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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
- --- 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER: 001-13637
APEX MORTGAGE CAPITAL, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 95-4650863
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
865 SOUTH FIGUEROA STREET
LOS ANGELES, CALIFORNIA 90017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 244-0440
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE WHICH REGISTERED
Common Stock ($.01 par value) New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 19, 1999, the aggregate market value of the voting stock held by
non-affiliates was $64,872,147 based on the closing price of the Common Stock
on the New York Stock Exchange.
Number of shares of Common Stock outstanding at March 19, 1999: 5,753,000
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days from December 31, 1998, are
incorporated by reference into Part III.
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SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CERTAIN INFORMATION CONTAINED IN THIS REPORT CONSTITUTES "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. 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 IS INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS.
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APEX MORTGAGE CAPITAL, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 34
ITEM 11. EXECUTIVE COMPENSATION 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 35
GLOSSARY 36
</TABLE>
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CERTAIN CAPITALIZED AND OTHER TERMS USED HEREIN SHALL HAVE THE MEANINGS
ASSIGNED TO THEM IN THE GLOSSARY AT THE END OF THIS REPORT.
PART I
ITEM 1. BUSINESS
GENERAL
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, single-family real estate adjustable and fixed rate
Mortgage Related Assets. The Company commenced operations on December 9, 1997
following the initial public offering of the Company's Common Stock. 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.
The Company uses its equity capital and borrowed funds to seek to
generate income based on the difference between the yield on its Mortgage
Related Assets and the cost of its borrowings. The Company has elected 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.
The day-to-day operations of the Company are managed by an external
management company, TCW Investment Management Company (the "Manager"),
subject to the direction and oversight of the Company's Board of Directors. A
majority of the Board of Directors are 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 are selected
members of the TCW Group's Mortgage-Backed Securities Group (the "MBS
Group"), all of whom have over eleven years of experience in raising and
managing mortgage capital. The Company has elected to be externally managed
by the Manager to take advantage of the existing operational systems,
expertise and economies of scale associated with the Manager's current
business operations, among other reasons. The Manager's key officers have
experience in raising and managing mortgage capital, mortgage finance and the
purchase and administration of Mortgage Related Assets.
RECENT EVENTS
CHANGES IN INVESTMENT AND INTEREST RATE RISK MANAGEMENT POLICIES. In May
1998, the Company's Board of Directors approved a change to the Company's
investment policy permitting the Company to invest in either adjustable-rate
or fixed-rate mortgage securities. Prior to the modification, the Company's
investment policy stated that the Company would invest primarily in
adjustable-rate mortgage securities. At the same, the Board of Directors
refined the interest rate risk management policy to replace the requirement
that the weighted average time to reset on the Company's mortgage assets and
debts remain within ninety days to a duration based policy. The new policy
targets the difference between the weighted average duration of the Company's
mortgage assets and the related debt used for funding to one year or less,
taking into account all hedging transactions.
AMENDMENT TO 1997 STOCK OPTION PLAN. In December 1998, the Company's
Board of Directors approved certain amendments to the Company's 1997 Stock
Option Plan which permit the Board of Director's Compensation Committee, the
members of which are the Unaffiliated Directors, to make discretionary option
grants from time to time to the Unaffiliated Directors, subject to
ratification by the Board of Directors.
SHARE REPURCHASE PROGRAM. In September 1998, the Company's Board of
Directors renewed and expanded a program to repurchase up to 1,500,000 shares
of the Company's Common Stock. As of March 19, 1999, the Company had
repurchased 947,100 shares of its Common Stock pursuant to the program. The
average price per share repurchased was $11.16. An additional 552,900 shares
are currently authorized for potential repurchase in the future. The Company
may continue to repurchase shares in the future when market conditions
warrant. See "Item 5.- Market for Registrant's Common Equity and Related
Stockholder Matters" in this report.
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DIVIDEND DECLARATION. On March 18, 1999, the Company's Board of
Directors declared a dividend distribution of $0.38 per share. The dividend
is payable on April 9, 1999, to shareholders of record on March 31, 1998.
REPORTING PERIOD. Unless otherwise noted, this report describes the
Company's operations and developments through the date hereof. Information
given for the year ended December 31, 1997 represents the Company's initial
twenty two days of operations which the reader should bear in mind when
making comparisons to 1998 data.
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 adjustable and fixed rate Mortgage Related
Assets;
- - manage the credit risk of its Mortgage Related Assets through, among other
activities (i) carefully selecting Mortgage Related Assets to be acquired,
(ii) complying with the Company's investment policy, (iii) actively
monitoring the ongoing credit quality and servicing of its Mortgage Related
Assets, and (iv) maintaining appropriate capital levels and allowances for
possible credit losses;
- - finance purchases of Mortgage Related Assets with the net proceeds of
equity offerings and, to the extent permitted by the Company's 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 in accordance with its interest rate risk
management policy;
- - utilize interest rate caps, swaps and similar financial instruments to
mitigate interest rate risks; and
- - seek to minimize prepayment risk primarily by structuring a diversified
portfolio with a variety of prepayment characteristics.
There can be no assurance that the Company will be able to generate
competitive earnings and dividends while holding primarily High Quality Mortgage
Related Assets and maintaining a disciplined risk-control profile.
The Company may attempt to increase the return to stockholders over time
by: (i) raising additional capital in order to increase its ability to invest
in additional Mortgage Related Assets; (ii) lowering its effective borrowing
costs through 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 issuing
uncollateralized subordinated debt and other forms of capital.
MANAGEMENT POLICIES AND PROGRAMS
The Company is a financial company that uses its equity capital and
borrowed funds to seek to generate net income based on the difference between
the interest income on its assets and the cost of its borrowings. The Company
has elected to be taxed as a REIT under the Code. The Company intends to
operate in accordance with its operating policies as approved by the
Company's Board of Directors at least annually.
The Company has established the following four primary operating
policies to implement its business strategy of acquiring assets consisting
primarily of United States agency and other high rated single-family real
estate mortgage securities and mortgage loans in order to generate dividend
yields that provide a competitive rate of return for its stockholders. These
policies supercede the Management Policies and Programs stated in the
Company's prospectus dated December 3, 1997, Form 10-K for its fiscal year
ended December 31, 1997, and Forms 10-Q for its quarters ended March 31, June
30 and September 30, 1998.
- - Investment Policy
- - Leverage Policy
- - Interest Rate Risk Management Policy
- - REIT Compliance Policy
Compliance with the policy guidelines shall be determined at the time of
purchase of the Mortgage Related Assets (based on the most recent valuation
used by the Company) and will not be affected by events subsequent to such
purchase. Such events include, without limitation, changes in
characterization, value or rating of any specific Mortgage Related Assets or
economic conditions or other events generally affecting any Mortgage Related
Assets of the type held by the Company.
INVESTMENT POLICY
The Company intends to acquire investments that it believes will
maximize returns on capital invested, after considering (i) the amount and
nature of the anticipated returns from the investment, (ii) the Company's
ability to pledge the investment to secure collateralized borrowings, and
(iii) the costs associated with financing, hedging, managing, securitizing
and reserving for such investments.
The Company generally expects to primarily invest in Mortgage Related
Assets that may include Short-Term Investments, Mortgage-Backed Securities,
High Credit Quality Mortgage Loans, Mortgage Derivative Securities and Other
Investments.
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The Company's investment policy is intended to provide guidelines for the
acquisition of its investments. Specifically, the investment policy states that
the Company intends to acquire a portfolio of investments that can be segregated
into specific categories. Each category and its respective investment
limitations are as follows:
50% CATEGORY
At least 50% of the Company's total assets are expected to consist of
(i) Short-Term Investments, (ii) Mortgage-Backed Securities that are either
issued or guaranteed by an agency of the U.S. government, (iii)
Mortgage-Backed Securities that are rated AAA by at least one nationally
recognized rating agency or (iv) High Credit Quality Mortgage Loans that are
funded with Committed Secured Borrowings.
75% CATEGORY
At least 75% of the Company's total assets are expected to consist of
investments that qualify for the 50% Category or other Mortgage-Backed
Securities that have received an investment grade rating by at least one
nationally recognized rating agency.
90% CATEGORY
At least 90% of the Company's total assets are expected to consist of
investments that qualify for the 75% Category or High Credit Quality Mortgage
Loans that are not funded by Committed Secured Borrowings.
10% CATEGORY
Not more than 10% of the Company's total assets are expected to consist
of (i) Mortgage-Backed Securities rated below investment grade, (ii) Mortgage
Derivative Securities or (iii) Other Investments.
LEVERAGE POLICY
The Company generally anticipates utilizing leverage to increase returns
to its shareholders. 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 leverage policy to control the type
and amount of leverage used to fund the acquisition of its Mortgage Related
Assets. The Company's leverage policy is intended to provide guidelines for
utilizing secured borrowings in the form of Uncommitted Secured Borrowings
and Committed Secured Borrowings.
UNCOMMITTED SECURED BORROWINGS
The Company expects a substantial portion of its borrowings may consist
of Uncommitted Secured Borrowings including reverse repurchase agreements,
lines of credit, Dollar-Roll Agreements, and other financing transactions.
Such funding sources generally do not commit the lender to continue to
provide financing to the Company. The Company intends to limit the amount of
Uncommitted Secured Borrowings to 92% of its total assets, less any assets
that are funded with Committed Secured Borrowings, plus the market value of
any related hedging transactions. If the amount of such borrowings exceeds
92%, the Manager will be required to submit to the Company's Board of
Directors a plan designed to bring the total amount of Uncommitted Secured
Borrowings below the 92% limitation. 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 value of the Company's total assets. The Company anticipates that
it will only enter into repurchase agreements and other financing
transactions with counter-parties rated investment grade by a Rating Agency.
COMMITTED SECURED BORROWINGS
The Company's borrowings may consist of Committed Secured Borrowings,
including the issuance of CMOs, structured commercial paper programs, secured
term notes and other financing transactions. Such funding sources generally
commit the lender to provide financing to the Company for a specified period
of time or to provide financing to the Company to fund specific assets until
they mature. The Company intends to limit the amount of Committed Secured
Borrowings to 97% of the assets funded with such borrowings at the time any
corresponding transaction is entered into.
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INTEREST RATE RISK MANAGEMENT POLICY
The Company has established an interest rate risk management policy that
is intended to mitigate the negative impact of changing interest rates. The
Company generally intends to mitigate interest rate risk by targeting the
difference between the market weighted average duration on its Mortgage
Related Assets funded with secured borrowings to the market weighted average
duration of such borrowings to one year or less, taking into account all
hedging transactions. The Company generally does not intend to have any
specific duration target for the portion of its Mortgage Related Assets that
are not funded by secured borrowings.
There can be no assurance that the Company will be able to limit such
duration differences and there may be periods of time when the duration
difference will be greater than one year.
The Company may implement its interest rate risk management policy by
utilizing various hedging transactions, including interest rate swaps,
interest rate swaptions, interest rate caps, interest rate floors, financial
futures contracts, options on financial futures contracts, and other
structured transactions. The Company does not intend to enter into such
transactions for speculative purposes.
REIT COMPLIANCE POLICY
The Company intends to operate its business in compliance with the REIT
Provisions of the Code. Accordingly, all of the provisions outlined in the
Company's investment, leverage and interest rate risk management policies are
subordinate to the REIT Provisions of the Code if any conflicts arise.
To qualify for tax treatment as a REIT, the Company must meet certain
tests as fully described in sections 856 and 857 of the Code. A summary of
the requirements for qualification as a REIT is described immediately below.
STOCK OWNERSHIP TESTS. The capital stock of the Company must be held by
at least 100 persons and no more than 50% of the value of such capital stock
may be owned, directly or indirectly, by five or fewer individuals at all
times during the last half of the taxable year. Tax-Exempt Entities, other
than private foundations and certain unemployment compensation trusts, are
generally not treated as individuals for these purposes. The stock ownership
requirements must be satisfied in the Company's second taxable year and in
each subsequent taxable year.
ASSET TESTS. The Company must generally meet the following asset tests
at the close of each quarter of each taxable year. At least 75% of the value
of the Company's total assets must consist of Qualified REIT Real Estate
Assets, U.S. Government securities, cash and cash items (the "75% Asset
Test"). The value of securities held by the Company but not taken into
account for purposes of the 75% Asset Test must not exceed (i) 5% of the
value of the Company's total assets in the case of securities of any one
non-government issuer, or (ii) 10% of the outstanding voting securities of
any such issuer.
INCOME TESTS. The Company must generally meet certain gross income tests
for each taxable year. At least 75% of the Company's gross income must be
derived from certain specified real estate sources, including interest income
and gain from the disposition of Qualified REIT Real Estate Assets or
Qualified Temporary Investment Income (the "75% Gross Income Test"). At least
95% of the Company's gross income for each taxable year must be derived from
sources of income qualifying for the 75% Gross Income Test, dividends,
interest unrelated to real estate, and gains from the sale of stock or other
securities (including certain interest rate swap and cap agreements entered
into to hedge variable rate debt incurred to acquire Qualified REIT Real
Estate Assets) not held for sale in the ordinary course of business (the "95%
Gross Income Test").
DIVIDEND DISTRIBUTION REQUIREMENTS. The Company must generally
distribute to its stockholders an amount equal to at least 95% of the
Company's taxable income before deductions of dividends paid and excluding
net capital gains. The Company has until January 31 following the end of the
fiscal year to pay the dividends out to shareholders and is permitted to
offer a special dividend in order to meet the 95% requirement.
OTHER POLICIES
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. The Company will not purchase any Mortgage Related 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.
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FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Company's Board of Directors has established the policies and
strategies set forth in this report. The Board of Directors (subject to
approval by a majority of Unaffiliated Directors) has the power to modify or
waive such policies and strategies without the consent of the stockholders.
The Company's Board of Directors will at least annually establish and approve
(including approval by a majority of Unaffiliated Directors) the policies and
strategies of the Company.
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DESCRIPTION OF MORTGAGE RELATED ASSETS
The Company invests principally in the following types of Mortgage
Related Assets subject to the operating restrictions described in "Management
Policies and Programs" below.
PRIMARY MORTGAGE SECURITIES
PASS-THROUGH CERTIFICATES. Pass-Through Certificates are securities
representing interests in "pools" of mortgage loans secured by residential
real property in which payments of both interest and principal on the
securities are generally made monthly, in effect "passing through" monthly
payments made by the individual borrowers on the mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of the
securities). Early repayment of principal on some Mortgage Related Assets
(arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Company to a lower rate of return upon reinvestment
of principal. This is known as prepayment risk. Also, if a security subject
to prepayment has been purchased at a premium, the value of the premium would
be lost in the event of prepayment. Like other fixed income securities, when
interest rates rise, the value of a Mortgage Related Asset generally will
decline; however, when interest rates are declining, the value of Mortgage
Related Assets with prepayment features may not increase as much as other
fixed income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a Mortgage Related Asset, and may have the
effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of purchase. When interest rates
rise, the holdings of Mortgage Related Assets by the Company can reduce
returns if the owners of the underlying mortgages pay off their mortgages
later than anticipated. This is known as extension risk.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case
of securities guaranteed by the Government National Mortgage Association
("GNMA")) or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (12 U.S.C., Section 1716 et seq.),
formerly known as the Federal National Mortgage Association ("Fannie Mae"),
or the Federal Home Loan Mortgage Corporation ("FHLMC")) which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations. Mortgage Related Assets created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit, which may be issued by governmental entities, private insurers or the
mortgage poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are hybrid mortgage related instruments. Interest and pre-paid
principal on a CMO are paid, in most cases, on a monthly basis. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC,
or Fannie Mae. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the first class has been retired. CMOs that are issued or guaranteed by
the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Company.
OTHER MORTGAGE SECURITIES
GENERAL. The Company may acquire other mortgage securities such as
non-High Quality Mortgage Related 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 not to exceed 10% of its total assets. Mortgage
Derivative Securities provide for the holder to receive interest only,
principal only, or interest and
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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 (slower) 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 (increase). 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 (decrease) in the event of rapid (slow)
prepayments.
The Company may also invest in Inverse Floaters, a class of CMOs with a
coupon rate that resets in the opposite direction from the market rate of
interest to which it is indexed such as the London Inter-Bank Offered Rate
("LIBOR") or the 11th District Cost of Funds Index ("COFI"). 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. An Inverse Floater
may behave like a security that is leveraged since its interest rate usually
varies by a magnitude much greater than the magnitude of the index rate of
interest. The "leverage-like" characteristics inherent in Inverse Floaters
are associated with greater volatility in their market prices.
The Company also may invest in other Mortgage Derivative Securities that
may in the future be developed.
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.
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 10% of its total Mortgage Related 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 is limited by the REIT Provisions of the Code.
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 Credit Quality Mortgage Loans. The
Company anticipates that the Mortgage Loans acquired by it and not yet
securitized, together with its investments in other Mortgage Related Assets,
will not constitute more than 25% of the Company's total Mortgage Related
Assets at any time. All Mortgage Loans will be acquired with the intention of
securitizing them into High Credit Quality Mortgage Loans. However, there can
be no assurance that the Company will be successful in securitizing the
Mortgage Loans. 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 Related 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
Related Assets.
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. 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
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 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
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privately issued pass-through certificates and Mortgage Loans. 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 Mortgage Related
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 rated
investment grade 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.
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 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.
PRINCIPAL RISKS AND SPECIAL CONSIDERATIONS
LEVERAGE RISK. The Company employs a leveraging strategy of generally
borrowing up to 92% of its total assets to finance the acquisition of
additional Mortgage Related Assets. The Company's borrowing may, at times,
exceed 92% of its total assets. In the event borrowing costs exceed the
income on its Mortgage Related Assets, the Company will experience negative
cash flow and incur losses. Another risk of leverage is the possibility that
the value of the collateral securing the borrowings will decline. In such
event, additional collateral or repayment of borrowings would be required.
The Company could be required to sell Mortgage Related 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 Related Assets, the
Company would experience losses.
INTEREST RATE RISK. There is the possibility that the value of the
Company's Mortgage Related Assets may fall since fixed income securities
generally fall when interest rates rise. The longer the term of a fixed
income instrument, the more sensitive it will be to fluctuations in value
from interest rate changes. Changes in interest rates may have a significant
effect on the Company's operations, because it may hold Mortgage Related
Assets with long terms to maturity. Rising interest rates will negatively
impact the Company's borrowings since the value of the collateral securing
the borrowing will decline in value, requiring additional collateral or
repayments of borrowing. This could reduce the level of borrowings and reduce
returns. Also, when interest rates rise, the Company's holding of Mortgage
Related Assets can reduce returns if the owners of the underlying mortgages
pay-off their mortgages later than anticipated. This is known as EXTENSION
RISK. When interest rates drop, the Company's holdings of the Mortgage
Related Assets can reduce returns if the owners of the underlying mortgages
pay off their mortgages sooner than anticipated since the funds prepaid will
have to be invested at the then lower prevailing rate. This is known as
PREPAYMENT RISK. In addition, when interest rates drop, not only can the
value of Mortgage Related Assets drop, but the yield can drop, particularly
where the yield on the security is tied to interest rates, such as adjustable
mortgages.
LIQUIDITY RISK. There is the possibility that the Company may lose money
or be prevented from earning capital gains if it cannot sell a Mortgage
Related Asset at a time and price that is most beneficial to the Company. The
Company is subject to liquidity risk because it invests in mortgage
securities which have experienced periods of illiquidity.
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CREDIT RISK. Credit risk is the possibility that the Company could lose
money if an issuer is unable to meet its financial obligations, such as the
payment of principal and/or interest on an instrument, or goes bankrupt. The
Company may invest a portion of its assets in Mortgage Related Assets which
are not guaranteed by the U.S. Government or investment grade, which may make
the Company subject to substantial credit risk. This is especially true
during periods of economic uncertainty or during economic down turns.
FAILURE TO MAINTAIN REIT STATUS RISK. Failure to maintain REIT status
risk refers to the possibility that the Company may become subject to federal
income tax as a regular corporation. The Company intends at all times to
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 for federal tax purposes. This would result in the Company being
subject to federal income tax that would further result in a substantial
reduction of cash available for distribution to shareholders.
FAILURE TO MAINTAIN INVESTMENT COMPANY ACT EXEMPTION RISK. The Company
intends to conduct its business so as not to become a "regulated investment
company" under the Investment Company Act. As a result, the Company's
ownership of certain Mortgage Related Assets may be limited by the Investment
Company Act. This could have the effect of adversely affecting the Company's
operations and returns to shareholders. In addition, if the Company fails to
qualify for the exemption from registration as an investment company, its
ability to use leverage would be substantially reduced. This could reduce
income to the Company and returns to shareholders.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax
consequences for 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, state,
local or foreign income taxation that may be relevant to a stockholder of the
Company in light of such stockholder's particular circumstances.
Prospective investors in the Company are urged to consult with their own
tax advisors regarding the specific consequences to each of them 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. In brief, if certain specific conditions
imposed by the Code are met, entities that invest primarily in real estate
assets, including Mortgage Loans, that otherwise would be taxed as
corporations are generally not taxed at the corporate level on their taxable
income that is 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.
The Company has made an election to be taxed as a REIT under the Code
commencing with its taxable year ended December 31, 1997. There can be no
assurance, however, that all qualification requirements for such treatment
will be met.
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.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must
meet certain tests. The Company has adopted a policy to comply with the REIT
Provisions of the Code.
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 Code's requirements. If this occurs,
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.
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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 with respect to undistributed income. The
Company intends to distribute substantially all of its Taxable Income to its
stockholders on a pro rata basis in each year.
In addition, the Company will also be subject to a tax of 100% of net
income from any prohibited transaction under the Code and will be subject to
a 100% tax on the amount by which it fails either the 75% or 95% Gross Income
Tests, reduced by approximated expenses, if the failure to satisfy such tests
is due to reasonable cause and not willful neglect and if certain other
requirements are met. The Company may also be subject to the alternative
minimum tax on certain items of tax preference with respect to undistributed
income.
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 under the Code. The Company therefore, intends to
make any such sales through a taxable subsidiary. The taxable subsidiary will
not be subject to this 100% tax on income from prohibited transactions under
the Code, 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. 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. 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% Gross Income Test, and will 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. 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. The Company's ability to
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establish and maintain taxable subsidiaries may be adversely affected by a
recent legislative proposal. See "Recent Proposed Legislation" below.
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 during the six-month period.
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 a gain realized from the sale of
the Company's Common Stock.
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 may 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 IRS 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. 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 Common Stock, a portion of the
dividends on such Common Stock could be treated as UBTI.
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 a purchaser of the Common Stock that, for United States income tax
purposes, is not a
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"United States Holder" (a "Foreign Holder"). For purposes of discussion, a
United States Holder 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 IRS 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 to
a Foreign Holder will generally be subject to federal income tax withholding
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.
However, any amounts withheld 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 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 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 a 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 two 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 is publicly traded, no assurance can be given that the Company
will continue to be a domestically controlled REIT.
INFORMATION REPORTING AND BACKUP WITHHOLDING. 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
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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 IRS.
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 PROPOSED LEGISLATION
The Clinton Administration has recently released a description of a
proposed legislative changes which, if enacted, may adversely affect the
ability of the Company to establish and maintain taxable subsidiaries. Under
the Clinton proposal, and subject to certain exceptions, the Code would be
amended to prohibit a REIT from owning more than 10 percent of the stock of a
taxable corporation, measured either by vote or by value, rather than more
than 10 percent of the voting stock of a taxable corporation as under current
law. The Clinton proposal would also restrict the deductibility of certain
expenses incurred by a taxable subsidiary. If this proposal is adopted, it
may be more difficult for the Company to establish taxable subsidiaries
through which to engage in non-qualifying activities, such as the holding of
property primarily for sale in the ordinary course of business or certain
hedging activities. It is impossible to predict at this time whether the
Clinton proposal, or some other proposal which would similarly affect the
Company's ability to utilize taxable subsidiaries, will ultimately be adopted.
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,
O'Melveny & Myers LLP, the Company's counsel, at the time of the Company's
public offering was of the opinion that 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.
COMPETITION
The Company believes that the principal competition in the business of
acquiring and holding Mortgage Related 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 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
Related 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.
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EMPLOYEES
As of December 31, 1998, the Company had no employees. The Manager
manages the day to day operations of the Company, subject to the direction
and oversight of the Company's Board of Directors and under the terms of a
Management Agreement discussed below.
THE MANAGEMENT AGREEMENT
The Company has entered into a Management Agreement with the Manager for
an initial two-year term expiring on December 31, 1999. The Manager is
primarily involved in two activities: (i) asset/liability
management--acquisition, financing, hedging, management and disposition of
Mortgage Related 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 formulates operating strategies for the Company,
arranges for the acquisition of Mortgage Related Assets by the Company,
arranges for various types of financing for the Company, monitors the
performance of the Company's Mortgage Related Assets and provides certain
administrative and managerial services in connection with the operation of
the Company. The Manager is 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 is required to prepare regular
reports for the Company's Board of Directors that will review the Company's
acquisitions of Mortgage Related 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 is 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 is responsible for
the day-to-day operations of the Company.
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 previously terminated by the Company or 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.
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,
minus (iii) the cumulative amounts paid by the Company to repurchase its
shares. Accordingly, incurring collateralized debt to finance specific
investment purchases does not ordinarily increase Average Net Invested
Capital.
18
<PAGE>
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 generally accepted accounting principles. 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, minus the cumulative amounts paid
by the Company to repurchase its shares.
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 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.
EXPENSES
Subject to the limitations set forth below, the Company will generally
pay all its operating expenses, except those specifically required to be
borne 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 are 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 Company's 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. Certain Company operating expenses 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. The operating
expenses that are subject to this limitation are:
(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;
19
<PAGE>
(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 to maintain relations with holders of such securities and in
complying with the continuous reporting and other requirements of
governmental bodies or agencies (these expenses include any costs of
computer services utilized in connection with these communications and
reporting requirements, 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;
(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 generally accepted accounting principles, 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 Related 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 has 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. In evaluating Mortgage Related 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 Related Asset portfolio.
20
<PAGE>
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 Related 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.
The Manager and its Affiliates may act as investment adviser or manager
for other entities, which may or may not include services similar to those it
renders to the Company. 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. 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.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to undertake the services called for thereunder and
is not 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 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 Related
Assets that meet the Company's policies and criteria. The Manager may also
advise or manage other mortgage related entities subject to certain
limitations, 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.
ITEM 2. PROPERTIES
The Company does not own or lease any real property. The Company's
principal executive offices are located at 865 South Figueroa Street, Los
Angeles, California 90017, telephone (213) 244-0440. Such offices are
provided by the Manager in accordance with the Management Agreement.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company. The
litigation regarding the Company's use of the name "Apex Mortgage Capital"
reported in last year's Form 10-K was settled.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on July 7,
1998. At the meeting, the ratification of the appointment of Deloitte &
Touche LLP, as auditors of the Company was submitted to a shareholder vote
and approval by a majority of the Company's outstanding voting securities
(votes for: 6,342,792; votes against: 15,365; abstentions: 21,150). 6,453,000
shares of the Company were outstanding on the record date and 6,379,307
shares of the Company entitled to vote were present in person or by proxy at
the meeting. No matters were submitted to shareholders in the fourth quarter
of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
EQUITY MARKET ACTIVITY
The Company's Common Stock began trading on December 4, 1997 and is
traded on the New York Stock Exchange under the trading symbol AXM. As of
March 19, 1999, the Company had 5,753,000 shares of Common Stock issued and
outstanding which were held of record by 39 shareholders.
The following table sets forth the high, low and closing sales prices
per share of Common Stock as reported on the New York Stock Exchange
composite tape and the cash dividend declared per share of Common Stock.
<TABLE>
<CAPTION>
Cash
Stock Price Dividends
-------------------------- Declared
1998 High Low Close Per Share
- ---- ---- --- ----- ---------
<S> <C> <C> <C> <C>
Fourth Quarter ended December 31, 1998 $11.13 $ 7.25 $ 9.63 $0.30
Third Quarter ended September 30, 1998 $12.06 $ 9.06 $ 9.56 $0.27
Second Quarter ended June 30, 1998 $12.75 $10.44 $10.50 $0.25
First Quarter ended March 31, 1998 $14.06 $11.50 $12.38 $0.25
1997
- ----
Fourth Quarter ended December 31, 1997 $15.00 $14.00 $14.00 $0.04
</TABLE>
On March 18, 1999, the Company's Board of Directors declared a dividend
distribution of $0.38 per share. The dividend is payable on April 9, 1999, to
shareholders of record on March 31, 1999.
The Company intends to pay quarterly dividends and to make distributions
to its stockholders of all or substantially all of its taxable income each
year (subject to certain adjustments) so as to qualify for the tax benefits
accorded to a REIT under the Code. All distributions will be made by the
Company at the discretion of the Board of Directors and will depend on the
taxable earnings of the Company, financial condition of the Company,
maintenance of REIT status and such other factors as the Board of Directors
may deem relevant from time to time.
SHARE REPURCHASE PROGRAM
On January 13, 1998, the Company's board of directors authorized a
program to repurchase up to 750,000 shares of the Company's Common Stock. On
September 16, 1998, the Company's board of directors authorized a program to
repurchase up to an additional 750,000 shares of the Company's Common Stock
having completed the original repurchase program of 750,000 shares.
22
<PAGE>
The Company repurchased 947,100 shares during the year ended December
31, 1998. The average price per share repurchased during the year ended
December 31, 1998 was $11.16. The repurchased shares are held in treasury at
cost in the financial statements herein.
An additional 552,900 shares are currently authorized for potential
repurchase in the future. The Company may continue to repurchase shares in
the future when market conditions warrant.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from audited financial
statements for the year ended December 31, 1998 and the period from
commencement of operations on December 9, 1997 to December 31, 1997. The
selected financial data should be read in conjunction with the more detailed
information contained in the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 9, 1997 TO
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Days in period 365 22
Interest income $41,785,000 $428,000
Interest expense $36,007,000 $111,000
Net interest income $5,778,000 $317,000
General and administrative expenses $2,104,000 $167,000
Net income $5,547,000 $150,000
Average number of shares outstanding 6,190,000 6,700,100
Basic and diluted net income per share $0.90 $0.02
Dividends declared per share $1.07 $0.04
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
----------------------------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Mortgage-backed securities $825,995,000 $265,880,000
Other Investments $20,139,000 0
Total assets $865,478,000 $271,307,000
Reverse repurchase agreements $767,908,000 $87,818,000
Total liabilities $777,448,000 $178,310,000
Stockholders' equity $88,030,000 $92,997,000
Book value per share $15.30 $13.88
Fair Value of Off Balance Sheet Hedging Instruments $(9,994,000) 0
Book value per share net of Hedging Instruments $13.56 $13.88
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Apex Mortgage Capital, Inc. commenced operations on December 9, 1997,
after its initial public offering of Common Stock. The Company received net
proceeds of $92,918,000, after all underwriting discounts and offering costs.
The Company uses 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 REIT under 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.
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
At December 31, 1998, the Company held $825,995,000 of Mortgage-Backed
Securities as compared to $265,880,000 at December 31, 1997. The original
maturity of a significant portion of the Mortgage-Backed Securities ranges
from fifteen to thirty years; the actual maturity is subject to change based
on the prepayments of the underlying mortgage loans.
The following table is a schedule of Mortgage-Backed Securities held listed
by security type (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------------------------
Carrying Percent of Carrying Percent of
Mortgage-Backed Securities Value Portfolio Value Portfolio
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
Adjustable Rate(1) $ 62,338 7.5% $240,819 90.6%
Fixed Rate 763,657 92.5% 25,061 9.4%
-------- ------ -------- ------
Totals $825,995 100.0% $265,880 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
(1) At December 31, 1998, the interest rate indices for 95% and 5% of
the adjustable rate mortgage securities were based on the one-year
U.S. Treasury rate and the six-month London Inter-Bank Offered
Rate, respectively. At December 31, 1997, the interest rate index
for all adjustable rate mortgage securities was based on the
one-year U.S. Treasury rate.
24
<PAGE>
The following table shows various weighted average characteristics of
the Mortgage-Backed Securities held by the Company at December 31, 1998
(dollars in thousands):
<TABLE>
<CAPTION>
Percent of Weighted
Total Par Amortized Market Current Average
Security Type Par Amount Amount Cost Basis Price Coupon Life(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
15 Year Agency/AAA Pass-throughs $253,581 30.9% 100.42% 101.23% 6.50% 3.7
20 Year Agency Pass-throughs 209,566 25.6% 100.45% 101.06% 6.50% 6.1
30 Year Agency Pass-throughs 8,076 1.0% 102.19% 101.99% 7.50% 3.2
AAA CMOs 286,887 35.0% 99.52% 100.01% 6.82% 2.7
-------- ------ ------- ------- ----- ---
Total Fixed Rate Holdings $758,110 92.5% 100.11% 100.74% 6.63% 3.9
Adjustable Rate Holdings 61,590 7.5% 101.25% 101.21% 6.79% 1.0
-------- ------ ------- ------- ----- ---
Total Portfolio $819,700 100.0% 100.20% 100.77% 6.64% 3.7
-------- ------ ------- ------- ----- ---
-------- ------ ------- ------- ----- ---
</TABLE>
The following table shows various weighted average characteristics of the
Mortgage-Backed Securities held by the Company at December 31, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
Percent of Weighted
Total Par Amortized Market Current Average
Security Type Par Amount Amount Cost Basis Price Coupon Life(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Agency CMO $24,826 9.5% 100.78% 100.95% 7.50% 0.9
Adjustable Rate Holdings 237,929 90.5% 101.12% 101.21% 6.90% 0.6
Total Portfolio $262,755 100.0% 101.11% 101.19% 6.66% 0.6
</TABLE>
(1) The weighted average life of the fixed rate mortgage securities is based
upon market prepayment expectations as of the dates shown. The actual
weighted average life could be longer or shorter depending on the actual
prepayment rates experienced over the life of the securities. The weighted
average life shown for the adjustable rate mortgage assets represents the
average time until the next coupon reset date. All averages are shown in
years.
OTHER INVESTMENTS
At December 31, 1998, the Company held $20,139,000 of other investments.
There were no such other investments held at December 31, 1997. The Company's
other investments consist primarily of equity securities issued by other real
estate investment trusts and securities generally collateralized by mortgage
assets.
The Company's investments in other real estate investment trusts of
$16,422,000 at December 31, 1998 consist of publicly traded preferred and
common stock securities issued by companies involved in the mortgage finance
industry. The Company generally expects to receive dividend income on the
majority of these investments which is included in other income in the
statement of operations.
The Company's other investments also include securities of
$3,717,000 at December 31, 1998 that are issued by special purpose companies
that invest primarily in mortgage assets. Such securities are generally
issued on a private placement basis and accordingly have a limited secondary
market. The Company generally expects to receive quarterly
25
<PAGE>
cash flows from these investments. Interest from income securities is accrued
and included in other income in the statement of operations using the
effective interest method applied prospectively based on current market
assumptions.
HEDGING INSTRUMENTS
The Company utilizes 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. The Company is currently utilizing both interest rate cap and
interest rate swap agreements.
Interest rate cap agreements consisted of LIBOR based agreements as
follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
-----------------------------------------------
<S> <C> <C>
Notional Amount $900,000,000 $500,000,000
Average Contract Rate 10.4% 10.0%
Average Final Maturity January 24, 2002 December 24, 2001
</TABLE>
Under these agreements, the Company will receive cash payments to the
extent of the excess of three-month LIBOR over the agreements' contract rate
times the notional amount. The interest rate cap agreements no longer qualify
for hedge accounting now that the Company has entered into additional hedging
transactions as discussed below. Accordingly, the Company now records the cap
agreements at fair market value, which is zero in the current market
environment.
During the year ended December 31, 1998, the Company entered into
interest rate swap agreements with current notional amounts as stated below.
Under these agreements, the Company receives a floating rate and pays a fixed
rate.
<TABLE>
<CAPTION>
Current
Notional
Amount Termination Unrealized
(000) Type Fixed Rate Floating Rate Date Gains (Losses)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 95,000 Interest Rate Swap 5.880% 1Mo LIBOR 5/29/00 $ (1,058)
30,000 Interest Rate Swap 5.905% 1Mo LIBOR 6/30/00 (378)
28,204 Interest Rate Swap 5.765% 1Mo LIBOR 7/25/00 (282)
61,599 Interest Rate Swap 5.775% 1Mo LIBOR 8/25/00 (653)
47,170 Interest Rate Swap 5.710% 1Mo LIBOR 8/28/00 (456)
60,000 Interest Rate Swap 5.900% 1Mo LIBOR 5/18/01 (1,086)
97,118 Interest Rate Swap 5.883% 1Mo LIBOR 6/25/01 (1,564)
117,755 Interest Rate Swap 5.905% 1Mo LIBOR 5/25/01 (1,720)
53,394 Interest Rate Swap 5.750% 1Mo LIBOR 7/14/01 (709)
65,000 Interest Rate Swap 5.791% 1Mo LIBOR 6/25/01 (1,045)
48,350 Interest Rate Swap 5.960% 1Mo LIBOR 5/15/02 (1,043)
- -------- --------
$703,590 $(9,994)
- -------- --------
- -------- --------
</TABLE>
The weighted average coupon the Company pays on the interest rate swap
agreements at December 31, 1998 was 5.85%. The weighted average life of the
agreements at December 31, 1998 was 1.9 years.
The Company is generally required to deposit collateral with the swap
agreement counter-parties in an amount at least equal to the amount of any
unrealized losses. At December 31, 1998 the Company had securities with a
fair market value of $17,327,000 on deposit with its counter-parties. If the
unrealized losses on the interest rate swap agreements were to increase, the
Company would be required to deposit additional collateral.
There can be no assurance that the Company will enter into hedging
activities or that, if entered into, such activities will have the desired
beneficial impact on the Company's results of operations or financial
condition. Moreover, no hedging activity can completely insulate the Company
from the risks associated with changes in interest rates and prepayment rates.
26
<PAGE>
Hedging involves risk and typically involves costs, including
transaction costs. Such costs increase dramatically as the period covered by
the hedging increases and during periods of rising and volatile interest
rates. The Company may increase its hedging activity and, thus, increase its
hedging costs during such periods when interest rates are volatile or rising
and hedging costs have increased. The Company intends generally to hedge as
much of the interest rate risk as the Manager determines is in the best
interest of the shareholders of the Company given the cost of such hedging
transactions and the Company's desire to maintain its status as a REIT. The
Company's policies do not contain specific requirements as to the percentages
or amount of interest rate risk which the Manager is required to hedge.
LIABILITIES
The Company has entered into reverse repurchase agreements to finance
certain of its mortgage-backed securities. These agreements are secured by a
portion of the Company's mortgage-backed securities and bear interest rates
that have historically moved in close relationship to LIBOR.
At December 31, 1998, the Company had outstanding $767,908,000 of
reverse repurchase agreements with a weighted average current borrowing rate
of 5.34% and a maturity of 2.9 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$800,260,000.
At December 31, 1997, the Company had outstanding $87,818,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.82%
and a maturity of 2.8 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$90,043,000.
The Company had $9,540,000 and $90,492,000 of other liabilities at
December 31, 1998 and December 31, 1997, respectively, consisting primarily
of accrued interest payable and payables for unsettled securities at December
31, 1998 and December 31, 1997, respectively. The Company anticipates
settling all other liabilities within one year by entering into additional
reverse repurchase agreements.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
The results of operations for the year ended December 31, 1998 represent
a full year of income from operations, net gains on the sale of investments
and include a large impact from leverage. In contrast, the results of
operations for the twenty-two day period ended December 31, 1997 largely
consisted of income from short-term investments and mortgage-backed
securities with little or no leverage applied. Because of this disparity in
operating periods, a direct comparative analysis of the year ended December
31, 1998 to the twenty-two day period ended December 31, 1997 would generally
not be relevant to investors. Therefore, the results from operations for the
two periods are discussed separately in this report.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1998, the Company's net income was
$5,547,000, or $0.90 per share on both a basic and diluted basis, based on a
weighted average of 6,190,000 shares outstanding. Net interest income for the
period was $5,778,000 consisting of interest income on mortgage assets and
cash balances less interest expense on reverse repurchase agreements. The
Company reported other income of $826,000 from dividend and interest income
on other investments. The Company reported gains on investment transactions,
net of $1,047,000 primarily from the sale of mortgage-backed securities and
other investments. The Company incurred operating expenses of $2,104,000 for
the period consisting of management fees, audit, tax, legal, printing,
insurance and other expenses.
The following table reflects the average balances for each category
of the Company's interest earning assets as well as the Company's interest
bearing liabilities, with the corresponding effective rate of interest
annualized for the twelve months ended December 31, 1998 (dollars in
thousands):
27
<PAGE>
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
-----------------------------
Average Effective
Balance Rate
-------- ---------
<S> <C> <C>
Interest Earning Assets:
Mortgage Assets $670,559 6.13%
Cash and Cash Equivalents 13,923 5.10%
-------- -----
Total Interest Earning Assets 684,482 6.10%
-------- -----
Interest Bearing Liabilities:
Reverse Repurchase Agreements 624,865 5.76%
-------- -----
Net Interest Earning Assets and Spread $ 59,617 0.34%
-------- -----
-------- -----
</TABLE>
The effective yield data is computed by dividing the annualized net
interest income or expense into the average daily balance shown.
The following table reflects the average balances for each category of
the Company's other investments for the year ended December 31, 1998 (dollars
in thousands):
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
-----------------------------
Average Effective
Balance Rate
-------- ---------
<S> <C> <C>
Other Investments:
Equity Securities $3,718 17.10%
Other Securities 1,324 14.37%
------ ------
Total Other Investments 5,042 16.38%
------ ------
------ ------
</TABLE>
RESULTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1997
For fiscal period from commencement of operations on December 9, 1997
through December 31, 1997, the Company's net income was $150,000, or $0.02
per share based on 6,700,100 shares outstanding. Net interest income for the
period was $317,000 consisting of interest income on Mortgage Assets and cash
balances less interest expense on reverse repurchase agreements. The Company
incurred operating expenses of $167,000 for the period consisting of
management fees, audit, tax, legal, printing, insurance and other expenses.
The following table reflects the average balances for each category of
the Company's interest earning assets as well as the Company's interest
bearing liabilities, with the corresponding effective rate of interest
annualized for the partial period ended December 31, 1997 (dollars in
thousands):
28
<PAGE>
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
Twenty-two Days Ended
December 31, 1997
-----------------------------
Average Effective
Balance Rate
-------- ---------
<S> <C> <C>
Interest Earning Assets:
Mortgage Assets $ 60,828 6.10%
Cash and Cash Equivalents 56,539 5.40%
-------- -----
Total Interest Earning Assets 117,367 5.97%
-------- -----
Interest Bearing Liabilities:
Reverse Repurchase Agreements 29,895 5.75%
-------- -----
Net Interest Earning Assets and Spread $ 87,472 0.22%
-------- -----
-------- -----
</TABLE>
The effective yield data is computed by dividing the annualized net
interest income or expense into the average daily balance shown.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds as of December 31, 1998 consisted
of reverse repurchase agreements totaling $767,908,000. The Company expects
to continue to borrow funds in the form of reverse repurchase agreements. At
December 31, 1998, the Company had borrowing arrangements with twenty-three
different investment banking firms. Increases in short-term interest rates
could negatively impact the valuation of the Company's mortgage assets which
could limit the Company's borrowing ability or cause its lenders to initiate
margin calls.
The Company will also rely on the cash flow from operations, primarily
monthly principal and interest payments to be received on the mortgage
assets, for liquidity.
The Company believes that equity capital, 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. If required,
the sale of mortgage assets at prices lower than the carrying value of such
assets would result in losses.
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, 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 stockholders' equity 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.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates and other factors drive the Company's
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates. The
Company's financial statements are prepared in accordance with generally
accepted accounting principles and the Company's dividends are determined by
the Company's net income as calculated for tax purposes; in each case, the
Company's activities and balance sheet are measured with reference to
historical cost and or fair market value without considering inflation.
29
<PAGE>
YEAR 2000 MATTERS
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any computer system that the
Company relies on with time sensitive software may recognize a date entered
as "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruption of operations,
including, among other things, a temporary inability to process transactions
or engage in normal business activities. The Company believes that most of
its exposure to Year 2000 issues involves the readiness of external third
parties such as, but not limited to, loan servicers, security master
servicers, security paying agents and trustees, its stock transfer agent, its
securities custodian, the counterparties on its various financing agreements
and hedging contracts and vendors ("External Service Providers").
The Company relies on the Manager for its computer services and the
Manager has been addressing this issue at no cost to the Company.
Specifically, the Manager's internally developed computer systems have been
implemented within the past five years. These systems have been developed
with software tools that utilize a century date format (ccyymmdd). Although
it has been a standard procedure to use this format for all date fields, the
Manager is nonetheless in the process of unit testing its internally
developed applications for numerous date conditions, including: the first and
last day of the year 2000, the leap year day and the day after, the first day
of the year 2001, functions with date ranges from 1999 which cross over into
year 2000, functions which have both "from date" and "to date" in the year
2000, date arithmetic and validation using standard routines through the year
2199.
The Manager has been, and is currently in contact with, each of its
External Service Providers to evaluate their readiness for the year 2000. The
Manager has requested each of its External Service Providers to either (i)
prepare a description of its process for identifying date sensitive areas,
its approach for implementing changes, its testing methodology, along with
its timetable for completion, or (ii) certify as to its year 2000 compliance.
Due to the technical architecture of the Manager's internally developed
applications, its emphasis on using major providers and its ongoing
communication with those providers, the Manager anticipates it will be well
positioned to begin the year 2000. There can be no assurance, however, that
the Company's External Service Providers will resolve their own Year 2000
issues in a timely manner, or that any failure by these External Service
Providers to resolve such issues would not have an adverse effect on the
Company's operations and financial condition. Each External Service Provider
is in turn subject to the Year 2000 issues of various third parties with
which it does business, making the Company's exposure to the noncompliance of
any External Service Provider difficult to assess. In a worst case scenario,
a significant portion of the Company's External Service Providers and
contractual counter-parties could fail to fulfill their respective
obligations which would significantly impair the Company's ability to meet
its obligations under its financing and hedging agreements. This would in
turn cause the Company to liquidate assets at potentially substantial losses
and possibly render the Company insolvent. The Company believes it is
devoting the necessary resources to address the Year 2000 issues over which
it has control. With respect to the Year 2000 issues of External Service
Providers, over which the Company has no control, the Company's contingency
plan is to identify replacement vendors, where possible.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company's two primary components of market risk are interest rate
risk and equity price risk as discussed below.
INTEREST RATE RISK
EFFECT ON NET INCOME. The Company invests in fixed-rate mortgage assets that
are expected to be funded with short-term borrowings. During periods of
rising interest rates, the borrowing costs associated with funding such
fixed-rate assets are subject to increase while the income earned on such
assets may remain substantially unchanged. This would result in a narrowing
of the net interest spread between the related assets and borrowings and may
even result in losses. The Company may enter into derivative transactions
seeking to mitigate the negative impact of 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 or
faster than assumed, the life of the mortgage assets will be longer or
shorter which would reduce the effectiveness of the Company's hedging
techniques and may result in losses on such transactions. Hedging techniques
involving the use of 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.
During the year, the Company increased its current allocation to
fixed-rate mortgage assets from 9.4% of the portfolio at December 31, 1997 to
92.5% at December 31, 1998. The Company may increase this allocation as
market conditions warrant. As mentioned above, there are certain risks
associated with investing in fixed-rate mortgage assets in combination with
hedging instruments. The two main risks the Company faces are that of
extension risk and prepayment risk.
EXTENSION RISK. Fixed-rate assets are generally acquired with a projected
weighted average life based on certain assumptions regarding prepayments. In
general, when a fixed-rate mortgage asset is acquired with borrowings, the
Company will enter into an interest rate swap agreement or other hedging
instrument that effectively fixes the Company's borrowing costs for a period
close to the anticipated average life of the related asset. This strategy is
designed to protect the Company from rising interest rates because the
borrowing costs are fixed for the duration of the asset. However, if
prepayment rates decrease in a rising interest rate environment, the life of
the mortgage asset could extend beyond the term of the swap agreement or
other hedging instrument. This situation could negatively impact the Company
as borrowing costs would no longer be fixed after the end of the hedging
instrument while the income earned on the asset would remain fixed. This
situation may also cause the market value of the Company's mortgage assets to
decline with little or no offsetting gain from the related hedging
transactions. In certain situations, the Company may be forced to sell assets
and incur losses to maintain adequate liquidity.
PREPAYMENT RISK. Fixed-rate assets in combination with hedging instruments
are also subject to prepayment risk. In falling interest rate scenarios, the
fixed-rate mortgage assets may prepay faster such that the average life
becomes shorter than its related hedging instrument. If this were to happen,
the Company would potentially need to reinvest at rates lower than that of
the related hedging instrument. This situation may result in the narrowing of
interest rate spreads or may cause losses.
The Company also invests in adjustable-rate mortgage assets that 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
are generally limited by caps. 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.
31
<PAGE>
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 financial condition, cash flows and results
of operations.
Prepayment rates generally increase when prevailing interest rates fall
below the interest rates on existing mortgage assets. In addition, prepayment
rates generally increase when the difference between long-term and short-term
interest rates declines. Prepayments of adjustable-rate 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.
EFFECT ON FAIR VALUE. Another component of interest rate risk is the effect
changes in interest rates will have on the market value of the Company's
assets. This is the risk that the market value of the Company's assets will
increase or decrease at different rates than that of the Company's
liabilities including its hedging instruments.
The Company primarily assesses its interest rate risk by estimating the
duration of its assets and the duration of its liabilities including all
hedging instruments. Duration essentially measures the market price
volatility of financial instruments as interest rates change. The Company
generally calculates duration using various financial models and empirical
data.
The following sensitivity analysis table shows the estimated impact on
the fair value of the Company's interest rate sensitive investments net of
its hedging instruments and reverse repurchase agreement liabilities assuming
rates instantaneously fall one hundred basis points and rise one hundred
basis points. (Dollars are in thousands except per share amounts.)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fair Value for Scenario Shown
--------------------------------
Interest Interest
Rates Fall Rates Rise
100 Basis 100 Basis
Points Unchanged Points
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Sensitive Instruments........... $47,143 $51,810 $44,787
Change in Fair Value.......................... $(4,667) -- $(7,023)
Change as a Percent of Fair Value............. (0.56%) -- (0.85%)
Change as a Percent of Stockholders' Equity... (5.30%) -- (7.98%)
Change on a Per Share Basis................... $ (0.81) -- $ (1.22)
</TABLE>
It is important to note that the impact of changing interest rates on
fair value can change significantly when interest rates change beyond one
hundred basis points from current levels. Therefore, the volatility in fair
value for the Company could increase significantly when interest rates
change beyond one hundred basis points. In addition, there are other
factors that impact the fair value of the Company's interest rate sensitive
investments and hedging instruments such as the shape of the yield curve,
market expectations as to future interest rate changes and other market
conditions. Accordingly, there may be differences between the fair value
changes shown above and actual changes in fair value as interest rates change
and those differences may be material.
The contract terms of the Company's liabilities exclusive of hedging
instruments are subject to change as interest rates change. In general, the
Company utilizes short-term borrowings in the form of reverse repurchase
agreements to finance certain of its mortgage-backed securities. These
agreements are secured by a portion of the Company's mortgage-backed
securities and bear interest rates that have historically moved in close
relationship to LIBOR.
32
<PAGE>
EQUITY PRICE RISK
Another component of market risk for the Company is equity price risk. This
is the risk that the market value of the Company's equity investments will
decrease. The following table shows the impact on the Company's fair value as
the price of its equity securities change assuming price decreases of 10% and
increases of 10%. Actual price decreases or increases may be greater or smaller.
(Dollars are in thousands except per share amounts.)
<TABLE>
<CAPTION>
Fair Value for Scenario Shown
--------------------------------------
Prices Prices
Decrease Unchanged Increase
10% 10%
---------------------------------------
<S> <C> <C> <C>
Equity Investments $14,780 $16,422 $18,064
Change in Fair Value (1,642) - 1,642
Change as a Percent of Fair Value (10%) - 10%
Change as a Percent of Stockholders' Equity (1.9%) - 1.9%
Change on a Per Share Basis $(0.29) - $ 0.29
</TABLE>
Although there is no direct link between changes in fair value and
changes in earnings in many cases, a decline in fair value for the Company
may translate into decreased earnings over the remaining life of the
investment portfolio.
If the fair market value of the Company's portfolio were to decline
significantly, the Company's overall liquidity may be impaired which could
result in the Company being required to sell assets at losses.
THE COMPANY'S ANALYSIS OF RISKS IS BASED ON MANAGEMENT'S EXPERIENCE,
ESTIMATES, MODELS AND ASSUMPTIONS. THESE ANALYSES RELY ON MODELS OF FINANCIAL
INFORMATION WHICH UTILIZE ESTIMATES OF FAIR VALUE AND INTEREST RATE
SENSITIVITY. ACTUAL ECONOMIC CONDITIONS OR IMPLEMENTATION OF INVESTMENT
DECISIONS BY THE MANAGER MAY PRODUCE RESULTS THAT DIFFER SIGNIFICANTLY FROM
THE ESTIMATES AND ASSUMPTIONS USED IN THE COMPANY'S MODELS AND THE
PROJECTED RESULTS SHOWN IN THE ABOVE TABLES AND IN THIS REPORT. THESE
ANALYSES CONTAIN CERTAIN "FORWARD-LOOKING STATEMENTS" AND ARE SUBJECT TO THE
SAFE HARBOR CONTAINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the related notes, together
with the Independent Auditors' Report thereon, are set forth on pages F-3
through F-15 on this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1998 pursuant to general instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1998 pursuant to general instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1998 pursuant to general instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1998 pursuant to general instruction G(3).
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following financial statements of the Company are included in Part
II, Item 8 of this Annual Report on Form 10-K:
Independent Auditors' Report;
Balance Sheets as of December 31, 1998 and December 31, 1997;
Statements of Operations for the Year Ended December 31, 1998 and
the Period from December 9, 1997 (Commencement of Operations) to
December 31, 1997
Statements of Stockholders' Equity Period from December 9, 1997
(Commencement of Operations) to December 31, 1997 and Year Ended
December 31, 1998
Statements of Cash Flows for the Year Ended December 31, 1998
and the Period from December 9, 1997 (Commencement of Operations)
to December 31, 1997
Notes to Financial Statements.
2. Schedules to financial statements:
All financial statement schedules have been omitted because they are
either inapplicable or the information required is provided in the
Company's Financial Statements and Notes thereto, included in Part II,
Item 8 of this Annual Report on Form 10-K.
3. Exhibits:
Exhibit
Number Exhibit
------- -------
10.1 Amendment to Management Agreement between the Registrant
and TCW Investment Management Company.
10.6 Amended and Restated 1997 Stock Option Plan.
24.1.1 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
35
<PAGE>
GLOSSARY
As used in this Annual Report on Form 10-K, 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.
"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, minus (iii) the cumulative amounts paid by the
Company to repurchase its shares.
"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, minus the cumulative amounts paid by the Company to
repurchase its shares.
"Bankruptcy Code" means Title 11 of the United States Code, as amended
"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.
"COFI" is the 11th District Cost of Funds Index, 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.
"Committed Secured Borrowings" means (i) CMOs, (ii) structured
commercial paper programs, (iii) secured term notes and (iv) other secured
financing transactions that generally commit the lender to provide financing
to the Company for a specified period of time or to provide financing to the
Company to fund specific assets until they mature.
"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.
"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 unit) residences.
"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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement or other
employee benefit plan that is subject to ERISA.
"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., Section 1716 et seq.), formerly known as
the Federal National Mortgage Association.
"FHA" means the United States Federal Housing Administration.
36
<PAGE>
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Foreign Holder" means a purchaser of the Common Stock that, for United
States income tax purposes, is not a United States person.
"GNMA" means the Government National Mortgage Association.
"High Credit Quality Mortgage Loans" means individual loans secured by
residential real property that are either underwritten to credit standards
that generally comply with the credit standards approved by Fannie, Freddie
Mac or GNMA or pools of loans that have other credit support features that
generally reduce the associated credit risk to that of investment grade
securities.
"High Quality" means either (i) securities that are rated investment
grade 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.
"Interest Only Derivatives" means Mortgage Derivative Securities
representing the right to receive interest only or a disproportionately large
amount of interest.
"Inverse Floaters" means a class of CMOs with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI. 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.
"IRAs" means Individual Retirement Accounts.
"IRS" means the Internal Revenue Service.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means the London-Inter-Bank Offered Rate.
"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.
"MBS Group" means the TCW Group's Mortgage-Backed Securities Group.
"Mortgage-Backed Securities" means securities representing interests in,
or secured by mortgages on residential real property that are not Mortgage
Derivative Securities.
"Mortgage Derivative Securities" means mortgage backed securities that
are (i) Interest Only Derivatives, (ii) Principal Only Derivatives, (iii)
inverse interest only derivatives, (iv) Inverse Floaters and (v) other
mortgage related derivative instruments.
"Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA
Loans and VA Loans.
"Mortgage Related Assets" means (i) Short-Term Investments, (ii)
Mortgage-Backed Securities, (iii) High Credit Quality Mortgage Loans, (iv)
Mortgage Derivative Securities and (v) Other Investments.
"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
37
<PAGE>
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 generally accepted
accounting principles.
"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.
"Other Investments" means (i) equity and debt securities issued by other
primarily mortgage related finance companies, (ii) interests in mortgage
related collateralized bond obligations, (iii) other subordinated interests
in pools of Mortgage Related Assets, (iv) commercial mortgage loans and
securities, and (v) residential mortgage loans other than High Credit Quality
Mortgage Loans.
"Principal Only Derivatives" means Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal.
"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 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 any nationally recognized rating agency.
"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.
"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.
"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.
"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, 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.
38
<PAGE>
"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.
"Uncommitted Secured Borrowings" means (i) reverse repurchase
agreements, (ii) lines of credit, (iii) Dollar-Roll Agreements, and (iv)
other secured financing transactions that generally do not commit the lender
to continue to provide financing to the Company.
"United States Holder" means a purchaser of the Common Stock that, for
United States income tax purposes, is a United States person (i.e., is not a
Foreign Holder).
"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.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Apex Mortgage Capital, Inc.
(Registrant)
Dated: March 31, 1999 /s/ Philip A. Barach
-------------------------------------
Philip A. Barach
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 31, 1999 /s/ Daniel K. Osborne
-------------------------------------
Daniel K. Osborne
Executive Vice President
Chief Operating Officer and
Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/Marc I. Stern Chairman of the Board March 31, 1999
- ---------------------------
Marc I. Stern
/s/Jeffrey E. Gundlach Vice Chairman of the Board March 31, 1999
- --------------------------- Chief Investment Officer
Jeffrey E. Gundlach
/s/Philip A. Barach President and March 31, 1999
- --------------------------- Chief Executive Officer
Philip A. Barach (Principal Executive Officer)
/s/Peter G. Allen* Director March 31, 1999
- ---------------------------
Peter G. Allen
/s/John C. Argue* Director March 31, 1999
- ---------------------------
John C. Argue
/s/John A. Gavin* Director March 31, 1999
- ---------------------------
John A. Gavin
/s/Carl C. Gregory III* Director March 31, 1999
- ---------------------------
Carl C. Gregory III
*By: /s/Daniel K. Osborne
---------------------
Daniel K. Osborne
Attorney-in-Fact
</TABLE>
40
<PAGE>
APEX MORTGAGE CAPITAL, INC.
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
FOR INCLUSION IN FORM 10-K
FILED WITH
SECURITIES AND EXCHANGE COMMISSION
DECEMBER 31, 1998
F-1
<PAGE>
APEX MORTGAGE CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Apex Mortgage Capital, Inc.
We have audited the accompanying balance sheets of Apex Mortgage Capital,
Inc. (the "Company") as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1998 and for the period from December 9, 1997
(commencement of operations) to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apex Mortgage Capital, Inc.
as of December 31, 1998 and 1997 and the results of its operations and its
cash flows for the year ended December 31, 1998 and for the period from
December 9, 1997 (commencement of operations) to December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 8, 1999
F-3
<PAGE>
APEX MORTGAGE CAPITAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,679,000 $ 3,085,000
Mortgage-backed securities available-for-sale, at fair value (Note 3) 825,995,000 265,880,000
Other investments available-for-sale, at fair value (Note 3) 20,139,000 -
Interest Rate Caps (Note 4) - 174,000
Accrued interest receivable 5,151,000 1,316,000
Principal payments receivable 937,000 -
Other assets 577,000 852,000
------------ ------------
$865,478,000 $271,307,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Reverse repurchase agreements (Note 5) $767,908,000 $ 87,818,000
Payable for unsettled securities 838,000 88,638,000
Accrued interest payable 6,173,000 110,000
Dividend payable 1,777,000 268,000
Accrued expenses and other liabilities 752,000 1,476,000
------------ ------------
777,448,000 178,310,000
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized;
no shares outstanding
Common Stock, par value $0.01 per share; 100,000,000 shares
authorized; 6,700,100 shares outstanding (Notes 8 and 9) 67,000 67,000
Additional paid-in-capital 92,978,000 92,860,000
Accumulated other comprehensive income 6,689,000 188,000
Accumulated dividend distributions in excess of net income (1,135,000) (118,000)
Treasury stock, at cost (947,100 shares) (Note 7) (10,569,000) -
------------ ------------
88,030,000 92,997,000
------------ ------------
$865,478,000 $271,307,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 9, 1997
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Interest Income:
Mortgage-backed securities $41,075,000 $ 227,000
Cash and cash equivalents 710,000 201,000
----------- -----------
41,785,000 428,000
INTEREST EXPENSE 36,007,000 111,000
----------- -----------
NET INTEREST INCOME 5,778,000 317,000
----------- -----------
GAIN ON INVESTMENT TRANSACTIONS, NET 1,047,000 -
OTHER INCOME 826,000 -
GENERAL AND ADMINISTRATIVE EXPENSES:
Management fee (Note 8) 644,000 43,000
Incentive fee (Note 8) 619,000 -
Audit and tax fees 75,000 45,000
Insurance expense 267,000 20,000
Directors' fees 70,000 15,000
Stock option expense 118,000 7,000
Other 311,000 37,000
----------- -----------
2,104,000 167,000
----------- -----------
NET INCOME $ 5,547,000 $ 150,000
----------- -----------
----------- -----------
Net Income Per Share:
Basic $ 0.90 $ 0.02
----------- -----------
----------- -----------
Diluted $ 0.90 $ 0.02
----------- -----------
----------- -----------
Weighted Average Number of Shares Outstanding:
(net of treasury shares)
Basic 6,190,000 6,700,100
----------- -----------
----------- -----------
Diluted 6,190,000 6,700,100
----------- -----------
----------- -----------
Dividends Declared Per Share $ 1.07 $ 0.04
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 9, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME
--------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, December 9, 1997 100 $ -- $ 2,000 $ --
Issuance of common stock:
Initial public offering,
net of offering costs 6,700,000 67,000 92,851,000 --
Issuance of stock options
to non-employees (Note 9) -- -- 7,000 --
Net unrealized gain on
mortgage-backed securities
available-for-sale -- -- -- 188,000
Net income -- -- -- --
Other Comprehensive Income
Dividends declared -- -- -- --
---------- --------- ----------- ----------
Balance, December 31, 1997 6,700,100 67,000 92,860,000 188,000
Repurchases of common stock -- -- -- --
Issuance of stock options
to non-employees (Note 9) -- -- 118,000 --
Net income -- -- -- --
Other comprehensive income:
Unrealized gain (loss) on
investments available-for-sale
during the year -- -- -- 6,501,000
Comprehensive income
Dividends declared -- -- -- --
---------- --------- ----------- ----------
Balance, December 31, 1998 6,700,100 $ 67,000 $92,978,000 $6,689,000
---------- --------- ----------- ----------
---------- --------- ----------- ----------
<CAPTION>
ACCUMULATED
DIVIDEND
DISTRIBUTION TREASURY
IN EXCESS OF COMPREHENSIVE STOCK, AT
NET INCOME INCOME COST TOTAL
------------ -------------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 9, 1997 $ -- $ -- $ -- $ 2,000
Issuance of common stock:
Initial public offering,
net of offering costs -- -- -- 92,918,000
Issuance of stock options
to non-employees (Note 9) -- -- -- 7,000
Net unrealized gain on
mortgage-backed securities
available-for-sale -- 188,000 -- 188,000
Net income 150,000 150,000 -- 150,000
----------
Other Comprehensive Income $ 338,000
----------
----------
Dividends declared (268,000) -- (268,000)
------------ ------------ -----------
Balance, December 31, 1997 (118,000) -- 92,997,000
Repurchases of common stock -- (10,569,000) (10,569,000)
Issuance of stock options
to non-employees (Note 9) -- 118,000
Net income 5,547,000 5,547,000 -- 5,547,000
Other comprehensive income:
Unrealized gain (loss) on
investments available-for-sale
during the year 6,501,000 -- 6,501,000
-----------
Comprehensive income $12,048,000
-----------
-----------
Dividends declared (6,564,000) -- (6,564,000)
------------ ------------ -----------
Balance, December 31, 1998 $(1,135,000) $(10,569,000) $88,030,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
F-6
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 9, 1997
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 5,547,000 $ 150,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 3,533,000 15,000
Gain on investment transactions, net (1,047,000) -
Change in assets and liabilities: -
Accrued interest receivable (3,835,000) (1,316,000)
Other assets 275,000 (852,000)
Accrued interest payable 6,063,000 110,000
Accrued expenses and other liabilities (724,000) 1,476,000
----------------- -----------------
Net cash provided by (used in) operating activities 9,812,000 (417,000)
----------------- -----------------
INVESTING ACTIVITIES:
Purchase of other investments (19,716,000) -
Purchase of interest rate cap agreements (80,000) (175,000)
Purchase of mortgage-backed securities (1,511,359,000) (177,061,000)
Proceeds from sales of other investments 1,662,000 -
Proceeds from sales of mortgage-backed securities 594,201,000 -
Principal payments on mortgage-backed securities 270,608,000 -
----------------- -----------------
Net cash used in investing activities (664,684,000) (177,236,000)
----------------- -----------------
FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements 680,090,000 87,818,000
Dividend distributions (5,055,000) -
Proceeds from stock offering, Net - 92,918,000
Purchase of treasury stock (10,569,000) -
----------------- -----------------
Net cash provided by financing activities 664,466,000 180,736,000
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,594,000 3,083,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,085,000 2,000
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,679,000 $ 3,085,000
----------------- -----------------
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 29,944,000 $ 2,000
----------------- -----------------
----------------- -----------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net unrealized gain on investments
available-for-sale $ 6,501,000 $ 188,000
----------------- -----------------
----------------- -----------------
Securities purchased, not yet settled $ 87,800,000 $ 88,638,000
----------------- -----------------
----------------- -----------------
Principal payments, not yet received $ 937,000 -
----------------- -----------------
----------------- -----------------
Dividends declared, not yet paid $ 1,777,000 $ 268,000
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
APEX MORTGAGE CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Apex Mortgage Capital, Inc. (the "Company") was incorporated in
Maryland on September 15, 1997. The Company commenced its operations of
acquiring and managing a portfolio of mortgage assets on December 9,
1997, upon receipt of the net proceeds from the initial public offering
of the Company's common stock. The Company uses its equity capital and
borrowed funds to seek to generate income based on the difference
between the yield on its mortgage-backed securities and the cost of its
borrowings. The Company is structured for tax purposes as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less. The carrying amount
of cash equivalents approximates their fair value.
MORTGAGE-BACKED SECURITIES
The Company's mortgage-backed securities consist of securities backed
by single-family residential real estate mortgage loans.
Mortgage-backed securities are recorded at cost on the date the assets
are purchased. Realized gains and losses on sales of the securities are
determined on a specific identification basis. Substantially all of the
Company's mortgage-backed securities are expected to qualify as real
estate assets under the REIT Provisions of the Code.
Interest income is accrued based on the outstanding principal amount of
the mortgage-backed securities and their contractual terms. Premiums
and discounts are amortized into interest income over the lives of the
securities using the effective yield method adjusted for the effects of
estimated prepayments.
The Company's policy is to generally classify its mortgage-backed
securities as available-for-sale. The mortgage-backed securities are
reported at fair value with unrealized gains and losses excluded from
earnings and reported in other comprehensive income.
OTHER INVESTMENTS
The Company's other investments consist primarily of equity securities
issued by other real estate investment trusts and securities generally
collateralized by mortgage assets.
Dividend income on equity securities is recorded on the declaration
date. Interest income on other securities is accrued using the
effective interest method applied prospectively based on current market
assumptions. Both dividend and interest income earned on other
investments is included in other income.
The Company's policy is to generally classify its other investments as
available-for-sale. Other investments are reported at fair value with
unrealized gains and losses excluded from earnings and reported in
other comprehensive income
F-8
<PAGE>
INTEREST RATE HEDGING TRANSACTIONS
The Company enters into interest rate swap and interest rate cap
agreements in order to mitigate the impact of rising interest rates on
the cost of its short-term borrowings. Amounts payable or receivable
from such agreements are accounted for on an accrual basis and
recognized as a net adjustment to interest expense. Premiums paid for
cap agreements accounted for as hedges are recorded as interest rate
caps and amortized over the lives of such agreements as an adjustment
to interest expense.
STOCK BASED COMPENSATION
The Company grants stock options to its directors and officers and to
certain directors, officers and employees of its investment manager and
the investment manager itself, as discussed in Note 9. Options granted
to directors of the Company are accounted for using the intrinsic
method, and generally no compensation expense is recognized in the
statement of operations for such options. Other options are accounted
for using the fair value method; such options are measured at their
fair value when they are granted and are recognized as a general and
administrative expense during the periods when the options vest and the
related services are performed.
FEDERAL AND STATE INCOME TAXES
The Company has elected to be taxed as a REIT and generally is 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 meets certain other asset, income and stock ownership
tests. As such, no accrual for income taxes has been included in the
financial statements.
NET INCOME PER SHARE
Basic net income per share is calculated on the basis of the weighted
average number of common shares outstanding during each period. Diluted
net income per share includes the additional dilutive effect of common
stock equivalents and outstanding stock options is calculated using the
treasury stock method.
Stock options that could potentially dilute net income per share
in the future were not included in the computation of diluted net
income per share in 1998 and 1997 because they would have been
antidilutive for the period presented.
DEFERRED ORGANIZATION COSTS
Costs incurred in connection with the organization of the Company are
deferred and amortized over five years using the straight line method.
Unamortized amounts are included on the balance sheet in other assets.
Amortization expense is included in other general and administrative
expenses in the statement of operations.
INCOME RECOGNITION
Income and expenses are recorded on the accrual basis of accounting.
CREDIT RISK
At December 31, 1998, the Company has limited its exposure to credit
losses on its portfolio of mortgage-backed securities by purchasing
securities that are either rated "AAA" by at least one nationally
recognized rating agency or are issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), Fannie Mae (formerly known as the
Federal National Mortgage Corporation) or the Government National
Mortgage Association ("GNMA"). The payment of principal and interest on
the FHLMC, Fannie Mae and GNMA securities are guaranteed by those
respective agencies. At December 31, 1998, all of the Company's
mortgage-backed securities have an actual or implied "AAA" rating.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
<PAGE>
COMPREHENSIVE INCOME
During the year ended December 31, 1998, the Company adopted SFAS No.
130, REPORTING COMPREHENSIVE INCOME. This statement establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners."
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. A company may also implement the Statement as of
the beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1998 and thereafter). Statement 133 cannot
be applied retroactively. Statement 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the Company's election,
before January 1, 1998). The Company will adopt the reporting
requirements of SFAS No. 133 by the first quarter of 2000. An earlier
adoption may be made if circumstances warrant. The Company expects the
impact of the adoption of the reporting requirements of SFAS No. 133 to
include the recording of the approximate fair value of the Company's
interest rate swaps as comprehensive income.
NOTE 3 - MORTGAGE-BACKED SECURITIES AND OTHER INVESTMENTS
At December 31, 1998, mortgage-backed securities consisted of the
following:
<TABLE>
<CAPTION>
Adjustable Rate Fixed Rate
Mortgage Mortgage
(in thousands) Securities Securities Total
---------------------------------------------------------
<S> <C> <C> <C>
Principal Amount $ 61,590 $ 758,110 $ 819,700
Unamortized Premium 772 800 1,572
---------------------------------------------------------
Amortized Cost 62,362 758,910 821,272
Unrealized Gains 86 4,762 4,848
Unrealized Losses (110) (15) (125)
---------------------------------------------------------
Fair Value $ 62,338 $ 763,657 $ 825,995
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
At December 31, 1997, mortgage-backed securities consisted of the
following:
<TABLE>
<CAPTION>
Adjustable Rate Fixed Rate
Mortgage Mortgage
(in thousands) Securities Securities Total
---------------------------------------------------------
<S> <C> <C> <C>
Principal Amount $ 237,929 $ 24,826 $ 262,755
Unamortized Premium 2,743 194 2,937
Amortized Cost 240,672 25,020 265,692
Unrealized Gains 162 41 203
Unrealized Losses (15) 0 (15)
---------------------------------------------------------
Fair Value $ 240,819 $ 25,061 $ 265,880
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
The contractual final maturity of the mortgage loans supporting the
mortgage-backed securities is generally between 15 and 30 years at
origination. Because of prepayments on the underlying mortgage loans,
the actual weighted-average maturity is expected to be less.
F-10
<PAGE>
The adjustable rate mortgage-backed securities are typically subject to
periodic and lifetime caps that limit the amount an adjustable rate
mortgage-backed security's interest rate can change during any given
period and over the life of the asset. At December 31, 1998, the
average periodic cap on the adjustable rate mortgage assets was 2.0%
per annum and the average lifetime cap was equal to 11.3%. At December
31, 1997, the average periodic cap on the adjustable rate mortgage
assets was 2.0% per annum and the average lifetime cap was equal to
11.4%.
During the year ended December 31, 1998 the Company realized $972,000
in gains on the sale of $594,201,000 of mortgage-backed securities
which were classified as available-for-sale.
At December 31, 1998, other investments consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
Equity Securities Other Securities Total
--------------------------------------------------
<C> <C> <C> <C>
Amortized Cost $ 14,154 $ 4,019 $ 18,173
Unrealized Gains 2,268 0 2,268
Unrealized Losses 0 (302) (302)
--------------------------------------------------
Fair Value $ 16,422 $ 3,717 $ 20,139
--------------------------------------------------
--------------------------------------------------
</TABLE>
The Other securities generally have an original maturity of five years
subject to certain acceleration provisions. The expected average
remaining maturity at December 31, 1998 was approximately four years.
During the year ended December 31, 1998, the Company realized $303,000
in gains on the sale of $1,662,000 of Other Investments which were
classified as available-for-sale.
NOTE 4 - INTEREST RATE CAP AGREEMENTS
Interest rate cap agreements include the carrying value of purchased
interest rate caps, entered into by the Company in order to mitigate
the impact of rising interest rates on the cost of its short-term
borrowings. As discussed in Note 10, the Company has entered into
certain interest rate swap transactions. The execution of these swaps
eliminated the need for the cap protection previously purchased.
Accordingly, the interest rate cap agreements no longer qualify for
hedge accounting and were written down to zero during the year ended
December 31, 1998 which approximates their fair value. A $228,000
charge for the write off is included in Gain on Investment
Transactions, net in the Statement of Operations.
The terms of outstanding interest rate cap agreements are as follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------------------
<S> <C> <C>
Notional Amount $900,000,000 $500,000,000
Average Contract Rate 10.4% 10.0%
Average Final Maturity January 24, 2002 December 24, 2001
</TABLE>
Under these agreements, the Company will receive cash payments to the
extent of the excess of three month London Interbank Offered Rate
("LIBOR") over the agreements' contract rate times the notional amount.
NOTE 5 - REVERSE REPURCHASE AGREEMENTS
The Company has entered into reverse repurchase agreements to finance
certain of its mortgage-backed securities. These agreements are secured
by a portion of the Company's mortgage-backed securities and bear
interest rates that have historically moved in close relationship to
LIBOR.
At December 31, 1998, the Company had outstanding $767,908,000 of
reverse repurchase agreements with a weighted average current borrowing
rate of 5.34% and a maturity of 2.9 months. The reverse repurchase
agreements were collateralized by mortgage-backed securities with an
estimated fair value of $800,260,000.
F-11
<PAGE>
At December 31, 1997, the Company had outstanding $87,818,000 of
reverse repurchase agreements with a weighted average current borrowing
rate of 5.82% and a maturity of 2.8 months. The reverse repurchase
agreements were collateralized by mortgage-backed securities with an
estimated fair value of $90,043,000.
For the year ended December 31, 1998, the average reverse repurchase
agreement balance was $624,865,000 with a weighted average interest
cost of 5.58%. The maximum reverse repurchase agreement balance
outstanding during the year ended December 31, 1998 was $823,296,000.
For the period ended December 31, 1997, the average reverse repurchase
agreement balance was $29,895,000 with a weighted average interest cost
of 5.75%. The maximum reverse repurchase agreement balance outstanding
during the period ended December 31, 1997 was $87,818,000.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the amortized cost and estimated fair
values of the Company's financial instruments. SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair
value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale (dollars in thousands):
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
---------------------------- -----------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Mortgage-backed Securities $821,272 $825,995 $265,692 $265,880
Interest Rate Caps - - 174 174
Other Investments 18,173 20,139 - -
Interest Rate Swaps - (9,994) - -
</TABLE>
The Company bases its fair value estimates for mortgage-backed
securities, other investments and interest rate swaps primarily on
third party price indications provided by dealers who make markets in
these financial instruments when such indications are available.
However, the fair value reported reflects estimates and may not
necessarily be indicative of the amounts the Company could realize in a
current market exchange. Cash and cash equivalents, interest receivable
and reverse repurchase agreements are reflected in the financial
statements at their costs, which approximates their fair value because
of the short-term nature of these instruments.
NOTE 7 - STOCK REPURCHASE PROGRAM
On January 13, 1998, the Company's Board of Directors authorized a
program to repurchase up to 750,000 shares of the Company's common
stock. On September 16, 1998, the Company's Board of Directors
authorized a program to repurchase up to an additional 750,000 shares
of the Company's common stock having completed the original repurchase
program of 750,000 shares.
The Company repurchased 947,100 shares during the year ended December
31, 1998. The average price per share repurchased during the year ended
December 31, 1998 was $11.16. The repurchased shares are held in
treasury at cost in the financial statements herein.
An additional 552,900 shares are currently authorized for potential
repurchase in the future. The Company may continue to repurchase shares
in the future when market conditions warrant.
F-12
<PAGE>
NOTE 8 - TRANSACTIONS WITH AFFILIATES
The Company has entered 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 monthly in
arrears, equal to 3/4 of 1% of the average net invested capital as
further defined in the Management Agreement.
The Company paid the Manager $644,000 in base management compensation
during the year ended December 31, 1998. The Company paid the Manager
$43,000 in base management compensation for the period ended December
31, 1997.
The Company also pays 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 US Treasury rate plus 1% as
further defined in the Management Agreement.
The Company accrued $619,000 for incentive compensation to the Manager
for the year ended December 31, 1998. The Company did not pay or accrue
incentive compensation to the Manager for the period ended December 31,
1997.
The Company may also grant stock options to directors, officers and key
employees of the Company, the Manager, its directors, officers and key
employees.
The Company's other investments include securities that are issued by
special purpose companies that invest primarily in mortgage-related
assets. An affiliate of the Manager serves as the investment manager to
these companies and is paid fees in connection with such services. The
Company does not anticipate paying any management fees directly to any
affiliate of the Manager in connection with these investments.
NOTE 9 - STOCK OPTIONS
The Company has adopted a stock option plan (the "Amended and Restated
1997 Stock Option Plan") that provides for the grant of both qualified
incentive stock options that meet the requirements of Section 422 of
the Code, and non-qualified stock options, stock appreciation rights
and dividend equivalent rights. Stock options may be granted to
directors, officers and key employees of the Company, the Manager, its
directors, officers and key employees.
The exercise price for any stock option granted under the Amended and
Restated 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. Each option must terminate no more than ten years from the
date it is granted. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the Amended and Restated
1997 Stock Option Plan authorizes the grant of options to purchase an
aggregate 1,000,000 shares of common stock.
The Company recognized compensation expense of (i) $118,000 during the
year ended December 31, 1998 for stock options granted to
non-employees, and (ii) $7,000 during the period ended December 31,
1997 for stock options granted to non-employees.
For the year ended December 31, 1998, options to purchase 112,000
shares of the Company's common stock were granted to directors of the
Company and options to purchase 58,000 shares were granted to officers
of the Company and officers and key employees of the Manager. The
exercise price of the options granted during 1998 was $10.38 per share.
All of the options granted during 1998 include dividend equivalent
rights that entitle the option holder to receive a cash payment equal
to the dividends declared on the Company's common stock multiplied by
the number of options held until the options are exercised or expire.
The fair value of each option granted during 1998 was estimated to be
$5.32 as of the grant date using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0% per annum (to
account for the dividend equivalent rights); expected volatility of
30%; risk free interest rate of 4.57% per annum; and an expected life
of 10 years.
F-13
<PAGE>
The options granted during 1998 expire in December 2008 and vest in two
equal installments during the month of December in 1999 and 2000.
For the year ended December 31, 1997, options to purchase 210,000
shares of the Company's common stock were granted to directors of the
Company and options to purchase 190,000 shares were granted to officers
of the Company and officers and key employees of the Manager. The
exercise price of the options granted during 1997 was $15 per share.
The fair value of each option granted during 1997 was estimated to be
$1.05 as of the grant date using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 11% per annum;
expected volatility of 30%; risk free interest rate of 5.82% per annum;
and an expected life of 10 years.
The options granted during 1997 expire in December 2007 and vest in
three equal installments during the month of February in 1999, 2000 and
2001.
If the Company had recorded stock option grants to Company directors at
fair value and related compensation expense, the pro forma effect on
the Company's net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, 1998 December 31, 1997
------------------------------------------
<S> <C> <C>
Net income - as reported $5,547,000 $150,000
Net income - pro forma 5,411,000 143,000
Basic and diluted earnings per share - as reported $0.90 $0.02
Basis and diluted earnings per share - pro forma $0.87 $0.02
</TABLE>
Information regarding stock option activity during the year ended
December 31, 1998 and the period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
---------------------------------
<S> <C> <C>
Options Granted During 1997 400,000 $15.00
Exercised - -
Expired - -
---------------------------------
Options Outstanding at December 31, 1997 400,000 15.00
Options Granted During 1998 170,000 10.38
Exercised - -
Expired - -
Options Outstanding at December 31, 1998 570,000 $13.62
---------------------------------
---------------------------------
</TABLE>
F-14
<PAGE>
NOTE 10 - CONTRACTUAL COMMITMENTS
During the year ended December 31, 1998 the Company entered into
interest rate swap agreements with original notional amounts as stated
below. Under these agreements, the Company receives a floating rate and
pays a fixed rate. (Amounts are in thousands)
<TABLE>
<CAPTION>
Current Termination Unrealized
Notional Amount Type Fixed Rate Floating Rate Date Gains (Losses)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 95,000 Interest Rate Swap 5.880% 1Mo LIBOR 5/29/00 $ (1,058)
30,000 Interest Rate Swap 5.905% 1Mo LIBOR 6/30/00 (378)
28,204 Interest Rate Swap 5.765% 1Mo LIBOR 7/25/00 (282)
61,599 Interest Rate Swap 5.775% 1Mo LIBOR 8/25/00 (653)
47,170 Interest Rate Swap 5.710% 1Mo LIBOR 8/28/00 (456)
60,000 Interest Rate Swap 5.900% 1Mo LIBOR 5/18/01 (1,086)
97,118 Interest Rate Swap 5.883% 1Mo LIBOR 6/25/01 (1,564)
117,755 Interest Rate Swap 5.905% 1Mo LIBOR 5/25/01 (1,720)
53,394 Interest Rate Swap 5.750% 1Mo LIBOR 7/14/01 (709)
65,000 Interest Rate Swap 5.791% 1Mo LIBOR 6/25/01 (1,045)
48,350 Interest Rate Swap 5.960% 1Mo LIBOR 5/15/02 (1,043)
------------ -----------
$703,590 $(9,994)
------------ -----------
------------ -----------
</TABLE>
The Company is generally required to deposit collateral with the swap
agreement counter-parties in an amount at least equal to the amount of
any unrealized losses. At December 31, 1998, the Company had securities
with a fair market value of $17,327,000 on deposit with its
counter-parties. If unrealized losses on the interest rate swap
agreements were to increase, the Company would be required to deposit
additional collateral.
NOTE 11 - SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations
(amounts are in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $ 13,738 $ 13,642 $ 9,498 $ 4,907
Interest Expense 11,726 11,271 8,999 4,011
-------- -------- -------- --------
Net Interest Income 2,012 2,371 499 896
-------- -------- -------- --------
Gain on Investment Transaction, net 571 7 469 -
Other Income 640 186 - -
General and Administrative Expenses (841) (572) (359) (332)
-------- -------- -------- --------
Net Income $ 2,382 $ 1,992 $ 609 $ 564
-------- -------- -------- --------
-------- -------- -------- --------
Basic and Diluted EPS $ 0.41 $ 0.33 $ 0.10 $ 0.09
-------- -------- -------- --------
-------- -------- -------- --------
Average Number of Shares Outstanding 5,761 6,022 6,387 6,603
(net of treasury shares)
-------- -------- -------- --------
-------- -------- -------- --------
Dividend Declared Per Share $ 0.30 $ 0.27 $ 0.25 $ 0.25
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-15
<PAGE>
EXHIBIT 10.1
APEX MORTGAGE CAPITAL, INC.
FIRST AMENDMENT TO MANAGEMENT AGREEMENT
This First Amendment to the Management Agreement between APEX MORTGAGE
CAPITAL, INC., a Maryland corporation (the "COMPANY"), and TCW INVESTMENT
MANAGEMENT COMPANY, a California corporation (the "MANAGER") executed December
9, 1997 is entered into as of December 16, 1998 by the Company and the Manager
pursuant to section 26 of the Management Agreement.
The Management Agreement is amended as follows:
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 offering, 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, minus (iii) the cumulative
amounts paid by the Company to repurchase its shares.
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,
minus the cumulative amounts paid by the Company to repurchase its
shares.
IN WITNESS WHEREOF, the parties have executed this First Amendment to the
Management Agreement as of the effective date.
APEX MORTGAGE CAPITAL, INC.
By: /s/ Daniel K. Osborne
--------------------------------------
Daniel K. Osborne
Executive Vice President
TCW INVESTMENT MANAGEMENT COMPANY
By: /s/ Alvin R. Albe, Jr.
--------------------------------------
Alvin R. Albe, Jr.
President
<PAGE>
EXHIBIT 10.6
APEX MORTGAGE CAPITAL, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
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 . . . . . . . . . . . . . . 4
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2.1 Pricing Limits. . . . . . . . . . . . . . . . . . . . . . 6
2.2.2 Payment Provisions. . . . . . . . . . . . . . . . . . . . 6
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
2.3 Limitations on Grant and Terms of Incentive Stock Options . . . . . 7
2.3.1 $100,000 Limit. . . . . . . . . . . . . . . . . . . . . . 7
2.3.2 Option Period . . . . . . . . . . . . . . . . . . . . . . 7
2.3.3 Other Code Limits . . . . . . . . . . . . . . . . . . . . 7
2.4 Limits on 10% Holders . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Option Repricing/Cancellation and Regrant/Waiver of
Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Effects of Termination of Employment; Termination of Subsidiary
Status; Discretionary Provisions. . . . . . . . . . . . . . . . . . 8
2.6.1 Options - Resignation or Dismissal. . . . . . . . . . . . 8
2.6.2 Options - Death or Disability . . . . . . . . . . . . . . 8
2.6.3 Options - Retirement. . . . . . . . . . . . . . . . . . . 8
2.6.4 Certain SARs. . . . . . . . . . . . . . . . . . . . . . . 9
2.6.5 Other Awards. . . . . . . . . . . . . . . . . . . . . . . 9
2.6.6 Committee Discretion. . . . . . . . . . . . . . . . . . . 9
2.7 Options and Rights in Substitution for Stock Options Granted by
Other Corporations. . . . . . . . . . . . . . . . . . . . . . . . . 9
3. Stock Appreciation Rights (Including Limited Stock Appreciation Rights. . . . 9
3.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Exercise of Stock Appreciation Rights . . . . . . . . . . . . . . . 9
3.2.1 Exercisability. . . . . . . . . . . . . . . . . . . . . . 9
3.2.2 Effect on Available Shares. . . . . . . . . . . . . . . . 10
3.2.3 Stand-Alone SARs. . . . . . . . . . . . . . . . . . . . . 10
3.2.4 Proportionate Reduction . . . . . . . . . . . . . . . . . 10
3.3 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3.1 Amount. . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3.2 Form of Payment . . . . . . . . . . . . . . . . . . . . . 10
3.4 Limited Stock Appreciation Rights . . . . . . . . . . . . . . . . . 10
4. Restricted Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2.1 Pre-Vesting Restraints. . . . . . . . . . . . . . . . . . 11
4.2.2 Dividend and Voting Rights. . . . . . . . . . . . . . . . 11
4.2.3 Cash Payments . . . . . . . . . . . . . . . . . . . . . . 11
4.3 Return to the Corporation . . . . . . . . . . . . . . . . . . . . . 12
5. Performance Share Awards; Stock Units; Stock Bonuses. . . . . . . . . . . . . 12
5.1 Grants of Performance Share Awards. . . . . . . . . . . . . . . . . 12
5.2 Special Performance-Based Share Awards. . . . . . . . . . . . . . . 12
5.2.1 Eligible Class. . . . . . . . . . . . . . . . . . . . . . 13
5.2.2 Maximum Award . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
5.2.3 Committee Certification . . . . . . . . . . . . . . . . . 13
5.2.4 Terms and Conditions of Awards. . . . . . . . . . . . . . 13
5.2.5 Stock Payout Features . . . . . . . . . . . . . . . . . . 13
5.2.6 Adjustments for Material Changes. . . . . . . . . . . . . 13
5.3 Grants of Stock Bonuses . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Deferred Payments . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.5 Cash Bonus Awards . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.5.1 Performance Goals . . . . . . . . . . . . . . . . . . . . 14
5.6 Alternative Payments. . . . . . . . . . . . . . . . . . . . . . . . 14
6. Other Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.1 Rights of Eligible Persons, Participants and Beneficiaries. . . . . 14
6.1.1 Employment Status . . . . . . . . . . . . . . . . . . . . 14
6.1.2 No Employment Contract. . . . . . . . . . . . . . . . . . 14
6.1.3 Plan Not Funded . . . . . . . . . . . . . . . . . . . . . 14
6.2 Adjustments; Acceleration . . . . . . . . . . . . . . . . . . . . . 15
6.2.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . 15
6.2.2 Acceleration of Awards Upon Change in Control . . . . . . 16
6.2.3 Possible Early Termination of Accelerated Awards. . . . . 16
6.2.4 Golden Parachute Limitations. . . . . . . . . . . . . . . 16
6.3 Effect of Termination of Employment . . . . . . . . . . . . . . . . 17
6.4 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . 17
6.4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.4.2 Restrictions on Transfer. . . . . . . . . . . . . . . . . 17
6.5 Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.5.1 Provision for Tax Withholding Offset. . . . . . . . . . . 18
6.5.2 Tax Loans . . . . . . . . . . . . . . . . . . . . . . . . 18
6.6 Plan Amendment, Termination and Suspension. . . . . . . . . . . . . 18
6.6.1 Board Authorization . . . . . . . . . . . . . . . . . . . 18
6.6.2 Stockholder Approval. . . . . . . . . . . . . . . . . . . 19
6.6.3 Amendments to Awards. . . . . . . . . . . . . . . . . . . 19
6.6.4 Limitations on Amendments to Plan and Awards. . . . . . . 19
6.7 Privileges of Stock Ownership . . . . . . . . . . . . . . . . . . . 19
6.8 Effective Date of the Plan. . . . . . . . . . . . . . . . . . . . . 19
6.9 Term of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.10 Governing Law/Construction/Severability . . . . . . . . . . . . . . 19
6.10.1 Choice of Law . . . . . . . . . . . . . . . . . . . . . . 19
6.10.2 Severability. . . . . . . . . . . . . . . . . . . . . . . 20
6.10.3 Plan Construction . . . . . . . . . . . . . . . . . . . . 20
6.11 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
6.12 Effect of Change of Subsidiary Status . . . . . . . . . . . . . . . 20
6.13 Non-Exclusivity of Plan . . . . . . . . . . . . . . . . . . . . . . 20
7. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8. Non-Employee Director Options . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2 Option Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2.1 Time of Initial Award . . . . . . . . . . . . . . . . . . 25
8.2.2 Subsequent Automatic Awards . . . . . . . . . . . . . . . 26
8.2.3 Subsequent Discretionary Awards . . . . . . . . . . . . . 26
8.3 Option Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.4 Option Period and Exercisability. . . . . . . . . . . . . . . . . . 26
8.5 Termination of Directorship . . . . . . . . . . . . . . . . . . . . 26
8.6 Adjustments; Accelerations; Terminations. . . . . . . . . . . . . . 26
8.7 Acceleration Upon a Change in Control Event . . . . . . . . . . . . 27
</TABLE>
iv
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APEX MORTGAGE CAPITAL, INC.
AMENDED AND RESTATED 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
stockholder(s) 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);
(d) construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and
Eligible Persons under this Plan, further
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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 Sections 8.2.1
and 8.2.2 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.
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.
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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"). The Shares may be delivered for any lawful
consideration.
1.4.2 SHARE LIMITS. The maximum number of Shares 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 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.
(a) 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, "ownership" is determined 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.
(b) If, after an Award is granted, circumstances of ownership
(or the Corporation's knowledge thereof) change so that the
exercise of such Award would cause the Participant to
beneficially own more Shares than are permitted pursuant to
paragraph (a) above, then upon any exercise of such Award
that causes such result, the Corporation shall have the
right to deliver to the Participant, in lieu of Shares, a
check or cash in the amount equal to the Fair Market Value
of the Shares otherwise deliverable on the date of exercise
(minus any amounts withheld pursuant to Section 6.5).
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
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are subject to or underlie Awards that expire or for any reason
are 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 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 Shares 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.
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:
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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 the Severance Date;
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.
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.
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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.
2.2 OPTION PRICE.
2.2.1 PRICING LIMITS. The purchase price per Share of the Shares
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
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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 Shares with respect to which incentive stock options
first become exercisable by a Participant in any calendar year
exceeds $100,000, taking into account both Shares 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 $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
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 who satisfy
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.
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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.
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, 90 days 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
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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.
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.
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3.2.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock
Appreciation Right is exercised, only the actual number of
delivered Shares 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 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 (valued at Fair Market Value on the date of
exercise of the Stock Appreciation Right), or partly in 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.
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
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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 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
Restricted Shares have lapsed and the Restricted 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 Restricted 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
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) to
which the cash must be returned (with or without an earnings
factor) as to any Restricted Shares that cease to be eligible for
vesting.
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4.3 RETURN TO THE CORPORATION. Unless the Committee otherwise expressly
provides, Restricted Shares that remain subject to restrictions as of a
Severance Date with respect to the Participant 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; 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 (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.
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
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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 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 Shares, 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.
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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.
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 Shares, Restricted Shares, 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
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assure payment of such 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 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) (i) proportionately adjust any or all of (1) the number
and type of Shares (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), (2) the
number, amount and type of Shares (or other securities or
property) subject to any or all outstanding Awards, (3) the grant,
purchase, or exercise price of any or all outstanding Awards, (4)
the securities, cash or other property deliverable upon exercise
of any outstanding Awards, or (5) the performance standards
appropriate to any outstanding Awards, or
(ii) in the case of an extraordinary dividend or other
distribution, recapitalization, reclassification,
merger, 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
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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 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 Shares 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
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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.
6.4.1 GENERAL. This Plan, the granting, vesting and exercise of
Awards under this Plan and the offer, issuance and delivery of
Shares 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
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 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 the Corporation's counsel.
Any determination by the Corporation 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:
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"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."
If, in the opinion of the Corporation 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 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 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 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.
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
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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 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 December 3,
1997 (the "Effective Date"). The Plan was approved by the Corporation's
stockholder(s) on October 17, 1997.
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.
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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
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.
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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.
"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;
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(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 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
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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 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 Corporation and 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
23
<PAGE>
securities of the Company in a capital raising transaction) to the Company. 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
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 under
Section 5.1, or to receive Shares 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. Amended and Restated 1997 Stock
Option Plan, as amended from time to time.
"QDRO" means a qualified domestic relations order.
"RESTRICTED SHARES" or "Restricted Stock" means Shares 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, or, in the case of a Non-Employee
Director, retirement or failure to stand for reelection, with the consent of the
Board of Directors, on or after age 55 with ten or more years of service, or in
any case after age 65.
24
<PAGE>
"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.
"STOCK APPRECIATION RIGHT" or "SAR" means a right authorized under this Plan to
receive a number of Shares 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 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 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
stockholder(s) 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
initial public offering.
25
<PAGE>
8.2.2 SUBSEQUENT AUTOMATIC 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.
8.2.3 SUBSEQUENT DISCRETIONARY AWARDS. The Committee shall have the
authority to grant additional Options to Non-Employee Directors
from time to time; provided, however that no more than 50,000
shares, subject to adjustment as contemplated by Section 6.2, in
the aggregate, shall be subject to Options made to any one
Non-Employee Director under this Section 8.2 and provided further
that any such discretionary Option shall be subject to
contemporaneous approval or ratification by a majority of the
members of the Board of Directors and a majority of the Directors
who are not recipients of such grants.
8.3 OPTION PRICE. The purchase price per share of the Common Stock covered
by each Option granted pursuant to Section 8.2.2 or Section 8.2.3 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 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. Any notice and third party cashless exercise payment
procedures authorized by the Committee with respect to Options under
Section 2 may be utilized with respect to Options granted under Section
8.2 unless the Committee or applicable law otherwise provide.
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
shall become exercisable no earlier than six months after the Award Date.
Unless the Board or Committee otherwise provides in the applicable Award
Agreement, an Option will vest as follows: one-third on each of the
first, second and third anniversaries of the date of grant.
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, Total
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
26
<PAGE>
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, 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.
27
<PAGE>
EXHIBIT 24.1.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John C. Argue, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, Inc.,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing in as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact or agents or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
/s/ John C. Argue
- -----------------
John C. Argue
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Peter G. Allen, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, Inc.,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing in as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact or agents or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
/s/ Peter G. Allen
- ------------------
Peter G. Allen
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John A. Gavin, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital,
Inc., and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing in as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ John A. Gavin
- -----------------
John A. Gavin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Carl C. Gregory III, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, Inc.,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing in as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact or agents or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
/s/ Carl C. Gregory
- -------------------
Carl C. Gregory III
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF THE REGISTRANT AS OF DECEMBER
31, 1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE
PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,679
<SECURITIES> 846,134
<RECEIVABLES> 6,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 577
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 865,478
<CURRENT-LIABILITIES> 777,448
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 87,963
<TOTAL-LIABILITY-AND-EQUITY> 865,478
<SALES> 0
<TOTAL-REVENUES> 43,658
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,007
<INCOME-PRETAX> 5,547
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,547
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
