exchange, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (iv)
if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one or
-----------------------------------------------
more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery
to purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting U.S. Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with respect
to any Date of Delivery which occurs after the Closing Time, the obligation
of the U.S. Underwriters to purchase and of the Company to sell the U.S.
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting U.S.
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell
27
<PAGE>
the relevant U.S. Option Securities, as the case may be, either the U.S.
Representatives or the Company shall have the right to postpone Closing Time or
the relevant Date of Delivery, as the case may be, for a period not exceeding
seven days in order to effect any required changes in the Registration Statement
or Prospectuses or in any other documents or arrangements. As used herein, the
term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter
under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, 250 Vesey Street, New York, New York 10281-1201 attention of
Corporate and Institutional Client Group; and notices to the Company shall be
directed to it at 865 South Figueroa Street, Suite 1800, Los Angeles, California
90017, attention of Philip A. Barach with a copy to O'Melveny & Myers LLP, 275
Battery Street, San Francisco, California 94111, attention: Peter T. Healy,
Esq.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
-------
and be binding upon the U.S. Underwriters, the Company and the Manager and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the U.S. Underwriters, the Company and the Manager and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the U.S.
Underwriters, the Company and the Manager and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Securities from any U.S. Underwriter shall be deemed to be a
successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
----------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the U.S. Underwriters, the Manager and the Company, in accordance with its
terms.
Very truly yours,
APEX MORTGAGE CAPITAL, INC.
By _____________________________________
Title:
TCW INVESTMENT MANAGEMENT COMPANY
By ____________________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY, INCORPORATED
SUTRO & CO. INCORPORATED
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By _______________________________________
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
29
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............
PaineWebber Incorporated..................
Stifel, Nicolaus & Company, Incorporated..
Sutro & Co. Incorporated..................
---------
Total..................................... 8,000,000
=========
</TABLE>
Sch A - 1
<PAGE>
SCHEDULE B
APEX MORTGAGE CAPITAL, INC.
8,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the Securities to be paid by the
several U.S. Underwriters shall be $., being an amount equal to the initial
public offering price set forth above less $. per share; provided that the
purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities.
Sch B - 1
<PAGE>
SCHEDULE C
List of persons and entities
subject to lock-up
Sch C - 1
<PAGE>
Exhibit A-1
FORM OF OPINION OF COUNSEL TO THE COMPANY
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Maryland.
(ii) The Company has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement, respectively.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect. [see examples enclosed]
(iv) The Company is organized in accordance with the requirements
for qualification as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code") and the rules and regulations thereunder. The contemplated
method of operation of the Company's business as described in the
Registration Statement will satisfy the operational requirements for
qualification as a real estate investment trust under Sections 856 through
860 of the Internal Revenue Code, and the rules and regulations thereunder.
(v) The Company is not, and upon the issuance and sale of the U.S.
Securities as contemplated in the U.S. Purchase Agreement and the
International Securities as contemplated in the International Purchase
Agreement and the application of the net proceeds from the sale of the
Securities as described in the Prospectuses will not be, an "investment
company" or an entity "controlled" by an "investment company," as such
terms are defined in the 1940 Act.
(vi) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if
any, pursuant to the U.S. Purchase Agreement or the International Purchase
Agreement or pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectuses or pursuant to the exercise of options
referred to in the Prospectuses); the shares of issued and outstanding
capital stock of the Company have been duly authorized and validly issued
and are fully paid and non-assessable [deletion made subject to
confirmation of inclusion in BSA&I opinion].
A-1-1
<PAGE>
(vii) The Securities have been duly authorized for issuance and sale
to the U.S. Underwriters pursuant to the U.S. Purchase Agreement and to the
International Managers pursuant to the International Purchase Agreement
and, when issued and delivered by the Company pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement, respectively, against
payment of the consideration set forth in the U.S. Purchase Agreement and
the International Purchase Agreement, respectively, will be validly issued
and fully paid and non-assessable [deletion made subject to confirmation of
inclusion in BSA&I opinion].
(viii) The issuance of the Securities is not subject to preemptive
or other similar rights of any security holder of the Company arising by
operation of law, under the charter or by-laws of the Company or, to the
best of our knowledge and information, otherwise.
(ix) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and by-laws
of the Company.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); and, to
the best of our knowledge, no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b) Registration Statement has
been issued under the 1933 Act and no proceedings for that purpose have
been instituted or are pending or threatened by the Commission.
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and Prospectuses as of their
respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to which
we need express no opinion) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(xii) If Rule 434 has been relied upon, the Prospectuses were not
"materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective.
(xiii) All descriptions in the Registration Statement of contracts and
other documents to which the Company is a party are accurate in all
material respects; to the best of our knowledge, there are no franchises,
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects. [see
examples enclosed]
(xiv) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which
the Company or the Manager is a
A-1-2
<PAGE>
party, or to which the property of the Company or the Manager is subject,
before or brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement or the Management Agreements, or the performance by the
Company and the Manager of its obligations thereunder.
(xv) To the best of our knowledge, the Company is not in violation
of its charter or by-laws and no default by the Company exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectuses or filed
as an exhibit to the Registration Statement. [see examples enclosed]
(xvi) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required in connection with the
due authorization, execution and delivery of the U.S. Purchase Agreement,
the International Purchase Agreement or the Management Agreement by the
Company, or for the offering, issuance or sale of the Securities.
(xvii) The Company possesses such permits, licenses, approvals,
consents and other authorizations (collectively, "Governmental Licenses")
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct its business as contemplated in the
Prospectuses that we have, in the exercise of customary professional
diligence, recognized as applicable to the Company and, to our knowledge
and information, the Company is in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to comply
would not, singly or in the aggregate, have a Material Adverse Effect.
(xviii) Each of the U.S. Purchase Agreement and the International
Purchase Agreement has been duly authorized, executed and delivered by the
Company.
(xix) The Management Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable against it in accordance with its terms, except
as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
enforcement of creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(xx) The execution, delivery and performance of the U.S. Purchase
Agreement, the International Purchase Agreement and the Management
Agreement, the consummation of the transactions contemplated therein and in
the Registration Statement (including the issuance and
A-1-3
<PAGE>
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and the compliance by the Company with its obligations under the
U.S. Purchase Agreement and the International Purchase Agreement,
respectively, do not and will not, whether with or without the giving of
notice or lapse of time or both, conflict with or constitute a breach of,
or default or Repayment Event (as defined in Section 1(a)(xi) of the U.S.
Purchase Agreement and International Purchase Agreement) under or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, known to us, to which the Company is a party or by
which it may be bound, or to which any of the property or assets of the
Company is subject (except for such conflicts, breaches or defaults or
liens, charges or encumbrances that would not have a Material Adverse
Effect), nor will such action result in any violation of the provisions of
the charter or by-laws of the Company or any applicable law, statute, rule,
regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its properties, assets or
operations, except for such violations, which singly or in the aggregate,
would not result in a Material Adverse Effect.
(xxi) The information in the Prospectuses under "Business and
Strategy--Legal Proceedings," "Federal Income Tax Consequences," "ERISA
Considerations," "Description of Capital Stock," "Certain Provisions of
Maryland Law and of the Company's Charter and Bylaws" and in Item 33 and
Item 34 of Part II of the Registration Statement, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects; and our opinion set
forth under "Federal Income Tax Consequences" is confirmed.
(xxii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are
not described as required. [see examples enclosed]
(xxiii) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule
430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included
therein or omitted therefrom, as to which we need make no statement), at
the time such Registration Statement or any such amendment became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted therefrom,
as to which we need make no statement), at the time the Prospectuses were
issued, at the time any such amended or supplemented prospectuses were
issued or at the Closing Time, included or includes an untrue statement of
a material fact or
A-1-4
<PAGE>
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of the laws of Maryland, upon the opinion of
Ballard Spahr Andrews & Ingersoll, special counsel to the Company (which
opinion shall be dated and furnished to the Representatives at the Closing
Time, shall be satisfactory in form and substance to counsel for the
Underwriters and shall expressly state that the Underwriters may rely on
such opinion as if it were addressed to them), provided that O'Melveny &
Myers LLP shall state in their opinion that they believe that they and the
Underwriters are justified in relying upon such opinion, and (B), as to
matters of fact (but not as to legal conclusions) O'Melveny & Myers LLP may
rely, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject
to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991). [Note: comments made to the foregoing
paragraph were unclear]
A-1-5
<PAGE>
Exhibit A-2
FORM OF OPINION OF COUNSEL TO THE MANAGER
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Manager has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
California.
(ii) The Manager has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement, respectively.
(iii) The Manager is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(iv) All of the issued and outstanding capital stock of the
Manager has been duly authorized and validly issued, is fully paid and non-
assessable and is owned by TCW, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(v) The Manager is duly registered as an "investment adviser," as
such term is defined in the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and is not prohibited by the Advisers Act or the
rules and regulations thereunder from acting under the Management Agreement
as contemplated by the Prospectuses.
(vi) All descriptions in the Registration Statement of contracts and
other documents to which the Manager is a party are accurate in all
material respects.
(vii) To the best of my knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which
the Manager is a party, or to which the property of the Manager is subject,
before or brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement or the Management Agreement or the performance by the
Manager of its obligations thereunder.
A-2-1
<PAGE>
(viii) To the best of my knowledge, the Manager is not in violation
of its charter or by-laws and no default by the Manager exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectuses or filed
as an exhibit to the Registration Statement. [see examples]
(ix) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, is necessary or
required in connection with the due authorization, execution and delivery
by the Manager of the U.S. Purchase Agreement, the International Purchase
Agreement or the Management Agreement.
(x) The Manager possesses such permits, licenses, approvals,
consents and other authorizations (collectively, "Governmental Licenses")
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct its business as contemplated in the
Prospectuses that we have, in the exercise of customary professional
diligence, recognized as applicable to the Manager and, to our knowledge
and information, the Manager is in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to comply
would not, singly or in the aggregate, have a Material Adverse Effect.
(xi) Each of the U.S. Purchase Agreement and the International
Purchase Agreement has been duly authorized, executed and delivered by the
Manager.
(xii) The Management Agreement has been duly authorized, executed
and delivered by the Manager and constitutes a valid and binding obligation
of the Manager enforceable against it in accordance with its terms, except
as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
enforcement of creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(xiii) The execution, delivery and performance of the U.S. Purchase
Agreement, the International Purchase Agreement and the Management
Agreement, the consummation of the transactions contemplated therein and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use Of Proceeds") and the
compliance by the Manager with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement, respectively, do not
and will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or Repayment
Event (as defined in Section 1(b)(v) of the U.S. Purchase Agreement and
International Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Manager pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or any other agreement or
instrument, known to us, to which the Manager is a party or by which it may
be bound, or to which any of the property or assets of the Manager
A-2-2
<PAGE>
is subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not have a Material Adverse Effect), nor
will such action result in any violation of the provisions of the charter
or by-laws of the Manager or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Manager or any of its properties, assets or operations, except for such
violations, which singly or in the aggregate, would not result in a
Material Adverse Effect.
(xiv) To the best of my knowledge and information, the description
of the Manager in the Registration Statement and the Prospectuses does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions) [ ] may rely, to the extent they deem
proper, on certificates of responsible officers of the Manager and public
officials. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
A-2-3
<PAGE>
Exhibit B
FORM OF OPINION OF
SPECIAL MARYLAND COUNSEL TO THE COMPANY
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the state of Maryland.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if
any, pursuant to the Purchase Agreement or pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectus or
pursuant to the exercise of options referred to in the Prospectus); the
shares of issued and outstanding capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
and none of the outstanding shares of capital stock of the Company was
issued in violation of the preemptive or other similar rights of any
securityholder of the Company, either pursuant to the charter or by-laws of
the Company or Maryland law.
(iv) The Securities have been duly authorized for issuance and sale
to the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment
of the consideration set forth in the Purchase Agreement, will be validly
issued and fully paid and non-assessable and no holder of the Securities is
or will be subject to personal liability by reason of being such a holder.
(v) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company, either pursuant
to the charter or by-laws of the Company or Maryland law.
(vi) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(vii) The Management Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable against it in accordance with its terms, except
as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
enforcement of creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
B-1
<PAGE>
(viii) The Insurance Policy has been duly authorized, executed and
delivered and is in full force and effect and enforceable in accordance
with its terms.
(ix) The form of certificate used to evidence the Common Stock
complies in all material respects with Maryland law and with any applicable
requirements of the charter and by-laws of the Company.
(x) The information in the Prospectus under "Description of Capital
Stock," "Certain Provisions of Maryland Law and of the Company's Charter
and Bylaws," and "Federal Income Tax Consequences," to the extent that it
constitutes matters of Maryland law or the Company's charter and bylaws,
has been reviewed by us and is correct in all material respects.
(xi) To the best of our knowledge, there are no statutes or
regulations of the State of Maryland that are required to be described in
the Prospectus that are not described as required.
(xii) To the best of our knowledge, the Company is not in
violation of its charter or by-laws and no default exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectus or filed as
an exhibit to the Registration Statement.
(xiii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency of the State of Maryland is necessary or
required in connection with the due authorization, execution and delivery
of the Purchase Agreement or for the offering, issuance or sale of the
Securities.
(xiv) The execution, delivery and performance of the Purchase
Agreement and the Management Agreement, the consummation of the
transactions contemplated therein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use Of Proceeds") and the compliance by the Company with
its obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict
with or constitute a breach of, or default or Repayment Event (as defined
in Section 1(a)(xi) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or any other agreement
or instrument, known to us, to which the Company is a party or by which it,
or to which any of the property or assets of the Company, is subject
(except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or by-laws
of the Company or any applicable Maryland law, statute, rule, regulation,
judgment, order, writ or decree, known to us, of any government, government
instrumentality or court of the State of Maryland or any of its properties,
assets or operations, except for such violations, which singly or in the
aggregate, would not result in a Material Adverse Effect.
B-2
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(L)]
Exhibit C
November __, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
PaineWebber Incorporated
Stifel, Nicolaus & Company, Incorporated
Sutro & Company Incorporated
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Apex Mortgage Capital, Inc.
-------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of Apex
Mortgage Capital, Inc., a Maryland corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), PaineWebber, Stifel, Nicolaus & Company, Incorporated, Sutro
& Company Incorporated propose to enter into a U.S. Purchase Agreement (the
"U.S. Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.01 per
share (the "Common Stock"). In recognition of the benefit that such an offering
will confer upon the undersigned as a stockholder [and an officer and/or
director] of the Company, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned agrees
with each underwriter to be named in the U.S. Purchase Agreement that, during a
period of 180 days from the date of the U.S. Purchase Agreement, the undersigned
will not, without the prior written consent of Merrill Lynch, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any shares
of the Company's Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
B-3
<PAGE>
whole or in part, directly or indirectly, the economic consequence of ownership
of the Common Stock, whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
Print Name:
B-4
<PAGE>
EXHIBIT 1.1
B&W Draft 11/19/97
------------------
________________________________________________________________________________
APEX MORTGAGE CAPITAL, INC.
(a Maryland corporation)
2,000,000 Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
--------------------------------
Dated: November __, 1997
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INTERNATIONAL PURCHASE AGREEMENT.............................................. 1
SECTION 1. Representations and Warranties............................. 3
(a) Representations and Warranties by the Company.............. 3
(i) Compliance with Registration Requirements.......... 3
(ii) Independent Accountants............................ 4
(iii) Financial Statements............................... 4
(iv) No Material Adverse Change in Business............. 5
(v) Good Standing of the Company....................... 5
(vi) Qualification as a REIT............................ 5
(vii) Capitalization..................................... 5
(viii) Authorization of Agreement......................... 5
(ix) Management Agreement............................... 6
(x) Authorization and Description of Securities........ 6
(xi) Absence of Defaults and Conflicts.................. 6
(xii) Absence of Proceedings............................. 7
(xiii) Accuracy of Exhibits............................... 7
(xiv) Possession of Intellectual Property................ 7
(xv) Absence of Further Requirements.................... 7
(xvi) Possession of Licenses and Permits................. 8
(xvii) Title to Property.................................. 8
(xviii) Investment Company Act............................. 8
(xix) Accounting Controls................................ 8
(xx) Registration Rights................................ 9
(b) Representations and Warranties by the Manager.............. 9
(i) No Material Misstatements or Omissions............. 9
(ii) Good Standing...................................... 9
(iii) Authorization of Agreements........................ 9
(iv) No Material Adverse Change in Business............. 10
(v) Absence of Defaults and Conflicts.................. 10
(vi) Absence of Proceedings............................. 10
(vii) Absence of Further Requirements.................... 11
(viii) Possession of Licenses and Permits................. 11
(ix) Investment Adviser................................. 11
(x) Financial Resources................................ 11
(c) Officer's Certificates..................................... 11
SECTION 2. Sale and Delivery to Underwriters; Closing................. 12
(a) Initial Securities......................................... 12
(b) Option Securities.......................................... 12
(c) Payment.................................................... 12
(d) Denominations; Registration................................ 13
SECTION 3. Covenants.................................................. 13
(a) Covenants of the Company................................... 13
(b) Covenant of the Manager.................................... 17
SECTION 4. Payment of Expenses........................................ 17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(a) Expenses................................................... 17
(b) Termination of Agreement................................... 18
SECTION 5. Conditions of International Managers' Obligations.......... 18
(a) Effectiveness of Registration Statement.................... 18
(b) Opinions of Counsel for Company and the Manager............ 18
(c) Opinion of Maryland Counsel for the Company................ 18
(d) Opinion of Counsel for International Managers.............. 18
(e) Officers' Certificate of the Company....................... 19
(f) Officers' Certificate of the Manager....................... 19
(g) Accountant's Comfort Letter................................ 19
(h) Bring-down Comfort Letter.................................. 19
(i) Approval of Listing........................................ 20
(j) No Objection............................................... 20
(k) Lock-up Agreements......................................... 20
(l) Insurance Policy........................................... 20
(m) Conditions to Purchase of International Option Securities.. 20
(n) Additional Documents....................................... 21
(o) Termination of Agreement................................... 21
SECTION 6. Indemnification............................................ 22
(a) Indemnification of International Managers by the Company
and the Manager............................................ 22
(b) Indemnification of the Company and the Manager, and their
Respective Directors and Officers.......................... 23
(c) Actions against Parties; Notification...................... 23
(d) Settlement without Consent if Failure to Reimburse......... 24
(e) Recourse Against the Manager............................... 24
SECTION 7. Contribution............................................... 25
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery................................................... 26
SECTION 9. Termination of Agreement................................... 26
(a) Termination; General....................................... 26
(b) Liabilities................................................ 27
SECTION 10. Default by One or More of the International Managers....... 27
SECTION 11. Notices.................................................... 28
SECTION 12. Parties.................................................... 28
SECTION 13. GOVERNING LAW AND TIME..................................... 28
SECTION 14. Effect of Headings......................................... 28
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SCHEDULES
Schedule A - List of International Managers............................. Sch A-1
Schedule B - Pricing Information........................................ Sch B-1
Schedule C - List of Persons Subject to Lock-up......................... Sch C-1
EXHIBITS
Exhibit A-1 Form of Opinion of Company's Counsel....................... A-1-1
Exhibit A-2 Form of Opinion of Counsel to the Manager.................. A-2-1
Exhibit B - Form of Opinion of Maryland Counsel......................... B-1
Exhibit C - Form of Lock-Up Letter...................................... C-1
</TABLE>
1
<PAGE>
APEX MORTGAGE CAPITAL, INC.
(a Maryland corporation)
2,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
--------------------------------
November __, 1997
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL (U.K.) LTD.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
SUTRO & CO. INCORPORATED
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Apex Mortgage Capital, Inc., a Maryland corporation (the "Company") and TCW
Investment Management Company, a California corporation (the "Manager"), confirm
their respective agreements with Merrill Lynch International ("Merrill Lynch"),
PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated,
Sutro & Co. Incorporated (collectively, the "International Managers", which term
shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), with respect to the issue and sale by the Company and the
purchase by the International Managers, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the International Managers, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 300,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 2,000,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the 300,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "International Option Securities") are hereinafter called,
collectively, the "International Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of 8,000,000 shares of Common Stock
(the "Initial U.S. Securities") through
1
<PAGE>
arrangements with certain underwriters in the United States (the "U.S.
Underwriters") for which Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, PaineWebber Incorporated, Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated are acting as representatives (the
"U.S. Representatives") and the grant by the Company to the U.S. Underwriters,
acting severally and not jointly, of an option to purchase all or any part of
the U.S. Underwriters' pro rata portion of up to 1,200,000 shares of additional
Common Stock solely to cover overallotments, if any (the "U.S. Option
Securities" and, together with the International Option Securities, the "Option
Securities"). The Initial U.S. Securities and the U.S. Option Securities are
hereinafter called the "U.S. Securities".
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company and the Underwriters agree that up to 500,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to directors, officers and employees of
the Company, The TCW Group, Inc. ("TCW") and its affiliates as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
laws, rules and regulations. To the extent that such Reserved Securities are
not so purchased by such persons, such Reserved Securities may be offered to the
public as part of the public offering contemplated hereby.
In consideration of the Underwriters entering into this Agreement and as a
condition to their obligations hereunder, TCW has entered into a representation
letter (the "Representation Letter") dated the date hereof with the
Underwriters.
The Company understands that the International Managers propose to make a
public offering of the International Securities as soon as they deem advisable
after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-11 (No. 333-36069) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933
2
<PAGE>
Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to
be used in connection with the offering and sale of the Securities: one relating
to the International Securities (the "Form of International Prospectus") and one
relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of
International Prospectus is identical to the Form of U.S. Prospectus, except for
the front cover and back cover pages and the information under the caption
"Underwriting". The information included in any such prospectus or in any such
Term Sheet, as the case may be, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (a) pursuant to paragraph
(b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to
paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form
of International Prospectus and Form of U.S. Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final Form of International Prospectus and final
Form of U.S. Prospectus in the forms first furnished to the Underwriters for use
in connection with the offering of the Securities are herein called the
"International Prospectus" and the "U.S. Prospectus," respectively, and
collectively, the "Prospectuses." If Rule 434 is relied on, the terms
"International Prospectus" and "U.S. Prospectus" shall refer to the preliminary
International Prospectus dated November 10, 1997 and the preliminary U.S.
Prospectus dated November 10, 1997, respectively, each together with the
applicable Term Sheet and all references in this Agreement to the date of such
Prospectuses shall mean the date of the applicable Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company represents
and warrants to each International Manager as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each International
Manager, as follows:
(i) Compliance with Registration Requirements. The Company meets the
-----------------------------------------
requirements for use of Form S-11 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of
3
<PAGE>
the Company, are contemplated by the Commission, and any written request to
the Company or counsel to the Company, or any oral request to their
knowledge, on the part of the Commission for additional information has
been complied with or satisfied.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any International Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any such
amendment or supplement was issued and at the Closing Time (and, if any
International Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or omitted
or will omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. If Rule 434 is used, the Company will comply with
the requirements of Rule 434 and the Prospectuses shall not be "materially
different", as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or International
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any International Manager expressly
for use in the Registration Statement or International Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and, each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
-----------------------
balance sheet included in the Registration Statement are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The balance sheet included in the
--------------------
Registration Statement and the Prospectuses, together with the related
notes, presents fairly the financial position of the Company at the date
indicated; said balance sheet has been prepared in conformity with
generally accepted accounting principles ("GAAP") applied on a consistent
basis.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as
4
<PAGE>
otherwise stated therein, (A) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company, other than those in the
ordinary course of business, which are material with respect to the
Company, and (C) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Maryland and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement and the U.S. Purchase Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect. The Company
has no subsidiaries.
(vi) Qualification as a REIT. The Company is organized in
-----------------------
accordance with the requirements for qualification as a real estate
investment trust under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code") and the rules and
regulations thereunder. The contemplated method of operation of the
Company's business as described in the Registration Statement will allow
the Company to satisfy the operational requirements for qualification as a
real estate investment trust under Sections 856 through 860 of the Internal
Revenue Code, and the rules and regulations thereunder.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or
pursuant to the exercise of options referred to in the Prospectuses). The
shares of issued and outstanding capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock of the Company was issued
in violation of the preemptive or other similar rights of any security
holder of the Company.
(viii) Authorization of Agreement. This Agreement and the U.S.
--------------------------
Purchase Agreement have been duly authorized, executed and delivered by the
Company.
(ix) Management Agreement. The Management Agreement (the
--------------------
"Management Agreement") dated as of November __, 1997 between the Company
and the Manager has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding agreement of the Company
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency,
5
<PAGE>
reorganization or other laws relating to or affecting enforcement of
creditors' rights or by general equity principles.
(x) Authorization and Description of Securities. The Securities to
-------------------------------------------
be purchased by the International Managers and the U.S. Underwriters from
the Company have been duly authorized for issuance and sale to the
International Managers pursuant to this Agreement and the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to this Agreement and the U.S. Purchase
Agreement, respectively, against payment of the consideration set forth
herein and in the U.S. Purchase Agreement, respectively, will be validly
issued and fully paid and non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectuses and such
description conforms in all material respects to the rights set forth in
the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any security holder of the Company.
(xi) Absence of Defaults and Conflicts. The Company is not in
---------------------------------
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company is a
party or by which it may be bound, or to which any of the property or
assets of the Company is subject (collectively, for purposes of this
paragraph, "Agreements and Instruments") except for such defaults that
would not result in a Material Adverse Effect; and the execution, delivery
and performance of this Agreement, the U.S. Purchase Agreement and the
Management Agreement and the consummation of the transactions contemplated
in this Agreement, the U.S. Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities and the use of
the proceeds from the sale of the Securities as described in the
Prospectuses under the caption "Use of Proceeds") and compliance by the
Company with its obligations under this Agreement, the U.S. Purchase
Agreement and the Management Agreement have been duly authorized by all
necessary corporate action and do not and will not, whether with or without
the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or defaults
or liens, charges or encumbrances that would not reasonably be expected to
result in a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or any
applicable law, statute, rule, regulation, judgment, order, writ or decree
of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any of its assets,
properties or operations, except for such violations, which singly or in
the aggregate, would not reasonably be expected to result in a Material
Adverse Effect. As used in this Section, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or other
evidence of indebtedness
6
<PAGE>
(or any person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company, which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement, the U.S.
Purchase Agreement, or the Management Agreement or the performance by the
Company of its obligations hereunder or thereunder; the aggregate of all
pending legal or governmental proceedings to which the Company is a party
or of which any of its property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company owns or
-----------------------------------
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names
or other intellectual property (collectively, "Intellectual Property")
necessary to carry on its business as contemplated in the Prospectuses, and
the Company has not received any notice and is not otherwise aware of any
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the U.S. Purchase Agreement or the
consummation of the transactions contemplated by this Agreement, the U.S.
Purchase Agreement or the Management Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws or the regulations of the NASD.
(xvi) Possession of Licenses and Permits. The Company possesses such
----------------------------------
permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental
7
<PAGE>
Licenses") issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies necessary to conduct its business as
contemplated in the Prospectus, the Company is in compliance with the terms
and conditions of all such Governmental Licenses, except where the failure
so to possess or comply would not, singly or in the aggregate, have a
Material Adverse Effect; all of the Governmental Licenses are valid and in
full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force
and effect would not have a Material Adverse Effect; and the Company has
not received any written notice, or any oral notice to its knowledge, of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would reasonably be expected to
result in a Material Adverse Effect.
(xvii) Title to Property. The Company owns no real property. The
-----------------
Company has good and marketable title to all other properties owned by it,
in each case, free and clear of all mortgages, pledges, liens, security
interests, claims, restrictions or encumbrances of any kind except such as
(a) are described in the Prospectuses or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company; and all of the leases and subleases material to the business of
the Company and under which the Company holds properties described in the
Prospectuses, are in full force and effect, and the Company does not have
notice of any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company to
the continued possession of the leased or subleased premises under any such
lease or sublease.
(xviii) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as contemplated herein and in the U.S.
Purchase Agreement and the application of the net proceeds from the sale of
the Securities substantially as described in the Prospectuses will not be,
an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940,
as amended (the "1940 Act").
(xix) Accounting Controls. As of the Closing Time, the Company has
-------------------
or will maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (A) transactions are executed in
accordance with transaction's general or specific authorization and (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for
assets.
(xx) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act.
(b) Representations and Warranties by the Manager. As an inducement to
each International Manager and to the Company to enter into this Agreement and
to complete the
8
<PAGE>
transactions contemplated hereby in connection with the consummation of the
issuance, sale and delivery of the International Securities, the Manager hereby
represents and warrants to each International Manager and to the Company as
follows:
(i) No Material Misstatements or Omissions. At the respective
--------------------------------------
times the Registration Statement, any Rule 462(b) Registration Statement
and any post-effective amendments thereto became effective and at the
Closing Time (and, if any International Option Securities are purchased, at
the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto, did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and neither the Prospectuses, nor
any amendments of supplements thereto, at the time the Prospectuses or any
such amendment or supplement thereto was issued and at the Closing Time
(and, if any International Option Securities are purchased, at the Date of
Delivery) did not and will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or International Prospectus made in reliance upon and in
conformity with information furnished to the Company or the Manager in
writing by any International Manager expressly for use in the Registration
Statement or International Prospectus.
(ii) Good Standing. The Manager has been duly organized and is
-------------
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement, the U.S. Purchase Agreement and the Management
Agreement; the Manager is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, except where the failure to so
qualify or be in good standing would not result in a Material Adverse
Effect. All of the issued and outstanding capital stock of the Manager has
been duly authorized and validly issued, is fully paid and non-assessable
and is owned by TCW, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
(iii) Authorization of Agreements. This Agreement, the International
---------------------------
Purchase Agreement and the Management Agreement have each been duly
authorized, executed and delivered by the Manager. The Management
Agreement constitutes the valid and binding agreement of the Manager,
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency or other laws
relating to or affecting enforcement of creditors' rights or by general
equity principles.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition,
9
<PAGE>
financial or otherwise, or in the earnings, business affairs or business
prospects of the Manager, whether or not arising in the ordinary course of
business and (B) there have been no transactions entered into by the
Manager, other than those in the ordinary course of business, which are
material in the context of the transactions contemplated in this Agreement,
the U.S. Purchase Agreement or the Management Agreement.
(v) Absence of Defaults and Conflicts. The Manager is not in
---------------------------------
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which it is a party or by
which it may be bound, or to which any of its property or assets is subject
(collectively, for purposes of this paragraph, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement, the U.S. Purchase Agreement and the Management Agreement and the
consummation of the transactions contemplated herein, in the U.S. Purchase
Agreement, in the Management Agreement and in the Registration Statement,
and compliance by the Manager with its obligations hereunder and under the
U.S. Purchase Agreement and the Management Agreement, have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Manager pursuant
to, the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Manager or any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Manager or any of its assets, properties or
operations, except for such violations which, singly or in the aggregate,
would result in a Material Adverse Effect. As used in this Section, a
"Repayment Event" means any event or condition which gives the holder of
any note, debenture or other evidence of indebtedness (or any person acting
on such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Manager.
(vi) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Manager, threatened against or affecting the Manager, which is required
to be disclosed in the Registration Statement (other than as disclosed
therein), or which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of
the transactions contemplated in this Agreement, the U.S. Purchase
Agreement or the Management Agreement or the performance by the Manager of
its obligations hereunder or under the U.S. Purchase Agreement or the
Management Agreement; the aggregate of all pending legal or governmental
proceedings to which the Manager is a party or of which any of its
10
<PAGE>
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, could not reasonably be expected to result in a Material
Adverse Effect.
(vii) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Manager of its
obligations hereunder or under the U.S. Purchase Agreement or the
Management Agreement.
(viii) Possession of Licenses and Permits. The Manager possesses
----------------------------------
such permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
its business as contemplated in the Prospectuses; the Manager is in
compliance with the terms and conditions of all such Governmental Licenses,
except where the failure so to comply would not, singly or in the
aggregate, have a Material Adverse Effect; all of the Governmental Licenses
are valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect would not have a Material Adverse Effect; and the
Manager has not received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(ix) Investment Adviser. The Manager is not prohibited by the
------------------
Investment Advisers Act of 1940, as amended (the "Advisers Act"), or the
rules and regulations thereunder, from acting under the Management
Agreement as contemplated by the Prospectuses.
(x) Financial Resources. The Manager has the financial resources
-------------------
available to it necessary for the performance of its services and
obligations as contemplated in the Prospectuses.
(c) Officer's Certificates. Any certificate signed by any officer of the
Company or the Manager delivered to the Global Coordinator, the International
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by the Company or the Manager to each International
Manager as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each International Manager, severally and not jointly,
and each International Manager, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial International Securities set forth in Schedule A opposite the name of
such International Manager, plus any additional number of Initial Securities
which such International
11
<PAGE>
Manager may become obligated to purchase pursuant to the provisions of Section
10 hereof bears to the total number of Initial International Securities,
subject, in each case, to such adjustments among the International Managers as
the Global Coordinator in its sole discretion shall make to eliminate any sales
or purchases of fractional securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the International Managers,
severally and not jointly, to purchase up to an additional 300,000 shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial International Securities but not payable on the
International Option Securities. The option hereby granted will expire 30 days
after the date hereof and may be exercised in whole or in part from time to time
only for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Initial International Securities upon
notice by the Global Coordinator to the Company setting forth the number of
International Option Securities as to which the several International Managers
are then exercising the option and the time and date of payment and delivery for
such International Option Securities. Any such time and date of delivery for
the International Option Securities (a "Date of Delivery") shall be determined
by the Global Coordinator, but shall not be later than seven full business days
after the exercise of said option, nor in any event prior to the Closing Time,
as hereinafter defined. If the option is exercised as to all or any portion of
the International Option Securities, each of the International Managers, acting
severally and not jointly, will purchase that proportion of the total number of
International Option Securities then being purchased which the number of Initial
International Securities set forth in Schedule A opposite the name of such
International Manager bears to the total number of Initial International
Securities, subject in each case to such adjustments as the Global Coordinator
in its discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
O'Melveny & Myers llp, Embarcadero Center West, 275 Battery Street, Suite 2600,
San Francisco, California 94111, or at such other place as shall be agreed upon
by the Global Coordinator and the Company, at 7:00 A.M. (California time) on the
third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given
day) business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called "Closing
Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the International Managers for
12
<PAGE>
the respective accounts of the International Managers of certificates for the
International Securities to be purchased by them. Merrill Lynch, individually
and not as representative of the International Managers, may (but shall not be
obligated to) make payment of the purchase price for the Initial International
Securities or the International Option Securities, if any, to be purchased by
any International Manager whose funds have not been received by the Closing Time
or the relevant Date of Delivery, as the case may be, but such payment shall not
relieve such International Manager from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the International
Managers may request in writing at least one full business day before the
Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial International Securities and the International
Option Securities, if any, will be made available for examination and packaging
by the International Managers in The City of New York not later than 10:00 A.M.
(Eastern time) on the business day prior to the Closing Time or the relevant
Date of Delivery, as the case may be.
SECTION 3. Covenants.
---------
(a) Covenants of the Company. The Company covenants with each
International Manager as follows:
(i) Compliance with Securities Regulations and Commission
-----------------------------------------------------
Requests. The Company, subject to Section 3(a)(ii), will comply with the
--------
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator as soon as reasonably practicable, and confirm the
notice in writing, (A) when any post-effective amendment to the
Registration Statement, shall become effective, or any supplement to the
Prospectuses or any amended Prospectuses shall have been filed, (B) of the
receipt of any comments from the Commission, (C) of any request by the
Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectuses or for additional information, and (D) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and,
in the event that it was not, it will promptly file such prospectus. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest possible moment.
(ii) Filing of Amendments. The Company will give the Global
--------------------
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectuses
included in the Registration Statement
13
<PAGE>
at the time it became effective or to the Prospectuses and will furnish the
Global Coordinator with copies of any such documents a reasonable amount of
time prior to such proposed filing or use, as the case may be, and will not
file or use any such document to which the Global Coordinator or counsel
for the International Managers shall reasonably object.
(iii) Delivery of Registration Statements. The Company has
-----------------------------------
furnished or will deliver to the International Managers and counsel for the
International Managers, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith) and signed copies of all consents and
certificates of experts, and will also deliver to the International
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the International Managers. The copies of the Registration Statement
and each amendment thereto furnished to the International Managers will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
(iv) Delivery of Prospectuses. The Company has delivered to
------------------------
each International Manager, without charge, as many copies of each
preliminary prospectus as such International Manager reasonably requested,
and the Company hereby consents to the use of such copies for purposes
permitted by the 1933 Act. The Company will furnish to each International
Manager, without charge, during the period when the International
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the
International Prospectus (as amended or supplemented) as such International
Manager may reasonably request. The International Prospectus and any
amendments or supplements thereto furnished to the International Managers
will be identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(v) Continued Compliance with Securities Laws. The Company
-----------------------------------------
will comply with the 1933 Act and the 1933 Act Regulations so as to permit
the completion of the distribution of the Securities as contemplated in
this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at
any time when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the reasonable opinion
of counsel for the International Managers or for the Company, to amend the
Registration Statement or amend or supplement any Prospectus in order that
the Prospectuses will not include any untrue statements of a material fact
or omit to state a material fact necessary in order to make the statements
therein not misleading in light of the circumstances existing at the time
it is delivered to a purchaser, or if it shall be necessary, in the
reasonable opinion of such counsel, at any such time to amend the
Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations,
the Company will promptly prepare and file with the Commission, subject to
Section 3(a)(ii), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or
14
<PAGE>
the Prospectuses comply with such requirements, and the Company will
furnish to the International Managers such number of copies of such
amendment or supplement as the International Managers may reasonably
request.
(vi) Blue Sky Qualifications. The Company will use its
-----------------------
commercially reasonable efforts, in cooperation with the International
Managers, to take such action as the Global Coordinator may reasonably
request to qualify the Securities for offering and sale under the
applicable securities laws of such states and other jurisdictions (domestic
or foreign) as the Global Coordinator may designate in writing to the
Company and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(vii) Rule 158. The Company will timely file such reports
--------
pursuant to the 1934 Act as are necessary in order to make generally
available to its security holders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated by,
the last paragraph of Section 11(a) of the 1933 Act.
(viii) Use of Proceeds. The Company will use the net proceeds
---------------
received by it from the sale of the Securities substantially in the manner
specified in the Prospectuses under "Use of Proceeds".
(ix) Listing. The Company will use its best efforts to effect
-------
the listing of the Common Stock (including the Securities) on the New York
Stock Exchange.
(x) Restriction on Sale of Securities. During a period of 180
---------------------------------
days from the date of the Prospectuses, the Company will not, without the
prior written consent of the Global Coordinator, in its discretion
reasonably exercised, (A) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
or file any registration statement under the 1933 Act with respect to any
of the foregoing or (B) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction described in clause (A) or (B) above is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to (A) the Securities to be sold
hereunder or under the International Purchase Agreement, (B) any shares of
Common Stock issued by the Company upon the exercise
15
<PAGE>
of an option or warrant or the conversion of a security outstanding on the
date hereof and referred to in the Prospectuses, (C) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant to
existing employee benefit plans of the Company referred to in the
Prospectuses or (D) any shares of Common Stock issued pursuant to any non-
employee director stock plan or dividend reinvestment plan.
(xi) Reporting Requirements. The Company, during the period
----------------------
when the Prospectuses are required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by the
1934 Act and the rules and regulations of the Commission thereunder.
(xii) REIT Qualification. The Company will use its best efforts
------------------
to meet the requirements to qualify, commencing with its taxable year
ending December 31, 1997, as a "real estate investment trust" under the
Code.
(xiii) Compliance with NASD Rules. The Company hereby agrees
--------------------------
that it will require that the holders of Reserved Securities execute lock-
up agreements that provide that such securities will be restricted as
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date of
this Agreement. The Underwriters will notify the Company in writing as to
which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restrictions upon such securities for such period of time.
(xiv) Insurance Policy. The Company agrees to provide, without
----------------
expense to the Underwriters, not later than the Closing Date, an insurance
policy (the "Insurance Policy") providing for coverage, among other things,
of the Company's and the Manager's indemnity and contribution obligations
pursuant to Section 6 and Section 7 of this Agreement and the U.S. Purchase
Agreement. The form of such policy shall be in the form previously
provided to the Underwriters and approved by Merrill Lynch. Such policy
shall be for a minimum of three years and shall be prepaid. The Company
and the Manager, on the one hand, and the Underwriters on the other,
respectively, acknowledge and agree that they shall not change, or permit
to be changed, any provision of such policy negatively affecting the
Company and/or the Manager, on the one hand, or the Underwriters, on the
other, respectively, without the prior written authorization of Merrill
Lynch.
(b) Covenant of the Manager. The Manager covenants with each International
Manager and with the Company that, during the period when the Prospectuses is
required to be delivered under the 1933 Act or the 1934 Act, it shall notify you
and the Company of the occurrence of any material events respecting its
activities, affairs or condition, financial or otherwise, and, if as a result of
any such event it is necessary, in the opinion of counsel, to amend or
supplement the Prospectuses in order to make the Prospectuses not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Manager will forthwith supply such information to the Company as
shall be necessary for the Company to
16
<PAGE>
prepare an amendment or supplement to the Prospectuses so that, as so amended or
supplemented, the Prospectuses will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time it is
delivered to a purchaser, not misleading.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
International Managers of this Agreement, any Agreement among Managers and such
other documents as may be required in connection with the offering, purchase,
sale, issuance or delivery of the Securities, (iii) the preparation, issuance
and delivery of the certificates for the International Securities to the
International Managers, including any stock or other transfer taxes and any
stamp or other duties payable upon the sale, issuance or delivery of the
International Securities to the International Managers and the transfer of the
International Securities between the International Managers and the U.S.
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the International
Securities under securities laws in accordance with the provisions of Section
3(a)(vi) hereof, including filing fees and the reasonable fees and disbursements
of counsel for the International Managers in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the International Managers of copies
of each preliminary prospectus, any Term Sheets and of the International
Prospectus and any amendments or supplements thereto, (vii) the cost of the
Insurance Policy, (viii) the preparation, printing and delivery to the
International Managers of copies of the Blue Sky Survey and any supplement
thereto, (ix) the fees and expenses of any transfer agent or registrar for the
Securities and (x) the filing fees incident to, and the reasonable fees and
disbursements actually incurred by counsel to the International Managers in
connection with, the review by the NASD of the terms of the sale of the
Securities, and (xi) the fees and expenses incurred in connection with the
listing of the Securities on the New York Stock Exchange [and (xii) all costs
and expenses of the International Managers, including the fees and disbursements
of counsel for the International Managers, in connection with matters related to
the Reserved Securities which are designated by the Company for sale to
directors, officers and employees of the Company, TCW and its affiliates.
(b) Termination of Agreement. If this Agreement is terminated by the
Global Coordinator in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company or the Manager shall reimburse the International
Managers for all of their out-of-pocket expenses, including the reasonable fees
and disbursements of counsel for the International Managers.
SECTION 5. Conditions of International Managers' Obligations. The
-------------------------------------------------
obligations of the several International Managers hereunder are subject to the
accuracy in all material respects of the representations and warranties of the
Company and the Manager contained in Section 1 hereof or in certificates of any
officer of the Company or the Manager delivered pursuant to the provisions
hereof, to the performance by each of the Company or the Manager of its
respective covenants and other obligations hereunder, and to the following
further conditions:
17
<PAGE>
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
International Managers. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 424(b)
(or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule
430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet
shall have been filed with the Commission in accordance with Rule 424(b).
(b) Opinions of Counsel for Company and the Manager. At Closing Time,
the International Managers shall have received the favorable opinions,
dated as of Closing Time, of O'Melveny & Myers LLP, as counsel for the
Company and of _________________, as counsel for the Manager, in form and
substance reasonably satisfactory to counsel for the International
Managers, together with signed or reproduced copies of each such letter for
each of the other International Managers to the effect set forth in Exhibit
A hereto.
(c) Opinion of Maryland Counsel for the Company. At Closing Time, the
International Managers shall have received the favorable opinion, dated as
of Closing Time, of Ballard Spahr Andrews & Ingersoll, special Maryland
counsel for the Company, in form and substance reasonably satisfactory to
counsel for the International Managers, together with signed or reproduced
copies of such letter for each of the other International Managers to the
effect set forth in Exhibit B hereto.
(d) Opinion of Counsel for International Managers. At Closing Time,
the International Managers shall have received the favorable opinion, dated
as of Closing Time, of Brown & Wood llp, counsel for the International
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers with respect to the matters set forth
in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar
rights arising by operation of law or under the charter or by-laws of the
Company), (vii) through (x), inclusive (xii), (xiv) (solely as to the
information in the Prospectuses under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto. In giving such
opinion Brown & Wood llp may rely, as to all matters governed by the laws
of jurisdictions other than the law of the State of New York and the
federal law of the United States, upon the opinions of counsel satisfactory
to the International Managers. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent
they deem proper, upon certificates of officers of the Company and the
Manager and certificates of public officials.
(e) Officers' Certificate of the Company. At Closing Time, there
shall not have been, since the date hereof or since the respective dates as
of which information is given in the Prospectuses, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company,
18
<PAGE>
whether or not arising in the ordinary course of business, and the
International Managers shall have received a certificate of the President
or a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct
in all material respects with the same force and effect as though expressly
made at and as of Closing Time, (iii) the Company has, in all material
respects, complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or, to
such persons' knowledge, are pending or are contemplated by the Commission.
(f) Officers' Certificate of the Manager. At Closing Time, there
shall not have been, since the date hereof or since the respective dates of
which information is given in the Prospectuses, any material adverse change
in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Manager, whether or not arising in the
ordinary course of business, and the International Managers shall have
received a certificate of the President or a Vice President of the Manager
and of the chief financial or chief accounting officer of the Manager,
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) the representations and warranties of the
Manager contained in Section 1(b) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time, and
(iii) the Manager has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the
Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the International Managers shall have received from Deloitte &
Touche LLP a letter dated such date, in form and substance reasonably
satisfactory to the International Managers, together with signed or
reproduced copies of such letter for each of the other International
Managers containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the International
Managers shall have received from Deloitte & Touche LLP a letter, dated as
of Closing Time, to the effect that they reaffirm the statements made in
the letter furnished pursuant to subsection (h) of this Section, except
that the specified date referred to shall be a date not more than three
business days prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
19
<PAGE>
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
International Managers shall have received an agreement in the form of
Exhibit C hereto signed by the persons listed on Schedule C hereto.
(l) Insurance Policy. At Closing Time, the Insurance Policy shall be
in full force and effect upon the terms and conditions agreed to by the
Underwriters prior to the date hereof.
(m) Conditions to Purchase of International Option Securities. In the
event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International
Option Securities, the representations and warranties of the Company and
the Manager contained herein and the statements in any certificates
furnished by the Company or the Manager hereunder shall be true and correct
in all material respects as of each Date of Delivery and, at the relevant
Date of Delivery, the International Managers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(f) hereof remains true and correct as of such Date of
Delivery.
(ii) Officers' Certificates. A certificate, dated such Date of
----------------------
Delivery, of the President or a Vice President of the Manager and of
the chief financial or chief accounting officer of the Manager
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(g) hereof remains true and correct as of such Date of
Delivery.
(iii) Opinions of Counsel for Company and the Manager. The favorable
------------------------------------------------
opinion of O'Melveny & Myers LLP, as counsel for the Company and
__________, as counsel for the Manager, in form and substance
satisfactory to counsel for the International Managers, dated such
Date of Delivery, relating to the International Option Securities to
be purchased on such Date of Delivery and otherwise to the same effect
as the opinions required by Section 5(b) hereof.
(iv) Opinion of Maryland Counsel for the Company. The favorable
-------------------------------------------
opinion of Ballard Spahr Andrews & Ingersoll, special Maryland counsel
for the Company, in form and substance satisfactory to counsel for the
International Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinions required by
Section 5(c) hereof.
20
<PAGE>
(v) Opinion of Counsel for the International Managers. The
-------------------------------------------------
favorable opinion of Brown & Wood llp, counsel for the International
Managers, dated such Date of Delivery, relating to the International
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(d)
hereof.
(vi) Bring-down Comfort Letter. A letter from Deloitte & Touche
-------------------------
LLP, in form and substance satisfactory to the International Managers
and dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the International Managers
pursuant to Section 5(g) hereof, except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the International Managers shall have been furnished
with such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained (provided, however, that neither the Company,
the Manager nor their counsel shall be required to provide any further
information, documents, assurances or opinions with respect to the
Insurance Policy not specified herein); and all proceedings taken by the
Company or the Manager in connection with the issuance and sale of the
Securities as herein contemplated shall be reasonably satisfactory in form
and substance to the International Managers and counsel for the
International Managers.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities, on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant International Option Securities, may be terminated by
the International Managers by notice to the Company at any time at or prior
to Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of International Managers by the Company and the
Manager. The Company and the Manager (subject to Section 6(e) below), jointly
and severally, agree to indemnify and hold harmless each International Manager
and each person, if any, who controls any International Manager within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material
21
<PAGE>
fact contained in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if
applicable, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact included in any preliminary prospectus
or the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company;
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
(iv) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of the failure of directors, officers
and employees of the Company, TCW and its affiliates to pay for and accept
delivery of Reserved Securities, which by the end of the first business day
following the date of this Agreement, were subject to a properly confirmed
agreement to purchase; and
(v) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement of a material
fact included in the supplemental material distributed in connection with
the reservation and sale of the Reserved Securities to directors, officers
and employees of the Company, TCW and its affiliates or the omission or
alleged omission therefrom of a material fact necessary to make the
statements therein, when considered in conjunction with the Prospectuses or
preliminary prospectuses, not misleading.
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense (A) to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager expressly for use in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectuses
(or any amendment or supplement thereto) or (B) that results solely from an
untrue statement of a material fact contained in, or the omission of a material
fact from, the preliminary prospectus, which untrue
22
<PAGE>
statement or omission was corrected in its entirety in the Prospectuses (as then
amended or supplemented).
(b) Indemnification of the Company and the Manager, and their Respective
Directors and Officers. Each International Manager severally agrees to
indemnify and hold harmless the Company and the Manager, and their respective
directors, each of the Company's officers who signed the Registration Statement,
and each person, if any, who controls the Company or the Manager within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such International Manager through Merrill Lynch expressly for
use in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested in writing an indemnifying party to
reimburse the indemnified party
23
<PAGE>
for fees and expenses of counsel, such indemnifying party agrees that it shall
be liable for any settlement of the nature contemplated by Section 6(a)(ii)
effected without its written consent if (i) such settlement is entered into more
than 45 days after receipt by such indemnifying party of the aforesaid request,
(ii) such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
Notwithstanding the immediately preceding sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, an indemnifying party shall
not be liable for any settlement of the nature contemplated by Section 6(a)(ii)
effected without its consent if such indemnifying party (i) reimburses such
indemnified party in accordance with such request to the extent it considers
such request to be reasonable and (ii) provides written notice to the
indemnified party substantiating the unpaid balance as unreasonable, in each
case prior to the date of such settlement.
(e) Recourse Against the Manager. Notwithstanding anything herein to the
contrary, the International Managers' recourse against the Manager with respect
to (i) the matters set forth in this Agreement (including, without limitation,
Sections 6 and 7 of this Agreement), (ii) any matters in the Registration
Statement, (iii) any matters arising as a matter of law, or (iv) any other
matters whatsoever, shall be expressly limited as follows:
(i) first, the International Managers shall have fully and finally
exhausted all of their rights and remedies under the Insurance Policy;
(ii) second, the International Managers, as their sole and exclusive
remedy, may thereafter assert any claims they may have against the Manager
directly against the Manager to the limited extent of the gross compensation
(not reimbursement of expenses) paid (not payable) by the Company to the Manager
solely in respect of the three-year period commencing at the Closing Time;
(iii) the Manager shall have no other liability to the International
Managers whatsoever; and
(iv) the International Managers' shall have no rights, remedies or
claims whatsoever against the Manager, directly or indirectly.
provided, however, that the foregoing limitations set forth in this subsection
- -------- -------
(e) shall not apply to any claim that the International Managers may have
against the Manager as to which there is a final adjudication of actual,
intentional and deliberate fraud on the part of the Manager.
SECTION 7. Contribution.
------------
If the indemnification provided for in Section 6 hereof is for any reason
unavailable to or insufficient to hold harmless an indemnified party in respect
of any losses, liabilities, claims, damages or expenses referred to therein,
then each indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such
24
<PAGE>
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Manager
(collectively, the "Company Parties"), on the one hand and the International
Managers, on the other hand, from the offering of the International Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company Parties, on the one hand, and of the International
Managers on the other hand, in connection with the statements or omissions.
The relative benefits received by the Company Parties, on the one hand, and
the International Managers, on the other hand, in connection with the offering
of the International Securities pursuant to this Agreement shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the International Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the total underwriting discount received
by the International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
The relative fault of the Company Parties, on the one hand, and the
International Managers, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company Parties, on the one hand, or by the
International Managers, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Manager and the International Managers agree that it would
not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the International Managers were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 7. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this Section
7 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Manager has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
25
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company or the Manager, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company or the Manager within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company and the Manager, respectively. The International
Managers' respective obligations to contribute pursuant to this Section 7 are
several in proportion to the number of Initial International Securities set
forth opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or the Manager submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any International Manager or controlling
person, or by or on behalf of the Company or the Manager, and shall survive
delivery of the Securities to the International Managers.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The International Managers may terminate this
Agreement, by written notice to the Company, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the International
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company, whether or not arising in the ordinary course of business, or any such
adverse change with respect to the Manager which is material in the context of
the transactions contemplated by this Agreement, or (ii) if there has occurred
any material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the International Managers, impracticable to market the Securities
or to enforce contracts for the sale of the Securities, or (iii) if trading in
any securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the NASD
or any other governmental authority, or (iv) if a banking moratorium has been
declared by either Federal or New York authorities.
26
<PAGE>
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the International Managers. If
----------------------------------------------------
one or more of the International Managers shall fail at Closing Time or a Date
of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the International
Managers shall have the right, within 24 hours thereafter, to make arrangements
for one or more of the non-defaulting International Managers, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the International Managers shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of Securities to be purchased on such date, each of the non-
defaulting International Managers shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with respect
to any Date of Delivery which occurs after the Closing Time, the obligation
of the International Managers to purchase and of the Company to sell the
International Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any non-
defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the International
Managers or the Company shall have the right to postpone Closing Time or the
relevant Date of Delivery, as the case may be, for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectuses or in any other documents or arrangements. As used herein, the
term "International Manager" includes any person substituted for a International
Manager under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the International Managers at
Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY, attention of Equity
Capital Markets; and notices to the Company shall be directed to it at 865 South
Figueroa Street, Suite 1800, Los Angeles, California 90017, attention of Philip
A. Barach with
27
<PAGE>
a copy to O'Melveny & Myers LLP, 275 Battery Street, San Francisco, California
94111, attention: Peter T. Healy, Esq.
SECTION 12. Parties. This Agreement shall each inure to the benefit of
-------
and be binding upon the International Managers, the Company and the Manager and
their respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the International Managers, the Company and the Manager and their
respective successors and the controlling persons and officers and directors
referred to in Sections 6 and 7 and their heirs and legal representatives, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
International Managers, the Company and the Manager and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any International Manager shall be
deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
----------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
28
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the International Managers, the Manager and the Company, in accordance with its
terms.
Very truly yours,
APEX MORTGAGE CAPITAL, INC.
By____________________________
Title:
TCW INVESTMENT MANAGEMENT COMPANY
By____________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL (U.K.) LTD.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
SUTRO & CO. INCORPORATED
By: MERRILL LYNCH INTERNATIONAL
By _______________________________________
Authorized Signatory
29
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
International
Name of International Manager Securities
------------------------------ ----------
<S> <C>
Merrill Lynch International...............
PaineWebber International (U.K.) Ltd......
Stifel, Nicolaus & Company, Incorporated..
Sutro & Co. Incorporated..................
---------
Total..................................... 2,000,000
=========
</TABLE>
<PAGE>
SCHEDULE B
APEX MORTGAGE CAPITAL, INC.
2,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the Securities to be paid by
the several International Managers shall be $., being an amount equal to
the initial public offering price set forth above less $. per share;
provided that the purchase price per share for any International Option
Securities purchased upon the exercise of the over-allotment option
described in Section 2(b) shall be reduced by an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial International Securities but not payable on the International
Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
List of persons and entities
subject to lock-up
Sch C-1
<PAGE>
Exhibit A-1
FORM OF OPINION OF COUNSEL TO THE COMPANY
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Maryland.
(ii) The Company has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the
International Purchase Agreement and the U.S. Purchase Agreement,
respectively.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect. [see examples enclosed]
(iv) The Company is organized in accordance with the requirements
for qualification as a real estate investment trust under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code") and the rules and regulations thereunder. The contemplated
method of operation of the Company's business as described in the
Registration Statement will satisfy the operational requirements for
qualification as a real estate investment trust under Sections 856 through
860 of the Internal Revenue Code, and the rules and regulations thereunder.
(v) The Company is not, and upon the issuance and sale of the
International Securities as contemplated in the International Purchase
Agreement and the U.S. Securities as contemplated in the U.S. Purchase
Agreement and the application of the net proceeds from the sale of the
Securities as described in the Prospectuses will not be, an "investment
company" or an entity "controlled" by an "investment company," as such
terms are defined in the 1940 Act.
(vi) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if
any, pursuant to the International Purchase Agreement or the U.S. Purchase
Agreement or pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectuses or pursuant to the exercise of options
referred to in the Prospectuses); the shares of issued and outstanding
capital stock of the Company have been duly authorized and validly issued
and are fully paid and non-assessable [deletion made subject to
confirmation of inclusion in BSA&I opinion].
A-1-1
<PAGE>
(vii) The Securities have been duly authorized for issuance and sale
to the International Managers pursuant to the International Purchase
Agreement and to the U.S. Underwriters pursuant to the U.S. Purchase
Agreement and, when issued and delivered by the Company pursuant to the
International Purchase Agreement and the U.S. Purchase Agreement,
respectively, against payment of the consideration set forth in the
International Purchase Agreement and the U.S. Purchase Agreement,
respectively, will be validly issued and fully paid and non-assessable
[deletion made subject to confirmation of inclusion in BSA&I opinion].
(viii) The issuance of the Securities is not subject to preemptive
or other similar rights of any security holder of the Company arising by
operation of law, under the charter or by-laws of the Company or, to the
best of our knowledge and information, otherwise.
(ix) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the charter and by-laws
of the Company.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); and, to
the best of our knowledge, no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b) Registration Statement has
been issued under the 1933 Act and no proceedings for that purpose have
been instituted or are pending or threatened by the Commission.
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and Prospectuses as of their
respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to which
we need express no opinion) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(xii) If Rule 434 has been relied upon, the Prospectuses were not
"materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective.
(xiii) All descriptions in the Registration Statement of contracts
and other documents to which the Company is a party are accurate in all
material respects; to the best of our knowledge, there are no franchises,
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects. [see
examples enclosed]
(xiv) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which
the Company or the Manager is a party, or to
A-1-2
<PAGE>
which the property of the Company or the Manager is subject, before or
brought by any court or governmental agency or body, domestic or foreign,
which might reasonably be expected to result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the transactions
contemplated in the International Purchase Agreement, the U.S. Purchase
Agreement or the Management Agreements, or the performance by the Company
and the Manager of its obligations thereunder.
(xv) To the best of our knowledge, the Company is not in violation
of its charter or by-laws and no default by the Company exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectuses or filed
as an exhibit to the Registration Statement. [see examples enclosed]
(xvi) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required in connection with the
due authorization, execution and delivery of the International Purchase
Agreement, the U.S. Purchase Agreement or the Management Agreement by the
Company, or for the offering, issuance or sale of the Securities.
(xvii) The Company possesses such permits, licenses, approvals,
consents and other authorizations (collectively, "Governmental Licenses")
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct its business as contemplated in the
Prospectuses that we have, in the exercise of customary professional
diligence, recognized as applicable to the Company and, to our knowledge
and information, the Company is in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to comply
would not, singly or in the aggregate, have a Material Adverse Effect.
(xviii) Each of the International Purchase Agreement and the U.S.
Purchase Agreement has been duly authorized, executed and delivered by the
Company.
(xix) The Management Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable against it in accordance with its terms, except
as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
enforcement of creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(xx) The execution, delivery and performance of the International
Purchase Agreement, the U.S. Purchase Agreement and the Management
Agreement, the consummation of the transactions contemplated therein and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in
A-1-3
<PAGE>
the Prospectuses under the caption "Use Of Proceeds") and the compliance by
the Company with its obligations under the International Purchase Agreement
and the U.S. Purchase Agreement, respectively, do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict
with or constitute a breach of, or default or Repayment Event (as defined
in Section 1(a)(xi) of the International Purchase Agreement and U.S.
Purchase Agreement) under or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known
to us, to which the Company is a party or by which it may be bound, or to
which any of the property or assets of the Company is subject (except for
such conflicts, breaches or defaults or liens, charges or encumbrances that
would not have a Material Adverse Effect), nor will such action result in
any violation of the provisions of the charter or by-laws of the Company or
any applicable law, statute, rule, regulation, judgment, order, writ or
decree, known to us, of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any of
its properties, assets or operations, except for such violations, which
singly or in the aggregate, would not result in a Material Adverse Effect.
(xxi) The information in the Prospectuses under "Business and
Strategy--Legal Proceedings," "Federal Income Tax Consequences," "ERISA
Considerations," "Description of Capital Stock," "Certain Provisions of
Maryland Law and of the Company's Charter and Bylaws" and in Item 33 and
Item 34 of Part II of the Registration Statement, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects; and our opinion set
forth under "Federal Income Tax Consequences" is confirmed.
(xxii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are
not described as required. [see examples enclosed]
(xxiii) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule
430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included
therein or omitted therefrom, as to which we need make no statement), at
the time such Registration Statement or any such amendment became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted therefrom,
as to which we need make no statement), at the time the Prospectuses were
issued, at the time any such amended or supplemented prospectuses were
issued or at the Closing Time, included or includes an untrue statement of
a material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
A-1-4
<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of the laws of Maryland, upon the opinion of
Ballard Spahr Andrews & Ingersoll, special counsel to the Company (which
opinion shall be dated and furnished to the Representatives at the Closing
Time, shall be satisfactory in form and substance to counsel for the
Underwriters and shall expressly state that the Underwriters may rely on
such opinion as if it were addressed to them), provided that O'Melveny &
Myers LLP shall state in their opinion that they believe that they and the
Underwriters are justified in relying upon such opinion, and (B), as to
matters of fact (but not as to legal conclusions) O'Melveny & Myers LLP may
rely, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. Such opinion shall not state
that it is to be governed or qualified by, or that it is otherwise subject
to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991). [Note: comments made to the foregoing
paragraph were unclear]
A-1-5
<PAGE>
Exhibit A 2
FORM OF OPINION OF COUNSEL TO THE MANAGER
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Manager has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
California.
(ii) The Manager has the corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the
International Purchase Agreement and the U.S. Purchase Agreement,
respectively.
(iii) The Manager is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(iv) All of the issued and outstanding capital stock of the
Manager has been duly authorized and validly issued, is fully paid and non-
assessable and is owned by TCW, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(v) The Manager is duly registered as an "investment adviser," as
such term is defined in the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and is not prohibited by the Advisers Act or the
rules and regulations thereunder from acting under the Management Agreement
as contemplated by the Prospectuses.
(vi) All descriptions in the Registration Statement of contracts and
other documents to which the Manager is a party are accurate in all
material respects.
(vii) To the best of my knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which
the Manager is a party, or to which the property of the Manager is subject,
before or brought by any court or governmental agency or body, domestic or
foreign, which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the
transactions contemplated in the International Purchase Agreement, the U.S.
Purchase Agreement or the Management Agreement or the performance by the
Manager of its obligations thereunder.
A-2-1
<PAGE>
(viii) To the best of my knowledge, the Manager is not in violation
of its charter or by-laws and no default by the Manager exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectuses or filed
as an exhibit to the Registration Statement. [see examples]
(ix) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, is necessary or
required in connection with the due authorization, execution and delivery
by the Manager of the International Purchase Agreement, the U.S. Purchase
Agreement or the Management Agreement.
(x) The Manager possesses such permits, licenses, approvals,
consents and other authorizations (collectively, "Governmental Licenses")
issued by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct its business as contemplated in the
Prospectuses that we have, in the exercise of customary professional
diligence, recognized as applicable to the Manager and, to our knowledge
and information, the Manager is in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to comply
would not, singly or in the aggregate, have a Material Adverse Effect.
(xi) Each of the International Purchase Agreement and the U.S.
Purchase Agreement has been duly authorized, executed and delivered by the
Manager.
(xii) The Management Agreement has been duly authorized, executed
and delivered by the Manager and constitutes a valid and binding obligation
of the Manager enforceable against it in accordance with its terms, except
as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting the
enforcement of creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(xiii) The execution, delivery and performance of the International
Purchase Agreement, the U.S. Purchase Agreement and the Management
Agreement, the consummation of the transactions contemplated therein and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use Of Proceeds") and the
compliance by the Manager with its obligations under the International
Purchase Agreement and the U.S. Purchase Agreement, respectively, do not
and will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or Repayment
Event (as defined in Section 1(b)(v) of the U.S. Purchase Agreement and
International Purchase Agreement) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Manager pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or any other agreement or
instrument, known to us, to which the Manager is a party or by which it may
be bound, or to which any of the property or assets of the Manager is
subject (except for such conflicts, breaches or defaults or liens, charges
or encumbrances that
A-2-2
<PAGE>
would not have a Material Adverse Effect), nor will such action result in
any violation of the provisions of the charter or by-laws of the Manager or
any applicable law, statute, rule, regulation, judgment, order, writ or
decree, known to us, of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Manager or any of
its properties, assets or operations, except for such violations, which
singly or in the aggregate, would not result in a Material Adverse Effect.
(xiv) To the best of my knowledge and information, the description
of the Manager in the Registration Statement and the Prospectuses does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
In rendering such opinion, such counsel may rely as to matters of
fact (but not as to legal conclusions) [ ] may rely, to the extent
they deem proper, on certificates of responsible officers of the Manager
and public officials. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including,
without limitation, the Legal Opinion Accord of the ABA Section of Business
Law (1991).
A-2-3
<PAGE>
Exhibit B
FORM OF OPINION OF
SPECIAL MARYLAND COUNSEL TO THE COMPANY
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state of
Maryland.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the
International Purchase Agreement and the U.S. Purchase Agreement,
respectively.
(iii) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectuses in the column entitled
"Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to the International Purchase Agreement and the
U.S. Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectuses or pursuant to the exercise
of options referred to in the Prospectuses); the shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the
Company, either pursuant to the charter or by-laws of the Company or
Maryland law.
(iv) The Securities have been duly authorized for issuance and
sale to the Managers pursuant to the International Purchase Agreement and
to the U.S. Underwriters pursuant to the U.S. Purchase Agreement and, when
issued and delivered by the Company pursuant to the International Purchase
Agreement and the U.S. Purchase Agreement, respectively, against payment of
the consideration set forth in the International Purchase Agreement and the
U.S. Purchase Agreement, respectively, will be validly issued and fully
paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(v) The issuance of the Securities is not subject to preemptive
or other similar rights of any securityholder of the Company, either
pursuant to the charter or by-laws of the Company or Maryland law.
(vi) Each of the International Purchase Agreement and the U.S.
Purchase Agreement has been duly authorized, executed and delivered by the
Company.
(vii) The Management Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company enforceable against it in accordance with its
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or
affecting the
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enforcement of creditors' rights generally and by general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(viii) The Insurance Policy has been duly authorized, executed
and delivered and is in full force and effect and enforceable in accordance
with its terms.
(ix) The form of certificate used to evidence the Common Stock
complies in all material respects with Maryland law and with any applicable
requirements of the charter and by-laws of the Company.
(x) The information in the Prospectus under "Description of
Capital Stock," "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws," and "Federal Income Tax Consequences," to the extent
that it constitutes matters of Maryland law or the Company's charter and
bylaws, has been reviewed by us and is correct in all material respects.
(xi) To the best of our knowledge, there are no statutes or
regulations of the State of Maryland that are required to be described in
the Prospectuses that are not described as required.
(xii) To the best of our knowledge, the Company is not in
violation of its charter or by-laws and no default exists in the due
performance or observance of any material obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectuses or filed
as an exhibit to the Registration Statement.
(xiii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency of the State of Maryland is necessary or
required in connection with the due authorization, execution and delivery
of the International Purchase Agreement, the U.S. Purchase Agreement and
the Management Agreement or for the offering, issuance or sale of the
Securities.
(xiv) The execution, delivery and performance of the
International Purchase Agreement, the U.S. Purchase Agreement and the
Management Agreement, the consummation of the transactions contemplated
therein and in the Registration Statement (including the issuance and sale
of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and the compliance by the Company with its obligations under the
International Purchase Agreement, the U.S. Purchase Agreement and the
Management Agreement do not and will not, whether with or without the
giving of notice or lapse of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of
the International Purchase Agreement and the U.S. Purchase Agreement) under
or result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or any other agreement or instrument, known to us, to which the Company is
a party or by which it, or to which any of the property or assets of the
Company, is subject (except for such conflicts, breaches or defaults or
liens, charges or encumbrances that would not have a Material Adverse
Effect), nor will such action result in any violation of the
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provisions of the charter or by-laws of the Company or any applicable
Maryland law, statute, rule, regulation, judgment, order, writ or decree,
known to us, of any government, government instrumentality or court of the
State of Maryland or any of its properties, assets or operations, except
for such violations, which singly or in the aggregate, would not result in
a Material Adverse Effect.
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[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(L)]
Exhibit C
, 1997
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL (U.K.) LTD.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
SUTRO & COMPANY INCORPORATED
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Re: Proposed Public Offering by Apex Mortgage Capital, Inc.
-------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of Apex
Mortgage Capital, Inc., a Maryland corporation (the "Company"), understands that
Merrill Lynch International ("Merrill Lynch"), PaineWebber International (U.K.)
Ltd., Stifel, Nicolaus & Company, Incorporated, Sutro & Company Incorporated
propose to enter into an International Purchase Agreement (the "International
Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.01 per
share (the "Common Stock"). In recognition of the benefit that such an offering
will confer upon the undersigned as a stockholder [and an officer and/or
director] of the Company, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned agrees
with each underwriter to be named in the International Purchase Agreement that,
during a period of 180 days from the date of the International Purchase
Agreement, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part,
C-1
<PAGE>
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether any such swap or transaction is to be settled by delivery of
Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
Print Name:
C-2
<PAGE>
ARTICLES OF AMENDMENT AND RESTATEMENT OF
APEX MORTGAGE CAPITAL, INC.
Apex Mortgage Capital, Inc., a Maryland corporation, having a principal
office in Baltimore, Maryland (the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended and restated as
-----
follows:
ARTICLE I
INCORPORATOR
The undersigned, Peter T. Healy, whose post office address is 275 Battery
Street, Suite 2600, San Francisco, California 94111-3305, being at least
eighteen (18) years of age, acting as incorporator does hereby form a
corporation under the General Laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (hereinafter called the "Corporation") is:
Apex Mortgage Capital, Inc.
ARTICLE III
PURPOSES
The purpose for which the Corporation is formed is to engage in any lawful
act or activity for which corporations may be organized under the General Laws
of the State of Maryland now or hereafter in force. Subject to, and not in
limitation of the authority of the preceding sentence, upon completion of its
Initial Public Offering (as defined in Article V), the Corporation shall engage
in business as a real estate investment trust (a "REIT") qualifying as such
under Sections 856 through 860 of the Code, as defined below, unless and until
the Board of Directors shall have determined that it is no longer in the best
interests of the Corporation to engage in such business, and shall have taken
the action contemplated in such event by Section 3(b) of Article IX hereof.
The foregoing enumerated purposes and objects shall be in no way limited or
restricted by reference to, or inference from, the terms of any other clause of
this or any other Article of the Articles of Incorporation of the Corporation,
and each shall be regarded as independent; and they are intended to be and shall
be construed as powers as well as purposes and objects of the Corporation and
shall be in addition to and not in limitation of the general powers of
corporations under the General Laws of the State of Maryland.
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ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND AND RESIDENT AGENT
SECTION 1. PRINCIPAL OFFICE. The present address of the principal office
of the Corporation in Maryland is:
CSC - Lawyers Incorporated Service Company
11 East Chase Street
Baltimore, Maryland 21202
SECTION 2. RESIDENT AGENT. The name and address of the resident agent of
the Corporation in Maryland is:
CSC - Lawyers Incorporated Service Company
11 East Chase Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation.
ARTICLE V
CAPITAL STOCK
SECTION 1. AUTHORIZED SHARES OF CAPITAL STOCK.
(a) Authorized Shares. The total number of shares of capital stock of
all classes that the Corporation has authority to issue is one hundred and fifty
million (150,000,000) shares of capital stock (par value one cent ($0.01) per
share), consisting of: (i) one hundred million (100,000,000) shares of Common
Stock, par value one cent ($0.01) per share (the "Common Shares"); and (ii)
fifty million (50,000,000) shares of Preferred Stock, par value one cent ($0.01)
per share (the "Preferred Shares") which may be issued in one or more classes as
described in Section 5 of Article V. The Common Shares and each class of the
Preferred Shares shall each constitute a separate class of capital stock of the
Corporation.
The Board of Directors may classify and reclassify any unissued shares
of capital stock in accordance with Section 6 of Article V hereof.
(b) Terminology and Aggregate Par Value. The Common Shares and
Preferred Shares are collectively referred to herein as the "Equity Shares."
The aggregate par value of all the Corporation's authorized Equity Shares having
par value is $1,500,000.
SECTION 2. RESTRICTIONS AND LIMITATIONS ON THE EQUITY SHARES OF THE
CORPORATION.
Subsequent to the date of the Initial Public Offering and until the
Restriction Termination Date (as defined in Article V), all Equity Shares of the
Corporation shall be subject to the following restrictions and limitations:
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(a) Definitions. For purposes of this Article V and the
interpretation of the stock legend set forth herein, the following terms shall
have the following meanings:
"Acquire" shall mean the acquisition of Beneficial or Constructive
Ownership of Equity Shares, whether by a Transfer, Non-Transfer Event of by any
other means, including, without limitation, acquisition pursuant to the exercise
of the Acquisition Rights or any other option, warrant, pledge or other security
interest or similar right to acquire Equity Shares, but shall not include the
acquisition of any such rights unless, as a result, the acquiror would be
considered a Beneficial Owner, as defined below.
"Acquisition Rights" shall mean rights to Acquire Equity Shares
pursuant to: (i) the exercise of any option or warrant issued by the Corporation
and outstanding at the opening of business on the first business day following
the closing of the Initial Public Offering (whether exercisable on that day or
not); or (ii) any pledge of Equity Shares made pursuant to an agreement executed
on or before the opening of business on the first business day following the
closing of the Initial Public Offering.
"Beneficial Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of Equity Shares either directly or
indirectly under Section 542(a)(2) of the Code, taking into account, for this
purpose, constructive ownership determined under Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code (except where expressly provided
otherwise). The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially
Owned" shall have the correlative meanings.
"Charitable Beneficiary" shall mean, with respect to any Share Trust,
one or more organizations described in each of Section 170(b)(1)(A) (other than
clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are
named by the Share Trustee as the beneficiary or beneficiaries of such Share
Trust, in accordance with the provisions of Section 4(a) of this Article V.
"Code" shall mean the Internal Revenue Code of 1986, as amended and in
effect from time to time, or any successor statute thereto, as interpreted by
the applicable regulations thereunder. Any reference herein to a specific
section or sections of the Code shall be deemed to include a reference to any
corresponding provision of future law.
"Constructive Ownership" shall mean ownership of Equity Shares by a
Person who would be treated as an owner of such Equity Shares either directly or
constructively through the application of Section 318 of the Code, as modified
by Section 856(d)(5) of the Code. The terms "Constructively Own,"
"Constructively Owned" and "Constructive Owner" shall have the correlative
meanings.
"Initial Public Offering" shall mean the closing of the first sale of
Common Shares by the Corporation in an underwritten public offering pursuant to
an effective registration statement for the sale of such Common Shares filed
under the Securities Act of 1933, as amended.
"Market Price" on any date shall mean, with respect to any class or
series of outstanding shares of the Corporation's stock, the Closing Price for
such shares on such date. The "Closing Price" on any date shall mean the last
sale price for such 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
shares, 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 such shares are not listed or admitted to trading
on the New York Stock Exchange, as reported on the principal consolidated
transaction reporting
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<PAGE>
system with respect to securities listed on the principal national securities
exchange on which such shares are listed or admitted to trading or, if such
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 may then be in use or, if such 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 shares selected by the Board
of Directors or, in the event that no trading price is available for such
shares, the fair market value of the shares, as determined in good faith by the
Corporation's Board of Directors.
"Non-Transfer Event" shall mean an event other than a purported
Transfer that would cause any Person to Beneficially Own or Constructively Own
Equity Shares in excess of the Ownership Limit (or would cause the Corporation
to fail to qualify as a REIT), including, without limitation, a change in the
capital structure of the Corporation.
"Ownership Limit" shall initially mean, (i) with respect to the Common
Shares, 9.8% of the lesser of (a) the total number, or (b) the value of the
total number, of outstanding Common Shares or (ii) with respect to the Preferred
Shares, 9.8% of the lesser of (a) the total number, or (b) the value of the
total number, of outstanding Preferred Shares (or such other number or value of
Preferred Shares as the Board of Directors may determine in fixing the terms of
the Preferred Shares).
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 4(e) of this Article V.
"Person" shall mean an individual, corporation, partnership, limited
liability company or partnership, estate, trust (including a trust qualified
under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the purposes described
in Section 642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other entity 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 but does not include (i) an
underwriter who participates in the Initial Public Offering or (ii) an
underwriter who participates in any public offering of the common Shares and/or
Preferred Shares and/or securities convertible into or exchangeable for Common
Shares and/or Preferred Shares subsequent to the Initial Public Offering (a
"Secondary Offering") for a period of sixty (60) days following the purchase by
such underwriter of the Common Shares and/or Preferred Shares and/or securities
convertible into or exchangeable for Common Shares and/or Preferred Shares in
such Secondary Offering.
"Purported Beneficial Transferee" shall mean, with respect to any
purported Transfer that results in Shares-in-Trust as defined below in Section 4
of this Article V, the purported beneficial transferee for whom the Purported
Record Transferee would have Acquired Equity Shares of the Corporation if such
Transfer had been valid under Section 2(b) of this Article V.
"Purported Record Transferee" shall mean, with respect to any
purported Transfer that results in Shares-in-Trust, the Person who would have
been the record holder of the Equity Shares of the Corporation if such Transfer
had been valid under Section 2(b) of this Article V.
"REIT" shall mean a real estate investment trust under Section 856 et
seq. of the Code.
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"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Corporation determines pursuant to
Section 3(b) of Article IX and Section 2(i) of this Article V that it is no
longer in the best interests of the Corporation to attempt to, or continue to,
qualify as a REIT.
"Share Trust" shall mean any separate trust created pursuant to
Section 4(a) of this Article V and administered in accordance with the terms of
Section 4 of this Article V, for the exclusive benefit of any Charitable
Beneficiary.
"Shares-in-Trust" shall mean any Equity Shares designated Shares-in-
Trust pursuant to Section 4(a) of this Article V.
"Share Trustee" shall mean the trustee of the Share Trust, which is
selected by the Corporation but not affiliated with the Corporation or the
Charitable Beneficiary, and any successor trustee appointed by the Corporation.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of Equity Shares or the right to vote or
receive dividends on Equity Shares (including without limitation (i) the
granting of any option or entering into any agreement for the sale, transfer or
other disposition of Equity Shares or the right to vote or receive dividends on
Equity Shares or (ii) the sale, transfer, assignment or other disposition or
grant of any Acquisition Rights or other securities or rights convertible into
or exchangeable for Equity Shares, or the right to vote or receive dividends on
Equity Shares), whether voluntary or involuntary, whether of record or
beneficially and whether by operation of law or otherwise. "Transfer" (as a
verb) shall have a correlative meaning.
(b) Ownership Limitation and Transfer Restrictions.
(i) Except as provided in Section 2(f) of this Article V, from
and after the date of the Initial Public Offering and prior to the Restriction
Termination Date: (w) no Person shall Beneficially Own or Constructively Own
Equity Shares in excess of the Ownership Limit; (x) no Person shall Acquire
Equity Shares, if, as a result of such action, the Equity Shares would be
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution under the Code); (y) no Person shall Acquire Equity
Shares or any interest therein if, as a result of such acquisition, the
Corporation would be "closely held" within the meaning of Section 856(h) of the
Code or would otherwise fail to qualify as a REIT, as the case may be; and (z)
no Person shall Acquire Equity Shares or any interest therein if, as a result of
such acquisition, the Corporation would Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's real property, within the
meaning of Section 856(d)(2)(B) of the Code, or would otherwise fail to qualify
as a REIT, as the case may be.
(ii) Any Transfer that would result in a violation of the
restrictions in Section (b)(i) above, shall be void ab initio as to the
-- ------
purported Transfer of such number of Equity Shares that would cause the
violation of the applicable restriction in Section (b)(i), and the Purported
Record Transferee (and the Purported Beneficial Transferee, if different) shall
acquire no rights in such Equity Shares.
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<PAGE>
(c) Automatic Transfer to Share Trust.
(i) If, notwithstanding the other provisions contained in this
Article V, at any time from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit, then, except
as otherwise provided in Section 2(f) of this Article V, (x) the Purported
Record Transferee (and the Purported Beneficial Transferee, if different) shall
acquire no right or interest (or, in the case of a Non-Transfer Event, the
person holding record title to the Equity Shares Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease
to own any right or interest) in such number of Equity Shares which would cause
such Purported Record Transferee (and Purported Beneficial Transferee, if
different) to Beneficially Own or Constructively Own Equity Shares in excess of
the Ownership Limit (rounded up to the nearest whole share), (y) such number of
Equity Shares in excess of the Ownership Limit (rounded up to the nearest whole
share) shall be designated Shares-in-Trust and, in accordance with the
provisions of Section 4(a) of this Article V, transferred automatically and by
operation of law to the Share Trust to be held in accordance with Section 4 of
this Article V and (z) such Purported Record Transferee (and the Purported
Beneficial Transferee, if different) shall submit such number of Equity Shares
to the Share Trust for registration in the name of the Share Trustee. Any
Purported Record Transferee (and Purported Beneficial Transferee, if different)
shall acquire no right or interest (or, in the case of a Non-Transfer Event, the
person holding title to the Shares Beneficially Owned or Constructively Owned by
such Beneficial Owner or Constructive Owner, shall cease to own any right or
interest) in such number of Shares which would cause such person to own Shares
in excess of the Ownership Limit. Such transfer to a Share Trust and the
designation of shares as Shares-in-Trust shall be effective as of the close of
business on the business day prior to the date of the Transfer or Non-Transfer
Event, as the case may be.
(ii) If, notwithstanding the other provisions contained in this
Article V, at any time from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result in the Equity Shares
being beneficially owned by fewer than 100 persons (determined without reference
to any rules of attribution), (ii) result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code, (iii) cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, or (iv) cause the Corporation to otherwise fail to
qualify as a REIT, as the case may be, then (x) the Purported Record Transferee
(and the Purported Beneficial Transferee, if different) shall acquire no right
or interest (or, in the case of a Non-Transfer Event, the person holding record
title to the Equity Shares with respect to which such Non-Transfer Event
occurred, shall cease to own any right or interest) in such number of Equity
Shares, the ownership of which by such Purported Record Transfer (and Purported
Beneficial Transferee, if different) would (A) result in the Equity Shares being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (B) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, (C) cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's property, within the meaning of Section 856(d)(2)(B) of the Code,
or (D) would otherwise cause the Corporation to fail to qualify as a REIT, as
the case may be, (y) such number of Equity Shares (rounded up to the nearest
whole share) shall be designated Shares-in-Trust and , in accordance with the
provisions of Section 4(a) of this Article V, transferred automatically and by
operation of law to the Share Trust to be held in accordance with Section 4 of
this Article V and (z) the Purported Record Transferee
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(and the Purported Beneficial Transferee, if different) shall submit such number
of Equity Shares to the Share Trust for registration in the name of the Share
Trustee.
(d) Remedies for Breach. If the Board of Directors or the Corporation
or its designee shall at any time determine in good faith that a purported
Transfer of Equity Shares has taken place in violation of Section 2(b) of this
Article V or that a Person intends to acquire or has attempted to acquire
beneficial ownership (determined without reference to any rules of attribution),
Beneficial Ownership or Constructive Ownership of any Equity Shares of the
Corporation in violation of Section 2(b) of this Article V, the Board of
Directors or the Corporation or its designee shall take such action as it deems
advisable to refuse to give effect to or to prevent such Transfer or
acquisition, including, but not limited to, refusing to give effect to such
Transfer or acquisition on the books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition; provided, however, that any
Transfer, attempted Transfer, acquisition or attempted acquisition in violation
of Section 2(b)(i) of this Article V shall automatically result in the transfer
described in Section 2(c) of this Article V, irrespective of any action (or non-
action) by the Board of Directors, except as provided in Section 2(f) of this
Article V.
(e) Notice of Restricted Transfer.
(i) Any Person who acquires or attempts to acquire Equity
Shares in violation of Section 2(b) of this Article V, and any Person who is a
Purported Record Transferee or a Purported Beneficial Transferee of Equity
Shares that are transferred to a Share Trust under Section 2(c) of this Article
V, shall immediately give written notice to the Corporation of such event, shall
submit to the Corporation such number of Equity Shares to be transferred to the
Share Trust and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or attempted Transfer or such Non-Transfer Event on the Corporation's
status as a REIT.
(ii) From and after the date of the Initial Public Offering and
prior to the Restriction Termination Date every Beneficial Owner or Constructive
Owner of more than 5%, in the case of 2,000 or more stockholders of record, or
1%, in the case of more than 200 but fewer than 2,000 stockholders of record, or
such other percentage as may be provided from time to time in the pertinent
income tax regulations promulgated under the Code, of the number or value of the
outstanding Equity Shares of the Corporation shall, within 30 days after January
1 of each year, give written notice to the Corporation stating the name and
address of such Beneficial Owner or Constructive Owner, the number of Equity
Shares Beneficially or Constructively Owned, and a description of how such
shares are held. Each such Beneficial Owner or Constructive Owner shall provide
to the Corporation such additional information that the Corporation may
reasonably request in order to determine the effect, if any, of such Beneficial
or Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit; and
(iii) From and after the date of the Initial Public Offering and
prior to the Restriction Termination Date, each Person who is a Beneficial Owner
or Constructive Owner of Equity Shares of the Corporation and each Person
(including the stockholder of record) who is holding Equity Shares of the
Corporation for a Beneficial Owner or Constructive Owner shall provide to the
Corporation such information as the Corporation may reasonably request in order
to determine the Corporation's status as a REIT, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance and to ensure compliance with the Ownership Limit.
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(f) Exception. The Board of Directors may, upon receipt of either a
certified copy of a ruling from the Internal Revenue Service or an opinion of
counsel satisfactory to the Board of Directors, but shall in no case be required
to, exempt a Person (the "Exempted Holder") from the Ownership Limit, if the
ruling or opinion concludes that no Person who is an individual as defined in
Section 542(a)(2) of the Code will, as the result of the ownership of Equity
Shares by the Exempted Holder, be considered to have Beneficial Ownership or
Constructive Ownership of an amount of Equity Shares that will violate the
restrictions contained in Sections 2(b)(i)(x), 2(b)(i)(y) and 2(b)(i)(z) of this
Article V; provided, that (i) the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary to
ascertain that no individual's Beneficial Ownership of Equity Shares will
violate the Ownership Limit, and (ii) such Person agrees that any violation or
attempted violation will result in such transfer to the Share Trust of Equity
Shares pursuant to Section 2(c) of this Article V. Unless and until a Person is
exempted from the Ownership Limit by the Board of Directors, the Ownership Limit
shall apply to such Person, notwithstanding the fact that if such Person were
otherwise to Acquire Equity Shares in excess of the Ownership Limit, such
Acquisition would not adversely affect the Corporation's qualification as a REIT
under the Code.
(g) Legend. Each certificate for shares of Equity Shares shall bear
substantially the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO SIGNIFICANT RESTRICTIONS ON OWNERSHIP AND TRANSFER.
EXCEPT AS OTHERWISE PROVIDED PURSUANT TO THE CHARTER OF THE
CORPORATION, NO PERSON MAY BENEFICIALLY OWN OR
CONSTRUCTIVELY OWN (1) COMMON SHARES OF THE CORPORATION IN
EXCESS OF 9.8% OF THE LESSER OF THE TOTAL NUMBER OR VALUE OF
THE OUTSTANDING COMMON SHARES OF THE CORPORATION, (2)
PREFERRED SHARES OF THE CORPORATION IN EXCESS OF 9.8% OF THE
LESSER OF THE TOTAL NUMBER OR VALUE OF THE OUTSTANDING
PREFERRED SHARES OF THE CORPORATION, (3) EQUITY SHARES IF
SUCH ACQUISITION WOULD RESULT IN THE TRUST BEING "CLOSELY
HELD" UNDER SECTION 856(h) OF THE CODE, (4) EQUITY SHARES IF
SUCH ACQUISITION WOULD RESULT IN THE EQUITY SHARES BEING
BENEFICIALLY OWNED BY FEWER THAN 100 PERSONS (DETERMINED
WITHOUT REFERENCE TO ANY RULES OF ATTRIBUTION), (5) EQUITY
SHARES IF SUCH ACQUISITION WOULD CAUSE THE CORPORATION TO
FAIL TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST UNDER THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR (6) EQUITY
SHARES IN VIOLATION OF ANY OF THE FURTHER RESTRICTIONS SET
FORTH IN THE CORPORATION'S CHARTER. ANY PERSON WHO ATTEMPTS
OR PROPOSES TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES
OF EQUITY SHARES IN EXCESS OF THE ABOVE LIMITATIONS MUST
IMMEDIATELY NOTIFY THE CORPORATION IN WRITING. IF AN ATTEMPT
IS MADE TO VIOLATE OR THERE IS A VIOLATION OF THESE
RESTRICTIONS (I) ANY PURPORTED
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TRANSFER WILL BE VOID AB INITIO AND WILL NOT BE RECOGNIZED
BY THE CORPORATION, (II) THE EQUITY SHARES IN VIOLATION OF
THESE RESTRICTIONS, WHETHER AS A RESULT OF A TRANSFER OR
NON-TRANSFER EVENT, WILL BE TRANSFERRED AUTOMATICALLY AND BY
OPERATION OF LAW TO A SHARE TRUST AND SHALL BE DESIGNATED
SHARES-IN-TRUST. ALL TERMS USED IN THIS LEGEND AND DEFINED
IN THE CORPORATION'S CHARTER HAVE THE MEANINGS PROVIDED IN
THE CORPORATION'S CHARTER, AS THE SAME MAY BE AMENDED FROM
TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON
OWNERSHIP AND TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH
STOCKHOLDER WHO SO REQUESTS."
(h) REIT Qualification. From and after the date of the Initial Public
Offering, the Board of Directors shall use its reasonable best efforts to cause
the Corporation and its stockholders to qualify for United States federal income
tax treatment as a REIT in accordance with the provisions of the Code applicable
to a REIT and shall not take any action which could adversely affect the ability
of the Corporation to qualify as a REIT. In furtherance of the foregoing, the
Board of Directors shall use its reasonable best efforts to take such actions as
are necessary, and may take such actions as in its sole judgment and discretion
are desirable, to preserve the status of the Corporation as a REIT; provided,
however that if it is determined that it is no longer in the best interests of
the Corporation to continue to have the Corporation qualify as a REIT, the
actions required by Article IX Section 3(b) may be taken to terminate the
Corporation's REIT election.
(i) Remedies Not Limited. Subject to Section 7 of this Article V,
nothing contained in this Article shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving the
Corporation's status as a REIT.
(j) Ambiguity. In the case of an ambiguity in the application of any
of the provisions of this Article V, including any definition contained in
Section 2(a), the Board of Directors shall have the power to determine the
application of the provisions of this Article V with respect to any situation
based on the facts known to it.
(k) Severability. If any provision of this Article V or any
application of any such provision is determined to be invalid by a federal or
state court having jurisdiction over the issue, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
SECTION 3. COMMON SHARES.
Subject to the provisions of Sections 2, 4 and 5 of this Article V,
the Common Shares shall have the following preferences, voting powers,
restrictions, limitations as to dividends and such other rights as may be
afforded by law.
(a) Voting Rights. Except as may otherwise be required by law, each
holder of Common Shares shall have one vote in respect of each Common Share on
all actions to be taken by the
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stockholders of the Corporation, and, except as otherwise provided in respect of
any class of stock, hereafter classified or reclassified, the exclusive voting
power for all purposes shall be vested in the holders of the Common Shares.
(b) Dividend Rights. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Shares of the Corporation at such
time and in such amounts as the Board of Directors may deem advisable and the
holders of the Common Shares shall share ratably in any such dividends, in
proportion to the number of Common Shares held by them respectively, on a share
for share basis.
(c) Liquidation Rights. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary of involuntary, the holders
of the Common Shares shall be entitled, after payment or provision for payment
of the debts and other liabilities of the Corporation and the amount to which
the holders of any class of capital stock hereafter classified or reclassified
having a preference on distributions in the liquidation, dissolution or winding
up on the Corporation are entitled, together with the holders of any other class
of capital stock hereafter classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation,
to share ratably in the remaining net assets of the Corporation.
(d) Stock Exchange and National Market Transactions. Notwithstanding
any provisions contained herein to the contrary, nothing in these Articles of
Incorporation shall preclude the settlement of any transaction entered into
through the facilities of the New York Stock Exchange, the American Stock
Exchange or other national exchange or the Nasdaq National Market or other
national market system.
SECTION 4. SHARES-IN-TRUST.
(a) Share Trust. Any Equity Shares transferred to a Share Trust and
designated Shares-in-Trust pursuant to Section 2(c) hereof shall be held for the
exclusive benefit of the Charitable Beneficiary. The Corporation shall name a
beneficiary and trustee of each Share Trust within five days after discovery of
the existence thereof. Any transfer to a Share Trust, and subsequent
designation of Equity Shares as Shares-in-Trust, pursuant to Section 2(c) hereof
shall be effective as of the close of business on the business day prior to the
date of the Transfer or Non-Transfer Event that results in the transfer to the
Share Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares
of the Corporation and shall be entitled to the same rights and privileges on
identical terms and conditions as are all other issued and outstanding Equity
Shares of the same class and series. When transferred to the Permitted
Transferee in accordance with the provisions of Section 4(c) hereof, such
Shares-in-Trust shall cease to be designated as Shares-in-Trust.
(b) Dividend Rights. The Trustee, as record holder of Shares-in-
Trust, shall be entitled to receive all dividends and distributions as may be
declared by the Board of Directors on such Equity Shares and shall hold such
dividends or distributions in trust for the benefit of the Charitable
Beneficiary. The Purported Record Transferee (or Purported Beneficial
Transferee, if applicable) with respect to Shares-in-Trust shall repay to the
Share Trustee the amount of any dividends or distributions received by it that
(i) are attributable to any Equity Shares designated as Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend
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or distribution paid to the Purported Record Transferee (or Purported Beneficial
Transferee, if applicable), including, if necessary, withholding any portion of
future dividends or distributions payable on Equity Shares Beneficially Owned or
Constructively Owned by the Person who, but for the provisions of Section 2(c)
hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and,
as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Share Trustee for the benefit of the
Charitable Beneficiary the dividends so received or withheld, as the case may
be.
(c) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of (other than a dividend), the Corporation, each Trustee of Shares-
in-Trust shall be entitled to receive, ratably with each other holder of Equity
Shares of the same class or series, that portion of the assets of the
Corporation which is available for distribution to the holders of such class and
series of Equity Shares. The Trustee shall distribute to the Purported Record
Transferee the amounts received upon such liquidation, dissolution, or winding
up, or distribution, provided, however, that the Purported Record Transferee
shall not be entitled to receive amounts pursuant to this Section 4(c) in excess
of, in the case of a purported Transfer in which the Purported Record Transferee
gave value for Equity Shares and which Transfer resulted in the transfer of the
shares to the Share Trust, the price per share, if any, such Purported Record
Transferee paid for the Equity Shares and, in the case of a Non-Transfer Event
or Transfer in which the Purported Record Transferee did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer. Any remaining amount in such Share
Trust shall be distributed to the Charitable Beneficiary.
(d) Voting Rights. The Share Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Purported Record Transferee as a holder of
Equity Shares prior to the discovery by the Corporation that the Equity Shares
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Purported Record
-- ------
Transferee shall be deemed to have given, as of the close of business on the
business day prior to the date of the purported Transfer or Non-Transfer Event
that results in the transfer to the Share Trust of Equity Shares under Section
2(c) hereof, an irrevocable proxy to the Share Trustee to vote the Shares-in-
Trust in the manner in which the Share Trustee, in its sole and absolute
discretion, desires.
(e) Designation of Permitted Transferee. The Share Trustee shall have
the exclusive and absolute right to designate a Permitted Transferee of any and
all Shares-in-Trust. In an orderly fashion so as not materially and adversely
to affect the Market Price of the Shares-in-Trust, the Share Trustee shall
designate any Person as Permitted Transferee, provided, however, that (i) the
Permitted Transferee so designated purchases for valuable consideration (whether
in a public or private sale), at a price as set forth in Section 4(g) hereof,
the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire
such Shares-in-Trust without such acquisition resulting in a transfer to a Share
Trust and the redesignation of such Equity Shares so acquired as Shares-in-Trust
under Section 2(c) hereof. Upon the designation by the Share Trustee of a
Permitted Transferee in accordance with the provisions of this Section 4(e), the
Share Trustee of a Share Trust shall (i) cause to be transferred to the
Permitted Transferee that number of Shares-in-Trust acquired by the Permitted
Transferee, (ii) cause to be recorded on the books of the Corporation that the
Permitted Transferee is the holder of record of such number of Equity Shares,
(iii) cause the Shares-in-Trust to be cancelled, and (iv) distribute to the
Charitable Beneficiary any and all amounts held with respect to the Shares-in-
Trust after making that payment to the Purported Record Transferee pursuant to
Section 4(f) hereof.
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(f) Compensation to Record Holder of Equity Shares that Become Shares-
in-Trust. Any Purported Record Transferee shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 4(c) hereof) to receive from the Share
Trustee upon the sale or other disposition of such Shares-in-Trust the lesser of
(i) in the case of (a) a purported Transfer in which the Purported Record
Transferee (or Purported Beneficial Transferee, if applicable) gave value for
Equity Shares and which Transfer resulted in the transfer of the shares to the
Share Trust, the price per share, if any, such Purported Record Transferee (or
Purported Beneficial Transferee, if applicable) paid for the Equity Shares, or
(b) a Non-Transfer Event or Transfer in which the Purported Record Transferee
(or Purported Beneficial Transferee, if applicable) did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer, and (ii) the price per share
received by the Share Trustee of the Share Trust from the sale or other
disposition of such Shares in Trust in accordance with Section 4(e) or (g)
hereof. Any amounts received by the Share Trustee in respect of such Shares-in-
Trust and in excess of such amounts to be paid the Purported Record Transferee
pursuant to this Section 4(f) shall be distributed to the Charitable Beneficiary
in accordance with the provisions of Section 4(e) hereof. Each Charitable
Beneficiary and Purported Record Transferee (and Purported Beneficial
Transferee, if different) waives any and all claims that each may have against
the Share Trustee and the Share Trust arising out of the disposition of the
Shares-in-Trust, except for claims arising out of the gross negligence or
willful misconduct of, or any failure to make payments in accordance with this
Section 4 by, such Share Trustee or the Corporation.
(g) Purchase Rights in Shares-in-Trust. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-
Transfer Event) and (ii) the Market Price on the date the Corporation, or its
designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 2(e) hereof.
SECTION 5. PREFERRED SHARES.
The Preferred Shares may be issued from time to time in one or more
classes. The Board of Directors is expressly authorized, in the resolution or
resolutions providing for the issuance of any wholly unissued class of Preferred
Shares, to fix, state and express the powers, rights, designations, preferences,
qualifications, limitations and restrictions thereof, including without
limitation: the rate of dividends upon which and the times at which dividends
on shares of such class shall be payable and the preference, if any, which such
dividends shall have relative to dividends on shares of any other class or
classes of stock of the Corporation; whether such dividends shall be cumulative
or noncumulative, and if cumulative, the date or dates from which dividends on
shares of such class shall be cumulative; the voting rights, if any, to be
provided for shares of such class; the rights, if any, which the holders of
shares of such class shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation; the
rights, if any, which the holders of shares of such class shall have to convert
such shares into or exchange such shares for shares of stock of the Corporation,
and the terms and conditions, including price and rate of exchange of such
conversion or exchange; and the
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redemption rights (including sinking fund provisions), if any, for shares of
such class; and such other powers, rights, designations, preferences,
qualifications, limitations and restrictions as the Board of Directors may
desire to so fix. The Board of Directors is also expressly authorized to fix
the number of shares constituting such class and to increase or decrease the
number of shares of any class prior to the issuance of shares of that class and
to increase or decrease the number of shares of any class subsequent to the
issuance of shares of that class, but not to decrease such number below the
number of shares of such class then outstanding. In case the number of shares
of any class shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such class.
SECTION 6. CLASSIFICATION AND RECLASSIFICATION OF CAPITAL STOCK.
(a) Subject to the foregoing provisions of Article V, the power of the
Board of Directors to classify and reclassify any of the unissued shares of
capital stock shall include, without limitation, subject to the provisions of
the Charter, authority to classify or reclassify any unissued shares of such
stock into a class or classes of preferred stock, preference stock, special
stock or other stock, by determining, fixing, or altering one or more of the
following:
(i) The distinctive designation of such class and the number of
shares to constitute such class, provided that, unless otherwise prohibited by
the terms of such or any other class, the number of shares of any class may be
decreased by the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such class may
be increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any class which have been
redeemed, purchased, otherwise acquired or converted into Common Shares or any
other class shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this Section.
(ii) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares of
such class, whether any such dividends shall rank senior or junior to or on a
parity with the dividends payable on any other class of stock, and the status of
any such dividends as cumulative, cumulative to a limited extent or non-
cumulative and as participating or non-participating.
(iii) Whether or not shares of such class shall have voting
rights, in addition to any voting rights provided by law and, if so, the terms
of such voting rights.
(iv) Whether or not shares of such class shall have conversion
or exchange privileges and, if so, the terms and conditions thereof, including
provision for adjustment of the conversion or exchange rate in such events or at
such times as the Board of Directors shall determine.
(v) Whether or not shares of such class shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
(vi) The rights of the holders of shares of such class upon the
liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation,
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which rights may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at different
dates, and whether such rights shall rank senior or junior to or on a parity
with such rights of any other class of stock.
(vii) Whether or not there shall be any limitations applicable,
while shares of such class are outstanding, upon the payment of dividends or
making of distributions on, or the acquisition of, or the use of moneys for
purchase or redemption of, any stock of the Corporation, or upon any other
action of the Corporation, including action under this Section, and, if so, the
terms and conditions thereof.
(viii) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class, not
inconsistent with law and the Charter of the Corporation.
(b) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class of stock of the
Corporation shall be deemed to rank:
(i) prior to another class either as to dividends or upon
liquidation, if the holders of such class shall be entitled to the receipt of
dividends or of amounts distributable on liquidation, dissolution or winding up,
as the case may be, in preference or priority to holders of such other class;
(ii) on a parity with another class either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class of stock shall be entitled to receipt
of dividends or amounts distributable upon liquidation, dissolution or winding
up, as the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over the
holders of such other class; and
(iii) junior to another class either as to dividends or upon
liquidation, if the rights of the holders of such class shall be subject or
subordinate to the rights of the holders of such other class in respect of the
receipt of dividends or the amounts distributable upon liquidation, dissolution
or winding up, as the case may be.
SECTION 7. SETTLEMENT.
Nothing in this Article V shall be interpreted to preclude the
settlement of any transaction entered into through the facilities of the New
York Stock Exchange, any other national securities exchange or The Nasdaq
National Market system, but the Equity Shares which are the subject of such
transaction shall continue to be subject to the terms of this Article V
subsequent to such settlement.
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ARTICLE VI
THE BOARD OF DIRECTORS
SECTION 1. NUMBER AND QUALIFICATION OF DIRECTORS.
(a) Authorized Number. The business and affairs of the Corporation
shall be managed by a Board of Directors which may exercise all of the powers of
the Corporation except those conferred on, or reserved to, the stockholders
hereunder, under the Bylaws or by law. The number of directors of the
Corporation initially shall be one (1) which number may be increased or
decreased pursuant to the Bylaws of the Corporation but in no event shall be
less than the minimum number required by the general laws of the State of
Maryland. A director need not be a shareholder of the Corporation. Prior to
the effective date of the registration statement relating to the Corporation's
Initial Public Offering, as defined in Article V, the Board of Directors shall
increase the number of directors to three (3) and shall appoint persons to fill
such vacancies pursuant to the Bylaws.
(b) Initial Director. The name of the director who will serve,
together with any subsequently appointed directors, until the first annual
meeting of stockholders and until his successors are elected and qualify is as
follows: Marc I. Stern.
SECTION 2. CLASSIFIED BOARD.
On a date (the "Classification Date") after the number of directors is
increased to seven but prior to the effective date of the registration statement
relating to the Corporation's Initial Public Offering, the Board of Directors
shall divide the directors of the Corporation into three classes (each a
"Class"), designated "Class I," "Class II" and "Class III," respectively. The
number of directors in each Class shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the date of the third
annual meeting of stockholders following the annual meeting at which such
director was elected; provided, however, that at the Classification Date, each
director in Class I shall serve for a term ending on the date of the first
subsequent annual meeting of stockholders, each director in Class II shall serve
for a term ending on the date of the second subsequent annual meeting of
stockholders; and each director in Class III shall serve for a term ending on
the date of the third subsequent annual meeting of stockholders; provided,
further, that, in accordance with Maryland law, if the Classification Date falls
prior to the first annual meeting of stockholders, then the initial terms of
each initial director shall end on such date and at their first annual meeting
the stockholders shall elect or reelect, as the case may be, directors to serve
the remainder of each classified term as described above. In accordance with
Maryland law, prior to the Classification Date, each director shall hold office
until the next annual meeting of stockholders and until his or her successor is
elected and qualifies.
SECTION 3. REMOVAL OF DIRECTORS.
Any director may be removed with or without cause by the affirmative
vote of stockholders holding not less than 66-2/3% of all votes entitled to be
cast for the election of directors.
SECTION 4. FILLING VACANCIES.
Except in the case of a vacancy on the Board of Directors among the
directors elected by a class of Equity Shares other than Common Shares, any
vacancy on the Board of Directors may be filled by the affirmative vote of the
remaining directors (except that a vacancy which results from an
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increase in the number of directors may be filled by a majority of the entire
Board of Directors), and, in the case of a vacancy resulting from the removal of
a director, by the stockholders by the vote of a majority of the votes entitled
to be cast in the election of directors, subject to any rights granted to any
class of Preferred Shares.
SECTION 5. NO CUMULATIVE VOTING.
Stockholders shall not be entitled to cumulative voting rights with
respect to the election of directors.
SECTION 6. RESERVED POWERS OF THE BOARD OF DIRECTORS.
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing provisions of Article VI or the provisions
of Article VII shall in no way be limited or restricted by reference to or
inference from the terms of any other clause of this or any other Article of the
Charter of the Corporation, or construed as or deemed by inference or otherwise
in any manner to exclude or limit any powers conferred upon the Board of
Directors under the General Laws of the State of Maryland now or hereafter in
force.
SECTION 7. INDEPENDENT DIRECTORS.
At all times (except (i) during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a
director prior to the expiration of the director's term of office or (ii) prior
to the closing date of the Initial Public Offering and the consummation of all
transactions related thereto), a majority of the directors shall be Independent
Directors.
An Independent Director shall be a natural person who is not
affiliated, directly or indirectly, with the Manager or its Affiliates, whether
by ownership of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of the
Manager or its Affiliates and are not employed by or officers of the Company.
For purposes of this Section 7 of this Article VII, (A) an
"Affiliate" of a person or entity shall mean any person that, directly or
indirectly, through one or more intermediaries, controls or is controlled by
or is under common control with such person, (B) the term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations companies, trusts,
banks, trust companies, last trusts, business trusts, or other entities and
governments and agencies and political subdivisions thereof, and (C) "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.
Notwithstanding the foregoing requirement that a majority of the
directors be Independent Directors, no action otherwise validly taken by the
Board of Directors during a period in which a
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majority of its members are not Independent Directors shall be invalidated or
otherwise affected by such circumstance, nor shall such circumstance subject the
directors taking any such action to a higher standard of care or to liability
other than that which would have applied to such action had a majority of the
members of the Board of Directors been Independent Directors at the time such
action was taken.
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING
CERTAIN POWERS OF THE CORPORATION AND OF THE
STOCKHOLDERS AND DIRECTORS
The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
SECTION 1. BOARD AUTHORIZATION OF SHARE ISSUANCES.
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of any class of Equity Shares, whether now or
hereafter authorized, or securities convertible into any class of Equity Shares,
whether now or hereafter authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action by the stockholders.
SECTION 2. NO PREEMPTIVE RIGHTS.
Except as provided by the Board of Directors in authorizing the
issuance of Preferred Shares pursuant to Section 5 of Article V, no holder of
any stock or any other securities of the Corporation, whether now or hereafter
authorized, shall have any preemptive right to subscribe to or purchase (i) any
shares of capital stock of the Corporation, (ii) any warrants, rights, or
options to purchase any such shares, or (ii) any other securities of the
Corporation or obligations convertible into any shares of capital stock of the
Corporation or such other securities or into warrants, rights or options to
purchase any such shares or other securities.
SECTION 3. POWERS OF THE BOARD OF DIRECTORS.
The Board of Directors of the Corporation shall, consistent with
applicable law, have the power in its sole discretion to determine from time to
time in accordance with sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits, earnings, surplus, or net
assets in excess of capital; to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; to set apart out of any funds of
the Corporation such reserve or reserves in such amount or amounts and for such
proper purpose or purposes as it shall determine and to abolish any such reserve
or any part thereof; to distribute and pay distributions or dividends in stock,
cash or other securities or property, out of surplus or any other funds or
amounts legally available therefor, at such times and to the stockholders of
record on such dates as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and under what
conditions and regulations the books, accounts and documents of the Corporation,
or any of them, shall be open to the inspection of stockholders, except as
otherwise provided by statute or by the Bylaws of the
17
<PAGE>
Corporation, and, except as so provided, no stockholder shall have any right to
inspect any book, account or document of the Corporation unless authorized so to
do by resolution of the Board of Directors.
SECTION 4. RELATED PARTY TRANSACTIONS.
Without limiting any other procedures available by law, set forth in
the Bylaws or otherwise established by the Corporation, the Board of Directors
may authorize any agreement or transaction with any Person, corporation,
association, company, trust, partnership (limited or general) or other
organization, although one or more of the directors or officers of the
Corporation may be a party to any such agreement or an officer, director,
stockholder or member of such other party (an "Interested Officer/Director"),
and no such agreement or transaction shall be invalidated or rendered void or
voidable solely by reason of the existence of any such relationship if: (i) the
existence is disclosed or known to the Board of Directors, and the contract or
transaction is authorized, approved or ratified by the affirmative vote of a
majority of the directors, excluding the Interested Officers/Directors; or (ii)
the existence is disclosed to the stockholders entitled to vote, and the
contract or transaction is authorized, approved or ratified by a majority of the
votes entitled to be cast by the stockholders, other than the votes of the
shares held of record by the Interested Officers/Directors; or (iii) the
contract or transaction is fair and reasonable to the Corporation. Any
Interested Officer/Director of the Corporation or the stock owned by them or by
a corporation, association, company, trust, partnership (limited or general) or
other organization in which an Interested Officer/Director may have an interest,
may be counted in determining the presence of a quorum at a meeting of the Board
of Directors or a committee of the Board of Directors or at a meeting of the
stockholders, as the case may be, at which the contract or transaction is
authorized, approved or ratified.
ARTICLE VIII
INDEMNIFICATION
AND LIMITATION OF LIABILITY
SECTION 1. INDEMNIFICATION.
(a) Indemnification of Agents. The Corporation shall indemnify, in
the manner and to the fullest extent permitted by law, any person (or the estate
of any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, whether or not
by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Corporation, or such director or
officer is or was serving at the request of the Corporation as a director,
officer, agent, trustee, partner or employee of another corporation,
partnership, joint venture, limited liability company, trust, real estate
investment trust, employee benefit plan or other enterprise. To the fullest
extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement and any such expenses may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding. The Corporation shall
indemnify other employees and agents to such extent as shall be authorized by
the Board of Directors or the Corporation's Bylaws and be permitted by law. Any
repeal or modification of this Section 1(a) by the stockholders of the
18
<PAGE>
Corporation shall be prospective only, and shall not adversely affect any right
to indemnification or advancement of expenses hereunder existing at the time of
such repeal or modification.
(b) Insurance. The Corporation may, to the fullest extent permitted
by law, purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against such person.
(c) Indemnification Non-Exclusive. The indemnification provided
herein shall not be deemed to limit the right of the Corporation to indemnify
any other person for any such expenses to the fullest extent permitted by law,
nor shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
SECTION 2. LIMITATION OF LIABILITY.
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted from time to time, no director or officer of this
Corporation shall be personally liable to the Corporation or its stockholders,
or any of them, for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate the
benefits provided to directors and officers under this provision with respect to
any act or omission which occurred prior to such amendment or repeal.
ARTICLE IX
AMENDMENT
SECTION 1. RIGHT TO AMEND CHARTER.
The Corporation reserves the right from time to time to make any
amendments to the Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in the Charter, of any of its outstanding stock by classification,
reclassification or otherwise.
SECTION 2. AMENDMENT TO THE CHARTER OF THE CORPORATION.
Notwithstanding any provision of law to the contrary, except as
otherwise specifically provided in Section 3 of this Article IX, the affirmative
vote of a majority of all votes entitled to be cast by the stockholders of the
Corporation shall be sufficient, valid and effective, after due authorization,
approval or advice by the Board of Directors, to approve and authorize any
amendment to the Charter of the Corporation.
SECTION 3. CERTAIN AMENDMENTS REQUIRING SPECIAL STOCKHOLDER VOTE.
(a) Notwithstanding any other provisions of the Charter or Bylaws of
the Corporation (and in addition to any other vote, approval, authorization or
advice (including that of the Board of Directors) that may be required by law,
the Charter or the Bylaws of the Corporation), the
19
<PAGE>
affirmative vote of stockholders holding at least two-thirds (66-2/3%) of all of
the votes entitled to be cast thereon shall be required to amend, alter, change,
repeal, or adopt any provisions inconsistent with, the provisions of this
Article IX, Section 2 (classified Board) and Section 3 (removal of directors) of
Article VI, Section 5 (no cumulative voting) of Article VI, Section 7
(Independent Directors) of Article VI, Article VIII (indemnification of
directors, officers, employees and agents and limitation of liability of
officers and directors) and Section 2 (preemptive rights) of Article VII. In
addition, no term or provisions of the Charter may be added, amended or repealed
in any respect that would, in the determination of the Board of Directors, cause
the Corporation not to qualify as a REIT under the Code unless, in each such
case, such action is approved (in addition to any other vote, approval,
authorization or advice (including that of the Board of Directors) that may
otherwise be required) by the affirmative vote of the holders of not less than
two-thirds (66-2/3%) of all the votes entitled to be cast on the matter.
(b) The Board of Directors shall take no action to terminate the
Corporation's status as a REIT or to amend the provisions of Article V until
such time as (i) the Board of Directors adopts a resolution recommending that
the Corporation terminate its status as a REIT or amend Article V, as the case
may be, (ii) the Board of Directors presents the resolution at an annual or
special meeting of the stockholders and (iii) such resolution is approved by at
least two-thirds (66-2/3%) of all of the votes entitled to be cast on the
matter.
ARTICLE X
DURATION OF CORPORATION
The duration of the Corporation shall be perpetual.
SECOND: The amendment to and restatement of the Charter of the
------
Corporation as hereinabove set forth has been duly authorized by the Board of
Directors and approved by the sole holder of stock entitled to be voted on the
matter at the time of approval.
THIRD: The amendment and restatement of the Charter of the
-----
Corporation does not increase the authorized stock of the Corporation.
FOURTH: The undersigned President acknowledges that these Articles of
------
Amendment and Restatement to be the corporate act of the Corporation and as to
all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information, and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
20
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and attested by its Secretary as of the 21st day of November, 1997.
By: /s/ Philip A. Barach
Philip A. Barach
President and Chief Executive Officer
ATTEST:
By: /s/ Michael E. Cahill
Michael E. Cahill
Secretary
21
<PAGE>
EXHIBIT 3.2
THE BYLAWS
OF
APEX MORTGAGE CAPITAL, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I Offices............................................................ 1
Section 1. Principal Office............................................... 1
Section 2. Additional Offices............................................. 1
Section 3. Fiscal and Taxable Years....................................... 1
ARTICLE II Definitions........................................................ 1
ARTICLE III Meetings of Stockholders........................................... 1
Section 1. Place.......................................................... 1
Section 2. Annual Meeting................................................. 2
Section 3. Special Meetings............................................... 3
Section 4. Notice......................................................... 4
Section 5. Organization................................................... 4
Section 6. Quorum......................................................... 4
Section 7. Voting......................................................... 5
Section 8. Proxies........................................................ 5
Section 9. Voting of Shares by Certain Holders............................ 5
Section 10. Inspectors..................................................... 5
Section 11. Determination of Stockholders of Record........................ 6
Section 12. Action Without a Meeting....................................... 6
Section 13. Voting by Ballot............................................... 6
Section 14. Control Share Acquisition Statute.............................. 6
ARTICLE IV Directors.......................................................... 6
Section 1. General Powers................................................. 6
Section 2. Number, Tenure and Qualifications.............................. 6
Section 3. Changes in Number; Vacancies................................... 7
Section 4. Resignations................................................... 7
Section 5. Removal of Directors........................................... 7
Section 6. Annual and Regular Meetings.................................... 8
Section 7. Special Meetings............................................... 8
Section 8. Notice......................................................... 8
Section 9. Quorum......................................................... 8
Section 10. Voting......................................................... 8
Section 11. Telephone Meetings............................................. 9
Section 12. Action Without a Meeting....................................... 9
Section 13. Compensation................................................... 9
Section 14. Policies and Resolutions....................................... 9
Section 15. External Management............................................ 9
ARTICLE V Committees......................................................... 10
Section 1. Committees of the Board........................................ 10
Section 2. Telephone Meetings............................................. 11
Section 3. Action By Committees Without a Meeting......................... 11
ARTICLE VI Officers........................................................... 11
Section 1. General Provisions............................................. 11
Section 2. Subordinate Officers, Committees and Agents.................... 12
</TABLE>
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<TABLE>
<S> <C>
Section 3. Removal and Resignation........................................ 12
Section 4. Vacancies...................................................... 12
Section 5. General Powers................................................. 12
Section 6. Chief Executive Officer........................................ 12
Section 7. Chief Operating Officer........................................ 12
Section 8. Chairman and Vice Chairman of the Board........................ 12
Section 9. President...................................................... 12
Section 10. Vice Presidents................................................ 13
Section 11. Secretary...................................................... 13
Section 12. Chief Financial Officer or Treasurer........................... 13
Section 13. Assistant Secretaries and Assistant Treasurers................. 13
Section 14. Salaries....................................................... 13
ARTICLE VII Execution of Corporate Instruments and Voting Securities........... 13
Section 1. Contracts...................................................... 13
Section 2. Checks and Drafts.............................................. 14
Section 3. Deposits....................................................... 14
Section 4. Voting Securities Owned by the Corporation..................... 14
ARTICLE VIII Capital Stock...................................................... 14
Section 1. Certificates of Shares......................................... 14
Section 2. Lost Certificate............................................... 14
Section 3. Transfer Agents and Registrars................................. 14
Section 4. Transfer of Shares............................................. 15
Section 5. Share Ledger................................................... 15
ARTICLE IX Dividends.......................................................... 15
Section 1. Declaration.................................................... 15
Section 2. Contingencies.................................................. 15
ARTICLE X Indemnification and Limitation of Liability........................ 15
Section 1. Indemnification of Agents...................................... 15
Section 2. Authority to Advance Expenses.................................. 16
Section 3. Right of Claimant to Bring Suit................................ 16
Section 4. Insurance...................................................... 16
Section 5. Indemnification Non-Exclusive.................................. 16
Section 6. Subrogation.................................................... 16
Section 7. No Duplication of Payments..................................... 16
Section 8. Limitation of Liability........................................ 16
ARTICLE XI Seal............................................................... 17
Section 1. Seal........................................................... 17
Section 2. Affixing Seal.................................................. 17
ARTICLE XII Waiver of Notice................................................... 17
ARTICLE XIII Amendment of Bylaws................................................ 17
</TABLE>
ii
<PAGE>
ARTICLE I
OFFICES
-------
SECTION 1. PRINCIPAL OFFICE. The principal office of Apex Mortgage
----------------
Capital, Inc. (the "Corporation") shall be located at 865 South Figueroa Street,
Suite 1800, Los Angeles, California 90017 or at any other place or places as the
Board of Directors may designate.
SECTION 2. ADDITIONAL OFFICES. The Corporation may have additional
------------------
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
SECTION 3. FISCAL AND TAXABLE YEARS. The fiscal and taxable years of
------------------------
the Corporation shall begin on January 1 and end on December 31.
ARTICLE II
DEFINITIONS
-----------
For purposes of these Bylaws, the following words shall have the
meanings set forth below:
(a) "Affiliate" of a person shall mean any person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with such person. The term "person" means and includes
individuals, corporations, general and limited partnerships, stock 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.
(b) "Independent Director" shall mean a Director of the Corporation
who is not affiliated, directly or indirectly, with the Manager or its
Affiliates, whether by ownership of, ownership interest in, employment by, any
material business or professional relationship with, or serving as an officer or
director of the Manager or its Affiliates.
(c) "Initial Public Offering" shall mean the initial public offering
of shares of common stock, par value $0.01 per share, of the Corporation.
(d) "Manager" shall mean TCW Investment Management Company or such
other person that manages the affairs of the Corporation pursuant to a written
management agreement.
ARTICLE III
MEETINGS OF STOCKHOLDERS
------------------------
SECTION 1. PLACE. All meetings of stockholders shall be held at 865
-----
South Figueroa Street, Suite 1800, Los Angeles, California, or at such other
place within the United States as shall be stated in the notice of the meeting.
SECTION 2. ANNUAL MEETING. The President or the Board of Directors
--------------
may fix the time of the annual meeting of the stockholders for the election of
Directors and the transaction of any business as may be properly brought before
the meeting, but if no such date and time is fixed by the President or the Board
of
<PAGE>
Directors, the meeting for any calendar year shall be held on the fourth
Thursday in May, if that day is not a legal holiday. If that day is a legal
holiday, the annual meeting shall be held on the next succeeding business day
that is not a legal holiday. Failure to hold an annual meeting does not
invalidate the Corporation's existence or affect any otherwise valid corporate
acts.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than 60 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 70 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the tenth day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the Corporation that are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in these Bylaws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section 2.
The Chairman of the annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 2, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Only persons who are nominated in accordance with the procedures set
forth in this Section 2 shall be eligible for election as Directors at an annual
meeting of stockholders. Nominations of persons for election to the Board of
Directors of the Corporation may be made at an annual meeting of stockholders by
or at the direction of the Board of Directors or by any stockholder of the
Corporation entitled to vote for the election of Directors at the meeting who
complies with the notice provisions set forth in this Section 2. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice of the
stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a Director, (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitation of proxies for election of Directors, or as otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including, without limitation, such persons' written consent to
being named in the proxy statement as a nominee or to serving as a Director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the class and number of shares of the Corporation that are beneficially owned by
such stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a Director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination that pertains to the nominee. No person
shall be eligible for election as a Director of the Corporation unless nominated
in accordance with the procedures set
2
<PAGE>
forth in this Section 2. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
SECTION 3. SPECIAL MEETINGS. The President, the Chairman of the
----------------
Board of Directors, a majority of the Directors or a majority of the Independent
Directors may call special meetings of the stockholders. Special meetings of
stockholders also shall be called by the Secretary upon the written request of
the holders of shares entitled to cast not less than fifty percent (50%) 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 stockholders of the reasonably estimated cost of
preparing and mailing notice of the meeting and, upon payment to the Corporation
of such costs by such stockholders, the Secretary shall give notice to each
stockholder entitled to notice of the meeting. Unless requested by stockholders
entitled to cast a majority of all the votes entitled to be cast at such
meeting, a special meeting need not be called to consider any matter that is
substantially the same as a matter voted on at any special meeting of the
stockholders held during the preceding twelve months.
At a special meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before a special meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors or (b) otherwise properly brought before the meeting by
holders of shares entitled to cast not less than fifty percent (50%) of the
votes entitled to be cast at such meeting. For business to be properly brought
before a special meeting by such stockholders, such stockholders must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, such stockholders' notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by such stockholders to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the special meeting was
mailed or such public disclosure was made. A stockholders' notice to the
Secretary shall set forth as to each matter such stockholders propose to bring
before the special meeting (a) a brief description of the business desired to be
brought before the special meeting and the reasons for conducting such business
at the special meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholders proposing such business, (c) the class
and number of shares of the Corporation that are beneficially owned by the
stockholders, and (d) any material interest of the stockholders in such
business. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at any special meeting except in accordance with the
procedures set forth in this Section 3. The Chairman of the special meeting
shall, if the facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this Section 3, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
The Board of Directors shall determine whether Directors will be
elected at any special meeting of the stockholders. Only persons who are
nominated in accordance with the procedures set forth in this Section 3 shall be
eligible for election as Directors at a special meeting of stockholders.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a special meeting of stockholders by or at the direction of the
Board of Directors or by holders of shares entitled to cast not less than fifty
percent (50%) of the votes entitled to be cast at such meeting who comply with
the notice provisions set forth in this Section 3. Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, such stockholders' notice shall be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by such stockholders to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholders' notice shall set forth (a)
as to each person whom the stockholders
3
<PAGE>
propose to nominate for election or reelection as a Director (i) the name, age,
business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation that are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitation of proxies for election of Directors, or as otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including without limitation such persons' written consent to being
named in the proxy statement as a nominee or to serving as a Director if
elected); and (b) as to the stockholders giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholders and
(ii) the class and number of shares of the Corporation that are beneficially
owned by such stockholders. At the request of the Board of Directors, any
person nominated by the Board of Directors for election as a Director shall
furnish to the Secretary of the Corporation that information required to be set
forth in a stockholders' notice of nomination that pertains to the nominee. No
person shall be eligible for election as a Director of the Corporation at a
special meeting of stockholders unless nominated in accordance with the
procedures set forth in this Section 3. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by these Bylaws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
SECTION 4. NOTICE. (a) Not less than fifteen (15) nor more than
------
ninety (90) days before each meeting of stockholders, the Secretary shall give
to each stockholder entitled to vote at such meeting and to each stockholder 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 statute, the purpose for which the
meeting is called, either by mail or by presenting it to such stockholder
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 stockholder at his post office address as it
appears on the records of the Corporation, with postage thereon prepaid.
(b) If any meeting action is proposed to be taken which, if taken,
would entitle stockholders fulfilling the requirements of Section 3-207 et seq.
-- ---
of the Maryland General Corporation Law to an appraisal of the fair value of
their shares, the notice of such meeting shall contain a statement of that right
and shall be accompanied by a copy of that statutory section.
SECTION 5. ORGANIZATION. At every meeting of the stockholders, the
------------
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there be one, the President, the Vice Presidents
in their order of rank and seniority, or a Chairman chosen by the stockholders
entitled to cast a majority of the votes that all stockholders 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 6. QUORUM. At any meeting of stockholders, the presence in
------
person or by proxy of stockholders entitled to cast fifty percent (50%) of all
the votes entitled to be cast at such meeting shall constitute a quorum; but
this Section 6 shall not affect any requirement under any statute, the Articles
of Incorporation or these Bylaws for the vote necessary for the adoption of any
measure. If such quorum shall not be present at any meeting of the
stockholders, no business may be transacted, except that the stockholders
representing a majority of the shares entitled to vote at such meeting, present
in person or by proxy, may vote 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 until such quorum shall be present. At such
adjourned meeting at which a quorum shall be present, any business may be
transacted that might have been transacted at the meeting as originally
notified.
SECTION 7. VOTING. A plurality of all the votes cast at a meeting of
------
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Director. There shall be no cumulative voting.
4
<PAGE>
Each common share may be voted for as many individuals as there are Directors to
be elected and for whose election the share is entitled to be voted. A majority
of the votes cast at a meeting of stockholders duly called and at which a quorum
is present shall be sufficient to approve any other matter that may properly
come before the meeting, unless more than a majority of the votes cast is
required by statute, by the Articles of Incorporation or by these Bylaws. Each
stockholder of record shall have the right, at every meeting of stockholders, to
one vote for each share held, except shares that are the subject of a redemption
notice as provided in the Articles of Incorporation.
SECTION 8. PROXIES. A stockholder may vote the common shares owned
-------
of record by him, either in person or by proxy executed in writing by the
stockholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation 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. Unless and until voted,
every proxy shall be revocable at the pleasure of the person who executed it or
of his legal representatives or assigns, except in those cases where an
irrevocable proxy permitted by statute has been given.
SECTION 9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares registered in
-----------------------------------
the name of a trust or another corporation, if entitled to be voted, may be
voted by the president, a vice president or a proxy appointed by the president
or a vice president of such trust or other corporation, unless some other person
who has been appointed to vote such shares pursuant to a bylaw or a resolution
of the board of such trust or other corporation presents a certified copy of
such bylaw or resolution, in which case such person may vote such shares. Any
fiduciary may vote shares registered in his name as such fiduciary, either in
person or by proxy.
Shares indirectly owned by the Corporation 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 all be counted in
determining the total number of outstanding shares at any given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares registered
in the name of the stockholder are held for the account of a specified person
other than the stockholder. The resolution shall set forth the class of
stockholders 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 Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers 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 stockholder of record of
the specified shares in place of the stockholder who makes the certification.
SECTION 10. INSPECTORS. At any meeting of stockholders, the Chairman
----------
of the meeting may, or upon the request of any stockholder shall, 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 stockholders.
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 11. DETERMINATION OF STOCKHOLDERS OF RECORD. The Board of
---------------------------------------
Directors shall fix a date, not more than ninety (90) nor less than fifteen (15)
days preceding the date of any meeting of stockholders, and not more than ninety
(90) days preceding the date fixed for the payment of any dividend or
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distribution, or the date for the allotment of rights, or the date when any
change or conversion or exchange of shares will be made or go into effect, as a
record date for the determination of the stockholders entitled to notice of, or
to vote at, any such meeting, or entitled to receive any such dividend or
distribution or allotment of rights, or to exercise the rights in respect to any
such change, conversion or exchange of shares.
When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this Section 11, such determination
shall apply to any adjournment thereof unless the meeting is adjourned to a date
more than one hundred twenty (120) days after the date fixed for the original
meeting, in which case the Board of Directors shall fix a new record date.
SECTION 12. ACTION WITHOUT A MEETING. Any action required or
------------------------
permitted to be taken at a meeting of stockholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by each
stockholder entitled to vote on the matter and any other stockholder entitled to
notice of a meeting of stockholders (but not to vote thereat) has waived in
writing any right to dissent from such action, and such consent and waiver are
filed with the minutes of proceedings of the stockholders.
SECTION 13. VOTING BY BALLOT. Voting on any question or in any
----------------
election may be viva voce unless the presiding officer shall order or any
stockholder shall demand that voting be by ballot.
SECTION 14. CONTROL SHARE ACQUISITION STATUTE. Subtitle 7 of Title 3
---------------------------------
of the Maryland General Corporation Law does not apply to any acquisition of
shares of capital stock of the Corporation.
ARTICLE IV
DIRECTORS
---------
SECTION 1. GENERAL POWERS. The Board of Directors shall have full
--------------
power to conduct, manage and direct the business and affairs of the Corporation,
and all powers of the Corporation, except those specifically reserved or granted
to the stockholders by statute or by the Articles of Incorporation or these
Bylaws, shall be exercised by, or under the authority of, the Board of
Directors. Except as otherwise agreed between the Corporation and the Director,
each individual Director, including each Independent Director, may engage in
other business activities of the type conducted by the Corporation and is not
required to present to the Corporation any investment opportunities presented to
them even though the investment opportunities may be within the scope of the
Corporation's investment policies.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting
---------------------------------
or at any special meeting called for that purpose, a majority of the entire
Board of Directors may establish, increase or decrease the number of Directors,
provided that the number thereof shall not be less than three (3) (or, if
greater, the minimum number required by the General Laws of the State of
Maryland now or hereafter in force and provided that if there is only one (1)
stockholder of the Corporation, there may be one (1) Director), nor more than
nine (9), and further provided that the tenure of office of a Director shall not
be affected by any decrease in the number of Directors. Pursuant to the
Articles of Incorporation of the Corporation, at all times subsequent to the
closing of the Initial Public Offering when there shall be at least seven (7)
Directors, the Directors shall be divided into three (3) classes with terms of
office of three years each, as nearly equal in numbers as the then total number
of Directors constituting the entire Board permits, with the term of office of
one class expiring at the annual meeting of stockholders in each year. Each
class of Directors shall contain at least one Independent Director and at least
one Director who is not an Independent Director.
At the initial annual meeting of stockholders, Directors of the first
class shall be elected to hold office for a term expiring at the next succeeding
annual meeting, Directors of the second class shall be elected to hold office
for a term expiring at the second succeeding annual meeting and Directors of the
third class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. Any vacancies
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in the Board of Directors for any reason, and any directorships resulting from
any increase in the number of Directors, may be filled as set forth in Section 3
of this Article, and any Directors so chosen shall hold office until the next
election of the class for which such Directors shall have been chosen and until
their successors shall be elected and qualified, or until his or her
resignation, removal (in accordance with the Articles of Incorporation and these
Bylaws) or death.
At all times (except (i) during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a
Director prior to the expiration of the Director's term of office or (ii) prior
to the closing date of the Initial Public Offering), a majority of the Directors
shall be Independent Directors.
Notwithstanding the foregoing requirement that a majority of the
Directors be Independent Directors, no action otherwise validly taken by the
Board of Directors during a period in which it is permitted in accordance with
the preceding paragraph that a majority of its members are not Independent
Directors shall be invalidated or otherwise affected by such circumstance, nor
shall such circumstance subject the Directors taking any such action to a higher
standard of care or to liability other than that which would have applied to
such action had a majority of the members of the Board of Directors been
Independent Directors at the time such action was taken.
SECTION 3. CHANGES IN NUMBER; VACANCIES. Except in the case of a
----------------------------
vacancy on the Board of Directors among the Directors elected by a class of
equity shares other than common shares or as provided in Section 5 of this
Article, any vacancy on the Board of Directors (including a vacancy resulting
from an increase in the number of Directors) shall be filled by the affirmative
vote of a majority of the remaining Directors. Any vacancy on the Board of
Directors among the Directors elected by a class of equity shares (other than
common shares) may be filled by a majority of the remaining Directors elected by
that class or the sole remaining Director elected by that class, or by the
stockholders by a majority of the votes of that class. If the stockholders of
any class or series are entitled separately to elect one or more Directors, a
majority of the remaining Directors elected by that class or series or the sole
remaining Director elected by that class or series may fill any vacancy among
the number of Directors elected by that class or series. Notwithstanding
anything herein to the contrary, the vacancy for any reason of any Independent
Director shall be filled by a majority vote of the remaining members of the
Board of Directors, including a majority vote of the remaining Independent
Directors. A Director elected by the Board of Directors to fill a vacancy shall
be elected to hold office until the next annual meeting of stockholders or until
his successor is elected and qualified. The Board of Directors may declare
unqualified a Director who has been declared of unsound mind by an order of
court who has pled guilty or nolo contendere to, or been convicted of, a felony
involving moral turpitude, or who has wilfully violated the Corporation's
Articles of Incorporation or these Bylaws. The office of a Director declared
unqualified shall be considered vacant until filled as herein provided.
SECTION 4. RESIGNATIONS. Any Director or member of a committee may
------------
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, or if no time be specified, at the time of
the receipt by the Chairman of the Board, the President or the Secretary.
SECTION 5. REMOVAL OF DIRECTORS. Any Director may be removed, with
--------------------
or without cause, by the affirmative vote of the stockholders holding not less
than two-thirds (66 2/3%) of all the votes entitled to be cast for the election
of Directors; provided, however, that in the case of any Director elected by
holders of a class of equity shares, other than common shares, such Directors
may be removed, with or without cause, by the affirmative vote of not less than
two-thirds (66 2/3%) of all the votes entitled to be cast by that class of
equity shares. In the case of a vacancy resulting from the removal of a
Director, such vacancy may be filled by the stockholders by the vote of a
majority of the votes entitled to be cast in the election of Directors, provided
that a vacancy resulting from the removal of a Director elected by a class of
equity shares, other than common shares, may be filled by the vote of a majority
of the votes of such class entitled to be cast in the election of Directors.
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SECTION 6. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
---------------------------
Board of Directors shall be held immediately after and at the same place as the
annual meeting of stockholders, no notice other than this bylaw being necessary.
The Board of Directors may provide, by resolution, the time and place, either
within or without the State of California, for the holding of regular meeting of
the Board of Directors without other notice than such resolution.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of
----------------
Directors may be called by or at the request of the President, a majority of the
Board of Directors or a majority of the Independent Directors then in office.
The person or persons authorized to call special meetings of the Board of
Directors may fix any place, either within or without the State of California,
as the place for holding any special meeting of the Board of Directors called by
them.
SECTION 8. NOTICE. Notice of any special meeting of the Board of
------
Directors shall be given by written notice delivered personally, telegraphed or
mailed to each Director at his business or resident 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.
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. Neither the business to be transacted at, nor the
purpose of, any annual, regular or special meeting of the Board of Directors
need be stated in the notice, unless required by statute or these Bylaws.
SECTION 9. QUORUM. A majority of the entire Board of Directors shall
------
constitute a quorum for transaction of business at any meeting of the Board of
Directors, provided that, if less than a quorum is present at said meeting, a
majority of the Directors present may adjourn the meeting from time to time
without further notice.
The Directors present at a meeting that has been duly called and
convened may continue to transact business until adjournment notwithstanding the
withdrawal of enough Directors to leave less than a majority of the entire
Board, provided that at least one-third of the entire Board of Directors remains
present at that meeting, in which case a quorum will still be deemed present.
SECTION 10. VOTING. (a) Except as provided in subsection (b) of this
------
Section 10, the action of the majority of the Directors present at a meeting at
which a quorum is present shall be the action of the Board of Directors, unless
the concurrence of a greater proportion is required for such action by the
Articles of Incorporation, these Bylaws, or applicable statute.
(b) Notwithstanding anything in these Bylaws to the contrary, any
action pertaining to a transaction involving the Corporation in which the
Manager, any Director or officer of the Corporation or any Affiliate of any of
the foregoing persons has any direct or indirect interest other than solely as a
result of such person's status as Manager, Director or officer of the
Corporation, shall be approved by a majority of the Directors and a majority of
the disinterested Independent Directors, even if the disinterested Independent
Directors constitutes less than a quorum. In approving any such transaction or
series of transactions, the Directors and the disinterested Independent
Directors must determine that:
(i) the transaction as contemplated is fair as to the Corporation
and its stockholders at the time it is authorized, approved and ratified;
(ii) if an acquisition of property other than mortgage securities or
mortgage loans is involved, the total consideration is not in excess of the
appraised value of such property being acquired; and
(iii) if the transaction involves compensation to the Manager or its
Affiliates for services rendered in a capacity other than that contemplated by
the management arrangements, to the knowledge of the
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Directors such compensation is not greater than the customary charges for
comparable services generally available from other competent unaffiliated
persons.
SECTION 11. TELEPHONE MEETINGS. Members of the Board of Directors
------------------
may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
SECTION 12. ACTION WITHOUT A MEETING. Any action required or
------------------------
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
Director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
SECTION 13. COMPENSATION. Independent Directors shall receive such
------------
reasonable compensation for their services as Directors as the Board of
Directors may fix or determine from time to time; such compensation may include
a fixed sum, capital stock of the Corporation or options to purchase capital
stock of the Corporation and Directors shall receive reimbursement of reasonable
expenses incurred in traveling to and from or attending regular or special
meetings of the Board of Directors or of any committee thereof.
SECTION 14. POLICIES AND RESOLUTIONS. The investment policies of the
------------------------
Corporation and the restrictions thereon shall be established from time to time
by the Board of Directors, including a majority of the Independent Directors.
The Independent Directors shall review the investment policies of the
Corporation at least annually to determine that the policies then being followed
by the Corporation are in the best interests of its stockholders. Each such
determination and the basis therefor shall be set forth in the minutes of the
Board of Directors. It shall be the duty of the Board of Directors to insure
that the purchase, sale, retention and disposal of the Corporation's assets, the
investment policies, operating policies and the borrowing policies of the
Corporation and the limitations thereon or amendment thereof are at all times:
(a) consistent with such policies, limitations and restrictions as are
contained in these Bylaws, or in the Corporation's Articles of Incorporation,
subject to revision from time to time at the discretion of the Board of
Directors (including approval by a majority of the Independent Directors)
without stockholder approval unless otherwise required by law; and
(b) in compliance with the restrictions applicable to real estate
investment trusts pursuant to the Internal Revenue Code of 1986, as amended.
SECTION 15. EXTERNAL MANAGEMENT.
-------------------
(a) AUTHORIZATION. The Board of Directors may authorize, subject to such
-------------
conditions, if any, as may be required by an applicable statute, rule,
regulation or another by-law of the Corporation, the execution and performance
by the Corporation of one or more agreements with a Manager whereby, subject to
the supervision and control of the Board of Directors, the Manager shall render
or make available to the Corporation managerial, investment, advisory and/or
related services, office space and other services and facilities (including the
management or supervision of the investments of the Corporation) upon such terms
and conditions as may be provided in such agreement or agreements (including the
compensation payable thereunder by the Corporation).
(b) TERM OF MANAGEMENT AGREEMENT; COMPENSATION REVIEW. Upon completion of
-------------------------------------------------
any initial term, each contract for the services of a Manager entered into by
the Board of Directors shall be terminable by a majority of the Directors upon
sixty (60) days' written notice without cause. Such termination right may, at
the discretion of the Independent Directors, include a termination fee. During
the term of any Management Agreement, the Board of Directors shall review and
approve the mathematical calculation of any base and
9
<PAGE>
incentive compensation paid to any Manager on a quarterly basis, one quarter in
arrears, during each scheduled quarterly Board of Directors meeting, as well as
any annual reconciliation thereof.
(c) REVIEW OF MANAGEMENT ARRANGEMENTS. The Board of Directors (including
---------------------------------
a majority of the Independent Directors) shall evaluate the performance of the
Manager at least annually and prior to any entry into or renewal of any
management agreement, provided that no such evaluation shall be necessary prior
to the Corporation's entry into its initial management agreement with its
initial Manager. The Board of Directors (including a majority of the
Independent Directors) shall further determine whether the compensation of the
Manager is reasonable in relation to the nature and quality of services
performed. The evaluation of the Board of Directors shall be based on such
factors as the Directors may deem relevant, which may include the following (it
being understood that the Independent Directors shall have no obligation to use
the following factors in developing their findings):
(i) The size of the management fee in relation to the size,
compensation and profitability of the investment portfolio of the
Corporation;
(ii) The success of the Manager in generating opportunities that meet
the investment objectives of the Corporation;
(iii) The rates charged to other corporations similar to the
Corporation and to other investors by advisers performing similar services;
and
(iv) The quality and extent of service and advice furnished to the
Corporation.
(d) QUALIFICATIONS OF SUCCESSOR MANAGER. Upon any termination of the
-----------------------------------
initial management arrangements with the initial Manager, the Board of Directors
(including a majority of the Independent Directors) shall determine that any
successor Manager possesses sufficient qualifications (a) to perform the
management function for the Corporation and (b) to justify the compensation
provided for in its contract with the Corporation.
SECTION 16. LIMITATION ON UNSECURED DEBT. The amount of the
----------------------------
Corporation's unsecured debt (excluding collateralized borrowings such as
reverse repurchase agreements, dollar-roll agreements, warehouse lines of credit
and collateralized mortgage obligations) shall be limited to three hundred
percent (300%) of the aggregate amount of the Corporation's equity on a
consolidated basis, unless a greater percentage or amount is specifically
approved by a majority of the Independent Directors.
ARTICLE V
COMMITTEES
----------
SECTION 1. COMMITTEES OF THE BOARD. The Board of Directors may
-----------------------
appoint from among its members an executive committee and other committees
comprised of one or more Directors. The Board of Directors shall appoint an
audit committee comprised of not less than two members, a majority of whom are
Independent Directors. The Board of Directors shall appoint a compensation
committee comprised of not less than three Independent Directors. The Board of
Directors may delegate to any committee any of the powers of the Board of
Directors except the power to elect Directors, declare dividends or
distributions on shares, recommend to the stockholders any action that requires
stockholder approval, amend or repeal these Bylaws, approve any merger or share
exchange which does not require stockholder approval or issue shares. However,
if the Board of Directors has given general authorization for the issuance of
shares, a committee of the Board of Directors, in accordance with a general
formula or method specified by the Board of Directors by resolution or by
adoption of a share option plan, may fix the terms of shares, subject to
classification or reclassification, and
10
<PAGE>
the terms on which any shares may be issued. At least a majority of the members
of any such committee shall be Independent Directors.
Notice of committee meetings shall be given in the same manner as
notice for special meetings of the Board of Directors.
One-third, but not less than two (unless the committee has less than
two members), of the members of any committee shall be present in person at any
meeting of such committee in order to constitute a quorum for the transaction of
business at such meeting, and the act of a majority present shall be the act of
such committee. The Board of Directors may designate a chairman of any
committee, and such chairman or any two members of any committee (unless the
committee has less than two members, in which case one member of such committee)
may fix the time and place of its meetings unless the Board shall otherwise
provide. In the absence or disqualification of any member of any such
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
Director to act at the meeting in the place of such absent or disqualified
members; provided, however, that in the event of the absence or disqualification
of an Independent Director, such appointee shall be an Independent Director.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Directors at the meeting next succeeding, and any
action by the committees shall be subject to revision and alteration by the
Board of Directors, provided that no rights of third persons shall be affected
by any such revision or altercation.
Subject to the provisions hereof, the Board of Directors shall have
the power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified members or to dissolve any such committee.
SECTION 2. TELEPHONE MEETINGS. Members of a committee of the Board
------------------
of Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in a person at the meeting.
SECTION 3. ACTION BY COMMITTEES WITHOUT A MEETING. Any action
--------------------------------------
required or permitted to be taken at any meeting of a committee of the Board of
Directors 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.
ARTICLE VI
OFFICERS
--------
SECTION 1. GENERAL PROVISIONS. The officers of the Corporation may
------------------
consist of a Chairman of the Board, a Vice Chairman of the Board, a President, a
Chief Executive Officer, a Chief Operating Officer, one or more Vice Presidents,
a Chief Financial Officer or Treasurer, one or more assistant treasurers, a
Secretary, and one or more assistant secretaries and such other officers as may
be elected in accordance with the provisions of Section 2 of this Article VI.
The officers of the Corporation shall be elected annually by the Board of
Directors at the first meeting of the Board of Directors held after each annual
meeting of stockholders. 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 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 may be held by the same person. In its discretion, the
Board of Directors may leave unfilled any office except that of President and
Secretary. Election or appointment of an officer or agent shall not of itself
create contract rights between the Corporation and such officer or agent.
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SECTION 2. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The Board of
-------------------------------------------
Directors may from time to time elect such other officers and appoint such
committees, employees, and other agents as the business of the Corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws, or as the Board of
Directors may from time to time determine. The Directors may delegate to any
officer or committee the power to elect subordinate officers and to retain or
appoint employees or other agents.
SECTION 3. REMOVAL AND RESIGNATION. Any officer or agent of the
-----------------------
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation 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 Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Any resignation shall take effect at 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.
SECTION 4. VACANCIES. A vacancy in any office may be filled by the
---------
Board of Directors for the balance of the term.
SECTION 5. GENERAL POWERS. All officers of the Corporation as
--------------
between themselves and the Corporation shall, respectively, have such authority
and perform such duties in the management of the property and affairs of the
Corporation as may be determined by resolution of the Board of Directors, or in
the absence of controlling provisions in a resolution of the Board of Directors,
as may be provided in these Bylaws.
SECTION 6. CHIEF EXECUTIVE OFFICER. The Board of Directors 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 Corporation, as determined by the Board of Directors, and for the
administration of the business affairs of the Corporation.
SECTION 7. CHIEF OPERATING OFFICER. The Board of Directors may
-----------------------
designate a Chief Operating Officer from among the elected officers. Said
officer will have the responsibility and duties as set forth by the Board of
Directors or the Chief Executive Officer.
SECTION 8. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The Chairman of
---------------------------------------
the Board, if there be one, shall preside over the meetings of the Board of
Directors and of the stockholders at which he shall be present. In the absence
of the Chairman of the Board, the Vice Chairman of the Board, if there be one,
shall preside at such meetings at which he shall be present. The Chairman of
the Board and the Vice Chairman of the Board shall, respectively, perform such
other duties as may be assigned to him or them by the Board of Directors.
SECTION 9. PRESIDENT. The President shall in general supervise and
---------
control all of the business and affairs of the Corporation. Unless the
President is not a member of the Board of Directors, in the absence of both the
Chairman and Vice Chairman of the Board, he shall preside at all meetings of the
Board of Directors and of the stockholders at which he shall be present. In the
absence of a designation of a Chief Executive Officer by the Board of Directors,
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
Board of Directors. He may execute any deed, mortgage, bond, contract or other
instrument to which the Corporation is a party, except in cases where the
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the Corporation or shall be
required by law to be otherwise executed; and in general shall perform all
duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
12
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SECTION 10. 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 the 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 Board of Directors. The Board of
Directors may designate one or more Vice Presidents as executive or senior Vice
President or as Vice President for particular areas of responsibility.
SECTION 11. SECRETARY. The Secretary shall (a) keep the minutes of
---------
the proceedings of the stockholders, the Board of Directors and committees of
the Board of Directors 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 corporate records and of
the seal of the Corporation; (d) keep a register of the post office address of
each stockholder which shall be furnished to the Secretary by such stockholder;
(e) have general charge of the share transfer books of the Corporation; and (f)
in general perform such other duties as from time to time may be assigned to him
by the President or by the Board of Directors.
SECTION 12. CHIEF FINANCIAL OFFICER OR TREASURER. The Chief
------------------------------------
Financial Officer or Treasurer shall have the custody of the corporate funds and
securities and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors.
He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and Board of Directors, at the regular meetings of the
Board of Directors or whenever they may require it, an account of all his
transactions as Chief Financial Officer or Treasurer and of the financial
condition of the Corporation.
If required by the Board of Directors, he shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his office
and for the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, all books, papers, vouchers, moneys and other
property of whatever kind in his possession or under his control belonging to
the Corporation.
SECTION 13. 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 the Chief Financial
Officer Treasurer, respectively, or by the President or the Board of Directors.
The assistant treasurers shall, if required by the Board of Directors, give
bonds for the faithful performance of their duties in such sums and with such
surety or sureties as shall be satisfactory to the Board of Directors.
SECTION 14. SALARIES. The salaries of the officers, if any, shall be
--------
fixed from time to time by the Board of Directors and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
Director of the Corporation.
ARTICLE VII
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING SECURITIES
--------------------------------------------------------
SECTION 1. CONTRACTS. The Board of Directors 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 Corporation and such authority
may be general or confined to specific instances.
13
<PAGE>
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 Corporation shall be signed by such officer or officers, agents or
agents of the Corporation and in such manner as shall from time to time be
determined by the Board of Directors.
SECTION 3. DEPOSITS. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
SECTION 4. VOTING SECURITIES OWNED BY THE CORPORATION. All stock and
------------------------------------------
other securities of other corporations owned or held by the Corporation for
itself or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized to do so by
resolution of the Board of Directors or, in the absence of such authorization,
by the Chairman of the Board or by the Chief Executive Officer.
ARTICLE VIII
CAPITAL STOCK
-------------
SECTION 1. CERTIFICATES OF SHARES. Each stockholder shall be
----------------------
entitled to a certificate or certificates which shall represent and certify the
number of shares of each kind and class of shares held by him in the
Corporation. Each certificate shall be signed by the Chairman of the Board or
the President or a Vice President and countersigned by the Secretary or an
assistant secretary of the Treasurer or an assistant treasurer and may be sealed
with the corporate seal.
The signatures may be either manual or facsimile. Certificates shall
be consecutively numbered; and if the Corporation 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 is restricted as to its transferability or voting powers, which is
preferred or limited as to its dividends or as to its share of the assets upon
liquidation or which is redeemable at the option of the Corporation, 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 Corporation may set forth upon the face or back of the
certificate a statement that the Corporation will furnish to any stockholder,
upon request and without charge, a full statement of such information.
SECTION 2. LOST CERTIFICATE. The Board of Directors may direct a new
----------------
certificate to be issued in place of any certificate previously issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of an
affidavit of that fact by the person claiming the shares certificate to be lost,
stolen or destroyed. When authorizing the issuance of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or his legal representative to advertise the same in such manner as
it shall require and/or to give bond, with sufficient surety, to the Corporation
to indemnify it against any loss or claim which may arise as a result of the
issuance of a new certificate.
SECTION 3. TRANSFER AGENTS AND REGISTRARS. At such time as the
------------------------------
Corporation lists its securities on a national securities exchange or qualifies
for trading in the over the counter market, the Board of Directors shall appoint
one or more banks or trust companies in such city or cities as the Board of
Directors may deem advisable, from time to time, to act as transfer agents
and/or registrars of the shares of the Corporation; and, upon such appointments
being made, no certificate representing shares shall be valid until
countersigned by one of such transfer agents and registered by one of such
registrars.
14
<PAGE>
SECTION 4. TRANSFER OF SHARES. No transfers of shares of the
------------------
Corporation shall be made if (i) void ab initio pursuant to any provision of the
Corporation's Articles of Incorporation or (ii) the Board of Directors, pursuant
to any provision of the Corporation's Articles of Incorporation, shall have
refused to permit the transfer of such shares. Permitted transfers of shares of
the Corporation shall be made on the share records of the Corporation only upon
the instruction of the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and upon surrender of the certificate
or certificates, if issued, for such shares properly endorsed or accompanied by
a duly executed share transfer power and the payment of all taxes thereon. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, as to any transfers not
prohibited by any provision of the Corporation's Articles of Incorporation by
action of the Board of Directors thereunder, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 5. SHARE LEDGER. The Corporation shall maintain at its
------------
principal office or at the office of its counsel, accountants or transfer agents
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
ARTICLE IX
DIVIDENDS
---------
SECTION 1. DECLARATION. Dividends upon the shares of the Corporation
-----------
may be declared by the Board of Directors, subject to applicable provisions of
law and the Articles of Incorporation. Dividends may be paid in cash, property
or shares of the Corporation, subject to applicable provisions of law and the
Articles of Incorporation.
SECTION 2. CONTINGENCIES. Before payment of any dividends, there may
-------------
be set aside out of any funds of the Corporation available for dividends such
sum or sums as the Board of Directors may from time to time, in its absolute
discretion, think proper as a reserve fund for contingencies, for equalizing
dividends, for repairing or maintaining the property of the Corporation, its
subsidiaries or any partnership for which it serves as general partner, or for
such other purpose as the Board of Directors shall determine to be in the best
interest of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
ARTICLE X
INDEMNIFICATION AND LIMITATION OF LIABILITY
-------------------------------------------
SECTION 1. INDEMNIFICATION OF AGENTS. The Corporation shall
-------------------------
indemnify, in the manner and to the fullest extent permitted by law, any person
(or the estate of any person) who is or was a party to, or is threatened to be
made a party to, any threatened, pending or completed action, suit or
proceeding, whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a Director or officer of the Corporation, or
such Director or officer is or was serving at the request of the Corporation as
a Director, officer, agent or employee of another corporation, partnership,
joint venture, trust or other enterprise. To the fullest extent permitted by
law, but subject to the provisions of this Article, the indemnification provided
herein shall include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement. The Corporation shall indemnify other employees and
agents to such extent as shall be authorized by the Board of Directors or these
Bylaws and be permitted by law. Any repeal or modification of this Article X by
the stockholders of the Corporation shall be
15
<PAGE>
prospective only, and shall not adversely affect any right to indemnification or
advancement of expenses hereunder existing at the time of such repeal or
modification. The right to indemnification conferred in this Article shall be a
contract right.
SECTION 2. AUTHORITY TO ADVANCE EXPENSES. Expenses incurred by an
-----------------------------
officer or Director (acting in his or her capacity as such) in defending an
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition thereof; provided, however, that such expenses shall be
advanced only upon delivery to the Corporation of an undertaking by or on behalf
of such Director or officer to repay such amount if it shall ultimately be
determined that he or she is not entitled to indemnification by the Corporation
as authorized in this Article or otherwise. Expenses incurred by other agents
of the Corporation (or by the Directors or officers not acting in their capacity
as such, including service with respect to employee benefit plans) may be
advanced upon such terms and conditions as the Board of Directors, including a
majority of the Independent Directors, deems appropriate. Any obligation to
reimburse the Corporation for expense advances shall be unsecured and no
interest shall be charged thereon.
SECTION 3. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section
-------------------------------
1 or 2 of this Article is not paid in full by the Corporation within 90 days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expenses (including attorneys' fees) of
prosecuting such claims.
SECTION 4. INSURANCE. The Corporation may to the fullest extent
---------
permitted by law, purchase and maintain insurance on behalf of any such person
against any liability which may be asserted against such person.
SECTION 5. INDEMNIFICATION NON-EXCLUSIVE. The indemnification
-----------------------------
provided herein shall not be deemed to limit the right of the Corporation to
indemnify any other person for any such expenses to the fullest extent permitted
by law, nor shall it be deemed exclusive of any other rights to which any person
seeking indemnification from the Corporation may be entitled under any
agreement, vote of stockholders or disinterested Directors, or otherwise, both
as to action in such person's official capacity and as to action in another
capacity while holding such office.
SECTION 6. SUBROGATION. In the event of payment under this Article,
-----------
the Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the indemnified person, who shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Corporation to
effectively bring suit to enforce such rights.
SECTION 7. NO DUPLICATION OF PAYMENTS. The Corporation shall not be
--------------------------
liable under this Article to make any payment in connection with any claim
against the indemnified person to the extent such person has actually received
payment (under any insurance policy, agreement, vote or otherwise) of the
amounts otherwise indemnifiable hereunder.
SECTION 8. LIMITATION OF LIABILITY. To the fullest extent permitted
-----------------------
by Maryland statutory or decisional law, as amended or interpreted from time to
time, no Director or officer of the Corporation shall be personally liable to
the Corporation or its stockholders, or any of them, for money damages. No
amendment of these Bylaws or repeal of any of its provisions shall limit or
eliminate the benefits provided to Directors and officers under this provision
with respect to any act or omission which occurred prior to such amendment or
repeal.
16
<PAGE>
ARTICLE XI
SEAL
----
SECTION 1. SEAL. The Corporation may have a corporate seal, which
----
may be altered at will by the Board of Directors. The Board of Directors may
authorize one or more duplicate or facsimile seals and provide for the custody
thereof. Unless specifically required by law, a corporate seal is not required
for the due execution of any document.
SECTION 2. AFFIXING SEAL. Whenever the Corporation is required to
-------------
place its corporate seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a corporate seal to
place the word "(SEAL)" adjacent to the signature of the person authorized to
execute the document on behalf of the Corporation.
ARTICLE XII
WAIVER OF NOTICE
----------------
Whenever any notice is required to be given pursuant to the Articles
of Incorporation or these Bylaws of the Corporation 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.
ARTICLE XIII
AMENDMENT OF BYLAWS
-------------------
The Board of Directors shall have the exclusive power to alter, modify
or repeal any Bylaws of the Corporation and to make new Bylaws not inconsistent
with the Articles of Incorporation of the Corporation and applicable law, except
that the Board of Directors shall not alter, modify or repeal any of the
following provisions of the Bylaws without the approval of a majority of the
stockholders:
(a) Article II, subsection (b);
(b) The third sentence of Article IV, Section 2;
(c) The third paragraph of Article IV, Section 2;
(d) The fourth sentence of Article IV, Section 3;
(e) Article IV, Section 10(b);
(f) The first paragraph of Article IV, Section 14;
(g) Article IV, Section 15; and
(h) This Article XIII.
17
<PAGE>
November 18, 1997
Apex Mortgage Capital, Inc.
865 South Figueroa Street, Suite 1800
Los Angeles, California 90017
Re: Apex Mortgage Capital, Inc., a Maryland corporation (the "Company") -
Registration Statement on Form S-11 (Registration No. 333-36069)
pertaining to eleven million five hundred thousand (11,500,000) shares
(the "Shares") of common stock, par value one cent ($0.01) per share
---------
(the "Common Stock")
--------------------------------------------
Ladies and Gentlemen:
In connection with the registration of the Shares under the Securities Act
of 1933, as amended (the "Act"), by the Company on Form S-11 filed with the
Securities and Exchange Commission (the "Commission") on or about September 23,
1997 (Registration No. 333-36069), as amended (the "Registration Statement"),
you have requested our opinion with respect to the matters set forth below.
We have acted as special Maryland corporate counsel for the Company in
connection with the matters described herein. In our capacity as special
Maryland corporate counsel to the Company, we have reviewed and are familiar
with proceedings taken and proposed to be taken by the Company in connection
with the authorization, issuance and sale of the Shares, and for purposes of
this opinion have assumed such proceedings will be timely completed in the
manner presently proposed. In addition, we have relied upon certificates and
advice from the officers of the Company upon which we believe we are justified
in relying and on various certificates from and documents recorded with, the
State Department of Assessments and Taxation of Maryland (the "Department"),
including the charter of the Company (the "Charter"), consisting of Articles of
Incorporation filed with the Department on September 15, 1997. We have also
examined the Bylaws of the Company adopted as of September 15, 1997 (the
"Bylaws") and in full force and effect on the date hereof and resolutions of the
Board of Directors of the Company adopted on
<PAGE>
Apex Mortgage Capital, Inc.
November 18, 1997
Page 2
October 1, 1997 and in full force and effect on the date hereof; and such laws,
records, documents, certificates, opinions and instruments as we deem necessary
to render this opinion.
We have assumed the genuineness of all signatures and the authenticity of
all documents submitted to us as originals and the conformity to the originals
of all documents submitted to us as certified, photostatic or conformed copies.
In addition, we have assumed that each person executing any instrument, document
or certificate referred to herein on behalf of any party is duly authorized to
do so. We have also assumed that none of the Shares will be issued or
transferred in violation of Article V, Section 2 of the Charter.
Based on the foregoing, and subject to the assumptions and qualifications
set forth herein, it is our opinion that, as of the date of this letter, all of
the Shares have been duly authorized and the Shares will, upon issuance and
delivery in accordance with the terms and conditions described in the
Registration Statement against payment of the purchase price therefor as
determined by the Board of Directors of the Company or a committee thereof, be
validly issued, fully paid and non-assessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement, and further consent to the filing of this opinion as an exhibit to
the applications to securities commissioners for the various states of the
United States for registration of the Shares. We also consent to the filing of
this opinion, as may be necessary, pursuant to Rule 462(b) of the Securities Act
of 1933. We also consent to the identification of our firm as Maryland counsel
to the Company in the section of the Prospectus (which is part of the
Registration Statement) entitled "Legal Matters."
The opinions expressed herein are limited to the laws of the State of
Maryland and we express no opinion concerning any laws other than the laws of
the State of Maryland. Furthermore, the opinions presented in this letter are
limited to the matters specifically set forth herein and no other opinion shall
be inferred beyond the matters expressly stated.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
Ballard Spahr Andrews & Ingersoll
<PAGE>
O'MELVENY & MYERS LLP
November
20th
1997
Apex Mortgage Capital, Inc.
865 South Figueroa Street
Suite 1800
Los Angeles, CA 90017
NY1-538168
Re: Tax Opinion Regarding REIT Status
---------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Apex Mortgage Capital, Inc., a
Maryland Corporation (the "COMPANY"), in connection with the preparation of
the Company's Registration Statement on Form S-11, Registration No. 333-36069,
filed with the Securities and Exchange Commission under the Securities Act on
September 22, 1997 (as thereafter amended to the date hereof and together with
all exhibits thereto, the "REGISTRATION STATEMENT"), relating to the offering
and sale (the "OFFERING") of up to 11,500,000 shares of the Company's Common
Stock (inclusive of 1,500,000 shares that may be sold pursuant to an over-
allotment option), par value $.01 per share (the "COMMON STOCK"). Capitalized
terms used but not otherwise defined herein shall have the meanings assigned to
such terms in the Registration Statement.
In formulating our opinions herein we have reviewed the Registration
Statement and such certificates, including the Officer's Certificate (the
"OFFICER'S CERTIFICATE"), records, and other documents, and statutes, rules,
and regulations as we have deemed necessary or appropriate as a basis for the
opinions set forth below. In conducting such review for purposes of rendering
our opinions we have not conducted an independent investigation of any of the
facts set forth in the Registration Statement, Officer's Certificate, or any
other documents, records, or certificates, and have, consequently, relied upon
the Company's representations that the information presented in such documents,
records, or certificates or otherwise furnished to us accurately represent and
completely describe all material facts relevant to our opinions herein, and upon
the authenticity of documents submitted to us as originals or certified copies,
the accuracy of copies, the genuineness of all signatures and the legal capacity
of all natural persons. No facts have come to our attention, however, that
would cause us to question the accuracy and completeness of such facts or
documents in a material way. We have also relied upon the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland, dated November 20, 1997, with
respect to all matters of Maryland law.
In rendering these opinions we have assumed that (i) the transactions
described in or contemplated by any of the aforementioned documents have been or
will be consummated in accordance with the operative documents, (ii) the Company
has been
<PAGE>
Apex Mortgage Capital, Inc.
November 20, 1997
Page 2
and will continue to be organized and operated in the manner described in the
Officer's Certificate, the Registration Statement, and the other relevant
documents referred to above, and (iii) there have been no changes in the
applicable laws of the State of maryland, the Internal Revenue Code of 1986, as
amended (the "CODE"), the regulations promulgated thereunder by the Treasury
Department (the "TREASURY REGULATIONS"), and the interpretations of the Code
and Treasury Regulations by the courts and the Internal Revenue Service
("IRS"), all as they exist on the date of this letter. Any material change
that is made after the date hereof in any of the foregoing bases for our
opinions could affect our conclusions.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is organized in conformity with the requirements for
qualification as a real estate investment trust ("REIT") under Sections 856
through 860 of the Code, and the Company's contemplated method of operations
will enable it to satisfy the requirements for such qualification commencing
with the Company's taxable year ending December 31, 1997.
2. The section of the Registration Statement entitled "Federal
Income Tax Considerations" identifies and fairly summarizes the federal income
tax considerations to a holder of Common Stock, and to the extent such summaries
involve matters of law, such statement of law are correct. However, such
section is not exhaustive and does not purport to discuss any state or local tax
considerations or all possible Federal income tax considerations of the
purchase, ownership, and disposition of the Common Stock. Additionally, the
Company's qualification as a REIT under the Code will depend upon the Company's
ability to meet, through actual operating results, distribution levels,
diversity of stock ownership, and the various income and asset qualification
tests imposed under the Code. Such operating results may not be reviewed by us,
and accordingly, no assurance can be given that the actual results of the
Company's operations for any one taxable year will satisfy the requirements for
REIT qualification. Moreover, certain aspects of the Company's method of
operations have not been considered by the courts or the IRS. There can be no
assurance that the courts or the IRS will agree with this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to O'Melveny & Myers
LLP under the caption "Federal Income Tax Considerations" in the Registration
Statement. 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 or the
rules and regulations promulgated thereunder by the Securities and Exchange
Commission.
Other than as expressly stated above, we express no opinion on any issue
relating to the Company or to any investment therein, or under any other law.
This opinion letter is solely for the information and use of the Company, and it
may not be distributed, relied
<PAGE>
Apex Mortgage Capital, Inc.
November 20, 1997
Page 3
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.
Respectfully submitted,
/s/ O'Melveny & Myers LLP
O'Melveny & Myers LLP
<PAGE>
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made as of the __ day of
_______________, 1997 (the "Effective Date"), by and between (i) APEX MORTGAGE
CAPITAL, INC., a Maryland corporation (the "Company"), and (ii) TCW INVESTMENT
MANAGEMENT COMPANY, a California corporation (the "Manager").
THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts,
understandings and intentions:
A. The Company intends to invest in Mortgage Assets (defined herein)
using the proceeds of borrowings and equity offerings and to qualify as a "real
estate investment trust" under the Internal Revenue Code of 1986, as amended
(the "Code").
B. The Company desires to have the Manager undertake, on the Company's
behalf, the duties and responsibilities set forth in this Agreement, subject to
the direction and oversight of the Board of Directors of the Company (the "Board
of Directors") on the terms and conditions set forth in this Agreement.
C. The Manager desires to undertake, on the Company's behalf, the duties
and responsibilities set forth in this Agreement, subject to the direction and
oversight of the Board of Directors, on the terms and conditions set forth in
this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual agreements set forth in this
Agreement, the Company and the Manager agree as follows:
1. Definitions. Capitalized terms used but not defined in this Agreement
-----------
shall have the respective meanings assigned to them below:
1.1 "Affiliate" means, when used with reference to a specified person, any
person that directly, or indirectly through one or more intermediaries, controls
or is controlled by, or is under common control with the specified person. For
purposes of this definition, the term "person" means and includes individuals,
corporations, general and limited partnerships, stock companies, land trusts,
business trusts and other entities and governments and agencies and political
subdivisions thereof. For 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.
1.2 "Agency Certificates" means GNMA Certificates, Fannie Mae Certificates
and FHLMC Certificates.
1.3 "Agreement" means this Management Agreement.
<PAGE>
1.4 "Average Net Invested Capital" means for any period (i) the arithmetic
average of the sum of the gross proceeds of the offerings of its equity
securities by the Company, after deducting any underwriting discounts and
commissions and other expenses and costs relating to such offerings, plus (A)
the Company's retained earnings (taking into account any losses incurred) and
(B) any non-cash charges or reserves, including depreciation, mark-to-market
adjustments and unrealized credit loss, computed by taking the average of such
values at the end of each month during such period, plus (ii) any unsecured debt
approved by a majority of the Unaffiliated Directors to be included in Average
Net Invested Capital.
1.5 "Average Net Worth" means for any period the arithmetic average of
the sum of the gross proceeds from the offerings of its equity securities by the
Company, before deducting any underwriting discounts and commissions and other
expenses and costs relating to the offerings, plus the Company's retained
earnings (without taking into account any losses incurred in prior periods)
computed by taking the average of such values at the end of each month during
such period.
1.6 "Base Management Compensation" has the meaning set forth in Section
6.1 of this Agreement.
1.7 "Board of Directors" has the meaning set forth in Recital B of this
Agreement.
1.8 "Code" has the meaning set forth in Recital A of this Agreement.
1.9 "Company" means Apex Mortgage Capital, Inc., a Maryland corporation,
and its successors.
1.10 "Conforming Mortgage Loans" means conventional Mortgage Loans that
either comply with requirements for inclusion in credit support programs
sponsored by FHLMC, Fannie Mae or GNMA or are FHA or VA Loans, all of which are
secured by first mortgages or deeds of trust on single-family (one to four
units) residences.
1.11 "CMOs" means debt obligations (bonds) that are collateralized by
mortgage loans or mortgage certificates other than Mortgage Derivative
Securities and Subordinated Interests. CMOs are structured so that principal
and interest payments received on the collateral are sufficient to make
principal and interest payments on the bonds. Such bonds may be issued by
United States government agencies or private issuers in one or more classes with
fixed or variable interest rates, maturities and degrees of subordination that
are characteristics designed for the investment objectives of different bond
purchasers.
1.12 "FHLMC" means the Federal Home Loan Mortgage Corporation.
1.13 "FHLMC Certificates" means mortgage participation certificates issued
by FHLMC, either in certificated or book-entry form.
2
<PAGE>
1.14 "Fannie Mae" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C. (S)1716 et seq.), formerly known as the
Federal National Mortgage Association.
1.15 "Fannie Mae Certificates" means guaranteed mortgage pass-through
certificates issued by Fannie Mae either in certified or book-entry form.
1.16 "Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
1.17 "FHA Loans" means Mortgage Loans insured by the United States Federal
Housing Administration.
1.18 "GAAP" means generally accepted accounting principles.
1.19 "GNMA" means the Governmental National Mortgage Association.
1.20 "GNMA Certificates" means fully modified pass-through mortgage-backed
certificates guaranteed by GNMA and issued either in certificated or book-entry
form.
1.21 "Governing Instruments" means the articles or certificate of
incorporation or charter, as the case may be, and the bylaws of the Company and
its subsidiaries.
1.22 "Incentive Management Compensation" has the meaning set forth in
Section 6.2 of this Agreement.
1.23 "Investment Advisers Act" means the Investment Advisers Act of 1940,
as amended from time to time.
1.24 "Limited Expenses" means the following expenses of the Company or any
subsidiary of the Company:
1.24.1 all insurance costs incurred by the Company or any subsidiary
of the Company, including any costs to obtain liability or other insurance to
indemnify the Manager and underwriters of any securities of the Company;
1.24.2 expenses connected with payments of dividends or interest or
distributions in any other form made or caused to be made by the Board of
Directors to holders of the securities of the Company or any subsidiary of the
Company;
1.24.3 all expenses of third parties connected with communications to
holders of equity securities or debt securities of the Company or any subsidiary
of the Company and the other bookkeeping and clerical work necessary in
maintaining relations with holders of such securities and in complying with the
continuous reporting and other requirements of governmental bodies or agencies,
including any costs of computer services in connection with
3
<PAGE>
this function, the cost of printing and mailing certificates for such securities
and proxy solicitation materials and reports to holders of the Company's or any
subsidiary's securities and reports to third parties required under any
indenture to which the Company or any subsidiary of the Company is a party;
1.24.4 custodian's, transfer agent's and registrar's fees and
charges;
1.24.5 compensation, fees and expenses paid to trustees or
Unaffiliated Directors of the Company or any subsidiary of the Company, the cost
of director and officer liability insurance and premiums for fidelity and errors
and omissions insurance;
1.24.6 legal, accounting and auditing fees and expenses relating to
the Company's or any subsidiary's operations (excluding litigation-related fees
and expenses described in Section 7.2.15 hereof);
1.24.7 expenses relating to any office or office facilities
maintained by the Company or any subsidiary of the Company exclusive of the
office of the Manager and its Affiliates;
1.24.8 travel and related expenses of directors, officers and
employees of the Manager and of directors, officers and employees of the Company
or any subsidiary of the Company who are also directors, officers or employees
of the Manager, incurred in connection with attending meetings of the Board of
Directors or holders of securities of the Company or any subsidiary of the
Company or performing other business activities that relate to the Company or
any subsidiary of the Company, including expenses allocable to such meetings or
business activities;
1.24.9 costs associated with computer hardware and software, third
party information services and office expenses that relate solely to the
business activities of the Company; and
1.24.10 all other expenses of every character regarded as ordinary
operating expenses in accordance with generally accepted accounting principles,
exclusive of those expenses referred to in Sections 7.2.1, 7.2.2, 7.2.3, 7.2.4,
7.2.5, 7.2.6, 7.2.7, 7.2.9, 7.2.10, 7.2.15, 7.2.16 and 7.2.21.
1.25 "Manager" means TCW Investment Management Company, a California
corporation, and its successors hereunder.
1.26 "Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans
and (iii) Short-Term Investments.
1.27 "Mortgage Derivative Securities" means Mortgage Securities that
provide for the holder to receive interest only, principal only, or interest and
principal in amounts that
4
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are disproportionate to those payable on the underlying Mortgage Loans and may
include other derivative instruments.
1.28 "Mortgage Loans" means Conforming and Nonconforming Mortgage Loans,
FHA Loans and VA Loans.
1.29 "Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs,
and (iii) Other Mortgage Securities.
1.30 "Mortgage Warehouse Participations" means participations in lines of
credit to mortgage originators that are secured by recently originated Mortgage
Loans that are in the process of being either securitized or sold to permanent
investors.
1.31 "Net Income" means the taxable income of the Company (including net
capital gains, if any) before the Manager's incentive compensation, net
operating loss deductions arising from losses in prior periods and deductions
permitted by the Code in calculating taxable income for a REIT plus the effects
of adjustments, if any, necessary to record hedging and interest transactions in
accordance with GAAP. A deduction for all of the Company's interest expenses
for borrowed funds is taken into account in calculating Net Income.
1.32 "Nonconforming Mortgage Loans" means conventional Mortgage Loans that
do not conform to one or more requirements of United States Federal Housing
Administration, FHLMC, Fannie Mae, GNMA or United States Veterans Administration
for participation in one or more of such agencies' mortgage loan credit support
programs, such as the principal amounts financed or the underwriting guidelines
used in making the loan.
1.33 "Other Mortgage Securities" means securities representing interests
in, or secured by mortgages on real property other than Pass-Through
Certificates and CMOs and may include certificates and other securities
collateralized by single-family loans, Mortgage Warehouse Participations,
Mortgage Derivative Securities, Subordinated Interests and other mortgage-backed
and mortgage-collateralized obligations.
1.34 "Pass-Through Certificates" means securities (or interests therein)
other than Mortgage Derivative Securities and Subordinated Interests evidencing
undivided ownership interests in a pool of mortgage loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying mortgage loans in accordance with the holders' respective,
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family properties.
1.35 "Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates and other assets of the type described in
Section 856(c)(6)(B) of the Code.
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1.36 "REIT" means real estate investment trust as defined under Section
856 of the Code.
1.37 "REIT Provisions of the Code" means Sections 856 through 860 of the
Code.
1.38 "Return on Equity" means an amount calculated for any quarter by
dividing the Company's Net Income for the quarter by its Average Net Worth for
the quarter.
1.39 "Short-Term Investments" means short-term bank certificates of
deposit, short-term United States Treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements, short-
term CMOs, short-term asset-backed securities and other similar types of short-
term investment instruments, all of which will have maturities or average lives
of less than one (1) year.
1.40 "Subordinated Interests" means a class of Mortgage Securities that is
subordinated to one or more other classes of Mortgage Securities, all of which
classes share the same collateral.
1.41 "TCW" means The TCW Group, Inc.
1.42 "TCW Group" means TCW and its subsidiaries and Affiliates.
1.43 "Ten-Year U.S. Treasury Rate" means the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to a constant maturity of ten
years) published by the Federal Reserve Board during a quarter, or, if such rate
is not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities selected by the
Company.
1.44 "Unaffiliated Directors" means a director who is not affiliated,
directly or indirectly, with the Manager or the TCW Group, whether by ownership
of, ownership interest in, employment by, any material business or professional
relationship with, or serving as an officer or director of the Manager or the
TCW Group, and are not employed by or officers of the Company.
1.45 "VA Loans" means Mortgage Loans partially guaranteed by the United
States Veterans Administration under the Serviceman's Readjustment Act of 1944,
as amended.
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2. General Duties of the Manager.
-----------------------------
2.1 Services to be Provided by the Manager. Subject to the direction and
--------------------------------------
oversight of the Board of Directors and in accordance with the Governing
Instruments, the Manager shall manage and provide services to the Company, and
to the extent directed by the Board of Directors, shall provide similar services
to any subsidiary of the Company. Without limiting the foregoing, the Manager
shall perform other services as may be required from time to time for management
and other activities relating to the assets of the Company as the Board of
Directors shall reasonably request or the Manager shall deem appropriate under
the particular circumstances, including the following:
2.1.1 serving as the Company's consultant with respect to formulation
of investment criteria and preparation of policy guidelines by the Board of
Directors;
2.1.2 assisting the Company in developing criteria for Mortgage Asset
purchase commitments that are specifically tailored to the Company's long-
term investment objectives and making available to the Company its
knowledge and experience with respect to Mortgage Assets;
2.1.3 representing the Company in connection with the purchase and
commitment to purchase or sell Mortgage Assets, including the accumulation
of Mortgage Loans for securitization and the incurrence of debt;
2.1.4 arranging for the issuance of Mortgage Securities from a pool of
Mortgage Loans;
2.1.5 furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
2.1.6 monitoring and providing to the Board of Directors on an ongoing
basis price information and other data, obtained from certain nationally
recognized dealers that maintain markets in Mortgage Assets identified by
the Board of Directors from time to time, and providing data and advice to
the Board of Directors in connection with the identification of such
dealers;
2.1.7 investing or reinvesting any money of the Company in accordance
with its policies and procedures;
2.1.8 providing the executive and administrative personnel, office
space and services required in rendering services to the Company;
2.1.9 administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the
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<PAGE>
Board of Directors, including the collection of revenues and the payment of
the Company's debts and obligations and maintenance of appropriate computer
systems to perform such administrative functions;
2.1.10 providing the Company with general data processing, legal and
administrative services to the extent required to implement the business
strategy of the Company;
2.1.11 counseling the Company in connection with policy decisions made
by the Board of Directors;
2.1.12 communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;
2.1.13 evaluating and recommending hedging strategies to the Board of
Directors and, upon approval by the Board of Directors, engaging in hedging
activities on behalf of the Company, consistent with the Company's status
as a REIT;
2.1.14 supervising compliance with the REIT Provisions of the Code and
maintenance of an exemption from the Investment Company Act;
2.1.15 qualifying and causing the Company to qualify to do business in
all applicable jurisdictions;
2.1.16 causing the Company to retain qualified accountants and tax
experts to assist in developing appropriate accounting procedures and
testing systems and to conduct quarterly compliance reviews;
2.1.17 providing all actions necessary for compliance by the Company
with all federal, state and local regulatory requirements applicable to the
Company in respect of its business activities, including preparing or
causing to be prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and documents, if
any, required under the Securities Exchange Act of 1934, as amended;
2.1.18 providing all actions necessary to enable the Company to make
required federal, state and local tax filings and reports and generally
enable the Company to maintain its status as a REIT, including soliciting
stockholders for required information to the extent provided in the REIT
Provisions of the Code;
2.1.19 performing such other services as may be required from time to
time for management and other activities relating to the assets of the
Company as the
8
<PAGE>
Board of Directors shall reasonably request or the Manager shall deem
appropriate under the particular circumstances; and
2.1.20 complying with and using commercially reasonable efforts to
cause the Company to comply with all applicable laws.
2.2 Obligations of the Manager.
--------------------------
2.2.1 Verify Conformity with Acquisition Criteria. The Manager shall
-------------------------------------------
use commercially reasonable efforts to provide that each Mortgage Asset conforms
to the acquisition criteria of the Company and shall require each seller or
transferor of Mortgage Assets to the Company to make such representations and
warranties regarding such Mortgage Assets as may, in the judgment of the
Manager, be necessary and appropriate. With respect to Mortgage Loans and
consistent with prevailing industry practices, the Manager shall use
commercially reasonable efforts to require the seller or transferor to
repurchase any Mortgage Loan with respect to which there is fraud or
misrepresentation. In addition, the Manager shall take such other action as it
deems necessary or appropriate with regard to the protection of the Company's
investments.
2.2.2 Conduct Activities in Conformity with REIT Status and All
---------------------------------------------------------
Applicable Restrictions. The Manager shall refrain from any action which, in
- -----------------------
its sole judgment made in good faith, would adversely affect the status of the
Company or, if applicable, any subsidiary of the Company as a REIT or which, in
its sole judgment made in good faith, would violate any material law, rule or
regulation of any governmental body or agency having jurisdiction over the
Company or any such subsidiary or which would otherwise not be permitted by the
Company's or such subsidiary's Governing Instruments; any operating policies
adopted by the Company; or any agreements provided to the Manager. If the
Manager is ordered to take any such action by the Board of Directors, the
Manager shall promptly notify the Board of Directors of the Manager's judgment
that such action would adversely affect such status or violate any such law,
rule or regulation or the Governing Instruments; operating policies adopted by
the Company; or any agreements provided to the Manager. Notwithstanding the
foregoing, the Manager, its directors, officers, stockholders and employees
shall not be liable to the Company, any subsidiary of the Company, the
Unaffiliated Directors or any Stockholders of the Company or any of its
subsidiaries for any act or omission by the Manager, its directors, officers,
stockholders or employees except as provided in Section 8 of this Agreement.
2.2.3 Reports. The Manager shall cause an annual compliance report
-------
to be prepared for the first two fiscal years of the Company, commencing with
fiscal year 1997, by a firm independent of the Manager and its Affiliates and
having the proper expertise to determine compliance with the REIT Provisions of
the Code and related matters. The Manager shall deliver each report for a
fiscal year to the Company no later than March 31 of the following year. In
addition, the Manager will prepare regular reports for the Company's Board of
Directors that will review the Company's acquisitions of Mortgage Assets,
portfolio
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composition and characteristics, credit quality, performance and compliance with
the policies approved by the Company's Board of Directors.
2.2.4 Portfolio Transactions. In placing portfolio transactions and
----------------------
selecting brokers or dealers, the Manager shall endeavor to obtain on behalf of
the Company commercially reasonable terms. In assessing commercially reasonable
terms for any transaction, the Manager shall consider all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis.
2.3 Compliance with the Investment Advisers Act. The Manager shall
-------------------------------------------
operate in compliance with the provisions of the Investment Advisers Act
applicable to the performance of the Manager's duties hereunder.
2.4 Cooperation of the Company. The Company agrees to take all actions
--------------------------
reasonably required to permit the Manager to carry out its duties and
obligations under this Agreement. The Company further agrees to make available
to Manager all materials reasonably requested by Manager to enable the Manager
to satisfy its obligations to deliver financial statements and any other
information or reports with respect to the Company.
2.5 Fidelity Bond. During the term of this Agreement the Manager shall
-------------
obtain and maintain a fidelity bond in such amount and with an issuer as the
Manager shall determine, which shall cover, among other things, losses resulting
directly from dishonest or fraudulent acts committed by an employee of the
Manager and certain other losses. The premium for such bond is to be paid by
the Manager or its Affiliates.
3. Additional Activities of the Manager and its Affiliates.
-------------------------------------------------------
3.1 Other Activities of the Manager. Nothing in this Agreement shall
-------------------------------
prevent the Manager, its Affiliates, or any of the officers, directors or
employees of the Manager or its Affiliates, from engaging in other businesses or
from rendering services of any kind to any other person or entity, including the
purchase of, or advisory service to others investing in, any type of real estate
investment, including investments that meet the principal investment objectives
of the Company. Notwithstanding the foregoing, members of the Mortgage Backed
Securities Group of the TCW Group or any equivalent or successor group of the
TCW Group during their employment by the TCW Group will not provide any direct
management services to a residential mortgage REIT that invests primarily in
high quality Mortgage Securities other than the Company. Directors, officers,
employees and agents of the Manager and of Affiliates of the Manager may serve
as trustees, directors, officers, employees, agents, nominees or signatories for
the Company or any subsidiary of the Company, to the extent permitted by their
Governing Instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Directors pursuant to the Company's Governing
Instruments. When executing documents or otherwise acting in such capacities
for the Company, such persons shall use their respective titles in the Company.
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<PAGE>
3.2 Other Investment Advisory Activities of the Manager. Except as
---------------------------------------------------
provided in Section 3.1 of this Agreement, nothing contained in this Agreement
shall prevent the Manager, or any Affiliate of the Manager, from acting as
investment advisor or manager for any other person, firm or corporation
(including any investment company), whether or not the investment objectives or
policies of any such other person, firm or corporation are similar to those of
the Company, and shall not in any way bind or restrict the Manager or any such
Affiliate from buying, selling or trading any securities or commodities for
their own accounts or for the account of others for whom the Manager or any such
Affiliate may be acting. The Company acknowledges that the Manager will base
allocation decisions on the procedures the Manager considers fair and equitable,
including, without limitation, such considerations as investment objectives,
restrictions and time horizon, availability of cash and the amount of existing
holdings. While information and recommendations supplied to the Company shall,
in the Manager's judgment, be appropriate under the circumstances and in light
of the investment objectives and policies of the Company, they may be different
from the information and recommendations supplied by the Manager or its
Affiliates to investment companies, funds and advisory accounts. The Company
shall be entitled to equitable treatment under the circumstances in receiving
information, recommendations and any other services, but the Company recognizes
that it is not entitled to receive preferential treatment as compared with the
treatment given by the Manager to any investment company, fund or advisory
account.
4. Bank Accounts. At the direction of the Board of Directors, the Manager
-------------
may establish and maintain one or more bank accounts in the name of the Company
or any subsidiary of the Company, and may collect and deposit into any such
account or accounts, and disburse funds from any such account or accounts, under
such terms and conditions as the Board of Directors may approve. The Manager
shall from time to time render appropriate accountings of such collections and
payments to the Board of Directors and, upon request, to the auditors of the
Company or any subsidiary of the Company.
5. Records; Confidentiality. The Manager shall maintain appropriate books
------------------------
of account and records relating to services performed under this Agreement, and
such books of account and records shall be accessible for inspection by
representatives of the Company or any subsidiary of the Company at any time
during normal business hours. Except in the ordinary course of business of the
Company, the Manager shall keep confidential any and all information it obtains
from time to time in connection with the services it renders under this
Agreement and shall not disclose any portion thereof to non-affiliated third-
parties (other than lenders to, and holders of stock or warrants of, the
Manager) except with the prior written consent of the Company.
6. Compensation of the Manager.
---------------------------
6.1 Base Management Compensation. For services rendered under this
----------------------------
Agreement, the Company shall pay to the Manager, commencing on the Effective
Date and payable as described below, base management compensation equal to 3/4
of 1% of the Average Net Invested Capital of the Company (the "Base Management
Compensation"). The
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Base Management Compensation for each month shall be calculated by the Manager
within 15 days after the end of such month, and such calculation shall be
promptly delivered to the Company. The Company shall pay any amount payable
pursuant to this Section 6.1 for such month within 15 days after the receipt of
Manager's written statement setting forth the computation of the Base Management
Compensation.
6.2 Incentive Management Compensation. In addition to the Base Management
---------------------------------
Compensation, the Manager shall receive as incentive compensation for each
fiscal quarter an amount equal to 30% of the Net Income of the Company, before
incentive compensation, for such fiscal quarter in excess of the amount that
would produce an annualized Return on Equity (calculated by multiplying the
Return on Equity for such fiscal quarter by four) equal to the Ten-Year U.S.
Treasury Rate for such fiscal quarter plus 1% (the "Incentive Management
Compensation"). The Incentive Management Compensation calculation and payment
shall be made quarterly in arrears. The Manager shall compute the quarterly
Incentive Management Compensation within 45 days after the end of each fiscal
quarter. The Company shall pay the Incentive Management Compensation with
respect to each fiscal quarter within 15 days following the delivery to the
Company of the Manager's written statement setting forth the computation of the
Incentive Management Compensation for such quarter. In connection with the
Company's annual audit, the Manager shall compute any final adjustments to the
Incentive Management Compensation payable under this Section 6.2 within 45 days
after the end of each fiscal year and any required adjustments shall be paid by
the Company within 15 days after delivery of such computation to the Company by
the Manager and any amounts payable by the Manager shall be deducted from the
next succeeding payment(s) of Base Management Compensation or Incentive
Management Compensation payable to Manager, unless the Agreement has terminated,
in which case the payment shall be made by Manager within 15 days following
delivery of such statement.
6.3 Annual Reconciliation Beginning in 1999. Beginning in calendar year
---------------------------------------
1999, the quarterly Incentive Management Compensation will be subject to annual
reconciliation so that the Incentive Management Compensation is based on the
Manager's performance for a calendar year rather than on a quarter-by-quarter
basis. Such reconciliation shall be determined as part of the Company's annual
audit and any reconciling payments shall be paid as provided in Section 6.2.
7. Expenses of the Manager and the Company.
---------------------------------------
7.1 Expenses of the Manager. Without regard to the compensation received
-----------------------
under this Agreement by the Manager, the Manager shall bear the following
expenses:
7.1.1 employment expenses of the personnel employed by the Manager
and/or its Affiliates (including, but not limited to, officers of the Company
employed by the Manager and/or its Affiliates), including, but not limited to,
salaries, wages, payroll taxes and the cost of employee benefit plans of such
personnel;
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7.1.2 rent, telephone, utilities, office furniture, equipment,
machinery, and other office expenses of the Manager and/or its Affiliates
required for the Company's day-to-day operations, including bookkeeping,
clerical and back-office services provided by the Manager or its Affiliates;
7.2 Expenses of the Company. The Company or any subsidiary of the Company
-----------------------
shall pay all of its expenses except those that are the responsibility of the
Manager pursuant to Section 7.1 of this Agreement, and without limiting the
generality of the foregoing, it is specifically agreed that the following
expenses of the Company or any subsidiary of the Company shall be paid by the
Company and shall not be paid by the Manager or Affiliates of the Manager:
7.2.1 the cost of money borrowed by the Company, including interest;
7.2.2 all taxes and license fees applicable to the Company or any
subsidiary of the Company, including interest and penalties thereon;
7.2.3 legal, audit, accounting, underwriting, brokerage, listing,
filing, rating agency, registration and other fees, printing, engraving,
clerical, personnel and other expenses and taxes incurred in connection with the
issuance, distribution, transfer, registration and stock exchange listing of
the Company's or any subsidiary's equity securities or debt securities;
7.2.4 fees and expenses paid to advisors and independent contractors,
consultants, managers, and other agents engaged directly by the Company or any
subsidiary of the Company or by the Manager at the Company's or such
subsidiary's request for the account of the Company or any subsidiary of the
Company (other than the Manager or its Affiliates);
7.2.5 expenses connected with the acquisition, disposition, financing
and ownership of the Company's or any subsidiary's investment assets, including,
but not limited to, commitment fees, brokerage fees, guaranty fees, ad valorem
taxes, costs of foreclosure, maintenance, repair and improvement of property and
premiums for insurance on property owned by the Company or any subsidiary of the
Company;
7.2.6 costs related to hedging transactions;
7.2.7 the expenses of organizing, modifying or dissolving the Company
or any subsidiary of the Company;
7.2.8 all insurance costs incurred by the Company or any subsidiary of
the Company, including any costs to obtain liability or other insurance to
indemnify the Manager and underwriters of any securities of the Company;
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<PAGE>
7.2.9 expenses connected with payments of dividends or interest or
distributions in any other form made or caused to be made by the Board of
Directors to holders of the securities of the Company or any subsidiary of the
Company;
7.2.10 expenses connected with the structuring, issuance and
administration of Mortgage Securities by the Company or any subsidiary of the
Company, including, but not limited to, legal fees, trustee's fees, insurance
premiums, and costs of required credit enhancements;
7.2.11 all expenses of third parties connected with communications to
holders of equity securities or debt securities issued by the Company or any
subsidiary of the Company and the other bookkeeping and clerical work necessary
in maintaining relations with holders of such securities and in complying with
the continuous reporting and other requirements of governmental bodies or
agencies, including any costs of computer services in connection with this
function, the cost of printing and mailing certificates for such securities and
proxy solicitation materials and reports to holders of the Company's or any
subsidiary's securities and reports to third parties required under any
indenture to which the Company or any subsidiary of the Company is a party;
7.2.12 custodian's, transfer agent's and registrar's fees and charges;
7.2.13 compensation, fees and expenses paid to trustees or
Unaffiliated Directors of the Company or any subsidiary of the Company, the cost
of director and officer liability insurance and premiums for errors and
omissions insurance;
7.2.14 legal, accounting and auditing fees and expenses relating to
the Company's or any subsidiary's operations (excluding litigation-related fees
and expenses described in Section 7.2.15);
7.2.15 legal, expert and other fees and expenses relating to any
actions, proceedings, lawsuits, demands, causes of action and claims, whether
actual or threatened, made by or against the Company, or which the Company is
authorized or obligated to pay under applicable law or its Governing Instruments
or by the Board of Directors;
7.2.16 any judgment rendered against the Company or any subsidiary of
the Company, or against any trustee, director or officer of the Company or any
subsidiary of the Company in his capacity as such for which the Company or any
subsidiary of the Company is required to indemnify such trustee, director, or
officer by any court or governmental agency, or settlement of pending or
threatened litigation;
7.2.17 expenses relating to any office or office facilities maintained
by the Company or any subsidiary of the Company exclusive of the office of the
Manager and/or its Affiliates;
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7.2.18 expenses related to the accumulation, servicing and
subservicing of Mortgage Loans;
7.2.19 travel and related expenses of directors, officers and
employees of the Manager and of directors, officers and employees of the Company
or any subsidiary of the Company who are also directors, officers or employees
of the Manager, incurred in connection with attending meetings of the Board of
Directors or holders of securities of the Company or any subsidiary of the
Company or performing other business activities that relate to the Company or
any subsidiary of the Company, including, where applicable, a proportionate
share of such expenses as reasonably determined by Manager where such expenses
were not incurred solely for the benefit of the Company;
7.2.20 costs associated with computer hardware and software, third
party information services and office expenses that relate solely to the
business activities of the Company;
7.2.21 any extraordinary or non-recurring costs or charges incurred by
the Company; and
7.2.22 other expenses of the Company or any subsidiary of the Company
that are not expenses of the Manager under Section 7.1 of this Agreement.
7.3 Limitation on Expenses Payable by the Company. Notwithstanding
---------------------------------------------
Sections 7.1 and 7.2 of this Agreement, the Limited Expenses required to be paid
by the Company shall be limited to an aggregate amount per year equal to the
greater of (i) 2% of the Average Net Invested Capital of the Company and (ii)
25% of its Net Income for that year. The determination of Net Income for
purposes of calculating such expense limitation will be the same as for
calculating the Manager's Incentive Management Compensation, except that it will
include any Incentive Management Compensation payable for such period. Expenses
of the Company that are not Limited Expenses shall be payable by the Company
regardless of the foregoing limit. Limited Expenses in excess of such limit
will be paid by the Manager, unless the Unaffiliated Directors determine that,
based upon extraordinary or non-recurring factors, a higher level of expenses is
justified for such fiscal year. In that event, such expenses may be recovered
by the Manager in succeeding years to the extent that Limited Expenses in
succeeding quarters are below the limitation on Limited Expenses for such
quarters.
7.4 Expense Reimbursement to the Manager. Expenses incurred by the
------------------------------------
Manager on behalf of the Company shall be reimbursed monthly to the Manager
within 30 days after the end of each month. The Manager shall prepare a
statement documenting the expenses of the Company and those incurred by the
Manager on behalf of the Company during each month, and shall deliver such
statement to the Company within 15 days after the end of each month. Expense
reimbursement to the Manager shall be subject to Section 7.3 hereof and
adjustment at the end of each fiscal year in connection with the annual audit of
the Company. Any amount that may become payable by the Manager pursuant to such
an annual adjustment
15
<PAGE>
shall be offset against future amounts payable to the Manager as provided in
Section 6.2 hereof.
8. Limits of Manager Responsibility. The Manager assumes no
--------------------------------
responsibility under this Agreement other than to render the services
specifically called for under this Agreement and shall not be responsible for
any action of the Board of Directors in following or declining to follow any
advice or recommendations of the Manager, including as set forth in Section
2.2.2 of this Agreement. The Manager, its directors, officers, stockholders and
employees will not be liable to the Company, any issuer of Mortgage Securities,
any subsidiary of the Company, its subsidiary's stockholders or the Unaffiliated
Directors for any acts or omissions, errors of judgment or mistakes of law by
the Manager, its directors, officers, stockholders or employees under or in
connection with this Agreement, except by reason of acts or omissions, errors of
judgment or mistakes of law constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under this Agreement. The
Company and its subsidiaries shall reimburse, indemnify and hold harmless the
Manager, its directors, officers, stockholders and employees of and from any and
all expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever (including, without limitation, attorneys' fees) in respect of
or arising from any acts or omissions, errors of judgment or mistakes of law of
the Manager, its stockholders, directors, officers and employees made in good
faith in the performance of the Manager's duties under this Agreement or
pursuant to any underwriting agreement or similar agreement to which Manager is
a party in connection with any debt or equity sales of the Company's securities
and not constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under this Agreement or any such underwriting
agreement. The Manager shall be indemnified by the Company as an agent of the
Company in accordance with the terms of the Company's Governing Instruments.
9. No Joint Venture. The Company and the Manager are not partners or
----------------
joint venturers with each other, and nothing in this Agreement shall be
construed to make them such partners or joint venturers or impose any liability
as such on any of them. The Manager is an independent contractor and, except as
expressly provided or authorized in this Agreement, shall have no authority to
act for or represent the Company.
10. Term; Termination; Termination Fee.
----------------------------------
10.1 Term. This Agreement shall commence on the Effective Date and shall
----
continue in force until December 31, 1999 and thereafter it shall be subject to
successive one-year renewal periods upon the review and approval of the
Unaffiliated Directors. If the Unaffiliated Directors do not resolve to renew
or terminate this Agreement, within at least 60 days prior to the end of the
then-current period of this Agreement, this Agreement shall be automatically
extended for a one-year period. The Company, subject to Section 10.2, and the
Manager shall have the right, following the initial term of this Agreement, to
terminate this Agreement at any time upon not less than 60 days prior written
notice.
16
<PAGE>
10.2 Termination; Termination Fee. In addition to such further liability
----------------------------
or obligation of either party to the other provided in Section 13 of this
Agreement, if this Agreement is terminated without cause (as "cause" is defined
in Section 12 of this Agreement) by delivery of a notice of non-renewal pursuant
to Section 10.1 or because the Company does not consent to an assignment of this
Agreement by the Manager in connection with any acquisition, consolidation or
merger of TCW (to the extent such consent is required pursuant to the Investment
Advisers Act), the Company, in addition to its obligations under Section 13,
shall pay the Manager a termination fee in an amount equal to the fair market
value of this Agreement determined by an independent appraisal. For the
purposes of determining the fair market value of this Agreement, it will be
assumed that this Agreement is unlimited in term and not subject to termination
or non-renewal. Such appraisal shall be conducted by a nationally recognized
appraisal firm selected (but not previously engaged) by the Manager, subject to
the approval by a majority of the Unaffiliated Directors, which approval shall
not be unreasonably withheld or delayed, and the costs of such appraisal shall
be borne equally by the parties. Any appraisal conducted under this Agreement
shall be performed no later than 45 days following selection of the appraiser or
appraisers. The termination fee payable by the Company shall be paid within 30
days following receipt of the final appraisal to be obtained under this
Agreement.
11. Assignments. Upon not less than sixty (60) days prior written notice
-----------
to the Board of Directors of the Company, this Agreement may be assigned by the
Manager to an Affiliate of TCW without the consent of the Company. Except in
the event of an assignment by the Manager to an Affiliate of TCW or as otherwise
set forth in this Section 11, this Agreement shall terminate automatically in
the event of its assignment, in whole or in part, by the Manager (other than the
pledge of amounts payable to the Manager under this Agreement to secure the
Manager's obligations to its lenders), unless such assignment is consented to in
writing by the Company with the consent of a majority of the Unaffiliated
Directors. The Company shall not withhold its consent to any assignment of this
Agreement by the Manager in connection with any acquisition, consolidation or
merger of TCW, to the extent such consent is required by the Investment Advisers
Act. Any assignment shall bind the assignee under this Agreement in the same
manner as the Manager is bound. In addition, the assignee shall execute and
deliver to the Company a counterpart of this Agreement naming such assignee as
Manager. This Agreement shall not be assigned by the Company without the prior
written consent of the Manager, except in the case of assignment by the Company
to a REIT or other organization which is a successor (by merger, consolidation
or purchase of assets) to the Company, in which case such successor organization
shall be bound under this Agreement and by the terms of such assignment in the
same manner as the Company is bound under this Agreement.
12. Termination by Company for Cause. At the option of the Company, this
--------------------------------
Agreement shall be and become terminated upon 60 days' written notice of
termination from the Board of Directors to the Manager if any of the following
events shall occur (termination for any of such events shall constitute
termination for "cause"):
17
<PAGE>
12.1 if a majority of the Unaffiliated Directors determines that the
Manager has violated this Agreement in any material respect and, after written
notice of such violation, the Manager has failed to cure such violation within
30 days, unless during such 30-day period the Manager has commenced to cure such
violation and thereafter diligently prosecutes to cure such violation; or
12.2 there is entered an order for relief or similar decree or order with
respect to the Manager by a court having competent jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency or
other similar laws; or the Manager (i) ceases, or admits in writing its
inability, to pay its debts as they become due and payable, or makes a general
assignment for the benefit of, or enters into any composition or arrangement
with, creditors; (ii) applies for, or consents (by admission of material
allegations of a petition or otherwise) to the appointment of a receiver,
trustee, assignee, custodian, liquidator or sequestrator (or other similar
official) of the Manager or of any substantial part of its properties or assets,
or authorizes such an application or consent, or proceedings seeking such
appointment are commenced without such authorization, consent or application
against the Manager and continue undismissed for 30 days; (iii) authorizes or
files a voluntary petition in bankruptcy, or applies for or consents (by
admission of material allegations of a petition or otherwise) to the application
of any bankruptcy, reorganization, arrangement, readjustment of debt,
insolvency, dissolution, liquidation or other similar law of any jurisdiction,
or authorizes such application or consent, or proceedings to such end are
instituted against the Manager without such authorization, application or
consent and are approved as properly instituted and remain undismissed for 30
days or result in adjudication of bankruptcy or insolvency; or (iv) permits or
suffers all or any substantial part of its properties or assets to be
sequestered or attached by court order and the order remains undismissed for 30
days; provided, however, that in the event the Manager becomes the subject of a
case under federal bankruptcy or similar federal or state laws and remains in
possession of its property and continues to operate its business (as a debtor in
possession or otherwise), the Company shall not have the option to terminate
this Agreement unless the Unaffiliated Directors determine in good faith that as
a result of such proceeding the Manager cannot reasonably be expected to fulfill
its obligations under this Agreement. If any of the events specified in Section
12.2 of this Agreement shall occur, the Manager shall give prompt written notice
thereof to the Board of Directors upon the happening of such event.
13. Action Upon Termination. From and after the effective date of
-----------------------
termination of this Agreement, pursuant to Sections 10, 11 or 12 of this
Agreement, except as otherwise specified in Section 10.2 of this Agreement, the
Manager shall not be entitled to compensation for further services under this
Agreement, but shall be paid all Base and Incentive Management Compensation
accruing to the date of termination. Upon such termination, the Manager shall
forthwith:
13.1 after deducting any accrued Base and Incentive Management Compensation
and reimbursement for its expenses to which it is then entitled, pay over to the
Company or
18
<PAGE>
any subsidiary of the Company all money collected and held for the account of
the Company or any subsidiary of the Company pursuant to this Agreement;
13.2 deliver to the Board of Directors a full accounting, including a
statement showing all payments collected by it and a statement of all money held
by it, covering the period following the date of the last accounting furnished
to the Board of Directors with respect to the Company or any subsidiary of the
Company; and
13.3 deliver to the Board of Directors all property and documents of the
Company or any subsidiary of the Company then in the custody of the Manager.
14. Release of Money or Other Property Upon Written Request. The Manager
-------------------------------------------------------
agrees that any money or other property of the Company or any subsidiary of the
Company held by the Manager under this Agreement shall be held by the Manager as
custodian for the Company or such subsidiary, and the Manager's records shall be
appropriately marked clearly to reflect the ownership of such money or other
property by the Company or such subsidiary. Upon the receipt by the Manager of
a written request signed by a duly authorized officer of the Company requesting
the Manager to release to the Company or any subsidiary of the Company any money
or other property then held by the Manager for the account of the Company or any
subsidiary of the Company under this Agreement, the Manager shall release such
money or other property to the Company or such subsidiary of the Company within
a reasonable period of time, but in no event later than the later to occur of
(i) 30 days following such request and (ii) the earliest time following such
request that remittance will not cause the Manager to violate any law or breach
any agreement to which it or the Company is a party. The Manager shall not be
liable to the Company, any subsidiaries of the Company, the Unaffiliated
Directors, or the Company's or its subsidiaries' stockholders for any acts
performed or omissions to act by the Company or any subsidiary of the Company in
connection with the money or other property released to the Company or any
subsidiary of the Company in accordance with this Section 14 and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties under this Agreement. The Company and any subsidiary of
the Company shall indemnify the Manager, its directors, officers, stockholders
and employees against any and all expenses, losses, damages, liabilities,
demands, charges and claims of any nature whatsoever, which arise in connection
with the Manager's release of such money or other property to the Company or any
subsidiary of the Company in accordance with the terms of this Section 14 unless
such expenses, losses, damages, liabilities, demands, charges and claims arise
in connection with acts or omissions which constitute bad faith, willful
misconduct, gross negligence or reckless disregard of its duties under this
Agreement. Indemnification pursuant to this provision shall be in addition to
any right of the Manager to indemnification under Section 8 of this Agreement.
15. Representations and Warranties.
------------------------------
15.1 Company in Favor of the Manager. The Company hereby represents and
-------------------------------
warrants to the Manager as follows:
19
<PAGE>
15.1.1 Due Formation. The Company is duly organized, validly existing
-------------
and in good standing under the laws of Maryland, has the power to own its assets
and to transact the business in which it is now engaged and is duly qualified
and in good standing under the laws of each jurisdiction where its ownership or
lease of property or the conduct of its business requires such qualification,
except for failures to be so qualified, authorized or licensed that could not in
the aggregate have a material adverse effect on the business operations, assets
or financial condition of the Company and its subsidiaries, taken as a whole.
The Company does not do business under any fictitious business name.
15.1.2 Power and Authority. The Company has the power and authority
-------------------
to execute, deliver and perform this Agreement and all obligations required
under this Agreement and has taken all necessary action to authorize this
Agreement on the terms and conditions hereof and the execution, delivery and
performance of this Agreement and all obligations required under this Agreement.
Except as shall have been obtained, no consent of any other person, including,
without limitation, stockholders and creditors of the Company, and no license,
permit, approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental authority is required
by the Company in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all obligations
required under this Agreement. This Agreement has been, and each instrument or
document required under this Agreement will be, executed and delivered by a duly
authorized officer of the Company, and this Agreement constitutes, and each
instrument or document required under this Agreement when executed and delivered
under this Agreement will constitute, the legally valid and binding obligation
of the Company enforceable against the Company in accordance with its terms.
15.1.3 Execution, Delivery and Performance. The execution, delivery
-----------------------------------
and performance of this Agreement and the documents or instruments required
under this Agreement will not violate any provision of any existing law or
regulation binding on the Company, or any order, judgment, award or decree of
any court, arbitrator or governmental authority binding on the Company, or the
Governing Instruments of, or any securities issued by, the Company or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Company is a party or by which the Company or any of
its assets may be bound, the violation of which would have a material adverse
effect on the business operations, assets or financial condition of the Company
and its subsidiaries, taken as a whole, and will not result in, or require, the
creation or imposition of any lien on any of its property, assets or revenues
pursuant to the provisions of any such mortgage, indenture, lease, contract or
other agreement, instrument or undertaking (other than the pledge of amounts
payable to the Manager under this Agreement to secure the Manager's obligations
to its lenders).
15.2 Manager In Favor of the Company. The Manager hereby represents and
-------------------------------
warrants to the Company as follows:
20
<PAGE>
15.2.1 Due Formation. The Manager is duly organized, validly existing
-------------
and in good standing under the laws of California, has the corporate power to
own its assets and to transact the business in which it is now engaged and is
duly qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole. The Manager does not do business under
any fictitious business name.
15.2.2 Power and Authority. The Manager has the corporate power and
-------------------
authority to execute, deliver and perform this Agreement and all obligations
required under this Agreement and has taken all necessary corporate action to
authorize this Agreement on the terms and conditions hereof and the execution,
delivery and performance of this Agreement and all obligations required under
this Agreement. Except as shall have been obtained, no consent of any other
person including, without limitation, stockholders and creditors of the Manager,
and no license, permit, approval or authorization of, exemption by, notice or
report to, or registration, filing or declaration with, any governmental
authority is required by the Manager in connection with this Agreement or the
execution, delivery, performance, validity or enforceability of this Agreement
and all obligations required under this Agreement. This Agreement has been and
each instrument or document required under this Agreement will be executed and
delivered by a duly authorized officer of the Manager, and this Agreement
constitutes, and each instrument or document required under this Agreement when
executed and delivered under this Agreement will constitute, the legally valid
and binding obligation of the Manager enforceable against the Manager in
accordance with its terms.
15.2.3 Execution, Delivery and Performance. The execution, delivery
-----------------------------------
and performance of this Agreement and the documents or instruments required
under this Agreement will not violate any provision of any existing law or
regulation binding on the Manager, or any order, judgment, award or decree of
any court, arbitrator or governmental authority binding on the Manager, or the
governing instruments of, or any securities issued by, the Manager or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Manager is a party or by which the Manager or any of
its assets may be bound, the violation of which would have a material adverse
effect on the business operations, assets, or financial condition of the Manager
and its subsidiaries, taken as a whole, and will not result in, or require, the
creation or imposition of any lien on any of its property, assets or revenues
pursuant to the provisions of any such mortgage indenture, lease, contract or
other agreement, instrument or undertaking.
16. Notices. Unless expressly provided otherwise in this Agreement, all
-------
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when (1) delivered by hand, (2) otherwise delivered against
receipt therefor, or (3) upon actual receipt of registered or certified mail,
postage prepaid, return receipt requested. The parties may deliver to each
other notice by electronically transmitted facsimile copies, provided that
21
<PAGE>
such facsimile notice is followed within 24 hours by any type of notice
otherwise provided for in this Section 16. Any notice shall be duly addressed
to the parties as follows:
(a) If to the Company:
865 South Figueroa Street
Suite 1800
Los Angeles, California 90017
Attn: Daniel K. Osborne
Telecopy: (213) 488-3366
with a copy given in the manner prescribed above, to:
(b) If to the Manager:
865 South Figueroa Street
Suite 1800
Los Angeles, California 90017
Attn: Michael E. Cahill
Telecopy: (213) 244-0705
with a copy given in the manner prescribed above, to:
865 South Figueroa Street
Suite 1800
Los Angeles, California 90017
Attn: Michael E. Cahill, Esq.
Telecopy: (213) 244-0780
Any party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this Section 16 for the giving of notice.
17. Binding Nature of Agreement; Successors and Assigns. This Agreement
---------------------------------------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns as provided
in this Agreement.
18. Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof. This Agreement may not be modified
or amended other than by an agreement in writing.
22
<PAGE>
19. Controlling Law. This Agreement and all questions relating to its
---------------
validity, interpretation, performance and enforcement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
California, notwithstanding any California or other conflict of law provisions
to the contrary.
20. Indulgences, Not Waivers. Neither the failure nor any delay on the
------------------------
part of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any right, remedy, power or privilege, nor shall any
waiver of any right, remedy, power or privilege with respect to any occurrence
be construed as a waiver of such right, remedy, power or privilege with respect
to any other occurrence. No waiver shall be effective unless it is in writing
and is signed by the party asserted to have granted such waiver.
21. Titles Not to Affect Interpretation. The titles of paragraphs and
-----------------------------------
subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
22. Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
23. Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
24. Gender. Words used herein regardless of the number and gender
------
specifically used shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
25. Attorneys' Fees. Should any action or other proceeding be necessary
---------------
to enforce any of the provisions of this Agreement or the various transactions
contemplated hereby, the prevailing party will be entitled to recover its actual
reasonable attorneys' fees and expenses from the non-prevailing party.
26. Amendments. This Agreement may not be amended, modified or changed
----------
(in whole or in part), except by a formal, definitive written agreement
expressly referring to this
23
<PAGE>
Agreement, which agreement is executed by all of the parties. The parties
hereto expressly acknowledge that no consent or approval of the Company's
stockholders is required in connection with any amendment, modification or
change to this Agreement.
27. Authority. Each signatory to this Agreement warrants and represents
---------
that he is authorized to sign on behalf of and to bind the party on whose behalf
he, she or it is signing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the effective date.
"COMPANY"
APEX MORTGAGE CAPITAL, INC.,
a Maryland corporation
By:______________________________________
Its:______________________________
"MANAGER"
TCW INVESTMENT MANAGEMENT COMPANY,
a California corporation
By:______________________________________
Its:______________________________
24
<PAGE>
APEX MORTGAGE CAPITAL, INC.
1997 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. The Plan................................................................... 1
1.1 Purpose............................................................... 1
1.2 Administration and Authorization; Power and Procedure................. 1
1.2.1 Committee...................................................... 1
1.2.2 Plan Awards; Interpretation; Powers of Committee................ 1
1.2.3 Binding Determinations......................................... 2
1.2.4 Reliance on Experts............................................ 2
1.2.5 Delegation..................................................... 2
1.3 Participation......................................................... 3
1.4 Shares Available for Awards; Share Limits............................. 3
1.4.1 Shares Available............................................... 3
1.4.2 Share Limits................................................... 3
1.4.3 Limitation on Ownership........................................ 3
1.4.4 Share Reservation; Replenishment and Reissue of Unvested
Awards......................................................... 3
1.5 Grant of Awards....................................................... 4
1.6 Award Period.......................................................... 4
1.7 Limitations on Exercise and Vesting of Awards......................... 4
1.7.1 Provisions for Exercise........................................ 4
1.7.2 Procedure...................................................... 4
1.7.3 Fractional Shares/Minimum Issue................................ 4
1.8 Acceptance of Notes to Finance Exercise............................... 5
1.8.1 Principal...................................................... 5
1.8.2 Term........................................................... 5
1.8.3 Recourse; Security; Compliance................................. 5
1.8.4 Termination of Employment...................................... 5
1.9 No Transferability; Limited Exception to Transfer Restrictions........ 5
1.9.1 Limit On Exercise and Transfer................................. 5
1.9.2 Exceptions..................................................... 6
1.9.3 Further Exceptions to Limits On Transfer....................... 6
2. Options.................................................................... 6
2.1 Grants................................................................ 6
2.2 Option Price.......................................................... 7
2.2.1 Pricing Limits................................................. 7
2.2.2 Payment Provisions............................................. 7
2.3 Limitations on Grant and Terms of Incentive Stock Options............. 7
2.3.1 $100,000 Limit................................................. 7
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.3.2 Option Period.................................................. 8
2.3.3 Other Code Limits.............................................. 8
2.4 Limits on 10% Holders................................................. 8
2.5 Option Repricing/Cancellation and Regrant/Waiver of Restrictions...... 8
2.6 Effects of Termination of Employment; Termination of Subsidiary
Status; Discretionary Provisions...................................... 9
2.6.1 Options - Resignation or Dismissal............................. 9
2.6.2 Options - Death or Disability.................................. 9
2.6.3 Options - Retirement........................................... 9
2.6.4 Certain SARs................................................... 9
2.6.5 Other Awards................................................... 10
2.6.6 Committee Discretion........................................... 10
2.7 Options and Rights in Substitution for Stock Options Granted by
Other Corporations.................................................... 10
3. Stock Appreciation Rights
(Including Limited Stock Appreciation Rights)................... 10
3.1 Grants................................................................ 10
3.2 Exercise of Stock Appreciation Rights................................. 10
3.2.1 Exercisability................................................. 10
3.2.2 Effect on Available Shares..................................... 10
3.2.3 Stand-Alone SARs............................................... 11
3.2.4 Proportionate Reduction........................................ 11
3.3 Payment............................................................... 11
3.3.1 Amount......................................................... 11
3.3.2 Form of Payment................................................ 11
3.4 Limited Stock Appreciation Rights..................................... 12
4. Restricted Stock Awards.................................................... 12
4.1 Grants................................................................ 12
4.2 Restrictions.......................................................... 12
4.2.1 Pre-Vesting Restraints......................................... 12
4.2.2 Dividend and Voting Rights..................................... 12
4.2.3 Cash Payments.................................................. 13
4.3 Return to the Corporation............................................. 13
5. Performance Share Awards; Stock Units and Stock Bonuses.................... 13
5.1 Grants of Performance Share Awards.................................... 13
5.2 Special Performance-Based Share Awards................................ 14
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.2.1 Eligible Class................................................. 14
5.2.2 Maximum Award.................................................. 14
5.2.3 Committee Certification........................................ 14
5.2.4 Terms and Conditions of Awards................................. 14
5.2.5 Stock Payout Features.......................................... 15
5.2.6 Adjustments for Material Changes............................... 15
5.3 Grants of Stock Bonuses............................................... 15
5.4 Deferred Payments..................................................... 15
5.5 Cash Bonus Awards..................................................... 16
5.5.1 Performance Goals.............................................. 16
5.6 Alternative Payments.................................................. 16
6. Other Provisions........................................................... 16
6.1 Rights of Eligible Persons, Participants and Beneficiaries............ 16
6.1.1 Employment Status.............................................. 16
6.1.2 No Employment Contract......................................... 16
6.1.3 Plan Not Funded................................................ 16
6.2 Adjustments; Acceleration............................................. 17
6.2.1 Adjustments.................................................... 17
6.2.2 Acceleration of Awards Upon Change in Control.................. 18
6.2.3 Possible Early Termination of Accelerated Awards............... 19
6.2.4 Golden Parachute Limitations................................... 19
6.3 Effect of Termination of Employment................................... 19
6.4 Compliance with Laws.................................................. 19
6.4.1 General........................................................ 20
6.4.2 Restrictions on Transfer....................................... 20
6.5 Tax Withholding....................................................... 21
6.5.1 Provision for Tax Withholding Offset........................... 21
6.5.2 Tax Loans...................................................... 21
6.6 Plan Amendment, Termination and Suspension............................ 22
6.6.1 Board Authorization............................................ 22
6.6.2 Stockholder Approval........................................... 22
6.6.3 Amendments to Awards........................................... 22
6.6.4 Limitations on Amendments to Plan and Awards................... 22
6.7 Privileges of Stock Ownership......................................... 22
6.8 Effective Date of the Plan............................................ 22
6.9 Term of the Plan...................................................... 23
6.10 Governing Law/Construction/Severability............................... 23
6.10.1 Choice of Law.................................................. 23
6.10.2 Severability................................................... 23
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.10.3 Plan Construction.............................................. 23
6.11 Captions.............................................................. 24
6.12 Effect of Change of Subsidiary Status................................. 24
6.13 Non-Exclusivity of Plan............................................... 24
7. Definitions................................................................. 24
8. Non-Employee Director Options............................................... 29
8.1 Participation......................................................... 29
8.2 Option Grants......................................................... 29
8.2.1 Time of Initial Award.......................................... 29
8.2.2 Subsequent Awards.............................................. 30
8.3 Option Price.......................................................... 30
8.4 Option Period and Exercisability...................................... 30
8.5 Termination of Directorship........................................... 30
8.6 Adjustments; Accelerations; Terminations.............................. 30
8.7 Acceleration Upon a Change in Control Event........................... 31
</TABLE>
iv
<PAGE>
APEX MORTGAGE CAPITAL, INC.
---------------------------
1997 STOCK OPTION PLAN
----------------------
1. THE PLAN
--------
1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company
-------
and the interests of its stockholders by attracting, motivating, retaining
and rewarding directors, officers and employees and other eligible persons
associated with the management of the Company with awards and incentives
for high levels of performance and improving the financial performance of
the Company, by aligning the interests of the those persons and the
Company's stockholders, and by attracting, motivating and retaining
experienced and knowledgeable independent directors through the benefits
provided under Section 8. "CORPORATION" means Apex Mortgage Capital, Inc.
and "COMPANY" means the Corporation and its Subsidiaries, collectively.
These terms and other capitalized terms are defined in Section 7.
1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE.
-----------------------------------------------------
1.2.1 COMMITTEE. This Plan will be administered by and all Awards to
---------
Eligible Persons will be authorized by the Committee, other than the
Initial Awards which have been authorized by the Corporation's
stockholders in connection with approving this Plan. Action of the
Committee with respect to the administration of this Plan will be
taken pursuant to a majority vote or by written consent of its
members.
1.2.2 PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the
------------------------------------------------
express provisions of this Plan, the Committee will have the
authority to:
(a) determine the particular Eligible Persons who will receive
Awards;
(b) grant Awards to Eligible Persons, determine the price at which
securities will be offered or awarded and the amount of
securities to be offered or awarded to any of such Eligible
Persons, and determine the other specific terms and conditions
of such Awards consistent with the express limits of this Plan,
and establish the installments (if any) in which such Awards
will become exercisable or will vest, or determine that no
delayed exercisability or vesting is required, and establish
the events of termination or reversion of such Awards;
(c) approve the forms of Award Agreements (which need not be
identical either as to type of Award or among Participants);
<PAGE>
(d) construe and interpret this Plan and any agreements defining
the rights and obligations of the Company and Eligible Persons
under this Plan, further define the terms used in this Plan,
and prescribe, amend and rescind rules and regulations relating
to the administration of this Plan;
(e) cancel, modify, or waive the Corporation's rights with respect
to, or modify, discontinue, suspend, or terminate any or all
outstanding Awards held by Eligible Persons, subject to any
required consent under Section 6.6;
(f) accelerate or extend the exercisability or extend the term of
any or all such outstanding Awards within the maximum 10 year
term of Awards under Section 1.6; and
(g) make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable
for the administration of this Plan and the effectuation of its
purposes.
Notwithstanding the foregoing, the provisions of Section 8 relating
to Non-Employee Director Awards will be automatic and, to the
maximum extent possible, self-effectuating.
1.2.3 BINDING DETERMINATIONS. Any action taken by, or inaction of, the
----------------------
Corporation, any Subsidiary, the Board or the Committee relating or
pursuant to this Plan will be within the absolute discretion of that
entity or body and will be conclusive and binding upon all persons.
No member of the Board or Committee, or officer of the Corporation
or any Subsidiary, will be liable for any such action or inaction of
the entity or body, of another person or, except in circumstances
involving bad faith, of himself or herself. Subject only to
compliance with the express provisions hereof, the Board and
Committee may act in their absolute discretion in matters within
their authority related to this Plan.
1.2.4 RELIANCE ON EXPERTS. In making any determination or in taking or
-------------------
not taking any action under this Plan, the Committee or the Board,
as the case may be, may obtain and may rely upon the advice of
experts, including professional advisors to the Corporation. No
director, officer or agent of the Company will be liable for any
such action or determination taken or made or omitted in good faith.
1.2.5 DELEGATION. The Committee may delegate ministerial, non-
----------
discretionary functions to individuals who are officers or employees
of the Company.
2
<PAGE>
1.3 PARTICIPATION. Awards may be granted by the Committee only to those
-------------
persons that the Committee determines to be Eligible Persons. An Eligible
Person who has been granted an Award may, if otherwise eligible, be granted
additional Awards if the Committee so determines.
1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS.
-----------------------------------------
1.4.1 SHARES AVAILABLE. Subject to the provisions of Section 6.2, the
----------------
capital stock that may be delivered under this Plan will be shares
of the Corporation's authorized but unissued Common Stock and any
shares of its Common Stock held as treasury shares. The shares may
be delivered for any lawful consideration.
1.4.2 SHARE LIMITS. The maximum number of shares of Common Stock that may
------------
be delivered pursuant to Awards granted to Eligible Persons under
this Plan will not exceed 1,000,000 shares (the "SHARE LIMIT"). The
number of shares of Common Stock subject to Awards outstanding at
any time will not exceed the number of shares remaining available
for issuance under the Plan. The maximum number of shares subject to
those Options and Stock Appreciation Rights that are granted during
any calendar year to any one individual, subject to Section 1.4.3,
will be limited to 200,000 shares. Each of the foregoing numerical
limits is subject to adjustment as contemplated by this Section 1.4
and Section 6.2.
1.4.3 LIMITATION ON OWNERSHIP. No Awards will be granted under the Plan
-----------------------
to any person who, after the grant of such Award, would be deemed to
beneficially own more than 9.8% (in value or in number of shares,
whichever is more restrictive) of the outstanding shares of Common
Stock of the Corporation. For purposes of this Section 1.4.3, the
terms "ownership" is defined in accordance with the Real Estate
Investment Trust provisions of the Code, the constructive ownership
provisions of Section 544 of the Code (as modified by Section
856(1)(b) of the Code), and Rule 13d-3 promulgated under the
Exchange Act.
1.4.4 SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS. No
---------------------------------------------------------------
Award may be granted under this Plan unless, on the date of grant,
the sum of (a) the maximum number of shares issuable at any time
pursuant to such Award, plus (b) the number of shares that have
previously been issued pursuant to Awards granted under this Plan,
other than reacquired shares available for reissue consistent with
any applicable legal limitations, plus (c) the maximum number of
shares that may be issued at any time after such date of grant
pursuant to Awards that are outstanding on such date, does not
exceed the Share Limit. Shares that are subject to or underlie
Awards that expire or for any reason are
3
<PAGE>
canceled or terminated, are forfeited, fail to vest, or for any
other reason are not paid or delivered under this Plan, as well as
reacquired shares, will again, except to the extent prohibited by
law, be available for subsequent Awards under the Plan. Except as
limited by law, if an Award is or may be settled only in cash, such
Award need not be counted against any of the limits under this
Section 1.4.
1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the
---------------
Committee will determine the number of shares of Common Stock subject to
each Award, the price (if any) to be paid for the shares or the Award and,
in the case of performance share awards, in addition to matters addressed
in Section 1.2.2, the specific objectives, goals and performance criteria
(such as an increase in sales, market value, earnings or book value over a
base period, the years of service before vesting, the relevant job
classification or level of responsibility or other factors) that further
define the terms of the performance share award. Each Award will be
evidenced by an Award Agreement signed by the Corporation and, if required
by the Committee, by the Participant.
1.6 AWARD PERIOD. The Award Period of any Option, SAR, warrant or similar
------------
right shall expire and any other Award shall either vest or be forfeited
not more than 10 years after the date of grant; provided, however, that any
-------- -------
payment of cash or delivery of stock pursuant to an Award may be delayed
until a future date if specifically authorized by the Committee in writing.
1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS.
---------------------------------------------
1.7.1 PROVISIONS FOR EXERCISE. Unless the Committee otherwise expressly
-----------------------
provides, no Award will be exercisable or will vest until at least
six months after the initial Award Date, and once exercisable an
Award will remain exercisable until the expiration or earlier
termination of the Award.
1.7.2 PROCEDURE. Any exercisable Award will be deemed to be exercised
---------
when the Corporation receives written notice of such exercise from
the Participant, together with any required payment made in
accordance with Section 2.2.2 or 8.4, as the case may be, and any
other requirements of exercise, including any document required by
Section 6.4 are satisfied.
1.7.3 FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests will be
-------------------------------
disregarded, but may be accumulated. The Committee, however, may
determine in the case of Eligible Persons that cash, other
securities, or other property will be paid or transferred in lieu of
any fractional share interests. No fewer than 100 shares may be
purchased on exercise of any Award at one time unless the number
purchased is the total number at the time available for purchase
under the Award.
4
<PAGE>
1.8 ACCEPTANCE OF NOTES TO FINANCE EXERCISE. The Corporation, in its sole
---------------------------------------
discretion, may accept one or more notes from any Eligible Person in
connection with the exercise or receipt of any outstanding Award; but any
such note will be subject to the following terms and conditions:
1.8.1 PRINCIPAL. The principal of the note will not exceed the amount
---------
required to be paid to the Corporation upon the exercise or receipt
of one or more Awards under the Plan and the note will be delivered
directly to the Corporation in consideration of such exercise or
receipt.
1.8.2 TERM. The initial term of the note will be determined by the
----
Committee; but the term of the note, including extensions, will not
exceed a period of five years.
1.8.3 RECOURSE; SECURITY; COMPLIANCE. The note will provide for full
------------------------------
recourse to the Participant and will bear interest at a rate
determined by the Committee but not less than the interest rate
necessary to avoid the imputation of interest under the Code. If
required by the Committee or by applicable law, the note will be
secured by a pledge of any shares or rights financed thereby in
compliance with applicable law. The terms, repayment provisions, and
collateral release provisions of the note and the pledge securing
the note will conform with applicable rules and regulations of the
Federal Reserve Board as then in effect.
1.8.4 TERMINATION OF EMPLOYMENT. If the employment of the Participant
-------------------------
terminates, the unpaid principal balance of the note will become due
and payable on the 10th business day after such termination; but if
a sale of such shares would cause the Participant to incur liability
under Section 16(b) of the Exchange Act, the unpaid balance will
become due and payable on the 10th business day after the first day
on which a sale of such shares could have been made without
incurring such liability assuming for these purposes that there are
no other transactions (or deemed transactions) in securities of this
Corporation by the Participant after such termination.
1.9 NO TRANSFERABILITY; LIMITED EXCEPTION TO TRANSFER RESTRICTIONS.
--------------------------------------------------------------
1.9.1 LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly provided
------------------------------
in (or pursuant to) this Section 1.9, by applicable law and by the
Award Agreement, as the same may be amended, (a) all Awards are non-
transferable and will not be subject in any manner to sale,
transfer, anticipation, alienation, assignment, pledge, encumbrance
or charge, (b) Awards may be exercised only by the Participant, and
(c) amounts payable or shares issuable pursuant to an Award will be
delivered only to (or for the account of) the Participant.
5
<PAGE>
1.9.2 EXCEPTIONS. The Committee may permit Awards to be exercised by and
----------
paid only to certain persons or entities related to the Participant
pursuant to such conditions and procedures as the Committee may
establish. Any permitted transfer will be subject to the condition
that the Committee receive evidence satisfactory to it that the
transfer is being made to related persons for estate and/or tax
planning purposes and without consideration (other than nominal
consideration). Incentive Stock Options and Restricted Stock Awards,
however, will be subject to any and all additional transfer
restrictions under the Code.
1.9.3 FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. The exercise and transfer
----------------------------------------
restrictions in Section 1.9.1 will not apply to:
(a) transfers to the Corporation,
(b) the designation of a beneficiary to receive benefits if the
Participant dies or, if the Participant has died, transfers to
or exercise by the Participant's beneficiary, or, in the
absence of a validly designated beneficiary, transfers by will
or the laws of descent and distribution,
(c) transfers pursuant to a QDRO if approved or ratified by the
Committee,
(d) if the Participant has suffered a disability, permitted
transfers or exercises on behalf of the Participant by the
Participant's legal representative, or
(e) the authorization by the Committee of "cashless exercise"
procedures with third parties who provide financing for the
purpose of (or who otherwise facilitate) the exercise of Awards
consistent with applicable laws and the express authorization
of the Committee.
2. OPTIONS
-------
2.1 GRANTS. One or more Options may be granted under this Section to any
------
Eligible Person. Each Option granted will be designated by the Committee
in the applicable Award Agreement as either an Incentive Stock Option,
subject to Section 2.3, or a Non-Qualified Stock Option.
6
<PAGE>
2.2 OPTION PRICE.
------------
2.2.1 PRICING LIMITS. The purchase price per share of the Common Stock
--------------
covered by each Option will be not be less than 100% (110% in the
case of a Participant described in Section 2.4) of the Fair Market
Value of the Common Stock on the date of grant.
2.2.2 PAYMENT PROVISIONS. The purchase price of any shares purchased on
------------------
exercise of an Option granted under this Section will be paid in
full at the time of each purchase in one or a combination of the
following methods: (a) in cash or by electronic funds transfer; (b)
by certified or cashier's check payable to the order of the
Corporation; (c) if permitted by the Committee, by a promissory note
of the Participant consistent with the requirements of Sections 1.8
and 6.4; (d) by notice and third party payment in such manner as may
be authorized by the Committee; or (e) by the delivery of shares of
Common Stock of the Corporation already owned by the Participant,
but the Committee may in its absolute discretion limit the
Participant's ability to exercise an Award by delivering such
shares, and any shares delivered that were initially acquired upon
exercise of a stock option must have been owned by the Participant
at least six months as of the date of delivery. Shares of Common
Stock used to satisfy the exercise price of an Option will be valued
at their Fair Market Value on the date of exercise. Without limiting
the generality of the foregoing, the Committee may provide that the
Option can be exercised and payment made by delivering a properly
executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Corporation the amount of sale
proceeds necessary to pay the exercise price and, unless otherwise
prohibited by the Committee or applicable law, any applicable tax
withholding under Section 6.5. The Corporation will not be obligated
to deliver certificates for the shares unless and until it receives
full payment of the exercise price therefor and any related
withholding obligations have been satisfied.
2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS.
---------------------------------------------------------
2.3.1 $100,000 LIMIT. To the extent that the aggregate "FAIR MARKET
--------------
VALUE" of stock with respect to which incentive stock options first
become exercisable by a Participant in any calendar year exceeds
$100,000, taking into account both Common Stock subject to Incentive
Stock Options under this Plan and stock subject to incentive stock
options under all other plans of the Company or any parent
corporation, such options will be treated as Nonqualified Stock
Options. For this purpose, the "FAIR MARKET VALUE" of the stock
subject to options will be determined as of the date the options
were awarded. In reducing the number of options treated as incentive
stock options to meet the
7
<PAGE>
$100,000 limit, the most recently granted options will be reduced
first. To the extent a reduction of simultaneously granted options
is necessary to meet the $100,000 limit, the Committee may, in the
manner and to the extent permitted by law, designate which shares of
Common Stock are to be treated as shares acquired pursuant to the
exercise of an Incentive Stock Option.
2.3.2 OPTION PERIOD. Except as provided in Section 1.6, each Option and
-------------
all rights thereunder will expire no later than 10 years after the
Award Date.
2.3.3 OTHER CODE LIMITS. Incentive Stock Options may only be granted to
-----------------
Eligible Employees of the Corporation or a Subsidiary that satisfies
the eligibility requirements of the Code. There will be imposed in
any Award Agreement relating to Incentive Stock Options such other
terms and conditions as from time to time are required in order that
the Option be an "incentive stock option" as that term is defined in
Section 422 of the Code.
2.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to any
---------------------
person who, at the time the Option is granted, owns (or is deemed to own
under Section 424(d) of the Code) shares of outstanding Common Stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Corporation, unless the exercise price of such Option is at
least 110% of the Fair Market Value of the stock subject to the Option and
such Option by its terms is not exercisable after the expiration of five
years from the date such Option is granted.
2.5 OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. Subject
----------------------------------------------------------------
to Section 1.4 and Section 6.6 and the specific limitations on Awards
contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible Person
any adjustment in the exercise or purchase price, the vesting schedule, the
number of shares subject to, the restrictions upon or the term of, an Award
granted under this Section by cancellation of an outstanding Award and a
subsequent regranting of an Award, by amendment, by substitution of an
outstanding Award, by waiver or by other legally valid means. Such
amendment or other action may result among other changes in an exercise or
purchase price that is higher or lower than the exercise or purchase price
of the original or prior Award, provide for a greater or lesser number of
shares subject to the Award, or provide for a longer or shorter vesting or
exercise period.
8
<PAGE>
2.6 EFFECTS OF TERMINATION OF EMPLOYMENT; TERMINATION OF SUBSIDIARY STATUS;
-----------------------------------------------------------------------
DISCRETIONARY PROVISIONS.
------------------------
2.6.1 OPTIONS - RESIGNATION OR DISMISSAL. If the Participant's employment
----------------------------------
by (or other service specified in the Award Agreement to) the
Company or the Manager, as the case may be, terminates for any
reason (the date of such termination being referred to as the
"SEVERANCE DATE") other than Retirement, Total Disability or death,
or "FOR CAUSE" (as determined in the discretion of the Committee),
the Participant will have, unless otherwise provided in the Award
Agreement and subject to earlier termination pursuant to or as
contemplated by Section 1.6 or 6.2, three months after the Severance
Date to exercise any Option to the extent exercisable on the
Severance Date. In the case of a termination "for cause", the Option
will terminate on the Severance Date. The Option, to the extent not
exercisable on the Severance Date, will terminate in all cases,
unless the Award Agreement or the Committee otherwise provides.
2.6.2 OPTIONS - DEATH OR DISABILITY. If the Participant's employment by
-----------------------------
(or specified service to) the Company or the Manager, as the case
may be, terminates as a result of Total Disability or death, the
Participant, Participant's Personal Representative or the
Participant's Beneficiary, as the case may be, will have, unless
otherwise provided in the Award Agreement and subject to earlier
termination pursuant to or as contemplated by Section 1.6 or 6.2,
until 12 months after the Severance Date to exercise any Option to
the extent exercisable on the Severance Date. Any Option to the
extent not exercisable on the Severance Date will terminate.
2.6.3 OPTIONS - RETIREMENT. If the Participant's employment by (or
--------------------
specified service to) the Company or the Manager, as the case may
be, terminates as a result of Retirement, the Participant,
Participant's Personal Representative or the Participant's
Beneficiary, as the case may be, will have, unless otherwise
provided in the Award Agreement and subject to earlier termination
pursuant to or as contemplated by Section 1.6 or 6.2, until 12
months after the Severance Date to exercise any Nonqualified Stock
Option (three months after the Severance Date if an Incentive Stock
Option states it is it be retained) to the extent exercisable on the
Severance Date. The Option, to the extent not exercisable on the
Severance Date, will terminate.
2.6.4 CERTAIN SARS. Any SAR granted concurrently or in tandem with an
------------
Option will have the same post-Severance Date provisions and
exercisability periods as the Option to which it relates, unless the
Committee otherwise provides.
9
<PAGE>
2.6.5 OTHER AWARDS. The Committee will establish in respect of each other
------------
Award granted hereunder the Participant's rights and benefits (if
any) if the Participant's employment is terminated and in so doing
may make distinctions based upon the cause of termination and the
nature of the Award.
2.6.6 COMMITTEE DISCRETION. Notwithstanding the foregoing provisions of
--------------------
this Section 2.6, in the event of, or in anticipation of, a
termination of employment with the Company or the Manager, as the
case may be, for any reason, other than a discharge for cause, the
Committee, by express provisions in or by amendment to the Award
Agreement, may increase the portion of the Participant's Award
available to the Participant, or Participant's Beneficiary or
Personal Representative, as the case may be, and/or, subject to the
provisions of Section 1.6, extend the exercisability period, upon
such terms as the Committee deems appropriate.
2.7 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
---------------------------------------------------------------------
CORPORATIONS. Options and Stock Appreciation Rights may be granted to
------------
Eligible Persons under this Plan in substitution for employee stock options
granted by other entities to persons who are or who will become Eligible
Persons in respect of the Company, in connection with a distribution,
merger or reorganization by or with the granting entity or an affiliated
entity, or the acquisition by the Company, directly or indirectly, of all
or a substantial part of the stock or assets of the employing entity.
3. STOCK APPRECIATION RIGHTS
--------------------------
(INCLUDING LIMITED STOCK APPRECIATION RIGHTS)
---------------------------------------------
3.1 GRANTS. The Committee may grant to any Eligible Person Stock Appreciation
------
Rights either concurrently with the grant of another Award or in respect of
an outstanding Award, in whole or in part, or independently of any other
Award. Any Stock Appreciation Right granted in connection with an
Incentive Stock Option will contain such terms as may be required to comply
with the provisions of Section 422 of the Code and the regulations
promulgated thereunder, unless the holder otherwise agrees.
3.2 EXERCISE OF STOCK APPRECIATION RIGHTS.
-------------------------------------
3.2.1 EXERCISABILITY. Unless the Award Agreement or the Committee
--------------
otherwise provides, a Stock Appreciation Right related to another
Award will be exercisable at such time or times, and to the extent,
that the related Award will be exercisable.
3.2.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock Appreciation
--------------------------
Right is exercised, only the actual number of delivered shares of
10
<PAGE>
Common Stock will be charged against the maximum amount of Common
Stock that may be delivered pursuant to Awards under this Plan. The
number of shares subject to the Stock Appreciation Right and the
related Option of the Participant will, however, be reduced by the
number of underlying shares as to which the exercise related, unless
the Award Agreement otherwise expressly provides.
3.2.3 STAND-ALONE SARS. A Stock Appreciation Right granted independently
----------------
of any other Award will be exercisable pursuant to the terms of the
Award Agreement but in no event earlier than six months after the
Award Date, except in the case of death or Total Disability.
3.2.4 PROPORTIONATE REDUCTION If an SAR extends to less than all the
-----------------------
shares covered by the related Award and if a portion of the related
Award is thereafter exercised, the number of shares subject to the
unexercised SAR shall be reduced only if and to the extent that the
remaining number of shares covered by the related Award is less than
the remaining number of shares subject to such SAR.
3.3 PAYMENT.
-------
3.3.1 AMOUNT. Unless the Committee otherwise provides, upon exercise of a
------
Stock Appreciation Right and the attendant surrender of an
exercisable portion of any related Award, the Participant will be
entitled to receive subject to Section 6.5 payment of an amount
determined by multiplying
(a) the difference obtained by subtracting the exercise price
per share of Common Stock under the related Award (if
applicable) or the initial share value specified in the
Award from the Fair Market Value of a share of Common Stock
on the date of exercise of the Stock Appreciation Right, by
(b) the number of shares with respect to which the Stock
Appreciation Right has been exercised.
3.3.2 FORM OF PAYMENT. The Committee, in its sole discretion, will
---------------
determine the form in which payment will be made of the amount
determined under Section 3.3.1 above, either solely in cash, solely
in shares of Common Stock (valued at Fair Market Value on the date
of exercise of the Stock Appreciation Right), or partly in such
shares and partly in cash, provided that the Committee has
determined that such exercise and payment are consistent with
applicable law. If the Committee permits the Participant to elect to
receive cash or shares (or a combination thereof) upon exercise, the
election will be subject to such conditions as the Committee may
impose.
11
<PAGE>
3.4 LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant to any Eligible
---------------------------------
Person Stock Appreciation Rights exercisable only upon or in respect of a
change in control or any other specified event ("LIMITED SARS") and such
Limited SARs may relate to or operate in tandem or combination with or
substitution for Options, other SARs or other Awards (or any combination
thereof), and may be payable in cash or shares based on the spread between
the base price of the SAR and a price based upon or equal to the Fair
Market Value of the Shares during a specified period or at a specified time
before, after or including the date of such event.
4. RESTRICTED STOCK AWARDS
-----------------------
4.1 GRANTS. The Committee may grant one or more Restricted Stock Awards to any
------
Eligible Person. Each Restricted Stock Award Agreement will specify the
number of shares of Common Stock to be issued to the Participant, the date
of such issuance, the consideration for such shares (but not less than the
minimum lawful consideration under applicable state law) payable by the
Participant, the extent (if any) to which and the time (if ever) at which
the Participant will be entitled to dividends, voting and other rights in
respect of the shares prior to vesting, and the restrictions (which may be
based on performance criteria, passage of time or other factors or any
combination thereof) imposed on such shares and the conditions of release
or lapse of such restrictions. Such restrictions will not lapse earlier
than six months after the Award Date, except to the extent the Committee
may otherwise expressly provide. Stock certificates evidencing shares of
Restricted Stock pending the lapse of the restrictions ("RESTRICTED
SHARES") will bear a legend making appropriate reference to the
restrictions hereunder and will be held by the Corporation or by a third
party designated by the Committee until the restrictions on such shares
have lapsed and the shares have vested in accordance with the provisions of
the Award and Section 1.7. Upon issuance of the Restricted Stock Award,
the Participant may be required to provide such further assurance and
documents as the Committee may require to enforce the restrictions.
4.2 RESTRICTIONS.
------------
4.2.1 PRE-VESTING RESTRAINTS. Except as provided in Sections 4.1 and
----------------------
1.9, restricted shares comprising any Restricted Stock Award
may not be sold, assigned, transferred, pledged or otherwise
disposed of or encumbered, either voluntarily or involuntarily,
until the restrictions on such shares have lapsed and the
shares have become vested.
4.2.2 DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the
--------------------------
applicable Award Agreement, a Participant receiving a
Restricted
12
<PAGE>
Stock Award will be entitled to cash dividend and voting rights
for all shares issued even though they are not vested, but such
rights will terminate immediately as to any Restricted Shares
which cease to be eligible for vesting.
4.2.3 CASH PAYMENTS. If the Participant has been paid or received
-------------
cash (including any dividends) in connection with the
Restricted Stock Award, the Award Agreement will specify the
extent (if any) the which the cash must be returned (with or
without an earnings factor) as to any restricted shares that
cease to be eligible for vesting.
4.3 RETURN TO THE CORPORATION. Unless the Committee otherwise expressly
-------------------------
provides, Restricted Shares that remain subject to restrictions at the
time of termination of employment or are subject to other conditions
to vesting that have not been satisfied by the time specified in the
applicable Award Agreement will not vest and will be returned to the
Corporation in such manner and on such terms as set forth in the Award
Agreement or as the Committee otherwise expressly provides.
5. PERFORMANCE SHARE AWARDS; STOCK UNITS AND STOCK BONUSES
-------------------------------------------------------
5.1 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may grant
----------------------------------
Performance Share Awards to Eligible Employees based upon such factors
as the Committee deems relevant in light of the specific type and
terms of the award. An Award Agreement will specify the maximum
number of shares of Common Stock (if any) subject to the Performance
Share Award, the consideration (but not less than the minimum lawful
consideration) to be paid for any such shares as may be issuable to
the Participant, the duration of the Award and the conditions upon
which delivery of any shares or cash to the Participant will be based.
The amount of cash or shares or other property that may be deliverable
pursuant to such Award will be based upon the degree of attainment
over a specified period of not more than 10 years (a "PERFORMANCE
CYCLE") as may be established by the Committee of such measure(s) of
the performance of the Company (or any part thereof) or the
Participant as may be established by the Committee. The Committee may
provide for full or partial credit, prior to completion of such
performance cycle or the attainment of the performance achievement
specified in the Award, in the event of the Participant's death,
Retirement, or Total Disability, a Change in Control Event or in such
other circumstances as the Committee (consistent with Section
6.10.3(b), if applicable) may determine.
13
<PAGE>
5.2 SPECIAL PERFORMANCE-BASED SHARE AWARDS. Options or SAR's granted with
--------------------------------------
an exercise price not less than Fair Market Value at the applicable
date of grant for Section 162(m) purposes to Eligible Employees which
otherwise satisfy the conditions to deductibility under Section 162(m)
of the Code are deemed "Qualifying Awards". Without limiting the
generality of the foregoing, and in addition to Qualifying Awards
granted under other provisions of this Plan, other performance-based
awards within the meaning of Section 162(m) of the Code ("PERFORMANCE-
BASED AWARDS"), whether in the form of restricted stock, performance
stock, phantom stock or other rights, the vesting of which depends on
the performance of the Company on a consolidated, segment, subsidiary,
or division basis, with reference to revenue growth, net earnings
(before or after taxes or before or after taxes, interest,
depreciation, and/or amortization), cash flow, return on equity,
return on assets or return on net investment, or cost containment or
reduction, or any combination thereof (the "BUSINESS CRITERIA")
relative to preestablished performance goals, may be granted under
this Plan. To the extent so applicable, these terms are used as
applied under generally accepted accounting principles and in the
Company's financial reporting. The applicable business criterion or
criteria and the specific performance goals must be approved by the
Committee in advance of any applicable deadlines under the Code and
while the performance relating to such goals remains substantially
uncertain. The applicable performance measurement period may be not
less than one (except as provided in Section 1.6) nor more than 10
years. Other types of performance and non-performance awards may
also be granted under the other provisions of this Plan. The
following provisions relate to all Performance-Based Awards (other
than Qualifying Awards) granted under this Plan:
5.2.1 ELIGIBLE CLASS. The eligible class of persons for Awards under
--------------
this Section is executive officers of the Corporation.
5.2.2 MAXIMUM AWARD. Subject to Section 1.4.2, in no event will
-------------
grants in any calendar year to any one individual under this
Section 5.2 relate to more than 250,000 shares or, (if payable
solely in cash) a cash amount of more than $1,000,000.
5.2.3 COMMITTEE CERTIFICATION. To the extent required by Section
-----------------------
162(m), before any Performance-Based Award under this Section
5.2 is paid, the Committee must certify that the material terms
of the Performance-Based Award were satisfied.
5.2.4 TERMS AND CONDITIONS OF AWARDS. The Committee will have
------------------------------
discretion to determine the restrictions or other limitations
of the individual Awards under this Section 5.2 (including the
authority
14
<PAGE>
to reduce Awards, payouts or vesting or to pay no Awards, in
its sole discretion, if the Committee preserves such authority
at the time of grant by language to this effect in its
authorizing resolutions or otherwise).
5.2.5 STOCK PAYOUT FEATURES. In lieu of cash payment of an Award,
---------------------
the Committee may require or allow all or a portion of the
Award to be paid in the form of stock, Restricted Shares, an
Option, or another Award.
5.2.6 ADJUSTMENTS FOR MATERIAL CHANGES. Performance goals or other
---------------------------------
features of an Award under this Section 5.2 may provide that
they (a) shall be adjusted to reflect a change in corporate
capitalization, a corporate transaction (such as a
reorganization, combination, separation, or merger) or a
complete or partial corporate liquidation, or (b) shall be
calculated either without regard for or to reflect any change
in accounting policies or practices affecting the Company
and/or the business criteria or performance goals or targets,
or (c) shall be adjusted for any other circumstance or event,
or (d) any combination of (a) through (c), but only to the
extent in each case that such adjustment or determination in
respect of Performance-Based Awards would be consistent with
the requirements of Section 162(m) to qualify as performance-
based compensation.
5.3 GRANTS OF STOCK BONUSES. The Committee may grant a Stock Bonus to any
-----------------------
Eligible Person to reward exceptional or special services,
contributions or achievements in the manner and on such terms and
conditions (including any restrictions on such shares) as determined
from time to time by the Committee. The number of shares so awarded
will be determined by the Committee. The Award may be granted
independently or in lieu of a cash bonus.
5.4 DEFERRED PAYMENTS; STOCK UNITS. The Committee may authorize for the
------------------------------
benefit of any Eligible Person the deferral of any payment of cash or
shares that may otherwise become due or of cash otherwise payable
under this Plan or otherwise, in the form of stock units payable in
cash or shares or by other means, and may provide for accretion
thereof based upon such deferment, at the election or at the request
of the Participant, subject to any other applicable terms of this
Plan. Such deferral will be subject to such further conditions,
restrictions or requirements as the Committee may impose, subject to
any then vested rights of Participants.
15
<PAGE>
5.5 CASH BONUS AWARDS.
-----------------
5.5.1 PERFORMANCE GOALS. The Committee may establish a program of
-----------------
annual incentive awards that are payable in cash to Eligible
Persons based upon the extent to which performance goals are
met during the performance period. The performance goals may
depend upon the performance of the Company on a consolidated,
subsidiary division basis with reference to revenues, net
earnings (before or after interest, taxes, depreciation, or
amortization), cash flow, return on equity or on assets or net
investment, cost containment or reduction, or achievement of
strategic goals (or any combination of such factors). In
addition, the award may depend upon the Eligible Employee's
individual performance.
5.6 ALTERNATIVE PAYMENTS. In lieu of cash payment of an Award, the
--------------------
Committee may require or allow all or a portion of the Award to be
paid or credited in the form of Common Stock, Restricted Stock, an
Option or other Award.
6. OTHER PROVISIONS
----------------
6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.
----------------------------------------------------------
6.1.1 EMPLOYMENT STATUS. Status as an Eligible Person will not be
-----------------
construed as a commitment that any Award will be made under
this Plan to an Eligible Person or to Eligible Persons
generally.
6.1.2 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in
----------------------
any other documents related to this Plan or to any Award) will
confer upon any Eligible Person or other Participant any right
to continue in the employ or other service of the Company or
the Manager, as the case may be, or constitute any management
or other contract or agreement of employment or other service,
nor will interfere in any way with the right of the Company or
the Manager, as the case may be, to otherwise change a person's
compensation or other benefits or to terminate the employment
or service of such person, with or without cause. This Plan or
any related document will not, however, adversely affect any
independent contractual right of such person without the
Participant's consent.
6.1.3 PLAN NOT FUNDED. Awards payable under this Plan will be
---------------
payable in shares or from the general assets of the
Corporation, and (except as provided in Section 1.4.3) no
special or separate reserve, fund or deposit will be made to
assure payment of such
16
<PAGE>
Awards. No Participant, Beneficiary or other person will have
any right, title or interest in any fund or in any specific
asset (including shares of Common Stock) of the Company by
reason of any Award hereunder. Neither the provisions of this
Plan (or of any related documents), nor the creation or
adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan will create, or be construed to create,
a trust of any kind or a fiduciary relationship between the
Company and any Participant, Beneficiary or other person. To
the extent that a Participant, Beneficiary or other person
acquires a right to receive payment pursuant to any Award
hereunder, such right will be no greater than the right of any
unsecured general creditor of the Company.
6.2 ADJUSTMENTS; ACCELERATION.
-------------------------
6.2.1 ADJUSTMENTS. The following provisions will apply in the case
-----------
of (i) any extraordinary dividend or other extraordinary
distribution occurs in respect of the Common Stock (whether in
the form of cash, Common Stock, other securities, or other
property), (ii) any reclassification, recapitalization, stock
split (including a stock split in the form of a stock
dividend), or reverse stock split, (iii) any reorganization,
merger, combination, consolidation, split-up, spin-off,
combination, material repurchase, or exchange of Common Stock
or other securities of the Corporation, (iv) any similar,
unusual or extraordinary corporate transaction (or event in
respect of the Common Stock) or (v) a sale of substantially all
the assets of the Corporation as an entirety. In such event,
the Committee will, in such manner and to such extent (if any)
as it deems appropriate and equitable
(a) proportionately adjust any or all of (i) the number and
type of shares of Common Stock (or other securities) that
thereafter may be made the subject of Awards (including
the specific maximum and numbers of shares set forth
elsewhere in this Plan), (ii) the number, amount and type
of shares of Common Stock (or other securities or
property) subject to any or all outstanding Awards,(iii)
the grant, purchase, or exercise price of any or all
outstanding Awards, (iv) the securities, cash or other
property deliverable upon exercise of any outstanding
Awards, or (v) the performance standards appropriate to
any outstanding Awards, or
(b) in the case of an extraordinary dividend or other
distribution, recapitalization, reclassification, merger,
17
<PAGE>
reorganization, consolidation, combination, sale of
assets, split up, exchange, or spin off, make provision
for a cash payment or for the substitution or exchange of
any or all outstanding Awards or the cash, securities or
property deliverable to the holder of any or all
outstanding Awards based upon the distribution or
consideration payable to holders of the Common Stock of
the Corporation upon or in respect of such event.
(c) In each case, with respect to Awards of Incentive Stock
Options, no such adjustment will be made that would cause
the Plan to violate Section 424(a) of the Code or any
successor provisions without the written consent of
holders materially adversely affected thereby.
(d) In any of such events, the Committee may take such action
sufficiently prior to such event if necessary to permit
the Participant to realize the benefits intended to be
conveyed with respect to the underlying shares in the same
manner as is available to stockholders generally.
6.2.2 ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Unless prior to
---------------------------------------------
a Change in Control Event the Committee determines that, upon
its occurrence, benefits under any or all Awards will not
accelerate or determines that only certain or limited benefits
under any or all Awards will be accelerated and the extent to
which they will be accelerated, and/or establishes a different
time in respect of such Event for such acceleration, then upon
the occurrence of a Change in Control Event
(a) each Option and Stock Appreciation Right will become
immediately exercisable,
(b) Restricted Stock will immediately vest free of
restrictions, and
(c) each Performance Share Award will become payable to the
Participant.
However, in the case of a transaction intended to be accounted
for as a pooling of interests transaction, the Committee shall
have no discretion with respect to the foregoing acceleration
of Awards. The Committee may override the limitations on
acceleration in this Section 6.2.2 by express provision in the
Award Agreement and may accord any Eligible Person a right to
18
<PAGE>
refuse any acceleration, whether pursuant to the Award
Agreement or otherwise, in such circumstances as the Committee
may approve.
Any acceleration of Awards will comply with applicable legal
requirements and, if the circumstances require, may be deemed
by the Committee to occur an instant before the event.
6.2.3 POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option
------------------------------------------------
or other right to acquire Common Stock under this Plan (other
than under Section 8) has been fully accelerated as required or
permitted by Section 6.2.2 but is not exercised at or prior to
(a) a dissolution of the Corporation, or (b) an event described
in Section 6.2.1 that the Corporation does not survive, or (c)
the consummation of an event described in Section 6.1 involving
a Change of Control approved by the Board, the Option or right
will terminate, subject to any provision that has been
expressly made by the Committee through a plan of
reorganization approved by the Board or otherwise for the
survival, substitution, assumption, exchange or other
settlement of the Option or right.
6.2.4 GOLDEN PARACHUTE LIMITATIONS. Unless otherwise specified in an
----------------------------
Award Agreement or expressly approved by the Committee, no
Award will be accelerated under this Plan to an extent or in a
manner that would not be fully deductible by the Company for
federal income tax purposes because of Section 280G of the
Code, nor will any payment hereunder be accelerated if any
portion of such accelerated payment would not be deductible by
the Company because of Section 280G of the Code. If a holder
would be entitled to benefits or payments hereunder and under
any other plan or program that would constitute "parachute
payments" as defined in Section 280G of the Code, then the
holder may by written notice to the Company designate the order
in which such parachute payments will be reduced or modified so
that the Company is not denied federal income tax deductions
for any "parachute payments" because of Section 280G of the
Code.
6.3 EFFECT OF TERMINATION OF EMPLOYMENT. The Committee will establish in
-----------------------------------
respect of each Award granted to an Eligible Person the effect of a
termination of employment or service on the rights and benefits
thereunder and in so doing may make distinctions based upon the cause
of termination.
6.4 COMPLIANCE WITH LAWS.
--------------------
19
<PAGE>
6.4.1 GENERAL. This Plan, the granting, vesting and exercise of
-------
Awards under this Plan and the offer, issuance and delivery of
shares of Common Stock and/or the payment of money under this
Plan or under Awards granted hereunder are subject to
compliance with all applicable federal and state laws, rules
and regulations (including but not limited to state and federal
securities law, federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority
as may, in the opinion of counsel for the Corporation, be
necessary or advisable in connection therewith. Any securities
delivered under this Plan will be subject to such restrictions,
and to any restrictions the Committee may require to preserve a
pooling of interests under generally accepted accounting
principles, and the person acquiring such securities will, if
requested by the Corporation, provide such assurances and
representations to the Corporation as the Corporation may deem
necessary or desirable, to assure compliance with all
applicable legal requirements.
6.4.2 RESTRICTIONS ON TRANSFER. If the offer or sale of any shares
------------------------
of Common Stock under the Plan is not registered under the
Securities Act, but an exemption is available which requires an
investment representation or other representation, each
Participant will be required to represent that the shares of
Common Stock are being acquired for investment, and not with a
view to the sale or distribution thereof, and to make such
other representations as are deemed necessary or appropriate in
the opinion of the Committee and its counsel. Any determination
by the Company and its counsel in connection with any other the
matters set forth in this Section 6.4 will be conclusive and
binding on all persons. Stock certificates evidencing shares
acquired under the Plan pursuant to an unregistered transaction
will bear the following restrictive legend and such other
restrictive legends as are required or deemed advisable under
the provisions of any applicable law:
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). ANY TRANSFER OF SUCH SECURITIES WILL BE INVALID
UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT
AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE
ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH
TRANSFER TO COMPLY WITH THE ACT."
20
<PAGE>
If, in the opinion of the Company and its counsel, any
legend placed on a stock certificate representing shares
sold under the Plan is no longer required, the holder of
such certificate may exchange such certificate for a
certificate representing the same number of shares without
such legend.
6.5 TAX WITHHOLDING.
---------------
6.5.1 PROVISION FOR TAX WITHHOLDING OFFSET. Upon any exercise,
------------------------------------
vesting, or payment of any Award or upon the disposition of
shares of Common Stock acquired pursuant to the exercise of an
Incentive Stock Option prior to satisfaction of the holding
period requirements of Section 422 of the Code, the Company
shall have the right at its option to (a) require the
Participant (or Personal Representative or Beneficiary, as the
case may be) to pay or provide for payment of the amount of any
taxes which the Company may be required to withhold with
respect to such Award event or payment or (b) deduct from any
amount payable in cash the amount of any taxes which the
Company may be required to withhold with respect to such cash
payment. In any case where a tax is required to be withheld in
connection with the delivery of shares of Common Stock under
this Plan, the Committee may in its sole discretion (subject to
Section 6.4) grant (either at the time of the Award or
thereafter) to the Participant the right to elect, pursuant to
such rules and subject to such conditions as the Committee may
establish, to have the Corporation reduce the number of shares
to be delivered by (or otherwise reacquire) the appropriate
number of shares valued at their then Fair Market Value, to
satisfy such withholding obligation.
6.5.2 TAX LOANS. If so provided in the Award Agreement, the Company
---------
may, to the extent permitted by law, authorize a loan to an
Eligible Person in the amount of any taxes that the Company may
be required to withhold with respect to shares of Common Stock
received (or disposed of, as the case may be) pursuant to a
transaction described in Section 6.5.1. Such a loan will be for
a term, at a rate of interest and pursuant to such other terms
and conditions as the Company, under applicable law may
establish and such loan need not comply with the provisions of
Section 1.8.
21
<PAGE>
6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION.
------------------------------------------
6.6.1 BOARD AUTHORIZATION. The Board may, at any time, terminate or,
-------------------
from time to time, amend, modify or suspend this Plan, in whole
or in part. No Awards may be granted during any suspension of
this Plan or after termination of this Plan, but the Committee
will retain jurisdiction as to Awards then outstanding in
accordance with the terms of this Plan.
6.6.2 STOCKHOLDER APPROVAL. To the extent then required under
--------------------
Sections 422 and 424 of the Code or any other applicable law,
or deemed necessary or advisable by the Board, any amendment to
this Plan shall be subject to stockholder approval.
6.6.3 AMENDMENTS TO AWARDS. Without limiting any other express
--------------------
authority of the Committee under but subject to the express
limits of this Plan, the Committee by agreement or resolution
may waive conditions of or limitations on Awards to
Participants that the Committee in the prior exercise of its
discretion has imposed, without the consent of a Participant,
and may make other changes to the terms and conditions of
Awards that do not affect in any manner materially adverse to
the Participant, the Participant's rights and benefits under an
Award.
6.6.4 LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment,
--------------------------------------------
suspension or termination of this Plan or change of or
affecting any outstanding Award will, without written consent
of the Participant, affect in any manner materially adverse to
the Participant any rights or benefits of the Participant or
obligations of the Corporation under any Award granted under
this Plan prior to the effective date of such change. Changes
contemplated by Section 6.2 will not be deemed to constitute
changes or amendments for purposes of this Section 6.6.
6.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly
-----------------------------
authorized by the Committee or this Plan, a Participant will not be
entitled to any privilege of stock ownership as to any shares of
Common Stock not actually delivered to and held of record by the
Participant. No adjustment will be made for dividends or other rights
as a stockholder for which a record date is prior to such date of
delivery.
6.8 EFFECTIVE DATE OF THE PLAN. This Plan is effective as of ___________
--------------------------
__, 1997 (the "EFFECTIVE DATE"). The Plan was approved by the
Corporation's stockholders on __________ __, 1997.
22
<PAGE>
6.9 TERM OF THE PLAN. No Award may be granted under this Plan more than
----------------
ten years after the Effective Date (the "TERMINATION DATE"). Unless
otherwise expressly provided in this Plan or in an applicable Award
Agreement, any Award granted prior to the termination date may extend
beyond such date, and all authority of the Committee with respect to
Awards hereunder, including the authority to amend an Award, will
continue during any suspension of this Plan and in respect of Awards
outstanding on the termination date.
6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY.
---------------------------------------
6.10.1 CHOICE OF LAW. This Plan, the Awards, all documents
-------------
evidencing Awards and all other related documents will be
governed by, and construed in accordance with the laws of
the State of California.
6.10.2 SEVERABILITY. If a court of competent jurisdiction holds any
------------
provision invalid and unenforceable, the remaining
provisions of this Plan will continue in effect.
6.10.3 PLAN CONSTRUCTION.
-----------------
(A) RULE 16B-3. It is the intent of the Corporation that the
----------
Awards hereunder satisfy and be interpreted in a manner
that, in the case of Participants who are or may be subject
to Section 16 of the Exchange Act, satisfies the applicable
requirements of Rule 16b-3 so that such persons (unless they
otherwise agree) will be entitled to the benefits of Rule
16b-3 or other exemptive rules under Section 16 of the
Exchange Act in respect of those transactions and will not
be subjected to avoidable liability thereunder. If any
provision of this Plan or of any Award would otherwise
frustrate or conflict with the intent expressed above, that
provision to the extent reasonable will be interpreted as to
avoid such conflict. If the conflict remains
irreconcilable, the Committee may disregard the provision if
it concludes that to do so furthers the interest of the
Corporation, is fair to the affected Participant and is
consistent with the purposes of this Plan as to such persons
in the circumstances.
(B) SECTION 162(M). It is the further intent of the Company
--------------
that, to the extent the Corporation or Awards under this
Plan may be or become subject to Section 162(m), Options or
SARs with an exercise or base price not less than Fair
23
<PAGE>
Market Value on the date of grant and performance awards
under Section 5.2 of this Plan that are granted to or held
by a person subject to Section 162(m) of the Code will
qualify as performance-based compensation under Section
162(m) of the Code, and this Plan will be interpreted
consistent with such intent.
6.11 CAPTIONS. Captions and headings are given to the sections and
--------
subsections of this Plan solely as a convenience to facilitate
reference. Such headings will not be deemed in any way material or
relevant to the construction or interpretation of this Plan or any
provision thereof.
6.12 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan and
-------------------------------------
any Award hereunder, if an entity ceases to be a Subsidiary a
termination of employment and service will be deemed to have occurred
with respect to each Eligible Person in respect of such Subsidiary who
does not continue as an Eligible Person in respect of another entity
within the Company.
6.13 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan will limit or be
-----------------------
deemed to limit the authority of the Board or the Committee to grant
awards or authorize any other compensation, with or without reference
to the Common Stock, under any other plan or authority.
7. DEFINITIONS
-----------
"AWARD" means an award of any Option, Stock Appreciation Right, Restricted
Stock, Stock Bonus, performance share award, stock unit, dividend equivalent or
deferred payment right or other right or security that would constitute a
"derivative security" under Rule 16a-1(c) of the Exchange Act, or any
combination thereof, whether alternative or cumulative, authorized by and
granted under this Plan.
"AWARD AGREEMENT" means any writing setting forth the terms of an Award that has
been authorized by the Committee.
"AWARD DATE" means the date upon which the Committee took the action granting an
Award or such later date as the Committee designates as the Award Date at
the time of the Award or, in the case of Awards under Section 8, the applicable
dates set forth therein.
"AWARD PERIOD" means the period beginning on an Award Date and ending on the
expiration date of such Award.
24
<PAGE>
"BENEFICIARY" means the person, persons, trust or trusts designated by a
Participant or, in the absence of a designation, entitled by will or the laws of
descent and distribution, to receive the benefits specified in the Award
Agreement and under this Plan if the Participant dies, and means the
Participant's executor or administrator if no other Beneficiary is designated
and able to act under the circumstances.
"BOARD" means the Board of Directors of the Corporation.
"CHANGE IN CONTROL EVENT" means any of the following:
(a) Approval by the stockholders of the Corporation of the dissolution or
liquidation of the Corporation;
(b) Approval by the stockholders of the Corporation of an agreement to
merge or consolidate, or otherwise reorganize, with or into one or
more entities that are not Subsidiaries or other affiliates, as a
result of which less than 50% of the outstanding voting securities of
the surviving or resulting entity immediately after the reorganization
are, or will be, owned, directly or indirectly, by stockholders of the
Corporation immediately before such reorganization (assuming for
purposes of such determination that there is no change in the record
ownership of the Corporation's securities from the record date for
such approval until such reorganization and that such record owners
hold no securities of the other parties to such reorganization), but
including in such determination any securities of the other parties to
such reorganization held by affiliates of the Corporation);
(c) Approval by the stockholders of the Corporation of the sale of
substantially all of the Corporation's business and/or assets as an
entity to a person or entity that is not a Subsidiary or other
affiliate; or;
(d) Any "PERSON" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act but excluding any person described in and satisfying the
conditions of Rule 13d-1(b)(1) thereunder) becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing more than
50% of the combined voting power of the Corporation's then outstanding
securities entitled to then vote generally in the election of
directors of the Corporation; or
(e) During any period not longer than two consecutive years, individuals
who at the beginning of such period constituted the Board cease to
constitute at least a majority thereof, unless the election, or the
nomination for election by the Corporation's stockholders, of each new
Board member was approved by a vote of at least three-fourths of the
25
<PAGE>
Board members then still in office who were Board members at the
beginning of such period (including for these purposes, new members
whose election or nomination was so approved).
"CODE" means the Internal Revenue Code of 1986, as amended from time to time.
"COMMISSION" means the Securities and Exchange Commission.
"COMMITTEE" means one or more committees appointed by the Board to administer
this Plan, each of which will be comprised of two or more directors meeting such
criteria as the Board may establish from time to time in order to satisfy any
applicable legal or regulatory requirements.
"COMMON STOCK" means the Common Stock of the Corporation and such other
securities or property as may become the subject of Awards, or become subject to
Awards, pursuant to an adjustment made under Section 6.2 of this Plan.
"COMPANY" means, collectively, the Corporation and its Subsidiaries.
"CORPORATION" means Apex Mortgage Capital, Inc., a Maryland corporation, and its
successors.
"ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or employee of
the Company.
"ELIGIBLE PERSON" means an Eligible Employee, or any Other Eligible Person, as
determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time
to time.
"FAIR MARKET VALUE" on any date means (a) if the stock is listed or admitted to
trade on a national securities exchange, the closing price of the stock on the
Composite Tape, as published in the Western Edition of The Wall Street Journal,
of the principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (b) if the
stock is not listed or admitted to trade on a national securities exchange, the
last price for the stock on such date, as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market
Reporting System or a similar organization if the NASD is no longer reporting
such information; (c) if the stock is not listed or admitted to trade on a
national securities exchange and is not reported on the National Market
Reporting System, the mean between the bid and asked price for the stock on such
date, as furnished by the NASD or a similar organization; or (d) if the stock is
not listed or
26
<PAGE>
admitted to trade on a national securities exchange, is not reported on the
National Market Reporting System and if bid and asked prices for the stock are
not furnished by the NASD or a similar organization, the value as established by
the Committee at such time for purposes of this Plan.
"INCENTIVE STOCK OPTION" means an Option that is designated and intended as an
incentive stock option within the meaning of Section 422 of the Code, the award
of that contains such provisions (including but not limited to the receipt of
stockholder approval of this Plan, if the award is made prior to such approval)
and is made under such circumstances and to such persons as may be necessary to
comply with that section.
"INITIAL AWARDS" means the Options granted immediately prior to the
effectiveness of the registration statement relating to the Corporation's
initial public offering, which Options are granted to officers and employees of
the Manager and which are exercisable for an aggregate of 300,000 shares of
Common Stock.
"MANAGER" means TCW Investment Management Company.
"NONQUALIFIED STOCK OPTION" means an Option that is designated as a Nonqualified
Stock Option and will include any Option intended as an Incentive Stock Option
that fails to meet the applicable legal requirements thereof. Any Option
granted hereunder that is not designated as an incentive stock option will be
deemed to be designated a nonqualified stock option under this Plan and not an
incentive stock option under the Code.
"NON-EMPLOYEE DIRECTOR" means a member of the Board of Directors of the
Corporation who is not an officer or employee of the Company. For purposes of
this Plan, the Chairman of the Board will be deemed an officer of the Company.
"OPTION" means an option to purchase Common Stock granted under this Plan. The
Committee will designate any Option granted to an Eligible Person as a
Nonqualified Stock Option or an Incentive Stock Option.
"OTHER ELIGIBLE PERSON" means any Non-Employee Director, the Manager, any
director, officer or employee of the Manager, or any other individual consultant
or advisor who renders or has rendered bona fide services (other than services
---- ----
in connection with the offering or sale of securities of the Company in a
capital raising transaction) to the Company. If the Corporation's officers and
directors are or become subject to Section 16 of the Exchange Act, a Non-
Employee Director will not thereafter be selected as an Other Eligible Person.
A non-employee providing bona fide services to the Company may only be selected
---- ----
as an Other Eligible Person if such person's participation in this Plan would
not adversely affect (a) the Corporation's eligibility to use Form S-8 or Form
S-3 to register under the Securities Act the offering of shares issuable under
this Plan by the Company or (b) the Corporation's compliance with any
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other applicable laws; provided, however, in the case of clause (a) above, such
-------- -------
person may be selected as an Other Eligible Person if the Committee determines
that the offering and issuance of shares to such person in the circumstances
satisfies the requirements of any applicable exemption from registration under
federal and state securities laws and regulations.
"PARTICIPANT" means an Eligible Person who has been granted an Award under this
Plan and a Non-Employee Director who has been received an Award under Section 8
of this Plan.
"PERFORMANCE SHARE AWARD" means an Award of a right to receive shares of Common
Stock under Section 5.1, or to receive shares of Common Stock or other
compensation (including cash) under Section 5.2, the issuance or payment of that
is contingent upon, among other conditions, the attainment of performance
objectives specified by the Committee.
"PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability
or incompetence of a Participant, has acquired on behalf of the Participant, by
legal proceeding or otherwise, the power to exercise the rights or receive
benefits under this Plan by virtue of having become the legal representative of
the Participant.
"PLAN" means this Apex Mortgage Capital, Inc. 1997 Stock Option Plan, as amended
from time to time.
"QDRO" means a qualified domestic relations order.
"RESTRICTED SHARES" or "RESTRICTED STOCK" means shares of Common Stock awarded
to a Participant under this Plan, subject to payment of such consideration, if
any, and such conditions on vesting (which may include, among others, the
passage of time, specified performance objectives or other factors) and such
transfer and other restrictions as are established in or pursuant to this Plan
and the related Award Agreement, for so long as such shares remain unvested
under the terms of the applicable Award Agreement.
"RETIREMENT" means retirement with the consent of the Company or the Manager, as
the case may be, or, from active service as an employee or officer of the
Company or the Manager, as the case may be, on or after attaining age 55 with
ten or more years of service or age 65.
"RULE 16B-3" means Rule 16b-3 as promulgated by the Commission pursuant to the
Exchange Act, as amended from time to time.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to time.
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"STOCK APPRECIATION RIGHT" OR "SAR" means a right authorized under this Plan to
receive a number of shares of Common Stock or an amount of cash, or a
combination of shares and cash, the aggregate amount or value of which is
determined by reference to a change in the Fair Market Value of the Common
Stock.
"STOCK BONUS" means an Award of shares of Common Stock granted under this Plan
for no consideration other than past services and without restriction other than
such transfer or other restrictions as the Committee may deem advisable to
assure compliance with law.
"STOCK UNIT" means a bookkeeping entry which serves a unit of measurement
relative to a share of Common Stock for purposes of determining the payment of a
deferred benefit or right under the Plan.
"SUBSIDIARY" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Corporation.
"TOTAL DISABILITY" means a disability where Participant is unable to effectively
engage in the material activities required for Participant's position with the
Company or the Manager, as the case may be, by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or that has lasted or can be expected to last for a period of 90
consecutive days or for shorter periods aggregating 180 days in any consecutive
12 month period.
8. NON-EMPLOYEE DIRECTOR OPTIONS
8.1 PARTICIPATION. Awards under this Section 8 will be made only to Non-
-------------
Employee Directors and will be evidenced by Award Agreements in the
form adopted by the Committee.
8.2 OPTION GRANTS.
-------------
8.2.1 TIME OF INITIAL AWARD. After approval of this Plan by the
---------------------
stockholders of the Corporation, and upon the closing of the
Corporation's initial public offering, each person who is then
a Non-Employee Director will automatically be granted (without
any action by the Board or Committee) a Non-qualified Stock
Option (the Award Date of which will be the date of the closing
of such initial public offering) to purchase 25,000 shares of
Common Stock at the price that the Corporations Common Stock is
offered in such intitial public offering.
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8.2.2 SUBSEQUENT AWARDS. If any person who is not then an officer or
-----------------
employee of the Company becomes a director of the Corporation,
such person will automatically be granted (without any action
by the Board or Committee) a Non-qualified Stock Option (the
Award Date of which will be the date such person takes office)
to purchase 25,000 shares of Common Stock.
8.3 OPTION PRICE. The purchase price per share of the Common Stock
------------
covered by each Option granted pursuant to Section 8.2.2 will be 100%
of the Fair Market Value of the Common Stock on the Award Date. The
exercise price of any Option granted under this Section will be paid
in full at the time of each purchase in cash or by check or in shares
of Common Stock valued at the Fair Market Value on the date of
exercise of the Option, or partly in such shares and partly in cash,
but any such shares used in payment must be owned by the Participant
at least six months prior to the date of exercise.
8.4 OPTION PERIOD AND EXERCISABILITY. Each Option granted under this
--------------------------------
Section 8 and all rights or obligations thereunder will expire on the
day before the 10th anniversary of the Award Date and will be subject
to earlier termination as provided below. Each Option granted under
Section 8.2 will become exercisable on the first anniversary of the
Award Date.
8.5 TERMINATION OF DIRECTORSHIP. If a Non-Employee Director's services as
---------------------------
a member of the Board of Directors terminate by reason of death,
Disability or Retirement, an Option granted pursuant to this Section 8
held by such Participant will immediately become and will remain
exercisable for nine months after the date of such termination or
until the expiration of the stated term of such Option, whichever
first occurs. If a Non-Employee Director's services as a member of
the Board of Directors terminate for any other reason, any portion of
an Option granted pursuant to this Section that is not then
exercisable will terminate and any portion of such Option that is then
exercisable may be exercised for six months after the date of such
termination or until the expiration of the stated term whichever first
occurs.
8.6 ADJUSTMENTS; ACCELERATIONS; TERMINATIONS. Options granted under this
----------------------------------------
Section 8 will be subject to adjustments, accelerations and
terminations as provided in Section 6.2, but only to the extent that
in the case of a Change in Control Event such effect and any Board or
Committee action in respect thereof is effected pursuant to the terms
of a reorganization agreement approved by stockholders of the
Corporation or is otherwise consistent with the effect on Options held
by persons other than executive officers or directors of the
Corporation (or, if there are none,
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consistent in respect of the underlying shares with the effect on
stockholders generally).
8.7 ACCELERATION UPON A CHANGE IN CONTROL EVENT. Upon the occurrence of a
-------------------------------------------
Change in Control Event and acceleration under Section 6.2.2, each
Option granted under Section 8.2 hereof will become immediately
exercisable in full. To the extent that any Option granted under this
Section 8 is not exercised prior to (a) a dissolution of the
Corporation or (b) a merger or other corporate event that the
Corporation does not survive, and no provision is (or consistent with
the provisions of this Plan can be) made for the assumption,
conversion, substitution or exchange of the Option, the Option will
terminate upon the occurrence of such event.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 3 to Registration
Statement No. 333-36069 of Apex Mortgage Capital, Inc. on Form S-11 of our
report dated September 16, 1997, appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Los Angeles, California
November 20, 1997
<PAGE>
EXHIBIT 99.1
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Apex Mortgage Capital, Inc., a
Maryland corporation (the "Company"), upon completion of its initial public
offering of Common Stock. I further consent to being named as a future
director of the Company in the Company's Registration Statement on Form S-11
to be filed with the Securities and Exchange Commission on or about November
20, 1997.
November 20, 1997 John A. Gavin
Dated:_______________________________ /s/__________________________________
John A. Gavin
<PAGE>
EXHIBIT 99.1
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Apex Mortgage Capital, Inc., a
Maryland corporation (the "Company"), upon completion of its initial public
offering of Common Stock. I further consent to being named as a future director
of the Company in the Company's Registration Statement on Form S-11 to be filed
with the Securities and Exchange Commission on or about November 20, 1997.
November 20, 1997 Peter G. Allen
Dated:_______________________________ /s/__________________________________
Peter G. Allen
