<PAGE>
As filed with the Securities and Exchange Commission on November 25, 1997
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
----------------------------
LASER MORTGAGE MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
(973) 912-8770
(Address of Principal Executive Offices)
----------------------------
Michael L. Smirlock, Ph.D.
Chief Executive Officer
LASER Mortgage Management, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
(973) 912-8770
(Name and Address of Agent for Service)
----------------------------
Copies to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------------------
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<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================== ================= ======================= =================== ==================
Proposed Proposed
Title of Securities Amount to be Maximum Offering Price Maximum Aggregate Amount of
Being Registered Registered Per Security(1) Offering Price(1) Registration Fee
- ------------------------------- ----------------- ----------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 4,347,333 shares $15.00 $65,209,995 $19,761.00
=============================== ================= ======================= =================== ==================
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933 based on the
estimated initial public offering price.
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 25, 1997
4,347,333 SHARES
LASER MORTGAGE MANAGEMENT, INC.
COMMON STOCK
This Prospectus is being used in connection with the offering (the
"Offering") from time to time of up to 4,347,333 shares (the "Shares") of
common stock, $.001 par value (the "Common Stock"), of LASER Mortgage
Management, Inc., a Maryland corporation (the "Company"), by certain
stockholders of the Company identified herein (the "Selling Stockholders").
See "Selling Stockholders." The Company is not selling any of the Shares
offered hereby and will not receive any of the proceeds from sales of Common
Stock by the Selling Stockholders.
The sale or distribution of any of the Shares may be effected by the
Selling Stockholders from time to time on terms to be determined at the time of
sale, in transactions in the over-the-counter market, in negotiated
transactions, or by a combination of these methods, at fixed prices that may be
changed, at market prices prevailing at the time of the sale, at prices related
to such market prices or at negotiated prices. The Selling Stockholders may
effect such transactions by selling the Shares to or through securities
broker-dealers or other agents, and such broker-dealers or other agents may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers of the Common Stock for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Common
Stock or interests therein as a pledgee and may, from time to time, effect
distributions of the Common Stock or interests in such capacity. See "Selling
Stockholders" and "Plan of Distribution." The Selling Stockholders and any
brokers, dealers or agents through whom sales of the Common Stock are made may
be deemed "underwriters" within the meaning of the Securities Act, and any
profits realized by them on the sale of the Common Stock may be considered to be
underwriting compensation.
The Company has agreed to bear all of the expenses in connection with the
registration and sale of the shares offered hereby by the Selling
Stockholders (other than underwriting discounts and selling commissions). The
Common Stock is traded on the New York Stock Exchange (the "NYSE") under the
symbol "LMM." The closing sale price per share of the Common Stock on the
NYSE on _________, 1997 was $[ ].
-------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK,
INCLUDING, AMONG OTHERS:
- - The Company was organized in September 1997 and has no operating history,
no assets, no identified investments and no established financing sources
- - The Manager has conflicts of interest, including those with other accounts
it manages and an incentive fee that may encourage speculative investments
- - On November 29, 1993, the Chief Executive Officer of the Company and the
Manager consented to the entry of a cease-and-desist order issued against
him by the Securities and Exchange Commission arising out of trading
activities in Mortgage Securities
- - The Company is totally reliant on the Manager, which has significant
operating discretion, including as to the use of proceeds of the Public
Offering and Private Placement and the Company's operating policies and
strategies
- - Interest rate fluctuations may decrease or eliminate net income from the
Company's investments
- - The Company's investments are expected to be highly leveraged; there are no
limitations on borrowings;
- - The Company can suffer significant losses on investments in IOs, Sub IOs,
Inverse IOs and other Mortgage Derivatives from rapid prepayments during
periods of interest rate declines
- - The Company will invest in non-real estate assets, including non-investment
grade high yield corporate debt that experiences high default rates, credit
losses and liquidity risks
- - The Company will engage in complex hedging strategies and will have no
significant credit risk or hedging policies
- - The Company will purchase Mortgage Loans and non-guaranteed Mortgage
Securities that are subject to credit risks
- - Stockholders will be subject to significant potential dilution from future
equity offerings
- - Failure to maintain REIT status would subject the Company to corporate tax
and an excise penalty tax and would reduce earnings and cash available for
distribution to stockholders
- - The Board of Directors determines the Company's operating policies and
strategies which may be changed without stockholder consent
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EX-
CHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The date of this Prospectus is ______________, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such reports and other
information may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, on payment of prescribed
charges. In addition, such reports, proxy statements and other information may
be electronically accessed at the Commission's site on the World Wide Web
located at http://www.sec.gov. Such reports, proxy statements and other
information concerning the Company may also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-11, of which this Prospectus forms a part (together with any amendments and
exhibits thereto, the "Registration Statement"), under the Securities Act in
respect of the Shares offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
Such additional information may be obtained from the public reference room of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Statements
contained in this Prospectus or in any document incorporated by reference in
this Prospectus as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS. THE COMPANY DISCLAIMS ANY
OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY
FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE
COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS
OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
2
<PAGE>
TABLE OF CONTENTS
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Limit on Such Assets May Change
PROSPECTUS SUMMARY . . . . . . . . . . . . . . 6 Without Stockholder Approval . . . . . . . 20
RISK FACTORS . . . . . . . . . . . . . . . . . 13 Possible Losses on Mortgage Loans During
Conflicts of Interest of the Manager . . . . . 13 Warehousing Period . . . . . . . . . . . . 21
Newly-Organized Corporation, No Lack of Access to Securitizations Would
Established Financing. . . . . . . . . . . 13 Adversely Affect the Company . . . . . . . 21
No Identified Assets; Discretionary Use of Credit Risks . . . . . . . . . . . . . . . . . 22
Proceeds . . . . . . . . . . . . . . . . . 14 Failure to Maintain REIT Status Would
Cease-and-Desist Order Against Chief Subject Company to Corporate Tax and
Executive Officer . . . . . . . . . . . . 14 Penalty Tax. . . . . . . . . . . . . . . . 22
Total Reliance on the Manager; Termination Pledged Assets and Risk of Bankruptcy in
of the Management Agreement. . . . . . . . 14 Reverse Repurchase Agreements. . . . . . . 23
Results of Operations Adversely Affected by Possible Environmental Liabilities . . . . . . 23
Factors Beyond Company's Control . . . . . . 15 Failure to Maintain Investment Company
Substantial Leverage Can Result in Net Act Exemption Would Adversely Affect
Interest and Operating Losses. . . . . . . . 15 Results of Operations. . . . . . . . . . . 23
Leveraging Strategy. . . . . . . . . . . . 15 Taxable Mortgage Pool Risk; Increased
Borrowing Risks; Margin Calls. . . . . . . 16 Taxation to Tax Exempt Entities and
No Restriction on the Incurrence of Other Investors. . . . . . . . . . . . . . 23
Additional Indebtedness. . . . . . . . . . 16 Phantom Income May Result in Additional
Interest Rate Fluctuations Will Affect Value Tax Liability. . . . . . . . . . . . . . . 24
of Mortgage Assets and Net Income. . . . . 16 Ownership Limitation May Restrict Business
General. . . . . . . . . . . . . . . . . . 16 Combination Opportunities. . . . . . . . . 24
Failure to Manage Mismatch Between Plans Should Consider ERISA Risks of
Long-Term Assets and Short-Term Investing in Common Stock. . . . . . . . . 25
Funding . . . . . . . . . . . . . 17 Preferred Stock May Prevent Change in
Inverted Yield Curve Adversely Affects Control. . . . . . . . . . . . . . . . . . 25
Income . . . . . . . . . . . . . . . . . 17 Lack of Operating Policies; Board of
Increased Prepayment Rates Will Reduce Directors May Change Policies Without
Value of Mortgage Assets . . . . . . . . 17 Stockholder Consent. . . . . . . . . . . . 25
Consequence and Costs of Hedging Lack of Policy Regarding Hedging or Credit
Transactions . . . . . . . . . . . . . . . 18 Risk; Future Revisions in Policies and
Competition for Mortgage Assets at Strategies . . . . . . . . . . . . . . . . 26
Favorable Yields and for Financing . . . . 19 Lack of Accounting and Testing Systems . . . . 26
Value of CMO's May Be Adversely Affected Limitation on Liability of Directors and
by Prepayment on Underlying Collateral . . 19 Officers and Manager Indemnification . . . 26
Value of Mortgage Derivatives May Be Interest Rate Volatility May Adversely
Reduced or Eliminated Due to Interest Affect Common Stock Price. . . . . . . . . 26
Rate Fluctuations; No Limit on Mortgage Illiquidity of Mortgage Loans, Subordinate
Derivatives. . . . . . . . . . . . . . . . 19 Interests and Mortgage Derivatives Could
Value of Subordinate Interests May be Cause Losses . . . . . . . . . . . . . . . 27
Adversely Affected by Losses on Benefits to Existing Stockholder, Directors
Underlying Mortgage Loans. . . . . . . . . 20 and Officers . . . . . . . . . . . . . . . 27
Investment in Non-Real Estate Assets
Subject to Liquidity and Credit Risks;
</TABLE>
3
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USE OF PROCEEDS. . . . . . . . . . . . . . . . 27 CERTAIN RELATIONSHIPS AND
DISTRIBUTION POLICY. . . . . . . . . . . . . . 28 RELATED PARTY TRANSACTIONS
MANAGEMENT'S DISCUSSION AND AND CONFLICTS OF INTEREST. . . . . . . . . 52
ANALYSIS OF FINANCIAL PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . 54
CONDITION AND RESULTS OF FEDERAL INCOME TAX
OPERATIONS . . . . . . . . . . . . . . . . 29 CONSIDERATIONS . . . . . . . . . . . . . . 55
General 29 General 55
Leverage 29 Requirements for Qualification . . . . . . . . 55
Hedging 29 Stock Ownership Tests. . . . . . . . . . . 56
Liquidity and Capital Resources. . . . . . . . 29 Asset Tests. . . . . . . . . . . . . . . . 56
Inflation. . . . . . . . . . . . . . . . . . . 30 Gross Income Tests . . . . . . . . . . . . 56
Certain Accounting Policies and Procedures . . 30 Distribution Requirement . . . . . . . . . . . 58
Mortgage Security Accounting Treatment . . 30 Taxation of the Company. . . . . . . . . . . . 58
Mortgage Loan Accounting Treatment . . . . 30 Taxation of Stockholders . . . . . . . . . . . 59
Taxable Income and GAAP Income . . . . . . 30 Taxation of Stockholders on the Disposition
BUSINESS 31 of the Common Stock. . . . . . . . . . . . 61
General 31 Capital Gains and Losses . . . . . . . . . . . 61
Investment Strategy. . . . . . . . . . . . . . 31 Information Reporting Requirement and
Operating Policies and Strategies. . . . . . . 32 Backup Withholding . . . . . . . . . . . . 61
Capital and Leverage Policies. . . . . . . 32 Taxation of Tax-Exempt Stockholders. . . . . . 61
Short-Term Borrowing . . . . . . . . . . . 33 Taxation of Non-U.S. Stockholders. . . . . . . 62
Securitization . . . . . . . . . . . . . . 34 State and Local Taxes. . . . . . . . . . . . . 63
Hedging Activities . . . . . . . . . . . . 34 ERISA CONSIDERATIONS . . . . . . . . . . . . . 64
Interest Rate Risk Management Strategy . . 35 Employee Benefit Plans, Tax-Qualified
Employees. . . . . . . . . . . . . . . . . . . 36 Retirement Plans and IRA's . . . . . . . . 64
Facilities . . . . . . . . . . . . . . . . . . 36 Status of the Company Under ERISA. . . . . . . 64
Legal Proceedings. . . . . . . . . . . . . . . 36 CERTAIN PROVISIONS OF MARYLAND
DESCRIPTION OF PROPOSED ASSETS . . . . . . . . 37 LAW AND THE COMPANY'S
Mortgage Loans . . . . . . . . . . . . . . . . 37 CHARTER AND BYLAWS . . . . . . . . . . . . 66
Pass-Through Certificates. . . . . . . . . . . 38 Certain Anti-Takeover Provisions . . . . . . . 66
FHLMC Certificates . . . . . . . . . . . . 38 Staggered Board of Directors . . . . . . . . . 66
FNMA Certificates. . . . . . . . . . . . . 39 Number of Directors, Removal, Filling
GNMA Certificates. . . . . . . . . . . . . 39 Vacancies. . . . . . . . . . . . . . . . . 66
Privately-Issued Certificates. . . . . . . 39 Advance Notice Provisions for Stockholder
CMOs . . . . . . . . . . . . . . . . . . . . . 39 Nominations and Stockholder Proposals. . . 66
Mortgage Derivatives . . . . . . . . . . . . . 40 Rights to Purchase Securities and Other
Subordinate Interests. . . . . . . . . . . . . 40 Property . . . . . . . . . . . . . . . . . 67
Other Fixed-Income Assets. . . . . . . . . . . 41 Indemnification. . . . . . . . . . . . . . . . 67
THE MANAGER. . . . . . . . . . . . . . . . . . 43 Limitation of Liability. . . . . . . . . . . . 67
Cease-and-Desist Order Against Chief Business Combinations. . . . . . . . . . . . . 67
Executive Officer. . . . . . . . . . . . . 44 Control Share Acquisitions . . . . . . . . . . 68
The Management Agreement . . . . . . . . . . . 44 DESCRIPTION OF CAPITAL STOCK . . . . . . . . . 68
Management Fees. . . . . . . . . . . . . . . . 46 General. . . . . . . . . . . . . . . . . . . . 68
Stock Options and Deferred Common Stock Common Stock . . . . . . . . . . . . . . . . . 69
Awards . . . . . . . . . . . . . . . . . . 47 Preferred Stock. . . . . . . . . . . . . . . . 69
Limits of Responsibility . . . . . . . . . . . 47 Standstill Agreement . . . . . . . . . . . . . 69
THE COMPANY. . . . . . . . . . . . . . . . . . 48 Repurchase of Shares and Restrictions on
Directors and Executive Officers . . . . . . . 48 Transfer . . . . . . . . . . . . . . . . . 70
Committees of the Board of Directors . . . . . 48 Transfer Agent and Registrar . . . . . . . . . 71
Compensation of Directors. . . . . . . . . . . 49 SELLING STOCKHOLDERS . . . . . . . . . . . . . 72
Executive Compensation . . . . . . . . . . . . 49 PLAN OF DISTRIBUTION . . . . . . . . . . . . . 74
PUBLIC OFFERING. . . . . . . . . . . . . . . . 75
Stock Incentive Plan . . . . . . . . . . . . . 49 PRIVATE PLACEMENT. . . . . . . . . . . . . . . 75
Grants of Awards . . . . . . . . . . . . . . . 51 LEGAL MATTERS. . . . . . . . . . . . . . . . . 75
Compensation Committee Interlocks. . . . . . . 51 EXPERTS. . . . . . . . . . . . . . . . . . . . 75
</TABLE>
4
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GLOSSARY . . . . . . . . . . . . . . . . . . . 76 INDEPENDENT AUDITORS' REPORT . . . . . . . . . F-1
</TABLE>
5
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in this Prospectus.
AN INVESTMENT IN THE COMMON STOCK IS HIGHLY SPECULATIVE. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, INVESTORS SHOULD
CAREFULLY CONSIDER THE RISK FACTORS SET FORTH IN THIS SUMMARY AND "RISK
FACTORS" BEGINNING ON PAGE 13.
THE COMPANY
GENERAL
LASER Mortgage Management, Inc. (the "Company") is a specialty
finance company, organized in September 1997, that will invest primarily in
mortgage-backed securities and mortgage loans. The mortgage-backed
securities will include mortgage pass-through certificates, collateralized
mortgage obligations and other securities representing interests in, or
obligations backed by, pools of mortgage loans (collectively, the "Mortgage
Securities"). The mortgage loans will be secured by first or second liens on
single-family residential, multi-family residential, commercial or other real
property (the "Mortgage Loans" and, together with the Mortgage Securities,
the "Mortgage Assets"). See "Description of Proposed Assets."
The Company will seek to generate net income for distribution
to stockholders from the spread between the interest income earned on its
investment portfolio and the cost of financing and hedging the portfolio.
The Company will elect to be taxed as a real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
The Company generally will not be subject to federal income tax provided that
it distributes its income to its stockholders and maintains its qualification
as a REIT. See "Federal Income Tax Considerations." LASER Advisers Inc. (the
"Manager"), which specializes in managing investments in Mortgage Securities
for institutions and other sophisticated investors, will manage the Company's
day-to-day operations. The Manager is a newly-organized registered investment
adviser.
The Company's principal executive offices are located at 51
John F. Kennedy Parkway, Short Hills, New Jersey 07078. Its telephone number
is (973) 912-8770.
INVESTMENT STRATEGY
The Company's investment strategy will be to create and manage
an investment portfolio, principally of Mortgage Assets, that, in combination
with financing and hedging activities, will be designed to generate income
for distribution to its stockholders while preserving the Company's capital
base.
The Company intends to acquire the following types of
investments: (i) fixed and adjustable rate mortgage pass-through certificates
("Pass-Through Certificates"), which are securities collateralized by pools
of Mortgage Loans issued and sold to investors by private non-governmental
issuers ("Privately-Issued Certificates") or by various U.S. government
agencies or instrumentalities, such as the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
the Government National Mortgage Association ("GNMA") (collectively, "Agency
Certificates"); (ii) collateralized mortgage obligations ("CMOs"), which are
fixed and adjustable rate debt obligations collateralized by Mortgage Loans
or Pass-Through Certificates; (iii) Mortgage Loans, which will be pooled and
securitized to provide long-term, non-recourse financing for the Company;
(iv) mortgage derivative securities ("Mortgage Derivatives"), including
interest-only securities ("IOs") which receive only certain interest payments
from a pool of Mortgage Securities or Mortgage Loans; (v) subordinate
interests ("Subordinate Interests"), which are classes of Mortgage Securities
junior to other classes of Mortgage Securities in the right to receive
payments from the underlying Mortgage Loans; and (vi) other fixed-income
securities in an amount not to exceed 5% of total assets. Initially, the
Company intends to invest at least 65% of its assets in fixed-rate
securities. See "Description of Proposed Assets." Consistent with the
Company's policy of maintaining its status as a REIT for federal income tax
purposes, substantially all of the Company's
6
<PAGE>
assets will consist of real estate assets of the type described in Section
856(c)(6)(B) of the Code ("Qualified Real Estate Assets").
The Company will invest at least 70% of its total assets (the
"70% Asset Group") in (i) securities which are rated within one of the two
highest ratings categories by one of the nationally recognized rating
agencies (the "Rating Agencies") or (ii) securities which are unrated but are
guaranteed by the U.S. government or an agency or instrumentality thereof, or
(iii) Mortgage Loans to borrowers who would otherwise meet FHLMC, FNMA or
GNMA guidelines, except with respect to the size of the loans. The Company
intends to securitize substantially all the Mortgage Loans it acquires by
issuing structured debt, such as CMOs, and to retain Subordinate Interests in
the pools of Mortgage Loans it securitizes.
The remainder of the Company's assets, not to exceed 30% of
its total assets (the "30% Asset Group"), is expected to consist of Mortgage
Loans other than those included in the 70% Asset Group, retained Subordinate
Interests and fixed-income securities, other than those included in the 70%
Asset Group, that are primarily Qualified Real Estate Assets but also will
include non-investment grade high yield corporate debt. To attempt to
minimize the potentially higher level of credit and liquidity risk of these
securities, the Company will limit its investments in, and diversify its
portfolio of securities in the 30% Asset Group. Only such retained
Subordinate Interests of securitized Mortgage Loans (and not the entire pools
of Mortgage Loans) will be considered in determining the proportion of assets
qualifying in the 70% Asset Group and in the 30% Asset Group held by the
Company.
The Company's policy is to acquire those Mortgage Assets which
it believes are likely to generate the highest returns on capital invested,
after considering (i) the amount and nature of anticipated cash flows from
the asset, (ii) the Company's ability to pledge the asset to secure
collateralized borrowings, (iii) the capital requirements resulting from the
purchase and financing of the asset, and (iv) the costs of financing, hedging
and managing the asset. Prior to acquisition, potential returns on capital
employed will be assessed over the life of the asset and in a variety of
interest rate, yield spread, financing cost, credit loss and prepayment
scenarios. See "Risk Factors--Lack of Operating Policies; Board of Directors
May Change Certain Policies Without Stockholder Consent."
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus and, in
particular, should evaluate the factors set forth in "Risk Factors." These risks
include, among others:
- The Company was organized in September 1997 and has no operating
history, no assets, no identified investments and no established
financing sources.
- The Manager has conflicts of interest, including those arising from
the Manager's management of the accounts of its other clients and the
fact that the Manager will be entitled to receive an incentive fee
that may encourage speculative investments.
- On November 29, 1993, the Chief Executive Officer of the Company and
the Manager consented to the entry of a cease-and-desist order issued
against him by the Securities and Exchange Commission arising out of
trading activities in Mortgage Securities.
- The Company is totally reliant on the Manager, which has significant
operating discretion, including as to the use of proceeds of the
Public Offering and the Private Placement and the Company's operating
policies and strategies.
- Interest rate fluctuations may decrease or eliminate net income from
the Company's investments.
- The Company's investments are expected to be highly leveraged; there
are no limitations on the Company's borrowings.
- The Company can suffer significant losses on investments in IOs, Sub
IOs, Inverse IOs and other Mortgage Derivatives from rapid prepayments
during periods of interest rate declines.
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<PAGE>
- The Company will invest in non-real estate assets, including
non-investment grade high yield corporate debt that experiences high
default rates, credit losses and liquidity risks.
- The Company will engage in complex hedging strategies and will have no
significant credit risk or hedging policies.
- The Company will purchase Mortgage Loans and non-guaranteed Mortgage
Securities that are subject to credit risks; credit losses will reduce
or eliminate the values of and income from such Mortgage Assets.
- Stockholders will be subject to significant potential dilution from
future equity offerings of the Company.
- Failure to maintain REIT status would subject the Company to corporate
tax and an excise penalty tax and would reduce earnings and cash
available for distribution to stockholders.
- The Board of Directors determines the Company's operating policies and
strategies which may be changed without stockholder consent.
- The Company will be subject to the risk of possible environmental
liabilities.
CAPITAL AND LEVERAGE POLICIES
The Company's operations are expected to be highly leveraged. Initially,
the Company intends to finance its acquisition of Mortgage Assets through the
proceeds of the Public Offering and the Private Placement and, thereafter,
primarily by borrowing against or "leveraging" its existing portfolio and
using the proceeds to acquire additional Mortgage Assets. See "Risk
Factors--Substantial Leverage Can Result in Net Interest and Operating
Losses;" "Public Offering" and "Private Placement." The Company expects to
incur debt such that it will maintain an equity-to-assets ratio of between 6%
to 10%, although the actual ratio may be higher or lower from time to time
depending on market conditions and other factors deemed relevant by the
Manager, subject to the review of the Company's Board of Directors.
HEDGING AND RISK MANAGEMENT
The Company will endeavor to protect itself against interest
rate fluctuations through its asset acquisition, borrowing and hedging
strategies. The Company's asset acquisition and borrowing strategies are
intended to offset the potential adverse effects resulting from the
differences between fixed-rates or other limitations on coupon rate
adjustment, such as interest rate caps, associated with its investment
portfolio, and the shorter term variable nature of the Company's related
borrowings. The Company intends to enter into hedging transactions in an
effort to further protect its portfolio of Mortgage Assets and related debt
from interest rate fluctuations. These transactions may include interest
rate swaps, the purchase or sale of interest rate collars, caps or floors,
options and IOs. There can be no assurance that the Company's hedging
activities will have the desired beneficial impact on the Company's results
of operations or financial condition. Hedging involves risk and typically
involves costs, including transaction costs, and risks associated with the
enforceability of agreements underlying derivative transactions, business
failure of counterparties and illiquidity of hedging instruments. See "Risk
Factors--Consequences and Costs of Hedging Transactions" and
"Business--Operating Policies and Strategies."
The Company intends to manage the credit risk associated with its
investment portfolio by maintaining a substantial portion of its assets in the
70% Asset Group, investing in a diversified portfolio of investments included in
the 30% Asset Group and regularly monitoring the credit risk associated with its
investment portfolio. See "Business--Investment Strategy."
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THE MANAGER
The day-to-day business and investment affairs of the Company
will be managed by the Manager, subject to the supervision of the Company's
Board of Directors. The Manager, a newly-organized entity and a registered
investment adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), specializes in managing investments in Mortgage Securities
for institutions and other sophisticated investors. The Manager employs
professionals who have significant experience in mortgage finance and in the
purchase and administration of Mortgage Securities; however, neither the
Manager nor its investment professionals have previously managed a REIT.
Michael L. Smirlock, Ph.D., the President and Chief Executive Officer of the
Manager and Chairman of the Board, Chief Executive Officer and President of
the Company, and the Manager's other investment professionals, each have at
least ten years' experience in mortgage research, mortgage finance and
investment management. The Manager's investment professionals currently
manage over $300 million of capital invested primarily in $3.9 billion of
Mortgage Securities. See "The Manager."
On November 29, 1993, Mr. Smirlock consented to the entry of a
cease-and-desist order issued against him by the Securities and Exchange
Commission (the "Commission") arising out of Mortgage Securities trading
activities supervised by Mr. Smirlock. The details of such order are
described under "Risk Factors--Cease-and-Desist Order Against Chief Executive
Officer " and "The Manager--Cease-and-Desist Order Against Chief Executive
Officer."
MANAGEMENT AGREEMENT
The Company will enter into a management agreement (the
"Management Agreement") with the Manager pursuant to which the Manager,
subject to the supervision of the Company's Board of Directors, will
formulate operating strategies for the Company, oversee the acquisition of
assets by the Company, arrange for various types of financing for the
Company, including the issuance of CMOs, monitor the performance of the
Company's assets and provide certain administrative and managerial services
in connection with the Company's operations. For its performance of these
services, the Manager will receive an annual base management fee, payable
monthly, as set forth below:
Annual Base Management Fee
as a Percentage of
Average Stockholders' Equity Average Stockholders' Equity
---------------------------- ----------------------------
$0 to $500 million 1.0%
$500 million to $1 billion $5 million plus 0.8% of amounts in
excess of $500 million
$1 billion or more $9 million plus 0.6% of amounts in
excess of $1 billion
The Manager also will receive a quarterly incentive fee in an
amount equal to 20% of the Net Income of the Company for the preceding fiscal
quarter, in excess of the amount that would produce an annualized Return on
Average Stockholders' Equity for such fiscal quarter equal to the Ten-Year
U.S. Treasury Rate plus 1%. The Board of Directors of the Company, with the
approval of a majority of the Company's Board of Directors who are
unaffiliated with the Manager (the "Independent Directors"), is authorized to
change the fees from time to time as agreed with the Manager. The Manager
will be reimbursed for certain out-of-pocket expenses incurred on behalf of
the Company. See "The Manager--Management Fees."
CONFLICTS OF INTEREST OF THE MANAGER
The Company is subject to conflicts of interest involving the Manager
because, among other reasons, (i) the Manager is permitted to advise accounts of
other clients, and many investments appropriate for the Company also will be
appropriate for these accounts and (ii) the incentive fee, which is based on
income of the Company, may create an incentive for the Manager to recommend
investments with greater income potential, which generally are riskier or more
speculative, than would be the case if its fee did not include a "performance"
component. Nevertheless, the Manager intends to conduct
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<PAGE>
its operations in a manner that will minimize the negative effect of any
conflicts of interest. Furthermore, a majority of the Company's Board of
Directors must be Independent Directors. The Independent Directors must approve
any amendment to the Management Agreement and will monitor the Company's
investments, borrowings and operations. See "Risk Factors--Conflicts of
Interest of the Manager."
Pursuant to the Management Agreement, the Manager will not
assume any responsibility other than to render the services called for
thereunder and will not be responsible for any action of the Board of
Directors in following or declining to follow its advice or recommendations.
The Manager and its directors and officers will not be liable to the Company,
any subsidiary of the Company, the Independent 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 and its directors and officers with respect
to all expenses, losses, damages, liabilities, demands, charges and claims
arising from acts of the Manager not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of duties, performed in
good faith in accordance with and pursuant to the Management Agreement.
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<PAGE>
Following the Public Offering, the structure and relationships
of the Company, the Manager and the Affiliated Funds will be as follows:
Management ===================
Agreement LASER Advisers Inc. Investment Advisory Agreements
---------------===================-----------------------------------
| | | | | |
| | | | | |
| |General | | | |
| |Partner(3) | | | |
| | | | | |
================= =========== ========= | ========= =========
LASER Mortgage Fund A(4) Fund B(4) | Fund C(4) Fund D(4)
Management, Inc. =========== ========= | ========= =========
================= |
==============
Master
Fund (1)(2)(4)
==============
- -----------------
(1) The executive officers of the Company will be officers and employees of the
Manager. Mr. Smirlock, the Company's and the Manager's Chief Executive
Officer and President, has purchased 6,000 shares, and has agreed to
purchase an additional 67,000 shares of Common Stock from the Company. See
"--Certain Benefits to Existing Stockholders, Directors and Officers" and
"Principal Stockholders."
(2) A majority of the equity of the Manager is owned by Mr. Smirlock. The
remaining equity of the Manager is owned by Appaloosa Partners Inc. Mr.
Tepper, a Director of the Company and the Manager, owns all of the equity
of Appaloosa Partners Inc.
(3) The Manager holds a 1% general partnership interest in Fund A.
(4) Substantially all of the assets of Funds A, B, C and D are invested,
directly or indirectly, in the Master Fund which serves as a trading
vehicle. The Master Fund currently has, and the Manager currently manages,
over $300 million of capital invested primarily in $3.9 billion of Mortgage
Securities similar to those in which the Company will be investing.
CERTAIN BENEFITS TO EXISTING STOCKHOLDER, DIRECTORS AND OFFICERS
Through the date hereof, Michael L. Smirlock, the Company's
Chief Executive Officer and President, has purchased 6,000 shares of Common
Stock at an average price of $2.50 per share in connection with the Company's
formation and has agreed to purchase from the Company 67,000 shares of Common
Stock at the initial public offering price in the Private Placement, or an
aggregate of 73,000 shares of Common Stock for an aggregate purchase price of
$1,020,005, or $13.97 per share. This average price per share is less than
the assumed initial public offering price of $15.00 per share.
The Company also has received irrevocable commitments to purchase a total
of 4,347,333 shares in the Private Placement. The purchasers in the Private
Placement will purchase the shares of Common Stock at a purchase price equal
to the initial public offering price. Of the 4,347,333 shares sold in the
Private Placement, (i) Mr. Smirlock has committed to purchase 67,000 shares,
(ii) David A. Tepper, a Director of the Company and the Manager, has
committed to purchase 103,000 shares and (iii) Frederick N. Khedouri, a
proposed Director of the Company and a Senior Managing Director of Bear,
Stearns & Co. Inc. ("Bear Stearns"), one of the Representatives of the
several Underwriters in the Public Offering, has committed to purchase 10,000
shares. In
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<PAGE>
addition, a total of 714,235 shares of Common Stock will be purchased by
entities over which Mr. Tepper may be deemed to have shared or sole voting and
dispositive power. See "Principal Stockholders" and "Private Placement."
The Company has granted to its directors, officers, employees and
consultants options to purchase an aggregate of 800,000 shares of Common Stock
(which include options to purchase 738,000 shares of Common Stock granted to
directors and officers of the Manager) at an exercise price equal to the initial
public offering price. The Company has also granted 400,000 shares of deferred
Common Stock to certain of its directors and officers. See "The Manager--Stock
Options and Other Awards" and "The Company--Stock Incentive Plan."
The Company will enter into the Management Agreement with the Manager
pursuant to which the Manager will be entitled to receive an annual base
management fee, a quarterly incentive fee and a non-competition payment in the
event of termination without cause or nonrenewal. Mr. Smirlock, the Chief
Executive Officer, President and a majority stockholder of the Manager, is also
the Chairman of the Board, Chief Executive Officer and President of the Company.
David A. Tepper, a Director and indirect minority stockholder of the Manager, is
also a Director of the Company. See "The Manager--The Management Agreement."
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a
REIT under the REIT Provisions of the Code commencing with its short taxable
year ending December 31, 1997. If the Company qualifies as a REIT, the
Company generally will not be subject to federal corporate income tax on
taxable income that is distributed to its stockholders. See "Risk
Factors--Failure to Maintain REIT Status Would Subject Company to Corporate
Tax and Penalty Tax," "Federal Income Tax Considerations--Taxation of the
Company" and "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer."
DISTRIBUTION POLICY
To maintain its qualification as a REIT, the Company must
distribute substantially all of its taxable income to stockholders each year,
which the Company intends to do. Each year, the Company intends to make four
regular quarterly distributions. To the extent necessary to maintain its
qualification as a REIT in any particular year, the Company will declare a
fifth, special distribution. The Company has adopted a Dividend Reinvestment
Plan that will allow stockholders to reinvest their distributions
automatically in additional shares of Common Stock. See "Distribution
Policy."
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES VARIOUS RISKS. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
CONFLICTS OF INTEREST OF THE MANAGER
The Company is subject to conflicts of interest involving the
Manager. The executive officers of the Company will be officers and
employees of the Manager. A majority of the Company's directors have no
business affiliations with the Manager, but were initially selected by the
Manager. Michael L Smirlock, the Chief Executive Officer, President and a
Director of the Company, is the owner of a majority of the capital stock of
the Manager. David A. Tepper, a Director of the Company, is the indirect
owner of a minority of the capital stock of the Manager. Moreover, several
members of the Board of Directors of the Company are directors of the
Manager. See "Certain Relationships And Related Party Transactions And
Conflicts Of Interest."
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; except that, during the term of the Management Agreement; the Manager
may not manage another publicly-traded mortgage REIT or any additional
private investment fund that invests primarily in Mortgage Assets and follow
investment strategies and policies similar to those employed by the Company
without the prior approval of the Independent Directors. The Manager and its
officers and employees advise and manage private investment funds (the
"Affiliated Funds") which invest in Mortgage Securities. The ability of the
Manager and its officers and employees to engage in other business activities
could reduce the time and effort the Manager spends on managing the Company's
investment portfolio. The Manager and its officers and employees may also
receive fees in connection with any investment by the Affiliated Funds in the
Company. In addition, the incentive fee payable to the Manager by the
Affiliated Funds or other clients may be higher than the fee paid by the
Company, creating additional conflicts of interest.
Many investments appropriate for the Company also will be
appropriate for the accounts of other clients the Manager advises, including
the Affiliated Funds. The Manager will act in a manner which it considers
fair and equitable in allocating investment opportunities among the Company
and the other accounts it manages. Situations may arise in which the
investment activities of the other accounts may disadvantage the Company,
such as the inability of the market to fully absorb orders for the purchase
or sale of particular securities placed by the Manager for the Company and
its other accounts at prices and in quantities which would be obtained if the
orders were being placed only for the Company. The Manager, however, will
not permit the Affiliated Funds or its other clients to sell securities or
other assets to or purchase securities or other assets from the Company nor
will any Affiliated Fund or other clients of the Manager enter into
derivative transactions with the Company. The Manager may aggregate orders
of the Company with orders for its other accounts. Such aggregation of
orders may not always be to the benefit of the Company with regard to the
price or quantity executed. The Manager will not reallocate assets among the
Company and the Affiliated Funds.
The incentive fee payable to the Manager is based upon the
income received by the Company. This may create an incentive for the Manager
to recommend investments with greater income potential, which generally are
riskier or more speculative than would be the case if its fees did not
include a "performance" component. Such incentives may result in increased
risk to the value of the Company's investment portfolio.
The Company has agreed that if it terminates the Management
Agreement without cause or the Board of Directors fails to approve a
continuation of the Management Agreement, or the Company engages another
person to manage a portion of its assets or to manage assets internally with
personnel other than those previously employed by the Manager, the Manager
will be entitled to receive a "Non-Competition Payment" in an amount equal to
the fair market value of the Management Agreement (without giving effect to
any termination and assuming it is renewed in accordance with its terms), to
be determined in accordance with the provisions of the Management Agreement.
NEWLY-ORGANIZED CORPORATION; NO ESTABLISHED FINANCING
The Company was organized in September 1997 and, therefore,
has no operating history and will commence operations only if it receives the
proceeds of the Public Offering and the Private Placement. The results of
the Company's
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<PAGE>
operations depend on many factors, including the availability of opportunities
for the acquisition of assets, the level and volatility of interest rates,
conditions in the financial markets and economic conditions. The Company has
not established any lines of credit or collateralized financing facilities.
There can be no assurance that the Company will be able to obtain adequate
financing and, if such financing is available, that it will be available on
favorable terms. Furthermore, no assurance can be given that the Company will
be able successfully to operate its business as described in this Prospectus.
NO IDENTIFIED ASSETS; DISCRETIONARY USE OF PROCEEDS
The Company has not yet purchased or entered into any
commitments to purchase any Mortgage Assets or other securities. The Manager
will exercise significant discretion in investing and allocating the proceeds
of the Public Offering and the Private Placement. See "Public Offering" and
"Private Placement."
CEASE-AND-DESIST ORDER AGAINST CHIEF EXECUTIVE OFFICER
On November 29, 1993, Mr. Smirlock consented to the entry of a
cease-and-desist order (the "Order") issued pursuant to Sections 203(f),
203(k) and 206(2) (the anti-fraud provisions) of the Investment Advisers Act
of 1940, as amended (the "Advisers Act")), against him by the Commission in
connection with certain securities transactions executed between December
1992 and February 1993 while Mr. Smirlock was Chief Investment Officer for
Goldman, Sachs Asset Management ("GSAM"). The Commission found that Mr.
Smirlock caused and aided and abetted violations of the Advisers Act by (i)
causing to be executed a series of purchase transactions in Mortgage
Securities for which he failed to promptly prepare order tickets allocating
the securities to specific client accounts and (ii) causing to be executed
two Mortgage Securities transactions between client accounts without
obtaining independent evaluations of the prices at which he instructed the
transactions to be executed in order to ensure that the best price and
execution were obtained for the clients. The Commission found that Mr.
Smirlock caused and aided and abetted violations of these recordkeeping
provisions by failing to write tickets allocating trades on the days the
trades were executed. The Commission (i) ordered Mr. Smirlock to cease and
desist from committing or causing any violation of the provisions of the
Advisers Act set forth in the Order (ii) suspended him from association with
any broker, dealer, investment adviser, investment company or municipal
securities dealer for a three-month period and (iii) required him to pay a
penalty of $50,000. Contemporaneously with the entry of the Order, Mr.
Smirlock submitted an Offer of Settlement to the Commission, which the
Commission accepted, in which he consented to the Commission's entry of the
Order, without admitting or denying the findings set forth therein. GSAM had
become aware of serious violations of its internal compliance policies and
reported these violations to the Commission. In March 1993, following its
report to the commission, GSAM suspended Mr. Smirlock's trading activities.
Mr. Smirlock resigned from GSAM and Goldman, Sachs & Co. effective November
30, 1993. No limitations will be imposed on Mr. Smirlock's activities in his
roles at the Manager and the Company in light of this proceeding and the
Order. See "The Manager - Cease-and-Desist Order Against Chief Executive
Officer."
TOTAL RELIANCE ON THE MANAGER; TERMINATION OF THE MANAGEMENT AGREEMENT
The Company's day-to-day operations will be administered by
the Manager, subject to the supervision of the Company's Board of Directors.
Thus, the Company is totally reliant on the services of the Manager and its
officers, directors and employees for the success of the Company. The
Manager will have significant operating discretion, including as to the use
of proceeds of the Public Offering and Private Placement and in developing
the Company's operating policies. The Company is subject to the risk that
the Manager will terminate the Management Agreement and that no suitable
replacement will be found to manage the Company. The Company and the Manager
may terminate the Management Agreement at any time upon 60 days' written
notice to the other party. The Company would be materially and adversely
affected if it were unable to engage an appropriate replacement for the
Manager. The Manager and its investment professionals have no prior
experience in managing a REIT, and there can be no assurance that the past
experience of the Manager's investment management personnel will be
appropriate to the Company's business or strategy. 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, except that during the term of the
agreement, the Manager will not serve as an investment adviser to any other
publicly-traded mortgage REIT, or any additional private investment fund that
invests primarily in Mortgage Assets and follows investment strategies and
policies similar to those employed by the Company without the written
approval of the Independent Directors. In addition, the Management Agreement
does not impose a minimum time commitment that the Manager and its personnel
must make in providing services to the Company. The ability of the Manager
and its employees to engage in other business activities
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<PAGE>
could reduce the time and effort spent by the Manager and its employees on the
management of the Company. See "The Manager."
RESULTS OF OPERATIONS ADVERSELY AFFECTED BY FACTORS BEYOND COMPANY'S CONTROL
The Company's results of operations can be adversely affected
by various factors, many of which are beyond the control of the Company, and
will depend on, among other things, the level of net interest income
generated by, and the market value of, the Company's investment portfolio.
The Company's net interest income and results of operations will vary
primarily as a result of fluctuations in short-term interest rates, borrowing
costs and prepayment rates. The Company's results of operations also will
depend upon the Company's ability to protect against the adverse effects of
such fluctuations as well as credit risks. Interest rates, prepayment rates,
credit risks, borrowing costs and credit losses depend upon the nature and
terms of the Mortgage Assets and other securities, conditions in financial
markets, the fiscal and monetary policies of the U.S. government and the
Board of Governors of the Federal Reserve System, international economic and
financial conditions and competition, none of which can be predicted with any
certainty. Because changes in interest rates may significantly affect the
Company's investment activities, the operating results of the Company will
depend, in large part, upon the ability of the Company to manage its interest
rate, prepayment rate and credit risks effectively while maintaining its
status as a REIT. See "--Consequences and Costs of Hedging Transactions,"
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations" and "Business -- Operating Policies and Strategies."
SUBSTANTIAL LEVERAGE CAN RESULT IN NET INTEREST AND OPERATING LOSSES
LEVERAGING STRATEGY
The Company intends to borrow against, or "leverage," its
Mortgage Assets in order to acquire additional Mortgage Assets, generally
through the use of reverse repurchase agreements, dollar roll agreements,
Mortgage Loan securitizations, loan agreements, lines of credit, commercial
paper borrowings and other credit facilities. The Company expects to incur
debt such that it will maintain an equity-to-assets ratio of between 6% to
10%, although the actual ratio may be higher or lower from time to time,
depending on market conditions and other factors deemed relevant by the
Manager, subject to the review of the Company's Board of Directors. The
equity-to-assets ratio is total stockholders' equity, determined in
accordance with GAAP, as a percentage of total assets. For purposes of
calculating the equity-to-assets ratio, the Company's total assets include
the value of the Company's investment portfolio on a marked-to-market basis.
For purchased Mortgage Assets, the Company obtains market quotes for its
Mortgage Assets from independent broker-dealers that make markets in
securities similar to those in the Company's portfolio or from pricing
services approved by the Company's Independent Directors. The Company's
total stockholders' equity, for purposes of this calculation, equals the
Company's stockholders' equity determined in accordance with GAAP. See
"Business--Operating Policies and Strategies--Capital and Leverage Policies"
and "Business--Operating Policies and Strategies--Securitization."
Leverage can reduce the net income available for distributions
to stockholders. If the interest income on the Mortgage Assets purchased
with borrowed funds fails to cover the cost of the borrowings, the Company
will experience net interest losses and may experience net losses. Such
losses could be increased substantially as a result of the leveraging
strategy. The percentage of leverage will vary depending on the Company's
estimate of the stability of the portfolio's cash flow. To the extent
changes in market conditions cause the cost of such financing to increase
relative to the income that can be derived from the assets acquired, the
Company may reduce the amount of leverage it utilizes.
The ability of the Company to achieve its investment
objectives depends on its ability to borrow money in sufficient amounts and
on favorable terms. The Company may not be able to achieve the degree of
leverage it believes to be optimal due to increases in "haircuts" (i.e., the
collateral required by a lender in excess of the amount borrowed), decreases
in the market value of the Company's Mortgage Assets, increases in interest
rate volatility, changes in the availability of financing in the market,
conditions then applicable in the lending market and other factors. This may
cause the Company to be less profitable than it would otherwise be and, in
some cases, to experience losses.
BORROWING RISKS; MARGIN CALLS
A substantial portion of the Company's borrowings are expected
to be in the form of collateralized borrowings, primarily reverse repurchase
agreements. The amount borrowed under a reverse repurchase agreement is
based on the
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<PAGE>
market value of the Mortgage Assets pledged to secure specific borrowings.
Under adverse market conditions, the value of pledged Mortgage Assets would
decline, and lenders could initiate margin calls (i.e., the Company could be
required to post additional collateral or to reduce the amount borrowed to
restore the ratio of the amount of the borrowing to the value of the
collateral). The Company may be required to sell Mortgage Assets to reduce the
amount borrowed. If these sales were made at prices lower than the carrying
value of the Mortgage Assets, the Company would experience losses. A default by
the Company under its collateralized borrowings also could result in a
liquidation of the collateral. If the Company is forced to liquidate Mortgage
Assets that qualify as Qualified Real Estate Assets to repay borrowings, there
can be no assurance that it will be able to maintain compliance with the REIT
Provisions of the Code regarding asset and source of income requirements. See
"Federal Income Tax Considerations--Requirements for Qualification."
NO RESTRICTION ON THE INCURRENCE OF ADDITIONAL INDEBTEDNESS
The Company's investment policy and operating strategy does
not restrict the Company from incurring additional indebtedness. The Company
is not subject to any other restriction on the incurrence of additional
indebtedness. The Company intends to borrow against or "leverage" its
Mortgage Assets in order to acquire additional Mortgage Assets. The Company
expects to incur debt such that it will maintain an equity-to-assets ratio of
between 6% to 10%, although the actual ratio may be higher or lower from time
to time depending on market conditions and other factors deemed relevant by
the Manager, subject to the review of the Company's Board of Directors. See
"--Substantial Leverage Can Result in Net Interest and Operating
Losses--Leveraging Strategy."
INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS AND NET INCOME
GENERAL
Interest rates are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic
and political considerations and other factors beyond the control of the
Company. Interest rate fluctuations can adversely affect the income and
value of the Company in many ways and present a variety of risks, including
the risk of a mismatch between asset yields and borrowing rates, reshaping of
the yield curve and changing prepayment rates. The Company intends to enter
into hedging transactions in an effort to protect its portfolio of Mortgage
Assets and related debt from interest rate fluctuations. See "--Consequences
and Costs of Hedging Transactions."
FAILURE TO MANAGE MISMATCH BETWEEN LONG-TERM ASSETS AND SHORT-TERM FUNDING
The Company's operating results will depend in large part on differences
between the income from its Mortgage Assets and its borrowing costs. The
Company anticipates that at least 65% of its Mortgage Assets will have interest
payment rates (i.e., coupon rates) which remain fixed for periods of 30 years or
more until their maturity. The Company intends to fund a substantial portion of
its Mortgage Assets with borrowings having interest rates (i.e., borrowing
rates) that reset more frequently, usually monthly or quarterly. If interest
rates rise, borrowing rates (and borrowing costs) of the Company are expected to
rise more quickly than coupon rates (and investment income) on the Company's
Mortgage Assets. This would decrease the Company's net income (or result in a
net loss) and the mark-to-market value of the Company's net assets, and would be
expected to decrease the market price of the Company's Common Stock. Although
the Company intends to invest primarily in fixed-rate Mortgage Assets, the
Company also may own adjustable rate Mortgage Assets. The coupon rates of
adjustable rate Mortgage Assets normally fluctuate with reference to a specific
rate index. The Company intends to fund these adjustable rate Mortgage Assets
with borrowings having borrowing rates which reset monthly or quarterly. To the
extent that there is a difference between (i) the interest rate index used to
determine the coupon rate of the adjustable rate Mortgage Asset (asset index)
and (ii) the interest rate index used to determine the borrowing rate for the
Company's related financing (borrowing index), the Company will bear a "basis"
interest rate risk. If the borrowing index rises more than the asset index, the
net income of the Company would be decreased. Additionally, the Company's
adjustable rate Mortgage Assets may be subject to periodic rate adjustment
limitations and periodic and lifetime rate caps which limit the amount that the
coupon rate can change during any given period. In a period of increasing
interest rates, the Company could experience a decrease in net income or a net
loss because its borrowing rates may adjust and rise more quickly than the
coupon rates on its adjustable rate Mortgage Assets. No assurance can be given
as to the amount or timing of changes in interest rates or their effect on the
Company's Mortgage Assets, their valuation or income derived therefrom. During
periods of changing interest rates, coupon rate and borrowing rate mismatches
could negatively impact the Company's net income, distribution yield and the
market price of the Common Stock. Interest rate fluctuations resulting in
interest expense exceeding interest income would result in the Company incurring
operating losses.
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INVERTED YIELD CURVE ADVERSELY AFFECTS INCOME
The relationship between short-term and long-term interest rates is often
referred to as the "yield curve." Ordinarily, short-term interest rates are
lower than long-term interest rates. If short-term interest rates rise
disproportionately relative to long-term interest rates (a flattening of the
yield curve), the borrowing costs of the Company may increase more rapidly than
the interest income earned on its assets. Because borrowings will likely bear
interest at short-term rates (such as LIBOR) and Mortgage Assets will likely
bear interest at medium-term to long-term rates (such as those calculated based
on the Ten-Year U.S. Treasury Rate), a flattening of the yield curve will tend
to decrease the Company's net income and the mark-to-market value of its net
assets. Additionally, to the extent cash flows from long-term assets that
return scheduled and unscheduled principal are reinvested in other long-term
assets, the spread between the coupon rates of long-term assets and short-term
borrowing rates may decline and also may tend to decrease the net income and
mark-to-market value of the Company's net assets. It is also possible that
short-term interest rates may adjust relative to long-term interest rates such
that the level of short-term rates exceeds the level of long-term rates (a yield
curve inversion). In this case, borrowing costs may exceed the interest income
and operating losses would be incurred.
INCREASED PREPAYMENT RATES WILL REDUCE VALUE OF MORTGAGE ASSETS
The value of Mortgage Assets may be affected substantially by prepayment
rates on the related Mortgage Loans. Prepayments are unscheduled payments of
principal made by mortgage borrowers, who generally are permitted to prepay
their borrowings at any time. Mortgage Securities traders have statistically
modeled borrower prepayment patterns over time, and Mortgage Securities
typically are valued based on these models and estimated prepayments. Actual
prepayments may vary significantly from estimates and, as a result, Mortgage
Security prices may fluctuate significantly as expectations of prepayment rates
change. Prepayment risk must be considered in conjunction with the credit risk
associated with certain Mortgage Assets. See "--Possible Losses on Mortgage
Loans During Warehousing Period" and "--Credit Risks."
Prepayment rates on Mortgage Assets are influenced by changes in current
interest rates and a variety of economic, geographic and other factors beyond
the control of the Company and cannot be predicted with certainty. In
periods of declining mortgage interest rates, prepayments on Mortgage Assets
generally increase. If general interest rates decline as well, the proceeds
of such prepayments received during such periods are likely to be reinvested
by the Company in assets yielding less than the yields on the Mortgage Assets
that were prepaid. In addition, the mark-to-market value of the Mortgage
Assets may, because of the risk of prepayment, benefit less than other
fixed-income securities from declining interest rates. Conversely, in
periods of rising interest rates, prepayments on Mortgage Assets generally
decrease; therefore, the Company will not have the proceeds from prepayments
available to invest in assets with higher yields. If interest rates decrease
and prepayment rates increase, the Company may fail to recoup fully its cost
of acquisition of certain investments.
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The Company may acquire classes of Mortgage Securities that are entitled to
no (or only nominal) payments of principal, but only to payments of interest,
such as IOs. The yield to maturity of IOs is very sensitive to the rate of
prepayments on the underlying Mortgage Loans. If the rate of prepayments is
faster than anticipated, the yield on IOs will be negatively affected, and, in
extreme cases, the IO investment could become worthless. Some IOs bear interest
at a floating rate that varies inversely with (and often at a multiple of)
changes in a specified interest rate index ("Inverse IOs"). Therefore, the
yield to maturity of an Inverse IO is extremely sensitive to changes in the
related index. The Company also expects to invest in subordinated IOs ("Sub
IOs"). Interest amounts otherwise allocable to Sub IOs generally are used to
make payments on more senior classes or to fund a reserve account for the
protection of senior classes until overcollateralization occurs or the balance
in the reserve account reaches a specified level. The yield to maturity of Sub
IOs is very sensitive not only to default losses but also to the rate and timing
of prepayment on the underlying loans. See "Business--Operating Policies and
Strategies." Under certain interest rate and prepayment scenarios, the Company
may fail to recoup fully the cost of acquiring IOs, Inverse IOs and Sub IOs.
CONSEQUENCES AND COSTS OF HEDGING TRANSACTIONS
The Company intends to enter into hedging transactions in an effort to
protect its portfolio of Mortgage Assets and related debt from interest rate
fluctuations. These transactions may include interest rate swaps, the purchase
or sale of interest rate collars, caps or floors, options and IOs. There can be
no assurance that the Company's hedging activities will have the desired
beneficial impact on the Company's results of operations or financial condition.
Moreover, no hedging activity can completely insulate the Company from the risks
associated with changes in interest rates and prepayment rates.
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Hedging" and "Business--Operating Policies and
Strategies--Hedging Activities."
The Company intends generally to hedge as much of the interest rate risk as
the Manager determines is in the best interests of the stockholders of the
Company given the cost of such hedging transactions and the need to maintain the
Company's status as a REIT. The Company has not established specific policies
as to the extent of the hedging transactions in which it will engage; however,
the Independent Directors will be responsible for reviewing at their regular
meetings the extent and effect of hedging activities. The amount of income the
Company may earn from its hedging instruments is subject to substantial
limitations under the REIT Provisions of the Code. In particular, when the
Company earns income under such instruments, it will seek advice from Special
Tax Counsel as to whether such income constitutes qualifying income for purposes
of the 95% Gross Income Test and as to the proper characterization of such
arrangements for purposes of the REIT Asset Tests. The "95% Gross Income Test"
means the requirement for each taxable year that at least 95% of the Company's
gross income for each taxable year must be derived from certain specified real
estate sources including interest income and gain from the disposition of
Qualified Real Estate Assets or "qualified temporary investment income" (i.e.,
income derived from "new capital" within one year of the receipt of such
capital), dividends, interest and gains from the sale of stock or other
securities (including certain interest rate swap or cap agreements, options,
forward rate agreements and similar financial instruments entered into to reduce
the interest rate risk with respect to debt incurred to acquire Qualified Real
Estate Assets) not held for sale in the ordinary course of business. See
"Federal Income Tax Considerations--Requirements for Qualification Gross Income
Tests." This determination may result in the Manager electing to have the
Company bear a level of interest rate risk that could otherwise be hedged when
the Manager believes, based on all relevant facts, that bearing such risk is
advisable to maintain the Company's status as a REIT.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. Furthermore, the enforceability of agreements underlying derivative
transactions may depend on compliance with applicable statutory and commodity
and other regulatory requirements, and, depending on the identity of the
counterparty, applicable international requirements.
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The business failure of a counterparty with which the Company has entered into a
hedging transaction will most likely result in a default. The default of a
party with which the Company has entered into a hedging transaction may result
in the loss of unrealized profits and force the Company to cover its resale
commitments, if any, at the then current market price. Although generally the
Company will seek to reserve for itself the right to terminate its hedging
positions, it may not always be possible to dispose of or close out a hedging
position without the consent of the counterparty, and the Company may not be
able to enter into an offsetting contract in order to cover its risk. There can
be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and the Company may be required to maintain a
position until exercise or expiration, which could result in losses.
COMPETITION FOR MORTGAGE ASSETS AT FAVORABLE YIELDS AND FOR FINANCING
The Company's net income depends, in large part, on the Company's ability
to acquire Mortgage Assets at favorable spreads over the Company's borrowing
costs. In acquiring Mortgage Assets, the Company competes with other mortgage
REITs, specialty finance companies, savings and loan associations, banks,
mortgage bankers, insurance companies, mutual funds, institutional investors,
investment banking firms, other lenders, FHLMC, FNMA, GNMA and other entities
purchasing Mortgage Assets. In addition, there are several mortgage REITs with
asset acquisition objectives similar to the Company, and others may be organized
in the future. The effect of the existence of additional REITs may be to
increase competition for the available supply of Mortgage Assets suitable for
purchase by the Company. Many of the Company's competitors for Mortgage Assets
may have access to greater capital and other resources and may have other
advantages over the Company.
There can be no assurance that the Company will be able to obtain financing
at borrowing rates below the asset yields of its Mortgage Assets. In such
event, the Company may incur losses or may be forced to reduce the size of its
Mortgage Asset portfolio. The Company will face competition for financing
sources which may limit the availability of, and affect the cost of, funds to
the Company.
VALUE OF CMOS MAY BE ADVERSELY AFFECTED BY PREPAYMENTS ON UNDERLYING COLLATERAL
CMOs are a series of bonds or certificates, each of which typically
consists of several classes with different maturities and often complex
priorities of payment, secured by a single pool of Mortgage Loans, Pass-Through
Certificates, other CMOs or other Mortgage Assets. Principal prepayments on
collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturities or final distribution dates. The principal and
interest on underlying Mortgages Loans may be allocated among the several
classes of a series of a CMO in many ways. Depending on the type of CMOs in
which the Company invests, the investment may be more sensitive to interest rate
fluctuations and prepayment rates than other types of Mortgage Securities. See
"Description Of Proposed Assets."
VALUE OF MORTGAGE DERIVATIVES MAY BE REDUCED OR ELIMINATED DUE TO INTEREST RATE
FLUCTUATIONS; NO LIMIT ON MORTGAGE DERIVATIVES
The Company may acquire an unlimited amount of Mortgage Derivatives,
including IOs, Inverse IOs, Sub IOs and floating rate Mortgage Derivatives.
Payments on the market value of Mortgage Derivatives are highly sensitive to the
rate of prepayments on the underlying Mortgage Loans and are highly sensitive to
interest rate fluctuations. IOs provide for the holder to receive no (or only
nominal) payments of principal, but only payments of interest. Payments on IOs
are highly sensitive to the rate of prepayment on the underlying Mortgage Loans.
In periods of declining interest rates, rates of prepayments on the Mortgage
Loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on IOs will be adversely affected. Under some
prepayment and interest rate scenarios, the Company may not be able to recoup
fully the cost of acquiring an IO, Inverse IO or Sub IO and, consequently, will
incur a loss on its investment.
In higher than expected prepayment and/or declining interest rate
environments, the ability to utilize Inverse IOs and Sub IOs as capital for
collateralized borrowings will be impaired. To the extent that Inverse IOs and
Sub IOs decrease in value, the Company likely will be required by its lenders to
provide additional capital for borrowings collateralized with Inverse IOs and
Sub IOs to compensate for the decline in their market value. If additional
capital in unavailable, the Company may be forced to liquidate securities into
illiquid markets and incur losses. Additionally, in such environments, lenders
may require additional capital as a percentage of the market value of the
Inverse IOs or Sub IOs (a higher capital "haircut") or may not provide
collateralized funding of Inverse IOs or Sub IOs. The requirement for
additional capital to
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support collateralized funding or the inability to obtain collateralized
borrowing of Inverse IOs or Sub IOs will reduce the Company's liquidity and will
require it to obtain more expensive funding.
Some IOs in which the Company may invest, such as Inverse IOs, bear
interest at a floating rate that varies inversely to (and often at a multiple
of) changes in a specific index. The Company also may invest in inverse
floating rate Mortgage Derivatives which are similar in structure and risk to
Inverse IOs, except they generally are issued with a greater stated principal
amount than Inverse IOs. The Company may invest in Inverse IOs for the purpose
of, among other things, hedging its portfolio of IOs. The yield to maturity of
an Inverse IO is extremely sensitive to changes in the related index.
The Company also expects to invest in Sub IOs, a class of securities for
which interest generally is withheld and used to make principal payments on more
senior classes or to fund a reserve account for the protection of senior classes
until overcollateralization or the balance in the reserve account reaches a
specified level. Interest on a Sub IO generally will be paid only after the
overcollateralization or the balance in the reserve account reaches the
specified level. Sub IOs provide credit support to the senior classes, and thus
bear substantial credit risk. Moreover, because Sub IOs receive only interest
payments, their yields are extremely sensitive to the rate of prepayments
(including prepayments as a result of defaults) on the underlying Mortgage
Loans. In addition, Sub IOs often generate taxable income in excess of cash
received.
The Company may invest in variable and floating rate securities that
provide for a periodic adjustment in the interest rate paid on the other
obligations. The Company may not be able to match these periodic rate
adjustments with increases or decreases in rates borne by the borrowings or
financings utilized by the Company. Accordingly, in a period of increasing
interest rates, the Company could experience a decrease in net interest income
or a net loss because the interest rates on borrowings could adjust faster than
the interest rates of the Company's floating rate securities. See "Description
Of Proposed Assets."
VALUE OF SUBORDINATE INTERESTS MAY BE ADVERSELY AFFECTED BY LOSSES ON UNDERLYING
MORTGAGE LOANS
The Company intends to retain a Subordinate Interest in the pools of
Mortgage Loans it securitizes and to acquire Subordinate Interests in pools of
Mortgage Loans securitized by others. Subordinate Interests bear significant
credit risks because they are structured to absorb losses from defaults or
foreclosures on the related Mortgage Loan collateral before losses are allocated
to more senior classes. Subordinate Interests will be more sensitive than other
Mortgage Securities to the frequency and the severity of losses on the
underlying Mortgage Loans. Loss frequency will depend upon a number of factors,
including economic conditions and interest rate fluctuations, beyond the control
of the Company. There can be no assurance that the Company's investment in a
Subordinate Interest will be returned in full or at all. See "Description Of
Proposed Assets."
INVESTMENT IN NON-REAL ESTATE ASSETS SUBJECT TO LIQUIDITY AND CREDIT RISKS;
LIMIT ON SUCH ASSETS MAY CHANGE WITHOUT STOCKHOLDER APPROVAL
The Company may invest up to 5% of the total assets in other fixed income
assets. This 5% limit may be changed from time to time at the discretion of the
Board of Directors, with the approval of the Independent Directors but without a
vote of stockholders. These other fixed-income assets may include securities
issued or guaranteed by foreign governments, non-investment grade high yield
corporate debt (commonly referred to as "junk bonds") and non-real estate loans.
Investing in securities issued by foreign governments or foreign companies
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government, agencies thereof and
domestic corporations. Such obligations are often unsecured and are subject to
greater credit and liquidity risk than is typically associated with investment
grade corporate obligations. They are also subject to, and may be adversely
affected by, risks associated with political and economic uncertainty,
fluctuations of currency exchange rates, lower levels of disclosure and
regulation in foreign securities markets than in the United States, risks of
nationalization, expropriation, confiscatory taxation, taxation of income earned
in foreign nations or other taxes imposed with respect to investments in foreign
nations, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country and repatriation of investments) and
uncertainties as to the status, interpretation and application of laws. In
addition, there is often less publicly available information about foreign
issuers than those in the United States. Foreign issuers may not be subject to
uniform accounting, auditing and financial reporting standards and auditing
practices, and even in the case of issuers that are subject to uniform standards
and practices, such standards and practices will generally not be comparable to
those applicable to U.S. companies.
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Junk bonds are generally unsecured, may be subordinated to other
obligations of the issuer and generally have greater credit and liquidity risk
than is typically associated with investment grade corporate obligations. Junk
bonds are often issued in connection with leveraged acquisitions or
recapitalizations in which the issuers incur a substantially higher amount of
indebtedness than the level at which they had previously operated. High-yield
debt obligations have historically experienced greater default rates than has
been the case for investment grade securities.
Investing in a non-real estate loans involves greater liquidity risk
because they are generally not traded in organized exchange markets but are
traded by banks and other institutional investors. In some cases, non-real
estate loans are subject to greater credit risks than is typically associated
with investment grade corporate obligations. Such loans may be subject to, and
may be adversely affected by, risks associated with lender liability. In
addition, such loans may be sold without recourse to the selling institutions,
and the selling institutions will generally make no representations and
warranties about the underlying loan, the borrower, the documentation of the
loans or any collateral securing the loans. See "Description of Proposed
Assets."
POSSIBLE LOSSES ON MORTGAGE LOANS DURING WAREHOUSING PERIOD
The Company intends to acquire and accumulate Mortgage Loans for
securitization as part of its investment strategy. The Manager, in its
discretion, will determine the quantity of Mortgage Loans sufficient for
securitization (which generally will be at least $100 million) after discussions
with potential underwriters, rating agencies and monoline insurers and an
evaluation of the costs of securitization. During the accumulation period, the
Company will be subject to risks of borrower defaults, bankruptcies, fraud and
losses and special hazard losses that are not covered by standard hazard
insurance. However, prior to securitization, the Company generally does not
intend to obtain credit enhancements such as mortgage pool or hazard insurance.
Typically, third parties insure against these types of losses, and the Company
would be dependent on the creditworthiness of the insurer and timeliness of the
reimbursement in the event of a default on the underlying obligations. Further,
the insurance coverage for various type of losses is limited in amount, and
losses in excess of the limitation would be the responsibility of the Company.
In the event of any default under Mortgage Loans held by the Company, the
Company will bear the risk of loss of principal to the extent of any deficiency
between the value of the mortgage collateral and the principal amount of the
Mortgage Loan. Also, during the accumulation or warehousing period, the costs
of financing and hedging the Mortgage Loans could exceed the interest income on
the Mortgage Loans. No assurance can be given that any mortgage, fraud or
hazard insurance will adequately cover a loss suffered by the Company. It may
not be possible or economical for the Company to securitize all of the Mortgage
Loans which it acquires, in which case the Company will continue to hold the
Mortgage Loans and bear the risks of borrower defaults, bankruptcies, fraud
losses and special hazard losses. Furthermore, if the Company retains a
Subordinate Interest in the securitizations, it will retain many of these risks.
See "Description of Proposed Assets--Mortgage Loans."
The Company expects that when it acquires Mortgage Loans, the seller of the
Mortgage Loans (the "Mortgage Seller") generally will represent and warrant to
the Company that there has been no fraud or misrepresentation during the
origination of the Mortgage Loans and will agree to repurchase any loan with
respect to which there is fraud or misrepresentation. Although the Company will
have recourse to the Mortgage Seller based on the Mortgage Seller's
representations and warranties to the Company, the Company will be at risk for
loss to the extent the Mortgage Seller does not or cannot perform its repurchase
obligations. The Company intends to acquire third party insurance, to the
extent that it is available at a reasonable price, for such risks. If the
Company is unable or fails to acquire such insurance, the Company would be
relying solely on the value of the collateral underlying the Mortgage Loans.
In addition, substantial delays could be encountered in connection with the
foreclosure of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by the Company. State and local statutes and rules
may delay or prevent the Company's foreclosure on or sale of the mortgaged
property and may prevent the Company from receiving new proceeds sufficient to
repay all amounts due on the related Mortgage Loan. Moreover, the Company's
servicing agent may be entitled to receive all expenses reasonably incurred in
attempting to recover amounts due and not yet repaid on liquidated Mortgage
Loans, thereby reducing amounts available to the Company.
LACK OF ACCESS TO SECURITIZATIONS WOULD ADVERSELY AFFECT THE COMPANY
The Company intends to rely upon securitizations of Mortgage Loans to
generate cash proceeds for the purchase of additional Mortgage Loans. Several
factors will affect the Company's ability to complete securitizations, including
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conditions in the securities markets generally, conditions in the
mortgage-backed securities market specifically, the credit quality of the
Company's portfolio of Mortgage Loans and the Company's ability to obtain credit
enhancement. If the Company were unable to successfully securitize a sufficient
amount of Mortgage Loans, then the Company would have to rely on other, more
expensive short-term methods of financing, or curtail or reduce its acquisition
of Mortgage Loans. There can be no assurance that the Company will be able to
successfully securitize any Mortgage Loans which it acquires or, if it is not
successful, that the Company will obtain financing alternatives to
securitization or that if such financing is available, that it will be available
on favorable terms.
CREDIT RISKS
The Company intends to invest primarily in Mortgage Securities and Mortgage
Loans which would be classified in the 70% Asset Group, as well as Mortgage
Loans and Mortgage Securities that constitute the 30% Asset Group. The
Company's investment strategy will seek to balance the risk and return potential
of its investments in a manner that attempts to maximize return while minimizing
the risk of loss to the Company through adverse events, including, without
limitation, credit and prepayment events that may decrease the income earned
from, and value of, the portfolio. The Company will not perform an independent
credit review of the Mortgage Loans it intends to purchase.
FAILURE TO MAINTAIN REIT STATUS WOULD SUBJECT COMPANY TO CORPORATE TAX AND
PENALTY TAX
The Company intends to operate in such a manner as to qualify as a REIT for
federal income tax purposes. Although the Company does not intend to request a
ruling from the Service as to its REIT status, upon consummation of the Public
Offering, the Company will receive an opinion of its Special Tax Counsel that,
based on certain assumptions and representations, it will so qualify. Investors
should be aware, however, that opinions of counsel are not binding on the
Service or any court. The REIT qualification opinion only represents the view
of Special Tax Counsel to the Company based on counsel's review and analysis of
existing law, which includes no controlling precedent. Furthermore, both the
validity of the opinion and the continued qualification of the Company as a REIT
will depend on the Company's satisfaction of certain asset, income,
organizational, distribution and stockholder ownership requirements on a
continuing basis. If the Company were to fail to qualify as a REIT in any
taxable year, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to stockholders would not be deductible by the Company
in computing its taxable income and the Company may be subject to a 4% federal
excise tax. Any such corporate tax liability could be substantial and would
reduce the amount of cash available for distribution to stockholders, which in
turn could have an adverse impact on the value of, and trading prices for, the
Common Stock. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
See "Federal Income Tax Considerations."
The Company must distribute at least 95% of its net taxable income annually
(excluding any net capital gain and certain non-cash income) to avoid corporate
income taxation of the earnings that it distributes (the "95% Distribution
Requirement"). In addition, the Company will be subject to a 4% non-deductible
excise tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of (i) 85% of its ordinary
income for that year, (ii) 95% of its capital gain net income for that year, and
(iii) 100% of its undistributed taxable income from prior years.
The Company intends to make distributions to its stockholders to comply
with the 95% Distribution Requirement and to avoid the nondeductible excise tax.
However, differences in timing between the recognition of taxable income and the
actual receipt of cash could require the Company to borrow funds or sell assets
on a short-term basis to satisfy the 95% Distribution Requirement or to avoid
the non-deductible excise tax. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company (i) to sell
assets in adverse market conditions, (ii) to distribute amounts that represent a
return of capital, or (iii) to distribute amounts that would otherwise be spent
on future investments or repayment of debt.
Gain from the disposition of any asset held primarily for sale to customers
in the ordinary course of business generally will be subject to a 100% tax.
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Pledged Assets and Risk of Bankruptcy in Reverse Repurchase Agreements
Substantially all of the Mortgage Assets will be pledged to secure reverse
repurchase agreements, bank borrowings or other credit arrangements, including
securitizations. Therefore, such Mortgage Assets may not be available to the
stockholders in the event of the liquidation of the Company, except to the
extent that the market value thereof exceeds the amounts due to the Company's
creditors. The market value of the Mortgage Assets will fluctuate as a result
of numerous market factors (including interest rates and prepayment rates) as
well as the supply of and demand for such assets. In the event of the
bankruptcy of a party with whom the Company has a reverse repurchase agreement,
the Company could experience difficulty recovering the pledged assets under such
agreement if it were to be repudiated and the Company's claim against the
bankrupt lender for damages resulting therefrom were to be treated simply as one
of an unsecured creditor. Should this occur, the Company's claims would be
subject to significant delay and any recoveries, if and when received, may be
substantially less than the damages actually suffered by the Company. Although
the Company intends to enter into reverse repurchase agreements with several
different parties and has developed policies to reduce its exposure to such
risks, no assurance can be given that the Company will be able to avoid such
third party risks. See "Business--Operating Policies and Strategies--Capital
and Leverage Policies."
POSSIBLE ENVIRONMENTAL LIABILITIES
The Company may become subject to environmental risks when taking an
interest in real property upon foreclosure of a Mortgage Loan. Such
environmental risks include the risk of the diminution of the value of a
contaminated property or liability for the costs of compliance with
environmental regulatory requirements or the costs of clean-up or other remedial
actions. The costs of investigation, remediation or removal of hazardous
substances could be substantial. These compliance or clean-up costs could
exceed the value of the property or the amount of the Mortgage Loan. There can
be no assurance that the Company will not incur any material costs or
liabilities with respect to such matters.
FAILURE TO MAINTAIN INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT
RESULTS OF OPERATIONS
The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an "investment company" under the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Investment Company Act exempts entities that, directly or through majority-owned
subsidiaries, are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretations by the Staff of the
Commission, to qualify for this exemption, the Company, among other things, must
maintain at least 55% of its assets in Qualifying Interests (the "55%
Requirement") and also may be required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets. The assets that the
Company may acquire, therefore, may be limited by the provisions of the
Investment Company Act. In connection with its acquisition of Subordinated
Interests, the Company intends, where appropriate, to obtain foreclosure rights
with respect to the underlying Mortgage Loans, although there can be no
assurance that it will be able to do so on acceptable terms. As a result of
obtaining such rights, the Company believes that the related Subordinated
Interests will constitute Qualifying Interests for the purpose of the Investment
Company Act. In addition, in meeting the 55% Requirement, the Company intends
to consider Privately-Issued Certificates issued with respect to an underlying
pool as to which the Company holds all issued certificates as Qualifying
Interests. The Company does not intend, however, to seek an exemptive order,
no-action letter or other form of interpretive guidance from the Commission or
its staff on these positions. If the Commission or its Staff were to take a
different position with respect to whether such Subordinate Interests or
Privately-Issued Certificates constitute Qualifying Interests, the Company
could, among other things, be required either (a) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (b) to register as an investment company, either of which could have
a material adverse effect on the Company and the market price of the Common
Stock.
TAXABLE MORTGAGE POOL RISK; INCREASED TAXATION TO TAX EXEMPT ENTITIES AND OTHER
INVESTORS
A REIT (or a segregated portion thereof) that incurs debt obligations with
two or more maturities and which are secured by assets such as the Mortgage
Assets may be classified as a "taxable mortgage pool" under the Code if payments
required to be made on such debt obligations bear a relationship to the payments
received on such assets. If the Company were to be subject to the taxable
mortgage pool rules, a portion or all of the taxable income (in excess of a
specified return to investors) generated by the Mortgage Assets constituting a
taxable mortgage pool may be characterized, under
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regulations to be issued by the Treasury Department, as "excess inclusion"
income and allocated to the stockholders. Any such excess inclusion income
(i) would not be allowed to be offset by the net operating losses of a
stockholder, (ii) would be subject to tax as UBTI to a tax-exempt stockholder
and (iii) would be subject to a 30% withholding tax in the case of a Non-U.S.
Stockholder. See "Federal Income tax Considerations--Taxation of Tax-Exempt
Stockholders."
The Company intends to enter into master reverse repurchase agreements
pursuant to which the Company may borrow funds with differing maturity dates
which are cross-collateralized by specific Mortgage Assets. The Treasury
Department has issued regulations that adopt a broad view of what may constitute
a taxable mortgage pool including anti-avoidance rules that authorize the
Service to treat equity interests issued by the Company as debt if such equity
interests correspond to maturities of classes of debt such as the Mortgage
Assets. The Company has been advised by Special Tax Counsel that master reverse
repurchase agreements and its other financing arrangements may be structured,
and the Company intends to structure master repurchase agreements and other
financing arrangements, in a manner which should not cause the Mortgage Assets
to be treated as a taxable mortgage pool. No assurance can be given, however,
that the Company will be able to structure master repurchase agreements in this
manner or that the Service might not successfully maintain that the REIT or the
Mortgage Assets collateralizing such master reverse repurchase agreements
constitute a taxable mortgage pool.
PHANTOM INCOME MAY RESULT IN ADDITIONAL TAX LIABILITY
The Company's investment in Subordinate Interests and certain types of
Mortgage Securities may cause it under certain circumstances to recognize
taxable income in excess of its economic income ("phantom income") and to
experience an offsetting excess of economic income over its taxable income in
later years. As a result, stockholders, from time to time, may be required to
treat distributions that economically represent a return of capital, as taxable
dividend. Such distributions would be offset in later years by distributions
representing economic income that would be treated as returns of capital for
federal income tax purposes (or by losses). Accordingly, if the Company
recognizes phantom income, its stockholders may be required to pay federal
income tax with respect to such income on an accelerated basis, (i.e., before
such income is realized by the stockholders in an economic sense). Taking into
account the time value of money, such an acceleration of federal income tax
liabilities would cause stockholders to receive an after-tax rate of return on
an investment in the Company that would be less than the after-tax rate of
return on an investment with an identical before-tax rate of return that did not
generate phantom income. In general, as the ratio of the Company's phantom
income to its total income increases, the after-tax rate of return received by a
taxable stockholder of the Company will decrease. See "Federal Income Tax
Considerations."
OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES
For the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). For the purpose, among others, of preserving the Company's
REIT status, the Charter generally prohibits direct or indirect ownership by any
person of more than 9.8% of the number of outstanding shares of Common Stock
(the "Ownership Limit"). For this purpose, the term "ownership" is defined as
either direct ownership or constructive ownership in accordance with the
constructive ownership provisions of Section 544 of the Code. Any transfer of
shares of capital stock that would result in disqualification of the Company as
a REIT or that would (a) create a direct or constructive ownership of shares of
stock in excess of the Ownership Limit, (b) result in the shares of stock being
beneficially owned (within the meaning Section 856(a) of the Code) by fewer than
100 persons (determined without reference to any rules of attribution), or
(c) result in the Company being "closely held" within the meaning of Section
856(h) of the Code (a "purported transfer"), will be null and void, and the
intended transferee (the "purported transferee") will acquire no rights to such
shares. Any purported transfer of shares that would result in a person owning
(directly or constructively) shares in excess of the Ownership Limit (except as
otherwise waived by the Board of Directors) due to the unenforceability of the
transfer restrictions set forth above will constitute "Excess Securities."
Excess Securities will be transferred by operation of law to a trust to be
established by the Company for the exclusive benefit of a charitable
organization, until such time as the trustee of the trust, which shall be a
banking institution designated as trustee by the Company, which is unaffiliated
with either the Company or the purported transferee, retransfers the Excess
Securities. Subject to the Ownership Limit, Excess Securities may be
transferred by the trust to any person (if such transfer would not result in
Excess Securities) at a price not to exceed the lesser of (i) the price paid by
the purported transferee or (ii) the fair market value of the Excess Securities
on the date of the purported transfer, at which point the Excess Securities will
automatically cease to be Excess Securities. See
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"Description of Capital Stock--Repurchase of Shares and Restriction on Transfer"
and "Federal Income Tax Considerations--Requirements for Qualifications."
Subject to certain limitations, the Board of Directors may increase or
decrease the Ownership Limit. In addition, to the extent consistent with the
REIT Provisions of the Code, the Board of Directors has the right, in its sole
discretion and pursuant to the Company's Charter, to waive the Ownership Limit
for, and at the request of, a purchaser of the Common Stock. However, the
Company's Board of Directors has waived the Ownership Limitation for certain
institutional investors participating in the Private Placement. See
"Description of Capital Stock." In connection with any such waiver, the Company
may require that the stockholder requesting such a waiver enter into an
agreement with the Company providing for the repurchase by the Company of shares
from the stockholder under certain circumstances to ensure compliance with the
REIT Provisions of the Code. Such repurchase would be at fair market value as
set forth in the agreement between the Company and such stockholder. The
consideration received by the stockholder in such repurchase might be
characterized as the receipt by the stockholder of a dividend from the Company,
and any stockholder entering into such an agreement with the Company should
consult its tax advisor in connection with its entering into such an agreement.
The provisions described above may inhibit market activity and any takeover
or other transaction in which holders of some or a majority of the Company's
capital stock might receive a premium for their shares or which such holders
might believe to be otherwise in their best interests. Such provisions also may
make the Company an unsuitable investment vehicle for any person seeking to
obtain ownership of more than 9.8% of the outstanding shares of capital stock.
See "Description of Capital Stock--Repurchase of Shares and Restrictions on
Transfer."
In addition, certain provisions of the Maryland General Corporation Law
(the "MGCL") relating to "business combinations" and of the Charter and Bylaws
may also have the effect of delaying, deterring or preventing a takeover attempt
or other change in control of the Company which may be beneficial to
stockholders and might otherwise result in a premium over then prevailing market
prices. See "Certain Provisions Of Maryland Law And The Company's Charter And
Bylaws."
PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK
Fiduciaries of employee benefit plans subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), should consider
the ERISA fiduciary investment standards before authorizing an investment by a
plan in the Common Stock. In addition, fiduciaries of employee benefit plans or
other retirement arrangements (such as an individual retirement account ("IRA")
or certain H.R. 10 Plans or Keogh plans) which are subject to Title I of ERISA,
and/or Section 4975 of the Code, as well as any entity, including an insurance
company general account, whose underlying assets include plan assets by reason
of a plan or account investing in such entity, should consult with their legal
counsel to determine whether an investment in the Common Stock will cause the
assets of the Company to be considered plan assets pursuant to the plan asset
regulations set forth at 29 C.F.R. Section 2510.3-101, thereby subjecting the
Plan to the prohibited transaction rules and the Company's assets to the
fiduciary investment standards of ERISA, or cause the excise tax provisions of
Section 4975 of the Code, to apply to the Company's assets, unless some
exception or exemption granted by the Department of Labor applies to the
acquisition, holding or transfer of the Common Stock. See "Erisa
Considerations."
PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL
The Charter authorizes the Board of Directors to issue up to 25,000,000
shares of preferred stock and to establish the preferences and rights of any
shares of preferred stock issued. Although the Company has no current intention
to issue any series of preferred stock in the foreseeable future, the issuance
of any series of preferred stock could have the effect of delaying or preventing
a change in control of the Company even if a majority of the holders of the
Company's Common Stock believed such change of control was in their best
interest. See "Description of Capital Stock--Preferred Stock."
LACK OF OPERATING POLICIES; BOARD OF DIRECTORS MAY CHANGE POLICIES WITHOUT
STOCKHOLDER CONSENT
The Company currently does not have specific operating guidelines. Any
operating policies, including investment and operating policies and other
policies with respect to acquisitions, financing, growth, operations, debt and
distributions will be determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies, or approve transactions
that deviate from these policies, from time to time without a vote of the
holders of the
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Common Stock. The effect of any such changes may be positive or negative. The
Company cannot change its policy of seeking to maintain its qualification as a
REIT without the approval of the holders of two-thirds of the outstanding shares
of Common Stock.
LACK OF POLICY REGARDING HEDGING OR CREDIT RISK; FUTURE REVISIONS IN POLICIES
AND STRATEGIES
The Board of Directors has not established any significant credit risk or
hedging policy; consequently, the Manager will exercise broad discretion
concerning credit risk and hedging strategies. The investment policies and
operating policies and strategies of the Company set forth in this Prospectus
may be modified or waived by the Board of Directors, subject in certain cases to
approval by a majority of the Independent Directors.
LACK OF ACCOUNTING AND TESTING SYSTEMS
Because the Company is newly formed and will only commence operations upon
consummation of the Public Offering and Private Placement, the Board of
Directors and the Company's officers have not established internal accounting
controls or testing systems. The Manager will cause the Company to retain
independent accountants and tax experts to assist in developing appropriate
accounting and testing procedures. The failure to successfully develop and
implement such internal systems would have a material adverse effect on the
integrity of the Company's books and records and increases the possibility that
the Company may inadvertently fail the REIT asset and/or income tests or the 55%
Requirement, either of which would have a material adverse effect on the value
of the Company's Common Stock and its ability to maintain its status as a REIT.
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS AND MANAGER INDEMNIFICATION
The Charter of the Company contains a provision which, subject to certain
exceptions, eliminates the liability of a director or officer to the Company or
its stockholders for monetary damages for any breach of duty as a director or
officer. This provision does not eliminate such liability to the extent that it
is proved that the director or officer actually received an improper benefit or
profit or to the extent that it is found that the act or omission of the
director or officer resulted from active or deliberate dishonesty.
The Company will indemnify the Manager and its officers and directors from
any action or claim brought or asserted by any party by reason of any allegation
that the Manager or one or more of its officers or directors is otherwise
accountable or liable for the debts or obligations of the Company or its
Affiliates. In addition, the Manager and its officers and directors will not be
liable to the Company, and the Company will indemnify the Manager and its
officers and directors, for acts performed pursuant to the Management Agreement,
except for claims arising from acts constituting bad faith, willful misconduct,
gross negligence or reckless disregard of their duties under the Management
Agreement. See "The Manager--Limits of Responsibility."
INTEREST RATE VOLATILITY MAY ADVERSELY AFFECT COMMON STOCK PRICE
It is likely that the market price of the Common Stock will be influenced
by any variation between the net yield on the Company's investment portfolio and
prevailing market interest rates and by the market's perception of the Company's
ability to achieve earnings growth. The Company's earnings will be derived
primarily from any positive spread between the yield on the Company's investment
portfolio and the cost of the Company's borrowings. The positive spread between
the yield on the Company's investment portfolio and the cost of borrowings will
not necessarily be larger in high interest rate environments than in low
interest rate environments, regardless of the Company's efforts to achieve such
result. Accordingly, in periods of high interest rates, the net income of the
Company, and therefore the dividend yield on the Common Stock, may be less
attractive compared with alternative investments which could negatively impact
the price of the Common Stock. If the anticipated or actual net yield on the
Company's investment portfolio declines or if prevailing market interest rates
rise, thereby decreasing the positive spread between the net yield on the
investment portfolio and the cost of the Company's borrowings, the market price
of the Common Stock may be adversely affected. In addition, if the market
prices of other mortgage REIT stocks decline for any reason, or the value of the
Company's portfolio of investment portfolio declines, the market price of the
Common Stock may be adversely affected. During any period when the market price
of the Common Stock has been adversely affected due to any of the foregoing
reasons, the liquidity of the Common Stock may be negatively impacted and
investors who may desire or be required to sell their shares may experience
losses.
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ILLIQUIDITY OF MORTGAGE LOANS, SUBORDINATE INTERESTS AND MORTGAGE DERIVATIVES
COULD CAUSE LOSSES
A portion of the Company's portfolio will be invested in Mortgage Loans,
Subordinate Interests and Mortgage Derivatives for which the secondary trading
market is not as well developed as the market for certain other Mortgage Assets,
such as Agency Certificates (or which are otherwise considered less marketable
or illiquid). Although the Company expects that most of the Company's
investments will be in Mortgage Assets for which a resale market exists, certain
of the Company's investments may lack a regular trading market and may be
illiquid. In addition, during adverse market conditions, the liquidity of all
of the Company's Mortgage Assets may be adversely impacted. There is no limit
on the percentage of the Company's investments that may be invested in illiquid
assets.
BENEFITS TO EXISTING STOCKHOLDER, DIRECTORS AND OFFICERS
Through the date hereof, Michael L. Smirlock, the Company's Chief Executive
Officer and President, has purchased and agreed to purchase from the Company an
aggregate of 73,000 shares of Common Stock (of which 6,000 shares of Common
Stock were issued at an average price of $2.50 per share in connection with the
Company's formation and 67,000 shares of Common Stock will be purchased at the
initial public offering price in the Private Placement) for an aggregate
purchase price of $1,020,005, or $13.97 per share. This average price per share
is less than the assumed initial public offering price of $15.00 per share.
The Company has also received irrevocable commitments to purchase a total
of 4,347,333 shares in the Private Placement. The purchasers in the Private
Placement will purchase the shares of Common Stock at a purchase price equal
to the initial public offering price. Of the 4,347,333 shares sold in the
Private Placement; (i) Mr. Smirlock has committed to purchase 67,000 shares,
(ii) David A. Tepper, a Director of the Company and the Manager has committed
to purchase 103,000 shares and (iii) Frederick N. Khedouri, a proposed
director of the Company and a Senior Managing Director of Bear Stearns, one
of the Representatives of the several Underwriters in the Public Offering,
has committed to purchase 10,000 shares. In addition, a total of 714,235
shares of Common Stock will be purchased by entities for which Mr. Tepper may
be deemed to have shared or sole voting and dispositive power. See
"Principal Stockholders."
The Company has granted to its directors, officers employees and
consultants options to purchase an aggregate of 800,000 shares of Common Stock
(which includes options to purchase 738,000 shares of Common Stock granted to
directors and officers of the Manager) at an exercise price equal to the initial
public offering price. The Company has also granted 400,000 shares of deferred
Common Stock to certain of its directors and officers. See "The Manager--Stock
Options and Other Awards" and The Company--Stock Incentive Plan."
The Company will enter into the Management Agreement with the Manager
pursuant to which the Manager will be entitled to receive an annual base
management fee and a quarterly incentive fee. Mr. Smirlock, the Chief Executive
Officer, President and majority stockholder of the Manager, is also the Chairman
of the Board, Chief Executive Officer and President of the Company. David A.
Tepper, a director and indirect minority stockholder of the Manager, is also a
Director of the Company. See "The Manager--The Management Agreement."
USE OF PROCEEDS
This Prospectus relates to Shares being offered and sold for the accounts
of the Selling Stockholders. The Company will not receive any of the proceeds
from the sale of the Shares offered by the Selling Stockholders. The Company
will pay for certain expenses related to the registration of the Shares. See
"Selling Stockholders" and "Plan of Distribution.
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DISTRIBUTION POLICY
The Company intends to distribute substantially all of its taxable income
(which generally does not ordinarily equal net income as calculated in
accordance with generally accepted accounting principles ("GAAP")) to its
stockholders each year to maximize the tax benefits of its REIT status. The
Company intends to make distributions on the Common Stock quarterly. To the
extent necessary to maintain its qualification as a REIT, for any year the
Company will make a fifth special distribution. The distribution policy is
subject to revision, and all distributions will be made by the Company, at the
discretion of the Board of Directors, and distributions will depend on, among
other things, the taxable earnings of the Company, the financial condition of
the Company, maintenance of REIT status and such other factors as the Board of
Directors deems relevant. See "Federal Income Tax Considerations--Distribution
Requirement."
To qualify as a REIT under the Code, the Company must make distributions to
its stockholders each year in an amount at least equal to (i) 95% of its Taxable
Income before deduction of dividends paid (less any net capital gain), plus (ii)
95% of the excess of the net income from foreclosure property over the tax
imposed on such income by the Code, minus (iii) any excess noncash income. The
"Taxable Income" of the Company for any year means the taxable income of the
Company for such year (excluding any net income derived either from property
held primarily for sale to customers or from foreclosure property) subject to
certain adjustments provided in the REIT Provisions of the Code.
Distributions to stockholders will generally be subject to tax as ordinary
income, although a portion of such distributions may be designated by the
Company as capital gain or may constitute a tax-free return of capital. The
Company will furnish annually to each of its stockholders a statement setting
forth distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital. For a discussion of the
federal income tax treatment of distributions by the Company, see "Federal
Income Tax Considerations."
The Company has adopted a Dividend Reinvestment Plan that will allow
stockholders to reinvest their dividends automatically in additional shares of
Common Stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in September 1997 and has no operating history
and will commence operations only if it receives the proceeds of the Public
Offering and the Private Placement. The Company's day-to-day operations will be
managed by the Manager, subject to the supervision of the Board of Directors.
The Manager and its investment professionals have no prior experience in
managing a REIT, and the past performance of the Manager's investment management
personnel in respect of the Affiliated Funds is not necessarily representative
of what the Manager's performance may be in the future or with respect to
managing the Company.
The Company intends to generate net income for distribution to stockholders
from the spread between the interest income earned on its investment portfolio
and the costs of borrowing to finance the portfolio. The Company's results of
operations will be affected by various factors, many of which are beyond the
control of the Company, including the availability of opportunities for the
acquisition of assets, the level and volatility of interest rates, conditions in
the financial markets and other economic conditions.
The Company has been organized and will elect to qualify as a REIT under
the Code and, as such, anticipates distributing at least 95% of its taxable
income annually, subject to certain adjustments. Cash for such distributions
is expected to be generated from the Company's operations, although the Company
also may borrow funds to make distributions.
The Company may experience high volatility in net interest income from
quarter to quarter and year to year, primarily as a result of fluctuations in
interest rates, borrowing costs, reinvestment opportunities and prepayment
rates. Because changes in interest rates may significantly affect the Company's
activities, the operating results of the Company will depend, in large part,
upon the ability of the Company to manage its interest rate, prepayment and
credit risks while effectively maintaining its status as a REIT. See
"BusinessCOperating Policies and Strategies."
LEVERAGE
The Company intends to employ a leveraging strategy of borrowing against
existing Mortgage Assets to acquire additional Mortgage Assets, generally
through the use of reverse repurchase agreements, dollar roll agreements,
Mortgage Loan, securitizations, loan agreements, lines of credit, commercial
paper borrowings and other credit facilities. The Company also may issue debt
in the public market to the extent the Manager deems appropriate. Leverage can
reduce the net income available for distributions to stockholders. To the
extent that changes in market conditions cause the cost of such financing to
increase relative to the income that can be derived from the assets acquired,
the Company may reduce the amount of leverage it utilizes. The Company also
intends to securitize substantially all the Mortgage Loans it acquires primarily
by issuing structured debt, such as CMOs, and retaining a Subordinate Interest.
HEDGING
To the extent consistent with its REIT election, the Company intends to
enter into hedging transactions to protect its portfolio of Mortgage Assets and
related debt from interest rate fluctuations. These transactions may include
interest rate swaps, the purchase or sale of interest rate collars, caps or
floors, options, Mortgage Derivatives and other hedging instruments. See
"Business--Operating Policies and StrategiesCCapital and Leverage Policies."
LIQUIDITY AND CAPITAL RESOURCES
Since the Company is newly-formed and has not yet commenced operations, it
has not yet established any lines of credit or collateralized financings
facilities. The Company has conducted preliminary discussions with potential
lenders and believes, on the basis of these discussions, that it will be able to
obtain financings in amounts and at interest rates consistent with the Company's
financing objectives.
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Management believes that the net proceeds of the Private Placement and the
Public Offering, combined with the cash flow from operations and borrowings,
will be sufficient to enable the Company to meet its anticipated liquidity and
capital requirements. See "Business--Operating Policies and Strategies."
INFLATION
Virtually all of the Company's assets and liabilities will be financial in
nature. As a result, interest rates are expected to influence the Company's
performance more directly than inflation. While changes in interest rates do
not necessarily correlate with inflation rates or changes in inflation rates,
interest rates ordinarily increase during periods of high or increasing
inflation and decrease during periods of low or declining inflation.
Accordingly, management believes that the Company's financial condition or
results of operations will be influenced by inflation to the extent interest
rates are affected by inflation.
CERTAIN ACCOUNTING POLICIES AND PROCEDURES
MORTGAGE SECURITY ACCOUNTING TREATMENT
Because a substantial portion of the Company's Mortgage Securities will be
classified for accounting purposes as "trading securities," unrealized
fluctuations in market values of the Mortgage Securities will change income
calculated according to GAAP ("GAAP income"), but not taxable income. As a
result of this mark-to-market accounting treatment, the book value and book
value per share of the Company are likely to fluctuate far more than if the
Company used amortized cost accounting. As a result, comparisons with companies
using historical cost accounting may be misleading.
Positive mark-to-market changes will increase the Company's equity base and
allow the Company to increase its spread lending activities while negative
changes will limit spread lending growth under the Company's leveraging
strategy. A very large negative change in the net market value of Mortgage
Assets and interest rate agreements might impair the Company's liquidity
position, requiring the Company to sell Mortgage Assets.
MORTGAGE LOAN ACCOUNTING TREATMENT
Substantially all of the Company's Mortgage Loans will be classified for
accounting purposes as "held for long-term investment," and accordingly, the
Company will use amortized cost to value such Mortgage Loans. Holding the
Mortgage Loans as investments allows the Company to record income as interest is
earned.
TAXABLE INCOME AND GAAP INCOME
Taxable income differs from GAAP income for certain reasons. Certain
Mortgage Securities and Mortgage Derivatives will be marked-to-market for
GAAP, but not for tax purposes. Interest income differs due to different
methods of calculating the rate of amortization of the premium or discount
when Mortgage Securities are acquired at a price above or below the stated
principal amount of the underlying Mortgage Loans. Treatment of credit
losses differs between tax and GAAP methods because the Company takes credit
provisions in order to make reserves for credit losses, whereas only actual
credit losses are deducted in calculating taxable income. General and
administrative expenses differ due to differing treatment of leasehold
amortization and other items. The Company's largest expense will likely be
the cost of borrowed funds. Interest expense generally will be calculated in
the same manner for GAAP and tax purposes.
These distinctions are relevant to the Company's stockholders because
distributions are based on taxable income as is the incentive fee paid to the
Manager. The Company generally will not pay federal taxes so long as it meets
the requirements of the REIT Provisions of the Code and makes distributions to
stockholders in an amount equal to its taxable income. See "Federal Income Tax
Considerations--Requirements for Qualification.
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BUSINESS
GENERAL
The Company is a specialty finance company, organized in September 1997,
that will invest primarily in Mortgage Securities and Mortgage Loans. The
Mortgage Securities will include Pass-Through Certificates, CMOs and other
securities representing interests in, or obligations backed by, pools of
Mortgage Loans. The Mortgage Loans will be secured by first or second liens on
single-family residential, multi-family residential, commercial or other real
property. See "Description of Proposed Assets."
The Company seeks to generate net income for distribution to stockholders
from the spread between the interest income earned on its investment portfolio
and the cost of financing and hedging the portfolio. The Company will elect to
be taxed as a REIT under the Code. The Company generally will not be subject to
federal income tax provided that it distributes its income to its stockholders
and maintains its qualification as a REIT. See "Federal Income Tax
Considerations." LASER Advisers Inc., which specializes in managing investments
in Mortgage Securities for institutions and other sophisticated investors, will
manage the Company's day-to-day operations. The Manager is a newly organized
registered investment adviser.
INVESTMENT STRATEGY
The Company's investment strategy will be to create and manage an
investment portfolio, principally of Mortgage Assets, that, in combination with
financing and hedging activities, will be designed to generate income for
distribution to its stockholders while preserving the Company's capital base.
The Company intends to acquire the following types of investments:
(i) fixed and adjustable rate Privately-Issued Certificates and Agency
Certificates; (ii) CMOs; (iii) Mortgage Loans, which will be pooled and
securitized to provide long-term, non-recourse financing for the Company; (iv)
Mortgage Derivatives, including IOs; (v) Subordinate Interests; and (vi) other
fixed-income securities which are non-Qualified Real Estate Assets, in an amount
not to exceed 5% of total assets. See "Description of Proposed Assets."
Consistent with the Company's policy of maintaining its status as a REIT for
federal income tax purposes, substantially all of the Company's assets will
consist of Qualified Real Estate Assets.
The Company will invest at least 70% of its total assets in (i) securities
which are rated within one of the two highest ratings categories by one of the
Rating Agencies or (ii) securities which are unrated but are guaranteed by the
U.S. government or an agent or instrumentality thereof or (iii) Mortgage Loans
to borrowers who would otherwise meet FHLMC, FNMA or GNMA guidelines, except
with respect to the size of the loans. The Company intends to securitize
substantially all the Mortgage Loans it acquires by issuing structured debt,
such as CMOs, and to retain Subordinate Interests in the pools of Mortgage Loans
it securitizes. Only such retained Subordinate Interests of Securitized
Mortgage Loans and not the entire pools of Mortgage Loans will be considered in
determining the proportion of assets classified within the 70% Asset Group and
the 30% Asset Group held by the Company.
The remainder of the Company's total assets, not to exceed 30%, are
expected to consist of Mortgage Loans (other than those included in the 70%
Asset Group), retained Subordinate Interests and fixed-income securities (other
than those included in the 70% Asset Group) that are primarily Qualified Real
Estate Assets. To attempt to minimize the potentially higher level of credit
and liquidity risk of these securities, the Company will limit its investments
in, and diversify its portfolio of, securities in the 30% Asset Group.
References to ratings of Mortgage Assets apply only at the time a
transaction is entered into by the Company. Any subsequent change in a rating
assigned to a Mortgage Asset or change in the percentage of Company assets
invested in certain Mortgage Assets or other instruments resulting from market
fluctuations or other changes in the Company's total assets will not require the
Company to dispose of an investment. If different Rating Agencies assign
different ratings to the same Mortgage Assets, the Company will determine which
rating it believes most accurately reflects the Mortgage Asset's quality and
risk at that time. A rating is not a recommendation to buy, sell or hold a
security, inasmuch as such rating does not comment as to the market price of the
security or the suitability of the security for a particular investor. There is
no assurance that a rating will continue for any given period of time or that a
rating will not be lowered or withdrawn entirely by a Rating Agency if, in its
judgment, circumstances so warrant.
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The REIT Provisions of the Code limit, in certain respects, the ability of
the Company to sell Mortgage Assets. See "Federal Income Tax Considerations."
However, from time to time, Mortgage Assets may be sold for a number of reasons,
including to dispose of an asset as to which credit risk concerns have arisen,
to reduce interest rate risk, to substitute one type of Mortgage Asset for
another, to improve yield, to maintain compliance with the 55% Requirement under
the Investment Company Act, and generally to restructure the balance sheet when
the Manager deems such action advisable. The Manager will select any Mortgage
Assets to be sold according to the particular purpose such sale will serve. The
Company's Board of Directors has not adopted a policy that would restrict the
Manager's authority to determine the timing of sales or the selection of
Mortgage Assets to be sold.
As a requirement for maintaining REIT status, the Company intends to
distribute to stockholders aggregate distributions equaling at least 95% of
its Taxable Income. See "Federal Income Tax Considerations." The Company
could make additional distributions of capital when the return expectations
of the stockholders appear to exceed returns potentially available to the
Company through making new investments in Mortgage Assets. Subject to the
limitations of applicable state securities and corporation laws, the Company
may distribute capital by making purchases of its own capital stock or paying
dividends in excess of earnings.
The Company's asset acquisition and investment strategy may change over
time in response to changing market conditions.
Operating Policies and Strategies
The Company's operating strategy is to acquire those Mortgage Assets which
it believes are likely to generate the highest returns on capital invested,
consistent with the Company's policies and strategies, after considering (i) the
amount and nature of anticipated cash flows from the Mortgage Asset, (ii) the
Company's ability to pledge the Mortgage Asset to secure collateralized
borrowings, (iii) the capital requirements resulting from the purchase and
financing of the Mortgage Assets, and (iv) the costs of financing, hedging and
managing the Mortgage Asset. Prior to acquisition, potential returns on capital
employed will be assessed over the life of the Mortgage Asset and in a variety
of interest rate, yield spread, financing cost, credit loss and prepayment
scenarios. Except as specifically prohibited by the Company's Charter or
Bylaws, the Board of Directors may, in its discretion, establish specific
operating policies and financing strategies and revise such policies and
strategies, from time to time, in response to changes in market conditions
without stockholder approval. Any such revisions to operating policies and
financing strategies are subject to approval of the Independent Directors.
The Company will adopt compliance guidelines, including restrictions on
acquiring, holding and selling assets, to ensure that the Company continues to
qualify as a REIT. Before acquiring any asset, the Manager will determine
whether such asset would constitute a Qualified Real Estate Asset.
Substantially all of the assets that the Company intends to acquire are expected
to be Qualified Real Estate Assets. The Company will regularly monitor
purchases of Mortgage Assets and the income generated from such assets,
including income from its hedging activities, in an effort to ensure that at all
times the Company maintains its qualification as a REIT and its exemption under
the Investment Company Act. The Company has engaged a nationally recognized
independent public accounting firm to assist it in developing internal
accounting and testing procedures and to assist in monitoring and conducting
quarterly compliance reviews to determine compliance with the REIT Provisions of
the Code.
CAPITAL AND LEVERAGE POLICIES
The Company's operations are expected to be highly leveraged. Initially,
the Company intends to finance its acquisition of Mortgage Assets through the
proceeds of the Private Placement and the Public Offering and, thereafter,
primarily by borrowing against or "leveraging" its existing portfolio and using
the proceeds to acquire additional Mortgage Assets. The Company expects to
incur debt such that it will maintain an equity-to-assets ratio of between 6% to
10%, although the actual ratio may be higher or lower from time to time
depending on market conditions and other factors deemed relevant by the Manager,
subject to the review of the Company's Board of Directors. The equity-to-assets
ratio is total stockholders' equity, calculated in accordance with GAAP, as a
percentage of total assets. For purposes of calculating the equity-to-assets
ratio, the Company's total assets include the value of the Company's investment
portfolio on a marked-to-market-basis. For purchased Mortgage Assets, the
Company obtains market quotes for its Mortgage Assets from independent
broker-dealers that make markets in securities similar to those in the Company's
portfolio or from pricing services approved by the Company's Independent
Directors. The Company's total stockholders' equity, for purposes of this
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calculation, equals the Company's stockholders' equity determined in accordance
with GAAP. The Board of Directors has discretion to deviate from or change the
Company's indebtedness policy at any time. However, the Company intends to
maintain an adequate capital base to protect against interest rate environments
in which the Company's financing and hedging costs might exceed interest income
from its Mortgage Assets. These conditions could occur, for example, when, due
to interest rate fluctuations, interest income on the Company's Mortgage Assets
(which occur during periods of rapidly rising interest rates or during periods
when the Mortgage Loans in the portfolio are prepaying rapidly) lags behind
interest rate increases in the Company's variable rate borrowings. The Company
intends to enter into hedging transactions in an effort to protect its portfolio
of Mortgage Assets and related debt from interest rate fluctuations. These
transactions may include interest rate swaps, the purchase or sale of interest
rate collars, caps or floors, options and IOs. See "--Securitization."
SHORT-TERM BORROWING
Mortgage Assets, other than securitized Mortgage Loans, will be financed
primarily at short-term borrowing rates through reverse repurchase agreements,
dollar roll agreements, loan agreements, lines of credit, commercial paper
borrowings and other credit facilities with institutional lenders. Reverse
repurchase agreements and dollar roll agreements are sales of pledged securities
to a lender at discounted prices in return for an agreement by the lender to
resell the same or substantially similar securities to the borrower on some
future date at an agreed price.
Reverse repurchase agreements are structured as sale and repurchase
obligations which allow a borrower to pledge purchased Mortgage Assets as
collateral securing short-term loans to finance the purchase of such Mortgage
Assets. Typically, the lender in a reverse repurchase arrangement makes a loan
in an amount equal to a percentage of the market value of the pledged
collateral. At maturity, the borrower is required to repay the loan and the
pledged collateral is released. Pledged Mortgage Assets continue to pay
principal and interest to the borrower.
A dollar roll agreement provides for the sale and delayed delivery of
Mortgage Securities and a simultaneous forward repurchase commitment by the
borrower to repurchase the same or a substantially similar security on a future
date. During the roll period, the borrower foregoes principal and interest
payments on the Mortgage Securities, but is compensated by the interest earned
on the cash proceeds of the initial sale of the Mortgage Securities and the
spread on the forward repurchase price. Because the dollar roll provides a
borrower with funds for the roll period, its value may be expressed as an
"implied financing rate." Dollar rolls are a favorable means of financing when
the forward repurchase price is low compared to the initial sale price, making
the implied financing rate lower than alternative short-term borrowing rates.
The Company's ability to enter into dollar roll agreements may be limited in
order to maintain the Company's status as a REIT or to avoid the imposition of
tax on the Company. See "Federal Income Tax Considerations."
The Company expects that reverse repurchase agreements and, to the extent
consistent with the REIT Provisions of the Code, dollar roll agreements will be,
together with Mortgage Loan securitizations, the principal means of leveraging
its Mortgage Assets. To the extent that reverse repurchase agreements or dollar
roll agreements are not available to finance certain assets, the Company intends
to enter into reverse repurchase agreements with financially sound institutions,
including broker-dealers, commercial banks and other lenders, which meet credit
standards established by the Board of Directors. Upon repayment of a reverse
repurchase agreement, or a repurchase pursuant to a dollar roll agreement, the
Company intends to pledge the same collateral promptly to secure a new reverse
repurchase agreement or will sell similar collateral pursuant to a new dollar
roll agreement. Since the Company is newly-formed and has not commenced
operations, it has not yet established any lines of credit or collateralized
financing facilities. The Company has conducted preliminary discussions with
potential lenders and believes, on the basis of these discussions, that it will
be able to obtain financing in amounts and at interest rates consistent with the
Company's financing objectives.
The reverse repurchase and dollar roll agreements also would require the
Company to deposit additional collateral (a "margin call") or reduce its
borrowings thereunder, if the market value of the pledged collateral declines.
This may require the Company to sell Mortgage Assets to provide such additional
collateral or to reduce the amount borrowed. If these sales were made at prices
lower than the carrying value of the Mortgage Assets, the Company would
experience losses. The Company intends to maintain an equity cushion sufficient
to provide liquidity in the event of interest rate movements and other market
conditions affecting the market value of the pledged Mortgage Assets. However,
there can be no assurance that the Company will be able to safeguard against
being required to sell Mortgage Assets in the event of a change in market
conditions. If the Company were forced to liquidate Mortgage Assets, there can
be no assurance that it
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would be able to maintain compliance with the REIT Provisions of the Code
regarding asset and source of income. See "Federal Income Tax
Considerations--Requirements for Qualification."
SECURITIZATION
The Company intends to acquire and accumulate Mortgage Loans for
securitization as part of its investment strategy. The Manager, in its
discretion, will determine the quantity of Mortgage Loans sufficient for
securitization (which will generally be at least $100 million), after
discussions with potential underwriters, rating agencies and monoline insurers,
if any are to be used, and an evaluation of the costs of securitization.
Securitization is the process of pooling Mortgage Loans in a trust or other
special purpose vehicle and issuing securities, such as CMOs, from the special
purpose vehicle. The Company intends to securitize Mortgage Loans by issuing
structured debt. Under this approach, for accounting purposes, the securitized
Mortgage Loans will remain on the Company's balance sheet as assets and the debt
obligations (i.e., the CMOs) will appear as liabilities, in contrast with
off-balance sheet sale treatment. The proceeds of securitizations by the
Company will be applied against preexisting borrowings (i.e., borrowings under
reverse repurchase or dollar roll agreements). Issuing structured debt in this
manner locks in less expensive, long-term, non-recourse financing that better
matches the terms of the Mortgage Loans serving as collateral for such debt.
Each series of Mortgage Securities created by securitization is expected to be
fully payable from the collateral pledged to secure the series. Except upon a
breach of the standard representations and warranties made by the Company when
loans are securitized, the debt obligations created in the securitization will
be non-recourse to the Company.
The Company anticipates that the proceeds from its securitizations will be
available to acquire additional Mortgage Loans and other investments.
Securitizations provide long-term financing and are not subject to margin calls
if an increase in interest rates reduces the value of the underlying Mortgage
Loans.
The Company expects that its retained interests in the securitizations will
be subordinated with respect to payments of principal and interest on the
underlying Mortgage Loans to the classes of securities issued to investors in
such securitizations. Accordingly, any losses incurred on the underlying
Mortgage Loans will be applied first to reduce the remaining amount of the
Company's retained interest, until reduced to zero. Thereafter, any further
losses would be borne by investors or, if used, by the monoline insurers in such
securitizations rather than the Company.
Typically, in connection with the creation of a new Mortgage Loan
securitization, the issuer generally will be required to enter into a master
servicing agreement with respect to such series of Mortgage Securities with an
entity acceptable to the Rating Agencies, that regularly engages in the business
of servicing Mortgage Loans (the "Master Servicer"). If, in the future, the
Company decides to service its own securitized Mortgage Loans, it will do so
only through Qualified REIT Subsidiaries, in structures designed not to endanger
the Company's REIT status.
The Company intends to structure its securitizations so as to avoid the
attribution of any Excess Inclusion Income to the Company's stockholders. See
"Federal Income Tax Considerations--Taxation of Stockholders."
HEDGING ACTIVITIES
The Company intends to enter into hedging transactions to protect its
investment portfolio from interest rate fluctuations and other changes in market
conditions. These transactions may include interest rate swaps, the purchase or
sale of interest rate collars, caps or floors, options and IOs. These
instruments may be used to hedge as much of the interest rate risk as the
Manager determines is in the best interest of the Company's stockholders, given
the cost of such hedges and the need to maintain the Company's status as a REIT.
The Company has not established specific policies as to the extent of the
hedging transactions in which it will engage; however, the Independent Directors
will be responsible for reviewing the extent and effect of hedging activities at
their regular meetings. The Manager may elect to have the Company bear a level
of interest rate risk that could otherwise be hedged when the Manager believes,
based on all relevant facts, that bearing such risk is advisable.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. The business failure of a counterparty with which the Company has
entered into a hedging transaction will most likely result in a default. The
default of a counterparty with which the Company has entered into a hedging
transaction may result in the loss of
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unrealized profits and force the Company to cover its resale commitments, if
any, at the then current market price. Although generally the Company will seek
to reserve for itself the right to terminate its hedging positions, it may not
always be possible to dispose of or close out a hedging position without the
consent of the counterparty, and the Company may not be able to enter into an
offsetting contract in order to cover its risk. There can be no assurance that
a liquid secondary market will exist for hedging instruments purchased or sold,
and the Company may be required to maintain a position until exercise or
expiration, which could result in losses.
The Company intends to seek to protect its investment portfolio against the
effects of significant interest rate fluctuations and to preserve the net income
flows and capital value of the Company. Specifically, the Company's asset
acquisition and borrowing strategies are intended to offset the potential
adverse effects resulting from the differences between fixed-rates or other
limitations on coupon rate adjustment, such as interest rate caps, associated
with its Mortgage Assets and the shorter term variable nature of the Company's
related borrowings.
The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between yields from Mortgage Assets and the Company's borrowing costs across a
reasonable range of adverse interest rate environments. Capital preservation
refers to maintaining a relatively steady level in the market value of the
Company's capital across a reasonable range of adverse interest rate scenarios.
To monitor and manage capital preservation risk, the Company will measure the
"duration" of its capital. The duration of capital is the expected change in
the market value of the Company's capital caused by a 1% change in interest
rate. To monitor duration and the related risks of fluctuations in the
liquidation value of the Company's equity, the Company will model the impact of
various economic scenarios on the market value of the Company's Mortgage Assets,
liabilities and hedging instruments.
The Company believes its hedging activities will provide a level of income
and capital protection against reasonable interest rate risks. However, no
strategy can insulate the Company completely from such risks, and certain of the
federal income tax requirements that the Company must satisfy to qualify as a
REIT limit the Company's ability to hedge. The Company intends to monitor its
hedging activity carefully and may have to limit its hedging strategies so that
it does not realize excessive income from hedging activities or hold hedging
instruments having excess value in relation to total assets, which would result
in the Company's disqualification as a REIT or, in the case of excess hedging
income, the payment of a penalty tax for failure to satisfy certain REIT income
tests under the Code, provided such failure was for reasonable cause. See
"Federal Income Tax Considerations--Requirements for Qualification."
Hedging activity involves transaction costs, and such costs can increase
significantly as the period covered by such activity increases. Therefore, the
Company may be prevented from effectively hedging all of its interest rate risk.
Certain losses incurred in connection with hedging activities may be capital
losses that would not be deductible to offset ordinary REIT income. In such a
situation, the Company would have incurred an economic loss of capital that
would not be deductible to offset the ordinary income from which dividends must
be paid.
INTEREST RATE RISK MANAGEMENT STRATEGY
The Company intends to follow an interest rate risk management strategy to
protect against the adverse effects of major interest rate changes. The
Company's interest rate risk management strategy is formulated with the intent
to offset the potential adverse effects resulting from the fixed rate nature or
other rate adjustment limitations of its assets and related changes in the
short-term borrowing costs. This encompasses a number of procedures including:
(i) purchasing interest rate caps and swaps caps to attempt to mitigate the risk
of the cost of variable rate liabilities increasing at a faster rate than the
earnings on the assets, (ii) purchasing IOs to attempt to offset the adverse
effects of rising interest rates, and (iii) monitoring the effect of changes in
interest rates on the earnings and the value of the Company.
The Company may purchase interest rate caps, interest swaps and similar
securities to attempt to mitigate the risk of the cost of its variable rate
liabilities increasing at a faster rate than the earnings on its assets. The
Company intends generally to hedge as much of the interest rate risk as the
Manager determines is in the best interest of the Company, given the cost of
such hedging transactions and the need to maintain the Company's status as a
REIT. This determination may result in the Manager having the Company bear a
level of interest rate risk that could otherwise be hedged when the Manager
believes, based on all relevant facts, that bearing such risk is advisable. The
Company also may, to the extent consistent with its compliance with the REIT
gross income tests and applicable law, utilize options and forward contracts as
a hedge against future interest rate changes.
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Interest rate caps are legal contracts between the Company and a third
party firm (the "counterparty") in which, in exchange for an initial premium,
the counterparty agrees to make payments to the Company if interest rates rise
above the rate specified in the contract.
Interest rate swaps are legal contracts between the Company and a
counterparty in which the Company pays a fixed rate of interest to the
counterparty and the counterparty pays a variable rate of interest to the
Company. These and other similar securities have the effect of offsetting the
increasing cost of variable rate liabilities during periods of rising interest
rates.
The Company intends to purchase IOs to endeavor to offset the effects of
rising interest rates. These securities can be effective in hedging the
investment portfolio as the values and yields of these securities tend to
increase as interest rates rise and to decrease as interest rates fall.
However, IOs may decline in value during periods of declining interest rates.
EMPLOYEES
The Company initially expects to have seven employees. The Manager will
employ the four executive officers of the Company and four additional employees.
Each of the officers of the Manager has at least ten years' experience in
mortgage research, mortgage finance and investment management.
FACILITIES
The Company's executive offices are located at 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party or
to which any property of the Company is subject.
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DESCRIPTION OF PROPOSED ASSETS
The Company intends to acquire the following types of investments subject
to the operating restrictions described in "Business--Operating Policies and
Strategies."
MORTGAGE LOANS
The Company intends to acquire and accumulate fixed and adjustable-rate
Mortgage Loans secured by first or second liens on single-family (one-to-four
unit) residential, multi-family residential, commercial or other real property
as part of its investment strategy.
The Company may acquire Mortgage Loans directly from Mortgage Sellers,
which include originators, and entities holding Mortgage Loans originated by
others throughout the United States, such as savings and loans associations,
banks, mortgage bankers, home builders, insurance companies and other mortgage
lenders. 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 the Mortgage Sellers.
The Company may issue commitments ("Commitments") to purchase Mortgage
Loans to Mortgage Sellers that follow policies and procedures that generally
comply with FHLMC, FNMA and GNMA regulations and guidelines and with all
applicable federal and state laws and regulations for loans secured by
single-family residential properties. In addition, Commitments may be issued
for Agency Certificates, Privately-Issued Certificates and Mortgage Loans.
These Commitments will obligate the Company to purchase Mortgage Assets from the
holders of the Commitment for a specific period of time, in a specific aggregate
principal amount and at a specified price and margin over an index. Although
the Company may commit to acquire Mortgage Loans prior to funding, all loans are
expected 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 the Company's Mortgage
Assets.
The Mortgage Loans will be acquired by the Company and held until a
quantity sufficient for securitization has been accumulated. During the
accumulation period, the Company will be subject to risks of borrower defaults,
bankruptcies, fraud losses and special hazard losses that are not covered by
standard hazard insurance. In the event of any default under Mortgage Loans
held by the Company, the Company will bear the risk of loss of principal to the
extent of any deficiency between the value of the mortgage collateral and the
principal amount of the Mortgage Loan. Also, during the accumulation period,
the costs of financing and hedging the Mortgage Loans could exceed the interest
income on the Mortgage Loans. No assurance can be given that any mortgage,
fraud or hazard insurance will adequately cover a loss suffered by the Company.
It is anticipated that each Mortgage Loan purchased will have a commitment
for mortgage pool insurance from a monoline insurance company with a claims
paying ability in one of the two highest rating categories of a Rating Agency.
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 guarantees, establishment of reserve
accounts or over-collateralization. The Company expects that all Mortgage Loans
to be acquired will be reviewed by a mortgage pool insurer or other qualified
mortgage loan underwriter to ensure that the credit quality of the Mortgage
Loans meets the insurer's guidelines, and the Company intends to rely primarily
upon this credit evaluation rather than making its own independent credit review
in determining whether to purchase a Mortgage Loan. Credit losses covered by
the mortgage pool insurance policies or other forms of credit enhancement are
restricted to the limits of their contractual obligations and may be lower than
the principal amount of the Mortgage Loans. The mortgage pool insurance or
credit enhancement will be issued when the Mortgage Loan is subsequently
securitized, and the Company will be at risk for credit losses on that Mortgage
Loan prior to its securitization.
In addition to credit enhancement, the Company may obtain a commitment for
special hazard insurance on the Mortgage Loans, if available at reasonable cost,
to protect against casualty losses not usually covered by standard hazard
insurance. This special hazard insurance does not cover losses during the
accumulation period, but coverage commences at the time the Mortgage Loans are
pledged as collateral for in a securitization. Accordingly, the risks
associated with such special hazard losses exist only between the time the
Company purchases a Mortgage Loan and the subsequent securitization.
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In connection with the Company's acquisition of Mortgage Loans, Mortgage
Sellers generally make representations and warranties customary in the industry
relating to, among other things, compliance with laws, regulations and program
standards, lack of encumbrances, enforceability, validity of the lien,
recordation of the Mortgage Loans and as to the accuracy of information. In the
event of a breach of these representations and warranties, the Mortgage Sellers
may become liable for certain damages or be required to repurchase such loans.
The Company will provide similar representations and warranties when the Company
sells or pledges the Mortgage Loans as collateral for Mortgage Securities.
Although the Company will have recourse to the Mortgage Sellers based on the its
representations and warranties, the Company will be at risk for loss to the
extent the Seller does not perform its repurchase obligations. If a Mortgage
Loan becomes delinquent and the mortgage pool insurer is able to prove that
there was fraud or misrepresentation in connection with the origination of the
Mortgage Loan, the mortgage pool insurer will not be liable for the portion of
the loss attributable to such fraud or misrepresentation.
PASS-THROUGH CERTIFICATES
The Company's investments in Mortgage Securities are expected to be
concentrated in Pass-Through Certificates. The Pass-Through Certificates to be
acquired by the Company will consist primarily of High Quality fixed and
adjustable rate Agency Certificates and Privately-Issued Certificates and will
represent interests in Mortgage Loans primarily secured by liens on
single-family residential, multi-family residential and commercial real
properties, but also may be secured by liens on other types of real property.
FHLMC CERTIFICATES
FHLMC is a privately-owned, government-sponsored enterprise created
pursuant to an act of Congress. FHLMC purchases conventional conforming
Mortgage Loans or participation interests therein and resells the loans and
participations so purchased in the form of guaranteed, mortgage-backed
securities. FHLMC guarantees to each holder of FHLMC certificates the timely
payment of interest at the applicable pass-through rate and ultimate collection
of all principal on the holder's pro rata share of the unpaid principal balance
of the related Mortgage Loans, but does not guarantee the timely payment of
scheduled principal of the underlying Mortgage Loans. Under FHLMC's Gold PC
Program, FHLMC guarantees the timely payment of principal based on the
difference between the pool factor published in the month preceding the month of
distribution and the pool factor published in such month of distribution. The
obligations of FHLMC under its guarantees are solely those of FHLMC and are not
backed by the full faith and credit of the U.S. government. If FHLMC were
unable to satisfy such obligations, distributions to holders of FHLMC
certificates would consist solely of payments and other recoveries on the
underlying Mortgage Loans and, accordingly, monthly distributions to holders of
FHLMC certificates would be affected by delinquent payments and defaults on such
Mortgage Loans.
FHLMC certificates may be backed by pools of Mortgage Loans secured by
single-family or multi-family residential properties. Such underlying Mortgage
Loans may have original terms to maturity of up to 40 years. FHLMC certificates
may be issued under Cash Programs (composed of Mortgage Loans purchased from a
number of sellers) or Guarantor Programs (composed of Mortgage Loans purchased
from one seller in exchange for participation certificates representing an
interest in the Mortgage Loans purchased). FHLMC certificates may pay interest
at a fixed or adjustable rate. The interest rate paid on FHLMC adjustable rate
mortgage ("ARM") certificates adjusts periodically within 60 days prior to the
month in which the interest rates on the underlying Mortgage Loans adjust. The
interest rates paid on FHLMC and adjustable rate mortgage ARM certificates
issued under FHLMC's standard ARM programs adjust in relation to the Treasury
Index. Other specified indices used in FHLMC ARM programs include the 11th
District Cost of Funds Index published by the Federal Home Loan Bank of San
Francisco (the "11th District Index") and LIBOR. Interest rates paid on
fully-indexed FHLMC ARM certificates equal the applicable index rate plus a
specified number of basis points ranging typically from 125 to 250 basis points.
In addition, the majority of series of FHLMC ARM certificates issued to date
have evidenced pools of Mortgage Loans with monthly, semi-annual or annual
interest adjustments. Adjustments in the interest rates paid are generally
limited to an annual increase or decrease of either 100 or 200 basis points and
to a lifetime cap of 500 or 600 basis points over the initial interest rate.
Certain FHLMC programs include Mortgage Loans which allow the borrower to
convert the adjustable mortgage interest rate of its ARMs to a fixed rate. ARMs
which are converted into fixed rate Mortgage Loans are repurchased by FHLMC, or
by the seller of such loan to FHLMC, at the unpaid principal balance thereof
plus accrued interest to the due date of the last adjustable rate interest
payment.
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FNMA CERTIFICATES
FNMA is a privately-owned, federally chartered corporation that provides
funds to the mortgage market primarily by purchasing Mortgage Loans (with
respect to residential properties) from local lenders, thereby replenishing
their funds for additional lending. FNMA guarantees to each registered holder
of a FNMA certificate that it will distribute amounts representing scheduled
principal and interest at the rate provided by the FNMA certificate on the
Mortgage Loans in the pool underlying the FNMA certificate whether or not
received, and the full principal amount of any such Mortgage Loan foreclosed or
otherwise finally liquidated, whether or not the principal amount is actually
received. The obligations of FNMA under its guarantees are solely those of FNMA
and are not backed by the full faith and credit of the U.S. government. If FNMA
were unable to satisfy such obligations, distributions to holders of FNMA
certificates would consist solely of payments and other recoveries on the
underlying Mortgage Loans and, accordingly, monthly distributions to holders of
FNMA certificates would be affected by delinquent payments and defaults on such
Mortgage Loans.
FNMA certificates may be backed by pools of Mortgage Loans secured by
single-family or multi-family residential properties. The original terms to
maturities of the Mortgage Loans generally do not exceed 40 years. FNMA
certificates may pay interest at a fixed rate or adjustable rate. Each series
of FNMA ARM certificates bears an initial interest rate and margin tied to an
index based on all loans in the related pool, less a fixed percentage
representing servicing compensation and FNMA's guarantee fee. The specified
index used in each such series has included the Treasury Index, the 11th
District Index and LIBOR. Interest rates paid on fully-indexed FNMA ARM
certificates equal the applicable index rate plus a specified number of basis
points ranging typically from 125 to 250 basis points. In addition, the
majority of series of FNMA ARM certificates issued to date have evidenced pools
of Mortgage Loans with monthly, semi-annual or annual interest rate adjustments.
Adjustments in the interest rates paid are generally limited to an annual
increase or decrease of either 100 or 200 basis points and to a lifetime cap of
500 or 600 basis points over the initial interest rate. Certain FNMA programs
include Mortgage Loans which allow the borrower to convert the adjustable
mortgage interest rate of its ARM to a fixed rate. ARMs which are converted
into fixed rate Mortgage Loans are repurchased by FNMA, or by the seller of such
loans to FNMA, at the unpaid principal balance thereof plus accrued interest to
the due date of the last adjustable rate interest payment. Adjustments to the
interest rates on FNMA ARM certificates are typically subject to lifetime caps
and periodic rate or payment caps.
GNMA CERTIFICATES
GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development ("HUD"). GNMA guarantees
the timely payment of the principal of and interest on certificates which
represent an interest in a pool of mortgages insured by the United States
Federal Housing Authority (the "FHA") and other loans eligible for inclusion in
mortgage pools underlying GNMA certificates. GNMA certificates are general
obligations of the U.S. government.
GNMA certificates may pay a fixed or adjustable coupon rate. At present,
most GNMA certificates issued under GNMA's standard ARM program adjust annually
in relation to the Treasury Index. Interest rates paid on GNMA ARM certificates
typically equal the index rate plus 150 basis points. Adjustments in the
interest rate are generally limited to an annual increase or decrease of 100
basis points and to a lifetime cap of 500 basis points over the initial coupon
rate.
PRIVATELY-ISSUED CERTIFICATES
Privately-Issued Certificates are structured similarly to Agency
Certificates and are issued by originators of, and investors in, Mortgage Loans,
including savings and loan associations, savings banks, commercial banks,
mortgage banks, investment banks and special purpose subsidiaries of such
institutions. Privately-Issued Certificates are usually backed by a pool of
fixed or adjustable rate Mortgage Loans and are generally structured with one or
more types of credit enhancement, including mortgage pool insurance or
subordination. However, Privately-Issued Certificates are typically not
guaranteed by an entity having the credit status of FHLMC, FNMA or GNMA.
CMOs
The Company may invest, from time to time, in adjustable rate and fixed
rate CMOs issued by private issuers or FHLMC, FNMA or GNMA. CMOs are a series
of bonds or certificates ordinarily issued in multiple classes, each of which
consists of several classes with different maturities and often complex
priorities of payment, secured by a single pool of
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Mortgage Loans, Pass-Through Certificates, other CMOs or other Mortgage Assets.
Principal prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all interest bearing classes of a CMO on a
monthly, quarterly or semi-annual basis. The principal and interest on
underlying Mortgage Loans may be allocated among the several classes of a series
of a CMO in many ways, including pursuant to complex internally leveraged
formulas that make the CMO class especially sensitive to interest rate or
prepayment risk.
CMOs may be subject to certain rights of issuers thereof to redeem such
CMOs prior to their stated maturity dates, which may have the effect of
diminishing the Company's anticipated return on its investment.
Privately-issued single-family, multi-family and commercial CMOs are supported
by private credit enhancements similar to those used for Privately-Issued
Certificates and are often issued as senior-subordinated Mortgage Securities.
The Company intends to only acquire CMOs or multi-class Pass-Through
Certificates that constitute debt obligations or beneficial ownership in grantor
trusts holding Mortgage Loans, or regular interests in REMICs, or that otherwise
constitute Qualified Real Estate Assets (provided that the Company has obtained
a favorable opinion of the Company's Special Tax Counsel or a ruling from the
Service to that effect).
MORTGAGE DERIVATIVES
The Company may acquire Mortgage Derivatives, including IOs, Inverse IOs,
Sub IOs and floating rate derivatives, as market conditions warrant. Mortgage
Derivatives provide for the holder to receive interest only, principal only, or
interest and principal in amounts that are disproportionate to those payable on
the underlying Mortgage Loans. Payments on Mortgage Derivatives are highly
sensitive to the rate of prepayments on the underlying Mortgage Loans. In the
event of more rapid than anticipated prepayments on such Mortgage Loans, the
rates of return on Mortgage Derivatives representing the right to receive
interest only or a disproportionately large amount of interest, i.e., IOs would
be likely to decline. Conversely, the rates of return on Mortgage Derivatives
representing the right to receive principal only or a disproportionate amount of
principal, i.e., POs would be likely to increase in the event of rapid
prepayments.
Some IOs in which the Company may invest, such as Inverse IOs, bear
interest at a floating rate that varies inversely with (and often at a multiple
of) changes in a specific index. The yield to maturity of an Inverse IO is
extremely sensitive to changes in the related index. The Company also may
invest in inverse floating rate Mortgage Derivatives which are similar in
structure and risk to Inverse IOs, except they generally are issued with a
greater stated principal amount than Inverse IOs.
Other IOs in which the Company may invest, such as Sub IOs, have the
characteristics of a Subordinate Interest. A Sub IO is entitled to no payments
of principal; moreover, interest on a Sub IO often is withheld in a reserve fund
or spread account to fund required payments of principal and interest on more
senior tranches of Mortgage Securities. Once the balance in the spread account
reaches a certain level, excess funds are paid to the holders of the Sub IO.
These Sub IOs provide credit support to the senior classes and thus bear
substantial credit risks. In addition, because a Sub IO receives only interest
payments, its yield is extremely sensitive to the rate of prepayments (including
prepayments as a result of defaults) on the underlying Mortgage Loans.
IOs can be an effective hedging device because they generally increase in
value as fixed rate Mortgage Securities decrease in value. The Company also may
invest in other types of derivatives currently available in the market and other
Mortgage Derivatives that may be developed in the future if the Manager
determines that such investments would be advantageous to the Company. The
Company does not intend to purchase REMIC residuals or other CMO residuals.
SUBORDINATE INTERESTS
The Company intends to retain a Subordinate Interest in the pools of
Mortgage Loans it securitizes and to acquire Subordinate Interests in pools of
Mortgage Loans securitized by others. The credit quality of Mortgage Loans, and
the Mortgage Securities utilizing Mortgage Loans as the underlying collateral,
depends on a number of factors, including their loan-to-value ratio, their terms
and the geographic diversification of the location of the properties securing
the Mortgage Loans and, in the case of multi-family and commercial properties,
the creditworthiness of tenants.
In a securitization, the principal of and interest on the underlying
Mortgage Loans may be allocated among several classes of Mortgage Securities in
many ways and the credit quality of a particular class depends primarily on its
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payment priority. In a typical securitization, the Subordinate Interests absorb
losses from defaults or foreclosures on the Mortgage Loan collateral before such
losses are allocated to senior classes, providing credit protection to more
senior classes. As a result, Subordinate Interests carry significant credit
risks. Subordinate Interests in a typical securitization are subject to a
substantially greater risk of non-payment than more senior classes.
Accordingly, Subordinate Interests are assigned lower credit ratings, or no
rating at all. Neither the Subordinate Interests nor the underlying mortgages
are guaranteed by agencies, or instrumentalities of the U.S. government.
As a result of the typical "senior-subordinated" structure, Subordinate
Interests will be extremely sensitive to losses on the underlying Mortgage
Loans. For example, if the Company owns a $10 million Subordinate Interest in
an issuance of Mortgage Securities consisting of $100 million of Mortgage Loan
collateral, a 7% loss on the underlying Mortgage Loans will result in a 70% loss
on the Subordinate Interest. Accordingly, the holder of the Subordinate
Interest is particularly interested in minimizing the loss frequency (the
percentage of the Mortgage Loan balances that default over the life of the
Mortgage Loan collateral) and the loss severity (the amount of loss on a
defaulted Mortgage Loan, i.e., the principal amount of the Mortgage Loan
unrecovered after applying any recovery to the expenses of foreclosure and
accrued interest) on the underlying Mortgage Loans. The loss frequency on a
pool of Mortgage Loans will depend upon a number of factors, most of which will
be beyond the control of the Company or the applicable Master Servicer.
Many of the Subordinate Interests to be acquired by the Company will not
have been registered under the Securities Act, but instead, will have initially
been sold in private placements. Such unregistered Subordinate Interests will
be subject to certain restrictions on resale and, accordingly, will have more
limited marketability and liquidity. Although there are some exceptions, most
issuers of multi-class Mortgage Securities elect to be treated, for federal
income tax purposes, as REMICs. The Company intends to acquire only Subordinate
Interests that are treated as regular interests in REMICs. Although the
Company's strategy is to purchase Subordinate Interests at a price designed to
return the Company's investment and generate a profit thereon, there can be no
assurance that such goal will be met or that the Company's investment in a
Subordinate Interest will be returned in full or at all.
OTHER FIXED-INCOME ASSETS
The Company may invest in fixed-income securities that are not Mortgage
Assets, including securities issued by corporations or issued or guaranteed by
the U.S. government or its agencies or instrumentalities, loan participations,
emerging market debt, non-investment grade high yield corporate debt and
collateralized bond obligations, denominated in U.S. dollars and foreign
currencies. A portion of these assets will be securities which are included in
the 30% Asset Group. The Company will invest no more than 5% of the assets in
such fixed-income securities. However, the Board of Directors, with the
approval of the Independent Directors, may determine to invest a larger
percentage of the Company's assets in such fixed-income securities.
The Company may invest in debt securities issued or guaranteed by foreign
governments, including debt securities rated below investment grade.
Obligations of governments of emerging market countries are often subject to, or
may be adversely affected by, risks associated with political and economic
uncertainty, fluctuations of currency exchange rates, lower levels of disclosure
and regulation in foreign securities markets than in the United States, risks of
nationalization, expropriation and confiscatory taxation, taxation of income
earned in foreign nations or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls and uncertainties as to the status,
interpretation and application of laws.
The Company also may invest in non-investment grade high yield corporate
debt rated below investment grade, commonly known as junk bonds. Junk bonds are
generally unsecured, may be subordinated to other obligations of the issuer and
generally have greater credit and liquidity risk than is typically associated
with investment grade corporate obligations.
The Company also may acquire interests in non-real estate loans. Such loan
interests may be purchased either directly (by way of assignment from the
selling institution) or indirectly (by way of the purchase of a participation
interest from the selling institution). The purchaser of an assignment of an
interest in a loan typically succeeds to all rights and obligations of the
assigning selling institution and becomes a lender under the loan agreement.
Participations typically result in a contractual relationship only with the
selling institution, not with the borrower.
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In addition, the Company may invest in asset-backed securities which have
structural characteristics similar to Mortgage Securities but relate to assets
other than Mortgage Assets, including credit card, automobile and other
receivables. Asset-backed securities may be rated or unrated and, if rated, may
be above or below investment grade. They may bear coupons at a fixed or
floating interest rate and also may be subject to prepayment risk.
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THE MANAGER
The day-to-day business and investment affairs of the Company will be
managed by the Manager subject to the supervision of the Company's Board of
Directors (the "Board of Directors"). The Manager, a Delaware corporation and a
registered investment adviser under the Advisers Act, specializes in managing
investments in Mortgage Securities. The stockholders of the Manager are
directors of the Company. The Manager employs investment professionals each of
whom has at least ten years' experience in mortgage research, mortgage finance
and investment management; however, neither the Manager nor its investment
professionals have previously managed a REIT. The Manager's investment
professionals currently manage over $300 million of capital invested primarily
in $3.9 billion of Mortgage Securities.
The directors and executive officers of the Manager are as follows:
Name Age Position(s) Held
- ---- --- ----------------
Michael L. Smirlock, Ph.D.* 41 Chief Executive Officer, President and
Director
Thomas G. Jonovich* 33 Chief Financial Officer
Peter T. Zimmermann* 31 Vice President and Director
Robert J. Gartner* 35 Vice President and Secretary
David A. Tepper* 40 Director
- ----------------------
* These persons also serve as directors or officers of the Company.
Michael L. Smirlock, Ph.D. has been the Chief Executive Officer, President
and a Director of the Manager since its inception and is one of its founders.
Mr. Smirlock is also the Chairman of the Board, Chief Executive Officer,
President and a Director of the Company. For the Manager, Mr. Smirlock
currently directs the investment of over $300 million in capital invested
primarily in Mortgage Securities for institutions and other sophisticated
investors. Prior to 1994, Mr. Smirlock was a principal of Appaloosa Management
L.P. ("Appaloosa"), where he managed investment vehicles and accounts investing
primarily in Mortgage Securities since 1994. From 1990 until he resigned in
1993, Mr. Smirlock was Domestic Fixed Income Chief Investment Officer for
Goldman Sachs Asset Management ("GSAM"), a division of Goldman, Sachs & Co., and
a partner of Goldman, Sachs & Co. From 1988 to 1990, Mr. Smirlock served as the
head of the Asset Acquisition Group at Franklin Savings Association. Mr.
Smirlock was an Associate Professor of Finance at the Wharton School of Business
of the University of Pennsylvania from 1982 to 1990.
Thomas G. Jonovich has been the Chief Financial Officer of the Manager
since its inception. He is also the Chief Financial Officer of the Company.
Before joining the Manager, Mr. Jonovich was employed by Appaloosa, since April
1997, where he was chief accountant for funds investing in Mortgage Securities.
From May 1996 until April 1997, Mr. Jonovich was a Fund Accounting Manager with
Individual Investor Group, Inc., a private investment adviser. He was a Senior
Accountant at Steinhardt Management Company Inc., an investment advisory firm,
from September 1993 to April 1996 and was employed as a certified public
accountant at Gershon, Pierce and Company, a public accounting firm, from
November 1991 to September 1993.
Peter T. Zimmermann has been Vice President and a Director of the Manager
since its inception. Mr. Zimmermann is also Chief Operating Officer of the
Company. Before joining the Manager, Mr. Zimmermann was employed by Appaloosa,
since October 1994, where he assisted Mr. Smirlock in the management of
investments, primarily in Mortgage Securities. Before joining Appaloosa, Mr.
Zimmermann was a Vice President and Mortgage Portfolio Manager for GSAM, where
he was employed since 1990. While at GSAM, he specialized in adjustable rate
mortgages and was responsible for the management of over $6 billion in
fixed-income mortgage assets. Mr. Zimmermann was an associate at Franklin
Savings Association prior to joining GSAM.
Robert J. Gartner has been a Vice President and Secretary of the Manager
since its inception. Mr. Gartner is also a Vice President of the Company.
Before joining the Manager, Mr. Gartner was employed by Appaloosa, since January
1997, where he assisted Mr. Smirlock in the management of investments,
primarily in Mortgage Securities. Before joining Appaloosa, Mr. Gartner held
various positions at Donaldson, Lufkin & Jenrette Securities Corporation from
1987, including Vice President and trader in the mortgage-backed securities
department.
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David A. Tepper has been a Director of the Manager since its inception.
Mr. Tepper is the chief principal and founder of Appaloosa which specializes in
investments in high-yield securities, Mortgage Securities and bank loans.
Before forming Appaloosa in 1993, Mr. Tepper was head trader in the High-Yield
Department of Goldman, Sachs & Co. Mr. Tepper was a director of the Stone Street
Funds, a private investment fund, from 1987 to 1992, and managed the high-yield
portion of those funds during that period. Mr. Tepper is an indirect minority
stockholder of the Manager.
A majority of the equity of the Manager is owned by Mr. Smirlock. The
remaining equity of the Manager is owned by Appaloosa Partners Inc. Mr. Tepper
owns all of the equity of Appaloosa Partners Inc.
The address of the Manager is 51 John F. Kennedy Parkway, Short Hills, New
Jersey 07078.
CEASE-AND-DESIST ORDER AGAINST CHIEF EXECUTIVE OFFICER
Except as described below, there have been no material administrative,
civil or criminal actions against the Manager or its principals during the
preceding five years. On November 29, 1993, Mr. Smirlock consented to the entry
of the Order issued pursuant to Sections 203(f), 203(k) and 206(2) (the
anti-fraud provisions) of the Advisers Act against him by the Commission in
connection with certain securities transactions executed between December 1992
and February 1993 while Mr. Smirlock was Chief Investment Officer for GSAM. The
Commission found that Mr. Smirlock caused and aided and abetted violations of
the Advisers Act by (i) causing to be executed a series of purchase transactions
in Mortgage Securities for which he failed to prepare promptly order tickets
allocating the securities to specific client accounts and (ii) causing to be
executed two Mortgage Securities transactions between client accounts without
obtaining independent evaluations of the prices at which he instructed the
transactions to be executed in order to ensure that the best price and execution
were obtained for the clients. The Commission found that Mr. Smirlock caused
and aided and abetted violations of these recordkeeping provisions by failing to
write tickets allocating trades on the days the trades were executed. The
Commission (i) ordered Mr. Smirlock to cease and desist from committing or
causing any violation of the provisions of the Advisers Act set forth in the
Order, (ii) suspended him from association with any broker, dealer, investment
adviser, investment company or municipal securities dealer for a three-month
period and (iii) required him to pay a penalty of $50,000. Contemporaneously
with the entry of the Order, Mr. Smirlock submitted an Offer of Settlement to
the Commission, which the Commission accepted, in which he consented to the
Commission's entry of the Order, without admitting or denying the findings set
forth therein. GSAM had become aware of serious violations of its internal
compliance policies and reported these violations to the Commission. In March
1993, following its report to the Commission, GSAM suspended Mr. Smirlock's
trading activities. Mr. Smirlock resigned from GSAM and Goldman, Sachs & Co.
effective November 30, 1993. No limitations will be imposed on Mr. Smirlock's
activities in his roles at the Manager and the Company in light of this
proceeding and the Order.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager for
an initial term expiring on December 31, 2002. The Management Agreement shall
continue automatically for successive three-year periods, provided such
continuance is specifically approved by the Board of Directors, including a
majority of the Independent Directors. The Management Agreement is terminable
by either the Company, pursuant to a majority vote of the Independent Directors
or a vote of the holders of 66 2/3% of the outstanding shares of Common Stock,
or the Manager, without cause at any time upon 60 days' written notice to the
other party. In addition, the Company has the right to terminate the Management
Agreement upon the occurrence of certain specified events, including a breach by
the Manager of any material provision contained in the Management Agreement.
The Management Agreement also will terminate automatically in the event of its
assignment (as defined in the Advisers Act), unless the assignment is consented
to by the non-assigning party. The Manager has agreed that, during the term of
the Management Agreement, it shall not serve as an investment adviser to any
other publicly-traded mortgage REIT, or any additional private investment fund
that invests primarily in Mortgage Assets and follow investment strategies and
policies similar to those employed by the Company, without the prior written
approval of the Independent Directors. In connection with such forbearance on
the Manager's part, the Company has agreed that if the Company terminates the
Management Agreement without cause or the Board of Directors fails to approve a
continuation of the Management Agreement, or the Company engages another person
to manage a portion of its assets or to manage assets internally with personnel
other than those previously employed by the Manager, the Manager will be
entitled to receive a "Non-Competition Payment" in an amount equal to the fair
market value of the Management Agreement (without giving effect to any
termination and assuming it is renewed in accordance with its terms), to be
determined in accordance with the provisions of the Management Agreement.
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The Management Agreement does not impose a minimum time commitment that the
Manager and its personnel must make in providing services to the Company. The
ability of the Manager and its employees to engage in other business activities
could reduce the time and effort spent by the Manager and its employees on the
management of the Company.
The Manager at all times will be subject to the supervision of the
Company's Board of Directors and will have only such functions and authority as
the Company may delegate to it. The Manager will be authorized to invest the
assets of the Company according to the strategy set forth in this Prospectus and
with the written instructions of the Company's Board of Directors. The Manager
will be responsible for the day-to-day operations of the Company and will
perform (or cause to be performed) such services and activities relating to the
assets and operations of the Company as may be appropriate, including, among
other things:
(i) serving as the Company's consultant with respect to formulation
of investment criteria by the Board of Directors;
(ii) advising the Company in connection with the purchase and
commitment to purchase Mortgage Assets, the sale and commitment
to sell Mortgage Assets, and the maintenance and administration
of its portfolio of Mortgage Assets;
(iii) arranging for the securitization of Mortgage Loans;
(iv) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services
performed for the Company by the Manager;
(v) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from certain
nationally recognized dealers that maintain markets in assets
identified by the Board of Directors from time to time, and
providing data and advice to the Board of Directors in connection
with the identification of such dealers;
(vi) providing executive and administrative personnel, office space
and office services required in rendering services to the
Company;
(vii) administering the day-to-day operations of the Company and
performing and supervising the performance of such other
administrative functions necessary to the management of the
Company as may be agreed upon by the Manager and the Board of
Directors, including the collection of revenues and the payment
of the Company's debts and obligations and maintenance of
appropriate computer systems to perform such administrative
functions;
(viii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy
the reporting and other requirements of any governmental bodies
or agencies or trading markets and to maintain effective
relations with such holders;
(ix) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for Mortgage Loans purchased
by the Company and arranging for the monitoring and administering
of such servicer, including negotiating servicing agreements,
collecting information and submitting reports pertaining to the
Mortgage Loans and to monies remitted to the Manager or the
Company;
(x) counseling the Board of Directors in connection with policy
decisions;
(xi) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT;
(xii) arranging financing of the type described under
"Business--Operating Policies and Strategies--Capital and
Leverage Policies;"
(xiii) supervising compliance with the REIT Provisions of the Code and
Investment Company Act requirements;
(xiv) upon request by, and in accordance with the directions of, the
Board of Directors, investing or reinvesting any monies of the
Company;
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(xv) qualifying and causing the Company to qualify to do business in
all applicable jurisdictions; and
(xvi) causing the Company to retain qualified accountants and tax
experts for at least a two-year period to assist in developing
appropriate accounting procedures and testing systems and to
conduct quarterly compliance reviews.
MANAGEMENT FEES
The Manager will receive an annual base management fee, payable monthly, as
set forth below:
Annual Base Management Fee
as a Percentage of
Average Stockholders' Equity Average Stockholders' Equity
$0 to $500 million.................. 1.0%
$500 million to $1 billion.......... $5 million plus 0.8% of amounts in
excess of $500 million
$1 billion or more.................. $9 million plus 0.6% of amounts in
excess of $1 billion
The term "Average Stockholders' Equity" for any period means stockholders'
equity, calculated in accordance with GAAP, excluding any mark-to-market
adjustments of the investment portfolio. The Manager will not receive any
management fee for the period prior to the sale of the shares of Common Stock
offered in the Public Offering.
The Manager also will be entitled to receive a quarterly incentive fee in
an amount equal to 20% of the Net Income of the Company for the preceding fiscal
quarter, in excess of the amount that would produce an annualized Return on
Average Stockholders' Equity for such fiscal quarter equal to the Ten-Year U.S.
Treasury Rate plus 1%. The term "Return on Average Stockholders' Equity" is
calculated for any quarter by dividing the Company's Net Income for the quarter
by its Average Stockholders' Equity for the quarter. For such calculations, the
"Net Income" of the Company means the taxable income of the Company within the
meaning of the Code, less capital gains and capital appreciation included in
taxable income, but before the Manager's incentive fees and before deduction of
dividends paid. The incentive fee payments to the Manager will be computed
before any income distributions are made to stockholders. As used in
calculating the Manager's fee, the term "Ten-Year U.S. Treasury Rate" means the
arithmetic average of the weekly yield to maturity for actively traded current
coupon U.S. Treasury fixed interest rate securities (adjusted to constant
maturities of ten years) published by the Federal Reserve Board during a
quarter, or, if such rate is not published by the Federal Reserve Board,
published by any Federal Reserve Bank or agency or department of the federal
government selected by the Company. The Ten-Year U.S. Treasury Rate is a
commonly used index for calculating management fees of REITs similar to the
Company and is the benchmark interest rate typically used in pricing Mortgage
Securities.
The incentive fee payable to the Manager may create an incentive for the
Manager to recommend investments with greater income potential, which generally
are riskier or more speculative than would otherwise be the case if such fees
did not include a "performance" component. Because the incentive fee is
calculated and payable quarterly, the failure to achieve income over the
Ten-Year U.S. Treasury Rate plus 1% in one quarter will not offset income in a
subsequent quarter and the Manager is not required to repay any portion of the
management fee as a result of losses in any quarter. Losses or gains in the
value of the Company's portfolio will not affect the calculation of the
incentive compensation, which is based on income. The Company will value its
portfolio on a mark-to-market basis in accordance with GAAP. The Manager
regularly will obtain third-party valuations of its portfolio securities from
brokers-dealers making a market in the securities or from pricing services.
These valuations will be made available to the Board of Directors. The Board of
Directors, with the approval of a majority of Independent Directors, is
authorized to change the rate at which fees are payable to the Manager from time
to time. The Manager will be reimbursed for out-of-pocket expenses paid to
third parties on behalf of the Company.
The management fees are payable in arrears. The Manager's base fee will be
calculated by the Manager as promptly as practicable after the month-end. The
Manager's incentive fee and expenses will be calculated by the Manager within 45
days after the end of each quarter. Such calculations shall be promptly
delivered to the Company. The Company is obligated to pay such fees and
expenses within 15 days after delivery of such calculation.
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STOCK OPTIONS AND DEFERRED COMMON STOCK AWARDS
The Company has adopted the Stock Incentive Plan under which awards may
be granted to the directors, officers, employees and consultants of the
Company and the Manager under the Stock Incentive Plan from time to time.
Upon consummation of the Public Offering, options will be granted at the
initial public offering price in the amounts indicated to the following
executive officers and directors: Michael L. Smirlock (480,000 shares); Peter
T. Zimmermann (110,000 shares); Robert J. Gartner (72,000 shares); and Thomas
G. Jonovich (28,000 shares). Options to acquire 800,000 shares of Common
Stock (which include options to purchase 738,000 shares of Common Stock
granted to directors and officers of the Manager) have been granted to
directors, officers, employees and consultants of the Company. The Company
has also granted 400,000 shares of deferred Common Stock to certain of its
directors and officers. See "The Company--Stock Incentive Plan."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Board of Directors in following or
declining to follow its advice or recommendations. The Manager and its
directors and officers will not be liable to the Company, any subsidiary of the
Company, the Independent 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 and
its directors and officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of the Manager not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant to
the Management Agreement.
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THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the current
directors and executive officers of the Company:
Name Age Position with the Company
- ---- --- -------------------------
Michael L. Smirlock, Ph.D 41 Chairman of the Board, President, Chief
Executive Officer and Director
Thomas G. Jonovich 33 Chief Financial Officer and Treasurer
Peter T. Zimmermann 31 Chief Operating Officer
Robert J. Gartner 35 Vice President and Secretary
Martin Bernstein 60 Director(1)
Frederick N. Khedouri 47 Director(1)
William Marshall, Ph.D. 51 Director(1)
David A. Tepper 40 Director
- -----------
(1) To become a Director upon and subject to the closing of the Public
Offering.
For biographical information regarding the business background and
experience of the Company's directors and officers other than Messrs.
Bernstein, Khedouri and Marshall, see "The Manager."
Martin Bernstein is a private investor who has been managing family funds
since 1988. Mr. Bernstein also currently serves on the Board of Directors of
Astro Communications, Inc., a public company specializing in strobe lighting,
and MBO Properties, Inc., a real estate mortgage investment trust, and on the
Board of Trustees of Value Property Trust, a real estate investment trust.
Frederick N. Khedouri is a Senior Managing Director of Bear Stearns, one of
the Representatives, and head of the firm's Financial Institutions Group, which
provides investment banking services to the banking, thrift, insurance,
investment management and specialty finance industries. Prior to joining Bear,
Stearns at the end of 1986, Mr. Khedouri was Associate Director of the White
House Office of Management and Budget from 1981 to 1985 and Deputy Chief of
Staff for Vice President George Bush in 1985 and 1986. After joining Bear
Stearns, he was appointed by President Ronald Reagan to the Board of Directors
of the Securities Investor Protection Corporation in 1987.
William Marshall, Ph.D. has been the Chief Operating Officer of NISA
Investment Advisors since 1994. From 1991 to 1994 Mr. Marshall was the Senior
Vice President of National Investment Services of America, Inc., a registered
investment adviser.
The Company's Board of Directors will, upon closing of the Public Offering,
consist of five directors, and at all times, a majority will be Independent
Directors. The directors will be divided as evenly as possible into three
classes, denominated Class I, Class II and Class III, with the terms of office
of each class expiring at the 1998, 1999 and 2000 annual meeting of
stockholders, respectively. At each annual meeting following such initial
classification and election, directors elected to succeed those directors whose
terms expire will be elected for a term to expire at the third succeeding annual
meeting of stockholders after their election. The directors in each class are
as follows: Class I--Mr. Bernstein, Class II--Messrs. Tepper and Khedouri, and
Class III--Messrs. Smirlock and Marshall. All officers are appointed by and
serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will have three standing committees: the Executive
Committee, the Compensation Committee and the Audit Committee. Messrs.
Smirlock and Tepper will serve on the Executive Committee which will be
authorized to exercise the powers of the Board of Directors between meetings.
However, the Executive Committee may not (i) amend the Charter or the Bylaws of
the Company, (ii) adopt an agreement of merger or consolidation, (iii)
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recommend to the stockholders the sale, lease, or exchange of all or
substantially all of the Company's property and assets, (iv) recommend to the
stockholders a dissolution of the Company or revoke a dissolution, (v) elect a
director, (vi) make a distribution or authorize the issuance of stock or (vii)
agree to an amendment, modification, renewal or termination of the Management
Agreement. Messrs. Khedouri and Marshall will serve on the Compensation
Committee. The Independent Directors, will serve on the Compensation Committee
and the Audit Committee. The Compensation Committee will be responsible for
recommending to the Board of Directors the Company's executive compensation
policies for the Chief Executive Officer and other senior officers and for
administering the Stock Incentive Plan. See "--Stock Incentive Plan." Messrs.
Bernstein and Khedouri will serve on the Audit Committee. The Audit Committee
is responsible for recommending independent auditors, reviewing the audit plan,
the adequacy of internal controls, the audit report and the management letter,
and performing such other duties as the Board of Directors may from time to time
prescribe.
COMPENSATION OF DIRECTORS
The Company will pay each non-employee director compensation of $10,000 per
annum and a fee of $500 for each meeting of the Board of Directors that he
attends. However, the directors may be granted awards from time to time
pursuant to the Stock Incentive Plan. See "--Stock Incentive Plan." The Company
will reimburse each director for ordinary and necessary expenses related to such
director's attendance at Board of Directors and committee meetings.
EXECUTIVE COMPENSATION
The Company has not paid, and does not intend to pay, any annual
compensation to the Company's executive officers for their services as executive
officers. However, the executive officers and directors may be granted awards
from time to time pursuant to the Stock Incentive Plan. See "--Stock Incentive
Plan."
STOCK INCENTIVE PLAN
The Company adopted the 1997 Stock Incentive Plan (the "Stock Incentive
Plan") in October 1997. The Stock Incentive Plan will be administered by the
Compensation Committee. Prior to the Public Offering, the Stock Incentive Plan
was administered by the Board of Directors. All employees and directors of, and
consultants to, the Company (including employees and directors of the Manager),
as may be determined from time to time by the Compensation Committee, are
eligible to receive awards under the Stock Incentive Plan (each, a "SIP
Participant").
Awards under the Stock Incentive Plan may include: (i) options to purchase
shares of Common Stock, including incentive stock options, non-qualified stock
options or both, which options may contain automatic reload features; (ii) stock
appreciation rights, whether in connection with the grant of stock options or
independent of such grant, or stock appreciation rights that are only
exercisable in the event of a Change of Control of the Company (as defined in
the Stock Incentive Plan) or upon other events; (iii) restricted stock, in which
Common Stock is granted to or purchased by SIP Participants for a purchase price
determined by the Compensation Committee, subject to restrictions on
transferability and other restrictions, which lapse over time; (iv) deferred
stock, in which delivery of Common Stock occurs upon expiration of a deferral
period; (v) bonus stock, consisting of a right to receive Common Stock in an
amount determined with reference to a fixed bonus amount; or (vi) other awards
not otherwise provided for, the value of which are based in whole or in part
upon the value of the Common Stock. The Compensation Committee currently does
not intend to award any dividend equivalents.
A total of 2,066,666 shares of Common Stock were authorized for issuance
under the Stock Incentive Plan; provided, however, that such number shall be
increased on a pro rata basis, to the extent the Underwriters of the Public
Offering exercise their over-allotment option in connection therewith or the
number of shares offered in the Public Offering increases from 15,000,000,
stock appreciation rights and any other awards that are exercisable only for
cash are not counted against the foregoing limitation. Not more than
1,300,000 shares of Common Stock may be the subject of options and stock
appreciation rights (including stock appreciation rights that are exercisable
only for cash) granted to any individual during any calendar year. Prior to
the Public Offering, the Board of Directors granted awards which are expected
to be ratified by the Compensation Committee with respect to the issuance of
an aggregate of 1,200,000 shares of its Common Stock. See "--Grants of
Awards."
At the time a stock option is granted, the Compensation Committee, in its
sole discretion, may designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no
such designation shall be deemed incentive stock options.
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The exercise price of an incentive stock option or a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of the Common Stock at the date of grant. The base value of a
stock appreciation right granted in connection with a stock option is equal to
the exercise price of the related option. The base value of a stock
appreciation right granted independently of an option is equal to the fair
market value of a share of Common Stock on the date of grant. Upon any exercise
of a stock appreciation right, the holder is entitled to receive an amount equal
to the spread (or a portion of such spread, as determined by the Compensation
Committee) between the fair market value of the Common Stock on the date of
exercise and the base value of the stock appreciation right. Such amount is
payable by the Company in the form of cash or shares of Common Stock, as
determined by the Compensation Committee.
Stock options and stock appreciation rights are exercisable for a duration
determined by the Compensation Committee, but in no event more than ten years
after the date of grant. Options and rights shall be exercisable at such rate
and times as may be fixed by the Compensation Committee on the date of grant.
The aggregate fair market value (determined at the time the option is granted)
of the Common Stock with respect to which incentive stock options are
exercisable for the first time by a SIP Participant during any calendar year
(under all stock incentive plans of the Company) shall not exceed $100,000; to
the extent this limitation is exceeded, such excess options shall be treated as
non-qualified stock options for purposes of the Stock Incentive Plan and the
Code.
The Company shall obtain such consideration for granting awards under the
Stock Incentive Plan as the Compensation Committee in its discretion may
request. Each award may be subject to provisions to assure that the grant, or
any exercise or disposition of Common Stock, will not violate federal and state
securities laws.
No award may be granted under the Stock Incentive Plan after the day
preceding the tenth anniversary of the adoption of the Stock Incentive Plan. No
awards may be granted under the Stock Incentive Plan to any person who, assuming
exercise or settlement of all options and rights held by such person, would own
or be deemed to own more than 9.8%, in number of shares or value, of any class
of capital stock of the Company.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months. Payment of the purchase
price to purchase restricted shares pursuant to a restricted stock award shall
be made in cash or by check payable to the order of the Corporation.
Stock options and stock appreciation rights terminate at the end of the
30th business day following the SIP Participant's termination of employment or
service. This period is extended to one year in the case of the disability or
death of the SIP Participant and, in the case of death, the stock option is
exercisable by the SIP Participant's estate. The post-termination exercise
period for any individual may be extended by the Board of Directors, but not
beyond the expiration of the original term of the option.
The awards granted under the Stock Incentive Plan generally become
immediately vested and exercisable in full in the following circumstances (each
an "Acceleration Event"): (i) upon the occurrence of special circumstances
determined in the opinion of the Board of Directors of the Company to merit
special consideration, (ii) upon a termination by the Company of the holder's
employment or service without cause (as defined in the Stock Incentive Plan),
(iii) in the case of an employee or director of the Manager, if the Management
Agreement terminates without the occurrence of a Termination Event (as defined
in the Stock Incentive Plan), or (iv) upon a Change of Control (as defined in
the Stock Incentive Plan) of the Company, except that vesting and exercisability
in the event of such a Change of Control shall be limited to the extent
necessary, and shall occur as soon as permissible under GAAP, to permit pooling
of interests accounting treatment if such treatment is desired.
The awards granted under the Stock Incentive Plan are not transferable,
except that the Compensation Committee may authorize a transfer of an award
(other than an incentive stock option) by the holder to certain family members
or trusts or other entities specified in the Plan or permitted by the
Compensation Committee, subject to such terms and conditions as the Compensation
Committee approves.
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The awards granted under the Stock Incentive Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
awards in the event of a stock dividend, split-up, conversion, exchange,
reclassification or substitution. In the event of any other change in the
corporate structure or outstanding shares of Common Stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Incentive Plan or any outstanding
awards as it shall deem appropriate to prevent dilution or enlargement of
rights.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Incentive Plan and may, with the consent of the
affected holder of an outstanding award at any time withdraw or amend the terms
and conditions of outstanding awards. Any amendment which would increase the
number of shares issuable pursuant to the Stock Incentive Plan or to any
individual thereunder or change the class of individuals to whom awards may be
granted shall be subject to the approval of the stockholders of the Company.
GRANTS OF AWARDS
In connection with the Public Offering, options to acquire 800,000 shares
of Common Stock and a grant 400,000 shares of deferred Common Stock were awarded
under the Stock Incentive Plan to certain individuals and groups of individuals,
as follows:
Types of Awards and Number of Shares of
Common Stock Subject to Awards
---------------------------------------
Deferred
Common Stock
Name or Group Stock(1) Options(2)
------------- ----------- ------------
Michael L. Smirlock................... 320,000 480,000
Thomas G. Jonovich.................... 28,000
Peter T. Zimmermann................... 60,000 110,000
Robert J. Gartner..................... 20,000 72,000
Martin Bernstein...................... 10,000
Frederick N. Khedouri................. 10,000
William Marshall...................... 10,000
David A. Tepper....................... 20,000
All other employees of the Company
or the Manager, as a group............ 60,000
- -----------
(1) The deferral period will expire at the rate of 6.25% per quarter commencing
on January 2, 1998, subject to the holder's continued employment or
service, or upon the earlier occurrence of an Acceleration Event.
(2) The options will be non-qualified options with a per share exercise price
under each option equal to the initial public offering price. The options
become exercisable at the rate of 25% on each of January 2, 1998, January
2, 1999, January 2, 2000, and January 2, 2001, subject to the holder's
continued employment or service, and will become exercisable in full upon
the earlier occurrence of an Acceleration Event.
If the Underwriters' over-allotment option to purchase an additional
2,250,000 shares in the Public Offering is exercised or the amount of shares
offered in the Public Offering increases from 15,000,000, the number of
options issued will increase on a pro rata basis to each of the above-named
individuals.
COMPENSATION COMMITTEE INTERLOCKS
No interlocking relationship exists between members of the Company's Board
of Directors or the Compensation Committee or officers responsible for
compensation decisions and the board of directors or compensation committee of
any other company, nor has such interlocking relationship existed in the past.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS; CONFLICTS OF INTEREST
The Company will be subject to various conflicts of interest involving the
Manager. The executive officers of the Company will be officers and employees
of the Manager. A majority of the Company's directors have no business
affiliations with the Manager, but were initially selected by the Manager.
Michael L. Smirlock, the Chief Executive Officer, President and a Director of
the Company, is the owner of a majority of the capital stock of the Manager.
David A. Tepper, a Director of the Company, is the indirect owner of a minority
of the capital stock of the Manager.
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, except
that, during the term of the Management Agreement, the Manager may not manage
another publicly-traded mortgage REIT or any additional private investment fund
that invests primarily in Mortgage Assets and follow investment strategies and
policies similar to those employed by the Company, without the prior approval of
the Independent Directors. The Manager and its officers and employees advise
and manage the Affiliated Funds, which invest in Mortgage Securities and intend
to invest in the Company's securities. See "Private Placement." The ability of
the Manager and its officers and employees to engage in other business
activities could reduce the time and effort the Manager spends on managing the
Company's investment portfolio. The Manager and its officers and employees also
may receive fees in connection with any investment by the Affiliated Funds in
the Company. In addition, the incentive fee payable to the Manager by the
Affiliated Funds or other clients may be higher than the fee paid by the
Company, creating additional potential conflicts of interest.
Many investments appropriate for the Company also will be appropriate for
accounts of other clients the Manager advises, including the Affiliated Funds.
The Manager will act in a manner which it considers fair and equitable in
allocating investment opportunities among the Company and the other accounts it
manages, including the Affiliated Funds. Situations may arise in which the
investment activities of the Manager or the other accounts may disadvantage the
Company, such as the inability of the market to fully absorb orders for the
purchase or sale of particular securities placed by the Manager for the Company
and its other accounts at prices and in quantities which would be obtained if
the orders were being placed only for the Company. The Manager may aggregate
orders of the Company with orders for its other accounts. Such aggregation of
orders may not always be to the benefit of the Company with regard to the price
or quantity executed.
The Manager, however, will not permit the Affiliated Funds or its other
clients to sell securities or other assets to, or purchase securities or other
assets from, the Company nor will any such Affiliates be permitted to enter into
derivative transactions with the Company. The Manager will not reallocate
assets among the Company and the Affiliated Funds.
The incentive fee payable to the Manager is based upon the net income
received by the Company. This may create an incentive for the Manager to
recommend investments with greater income potential, which generally are riskier
or more speculative than would be the case if such fees did not include a
"performance" component. Such incentives may result in increased risk to the
value of the Company's investment portfolio. See "The Manager--Management
Fees."
The Company has agreed that if it terminates the Management Agreement
without cause or the Board of Directors fails to approve a continuation of the
Management Agreement, or the Company engages another person to manage a portion
of its assets or to manage assets internally with personnel other than those
previously employed by the Manager, the Manager will be entitled to receive a
"Non-Competition Payment" in an amount equal to the fair market value of the
Management Agreement (without giving effect to any termination and assuming it
is renewed in accordance with its terms), to be determined in accordance with
the provisions of the Management Agreement.
The Manager, its Affiliates and the funds managed by Appaloosa have
committed to purchase an aggregate of 714,235 shares of Common Stock as part of
the Private Placement. This purchase will result in ownership by all such
persons of approximately 4.2% of the total shares outstanding after the Public
Offering, exclusive of the Underwriters' over-allotment option and any options
granted under the Stock Incentive Plan. The sale of the shares purchased in the
Private Placement will be subject to a resale registration statement expected to
be declared effective shortly following the closing of the Public Offering. The
Manager and its directors, officers and employees will receive stock options
pursuant to the Company's Stock Incentive Plan. See "The Company--Stock
Incentive Plan."
The Manager, its Affiliates and funds managed by Appaloosa may dispose of
their shares any time after the lock-up period pursuant to the resale
registration statement and otherwise in compliance with all applicable
restrictions.
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The market in which the Company expects to purchase Mortgage Assets is
characterized by the rapid evolution of products and services, and thus, there
may in the future be relationships among the Company, the Manager, and
Affiliates of the Manager in addition to those described herein.
Frederick N. Khedouri, a Senior Managing Director of Bear Stearns, is a
proposed Director of the Company and has committed to purchase 10,000 shares at
the initial public offering price in the Private Placement. Bear Stearns
provides financial advisory services to the Company and its Affiliates.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock on the date hereof
and as adjusted to reflect the sale of Common Stock being offered hereby and
assuming the sale of all of the shares for which commitments to purchase have
been received in connection with the Private Placement and the Public Offering,
by (i) each director and nominee for director, (ii) any person known to the
Company to be the beneficial owner of five percent or more of the Common Stock
and (iii) all directors and executive officers as a group. The table does not
give effect to the contemplated Total Return Swap. See "The Manager -- Certain
Benefits to Existing Stockholder, Directors and Officers." Unless otherwise
indicated in the footnotes to the table, the beneficial owners named have, to
the knowledge of the Company, sole voting and investment power with respect to
the shares beneficially owned, subject to community property laws where
applicable.
Shares Beneficially
Owned After
the Public Offering
-------------------------------
Name and Address of Beneficial Owner(1) Number
- --------------------------------------- of Shares Percent
--------- -------
Michael L. Smirlock, Ph.D. (2). 73,000 *
Thomas G. Jonovich 1,000 *
Peter T. Zimmermann (3) 25,000 *
Robert J. Gartner (4) 10,000 *
Martin Bernstein (5) -- --
Frederick N. Khedouri (5) 10,000 *
William Marshall, Ph.D. (5) -- --
David A. Tepper 817,235(6) 4.2%
Franklin Mutual Advisers Inc. (7) 3,333,333 17.2%
All directors and executive officers
as a group (6 persons) 952,000 4.9%
- -----------
* Less than one percent
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
LASER Mortgage Management, Inc., 51 John F. Kennedy Parkway, Short Hills,
New Jersey 07078. Mr. Bernstein's address is 85 Shrewsbury Drive,
Livingston, New Jersey 07039. Mr. Khedouri's address is c/o Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167. Mr.
Marshall's address is c/o NISA Investment Advisors, L.L.C., 150 N.
Meramec, Suite 640, St. Louis, Missouri 63105.
(2) Does not include 320,000 shares of deferred Common Stock being awarded to
Mr. Smirlock in connection with the Public Offering.
(3) Does not include 60,000 shares of deferred Common Stock being awarded to
Mr. Zimmermann in connection with the Public Offering.
(4) Does not include 20,000 shares of deferred Common Stock being awarded to
Mr. Gartner in connection with the Public Offering.
(5) To become a director upon and subject to the closing of the Public
Offering.
(6) This number includes 714,235 shares of Common Stock beneficially held by
private investment funds over which Mr. Tepper exercises dispositive
control.
(7) Includes all of the shares of Common Stock advised by Franklin Mutual
Advisers Inc., 51 John F. Kennedy Parkway, Short Hills, New Jersey 07078,
and owned by the Funds.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations that
may be relevant to a prospective holder of Common Stock in the Company. Stroock
& Stroock & Lavan LLP has acted as Special Tax Counsel to the Company and has
reviewed this summary and has rendered an opinion that the descriptions of the
law and the legal conclusions contained herein are correct in all material
respects, and the discussions hereunder fairly summarize the federal income tax
considerations that are likely to be material to the Company and to holders of
the Common Stock. The discussion contained herein does not address all aspects
of taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations, and persons who are not citizens or
residents of the U.S.) subject to special treatment under the federal income tax
laws.
The statements in this discussion, including the opinions of Stroock &
Stroock & Lavan LLP referred to herein, are based on current provisions of the
Code, existing, temporary and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Service and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSIDERATIONS TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSIDERATIONS OF
SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company will elect to become subject to tax as a REIT under the REIT
Provisions of the Code for federal income tax purposes, commencing with the
taxable year ending December 31, 1997. The Company currently expects that it
will operate in a manner that will permit the Company to maintain its
qualification as a REIT for the taxable year ending December 31, 1997, and in
each taxable year thereafter. This treatment will permit the Company to deduct
dividend distributions to its stockholders for Federal income tax purposes, thus
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to its stockholders in the
form of dividends.
In the opinion of Special Tax Counsel to the Company, the Company's
contemplated method of operation described in this Prospectus and as represented
by the Company will enable it to satisfy the requirements for qualification as a
REIT under the Code commencing with the taxable year ending December 31, 1997.
This opinion is based on various assumptions relating to the organization and
operation of the Company and is conditioned upon certain representations made by
the Company as to certain factual matters. The continued qualification and
taxation of the Company as a REIT will depend upon the Company's ability to
meet, on a continuing basis, distribution levels and diversity of stock
ownership, and the various qualification tests imposed by the Code as discussed
below.
There can be no assurance, however, that the Company will qualify as a REIT
in any particular taxable year, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in the circumstances of the Company. If the
Company were not to qualify as a REIT in any particular year, it would be
subject to federal income tax as a regular, domestic corporation, and its
stockholders would be subject to tax in the same manner as stockholders of such
corporation. In this event, the Company could be subject to potentially
substantial income tax liability in respect of each taxable year that it fails
to qualify as a REIT, and the amount of earnings and cash available for
distribution to its stockholders could be significantly reduced or eliminated.
In addition, the Company may be subject to a 4% federal excise tax to the extent
the Company does not distribute 85% of its REIT ordinary income for such year
and 95% of its REIT capital gain net income for such year.
REQUIREMENTS FOR QUALIFICATION
The following is a brief summary of certain technical requirements that the
Company must meet on an ongoing basis in order to qualify, and remain qualified,
as a REIT under the Code:
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STOCK OWNERSHIP TESTS
The capital stock of the Company must be transferable stock held, beginning
with its January 1, 1998 taxable year, by at least 100 persons during at least
335 days of a taxable year of 12 months (or during a proportionate part of a
taxable year of less than 12 months), and no more than 50% of the value of such
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) at any time during the last
half of the taxable year. Tax-exempt entities, other than private foundations,
certain unemployment compensation trusts and certain charitable trusts generally
are not treated as individuals for these purposes. The Company expects that it
will satisfy the capital stock ownership requirements immediately following the
Public Offering. In addition, the Charter provides restrictions regarding the
transfer of the Company's shares to assist in meeting the stock ownership
requirements. See "Description of Capital Stock."
ASSET TESTS
The Company must generally meet the following asset tests (the "REIT Asset
Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets must
consist of Interests in Real Property (as defined below), including
interests in mortgages on real property (to the extent the principal
balance of a mortgage does not exceed the fair market value of the
associated real property), regular or residual interests in a REMIC (except
that, if less than 95% of the assets of a REMIC consists of real estate
assets (determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), shares of other REITs, government securities, temporary investments
in stock or debt instruments during the one year period following the
Company's receipt of certain new capital cash, and cash items (the "75%
Asset Test"). For purposes of the 75% Asset Test, the term "Interest in
Real Property" includes an interest in Mortgage Loans (to the extent the
principal balance of a mortgage does not exceed the fair market value of
the associated real property) or land and improvements thereon, such as
buildings or other inherently permanent structures (including items that
are structural components of such buildings or structures), a leasehold of
real property, and an option to acquire real property (or a leasehold of
real property); and
(b) the value of securities held by the Company but not taken into
account for purposes of the 75% Asset Test must not exceed (i) 5% of the
value of the Company's total assets in the case of securities of any one
issuer, or (ii) 10% of the outstanding voting securities of any such
issuer.
The Company expects that any Subordinate Interests, IOs, Inverse IOs, and
temporary investments that it acquires generally will be treated as qualifying
assets for purposes of the 75% Asset Test, except to the extent that less than
95% of the assets of a REMIC in which the Company owns an interest consists of
real estate assets and the Company's proportionate share of those assets
includes assets that are nonqualifying assets for purposes of the 75% Asset
Test. In addition, the Company does not expect that the value of any security
of any one entity would exceed 5% of the Company's total assets, and the Company
does not expect to own more than 10% of any one issuer's voting securities. The
Company also may purchase regular interests in a Financial Asset Securitization
Investment Trust (a "FASIT") which will be treated as qualifying assets for
purposes of the 75% Asset Test, except to the extent that less than 95% of the
assets of a FASIT consists of real estate assets in which case the Company's
proportionate share of the FASIT's nonqualifying assets will be treated as
nonqualifying assets for purposes of the 75% Asset Test.
The Company will monitor the status of the assets that it acquires to
assure compliance with the REIT Asset Tests and has represented that it will
manage its portfolio to comply with such tests.
If the Company should fail to satisfy the REIT Asset Tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the REIT Asset Tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the REIT Asset Test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by the acquisition of one or more
nonqualifying assets. If the condition described in clause (ii) of the
preceding sentence was not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
GROSS INCOME TESTS
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The Company must generally meet the following gross income tests (the "REIT
Gross Income Tests") for each taxable year:
(a) at least 75% of the Company's gross income must be derived from
certain specified real estate sources including interest income on Mortgage
Loans and gain from the disposition of Qualified Real Estate Assets or
"qualified temporary investment income," (i.e., income derived from "new
capital" within one year of the receipt of such capital) (the "75% Gross
Income Test"); and
(b) at least 95% of the Company's gross income must consist of the
income which qualifies for the 75% Gross Income Test, as well as other
interest and gains from the sale of stock or other securities (including
certain interest rate swap or cap agreements, options, forward rate
agreements, and similar financial instruments entered into to reduce the
interest rate risk with respect to debt incurred to acquire Qualified Real
Estate Assets) not held for sale in the ordinary course of business (the
"95% Gross Income Test").
For purposes of determining whether the Company complies with the 75% and
95% Gross Income Tests, gross income does not include gross income from
"prohibited transactions." A "prohibited transaction" is one involving a sale of
dealer property, other than foreclosure property. Net income from "prohibited
transactions" is subject to a 100% tax. If the Company sells Mortgage
Securities that it created through Mortgage Loan securitizations, the Company
may recognize income that, if sufficient to cause the Company to be treated as a
dealer in Mortgage Securities for federal income tax purposes, could constitute
"prohibited transaction" income. See "--Taxation of the Company."
Interest on obligations secured by mortgages on real property or on
Interests in Real Property is qualifying income for purposes of the 75% Gross
Income Test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC or a regular interest in a FASIT generally is
treated as interest on an obligation secured by a mortgage on real property.
If, however, less than 95% of the assets of a REMIC or a FASIT consists of real
estate assets (determined as if the Company held such assets), the Company will
be treated as receiving directly its proportionate share of the income of the
REMIC or the FASIT. In addition, if the Company receives interest income with
respect to a mortgage loan that is secured by both real property and other
property and the highest principal amount of the loan outstanding during a
taxable year exceeds the fair market value of the real property on the date the
Company purchased the mortgage loan, the interest income will be apportioned
between the real property and the other property, which apportionment may cause
the Company to recognize income that is not qualifying income for purposes of
the 75% Gross Income Test.
Most of the income that the Company recognizes with respect to its
investments in Mortgage Loans will be qualifying income for purposes of both the
75% and 95% Gross Income Tests. This generally will include interest, original
issue discount, and market discount income that the Company derives from its
investments in Subordinate Interests, IOs and Inverse IOs.
The Company may originate or acquire Mortgage Loans and securitize such
loans through the issuance of non-REMIC CMOs. As a result of such transactions,
the Company will retain an equity ownership interest in the Mortgage Loans that
has economic characteristics similar to those of a Subordinate Interest. In
addition, the Company may resecuritize Mortgage Securities (or non-REMIC CMOs)
through the issuance of non-REMIC CMOs, retaining an equity interest in the
Mortgage Securities used as collateral in the resecuritization transaction.
Such transactions will not cause the Company to fail to satisfy the Gross Income
Tests. Further, the Company intends to structure such securitizations in a
manner which does not result in treatment of the REIT or issuing entity as a
"taxable mortgage pool."
The Company may receive income that is nonqualifying income for either the
75% Gross Income Test or both the 75% and 95% Gross Income Tests. For example,
(i) the loan amount of a Mortgage Loan may exceed the value of the real property
securing the loan, which will result in a portion of the income from the loan
being classified as qualifying income for purposes of the 95% Gross Income Test,
but not for purposes of the 75% Gross Income Test, (ii) the Company may hold an
interest in a REMIC or in a FASIT less than 95% of the assets of which consist
of real estate assets (determined as if the Company held such assets), in which
case the Company's proportionate share of the income of the REMIC or FASIT may
include income that is not qualifying income for purposes of the 75% or 95%
Gross Income Tests and (iii) the Company may recognize foreign currency gain
from non-dollar denominated loans which will not be qualifying income for
purposes of the 75% and 95% Gross Income Tests.
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It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any such
hedging transactions could take a variety of forms, including interest rate swap
contracts, interest rate cap or floor contracts, forward contracts, and options.
To the extent that the Company enters into a contract to hedge indebtedness
incurred to acquire or carry real estate assets, any periodic income or gain
from the disposition of such contract should be qualifying income for purposes
of the 95% Gross Income Test, but not the 75% Gross Income Test. To the extent
that the Company hedges its capital assets, it is not clear how the income from
those transactions will be treated for purposes of the Gross Income Tests. The
Company intends to structure its dollar roll transactions such that income or
gain from such transactions will not cause it to violate the 75% and 95% Gross
Income Tests.
To ensure that the Company does not violate the REIT Gross Income Tests,
certain hedging activities, the creation of Mortgage Securities through
securitizations, and certain financing techniques may be conducted through one
or more taxable subsidiaries of the Company. To avoid a violation of the REIT
Asset Tests, the Company would own only nonvoting preferred and common stock of
the taxable subsidiary (other entities and/or individuals would own all of the
voting common stock) and the value of the Company's investment in such a
subsidiary would be limited to less than 5% of the value of the Company's total
assets at the end of each calendar quarter. The taxable subsidiary would not
elect REIT status and would distribute only net after-tax profits to its
stockholders, including the Company.
DISTRIBUTION REQUIREMENT
In order to avoid subjecting its income to tax at regular corporate rates
(without a deduction for dividends paid), the Company generally must distribute
to its stockholders an amount equal to at least 95% of the Company's REIT
taxable income before deductions of dividends paid, excluding net capital gain
and certain non-cash income including original issue discount and cancellation
of indebtedness income.
The Company intends to make distributions to its stockholders to comply
with the 95% Distribution Requirement. However, differences in timing between
the recognition of taxable income and the actual receipt of cash could require
the Company to borrow funds or sell assets on a short-term basis to satisfy the
95% Distribution Requirement. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company to (i) sell
assets in adverse market conditions, (ii) distribute amounts that represent a
return of capital, or (iii) distribute amounts that would otherwise be spent on
future investments or repayment of debt.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to federal income tax on the portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain.
Beginning with the Company's 1998 taxable year, stockholders will be entitled to
a credit against their federal income tax for their allocable share of tax paid
by the Company on undistributed long-term capital gains so designated in a
notice by the Company (which are treated as having been distributed to and
subject to tax in the hands of the stockholders).
Notwithstanding its qualification as a REIT, the Company may also be
subject to tax in certain other circumstances. If the Company fails to satisfy
either the 75% or the 95% Gross Income Test, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it generally
will be subject to a 100% tax on the greater of the amount by which the Company
fails either the 75% or the 95% Gross Income Test. The Company also will be
subject to a tax of 100% on net income derived from a "prohibited transaction,"
and if the Company has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from foreclosure
property, it will be subject to Federal income tax on such income at the highest
corporate income tax rate. In addition, if the Company fails to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year and (ii) 95% of its REIT capital gain net income for such
year, the Company would be subject to a 4% Federal excise tax on the excess of
such required distribution over the amounts actually distributed during the
taxable year, plus any undistributed amount of ordinary and capital gain net
income from the preceding taxable year. The Company also may be subject to the
corporate alternative minimum tax, as well as other taxes in certain situations
not presently contemplated.
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Further, if the Company were to sell Mortgage Securities that it created
through securitization of Mortgage Loans or to sell to customers Mortgage Assets
or hedging instruments on a regular basis, there is a substantial risk that such
assets 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. Although the Company does not presently intend to make regular
sales to customers of such Mortgage Securities or other assets, if this
intention changes in the future, the Company intends that any such sales would
be made through a taxable subsidiary formed for such purpose. Any such
subsidiary would not be subject to this 100% tax, which is only applicable to
REITs or Qualified REIT Subsidiaries. The Company (either directly or through
Qualified REIT Subsidiaries or a taxable subsidiary) intends to enter into
dollar roll transactions which will be structured such that income or gain from
such transactions will not be subject to the 100% tax.
A "dealer" (as specially defined in Section 475 of the Code) generally is
required to mark-to-market for tax purposes, i.e. treat as sold in a taxable
transaction, securities which it holds at the end of each year, unless it
identifies the securities as held for investment. Pursuant to proposed Treasury
Regulations such a dealer is required to mark-to-market securities that are
transferred in a securitization transaction unless the transferor expects to
hold for investment each of the interests received. The Company intends to
structure its activities in a manner which avoids (or, with respect to
securities used in dollar roll financings, which substantially reduces or
eliminates any potential negative impact of) the application to it of the
mark-to-market rule. It should be noted that final Treasury Regulations may
require a different treatment of Mortgage Loans or Mortgage Securities acquired
for securitizations than provided in the proposed regulations, possibly with
retroactive effect.
If the Company fails to qualify as a REIT in any taxable year and certain
relief provisions of the Code do not apply, the Company would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at the regular corporate income tax rates and may be subject to a
4% federal excise tax. Distributions to stockholders in any year in which the
Company fails to qualify as a REIT would not be deductible by the Company, nor
would they generally be required to be made under the Code. Further, unless
entitled to relief under certain other provisions of the Code, the Company also
would be disqualified from re-electing REIT status for the four taxable years
following the year during which it became disqualified.
The Company intends to monitor on an ongoing basis its compliance with the
REIT requirements described above. To maintain its REIT status, the Company
will be required to limit the types of assets that the Company might otherwise
acquire, or hold certain assets at times when the Company otherwise might have
determined that the sale or other disposition of such assets would have been
more prudent.
TAXATION OF STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. stockholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the U.S.,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the U.S. or of any political subdivision thereof, (iii) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of its connection
with the conduct of a trade or business within the United States, or (iv) any
trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
persons have the authority to control all substantial decisions of the trust.
Distributions that are designated as capital gain dividends will be taxed as
gain from the sale of a capital asset held for more than one year (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the U.S. stockholder has held his Common
Stock. Stockholders' bases in their shares will be increased by undistributed
long-term capital gains so designated by the Company less the taxes thereon paid
by the Company and credited to stockholders. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a U.S. stockholder
to the extent that they do not exceed the adjusted basis of the U.S.
stockholder's Common Stock, but rather will reduce the adjusted basis of such
stock. To the extent that such distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a stockholder's
Common Stock, such distributions will be included in income as long-term capital
gain (or short-term capital gain if the Common Stock had been held for one year
or less), assuming the Common Stock is a capital asset in the hands of the U.S.
stockholder. In addition, any distribution declared by the Company in October,
November or December of any year and payable to a U.S. stockholder of record on
a specified date in any such month shall be treated as both paid by the
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Company and received by the U.S. stockholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year.
U.S. stockholders may not include in their individual income tax returns
any net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against its future
income (subject to certain limitations). Taxable distributions from the Company
and gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a U.S. stockholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such), however, will be treated as investment income
only if the U.S. stockholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify U.S. stockholders after
the close of the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income or capital gain
dividends. In addition, pursuant to Notice 97-64, recently issued by the
Service, the Company will notify its U.S. stockholders of the portions of the
capital gain dividends, if any, which are designated as "20% rate gain
distributions," "unrecaptured Section 1250 gain distributions," and "28% rate
gain distributions," which generally will be subject to tax at rates of 20%, 25%
and 28%, respectively. To the extent that the Company does not make such a
specific designation, a capital gain dividend will be treated as a "28% rate
gain distribution."
The Company does not expect to acquire or retain (other than through
taxable subsidiaries) residual interests issued by REMICs. Such residual
interests, if acquired by a REIT, would generate excess inclusion income.
Excess inclusion income cannot be offset by net operating losses of a
stockholder. If the stockholder is a Tax- Exempt Entity, the excess inclusion
income is fully taxable as UBTI. If allocated to a foreign stockholder, the
excess inclusion income is subject to Federal income tax withholding without
reduction pursuant to any otherwise applicable tax treaty.
The Company intends to enter into master reverse repurchase agreements with
secured lenders known as "counterparties." Typically, such master reverse
repurchase agreements have cross- collateralization provisions that afford the
counterparty the right to foreclose on the Mortgage Assets pledged as
collateral. If the cross-collateralization provisions of the master reverse
repurchase agreements result in the Company being treated as if it issued debt
instruments with differing maturity dates secured by a pool of Mortgage Assets
the Company would be subject to the "taxable mortgage pool" rules and a portion
of its income would be characterized as "excess inclusion income." Special Tax
Counsel has advised the Company that the master repurchase agreements may be
structured, and the Company intends to structure such agreements, in a manner
which should not cause the Mortgage Assets to be treated as a taxable mortgage
pool. No assurance can be given, however, that the Company will be able to
structure the master reverse repurchase agreements in this manner, or that the
Service might not successfully maintain that the Mortgage Assets collateralizing
such master reverse repurchase agreements constitute a taxable mortgage pool.
The Company's investment in Subordinate Interests and certain types of
Mortgage Securities may cause it under certain circumstances to recognize
taxable income in excess of its economic income and to experience an offsetting
excess of economic income over its taxable income (or losses) in later years.
As a result, stockholders, from time to time, may be required to pay federal
income tax on distributions that economically represent a return of capital,
rather than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes (or less income). Accordingly, if the
Company receives phantom income, its stockholders may be required to pay federal
income tax with respect to such income on an accelerated basis, i.e., before
such income is realized by the stockholders in an economic sense. Taking into
account the time value of money, such an acceleration of federal income tax
liabilities would cause stockholders to receive an after-tax rate of return on
an investment in the Company that would be less than the after-tax rate of
return on an investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an effective
income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an
annual interest rate of 10% for its face value, his before-tax return on his
investment would be 10%, and his after-tax return would be 7%. However, if the
same investor purchased stock of the Company at a time when the before-tax rate
of return was 10%, his after-tax compounded rate of return on his stock might be
somewhat less than 7% as a result of the Company's phantom income. In general,
as the ratio of the Company's phantom income to its total income increases, the
after-tax rate of return received by a taxable stockholder of the Company will
decrease. The Company will consider the potential effects of phantom income on
its taxable stockholders in managing its investments.
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TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. Lower capital
gains rates will apply to individuals who have held such stock for more than
eighteen months. However, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
stockholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of the Common Stock may be disallowed if other shares
of Common Stock are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on long-term capital gains applicable to individuals is 28%
with respect to a capital asset held more than 12 months and not more than 18
months, and, generally, 20% for capital assets held for more than 18 months.
Thus, the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against an
individual's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward indefinitely by individuals. All
net capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. stockholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any stockholders who fail to certify their nonforeign status to the Company.
The Treasury Department has issued regulations regarding the backup withholding
rules as applied to non-U.S. stockholders that unify and tighten current
certification procedures and forms and clarify reliance standards but generally
do not substantially alter the current system of backup withholding compliance.
These regulations will be generally effective with respect to distributions made
after December 31, 1998, subject to certain transition rules.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their UBTI. While many investments in real estate generate UBTI,
the Service has issued a published ruling that dividend distributions from a
REIT to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or business
of the exempt employee pension trust. Based on that ruling, amounts distributed
by the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of the Common Stock
with debt, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17), and (20), respectively, of Section 501(c) of
the Code are subject to different UBTI rules, which generally will require them
to characterize distributions from the Company as UBTI. In addition, in certain
circumstances, a pension trust that was to own more than 10% of the Company's
stock would be to treat a percentage of the dividends from the Company as UBTI
(the "UBTI Percentage"). The UBTI Percentage is the gross income derived by the
Company from an unrelated trade or business (determined as if the Company were a
pension trust)
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divided by the gross income of the Company for the year in which the dividends
are paid. The UBTI rule applies to a pension trust holding more than 10% of the
Company's stock only if (i) the UBTI Percentage is at least 5%, (ii) the Company
qualifies as a REIT by reason of the modification of the rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust for
purposes of certain stock ownership tests, and (iii) either (A) one pension
trust owns more than 25% of the value of the Company's stock or (B) a group of
pension trusts individually holding more than 10% of the value of the Company's
stock collectively owns more than 50% of the value of the Company's stock.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF FEDERAL, STATE, FOREIGN AND LOCAL INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. stockholders that are not designated by the
Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Stock is treated as effectively connected with the
Non-U.S. stockholder's conduct of a U.S. trade or business, the Non-U.S.
stockholder generally will be subject to federal income tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such
distributions (and also may be subject to a 30% branch profits tax in the case
of a Non-U.S. stockholder that is a corporation). The Company expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. stockholder unless (i) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with the Company or (ii) the Non-U.S. stockholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected income.
The Treasury Department has issued regulations regarding the backup withholding
rules as applied to non-U.S. stockholders that unify and tighten current
certification procedures and forms and clarify reliance standards but generally
do not substantially alter the current system of backup withholding compliance.
These regulations will be generally effective with respect to distributions made
after December 31, 1998, subject to certain transition rules.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
A Non-U.S. stockholder will generally not be subject to United States
federal income tax on gain recognized on a sale or other disposition of the
Common Stock unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-U.S. stockholder, or (ii)
in the case of a Non-U.S. stockholder 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.
Gain of a Non-U.S. stockholder that is effectively connected with the conduct of
a U.S. trade or business by the Non-U.S. stockholder will be subject to the U.S.
federal income tax on net income that applies to U.S. persons generally (and,
with respect to corporate stockholders and under certain circumstances, the
branch profits tax) but will not be subject to withholding. Non-U.S.
stockholders should consult applicable treaties, which may provide for different
rules.
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STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state and local tax in
various states and localities, including those states and localities in which it
or they transact business, own property, or reside. The state and local tax
treatment of the Company and its stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws upon an investment in the Common Stock.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA,
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser subject to ERISA. The discussion does
not purport to deal with all aspects of ERISA or Section 4975 of the Code that
may be relevant to particular stockholders in light of their particular
circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
subject to Title I of ERISA (a "Plan") should consider carefully whether an
investment in the Common Stock is consistent with his fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of
ERISA require a Plan's investment to be (i) prudent and in the best interests of
the plan, its participants, and its beneficiaries, (ii) diversified in order to
minimize the risk of large losses, unless it is clearly prudent not to do so,
and (iii) authorized under the terms of the Plan's governing documents (provided
the documents are consistent with ERISA). In determining whether an investment
in the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary
of a Plan should consider all of the facts and circumstances, including whether
the investment is reasonably designed, as a part of the plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow, and funding
requirements of the plan's portfolio. A fiduciary also should take into account
the nature of the Company's business, the management of the Company, the length
of the Company's operating history, the fact that certain investment assets may
not have been identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan. A Plan
fiduciary also should consider the relevance of those principles to ERISA's
prohibition on improper delegation of control over or responsibility for "plan
assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who
participates in, permits (by action or inaction) the occurrence of, or fails to
remedy a known breach by another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets,
(ii) persons who exercise any authority over the Company's assets, or who
provide investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a Plan
to cause it to acquire or hold the Common Stock could be liable under Part 4 of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of prudence and fiduciary responsibility, and
(iv) certain transactions that the Company might enter into in the ordinary
course of its business and operations might constitute "prohibited transactions"
under ERISA and the Code.
The "Plan Asset Regulations" generally provide that when a Plan acquires a
security that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered
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under the Investment Company Act, the Plan's assets include both the equity
interest and an undivided interest in each of the underlying assets of the
issuer of such equity interest, unless one or more exceptions specified in the
Plan Asset Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration statement under
the Securities Act (provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during which
the offering occurred). The Common Stock is being sold in an offering
registered under the Securities Act and will be registered under the Exchange
Act. The Plan Asset Regulations provide that a security is "widely held" only
if it is part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
widely held because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company anticipates that upon completion of the Public
Offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with the Public Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Charter on the transfer of the Company's stock
will not result in the failure of the Common Stock to be "freely transferable."
The Company also is not aware of any other facts or circumstances limiting the
transferability of the Common Stock that are not enumerated in the Plan Asset
Regulations as those not affecting free transferability, and no assurance can be
given that the DOL or the Treasury Department will not reach a contrary
conclusion.
Assuming that the Common Stock will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company should
not be deemed to be "plan assets" of any Plan, IRA or non-ERISA Plan that
invests in the Common Stock.
Without regard to whether the assets of the Company are considered plan
assets, fiduciaries of Plans should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their decision to
purchase the Common Stock, as such acquisition may be a sale or exchange of
property between a Plan and a party in interest or disqualified person. A
"party in interest" or "disqualified person" with respect to an Plan or with
respect to a Plan subject to Section 4975 of the Code is subject to (i) an
initial 15% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan and (ii) an excise tax equal to 100% of the
amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its
tax-exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs as
a result of the transaction or for any profits earned by the fiduciary in the
transaction. In this regard Prohibited Transaction Class Exemption 75-1 may be
applicable.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of the Charter
and the Bylaws of the Company does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and to the Charter
and the Bylaws of the Company, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Charter and the Bylaws of the Company contain certain provisions that
could discourage, impede or impair acquisition of control of the Company by
means of a tender offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company to negotiate first with the Board of Directors. The Company
believes that these provisions increase the likelihood that proposals initially
will be on more attractive terms than would be the case in their absence and
increases the likelihood of negotiations, which might outweigh the potential
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals might result in improvement of terms. The
description set forth below is a summary only, and is qualified in its entirety
by reference to the Charter and the Bylaws which have been incorporated by
reference as exhibits to the Registration Statement of which this Prospectus is
a part. See "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer."
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws divide the Board of Directors into three classes
of directors, each class constituting approximately one-third of the total
number of directors, with the classes serving staggered three-year terms. The
classification of the Board of Directors will make it more difficult for
stockholders to change the composition of the Board of Directors because only a
minority of the directors can be elected at once. The Company believes,
however, that the staggered Board of Directors will help to ensure continuity
and stability of the Company's management and policies. The classification
provisions could also discourage a third party from accumulating the Company's
stock or attempting to obtain control of the Company, even though this attempt
might be beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances stockholders could be deprived of
opportunities to sell their shares of Common Stock at a higher price than might
otherwise be available.
NUMBER OF DIRECTORS, REMOVAL, FILLING VACANCIES
The Charter and Bylaws provide that the number of directors will be five, a
majority of whom will at all times be Independent Directors, and may be changed
by a majority of the entire Board of Directors. In addition, the Charter
provides that, unless the Board of Directors otherwise determines, any vacancies
may be filled by a vote of the stockholders or a majority of the remaining
directors, though less than a quorum, except vacancies created by the increase
in the number of directors, which only may be filled by a majority of the entire
Board of Directors. Accordingly, the Board of Directors could temporarily
prevent any stockholder from enlarging the Board of Directors and filling the
new directorship with such stockholder's own nominees. The Charter and the
Bylaws provide that, subject to the rights of any class or series to elect
directors, directors may be removed only for cause upon the affirmative vote of
a majority of holders of all the then outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single class.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for director or bring other business before an annual
meeting of stockholders of the Company (the "Stockholders Notice Procedure").
The Bylaws provide that (i) only persons who are nominated by, or at the
direction of, the Board of Directors, or by a stockholder who has given timely
written notice containing specified information to the Secretary of the Company
prior to the meeting, at which directors are to be elected, will be eligible for
election as directors of the Company, and (ii) at an annual meeting, only such
business may be conducted as has been brought before the meeting by or at the
direction of, the Chairman or the Board of Directors or by a stockholder who has
given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting. In general,
for notice of stockholder nominations or proposed business (other than business
to be included in the Company's Proxy Statement under the
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Commission's Rule 14a-8) to be conducted at an annual meeting to be timely, such
notice must be received by the Company not less than 60 days nor more than 90
days prior to the first anniversary of the previous year's annual meeting. The
purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Board of Directors a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders and make
recommendations about such nominees or business, as well as to ensure an orderly
procedure for conducting meetings of stockholders. Although the Charter and the
Bylaws do not give the Board of Directors power to block stockholder nominations
for the election of directors or proposals for action, they may have the effect
of discouraging stockholders from proposing nominees or business, precluding a
contest for the election of directors or the consideration of stockholder
proposals if procedural requirements are not met and deterring third parties
from soliciting proxies for a non-management slate of directors or proposals,
without regard to the merits of such slate or proposals.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Charter provides that the Board of Directors may create and authorize
the Company to issue rights entitling the holders thereof to purchase from the
Company shares of capital stock or other securities or property. The times at
which and terms upon which such rights are to be issued are within the
discretion of the Board of Directors. The provision is intended to confirm the
Board of Directors' authority to issue share purchase rights which could have
terms that would impede a merger, tender offer or other takeover attempt, or
other rights to purchase securities of the Company or any other entity.
INDEMNIFICATION
The Company's Charter obligates the Company to indemnify its directors and
officers and to pay or reimburse expenses for such individuals in advance of the
final disposition of a proceeding to the maximum extent permitted from time to
time by Maryland law. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that
(a) the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith, or (ii) was a
result of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. As permitted by the
MGCL, the Company's Charter obligates the Company to indemnify its present and
former directors and officers and to pay or reimburse reasonable expenses for
such individuals in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time by Maryland law.
LIMITATION OF LIABILITY
The MGCL permits the Charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and to its stockholders for money damages, except to the extent that
(i) it is proved that the person actually received an improper benefit or profit
in money, property or services, or (ii) a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Charter contains a provision providing for
elimination of the liability of its directors and officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
as amended or interpreted.
BUSINESS COMBINATIONS
Under Section 3-603(c) of the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
10% or more of the voting power of the corporation's shares or an affiliate or
associate of the corporation which, at any time within the two-year period prior
to the date in question, beneficially owned 10% or more of the voting power of
the corporation's shares (an "Interested Stockholder") or an affiliate thereof,
are prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such
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corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, or by an affiliate or associate of the Interested
Stockholder, unless, among other things, the corporation's stockholders receive
a minimum price (as defined in the MGCL) for their shares and the consideration
is received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder.
By resolution of the Board of Directors, dated November 7, 1997, the
several mutual funds advised by Franklin Mutual Advisers Inc. (each a "Fund"
and, together, the "Funds") who are participating in this Private Placement have
been irrevocably exempted from Section 3-603(c) of the MGCL.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock owned by such a person,
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. "Control shares" do not include shares of stock
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means, subject to
certain exceptions, the acquisition of, ownership of, or the power to direct the
exercise of voting power with respect to "control shares."
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders' meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as permitted by the statute, then, subject to certain
conditions and limitations, the corporation may redeem any or all of the
"control shares" (except those for which voting rights have previously been
approved) for fair value determined, without regard to absence of voting rights,
as of the date of the last "control share acquisition" or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for "control shares" are approved at a stockholders'
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the stock, as determined for purposes of such appraisal rights may
not be less than the highest price per share paid in the "control share
acquisition," and certain limitations and restrictions otherwise applicable to
the exercise of appraisal rights do not apply in the context of "control share
acquisitions."
The "control share acquisition" statute does not apply to stock acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a provision of the
charter or bylaws of the corporation adopted prior to the acquisition of the
shares. The Company has adopted a provision in its Bylaws that exempts the
Company's shares of Common Stock from application of the "control share
acquisition" statute. No assurance can be given, however, that such Bylaw
provision may not removed at any time by amendment of the Bylaws.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Charter provides that the Company may issue up to 100,000,000 shares of
capital stock, consisting of 75,000,000 shares of Common Stock, par value $.001,
and 25,000,000 shares of Preferred Stock, par value $.01 (the "Preferred
Stock"). Upon completion of the Private Placement and the Public Offering
19,353,333 shares of Common Stock will be issued and outstanding (or 21,603,333
shares if the Underwriters' over-allotment option granted in connection with
the Public Offering is exercised in full),
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and 2,066,666 shares of Common Stock will be reserved pursuant to the Stock
Incentive Plan for issuance upon exercise of options and grants of deferred
Common Stock, and no Preferred Stock will be issued and outstanding.
COMMON STOCK
All outstanding shares of Common Stock will be duly authorized, fully paid
and nonassessable upon the Closing. Subject to the preferential rights of any
other shares or series of shares of capital stock, holders of Common Stock are
entitled to receive dividends if and when authorized and declared by the Board
of Directors of the Company out of assets legally available therefor and to
share ratably in the assets of the Company legally available for distribution to
its stockholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
the Company. The Company intends to pay quarterly dividends.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders of
Common Stock will possess the exclusive voting power. There is no cumulative
voting in the election of directors, which means in all elections of directors,
each holder of Common Stock has the right to cast one vote for each share of
stock for a candidate.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, the Board of Directors may afford the holders of any series or
class of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of the holders of Common Stock. The Board could authorize
the issuance of Preferred Stock with terms and conditions which could have the
effect of discouraging a takeover or transaction which holders of some, or a
majority, of the shares of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares of Common Stock over the then
market price of such shares of Common Stock. As of the date hereof, no shares
of Preferred Stock are outstanding. The Charter provides that the Board of
Directors may classify or reclassify any unissued capital stock from time to
time. Thus, the Company may in the future increase the number of authorized
shares of Preferred Stock.
STANDSTILL AGREEMENT
In connection with its commitment to purchase in the Private Placement,
each of the Funds has agreed with respect to any shares of Common Stock owned
or purchased by any of the Funds aggregating in excess of 9.8% of the
outstanding voting stock of the Company (the "Excess Shares"), for so long as
such shares shall be deemed Excess Shares (the "Standstill Period"): (a) not to
solicit proxies from stockholders of the Company, the power to vote, become a
"participant" in any "election contest" (as such terms are used in Rule 14a-11
of the Exchange Act), with respect to the Company, or make a communication
referred to in Rule 14a-1(1)(2)(iv) of the Exchange Act in connection with any
election contest or other vote by stockholders of the Company that is contrary
to or is opposed to the position of the Board of Directors or management of the
Company, subject to certain restrictions; (b) not to seek or vote for the
removal of any member of or the election of any person to the Board of Directors
of the Company, except removal "for cause," within the contemplation of the
MGCL; (c) not to seek or vote for the replacement of the Manager or any change
in the terms of the Management Agreement, unless such proposed change or removal
is "for cause," as defined in the Management Agreement; (d) not to call or seek
to have called any meeting of the stockholders of the Company; (e) not to
otherwise act, alone or in concert with others to (i) solicit, propose, seek to
effect or negotiate with any other person with respect to (A) any business
combination with the Company or (B) any restructuring, recapitalization or
similar transaction of the Company, (ii) solicit, propose, seek to effect or
negotiate with any other person with any other person with respect to, or
announce an intent to make, any tender offer or exchange offer for any voting
securities of the Company, (iii) disclose an intent, purpose, plan or proposal
with respect to the Company or any voting securities of the Company otherwise
prohibited by these provisions, or (iv) assist, participate in, facilitate or
solicit any effort or attempt by any person to do or seek any of the foregoing;
and (f) not to form, join or participate in a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) with respect to the matters described in
clauses (a) through (e) above.
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The Standstill period shall terminate upon a change of control of the
Company (as defined in the purchase agreement among the Company and the Funds)
or if Michael L. Smirlock shall no longer serve as Chief Executive Officer and
a Director of the Company and the Manager.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements of qualification for the tax benefits afforded by
the REIT Provisions of the Code are that (i) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals (the "5/50 Rule") and
(ii) there must be at least 100 stockholders during 335 days of each taxable
year of 12 months.
So that the Company may meet these requirements at all times, the Charter
prohibits any person from acquiring or holding, directly or indirectly, shares
of Common Stock in excess of 9.8% in value of the aggregate of the outstanding
shares of Common Stock or in excess of 9.8% (in value or in number of shares,
whichever is more restrictive) of the aggregate of the outstanding shares of
Common Stock of the Company. For this purpose, the term "ownership" is defined
in accordance with the REIT Provisions of the Code and the constructive
ownership provisions of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code.
For purposes of the 5/50 Rule, the constructive ownership provisions
applicable under Section 544 of the Code attribute ownership of securities owned
by a corporation, partnership, estate or trust proportionately to its
stockholders, partners or beneficiaries, attribute ownership of securities owned
by family members and partners to other members of the same family, treat
securities with respect to which a person has an option to purchase as actually
owned by that person, and set forth rules as to when securities constructively
owned by a person are considered to be actually owned for the application of
such attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds shares of Common Stock in violation of the
ownership limitation set forth in the Charter, many types of entities may own
directly more than the 9.8% limit because such entities' shares are attributed
to its individual stockholders. On the other hand, a person will be treated as
owning not only shares of Common Stock actually or beneficially owned, but also
any shares of Common Stock attributed to such person under the attribution
rules described above. Accordingly, under certain circumstances, shares of
Common Stock owned by a person who individually owns less than 9.8% of the
shares outstanding nevertheless may be in violation of the ownership limitations
set forth in the Charter. Ownership of shares of the Company's Common Stock
through such attribution is generally referred to as constructive ownership.
The 100 stockholder test is determined by actual, and not constructive,
ownership. It is contemplated that, following the Public Offering, the Company
will have greater than 100 stockholders of record.
The Charter further provides that any transfer of shares of Common Stock
that would result in disqualification of the Company as a REIT or that would
(a) create a direct or constructive ownership of shares of stock in excess of
the Ownership Limit, or (b) from and after the earlier of January 1, 1998 and
the date of closing of the sale of Common Stock pursuant to the offering (the
"One Hundred Stockholder Date"), result in the shares of stock being
beneficially owned (within the meaning Section 856(a) of the Code) by fewer than
100 persons (determined without reference to any rules of attribution), or
(c) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, will be null and void, and the intended transferee (the
"purported transferee") will acquire no rights to such shares. Any purported
transfer of shares that would result in a person owning (directly or
constructively) shares in excess of the Ownership Limit (except as otherwise
waived by the Board of Directors) due to the unenforceability of the transfer
restrictions set forth above will constitute "Excess Securities." Excess
Securities will automatically be deemed to have been transferred by operation of
law to a trust to be established by the Company for the exclusive benefit of a
charitable organization, until such time as the trustee of the trust, which
shall be a banking institution designated as trustee by the Company, which is
unaffiliated with either the Company or the purported transferee, retransfers
the Excess Securities. Subject to the Ownership Limit, Excess Securities may be
transferred by the trust to any person (if such transfer would not result in
Excess Securities) at a price not to exceed the price paid by the purported
transferee, the fair market value of the Excess Securities on the date of the
purported transfer), at which point the Excess Securities will automatically
cease to be Excess Securities. See "Federal Income Tax
Considerations--Requirements for Qualification."
Subject to certain limitations, the Board of Directors may increase or
decrease the Ownership Limit. In addition, to the extent consistent with the
REIT Provisions of the Code, the Board of Directors has the right, in its sole
discretion, pursuant to the Company's Charter to waive the Ownership Limit for,
and at the request of, a purchaser of the Common Stock. In connection with any
such waiver, the Company may require that the stockholder requesting such a
waiver enter
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into an agreement with the Company providing for the repurchase by the Company
of shares from the stockholder under certain circumstances to ensure compliance
with the REIT Provisions of the Code. Such repurchase would be at fair market
value as set forth in the agreement between the Company and such stockholder.
The consideration received by the stockholder in such repurchase might be
characterized as the receipt by the stockholder of a dividend from the Company,
and any stockholder entering into such an agreement with the Company should
consult its tax advisor in connection with its entering into such an agreement.
As part of the Private Placement, the Company received commitments to
purchase 3,333,333 shares of Common Stock from the Funds. The Board of
Directors has waived the Ownership Limit for the Funds and their Affiliates and
the Funds have entered into an agreement with the Company which imposes certain
restrictions on the sale and transfer of the shares held, beneficially or
constructively by the Funds. The Funds have agreed not to acquire more than
17.5% of the Company's outstanding shares of Common Stock. This waiver of the
Ownership Limit applies only to the Funds and their Affiliates. Any subsequent
transferee of the shares held by the Funds and their Affiliates will be subject
to the Ownership Limit, unless specifically exempted by the Company's Board of
Directors.
Every owner of more than five percent (or such lower percentage as required
by the Code or the regulations promulgated thereunder) of all classes or series
of the Company's stock, within 30 days after the end of each taxable year, is
required by the Company's Charter to give written notice to the Company stating
the name and address of such owner, the number of shares of each class and
series of stock of the Company beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on the Company's
status as a REIT and to ensure compliance with the ownership limitations.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of the Company's Common Stock to receive a
premium for their shares or warrants that might otherwise exist in the absence
of such provisions. Such provisions also may make the Company an unsuitable
investment vehicle for any person seeking to obtain ownership of more than 9.8%
of the outstanding shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
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SELLING STOCKHOLDERS
This Prospectus relates to the offer and sale from time to time of
4,347,333 shares of Common Stock. The Shares are offered by the Selling
Stockholders identified in the table below. It is unknown if, when, or in what
amounts a Selling Stockholder may offer the Shares for sale. There is no
assurance that the Selling Stockholders will sell any or all of the Shares
offered hereby.
In addition, in the Purchase Agreements (the "Purchase Agreement"), the
Company has agreed to indemnify the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Selling Stockholders may be required to make in respect thereof.
Insofar as indemnification of the Selling Stockholders for liabilities arising
under the Securities Act may be permitted pursuant to such agreements, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Because the Selling Stockholders may offer all or some of the Shares
pursuant to the Offering, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the Shares
that will be held by the Selling Stockholders after completion of the Offering,
no estimate can be given as to the amount of the Shares that will be held by the
Selling Stockholders after completion of the Offering.
The Selling Stockholders and any broker or dealer to or through whom any of
the Shares are sold may be deemed to be underwriters within the meaning of the
Securities Act with respect to the Shares offered hereby, and any profits
realized by the Selling Stockholders are not expected to exceed normal selling
expenses for sales. The registration of the Shares under the Securities Act
shall not be deemed an admission by the Selling Stockholders or the Company that
the Selling Stockholders are underwriters for purposes of the Securities Act of
any Shares offered under this Prospectus.
The Selling Stockholders purchased the Shares in connection with private
placement transactions. In connection with the purchase of such Shares, each
Selling Stockholder entered into a purchase agreement pursuant to which such
Selling Stockholder represented that he, she or it was acquiring the Shares for
investment and with no present intention of distributing the Shares. In
accordance with the purchase agreements, which contain customary representations
and warranties relating to the Company, this Prospectus (and the registration
statement of which it is a part) relates to sales of the Shares by the Selling
Stockholders, subject to the terms and conditions set forth in the Purchase
Agreements. The Company agreed, in such purchase agreements, to bear all
expenses other than fees and expenses of counsel for a Selling Stockholder and
underwriting discounts and commissions and brokerage commissions and fees. The
Company has agreed to prepare and file such amendments and supplements to the
Registration Statement as may be necessary to keep the Registration Statement
effective until all Shares offered hereby have been sold pursuant hereto or
until such Shares are no longer, by reason of Rule 144 under the Securities Act
or any other rule of similar effect, required to be registered for the sale
thereof by the Selling Stockholders.
The following table sets forth the name of each Selling Stockholder and the
number of shares and percentage of Common Stock owned beneficially by each
Selling Stockholder as of November 20, 1997. The Company will not receive any
of the proceeds from the sale of Shares by the Selling Stockholders.
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Shares of Common Stock
Beneficially Owned
Prior to Offering
----------------------
Name of Selling Stockholder Number Percent
Ashok N. Vasvani/ Bansie Vasvani (2) 15,000 *
Robert J. Gartner (3) 10,000 *
Akhil A. Vasvani 1,000 *
Peter T. Zimmermann (4) 25,000 *
Ronald M. Goldstein 10,000 *
James E. Bolin 4,500 *
John Jakubowski 300 *
Devrah E. Karlebach 333 *
Michael L. Smirlock (5) 67,000 *
Jonathan Green 1,032 *
Thomas G. Jonovich (6) 1,000 *
The Tepper Family Irrevocable Trust 14,600 *
Abigail Fournier 1,200 *
Elizabeth Fournier 1,200 *
Alan P. Fournier 17,600 *
David A. Tepper (7) 103,000 *
Appaloosa Investment Limited Partnership I (8) 714,235 3.7%
Lawrence P. O'Friel 2,000 *
John C. Walton 10,000 *
The Walton Family Irrevocable Trust 5,000 *
Frederick N. Khedouri (9) 10,000 *
Mutual Beacon Fund (10) 275,000 1.4%
Mutual Discovery Fund (10) 1,691,833 8.7%
Mutual Finance Services Fund (10) 250,000 1.3%
Mutual Qualified Fund (10) 235,000 1.2%
Mutual Shares Fund (10) 350,000 1.8%
Mutual Discovery Securities Fund (11) 115,000 *
Mutual Shares Securities Fund (11) 220,000 1.1%
Franklin Mutual Beacon Fund (12) 16,500 *
Mutual Beacon Fund (13) 55,000 *
Orion Fund Limited (13) 125,000 *
- -----------------
* Less than one percent
(1) Unless otherwise indicated, the Selling Stockholders named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned.
(2) Joint tenants with right of survivorship.
(3) Mr. Gartner is Vice President and Secretary of the Company.
(4) Mr. Zimmermann is the Chief Operating Officer of the Company.
(5) Mr. Smirlock is the Chief Executive Officer, President and a Director of
the Company.
(6) Mr. Jonovich is the Chief Financial Officer and Treasurer of the Company.
(7) Mr. Tepper is a Director of the Company.
(8) Mr. Tepper, a Director of the Company, exercises sole voting and
investment power over the shares held by Appaloosa Investment Limited
Partnership I.
(9) Mr. Khedouri is a Director of the Company.
(10) Each, a series of Franklin Mutual Series Fund Inc. and one of the Funds.
(11) Each, a series of Franklin Valuemark Funds and one of the Funds.
(12) A subfund of Templeton Global Strategy Funds and one of the Funds.
(13) One of the Funds.
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PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the
Common Stock offered hereby. The Selling Stockholders may sell all or a portion
of the shares of Common Stock from time to time while the registration statement
of which this Prospectus is a part remains effective. The Company has agreed to
maintain the effectiveness of such registration statement until the date all of
the shares of Common Stock offered hereby have been sold or withdrawn from
registration by them. To the extent required, the number of shares of Common
Stock to be sold, the names of the Selling Stockholders, the purchase price, the
name of any agent or dealer and any applicable commissions with respect to a
particular offer will be set forth in an accompanying supplement to this
Prospectus. The aggregate proceeds to the Selling Stockholders from the sale of
Common Stock offered hereby will be the prices at which such securities are
sold, less any commissions.
The Common Stock may be sold by the Selling Stockholders in transactions on
the over-the-counter market, in negotiated transactions, or by a combination of
these methods, at fixed prices that may be changed, at market prices prevailing
at the time of sale, at prices related to such market prices or at negotiated
prices. A Selling Stockholder may elect to engage a broker or dealer to effect
sales in one or more of the following transactions: (a) block trades in which
the broker or dealer so engaged will attempt to sell the converted shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction, (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus, and
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers, (d) pro rata distributions as part of the liquidation and
winding up of the affairs of the Selling Stockholders, (e) privately negotiated
transactions and (f) exchange distributions and/or secondary distributions in
accordance with the rules of the NYSE. In effecting sales, brokers and dealers
engaged by Selling Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from
Selling Stockholders in amounts to be negotiated (and, if such broker-dealer
acts as agent for the purchaser of such shares, from such purchaser).
Broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for a Selling Stockholder, to
purchase as principal any unsold shares at the price required to fulfill the
broker-dealer commitment to such Selling Stockholder. Broker-dealers who
acquire shares as principal may thereafter resell such shares from time to time
in transactions (which may involve crosses and block transactions and sales to
and through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market or otherwise at prices and on terms then
prevailing at the time of sale, at prices then related to the then-current
market price or in negotiated transactions and, in connection with such resales,
may pay to or receive from the purchasers of such shares commissions as
described above. The Selling Stockholders may also pledge such shares to banks,
brokers or other financial institutions as security for margin loans or other
financial accommodations that may be extended to such Selling Stockholders, and
any such bank, broker or other institution may similarly offer, sell and effect
transactions in such shares.
The Selling Stockholders may from time to time deliver all or a portion of
the Shares to cover a short sale or sales upon the exercise, settlement, or
closing of a call equivalent position or a put equivalent position.
The Selling Stockholders may sell all or any portion of the Shares in
reliance upon Rule 144 under the Securities Act. Shares not sold pursuant to
the Registration Statement of which this Prospectus is a part may be subject to
certain restrictions under the Securities Act and could be sold, if at all, only
pursuant to Rule 144 or another exemption from the registration requirements of
the Securities Act. In general, under Rule 144, a person (or persons whose
Shares are aggregated) who has satisfied a one-year holding period may, under
certain circumstances, sell within any three-month period a number of Shares
which does not exceed the greater of one percent of the Company's outstanding
shares of Common Sock or the average weekly reported trading volume of the
Company's Common Stock during the four calendar weeks prior to such sale. Rule
144 also permits, under certain circumstances, the sale of Shares by a person
who is not an affiliate of the Company and who has satisfied a two-year holding
period without any volume limitation. Therefore, both during and after the
effectiveness of the Registration Statement, sales of the Shares may be made by
the Selling Stockholders pursuant to Rule 144.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of shares of Common Stock may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
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The Company will pay all expenses incident to the offering and sale of the
Common Stock to the public other than underwriting discounts and selling
commissions.
The Company and the Selling Stockholders may agree to indemnify certain
persons, including broker-dealers or others, against certain liabilities in
connection with the offering of the Shares, including liabilities under the
Securities Act.
PUBLIC OFFERING
The Company expects the Underwriters of the Public Offering to purchase
from the Company an aggregate of 15,000,000 shares of Common Stock.
Consummation of the Private Placement is contingent upon and will occur
simultaneous with the closing of the Public Offering.
The Company expects to grant the Underwriters an option to purchase up to
2,250,000 additional shares of Common Stock at the initial public offering
price less underwriting discounts and commissions, solely to cover
overallotments, if any. Such options may be exercised at any time until 30
days after the date of the closing of the Public Offering.
Prior to the Public Offering, there will be no public market for the
Common Stock. Consequently, the public offering price will be determined by
negotiation between the Company and the Underwriters. Among the factors
expected to be considered in such negotiations are the nature of the
Company's business, its prospects and management, and the general conditions
of the securities markets at the time of the Public Offering. There can be no
assurance, however, that the prices at which the shares will sell in the
public market after the Public Offering and the Private Placement will not be
lower than the initial public offering price.
In connection with the Public Offering, the Company, each of its officers
and directors and certain other stockholders will agree that they will not,
directly or indirectly, offer, pledge, sell, offer to sell, contract to sell
or grant any option to purchase or otherwise sell or dispose (or announce any
offer, pledge, sale, offer of sale, contract of sale, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock or securities exchangeable or exercisable for, or convertible
into shares of Common Stock or other capital stock for a period of 180 days
or such shorter period as expressly agreed by Bear Stearns after the date of
the closing of the Public Offering, except (i) with the prior written consent
of the lead managing underwriter, and (ii) in the case of the Company, for
issuance under the terms of the Stock Incentive Plan. The Funds have agreed
to the same restrictions for a period of 90 days.
PRIVATE PLACEMENT
The Company received commitments on September 15, 1997 for the purchase, in
a private placement, of 1,014,000 shares of Common Stock at the initial public
offering price from certain officers, directors, proposed directors, employees
and Affiliates of the Company and the Manager. On November 7, 1997, the Company
received commitments from the Funds for the purchase, in a private placement, of
3,333,333 shares of Common Stock at the initial public offering price. In
connection with their purchase, the Funds entered into an agreement with the
Company providing for, among other things, certain restrictions on the sale and
transfer of the shares held, beneficially or constructively, by the Funds. See
"Description of Capital Stock."
Consummation of such transactions (the "Private Placement") is contingent
only upon and will occur simultaneous with the closing of the Public Offering.
The shares sold in the Private Placement were sold without registration under
the Securities Act, in reliance on the exemption provided by Section 4(2)
thereof.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby have been passed upon for the Company by Stroock & Stroock & Lavan LLP,
New York, New York. Certain matters relating to Maryland law have been passed
upon for the Company by Miles & Stockbridge, a Professional Corporation,
Baltimore, Maryland.
EXPERTS
The statement of financial condition of the Company as of September 25,
1997, included in this Prospectus is included in reliance on the report of
Deloitte & Touche LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"Acceleration Event" means any of the following circumstances in which the
awards granted under the Stock Incentive Plan generally become immediately
vested and exercisable: (i) upon the occurrence of special circumstances
determined in the opinion of the Board of Directors of the Company to merit
special consideration, (ii) upon a termination of the Company of the holder's
employment or service without cause (as defined in the Stock Incentive Plan),
(iii) in the case of an employee or director of the Manager, if the Management
Agreement terminates without the occurrence of a Termination Event (as defined
in the Stock Incentive Plan), or (iv) upon a Change of Control (as defined in
the Stock Incentive Plan) of the Company, except that vesting and exercisability
in the event of such a Change of Control shall be limited to the extent
necessary, and shall occur as soon as permissible under GAAP, to permit pooling
of interests accounting treatment if such treatment is desired.
"Advisers Act" means the Investment Advisers Act of 1940, as amended.
"Affiliate" means, when used with reference to a specified person, (i) any
person that directly or indirectly controls or is controlled by or is under
common control with the specified person, (ii) any person that is an officer of,
partner in or trustee of, or serves in a similar capacity with respect to, the
specified person or of which the specified person is an officer, partner or
trustee, or with respect to which the specified person serves in a similar
capacity, and (iii) any person that, directly or indirectly, is the beneficial
owner of 5% or more of any class of equity securities of the specified person or
of which the specified person is directly or indirectly the owner of 5% or more
of any class of equity securities.
"Affiliated Funds" means the private investment funds advised by the
Manager which invest in Mortgage Assets.
"Agency Certificates" means FHLMC Certificates, FNMA Certificates and GNMA
Certificates.
"Appaloosa" means Appaloosa Management L.P.
"ARM" means a Mortgage Loan or any mortgage loan underlying a Mortgage
Security that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index. An ARM
is usually subject to periodic and lifetime interest rate and/or payment caps.
"Average Market Price" means the average of the daily high and low sales prices,
computed to seven decimal places, of the Company's Common Stock on the NYSE, as
reported in The Wall Street Journal, during the pricing period (the ten days on
which the NYSE is open and for which trades in the Company's Common Stock are
reported immediately preceding the relevant investment date).
"Average Stockholders' Equity" means, for any period, stockholders' equity,
calculated in accordance with GAAP, excluding any mark-to-market adjustments of
the investment portfolio.
"Bear, Stearns" means Bear, Stearns & Co. Inc., one of the Representatives.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws, as amended, of the Company.
"Charter" means the Articles of Incorporation, as amended, of the Company.
"CMOs" means fixed- or adjustable-rate debt obligations (bonds) that are
collateralized by Mortgage Loans or other Mortgage Assets. Such bonds may be
issued by U.S. government agencies or private issuers in one or more classes
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with fixed or variable interest rates, maturities and degrees of subordination
which are characteristics designed for the investment objectives of different
bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitments" means commitments issued by the Company which will obligate
the Company to purchase Mortgage Assets from, or sell them to, the holders of
the commitment for a specified period of time, in a specified aggregate
principal amount and at a specified price.
"Common Stock" means shares of the Company's common stock, $.001 par value
per share.
"Company" means LASER Mortgage Management, Inc., a Maryland corporation.
"control shares" means voting shares of stock which, if aggregated with all
other shares of stock owned by such person, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third; (ii) one-third
or more but less than a majority or (iii) a majority or more of all voting
power.
"control share acquisition" means, subject to certain exceptions, the
acquisition of, ownership of, or the power to direct the exercise of voting
power with respect to "control shares."
"dealer property" means assets such as Mortgage Securities that the Company
creates through securitization of Mortgage Loans or Mortgage Assets or hedging
instruments in which any of the profits made from selling such assets would be
subject to tax at the rate of 100% as income from prohibited transactions.
"DOL" means the U.S. Department of Labor.
"11th District Index" means the 11th District Cost of Funds Index published
by the Federal Home Loan Bank of San Francisco.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"excess inclusion" means taxable income that is generated by the Mortgage
Assets constituting a "taxable mortgage pool" under regulations to be issued by
the Treasury Department.
"Excess Securities" means shares of the Company owned by a person (directly
or indirectly) in excess of the Ownership Limit due to the unenforceability of
transfer restrictions.
"Excess Shares" means any shares of Common Stock owned or purchased by any
of the Funds aggregating in excess of 9.8% of the outstanding voting stock of
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"FASIT" means a Financial Asset Securitization Investment Trust.
"FHA" means the U.S. Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
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"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form. An FHLMC ARM Certificate is
an FHLMC Certificate collateralized by adjustable-rate FHLMC Certificates.
"55% Requirement" means the requirement under the Investment Company Act
that the Company must, among other things, maintain at least 55% of its assets
in Qualifying Interests in order to qualify for the Investment Company Act
exemption.
"Funds" means the several mutual funds advised by Franklin Mutual Advisers
Inc. purchasing in the Private Placement.
"5/50 Rule" means that, for the Company to maintain its qualification as a
REIT, during the last half of each taxable year, not more than 50% in value of
its outstanding shares may be owned directly or indirectly by five or fewer
individuals.
"FNMA" means the Federal National Mortgage Association.
"FNMA Certificates" means guaranteed mortgage-pass-through certificates
issued by FNMA either in certified or book-entry form. An FNMA ARM Certificate
is an FNMA Certificate collateralized by adjustable-rate FNMA Certificates.
"GAAP" means generally accepted accounting principles.
"GAAP income" means income calculated according to GAAP.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means fully modified pass-through mortgage backed
certificates guaranteed by GNMA and issued either in certificated or book-entry
form. A GNMA ARM Certificate is a GNMA Certificate collateralized by
adjustable-rate GNMA Certificates.
"GSAM" means Goldman Sachs Asset Management.
"haircut" means the over-collateralization amount required by a lender in
connection with a collateralized borrowing.
"HUD" means the Department of Housing and Urban Development.
"Independent Directors" means those directors that are not affiliated,
directly, or indirectly, with the Company or the Manager, 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 Company or the
Manager or an affiliated business entity of the Company or the Manager.
"Interest in Real Property" means an interest in Mortgage Loans or land and
improvements thereon, such as buildings or other inherently permanent
structures, a leasehold of real property, and an option to acquire real
property.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the Company's shares or an affiliate or associate of the
Company which, at any time within the two-year period prior to the date in
question, beneficially owned 10% or more of the voting power of the Company's
shares.
"Inverse IOs" means IOs that bear interest at a floating rate that varies
inversely with (and often at a multiple of ) changes in a specified index.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRAs" means Individual Retirement Accounts.
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"Interest-only security" or "IO" means a type of Mortgage Security which
receives a portion of the interest payments from an underlying pool of Mortgage
Loans but will receive little or no principal payments and hence will have
little or no face value.
"junk bonds" means non-investment grade high yield corporate debt.
"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 fees.
"Manager" means Laser Advisers Inc., a Delaware corporation.
"margin call" means additional collateral that the Company would be
required to deposit due to potential reverse repurchase and dollar roll
agreements.
"Master Servicer" means an entity that will administer and supervise the
performance by servicers of the duties and responsibilities under Servicing
Agreements in respect of the collateral for a series of Mortgage Securities.
"MGCL" means the Maryland General Corporation Law.
"Mortgage Assets" means (i) Mortgage Securities and (ii) Mortgage Loans.
"Mortgage Derivatives" means Mortgage Securities which provide for the
holder to receive interest only, principal only, or interest and principal in
amounts that are disproportionate to those payable on the underlying Mortgage
Loans.
"Mortgage Loans" means mortgage loans secured by first or second liens on
single-family residential, multi-family residential, commercial or other real
property.
"Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs, and
(iii) other securities representing interests in, or obligations backed by,
pools of Mortgage Loans.
"Mortgage Seller" means entities such as savings and loan associations,
banks, mortgage bankers, home builders, insurance companies and other mortgage
lenders which sell Mortgage Loans.
"Net Income" means the taxable income of the Company within the meaning of
the Code, less capital gains and capital appreciation included in taxable
income, but before the Manager's fees and before deduction of dividends paid.
"95% Distribution Requirement" means the requirement of the Company to
distribute 95% of its net taxable income annually (excluding any net capital
gain and certain non-cash income) in order to avoid corporate income taxation of
the earnings that it distributes.
"95% Gross Income Test" means the requirement for each taxable year that at
least 95% of the Company's gross income for each taxable year must be derived
from certain specified real estate sources including interest income and gain
from the disposition of Qualified Real Estate Assets or "qualified temporary
investment income" (i.e., income derived from "new capital" within one year of
the receipt of such capital), dividends, interest, and gains from the sale of
stock or other securities (including certain interest rate swap or cap
agreements, options, forward rate agreements, and similar financial instruments
entered into to reduce the interest rate risk with respect to debt incurred to
acquire Qualified Real Estate Assets) not held for sale in the ordinary course
of business.
"Non-ERISA Plan" means an IRA or a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees.
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"Non-U.S. stockholders" means nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign stockholders
"NYSE" means the New York Stock Exchange.
"Offering" means the offering from time to time of up to 4,347,333 shares
of Common Stock of the Company by the Selling Stockholders.
"One Hundred Stockholder Date" means the earlier of (i) January 1, 1998
and (ii) the date of closing of the sale of Common Stock pursuant to the
Offering.
"Order" means the order of the Commission issued on November 29, 1993
pursuant to Sections 203(f) and 203(k) of the Advisers Act in connection with
certain securities transactions executed between December 1992 and February 1993
while Mr. Smirlock was Chief Investment Officer for Goldman Sachs Asset
Management.
"Ownership Limit" means the limit set forth by the Charter of the Company
which prohibits direct or indirect ownership by any person of more than 9.8% of
the number of outstanding shares of Common Stock.
"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective,
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family residential, multi-family residential, commercial
and/or other real property.
"passive activity losses" means losses like those from certain types of
limited partnerships in which a U.S. stockholder is a limited partner.
"phantom income" means that the Company's investment in Subordinate
Interests and certain types of Mortgage Securities may cause it under certain
circumstances to recognize taxable income in excess of its economic income.
"Plan Asset Regulations" means regulations of the DOL defining "plan
assets."
"Plan" means any pension, profit-sharing or other employee benefit plan
subject to Title I of ERISA.
"Preferred Stock" means the Company's preferred stock, par value $0.01.
"Principal-only Derivative," or "PO"' means a type of Mortgage Security
which receives only principal payments.
"Private Placement" means the consummation of the transactions described
herein under the caption "Private Placement."
"Privately-Issued Certificates" means privately-issued Pass-Through
Certificates issued by a third party issuer which is not an Agency Certificate.
"prohibited transaction" means a transaction involving a sale of dealer
property, other than foreclosure property.
"Prospectus" means the prospectus prepared in conjunction with the
initial public offering of the Company's Common Stock described herein under
the caption "Public Offering."
"Public Offering" means the initial public offering of the Company's Common
Stock described herein under the caption "Public Offering."
"purported transfer" means any transfer of shares of capital stock that
would result in disqualification of the Company as a REIT or that would
(a) create a direct or constructive ownership of shares of stock in excess of
the Ownership Limit, (b) result in the shares of stock being beneficially owned
by fewer than 100 persons or (c) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code.
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"purported transferee" means any intended transferee of a purported
transfer.
"Qualified Real Estate Assets" means real estate assets of the type
described in Section 856(c)(6)(B) of the Code.
"Qualified REIT Subsidiaries" means subsidiaries that meet the requirements
under the REIT Provisions of the Code.
"Qualifying Interests" means "mortgages and other liens on and interests in
real estate," as defined in Section 3(c)(5)(C) under the Investment Company Act.
"Rating Agencies" means the nationally recognized rating agencies.
"REIT" means Real Estate Investment Trust.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code.
"REMIC" means real estate mortgage investment conduit.
"REO" means real estate owned property.
"Return on Average Stockholders' Equity" means an amount calculated for any
quarter by dividing the Company's Net Income for the quarter by its Average
Stockholders' Equity for the quarter.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"75% Asset Test" means at the close of each quarter of each taxable year
that at least 75% of the value of the Company's total assets must consist of
Interests in Real Property, interests in mortgages on real property to the
extent the principal balance of a mortgage does not exceed the fair market value
of the associated real property, regular or residual interests in a REMIC
(except that, if less than 95% of the assets of a REMIC consists of real estate
assets (determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), shares of other REITs, government securities, temporary investments in
stock or debt instruments closing the one year period following the Company's
receipt of certain new capital cash and cash items.
"75% Gross Income Test" means for each taxable year that at least 75% of
the Company's gross income must be derived from certain specified real estate
sources including interest income on Mortgage Loans and gain from the
disposition of Qualified Real Estate Assets or "qualified temporary investment
income," i.e., income derived from "new capital" within one year of the receipt
of such capital.
"Shares" means up to 4,347,333 shares of Common Stock of the Company to
be offered from time to time by the Selling Stockholders.
"SIP Participant" means all employees and directors of, and consultants to,
the Company, as well as all employees and directors of the Manager, eligible to
receive awards under the Stock Incentive Plan.
"Special Tax Counsel" means the law firm of Stroock & Stroock & Lavan LLP.
"Standstill Period" means the period so long as any shares of Common Stock
owned or purchased by any of the Funds shall be deemed Excess Shares.
"Stock Incentive Plan" means the stock incentive plan adopted by the
Company.
"Stockholder of Record" means a stockholder who owns shares of the
Company's Common Stock in his, her or its own name.
"Stockholders Notice Procedure" means the advance notice procedure for
stockholders to make nominations of candidates for director or bring other
business before an annual meeting of stockholders of the Company established in
the Bylaws.
81
<PAGE>
"Sub IO" means a subordinated interest-only security.
"Subordinate Interests" means a class of Mortgage Securities that is junior
to other classes of Mortgage Securities in the right to receive payments from
the underlying Mortgage Loans.
"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.
"taxable mortgage pool" means a REIT that incurs debt obligations with two
or more maturities and which are secured by assets such as the Mortgage Assets.
"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.
"30% Asset Group" is comprised of the remainder of the Company's total
assets, which are expected to consist of Mortgage Loans not included in the 70%
Asset Group, retained Subordinate Interests and fixed-income securities that are
primarily Qualified Real Estate Assets but also will include non-investment
grade high yield corporate debt.
"UBTI" means "unrelated business taxable income" as defined in Section 512
of the Code.
"UBTI Percentage" means that, in certain circumstances, a pension trust
that owns more than 10% of the Company's stock is required to treat a percentage
of the dividends from the Company as UBTI.
"Underwriters" means the underwriters acting as underwriters of the Public
Offering.
"yield curve" means the relationship between short-term and long-term
interest rates.
82
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
LASER Mortgage Management, Inc.
We have audited the accompanying statement of financial condition of LASER
Mortgage Management, Inc. (the "Company") as of September 25, 1997. This
statement of financial condition is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
financial condition based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of financial condition presents fairly, in all
material respects, the financial position of LASER Mortgage Management, Inc. as
of September 25, 1997 in conformity with generally accepted accounting
principals.
Deloitte & Touche LLP
New York, New York
September 26, 1997
F-1
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 25, 1997
Asset
Cash $15,005
Stockholders' Equity
Common Stock, par value $.001 per share, authorized
75,000,000 shares; 6,000 shares issued and outstanding;
Preferred Stock, par value $.01 per share, authorized
25,000,000 shares; no shares issued and outstanding $6
Additional paid-in capital 14,999
-------
Total Stockholders' Equity $15,005
=======
See accompanying Notes to Statement of Financial Condition
F-2
<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
NOTES TO STATEMENT OF FINANCIAL CONDITION
NOTE 1. ORGANIZATION
LASER Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on September 3, 1997 but has had no operations to date other than
matters relating to its organization and the issuance of 6,000 shares of Common
Stock, par value $.001 per share ("Common Stock"), to its initial stockholder.
The Company is a newly organized specialty finance company that will invest
primarily in mortgage- backed securities and mortgage loans. The mortgage-backed
securities will include mortgage pass-through certificates, collateralized
mortgage obligations and other securities representing interests in, or
obligations backed by, pools of mortgage loans. The mortgage loans will be
secured by first or second liens on single-family residential, multi-family
residential, commercial or other real property.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The books and records of the Company are maintained on an accrual basis, in
accordance with generally accepted accounting principles.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results may differ from those estimates.
INCOME TAXES
The Company intends to elect to be taxed as a real estate investment trust
(a "REIT") and to comply with the provisions of the Internal Revenue Code of
1986, as amended, with respect thereto. Accordingly, the Company will not be
subject to Federal income tax to the extent of its distributions to
stockholders.
PROFIT AND LOSS ALLOCATIONS AND DISTRIBUTIONS
As a REIT, the Company intends to distribute substantially all its taxable
income to stockholders each year. The Company intends to declare regular
quarterly dividends.
NOTE 3. FEES
ORGANIZATIONAL, OFFERING, GENERAL AND ADMINISTRATIVE COSTS
The Company will be required to pay all of its organizational and offering
expenses.
NOTE 4. RELATED PARTIES
The day-to-day business and investment affairs of the Company will be
managed by LASER Advisers Inc. ("LASER Advisers"), an investment adviser
registered under the Investment Advisers Act of 1940, as amended, subject to the
supervision of the Company's Board of Directors and pursuant to a management
agreement between the Company and LASER Advisers (the "Management Agreement").
Under the Management Agreement, the Company will pay LASER Advisers: (i) an
annual base management fee equal to 1.0% of the first $500 million of average
stockholders' equity, plus 0.8% of the next $500 million of average
stockholders' equity, plus 0.6% of average stockholders' equity exceeding $1
billion and (ii) a quarterly incentive fee in an amount equal to 20% of the net
income of the Company for the preceding fiscal quarter (less capital gains and
capital appreciation included in taxable income, but before LASER Advisers'
incentive fee and before
F-3
<PAGE>
deduction of dividends paid) in excess of the amount that would produce an
annualized return on average stockholders' equity for such fiscal quarter equal
to the Ten-Year Treasury Rate plus 1%.
The Company and LASER Advisers will share office space. The officers of the
Company are also officers of LASER Advisers. Messrs. Michael L. Smirlock and
David A. Tepper, directors of the Company, together own all of the equity of
LASER Advisers.
F-4
<PAGE>
=========================================== ====================================
NO DEALER, SALES REPRESENTATIVE OR
ANY OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH
THE OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE 4,347,333
COMPANY OR ANY SELLING STOCKHOLDER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN LASER MORTGAGE
THOSE TO WHICH IT RELATES OR AN OFFER MANAGEMENT, INC.
TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS COMMON STOCK
NOT AUTHORIZED, OR TO ANY PERSON TO WHOM
+IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS ----------
BEEN NO CHANGE IN THE AFFAIRS OF THE PROSPECTUS
COMPANY SINCE THE DATE HEREOF OR THAT ----------
THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
----------------
SUMMARY TABLE OF CONTENTS
Page
Prospectus Summary . . . . . . . . . . . 6
Risk Factors . . . . . . . . . . . . . . 13
Use of Proceeds. . . . . . . . . . . . . 27
Distribution Policy. . . . . . . . . . . 28
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations. . . . . . . . . . . . . 29
Business . . . . . . . . . . . . . . . . 31
Description of Proposed Assets . . . . . 37
The Manager. . . . . . . . . . . . . . . 43
The Company. . . . . . . . . . . . . . . 48
Certain Relationships and Related Party
Transactions and Conflicts of Interest 52
Principal Stockholders . . . . . . . . . 54
Federal Income Tax Considerations. . . . 55
ERISA Considerations . . . . . . . . . . 64
Certain Provisions of Maryland Law and
the Company's Charter and Bylaws . . . 66
Description of Capital Stock . . . . . . 68
Selling Stockholders . . . . . . . . . . 72
Plan of Distribution . . . . . . . . . . 74
Private Placement. . . . . . . . . . . . 75
Legal Matters. . . . . . . . . . . . . . 75
Experts. . . . . . . . . . . . . . . . . 75
Glossary . . . . . . . . . . . . . . . . 76
Independent Auditors' Report . . . . . .F-1 , 1997
=========================================== ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses estimated to be incurred in connection with the issuance and
distribution of the securities being registered are as set forth below:
SEC registration fee $19,761.00
Legal fees and expenses $10,000.00
Accounting fees and expenses $10,000.00
Blue Sky qualification fees and
expenses (including counsel fees) $ 1,000.00
Miscellaneous $ 4,239.00
----------
Total $45,000.00
==========
ITEM 32. SALES TO SPECIAL PARTIES.
On September 15, 1997, the Registrant received commitments for the
purchase of 1,014,000 shares of Common Stock at the initial public offering
price from certain directors, officers, employees and Affiliates of the
Company and the Manager. These sales are contingent upon and will be
consummated concurrent with the closing of the Public Offering. The
foregoing shares were sold without registration under the Securities Act, in
reliance on the exemption provided by Section 4(2) thereof.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On September 15, 1997, the Registrant received commitments for the
purchase of 1,014,000 shares of Common Stock from certain directors,
officers, employees and Affiliates of the Company and the Manager. On
November 7, 1997, the Registrant received commitments from several mutual
funds under common management for the purchase of 3,333,333 shares of Common
Stock at the initial public offering price. These sales are contingent upon
and will be consummated concurrent with the closing of the Public Offering.
The foregoing shares were sold without registration under the Securities Act,
in reliance on the exemption provided by Section 4(2) thereof.
Item 34. Indemnification of Directors and Officers.
Section 2-418 of the Maryland General Corporation Law provides that a
Maryland corporation may indemnify any director (and any person who, while a
director of the corporation, is or was serving at the request of the corporation
as director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, or other enterprise or
employee benefit plan), is made a party to any proceeding by reason of service
in that capacity unless it is established that (i) the act or omission of the
director was material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty; or
(ii) the director actually received an improper personal benefit in money,
property or services; or, (iii) in the case of any criminal proceeding, the
director had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be against judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the director in connection with the
proceeding. If the proceeding was one by or in the right of the corporation,
indemnification may not be made in respect of any proceedings in
II-1
<PAGE>
which the director shall have been adjudged to be liable to the corporation.
Such indemnification may not be made unless authorized for a specific proceeding
after a determination has been made, in the manner prescribed by the law, that
indemnification is permissible in the circumstances because the director has met
the applicable standard of conduct. On the other hand, the director must be
indemnified for expenses if he has been successful in the defense of such
proceeding or as otherwise ordered by a court. The law also permits the
circumstances under which the corporation may advance expenses to, or obtain
insurance or similar protection for, directors.
The law also permits for comparable indemnification for corporate officers
and agents.
The Registrant's Charter provides that its directors and officers shall,
and its agents in the discretion of the Board of Directors may, be indemnified
to the fullest extent required or permitted from time to time by the laws of
Maryland.
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages except to the
extent that (i) it is proved that the person actually received an improper
benefit or profit in money, property or services for the amount of the benefit
or profit in money, property or services actually received, or (ii) a judgment
or other final adjudication is entered in a proceeding based on a finding that
the person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Charter contains a provision providing for
elimination of the liability of its directors and officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
from time to time.
Policies of insurance may be obtained and maintained by the Company under
which its directors and officers, will be insured, within the limits and subject
to the limitations of the policies, against certain expenses in connection with
the defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
Item 35. Treatment of Proceeds from Stock being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements:
(b) Exhibits:
Exhibit Number Exhibit
- -------------- -------
3.1 Charter of the Registrant (Incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-11 (File
No. 333-35673))
3.2 By-Laws of the Registrant (Incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-11 (File
No. 333-35673))
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-35673))
*5.1 Opinion of Miles & Stockbridge, a Professional Corporation
(including consent)
*23.1 Consent of Stroock & Stroock & Lavan LLP
*23.2 Consent of Independent Auditors
*23.3 Consent of Miles & Stockbridge, a Professional Corporation
(to be included in Exhibit 5.1)
*24.1 Power of Attorney (included in the signature page)
*99.1 Consent of William Marshall to be named as a proposed
Director
*99.2 Consent of Martin Bernstein to be named as a proposed
Director
*99.3 Consent of Frederick N. Khedouri to be named as a proposed
Director
- --------------------------
* Filed herewith.
II-2
<PAGE>
Item 37. Undertakings.
The Registrant hereby undertakes to provide to the Underwriters specified
in the Underwriting Agreement at the closing, certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of Prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of Prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (ii) for the purpose of determining liability under the
Securities Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement, relating to the securities
offered therein and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Short Hills, State of New Jersey on the 25th day of
November, 1997.
LASER MORTGAGE MANAGEMENT, INC.
By: /s/ MICHAEL L. SMIRLOCK
---------------------------
Michael L. Smirlock
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Michael L. Smirlock his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him or her and in his name, place and stead, in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ MICHAEL L. SMIRLOCK Chief Executive Officer, November 25, 1997
- -------------------------- Chairman of the Board
Michael L. Smirlock and Director (principal
executive officer)
/s/ DAVID A. TEPPER Director November 25, 1997
- --------------------------
David A. Tepper
/s/ THOMAS G. JONOVICH Chief Financial Officer November 25, 1997
- -------------------------- and Treasurer (principal
Thomas G. Jonovich financial and accounting
officer)
II-4
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
3.1 Charter of the Registrant (Incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-11 (File
No. 333-35673))
3.2 By-Laws of the Registrant (Incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-11 (File
No. 333-35673))
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-11
(File No. 333-35673))
*5.1 Opinion of Miles & Stockbridge, a Professional Corporation
(including consent)
*23.1 Consent of Stroock & Stroock & Lavan LLP
*23.2 Consent of Independent Auditors
*23.3 Consent of Miles & Stockbridge, a Professional Corporation
(to be included in Exhibit 5.1)
*24.1 Power of Attorney (included in the signature page)
*99.1 Consent of William Marshall to be named as a proposed
Director
*99.2 Consent of Martin Bernstein to be named as a proposed
Director
*99.3 Consent of Frederick N. Khedouri to be named as a proposed
Director
- --------------------------
* Filed herewith.
<PAGE>
Exhibit 5.1
[Letterhead of Miles & Stockbridge, a Professional Corporation]
November 21, 1997
LASER Mortgage Management, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933 (the
"Act") of 4,347,333 shares of common stock (the "Common Stock") of LASER
Mortgage Management, Inc., a Maryland corporation, on its Registration Statement
on Form S-11 (the "Registration Statement"), we have examined such corporate
records, certificates and documents as we deemed necessary for the purpose of
this opinion. Based on that examination, we advise you that in our opinion the
Common Stock to be offered by the Selling Stockholders (as that term is defined
in the Registration Statement), when sold under the circumstances contemplated
in the Registration Statement, will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving our consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission
thereunder. Additionally, we understand that Stroock & Stroock & Lavan LLP will
rely on our opinion in giving its opinion letter to you on the date hereof and
we consent to that reliance. The opinion expressed herein is limited to the
matters set forth in this letter and no other opinion should be inferred beyond
the matters expressly stated.
Very truly yours,
Miles & Stockbridge,
a Professional Corporation
By: /s/ J. W. Thompson Webb
-----------------------------
Principal
<PAGE>
Exhibit 23.1
CONSENT OF STROOCK & STROOCK & LAVAN LLP
We hereby consent to the use in the Registration Statement on Form S-11 of
LASER Mortgage Management, Inc. of the reference to us under the heading "Legal
Matters."
STROOCK & STROOCK & LAVAN LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Registration Statement No. ___________ of LASER
Mortgage Management, Inc. of our report dated September 26, 1997, except for
Note 5, dated November 7, 1997 and to the reference to us under the heading
"Experts" both of which are included in the Prospectus, which is also included
in such Registration Statement.
Deloitte & Touche LLP
New York, New York
November 24, 1997
<PAGE>
Exhibit 99.1
CONSENT OF WILLIAM MARSHALL
I hereby consent to the reference to me as a person who has been designated
to serve as a director of LASER Mortgage Management, Inc. under the heading "The
Company" in the Prospectus constituting a part of the Registration Statement on
Form S-11 with which this consent is filed.
/s/ William Marshall
---------------------------
Name: William Marshall
Date: November 21, 1997
<PAGE>
Exhibit 99.2
CONSENT OF MARTIN BERNSTEIN
---------------------------
I hereby consent to the reference to me as a person who has been designated
to serve as a director of LASER Mortgage Management, Inc. under the heading "The
Company" in the Prospectus constituting a part of the Registration Statement on
Form S-11 with which this consent is filed.
/s/ Martin Bernstein
----------------------------
Name: Martin Bernstein
Date: November 21, 1997
<PAGE>
Exhibit 99.3
CONSENT OF FREDERICK N. KHEDOURI
--------------------------------
I hereby consent to the reference to me as a person who has been designated
to serve as a director of LASER Mortgage Management, Inc. under the heading "The
Company" in the Prospectus constituting a part of the Registration Statement on
Form S-11 with which this consent is filed.
/s/ Frederick N. Khedouri
--------------------------------
Name: Frederick N. Khedouri
Date: November 21, 1997
