<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997
REGISTRATION NO. 333-
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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:
<TABLE>
<S> <C>
STUART H. COLEMAN, ESQ. MALCOLM P. WATTMAN, ESQ.
STROOCK & STROOCK & LAVAN LLP CADWALADER, WICKERSHAM & TAFT
180 MAIDEN LANE 100 MAIDEN LANE
NEW YORK, NEW YORK 10038-4982 NEW YORK, NEW YORK 10038
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 17,250,000 shares $15.00 $258,750,000 $78,410
</TABLE>
(1) Includes up to 2,250,000 shares of Common Stock which the Underwriters have
the option to purchase solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
------------------------
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.
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<PAGE>
LASER MORTGAGE MANAGEMENT, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OR REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS 1-30
<TABLE>
<CAPTION>
FORM S-11 CAPTION IN PROSPECTUS OR
ITEM NUMBER AND CAPTION PAGE REFERENCE
----------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... FOREPART OF REGISTRATION STATEMENT; OUTSIDE FRONT
COVER PAGE OF PROSPECTUS
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... INSIDE FRONT COVER PAGE OF PROSPECTUS; OUTSIDE BACK
COVER PAGE OF PROSPECTUS
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... PROSPECTUS SUMMARY; RISK FACTORS
4. Determination of Offering Price...................... OUTSIDE FRONT COVER PAGE OF PROSPECTUS; UNDERWRITING
5. Dilution............................................. *
6. Selling Security Holders............................. *
7. Plan of Distribution................................. OUTSIDE FRONT COVER PAGE OF PROSPECTUS; UNDERWRITING
8. Use of Proceeds...................................... PROSPECTUS SUMMARY; USE OF PROCEEDS
9. Selected Financial Data.............................. *
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
11. General Information as to Registrant................. PROSPECTUS SUMMARY; BUSINESS; THE MANAGER; THE
COMPANY
12. Policy with Respect to Certain Activities............ BUSINESS; THE MANAGER; DESCRIPTION OF CAPITAL STOCK;
ADDITIONAL INFORMATION
13. Investment Policies of Registrant.................... PROSPECTUS SUMMARY; BUSINESS; THE MANAGER; THE
COMPANY
14. Description of Real Estate........................... *
15. Operating Data....................................... *
16. Tax Treatment of Registrant and Its Security
Holders............................................ PROSPECTUS SUMMARY; RISK FACTORS; CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS; ERISA CONSIDERATIONS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-11 CAPTION IN PROSPECTUS OR
ITEM NUMBER AND CAPTION PAGE REFERENCE
----------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters...... RISK FACTORS; DIVIDEND AND DISTRIBUTION POLICY;
PRINCIPAL STOCKHOLDERS
18. Description of Registrant's Securities............... OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS
SUMMARY; DESCRIPTION OF CAPITAL STOCK; CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS; ERISA
CONSIDERATIONS
19. Legal Proceedings.................................... BUSINESS
20. Security Ownership of Certain Beneficial Owners and
Management......................................... OUTSIDE FRONT COVER PAGE OF PROSPECTUS; THE MANAGER;
THE COMPANY; PRINCIPAL STOCKHOLDERS
21. Directors and Executive Officers..................... THE MANAGER; THE COMPANY
22. Executive Compensation............................... THE MANAGER; THE COMPANY
23. Certain Relationships and Related Transactions....... RISK FACTORS; THE MANAGER
24. Selection, Management and Custody of Registrant's
Investments........................................ RISK FACTORS; BUSINESS; THE MANAGER
25. Policies with Respect to Certain Transactions........ RISK FACTORS; THE MANAGER
26. Limitations of Liability............................. THE MANAGER; THE COMPANY; DESCRIPTION OF CAPITAL
STOCK
27. Financial Statements and Information................. INDEX TO FINANCIAL STATEMENTS
28. Interests of Named Experts and Counsel............... LEGAL MATTERS; EXPERTS
29. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
30. Quantitative and Qualitative Disclosures About Market
Risk............................................... *
</TABLE>
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* Not Applicable
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997
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>
15,000,000 SHARES
LASER MORTGAGE MANAGEMENT, INC.
COMMON STOCK
LASER Mortgage Management, Inc. (the "Company") is a newly-organized
specialty finance company that will invest primarily in mortgage-backed
securities and mortgage loans. The Company will elect to be taxed as a real
estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as
amended. LASER Capital LLC, a Delaware limited liability company which has
applied to become a registered investment adviser, will manage the day-to-day
operations of the Company, subject to the supervision of the Company's Board of
Directors.
All of the 15,000,000 shares of common stock, $.001 par value (the "Common
Stock"), offered pursuant to this Prospectus are being offered by the Company
(the "Offering"). Prior to the Offering, there has been no market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be $ per share. Application will be made to
have the Common Stock approved for listing on the New York Stock Exchange (the
"NYSE") under the symbol LMM.
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK,
INCLUDING, AMONG OTHERS:
- The Company's investments and income will be sensitive to changes in
prevailing interest rates, reshaping of the yield curve and changes in
prepayment rates which may result in a mismatch between the Company's
borrowing rates and asset yields;
- The Company intends to use hedging strategies that involve risk and that
may not be successful in insulating the Company from exposure to changing
interest rates;
- The Company's operations are expected to be highly leveraged, which is
likely to increase the volatility of the Company's income and the value of
its net assets;
- The Company intends to invest a portion of its assets in mortgage loans
and subordinated mortgage-backed securities, which are sensitive to events
of loss, such as credit losses due to borrower defaults and hazard losses;
- The Company has no operating history;
- The Company will be taxed as a corporation if it fails to qualify, or
maintain its qualification, as a REIT;
- The Company will be dependent on certain key personnel and the Manager;
and
- The Manager will be subject to certain conflicts of interest in connection
with the management of the Company's assets.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE 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.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY (2)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total (3)....................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "UNDERWRITING."
(2) Before deducting expenses payable by the Company, estimated to be $ .
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 2,250,000 additional shares of Common Stock to cover over-allotments,
on the same terms and conditions as set forth above. If all such shares of
Common Stock are purchased, the total Price to Public, Underwriting Discount
and Commissions and Proceeds to Company, before expenses of the Offering,
will be $ , $ and $ , respectively. See
"UNDERWRITING."
--------------------------
The shares of Common Stock are being offered by the Underwriters, subject to
prior sale, when, as and if accepted by them and subject to certain conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer and
to reject any offer in whole or in part. It is expected that delivery of the
shares of Common Stock will be made in New York, New York on or about ,
1997.
--------------------------
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
GENERAL
LASER Mortgage Management, Inc. (the "Company") is a newly-organized
specialty finance company that will invest primarily in mortgage-backed
securities and mortgage loans. The mortgage-backed securities 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 ASSETS."
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 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 "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS." LASER Capital LLC (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 newly-organized and has applied to become a registered investment
adviser. See "APPENDIX A--Past Performance Results."
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 generate income for distribution to its
stockholders while preserving the Company's capital base. The Company intends
generally to hold its Mortgage Assets to maturity and, therefore, expects to
have a low turnover of the investments in its portfolio.
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
assembled for sale to investors by private 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
3
<PAGE>
amount not to exceed 10% of total 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 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 assets in High Quality Mortgage
Securities, High Quality Mortgage Loans and other High Quality investments. The
term "High Quality" means securities which are (i) rated within one of the two
highest ratings categories by one of the nationally recognized rating agencies
(the "Rating Agencies"), (ii) unrated but are guaranteed by the U.S. government
or an agency or instrumentality thereof or (iii) of equivalent credit quality as
determined by the Manager. When used with respect to Mortgage Loans, the term
"High Quality" means 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
primarily 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, are expected to consist
of non-High Quality fixed-income securities and Mortgage Loans that are
primarily Qualified Real Estate Assets. 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, these non-High Quality
securities.
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. In managing the
Company's portfolio, the Manager also will consider balance sheet management and
risk diversification issues.
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 Offering and, thereafter, primarily by borrowing against or
"leveraging" its existing portfolio and using the proceeds to acquire additional
Mortgage Assets. See "RISK FACTORS--Operating Risks--Risk of Substantial
Leverage and Potential Net Interest and Operating Losses." 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. The
Company will leverage its portfolio: (i) by entering into reverse repurchase
agreements (borrowings evidenced by an agreement to sell securities to a
third-party with a simultaneous agreement to repurchase them at a specified
future date and price, the price difference constituting the borrowing cost) and
dollar roll agreements (an agreement to sell a security for delivery on a
specified future date and a simultaneous agreement to repurchase the same or
substantially similar security on a specified future date); (ii) by engaging in
securitization transactions; (iii) by borrowing under loan agreements and lines
of credit, or other credit facilities with institutional lenders; or (iv) by
issuing unsecured debt. The Company also may acquire securities with imbedded
leverage characteristics, such as Mortgage Derivatives and Subordinate
Interests. The Company intends to structure its transactions, including any
issuance of debt obligations, to avoid the creation of "excess inclusion" income
and the attribution of any "unrelated business taxable income" ("UBTI"). See
"BUSINESS." 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.
4
<PAGE>
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, Mortgage Derivatives and other hedging instruments. See
"BUSINESS--Operating Policies and Strategies." No hedging strategy will insulate
the Company completely from interest rate risk, and the Company's ability to
enter into hedging transactions may be limited by Sections 856 through 860 of
the Code (the "REIT Provisions of the Code") and the transaction costs
associated with entering into such transactions.
The Company intends to manage the credit risk associated with its investment
portfolio by maintaining a substantial portion of its assets in High Quality
investments, investing in a diversified portfolio of non-High Quality
investments and regularly monitoring the credit risk associated with its
investment portfolio. See "BUSINESS--Investment Strategy."
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 which has applied to become a
registered investment adviser, 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."
PAST PERFORMANCE
Accounts managed by Mr. Smirlock and other investment professionals of the
Manager have successfully employed, since 1994, an investment strategy similar
to the strategy to be employed in managing the Company's investments. "APPENDIX
A--Past Performance Results" sets forth the composite performance record
achieved for other clients of the Manager whose accounts have employed a similar
strategy. This data is presented (i) without deduction of fees, (ii) net of
actual fees and (iii) as adjusted to give effect to the Company's fee structure.
Performance figures also are compared to a variety of fixed-income indices.
While past performance does not guarantee, and is not necessarily indicative of,
future results, potential investors should review this information carefully.
See "APPENDIX A--Past Performance Results."
5
<PAGE>
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 (i)
an annual base management fee based on Average Stockholders' Equity 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, 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 management
fee 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."
POTENTIAL CONFLICTS OF INTEREST OF THE MANAGER
The Company will be subject to various potential conflicts of interest
involving the Manager and its Affiliates 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; (ii)
other accounts managed by the Manager may purchase securities or other assets
from, or sell securities or other assets to, the Company; and (iii) 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 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 establish guidelines for, and
monitor, the Company's investments, borrowings and operations. See "RISK
FACTORS--General Risks--Potential Conflicts of Interest of the Manager."
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. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its annual taxable income. Although the Company does
not intend to request a ruling from the Internal Revenue Service (the "Service")
as to its REIT status, the Company will receive an opinion from Stroock &
Stroock & Lavan LLP, its Special Tax Counsel, that the Company qualifies as a
REIT, which opinion will be based on certain assumptions and representations
about the Company's ongoing business and investment activities and other
matters. No complete assurance can be given that the Company will be able to
comply with such assumptions and representations in the future. Furthermore,
such opinion is not binding on the Service or any court. Failure to qualify as a
REIT would render the Company subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions
6
<PAGE>
to the Company's stockholders would not be deductible. Even if the Company
qualifies as a REIT, the Company may be subject to certain federal, state and
local taxes on its income and property. The Company will adopt the calendar year
as its taxable year. In connection with the Company's election to be taxed as a
REIT, its Articles of Incorporation, as amended (the "Charter"), will impose
restrictions on the transfer of its Common Stock. See "RISK FACTORS--Legal, Tax
and Other Risks," "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the
Company" and "DESCRIPTION OF CAPITAL STOCK--Repurchase of Shares and
Restrictions on Transfer."
DIVIDEND AND 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 declare four regular
quarterly dividends. To the extent necessary to maintain its qualification as a
REIT in any particular year, the Company will declare a fifth, special dividend.
The Company has adopted a Dividend Reinvestment Plan that will allow
stockholders to reinvest their dividends automatically in additional shares of
Common Stock. See "DIVIDEND REINVESTMENT PLAN."
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's investments and income will be sensitive to changes in
prevailing interest rates, reshaping of the yield curve and changes in
prepayment rates which may result in a mismatch between the Company's
borrowing rates and asset yields;
- The Company intends to use hedging strategies that involve risk and that
may not be successful in insulating the Company from exposure to changing
interest rates;
- The Company's operations are expected to be highly leveraged, which is
likely to increase the volatility of the Company's income and the value of
its net assets;
- The Company intends to invest a portion of its assets in Mortgage Loans
and subordinated Mortgage Securities, which are sensitive to events of
loss, such as credit losses due to borrower defaults and hazard losses;
- The Company has no operating history;
- The Company will be taxed as a corporation if it fails to qualify, or
maintain its qualification, as a REIT;
- The Company will be dependent on certain key personnel and the Manager;
and
- The Manager will be subject to certain conflicts of interest in connection
with the management of the Company's assets.
7
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THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby (1).............. 15,000,000 shares
Common Stock to be Outstanding
after the Offering (1)(2).................. 16,019,068 shares
Use of Proceeds.............................. The Company intends to use the net proceeds
of the Offering principally to acquire
Mortgage Assets.
Proposed NYSE Symbol......................... LMM
</TABLE>
- ------------------------
(1) Assumes that the Underwriters' option to purchase up to an additional
2,250,000 shares to cover over-allotments is not exercised.
(2) Includes 1,014,068 shares subscribed for in the Private Placement, but
excludes 1,825,500 shares of Common Stock reserved for issuance under the
Company's Stock Incentive Plan. Options to acquire shares have been granted
to officers and directors of the Company. See "THE COMPANY--Stock Incentive
Plan" and "PRIVATE PLACEMENT."
8
<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.
OPERATING RISKS
GENERAL
The Company's results of operations are 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, which involve
various risks and uncertainties as explained below. 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, competition and other factors, 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 "--Risks Associated with Hedging
Transactions," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "BUSINESS--Operating Policies and Strategies."
RISKS OF SUBSTANTIAL LEVERAGE AND POTENTIAL 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. The
Company's Charter and Bylaws do not limit the amount of indebtedness the Company
may incur. See "BUSINESS--Operating Policies and Strategies--Capital and
Leverage Policies" and "-- 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.
9
<PAGE>
BORROWING RISKS. 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 market value of the Mortgage Assets pledged to secure specific
borrowings. Under adverse market conditions, the value of pledged Mortgage
Assets would decline, and the Company could be required to post additional
collateral or to reduce the amount borrowed. 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 "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Requirements for Qualification."
ECONOMIC CONDITIONS
RISK OF INTEREST RATE FLUCTUATIONS
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 "--Risks Associated with
Hedging Transactions."
INTEREST RATE MISMATCH BETWEEN ASSET YIELDS AND BORROWING RATES. 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 intends to
fund a substantial portion of its Mortgage Assets with borrowings having
interest rates that reset relatively rapidly, such as monthly or quarterly. The
Company anticipates that, in most cases, the revenue from its Mortgage Assets
will respond more slowly to interest rate fluctuations than the cost of its
borrowings, creating a potential mismatch between asset yields and borrowing
rates. Consequently, changes in interest rates, particularly short-term interest
rates, may significantly influence the Company's net income. Increases in these
rates may raise the borrowing costs of the Company more rapidly than any
increases in the interest income on its Mortgage Assets and, therefore, will
tend to decrease the Company's net income and the mark-to-market value of the
Company's net assets. Conversely, decreases in interest rates may decrease the
interest cost on the Company's borrowings more rapidly than the interest earned
on the Mortgage Assets and may tend to increase the Company's net income and the
mark-to-market value of the Company's net 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, asset yield and borrowing rate mismatches
could negatively impact the Company's net income, dividend yield and the market
price of the Common Stock. Interest rate fluctuations resulting in the interest
expense exceeding interest income would result in the Company incurring
operating losses.
YIELD CURVE RESHAPING. 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 and Mortgage Assets will likely bear
interest at medium-term to long-term rates, 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 yields of long-term assets and short-term
borrowing rates
10
<PAGE>
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.
Conversely, if short-term interest rates decrease relative to long-term
interest rates (a steepening of the yield curve), the borrowing costs of the
Company may decrease more rapidly than the interest earned on the assets and,
therefore, may tend to increase the Company's net income and mark-to-market
value of the Company's net assets. Additionally, to the extent the cash flows
from long-term assets that return scheduled and unscheduled principal are
reinvested in other long-term assets, the spread between the yields of long-term
assets and short-term borrowing rates may increase and also may tend to increase
the net income and mark-to-market value of the Company's net assets. No
assurance can be given on the amount or timing of changes in interest rates or
their effect on the Company's net assets, their valuation or income therefrom.
RISK OF CHANGING PREPAYMENT RATES. The value of Mortgage Assets may be
affected substantially by prepayment rates on the related Mortgage Loans.
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. Under certain interest rate and prepayment scenarios
the Company may fail to recoup fully its cost of acquisition of certain
investments.
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.
RISKS ASSOCIATED WITH 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, Mortgage Derivatives
(including IOs) and other hedging instruments. 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.
11
<PAGE>
Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs, during
such periods when interest rates are volatile or rising and hedging costs have
increased. 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 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 "CERTAIN 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. 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.
12
<PAGE>
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. The Company
will face competition for financing sources which may limit the availability of,
and affect the cost of funds to, the Company.
RISK OF LOSS ON MORTGAGE LOANS
The Company intends to acquire and accumulate Mortgage Loans as part of its
investment strategy until a quantity sufficient for securitization has been
acquired. 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. 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 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 ASSETS--Mortgage Loans" and "CERTAIN
LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS."
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.
CREDIT RISKS
The Company intends to invest primarily in High Quality Mortgage Securities
and High Quality Mortgage Loans, as well as Mortgage Loans and securities that
do not qualify as High Quality. 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.
GENERAL RISKS
NEWLY-ORGANIZED CORPORATION
The Company has no operating history and will commence operations only if it
receives the proceeds of the Offering and the Private Placement. The Company has
not yet purchased or entered into any commitments to purchase any Mortgage
Assets or other securities. The results of the Company's operations are
dependent 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. No assurance can be given that
the Company will be able successfully to operate its business as described in
this Prospectus.
13
<PAGE>
DEPENDENCE ON KEY PERSONNEL AND THE MANAGER
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 will depend on the services of the Manager and its officers, directors
and employees for the success of the Company. 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 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. See "THE
MANAGER."
POTENTIAL CONFLICTS OF INTEREST OF THE MANAGER
The Company will be subject to various potential conflicts of interest
involving the Manager and its Affiliates. 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. David A. Tepper, a director of the Company, is the
indirect owner of a majority of the capital stock of the Manager. Moreover,
several members of the Board of Directors of the Company and all of its officers
are also employed by the Manager or its Affiliates. See "THE MANAGER--Certain
Relationships and Related Party Transactions; 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
mortgage REIT 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 and have
committed 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
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, 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.
From time to time, one or more Affiliated Funds and the Manager's other
clients may sell securities or other assets to, or purchase securities or other
assets from, the Company. The Company's policy is that the approval of the Board
of Directors, including a majority of its Independent Directors (with any
interested director abstaining), is required for any Affiliate of the Company
(a) to have any direct or indirect pecuniary interest in any investment to be
acquired or disposed of by the Company or in any transaction to which the
Company is a party or has an interest or (b) to engage for his or her own
account in realizing upon a corporate opportunity learned of solely as a result
of his or her service to or representation of the Company.
14
<PAGE>
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.
LEGAL, TAX AND OTHER RISKS
FAILURE TO MAINTAIN REIT STATUS WOULD SUBJECT COMPANY TO ADDITIONAL 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, 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. 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 "CERTAIN 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.
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
15
<PAGE>
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."
CONSEQUENCES OF FAILURE TO MAINTAIN INVESTMENT COMPANY ACT EXEMPTION
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
Securities and Exchange Commission (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, the Company's status as a REIT would not be impaired, but a
portion or all of the taxable income (in excess of a specified return to
investors) generated by the Mortgage Assets constituting a taxable mortgage pool
may be characterized, under 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 "CERTAIN FEDERAL INCOME CONSIDERATIONS--Taxation of
Tax-Exempt Stockholders."
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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.
RISK OF PHANTOM INCOME
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 "CERTAIN 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
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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 "DESCRIPTION OF CAPITAL STOCK-- Repurchase of Shares and
Restriction on Transfer" and "CERTAIN 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. In connection with
any such waiver, the Company may require that the stockholder requesting such a
waiver enter into an agreement with the Company providing for the repurchase by
the Company of shares from the stockholder under certain circumstances to ensure
compliance with the REIT Provisions of the Code. Such repurchase would be at
fair market value as set forth in the agreement between the Company and such
stockholder. The consideration received by the stockholder in such repurchase
might be characterized as the receipt by the stockholder of a dividend from the
Company, and any stockholder entering into such an agreement with the Company
should consult its tax advisor in connection with its entering into such an
agreement. At present, the Company does not intend to waive the Ownership Limit
for any purchaser of shares of the Common Stock.
The provisions described above may inhibit market activity and 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 a "control share acquisition"
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.
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<PAGE>
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."
BOARD OF DIRECTORS MAY CHANGE CERTAIN POLICIES WITHOUT STOCKHOLDER CONSENT
The major policies of the Company, including its investment and operating
policies and other policies with respect to acquisitions, financing, growth,
operations, debt and distributions are 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 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.
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."
NO PRIOR TRADING MARKET
Prior to the Offering, there has been no public market for the Common Stock.
The Company has applied to list the Common Stock on the NYSE. However, there can
be no assurance that, if approved for listing, an active trading market will
develop or be sustained after the Offering or that if such a market develops,
the market price will not decline below the public offering price. The public
offering price of the Common Stock will be determined through negotiations
between the Company and the representatives of the Underwriters, and may not be
indicative of future market prices. See "UNDERWRITING."
COMMON STOCK PRICE VOLATILITY RISK
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
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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.
ILLIQUIDITY OF CERTAIN INVESTMENTS
A portion of the Company's portfolio may be invested in Mortgage Assets for
which the secondary trading market is not as well developed as the market for
certain other Mortgage Assets (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.
RISK OF POTENTIAL FUTURE OFFERINGS
The Company, in the future, may increase its capital resources by making
offerings of additional equity and debt securities, including classes and series
of preferred stock, additional classes and series of common stock, commercial
paper, medium-term notes and senior or subordinated notes. All debt securities
and classes of preferred stock will be senior to the Common Stock in a
liquidation of the Company. The effect of additional equity offerings (including
issuances under the DRP) may be to dilute the equity of stockholders of the
Company or to reduce the price of shares of the Common Stock, or both. The
Company is unable to estimate the amount, timing or nature of additional
offerings as they will depend upon market conditions and other factors.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Offering are estimated to be
$ , assuming an initial public offering price of $ per share (or
$ , if the Underwriters' over-allotment option is exercised in full). The
Company expects to receive an additional $ in net proceeds from the
Private Placement.
The Company intends to use the net proceeds of the Offering principally to
acquire Mortgage Assets. The proceeds received from the Private Placement also
will be used to acquire Mortgage Assets. The Company then intends to increase
its investment assets by borrowing against the Mortgage Assets and using the
proceeds to acquire additional Mortgage Assets and other portfolio securities.
The Company expects to require approximately two months to implement
substantially its investment strategy and to reach the desired leverage level.
Pending full investment in the desired mix of assets, the net proceeds of the
Offering will be invested in High Quality short-term investments that are
expected to provide a lower net return than the Company expects to achieve from
its investments in Mortgage Assets.
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CAPITALIZATION
The capitalization of the Company at September 15, 1997 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 15, 1997
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(1)(2)
--------- -----------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, par value $.01; authorized Preferred Stock--25,000,000 shares; none
outstanding....................................................................... $ -- $ --
Common Stock, par value $.001; authorized Common Stock--75,000,000 shares; 5,000
shares outstanding; 16,019,068 shares, as adjusted(3)............................. $ -- $ 16
Additional paid-in capital............................................................
--------- ------
Total............................................................................... $ -- $ 16
--------- ------
--------- ------
</TABLE>
- ------------------------
(1) Includes 1,014,068 shares of Common Stock subscribed for in the Private
Placement. See "PRIVATE PLACEMENT."
(2) After deducting offering and organizational expenses estimated to be
$ payable by the Company, and assuming no exercise of the
Underwriters' over-allotment option to purchase up to an additional
2,250,000 shares of Common Stock.
(3) Does not include 1,825,500 shares reserved for issuance upon the exercise of
options granted under the Company's Stock Incentive Plan. Options to acquire
shares have been granted to officers and directors of the Company and the
Manager. See "THE COMPANY--Stock Incentive Plan."
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<PAGE>
DIVIDEND AND DISTRIBUTION POLICY
The Company intends to distribute substantially all of its taxable income
(which generally does not 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 declare
dividends on the Common Stock quarterly. To the extent necessary to maintain its
qualification as a REIT, for any year the Company will declare a fifth special
dividend. The dividend 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 "CERTAIN
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 "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has no operating history and will commence operations only if it
receives the proceeds of the Offering. 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. See "APPENDIX A--Past Performance Results" concerning past
performance of the Manager's investment professionals.
The Company intends to generate net income for distribution to stockholders
from the spread between the interest income earned on its investment portfolio
and borrowing and hedging costs. 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 effectively while maintaining its status as a REIT. See "RISK
FACTORS--Operating Risks--Risks Associated with Hedging Transactions" and
"BUSINESS--Operating 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. See "RISK
FACTORS--Operating Risks--Risks of Substantial Leverage and Potential Net
Interest and Operating Losses." 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 Strategies--Capital and Leverage Policies."
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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 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 financings in amounts and at interest rates consistent with the Company's
financing objectives.
Management believes that the net proceeds of the Offering and the Private
Placement, 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 "USE OF PROCEEDS" and "BUSINESS--Operating Policies and
Strategies."
INFLATION
As virtually all of the Company's assets are financial in nature, interest
rates and other factors will be expected to have a much greater effect on the
Company's financial condition and results of operations than inflation. Changes
in interest rates do not necessarily correlate with inflation rates or changes
in inflation rates.
CERTAIN ACCOUNTING POLICIES AND PROCEDURES
MORTGAGE SECURITY ACCOUNTING TREATMENT
Because the Company's Mortgage Securities are classified for accounting
purposes as "available for sale," unrealized fluctuations in market values of
the Mortgage Securities do not change income calculated according to GAAP ("GAAP
income") or taxable income, but rather, are reflected on the balance sheet by
changing the carrying value of the Mortgage Security and reflecting the change
in stockholders' equity under "Net Unrealized Losses on Assets Available for
Sale." 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, likely resulting in
losses upon sale. See "RISK FACTORS--Operating Risks--Risk of Substantial
Leverage and Potential Net Interest and Operating Losses."
TAXABLE INCOME AND GAAP INCOME
Taxable income differs from GAAP income for certain reasons. Interest income
differs due to different methods of calculating the rate of amortization of the
premium or discount when Mortgage Assets 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
dividends are based on taxable income. The Company generally will not pay
federal taxes so long as it meets the requirements of the REIT Provisions of the
Code and distributes dividends to stockholders in an amount equal to its taxable
income. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Requirements for
Qualification."
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<PAGE>
BUSINESS
GENERAL
The Company is a newly-organized specialty finance company that will invest
primarily in Mortgage Securities and Mortgage Loans. The Mortgage Securities
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
ASSETS."
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 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 "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS." LASER Capital LLC, 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 newly organized and
has applied to become a registered investment adviser. See "APPENDIX A--Past
Performance Results."
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 generate income for distribution to its
stockholders while preserving the Company's capital base. The Company intends
generally to hold its Mortgage Assets to maturity and, therefore, expects to
have a low turnover of the investments in its portfolio.
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 10% of
total 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 assets in High Quality Mortgage
Securities, High Quality Mortgage Loans and other High Quality investments. The
Company intends to securitize substantially all the Mortgage Loans it acquires
primarily 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%, are expected to consist of non-High Quality
fixed-income securities and Mortgage Loans that are primarily Qualified Real
Estate Assets. 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, non-High Quality securities.
References to ratings of Mortgage Assets (whether assigned by a Rating
Agency or, if unrated, deemed by the Manager to be of comparable credit quality
to rated securities) 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.
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
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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. In managing the Company's portfolio, the Manager also will consider
balance sheet management and risk diversification issues.
Mortgage Assets generally will be held to maturity. In addition, the REIT
Provisions of the Code limit, in certain respects, the ability of the Company to
sell Mortgage Assets. See "CERTAIN 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 dividends equaling at least 95% of its
Taxable Income. See "CERTAIN 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
OPERATING POLICIES
The Board of Directors has established certain operating policies (the
"Guidelines") for the Company. Except as specifically prohibited by the
Company's Charter or Bylaws, the Board of Directors may, in its discretion,
revise the Company's operating policies and financing strategies, operating
policies, including the Guidelines, and financing 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 also has adopted 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.
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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 Offering and, thereafter, primarily by borrowing against or
"leveraging" its existing portfolio and using the proceeds to acquire additional
Mortgage Assets. See "RISK FACTORS--Operating Risks--Risk of Substantial
Leverage and Potential Net Interest and Operating Losses." 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.
The Company's Charter and Bylaws do not limit the amount of indebtedness the
Company can incur, and 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. See "RISK FACTORS--Operating Risks-- Economic Conditions--Risk of
Interest Rate Fluctuations" and "--Interest Rate Mismatch Between Asset Yields
and Borrowing 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. 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 "--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 "CERTAIN 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
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principal means of leveraging its Mortgage 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 its borrowings. 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.
SECURITIZATION
The Company intends to acquire and accumulate Mortgage Loans for
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. 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 also may employ, from time to time, other forms of
securitization under which a "sale" of an interest in the Mortgage Loans occurs,
and a resulting gain or loss is recorded on the Company's balance sheet for
accounting purposes at the time of sale. Under this form of securitization, only
the net retained interest in the securitized Mortgage Loans would remain on the
Company's balance sheet. The Company may elect to conduct certain of its
securitization activities, including such sales, through one or more taxable
subsidiaries or through "Qualified REIT Subsidiaries", as defined under the REIT
Provisions of the Code, formed for such purpose.
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.
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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"). Currently, the Company does
not engage in this business.
The Company intends to structure its securitizations so as to avoid the
attribution of any Excess Inclusion Income to the Company's stockholders. See
"CERTAIN 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, Mortgage Derivatives and
other hedging instruments. 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 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 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 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
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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 "CERTAIN 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.
EMPLOYEES
The Company initially expects to have five employees. The Manager will
employ the four executive officers of the Company and four additional employees.
Each of the investment professionals 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 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. See
"RISK FACTORS--Operating Risks--Economic Conditions."
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. See "CERTAIN
LEGAL ASPECTS OF MORTGAGE LOANS AND REAL PROPERTY INVESTMENTS."
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
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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 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.
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 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 Mortgage
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
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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
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"), LIBOR and other indices.
Interest rates paid on fully-indexed FHLMC ARM certificates equal the applicable
index rate plus a specified number of basis points ranging typically from 125 to
250 basis points. In addition, the majority of series of FHLMC ARM certificates
issued to date have evidenced pools of Mortgage Loans with monthly, semi-annual
or annual interest adjustments. Adjustments in the interest rates paid are
generally limited to an annual increase or decrease of either 100 or 200 basis
points and to a lifetime cap of 500 or 600 basis points over the initial
interest rate. Certain FHLMC programs include Mortgage Loans which allow the
borrower to convert the adjustable mortgage interest rate 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.
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 11(th) District Index,
LIBOR and other indices. 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.
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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 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 Mortgages 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 real estate mortgage investment conduits ("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
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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
disproportional 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
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
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<PAGE>
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 illiquidity. 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 ASSETS
The Company may invest in fixed-income securities that are not Mortgage
Assets, including securities issued by corporations or issued or guaranteed by
U.S. or sovereign foreign entities, loan participations, emerging market debt,
high yield debt and collateralized bond obligations, denominated in U.S.
dollars. A portion of these assets will be non-High Quality securities.
37
<PAGE>
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 is a Delaware limited
liability company, certain of whose members are directors or officers of the
Company. The Manager was organized in August 1997 and specializes in managing
investments in Mortgage Securities. The Manager has applied to become a
registered investment adviser under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). 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. See "APPENDIX A--Past
Performance Results" for information relating to the prior performance of the
Manager's investment professionals using an investment strategy similar to the
strategy to be employed by the Manager in managing the Company's investments.
The directors and executive officers of the Manager are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE MANAGER
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
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
Lawrence P. O'Friel.................................. 31 Director
</TABLE>
- ------------------------
* 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, President, Chief Executive
Officer and a Director of the Company. Mr. Smirlock currently directs the
investment of over $300 million in capital invested primarily in $3.9 billion of
Mortgage Securities for institutions and other sophisticated investors. Prior to
forming the Manager, 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. See "APPENDIX A--Past Performance
Results." From 1990 through 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. Mr. Jonovich is also the Chief Financial Officer and Treasurer 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 April 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 May 1996 and at Gershon, Pierce and
Company, a public accounting firm, from November 1991 to September 1993. Mr.
Jonovich is a certified public accountant.
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. Zimmerman was employed by Appaloosa,
since October 1994, where he assisted Mr. Smirlock in the management of
investments, primarily in Mortgage Securities. Before joining Appaloosa,
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<PAGE>
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 and Secretary 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.
LAWRENCE P. O'FRIEL has been a Director of the Manager since its inception.
Since October 1993, Mr. O'Friel has been employed by Appaloosa, where he is a
principal and is the chief accounting officer. Mr. O'Friel had previously been
associated with Tiger Management, a private investment adviser, from December
1991 to September 1993 and Ernst & Young LLP from September 1989 to December
1991.
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, the Commission issued an order (the "Order")
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 GSAM. The Commission found
that Mr. Smirlock violated 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 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 (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 issuance 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 issuance of the
Order, without admitting or denying the findings set forth therein.
The address of the Manager is 51 John F. Kennedy Parkway, Short Hills, New
Jersey 07078.
A majority of the equity of the Manager is owned by Appaloosa Partners Inc.
David A. Tepper, a director of the Company, indirectly owns all of the equity of
Appaloosa Partners Inc. The remaining equity of the Manager is owned by Mr.
Smirlock.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager for an
initial term expiring on December 31, 2002. Thereafter, successive renewals,
each for a period of three years, may be made by agreement between the Company
and the Manager, subject to the affirmative vote of a majority of the
Independent Directors. Either the Company or the Manager may terminate, or
decline to extend the term of, the Management Agreement without cause at any
time upon 60 days' written notice to the other party. The Company may do so by a
majority vote of the Independent Directors or by a vote of the holders of a
majority of the outstanding shares of Common Stock. In addition, the Company has
the right to terminate the Management Agreement upon the occurrence of certain
specified events, including a material breach by the Manager of any provision
contained in the Management Agreement. The Manager has agreed that, during the
term of the Management Agreement, it shall not manage another mortgage REIT
without the prior approval of the Independent Directors. In connection with such
forbearance on the Manager's part, the Company has agreed that, during the term
of the Management Agreement, if the
39
<PAGE>
Management Agreement is terminated by the Company without cause, the Manager
will be entitled to receive an amount equal to the aggregate management fees
(including the incentive fee) paid or payable in respect of the prior three
years, or, if such termination occurs within the first three years after the
closing of the Offering, an amount equal to three times the average annual
management fee paid or payable in respect of such period. See "SHARES ELIGIBLE
FOR FUTURE SALE."
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 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 and preparation of the Guidelines 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;
(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 and with the Guidelines;
(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;
40
<PAGE>
(xiv) upon request by, and in accordance with the directions of, the
Board of Directors, investing or reinvesting any monies of the Company;
(xv) qualifying and causing the Company to qualify to do business in all
applicable jurisdictions;
(xvi) causing the Company to retain qualified accountants and tax experts
for at least a two-year period to assist in developing appropriate
accounting procedures and testing systems and to conduct quarterly
compliance reviews; and
(xvii) monitoring the servicing of the Company's Mortgage Loans, including
negotiating servicing agreements, collecting information and submitting
reports pertaining to the Mortgage Loans and to monies remitted to the
Manager or the Company.
MANAGEMENT FEES
The Manager will receive 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, calculated and paid quarterly, in arrears, based
upon Average Stockholders' Equity for such quarter. 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 hereby.
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 fees and before deduction of dividends
paid. The incentive fee payments to the Manager will be made 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, 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, losses or the failure to achieve income over
the Ten-Year U.S. Treasury Rate plus 1% in one quarter will not offset gains 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. 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.
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<PAGE>
The management fees are payable in arrears. The Manager's base and incentive
fee and expenses will be calculated by the Manager within 45 days after the end
of each quarter, and such calculation 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.
STOCK OPTIONS AND OTHER AWARDS
The Company has adopted the Stock Incentive Plan and options may be granted
to the directors, officers and employees of the Company and the Manager under
the Stock Incentive Plan. Options to acquire shares of Common Stock have
been granted to directors, officers and employees of the Manager. 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.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS; CONFLICTS OF INTEREST
The Company will be subject to various potential conflicts of interest
involving the Manager and its Affiliates. 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. David A. Tepper, a director of the Company, is the
indirect owner of a majority 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
mortgage REIT 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 have committed 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
42
<PAGE>
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.
From time to time, one or more Affiliated Funds and the Manager's other
clients may sell securities or other assets to, or purchase securities or other
assets from, the Company. The Company's policy is that the approval of the Board
of Directors, including a majority of its Independent Directors (with any
interested director abstaining), is required for any Affiliate of the Company
(a) to have any direct or indirect pecuniary interest in any investment to be
acquired or disposed of by the Company or in any transaction to which the
Company is a party or has an interest or (b) to engage for his or her own
account in realizing upon a corporate opportunity learned of solely as a result
of his or her service to or representation of the Company.
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 "Management Fees."
The relationships between the Company, on the one hand, and the Manager and
its Affiliates, on the other, will be governed by the Guidelines, which will be
approved by a majority of the Independent Directors. The Guidelines establish
certain parameters for the operations of the Company, including quantitative and
qualitative limitations on the assets the Company may acquire. The Guidelines
are designed to assist and instruct the Manager and to establish restrictions
applicable to transactions with Affiliates of the Manager. Transactions with
Affiliates of the Manager that fall within the provisions of the Guidelines need
not be specifically approved by a majority of the Independent Directors. The
Independent Directors, however, will review the Company's transactions on a
quarterly basis to ensure compliance with the Guidelines. In conducting this
review, the Independent Directors will rely primarily on information provided to
them by the Manager.
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Guidelines,
then the Independent Directors will consider what corrective action, if any,
should be taken. If the transaction is one with the Manager or an Affiliate of
the Manager, then the Manager may be required to repurchase the asset at the
purchase price to the Company. Moreover, if transactions are consummated that
deviate from the Guidelines, then the Independent Directors will have the
option, under the terms of the Management Agreement, to terminate the Management
Agreement for cause.
The Manager, its Affiliates and the Affiliated Funds have committed to
purchase an aggregate of 1,014,068 shares of Common Stock as part of the Private
Placement. See "PRIVATE PLACEMENT." This purchase will result in ownership by
all such persons of approximately 6.3% of the total shares outstanding after the
Offering, exclusive of the Underwriters' over-allotment option. 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 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 the Affiliated Funds 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. See
"UNDERWRITING" and "SHARES ELIGIBLE FOR FUTURE SALE."
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.
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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:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
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
William Marshall, Ph.D............................... 51 Director(1)
David A. Tepper...................................... 40 Director
</TABLE>
- ------------------------
(1) To become a Director upon and subject to the closing of the Offering.
For biographical information regarding the business background and
experience of the Company's directors and officers other than Messrs. Tepper and
Marshall, see "THE MANAGER".
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.
DAVID A. TEPPER is the chief principal and founder of Appaloosa which
specializes in investments in high yield securities and Mortgage Securities.
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 the indirect majority
owner of the Manager.
The Company's Board of Directors will, upon closing of the 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-- , Class II-- Messrs. Tepper and , 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) 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) declare a
dividend or authorize the issuance of stock or (vii) agree to an amendment,
modification, renewal or termination of the Management Agreement. 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
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<PAGE>
Officer and other senior officers and for administering the Stock Incentive
Plan. See "--Stock Incentive Plan." 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 $20,000 per
annum and a fee of $500 for each meeting of the Board of Directors that he
attends. The Company will initially grant 300 options to each non-employee
director, one-third of which will vest immediately, with an additional one-third
vesting each year thereafter. 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 Company may from time to time, in the discretion of the
Board of Directors, grant options to purchase shares of the Company's Common
Stock to the executive officers and directors 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 September 1997. The Stock Incentive Plan will be administered by the
Compensation Committee. All employees and directors of, and consultants to, the
Company, as may be determined from time to time by the Compensation Committee,
as well as all employees and directors of the Manager, 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 conjunction with the grant of stock options or
independent of such grant, or stock appreciation rights that are only
exercisable in the event of a Change 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 SIP Participants subject to restrictions on
transferability and other restrictions, which lapse over time; (iv) deferred
stock, in which delivery of Common Stock occurs upon expiration of a deferral
period; (v) bonus stock, consisting of a right to receive Common Stock in an
amount determined with reference to a fixed bonus amount; (vi) dividend
equivalents, consisting of a right to receive cash, other awards or other
periodic payments; or (vii) other awards not otherwise provided for, the value
of which are based in whole or in part upon the value of the Common Stock. The
Company currently does not intend to award any dividend equivalents and will not
do so without the vote of the Compensation Committee.
A total of 1,825,500 shares of Common Stock were authorized for issuance
under the Stock Incentive Plan. Not more than shares of Common Stock may
be the subject of options granted to any individual during the duration of the
Stock Incentive Plan. Prior to the Offering, the Company will grant options to
purchase an aggregate of shares of its Common Stock to certain SIP
Participants.
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 non-qualified stock options.
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
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must be at least equal to the fair market value of the Common Stock at the date
of grant. Stock options become immediately vested and exercisable in full upon
the occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration. The Company shall obtain such
consideration for granting options under the Stock Incentive Plan as the
Compensation Committee in its discretion may request. Each option may be subject
to provisions to assure that any exercise or disposition of Common Stock will
not violate federal and state securities laws.
Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
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.
No option 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.
Stock options terminate at the end of the 30th business day following the
SIP Participant 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 options granted under the Stock Incentive Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option 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
option 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.
OPTION GRANTS
In connection with the Offering, options to acquire shares of Common
Stock will be granted under the Stock Incentive Plan.
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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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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 of Common Stock for which commitments to
purchase have been received in connection with the Private Placement, 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. 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.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE
OFFERING(2) OFFERING
------------------------ ------------------------
<S> <C> <C> <C> <C>
NUMBER NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OF SHARES PERCENT OF SHARES PERCENT
- ------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Michael L. Smirlock, Ph.D................................................ 5,000 100% 72,000 *
Thomas G. Jonovich....................................................... -- -- 1,000 *
Peter T. Zimmermann...................................................... -- -- 25,000 *
Robert J. Gartner........................................................ -- -- 10,000 *
William Marshall, Ph.D................................................... -- -- * *
David A. Tepper.......................................................... -- -- 833,000(3) 5.2%
All directors and executive officers as a group (5 persons).............. 5,000 100% 941,000 5.9%
</TABLE>
- ------------------------
* 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. 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 any shares for which commitments have been received from
the directors and officers in the Private Placement. See "PRIVATE
PLACEMENT."
(3) This number includes 730,000 shares of Common Stock beneficially held by the
Affiliated Funds over which Mr. Tepper exercises dispositive control.
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DIVIDEND REINVESTMENT PLAN
The Company has adopted a Dividend Reinvestment Plan (the "DRP") to provide
stockholders with a convenient method to automatically reinvest their cash
dividends in, and, subject to the Board of Director's determination, make
periodic cash subscriptions for, shares of the Company's Common Stock. The DRP
is being administered by (the "Plan
Administrator"). The Plan Administrator keeps records, sends statements of
account to each stockholder who participates in the DRP (the "DRP Participant"),
provides safekeeping for the shares, and performs other duties related to the
DRP. The Plan Administrator also acts as the dividend disbursing agent, transfer
agent and registrar for the Capital Stock of the Company.
All of the Company's stockholders owning at least 100 shares or a minimum
optional subscription of $250, are eligible to participate in the DRP.
Stockholders whose shares are registered in their own names may participate
directly in the DRP. Stockholders who beneficially own shares that are
registered in a name other than their own (I.E., in the name of a broker, bank
or other nominee) must either make arrangements with their broker, bank or other
nominee to participate in the DRP on their behalf or become the registered owner
of the stock by having such shares transferred into their names. If shares are
owned in the stockholder's own name, the stockholder may elect to participate in
the DRP by requesting from the Company a Prospectus for the DRP and by
completing and sending an authorization form to the Plan Administrator. If the
stockholder beneficially owns shares registered in the name of a broker, bank or
other nominee, the stockholder must contact such broker, bank or other nominee
and ask them to participate in the DRP on the stockholder's behalf.
The authorization form provides for the purchase of shares of the Company's
Common Stock through the following investment options: (i) Full Dividend
Reinvestment--the Plan Administrator will apply cash dividends paid on all the
shares of Common Stock registered in the record owner's name(s) toward the
purchase of shares of the Company's Common Stock; (ii) Partial Dividend
Reinvestment--the Plan Administrator will apply cash dividends paid on only the
number of participating shares specified on the Authorization Form toward the
purchase of shares of the Company's Common Stock; or (iii) optional cash
subscriptions. Shares purchased by the DRP will be automatically enrolled in the
DRP so that the dividends paid on such shares will also be reinvested in
additional shares of the Company's Common Stock.
Stockholders will not be automatically enrolled in the DRP. Each stockholder
desiring to participate in the DRP must complete and deliver to the Agent an
enrollment form, which will be sent to each eligible stockholder following the
effectiveness of the registration of the shares to be issued under the DRP.
Participation in the DRP will commence with all dividends and distributions
payable after receipt of a DRP Participant's authorization form; provided that
the authorization form must be received by the Plan Administrator at least two
business days prior to the record date for any dividends in order for any
stockholder to be eligible for reinvestment of such dividends. A DRP Participant
may terminate participation in the DRP at any time upon delivery of a written
notice to that effect to the Plan Administrator; provided that the termination
notice must be received by the Plan Administrator at least two business days
prior to the record date for any dividends in order for the termination to be
effective with respect to such dividends. Upon termination, the Plan
Administrator will send to the DRP Participant certificates evidencing the whole
shares in the DRP Participant's account and a check for any fractional shares
based on the current market price of the Common Stock on the date of
termination.
The Company will pay to the Plan Administrator all dividends payable with
respect to shares of Common Stock owned by DRP Participants, including shares
and fractional shares previously acquired under the DRP. The Plan Administrator
will apply such funds towards the purchase of the Company's Common Stock for the
DRP Participant's account either directly from the Company or on the open
market, as instructed by the Company. The price of the shares purchased by the
Plan Administrator directly from the Company will be the then-current Average
Market Price or at a discount thereto at the
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discretion of the Company. The "Average Market Price" is the average of the
daily high and low sales prices, computed to seven decimal places, of the
Company's Common Stock on the NYSE 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). In the case of
purchases on the open market, the price will be the weighted average purchase
price of the Company's Common Stock purchased for the DRP in respect of the
related investment date.
Generally, the Company pays all costs relating to the administration and
maintenance of the DRP. There will be no brokerage commission on shares
purchased directly from the Company. With respect to purchases on the open
market, the Plan Administrator shall pay brokerage commissions, administration
costs and other charges in an amount determined by the prevailing rates at the
time of purchase. Such commissions, administration costs and charges will be
reimbursed by the Company, but in no event shall the Company pay commissions,
administration costs or other charges which, when combined with any discount,
exceed 5% of the fair market value of the stock at the time of purchase. A DRP
Participant pays a $5.00 fee and brokerage commissions in the event the DRP
Participant asks the Plan Administrator to sell all of the DRP Participant's
shares, or a $15.00 fee and brokerage commissions for each partial sale.
As soon as practical after the purchase of the shares has been completed,
the Plan Administrator will send each DRP Participant a statement of account
confirming the transaction and itemizing the previous reinvestment activity for
the calendar year. DRP Participants will receive tax information annually for
their personal records and to assist in the preparation of their federal income
tax returns. DRP Participants will generally be treated as having received a
dividend distribution equal to the fair market value of the DRP shares that are
purchased with the DRP Participant's reinvested dividends generally on the date
that the Company credits such shares to the DRP Participant's account, plus the
brokerage commissions, if any, allocable to the purchase of such shares, and DRP
Participants will have a tax basis in the shares equal to such value. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
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CERTAIN 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 with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD 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 will meet
the requirements for qualification as a REIT under the Code commencing with the
Company's taxable year ending December 31, 1997, and the Company's contemplated
method of operation described in this Prospectus and as represented by the
Company will enable it to continue to satisfy the requirements for such
qualification. This opinion is based on various assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to certain factual matters. The continued
qualification and taxation of the Company as a REIT will depend upon the
Company's ability to meet, on a continuing basis, distribution levels and
diversity of stock ownership, and the various qualification tests imposed by the
Code as discussed below.
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
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<PAGE>
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.
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:
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 then 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
Offering. In addition, the Charter provide 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), 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 (the "75% Asset Test"). For purposes of the 75%
Asset Test, the term "Interest in Real Property" includes an interest in
Mortgage Loans or land and improvements thereon, such as buildings or other
inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property,
and an option to acquire real property (or a leasehold of real property);
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. Mortgage Loans also will be treated as qualifying assets for purposes of
the 75% Asset Test to the extent that the principal balance of each Mortgage
Loan does not exceed the value of the associated real property. 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
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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 and the Company's proportionate share of those assets includes assets
that are 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
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 REIT real estate assets or
"qualified temporary investment income," (I.E., income derived from "new
capital" within one year of the receipt of such capital) (the "75% Gross
Income Test"); and
(b) at least 95% of the Company's gross income must be derived from
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
REIT 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 will include
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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.
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.
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 entirely clear how the
income from those transactions will be treated for purposes of the Gross Income
Tests. It also is not clear how income or gain from dollar roll transactions
will be treated for purposes of 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 dollar roll transactions may be conducted through a taxable
subsidiary 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
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.
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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.
Further, if the Company were to sell Mortgage Securities that it created
through securitization of Mortgage Loans or to sell 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 of such Mortgage Securities or other assets, if this intention changes in
the future, any such regular sales would only 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.
If the Company fails to qualify as a REIT in any taxable year and certain
relief provisions of the Code do not apply, the Company would be subject to
Federal income tax (including any applicable alternative minimum tax) on its
taxable income at the regular corporate income tax rates. Distributions to
stockholders in any year in which the Company fails to qualify as a REIT would
not be deductible by the Company, nor would they generally be required to be
made under the Code. Further, unless entitled to relief under certain other
provisions of the Code, the Company 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.
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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 credits 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 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.
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. Potential investors, and in particular Tax
Exempt Entities, are urged to consult with their tax advisors concerning this
issue.
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
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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. 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.
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
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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 issued proposed regulations in April 1996 regarding the backup
withholding rules as applied to Non-U.S. stockholders (as defined below). The
proposed regulations would alter the current system of backup withholding
compliance and are proposed to be effective for distributions made after
December 31, 1997. See "--Taxation of Non-U.S. Stockholders."
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 owns more than 10% of the Company's stock is
required 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) 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
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complex and no attempt will be made herein to provide more than a summary of
such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD 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 the 30% branch profits tax in the case
of a Non-U.S. stockholder that is a non-U.S. corporation). The Company expects
to withhold U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. 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 issued proposed regulations in April 1996 that would
modify the manner in which the Company complies with the withholding
requirements.
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.
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.
See "RISK FACTORS--Legal, Tax and Other Risks--Taxable Mortgage Pool Risk;
Increased Taxation to Tax Exempt Entities and Other Investors."
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
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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 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 Offering, the Common Stock will be
"widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with the Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. 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"
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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 SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH
PLAN OR IRA.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
There are a number of legal considerations involved in the acquisition of
Mortgage Loans or the foreclosure and sale of defaulted Mortgage Loans (whether
individually or as part of a series of Mortgage Securities). The following
discussion provides general summaries of certain legal aspects of Mortgage Loans
and real property. Because such legal aspects are governed by applicable state
law (which laws vary from state to state), the summaries do not purport to be
complete, to reflect the laws of any particular state, or to encompass the laws
of all states. Accordingly, the summaries are qualified in their entirety by
reference to the applicable laws of the states where the property is located.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related mortgaged property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee, to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. The grantor (the borrower) conveys title to the real property to
the grantee (the lender), generally with a power of sale, until such time as the
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
and, in some deed of trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that would
be needed to service the debt if the leases on the property are at below-market
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rents, the market rents have fallen since the original financing, vacancies have
increased, or as a result of excessive or increased maintenance, repair or other
obligations to which a lender succeeds as landlord.
SECONDARY FINANCING: DUE-ON-ENCUMBRANCE PROVISIONS
Some Mortgage Loans may have no restrictions on secondary financing, thereby
permitting the borrower to use the mortgaged property as security for one or
more additional loans. Some Mortgage Loans may preclude secondary financing
(often by permitting the first lender to accelerate the maturity of its loan if
the borrower further encumbers the mortgaged property) or may require the
consent of the senior lender to any junior or substitute financing, however,
such provisions may be unenforceable in certain jurisdictions under certain
circumstances.
Where the borrower encumbers the mortgaged property with one or more junior
items, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. Third, if
the borrower defaults on the senior loan and/or any junior loan or loans, the
existence of junior loans and actions taken by junior lenders can impair the
security available to the senior lender and can interfere with, delay and in
certain circumstances even prevent the taking of action by the senior lender.
Fourth, the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceeding by the senior lender.
DUE-ON-SALE PROVISIONS
The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, the enforceability has been
limited or denied. The Garn-St. Germain Depository Institutions Act of 1982 (the
"Garn-St. Germain Act") preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits leaders to
enforce those clauses in accordance with their terms, subject to certain
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of such clauses with respect to certain Mortgage Loans. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rates.
Under federal bankruptcy law, due-on-sale clauses may not be enforceable in
bankruptcy proceedings and, under certain circumstances, may be eliminated in
any modified mortgage resulting from such bankruptcy proceeding.
CONDEMNATION AND INSURANCE
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or if the property
is taken by condemnation, the mortgagee or beneficiary under the senior mortgage
or deed of trust will have the prior right to collect any insurance proceeds
payable under a hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the indebtedness secured by the
senior mortgage or deed of trust. Proceeds in excess of the amount of senior
mortgage indebtedness will, in most cases, be applied to the indebtedness of a
junior mortgage or trust deed to the extent the junior mortgage or deed of trust
so provides. The laws of certain states may limit the ability of mortgagees or
beneficiaries to apply the proceeds of hazard insurance and partial condemnation
awards to the secured indebtedness. In such states, the mortgagor or trustor
must be allowed to use the proceeds of hazard insurance to repair the damage
unless the security of the mortgagee
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or beneficiary has been impaired. Similarly, in certain states, the mortgagee or
beneficiary is entitled to the award for a partial condemnation of the real
property security only to the extent that its security is impaired.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the lender to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at a public auction to satisfy the
indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, such as
strict foreclosure, but they are either infrequently used or available only in
limited circumstances.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having a subordinate interest of
record in the real property and all parties in possession of the property, under
leases or otherwise, whose interests are subordinate to the mortgage. A
foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
requires several years to complete. When the lender's right to foreclose is
contested, the legal proceedings can be time-consuming. Upon successful
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other officer to conduct a
public sale of the mortgaged property, the proceeds of which are used to satisfy
the judgment. Such sales are made in accordance with procedures that vary from
state to state.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to a power of sale typically granted in the deed of
trust. A power of sale also may be contained in any other type of mortgage
instrument if applicable law so permits. A power of sale under a deed of trust
allows a non-judicial public sale to be conducted generally following a request
from the beneficiary/lender to the trustee to sell the property upon default by
the borrower and after notice of sale is given in accordance with the terms of
the mortgage and applicable state law. The borrower or junior lienholder may
then have the right, during a reinstatement period required in some states, to
cure the default by paying the entire actual amount in arrears (without regard
to the acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior lienholder
is not provided a period to reinstate the loan, but has only the right to pay
off the entire debt to prevent the foreclosure sale. Generally, state law
governs the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
U.S. courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles
generally are designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative actions to determine the cause of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or
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recast payment schedules in order to accommodate borrowers who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose in the case of a non-monetary default, such as
a failure to adequately maintain the mortgaged property or an impermissible
further encumbrance of the mortgaged property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
property may be significant and may be greater than the income derived from that
property, especially for commercial and multifamily property. The costs of
management and operation of those mortgaged properties which are hotels, motels,
restaurants, nursing homes, convalescent homes or hospitals may be particularly
significant because of the expertise, knowledge and with respect to nursing or
convalescent homes, regulatory compliance, required to run such operations and
the effect which foreclosure and a change in ownership may have with respect to
consent requirements and on the public's and the industry's (including
franchisers) perception of the quality of such operations. The lender also
commonly will obtain the services of a real estate broker and pay the broker's
commission in connection with the sale or lease of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged property
is sold at foreclosure, or resold after it is acquired through foreclosure, for
an amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property does
so subject to senior mortgages and any other prior liens, and may be obliged to
keep senior Mortgage Loans current in order to avoid foreclosure of its interest
in the property. In addition, if the foreclosure of a junior mortgage triggers
the enforcement of a "due-on-sale" clause contained in a senior mortgage, the
junior mortgagee could be required to pay the full amount of the senior mortgage
indebtedness or face foreclosure.
POST-SALE REDEMPTION
In a majority of states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory period in which to redeem the property. In some states, statutory
redemption may occur only upon payment of the foreclosure sale price. In other
states, redemption may be permitted if the former borrower pays only a portion
of the sums due. In some states, the borrower retains possession of the property
during the statutory redemption period. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property because the exercise of a right of redemption would defeat the title of
any purchaser through a foreclosure. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states, a
post-sale statutory right of redemption may exist following a judicial
foreclosure, but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION
Any commercial or multi-family residential Mortgage Loans acquired by the
Company are likely to be nonrecourse loans, as to which recourse in the case of
default will be limited to the property and such other assets, if any, that were
pledged to secure the Mortgage Loan. However, even if a Mortgage Loan by its
terms provides for recourse to the borrower's other assets, a lender's ability
to realize upon those assets may be limited by state law. For example, in some
states a lender cannot obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust or by non-judicial means.
Other statutes may require the lender to exhaust the security afforded under a
mortgage before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of those states, the lender, following judgment on such personal action,
may be deemed to have elected a
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remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy provision
exists may choose to proceed first against the security. Finally, other
statutory provisions, designed to protect borrowers from exposure to large
deficiency judgments that might result from bidding at below-market values at
the foreclosure sale, limit any deficiency judgment to the excess of the
outstanding debt over the fair market value of the property at the time of the
sale.
COOPERATIVES
Mortgage Loans may be secured by a security interest on the borrower's
ownership interest in shares, and the proprietary leases appurtenant thereto (or
cooperative contract rights), allocable to cooperative dwelling units that may
be vacant or occupied by non-owner tenants. Such loans are subject to certain
risks not associated with Mortgage Loans secured by a lien on the fee estate of
a borrower in real property. Such a loan typically is subordinate to the
mortgage, if any, on the cooperative's building which, if foreclosed, could
extinguish the equity in the building and the proprietary leases of the dwelling
units derived from ownership of the shares of the cooperative. Further, transfer
of shares in a cooperative are subject to various regulations as well as to
restrictions (including transfer restrictions) under the governing documents of
the cooperative, and the shares may be canceled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the cooperative
provides, among other things, the lender with an opportunity to cure a default
under a proprietary lease but such recognition agreements may not have been
obtained in the case of all the Mortgage Loans secured by cooperative shares (or
contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the Uniform Commercial Code (the "UCC") and the security agreement relating
to the shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner, which may be dependent upon, among other
things, the notice given to the debtor and the method, manner, time, place and
terms of the sale. Article 9 of the UCC provides that the proceeds of the sale
will be applied first to pay the costs and expenses of the sale and then to
satisfy the indebtedness secured by the lender's security interest. A
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien. Under
the Bankruptcy Code, provided certain substantive and procedural safeguards
protective of the lender are met, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
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Federal bankruptcy law also may have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under Section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. In addition, the
Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment to
the lender. In certain circumstances, a debtor in bankruptcy may have the power
to grant liens senior to the lien of a mortgage, and analogous state statutes
and general principles of equity may also provide a mortgagor with means to halt
a foreclosure proceeding or sale and to force a restructuring of a mortgage loan
on terms a lender would not otherwise accept.
Moreover, the laws of certain states also give priority to certain tax liens
over the lien of a mortgage or deed of trust. Under the Bankruptcy Code, if the
court finds that actions of the mortgagee have been unreasonable, the lien of
the related mortgage may be subordinated to the claims of unsecured creditors.
The Company's acquisition of real property, particularly real estate owned
("REO") property, may be affected by many of the considerations applicable to
mortgage loan lending. For example, the Company's acquisition of certain
property at foreclosure sales could be affected by a borrower's post-sale right
of redemption. In addition, the Company's ability to derive income from real
property will generally be dependent on its receipt of rent payments under
leases of the related property. The ability to collect rents may be impaired by
the commencement of a bankruptcy proceeding relating to a lessee under such
lease. Under the Bankruptcy Code, the filing of a petition in bankruptcy by or
on behalf of a lessee results in a stay in bankruptcy against the commencement
or continuation of any state court proceeding for past due rent, for accelerated
rent, for damages or for a summary eviction order with respect to a default
under the lease that occurred prior to the filing of the lessee's petition. In
addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (i) assume the lease
and retain it or assign it to a third party or (ii) reject the lease. If the
lease is assumed, the trustee or debtor-in-possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to pay
a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the
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enforceability of provisions that provide for prepayment fees or penalties upon
an involuntary prepayment is unclear under the laws of many states.
The Company may invest in Mortgage Loans which contain a "debt-acceleration"
clause, which permits the lender to accelerate the full debt upon a monetary or
non-monetary default of the borrower. The courts of most states will enforce
clauses providing for acceleration in the event of a material payment default
after giving effect to any appropriate notices. The equity courts of any state,
however, may refuse to foreclose a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable. Furthermore, in some
states, the borrower may avoid foreclosure and reinstate an accelerated loan by
paying only the defaulted amounts and the costs and attorneys' fees incurred by
the lender in collecting such defaulted payments.
State courts also are known to apply various legal and equitable principles
to avoid enforcement of the forfeiture provisions of installment contracts. For
example, a lender's practice of accepting late payments from the borrower may be
deemed a waiver of the forfeiture clause. State courts also may impose equitable
grace periods for payment of arrearage or otherwise permit reinstatement of the
contract following a default. Not infrequently, if a borrower under an
installment contract has significant equity in the property, equitable
principles will be applied to reform or reinstate the contract or to permit the
borrower to share the proceeds upon a foreclosure sale of the property if the
sale price exceeds the debt.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of Mortgage Loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
ENVIRONMENTAL RISKS
GENERAL
The Company will be subject to environmental risks when taking a security
interest in real property, as well as when it acquires any real property. Of
particular concern may be properties that are or have been used for industrial,
manufacturing, military or disposal activity. Such environmental risks include
the risk of the diminution of the value of a contaminated property or as
discussed below, liability for the costs of compliance with environmental
regulatory requirements or the costs of clean-up or other remedial actions.
These compliance or clean-up costs could exceed the value of the property or the
amount of the lender's loan. In certain circumstances, a lender could determine
to abandon a contaminated mortgaged property as collateral for its loan rather
than foreclose and risk liability for compliance or clean-up costs.
CERCLA
The Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), imposes strict liability on present and past
"owners" and "operators" of contaminated real property for the costs of
clean-up. A secured lender may be liable as an "owner" or "operator" of a
contaminated mortgaged property if agents or employees of the lender have become
sufficiently involved in the management of such mortgaged property or the
operations of the borrower. Such liability
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may exist even if the lender did not cause or contribute to the contamination
and regardless of whether the lender has actually taken possession of a
mortgaged property through foreclosure, deed in lieu of foreclosure or
otherwise. The magnitude of the CERCLA liability at any given contaminated site
is a function of the actions required to address adequately the risks to human
health and the environment posed by the particular conditions at the site. As a
result, such liability is not constrained by the value of the property or the
amount of the original or unamortized principal balance of any loans secured by
the property. Moreover, under certain circumstances, liability under CERCLA may
be joint and several--I.E., any liable party may be obligated to pay the entire
cleanup costs regardless of its relative contribution to the contamination.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured lenders
from CERCLA liability even though the lender forecloses and sells the real
estate securing the loan, provided the secured lender sells "at the earliest
practicable, commercially reasonable time, at commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements."
Although the 1996 Lender Liability Act provides significant protection to
secured lenders, it has not been construed by the courts and there are
circumstances in which actions taken could expose a secured lender to CERCLA
liability. And, the transferee from the secured lender is not entitled to the
protections enjoyed by a secured lender. Hence, the marketability of any
contaminated real estate continues to be suspect.
CERTAIN OTHER FEDERAL AND STATE LAWS
Many states have environmental clean-up statutes similar to CERCLA, and not
all those statutes provide for a secured creditor exemption. In addition,
underground storage tanks are commonly found on a wide variety of commercial and
industrial properties. Federal and state laws impose liability on the owners and
operators of underground storage tanks for any cleanup that may be required as a
result of releases from such tanks. These laws also impose certain compliance
obligations on the tank owners and operators, such as regular monitoring for
leaks and upgrading of older tanks. The Company may become a tank owner or
operator and subject to compliance obligations and potential cleanup
liabilities, either as a result of becoming involved in the management of a site
at which a tank is located or, more commonly, by taking title to such a
property. Federal and state laws also obligate property owners and operators to
maintain and, under some circumstances, to remove asbestos-containing building
materials and lead-based paint. As a result, the presence of these materials can
increase the cost of operating a property and thus diminish its value. In a few
states, transfers of some types of properties are conditioned upon cleanup of
contamination prior to transfer. In these cases, a lender that becomes the owner
of a property through foreclosure, deed in lieu of foreclosure or otherwise, may
be required to clean up the contamination before selling or otherwise
transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property.
SUPERLIEN LAWS
Under the laws of many states, contamination of a property may give rise to
a lien on the property for clean-up costs. In several states, such a lien has
priority over all existing liens, including those of existing mortgages. In
these states, the lien of a mortgage may lose its priority to such a
"superlien."
ADDITIONAL CONSIDERATIONS
The cost of remediating environmental contamination at a property can be
substantial. To reduce the likelihood of exposure to such losses, the Company
will not acquire title to a mortgaged property or take
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over its operation unless, based on an environmental site assessment prepared by
a qualified environmental consultant, it has made the determination that it is
appropriate to do so. The Company expects that it will organize a special
purpose subsidiary to acquire any environmentally contaminated real property.
ENVIRONMENTAL SITE ASSESSMENTS
In addition to possibly allowing a lender to qualify for the innocent
landowner defense (see "-- Environmental Risks--CERCLA" above), environmental
site assessments can be a valuable tool in anticipating, managing and minimizing
environmental risk. They are commonly performed in many commercial real estate
transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems because
an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial real
estate (including multi-family properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multi-family) first Mortgage Loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
Mortgage Loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
AMERICANS WITH DISABILITIES ACT
Under Title 111 of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the Maryland General
Corporation Law (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. See "DESCRIPTION OF CAPITAL
STOCK--Repurchase of Shares and Restrictions on Transfer" and "RISK
FACTORS--Legal, Tax and Other Risks--Ownership Limitation May Restrict Business
Combination Opportunities."
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 and
may be changed by a majority of the entire Board of Directors. In addition, the
Bylaws provide that, unless the Board of Directors otherwise determines, any
vacancies may be filled by 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 vote of the stockholders or 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
provides that, subject to the rights of any class or series separately to elect
one or more 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
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"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 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.
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF DIRECTORS
The Charter provides that, in determining what is in the best interest of
the Company in a business combination or certain change of control events, a
director of the Company shall consider the best interests of the Company and the
stockholders of the Company and, in his or her discretion, also may consider (i)
the interests of the Company's employees, suppliers, creditors and tenants; (ii)
the economy of the nation; (iii) community and societal interests; and (iv) both
the long-term and short-term interests of the Company and its stockholders,
including the possibility that these interests may be best served by the
continued independence of the Company. Pursuant to this provision, the Board of
Directors may consider subjective factors affecting a proposal, including
certain non-financial matters, and on the basis of these considerations may
oppose a business combination or other transaction which, evaluated only in
terms of its financial merits, might be attractive to some, or a majority, of
the Company's stockholders.
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.
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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
$0.001, and 25,000,000 shares of Preferred Stock, par value $0.01 (the
"Preferred Stock"). Upon completion of the Offering, 16,019,068 shares of Common
Stock will be issued and outstanding (or 18,255,000 shares if the Underwriters'
over-allotment option is exercised in full), and 1,825,500 shares of Common
Stock will be reserved for issuance upon exercise of options, 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.
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
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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 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 "RISK
FACTORS--Legal, Tax and Other Risks" and "CERTAIN 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 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
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the Company, and any stockholder entering into such an agreement with the
Company should consult its tax advisor in connection with its entering into such
an agreement. At present, the Company does not intend to waive the Ownership
Limit for any purchaser of shares of the Common Stock.
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.
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.
LIMITATION OF LIABILITY
As permitted by the MGCL, the Company's Charter obligates the Company to
indemnify its present and former directors and officers and to pay or reimburse
reasonable expenses for such individuals in advance of the final disposition of
a proceeding to the maximum extent permitted from time to time by Maryland law.
The MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which may be made a party by reason of their service in those or other
capacities, unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to such proceeding
and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. The Bylaws implement the provisions
relating to indemnification contained in the Company's Charter.
The MGCL permits the Charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and 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
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deliberate dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Charter contain a provision providing for elimination
of the liability of its directors and officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
as amended or interpreted.
BUSINESS ACQUISITION STATUTES
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate 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 was 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 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.
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
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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 shares
acquisition" statute. No assurance can be given, however, that such Bylaw
provision may not removed at any time by amendment of the Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is State Street Bank
and Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Sales of a substantial number of shares of Common Stock in the
public market following the Offering, or the perception that such sales could
occur, could adversely affect the market price of the Common Stock prevailing
from time to time and could impair the Company's future ability to raise capital
through an offering of equity securities.
Upon the closing of the Offering, the Company will have reserved for
issuance upon exercise of options 1,825,500 shares of Common Stock. The
15,000,000 shares of Common Stock issued in the Offering will be freely tradable
by persons other than "affiliates" of the Company, as that term is defined under
the Securities Act ("Affiliates"), of the Company without restriction under the
Securities Act, subject to certain limitations on ownership set forth in the
Charter. See "DESCRIPTION OF CAPITAL STOCK--Repurchase of Shares and
Restrictions on Transfer."
In general, pursuant to Rule 144 under the Securities Act as currently in
effect, if one year has elapsed since the later of the date of acquisition of
restricted shares from the Company or any "Affiliate" of the Company, as that
term is defined under the Securities Act, the acquiror or subsequent holder
thereof is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding Common Stock or
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 under the Securities Act also are subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. If two years have elapsed since
the date of acquisition of restricted shares from the Company or from any
Affiliate of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an Affiliate of the Company at any time during the three
months preceding a sale, such person would be entitled to sell such shares in
the public market pursuant to Rule 144(k) under the Securities Act without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
The 1,014,068 shares of Common Stock sold in the Private Placement are
"restricted securities" for purposes of Rule 144 under the Securities Act.
However, the Company will file and seek to have declared effective a resale
registration statement covering the sale of such shares in the public market.
Following expiration of the applicable lock-up restrictions discussed in
"UNDERWRITING," these shares will be available for sale in the public market,
subject to Rule 144 manner of sale and volume limitations in the case of
Affiliates. See "PRIVATE PLACEMENT."
At the closing of the Offering, options to purchase shares will be
outstanding. Shortly after the Offering, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Company's Stock Incentive Plan.
Shares of Common Stock issued upon exercise of options under the Registration
Statement on Form S-8 will be available for sale in the public market, subject
to Rule 144 manner of sale and volume limitations in the case of Affiliates and
subject to any lock-up restrictions discussed in "UNDERWRITING."
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UNDERWRITING
The underwriters of the Offering of the Common Stock (the "Underwriters"),
for whom Bear, Stearns & Co. Inc. and are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement (the "Underwriting Agreement") (the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part), to purchase from the Company the aggregate number of shares of Common
Stock set forth opposite their name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Bear, Stearns & Co. Inc. .......................................................
------------
Total........................................................................... 15,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that, if any of the foregoing
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares must be so purchased. The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock to the public initially at the public offering price set
forth on the cover of this Prospectus and to certain selected dealers (who may
include the Underwriters) at such public offering price less a concession not to
exceed $ per share. The selected dealers may reallow a concession to
certain other dealers not to exceed $ per share. After the initial
offering to the public, the public offering price, the concession to selected
dealers and the reallowance to other dealers may be changed by the
Representatives.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company. The Underwriters may elect to cover any such
short position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment option granted to the Underwriters. In addition,
such persons may stabilize or maintain the price of the Common Stock by bidding
for or purchasing shares of Common Stock in the open market and may impose
penalty bids, under which selling concessions allowed to syndicate members or
other broker-dealers participating in the Offering are reclaimed if shares of
Common Stock previously distributed in the Offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of the Common Stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
The Company has granted the Underwriters options to purchase up to 2,250,000
additional shares of Common Stock at the public offering price less underwriting
discounts and commissions set forth on the cover page of this Prospectus, solely
to cover over-allotments, if any. Such options may be exercised at any
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time until 30 days after the date of this Prospectus. To the extent the
Underwriters exercise such options, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table.
Prior to the Offering, there has been no public market for the Common Stock.
Application has been made to list the Common Stock on the NYSE. Consequently,
the public offering price was determined by negotiation between the Company and
the Underwriter. Among the factors considered in such negotiations were the
nature of the Company's business, its prospects and management, and the general
conditions of the securities markets at the time of the Offering. There can be
no assurance, however, that the prices at which the shares will sell in the
public market after the Offering will not be lower than the price at which they
are sold by the Underwriter.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
In connection with the Offering, the Company, each of its officers and
directors and certain other stockholders who have purchased in the Private
Placement has agreed 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 after the date of this Prospectus, except (i)
with the prior written consent of Bear, Stearns & Co. Inc., on behalf of the
Underwriters, and (ii) in the case of the Company, for issuance under the terms
of the Stock Incentive Plan.
In connection with the Offering, the Affiliated Funds have agreed not to,
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 for a
period of 60 days after the date of this Prospectus without the prior written
consent of Bear, Stearns & Co. Inc., with one-quarter of the total number of
shares held by the Affiliated Funds released from these restrictions each
successive month following such 60-day period.
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, employees and Affiliates of the
Company and the Manager. Consummation of the Private Placement is contingent
only upon and will occur simultaneous with the closing of the 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.
The Company has agreed that it will file and use its best efforts to have
declared effective a resale registration statement covering the sale of the
shares purchased in the Private Placement. These shares will be subject to
certain lock-up restrictions as described in "UNDERWRITING" but will be
available for public sale following expiration of such restrictions.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Stroock &
Stroock & Lavan LLP, New York, New York, and for the Underwriters by Cadwalader,
Wickersham & Taft, New York, New York. Certain matters relating to Maryland law
have been passed upon by for the Company by Miles &
81
<PAGE>
Stockbridge, a Professional Corporation, Baltimore, Maryland. Certain tax
matters will be passed upon by Stroock & Stroock & Lavan LLP, New York, New
York, as Special Tax Counsel.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus forms a part) under the Securities Act with respect to the
Common Stock offered pursuant to the Prospectus. This Prospectus contains
summaries of the material terms of the documents referred to herein and therein,
but does not contain all of the information set forth in the Registration
Statement pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits as well as reports and other
information filed by the Company can be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the Commission
at the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago
Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and New York Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048. The Commission maintains a Web site that
contains reports, proxy, and information statements and other information
regarding registrants that file electronically with the Commission. The Web site
is located at http://www.sec.gov. Application has been made to list the
Company's Common Stock on the NYSE. Reports and other information concerning the
Company can also be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal
requirements, if any, holders of Common Stock will receive annual reports
containing audited financial statements with a report thereon by the Company's
independent certified public accounts, and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
82
<PAGE>
INDEX OF TERMS
<TABLE>
<S> <C>
11(th) District Index.............. 34
1996 Lender Liability Act.......... 70
5/50 Rule.......................... 74
55% Requirement.................... 16
75% Asset Test..................... 52
75% Gross Income Test.............. 53
95% Distribution Requirement....... 15
95% Gross Income Test.............. 12
ADA................................ 71
Advisers Act....................... 38
Affiliated Funds................... 14
Affiliates......................... 79
Agency Certificates................ 3
Appaloosa.......................... 38
ARM................................ 34
Average Market Price............... 49
Average Stockholders' Equity....... 41
Board of Directors................. 38
Bylaws............................. 27
CERCLA............................. 69
Charter............................ 6
CMOs............................... 3
Code............................... 3
Commission......................... 16
Commitments........................ 32
Common Stock....................... 1
Company............................ 3
control shares..................... 77
control share acquisition.......... 77
Crime Control Act.................. 69
dealer property.................... 55
DOL................................ 60
DRP................................ 49
DRP Participant.................... 49
ERISA.............................. 18
excess inclusion................... 17
Excess Securities.................. 18
Exchange Act....................... 61
Exempt Organizations............... 58
FASIT.............................. 52
FHA................................ 35
FHLMC.............................. 3
FHLMC Certificates................. 33
FNMA............................... 3
FNMA Certificates.................. 34
GAAP............................... 23
GAAP income........................ 25
Garn-St. Germain Act............... 64
GNMA............................... 3
GNMA Certificates.................. 35
GSAM............................... 38
Guidelines......................... 27
haircut............................ 9
High Quality....................... 4
HUD................................ 33
Independent Directors.............. 6
Interest in Real Property.......... 52
Interested Stockholder............. 77
Inverse IOs........................ 11
Investment Company Act............. 16
IOs................................ 35
IRA................................ 18
MGCL............................... 18
Management Agreement............... 5
Manager............................ 3
margin call........................ 29
Master Servicer.................... 30
Mortgage Assets.................... 3
Mortgage Derivatives............... 3
Mortgage Loans..................... 3
Mortgage Securities................ 3
Mortgage Seller.................... 13
Net Income......................... 41
Non-U.S. stockholders.............. 58
Non-ERISA Plan..................... 66
NYSE............................... 1
Offering........................... 1
One Hundred Stockholder Date....... 75
Order.............................. 39
Ownership Limit.................... 17
Pass-Through Certificates.......... 3
passive activity losses............ 56
phantom income..................... 17
Plan............................... 60
Plan Administrator................. 49
Plan Asset Regulations............. 61
POs................................ 35
Preferred Stock.................... 74
Privately-Issued Certificates...... 3
prohibited transaction............. 53
purported transfer................. 18
purported transferee............... 18
Qualified Real Estate Assets....... 3
Qualified REIT Subsidiaries........ 29
Qualifying Interests............... 16
Rating Agencies.................... 4
REIT............................... 3
REIT Asset Tests................... 52
REIT Gross Income Tests............ 58
REIT Provisions of the Code........ 5
REO................................ 68
Representatives.................... 80
Return on Average Stockholders'
Equity........................... 41
RICO............................... 69
Securities Act..................... 1
SIP Participant.................... 45
Service............................ 6
Special Tax Counsel................ 6
Stock Incentive Plan............... 45
Stockholders Notice Procedure...... 73
Sub IOs............................ 11
Subordinate Interests.............. 3
Taxable Income..................... 23
taxable mortgage pool.............. 16
Ten-Year U.S. Treasury Rate........ 41
Title V............................ 71
U.S. stockholder................... 56
UBTI............................... 4
UBTI Percentage.................... 58
UCC................................ 67
Underwriters....................... 80
Underwriting Agreement............. 80
yield curve........................ 10
</TABLE>
83
<PAGE>
APPENDIX A
PAST PERFORMANCE RESULTS
The Manager expects to employ an operating and investment strategy for the
Company similar to the investment strategy currently employed by the Manager's
investment professionals for the Manager's other clients. 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.
This capital is invested in three pooled investment funds, with approximately
114 investors of record, some of whom, for pooled investment vehicles sold
offshore, act as nominees for multiple eligible investors. This Appendix sets
forth composite past performance results for these funds.
The Manager's investment strategy with respect to these funds has been to
create a portfolio of High-Quality Mortgage Assets that generates income while
minimizing interest rate exposure. However, consistent with maintaining the
Company's status as a REIT for federal income tax purposes and its exemption
from registration under the Investment Company Act, certain differences will
exist between the operating and investment strategy employed for these funds and
the strategy which will be employed for the Company. For example, the Company's
ability to actively trade, finance through dollar rolls and dynamically hedge
will be limited by the REIT Provisions of the Code. In addition, requirements to
hold Mortgage Assets to meet the 55% Requirement and the 75% Asset and Gross
Income Tests will limit the Company's investment options. The costs associated
with hedging in the Company are expected to be higher, which may affect gross
returns.
The following information sets forth the composite performance record of
these funds for the periods indicated. The tables should be read in conjunction
with the notes thereto. PAST PERFORMANCE DOES NOT GUARANTEE, AND IS NOT
NECESSARILY INDICATIVE OF, FUTURE RESULTS. Prospective investors should
recognize that there are certain differences between the investment policies
applicable to these funds and those of the Company and that their fees and
expenses also differ. Future performance of client accounts and that of the
Company will differ.
The total returns for fund accounts and certain other information, (i)
without deduction of fees, (ii) net of fees and (iii) as adjusted to give effect
to the Company's fee structure are shown below. Performance figures for a
variety of relevant indices are also provided for comparative purposes. The
performance data of the indices have been prepared from sources and data that
the Company believes to be reliable, but no representation is made as to their
accuracy.
A-1
<PAGE>
<TABLE>
<CAPTION>
COMPOSITE RETURNS
-----------------------------------------------------
ADJUSTED LIPPER
FOR ESTIMATED MERRILL LEHMAN ADJUSTED
MANAGEMENT 1-2.99 YR. MBS ARM
GROSS NET FEES INDEX INDEX INDEX
MONTH (A) (B) (C) (D) (E) (F)
- ----------------------- ----------- --------- ----------------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jul-94 (inception)..... 0.04% (0.04%) (0.04%) 0.86% 2.00% 0.32%
Aug-94................. 1.75% 1.34% 1.47% 0.35% 0.32% 0.00%
Sep-94................. 1.86% 1.42% 1.57% (0.23%) (1.42%) (0.19%)
Oct-94................. (0.61%) (0.70%) (0.70%) 0.23% (0.06%) (0.15%)
Nov-94................. 1.02% 0.75% 0.90% (0.45%) (0.31%) (0.48%)
Dec-94................. 0.06% (0.03%) (0.03%) 0.23% 0.80% (0.41%)
Jan-95................. (0.34) (0.42%) (0.42%) 1.39% 2.14% 0.54%
Feb-95................. 1.70% 1.29% 1.44% 1.37% 2.55% 1.01%
Mar-95................. 1.59% 1.20% 1.34% 0.56% 0.47% 0.60%
Apr-95................. 1.70% 1.29% 1.43% 0.89% 1.42% 0.65%
May-95................. 1.16% 0.86% 0.99% 1.75% 3.15% 1.04%
Jun-95................. 2.13% 1.63% 1.75% 0.54% 0.56% 0.08%
Jul-95................. 2.25% 1.59% 1.85% 0.41% 0.17% 0.23%
Aug-95................. 1.52% 1.05% 1.28% 0.60% 1.04% 0.57%
Sep-95................. 1.52% 1.05% 1.27% 0.49% 0.88% 0.26%
Oct-95................. 2.25% 1.59% 1.85% 0.84% 0.89% 0.06%
Nov-95................. 0.80% 0.51% 0.69% 0.88% 1.14% 0.65%
Dec-95................. 1.29% 0.88% 1.08% 0.77% 1.25% 0.44%
Jan-96................. 2.16% 1.53% 1.78% 0.85% 0.75% 0.65%
Feb-96................. 1.56% 1.07% 1.29% (0.42%) (0.83%) 0.08%
Mar-96................. 1.14% 0.76% 0.97% (0.09%) (0.36%) 0.17%
Apr-96................. 1.78% 1.24% 1.48% 0.08% (0.28%) 0.28%
May-96................. 2.06% 1.45% 1.71% 0.21% (0.29%) 0.34%
Jun-96................. 1.53% 1.06% 1.29% 0.72% 1.38% 0.57%
Jul-96................. 1.70% 1.18% 1.42% 0.39% 0.37% 0.42%
Aug-96................. 1.87% 1.31% 1.56% 0.34% 0.00% 0.37%
Sep-96................. 1.73% 1.20% 1.45% 0.91% 1.67% 0.68%
Oct-96................. 2.02% 1.42% 1.67% 1.13% 1.96% 0.75%
Nov-96................. 0.76% 0.47% 0.66% 0.77% 1.43% 0.57%
Dec-96................. 1.31% 0.89% 1.10% 0.00% (0.52%) 0.39%
Jan-97................. 1.84% 1.29% 1.53% 0.47% 0.74% 0.44%
Feb-97................. 1.51% 1.04% 1.27% 0.23% 0.33% 0.48%
Mar-97................. 1.67% 1.16% 1.40% (0.04%) (0.94%) 0.31%
Apr-97................. 1.72% 1.20% 1.44% 0.82% 1.59% 0.70%
May-97................. 1.55% 1.07% 1.30% 0.68% 0.98% 0.57%
Jun-97................. 1.69% 1.17% 1.41% 0.69% 1.17% 0.58%
Jul-97................. 1.51% 1.04% 1.26% 1.10% 1.88% 0.68%
Aug-97................. 1.56% 1.08% 1.30% 0.09% (0.24%) 0.23%
<CAPTION>
CAPITAL UNDER
MONTH MANAGEMENT
- ----------------------- ---------------
<S> <C>
(IN MILLIONS)
Jul-94 (inception)..... $ 39.8
Aug-94................. $ 39.8
Sep-94................. $ 40.5
Oct-94................. $ 43.1
Nov-94................. $ 42.8
Dec-94................. $ 50.5
Jan-95................. $ 43.6
Feb-95................. $ 43.4
Mar-95................. $ 43.0
Apr-95................. $ 43.2
May-95................. $ 43.9
Jun-95................. $ 49.4
Jul-95................. $ 50.6
Aug-95................. $ 56.7
Sep-95................. $ 57.6
Oct-95................. $ 56.9
Nov-95................. $ 58.0
Dec-95................. $ 53.4
Jan-96................. $ 41.9
Feb-96................. $ 47.7
Mar-96................. $ 54.5
Apr-96................. $ 56.9
May-96................. $ 59.4
Jun-96................. $ 64.9
Jul-96................. $ 80.2
Aug-96................. $ 98.5
Sep-96................. $ 105.7
Oct-96................. $ 122.3
Nov-96................. $ 154.8
Dec-96................. $ 161.4
Jan-97................. $ 199.2
Feb-97................. $ 217.9
Mar-97................. $ 244.3
Apr-97................. $ 249.0
May-97................. $ 266.2
Jun-97................. $ 276.8
Jul-97................. $ 293.0
Aug-97................. $ 310.8
</TABLE>
- ------------------------
A-2
<PAGE>
COMPOSITE HISTORICAL PERFORMANCE RECORD
<TABLE>
<CAPTION>
COMPOSITE RETURNS
-----------------------------------
ADJUSTED FOR MERRILL LEHMAN
ESTIMATED 1-2.99 YR. MBS
GROSS NET MANAGEMENT INDEX INDEX
(A) (B) FEES(C) (D) (E)
--------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ANNUAL RETURNS
1994 Return (6 mo.).................................... 4.17% 2.75% 3.19% 0.99% 1.30%
1995 Return............................................ 19.03% 13.25% 15.53% 11.00% 16.79%
1996 Return............................................ 21.47% 14.46% 17.56% 4.98% 5.35%
1997 Return Through Aug................................ 13.83% 9.41% 11.45% 4.10% 5.62%
LIFE OF FUNDS RETURNS (JULY-94--AUG-97)
Total.................................................. 71.43% 45.74% 56.34% 22.51% 31.64%
Annualized............................................. 18.56% 12.63% 15.15% 6.62% 9.07%
Risk Adjusted Return Ratio (g)......................... 5.65x 3.96x 4.78x 0.75x 1.06x
<CAPTION>
LIPPER
ADJUSTED
ARM INDEX
(F)
-------------
<S> <C>
ANNUAL RETURNS
1994 Return (6 mo.).................................... (0.91%)
1995 Return............................................ 6.30%
1996 Return............................................ 5.39%
1997 Return Through Aug................................ 4.06%
LIFE OF FUNDS RETURNS (JULY-94--AUG-97)
Total.................................................. 15.52%
Annualized............................................. 4.66%
Risk Adjusted Return Ratio (g)......................... (0.58x)
</TABLE>
- ------------------------
(a) Composite Gross Return is calculated without reduction of any fees charged
by the Manager. These figures must be read in conjunction with the column
setting forth Composite Net Return.
(b) Composite Net Return is calculated by reducing Composite Gross Return (the
aggregate return, including mark-to-market gains or losses for the period,
divided by the beginning net capital of the period) by the highest fee
charged by the Manager during the relevant period. The Manager's actual fee
formulas ranged from a 1% base management fee plus a 20% incentive fee based
on total returns after the base fee to a 1.5% base management fee plus a 25%
incentive fee based on total returns after the base fee.
(c) Return as Adjusted for Estimated Management Fees is calculated by reducing
Composite Gross Return by the estimated fees payable under Manager's
proposed fee schedule. These returns are not necessarily indicative of the
actual returns which might have been achieved by the Company.
(d) The Merrill 1-2.99 Year Index is a market capitalization weighted index
including all U.S. Treasury Notes and Bonds with maturities greater than or
equal to one year and less than three years, but excluding U.S. Treasury
Bills, stripped U.S. Treasury securities and index-linked bonds. The index
is equally weighted and adjusted for distributions and capital gains. The
index is unmanaged and is calculated without reduction of any fees.
(e) The Lehman Mortgage-Backed Securities Index is a market value-weighted index
that tracks the daily price, coupon paydown and total return performance of
publicly traded, fixed rate Agency Certificates. The index is unmanaged and
is calculated without reduction of any fees.
(f) The Lipper Adjusted ARM Index is comprised of the ten largest ARM mutual
funds as of December 31 of the prior year. The index is equally weighted and
adjusted for distributions and capital gains. An ARM mutual fund is an
investment company which invests more than 65% of its assets in ARMs.
(g) The Risk-Adjusted Return Ratio is the Sharpe risk-adjusted ratio which takes
a portfolio's volatility, as measured by its standard deviation of return,
into account. The higher the ratio, the better the portfolio's risk-adjusted
return. The ratio is calculated by subtracting the risk-free Treasury bill
return from the portfolio's return and then dividing the difference by the
portfolio's overall standard deviation of return.
A-3
<PAGE>
The following graph shows the Return as Adjusted for Estimated Management
Fees and cumulative compounded returns for the period since inception through
August 1997.
CUMULATIVE COMPOUNDED RETURNS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Pro-Forma Net Merrill 1-2.96 Lehman Lipper Adjusted
<S> <C> <C> <C> <C>
REIT Return Yr. Index Mortgage Index ARM Index
Jul-94 -0.04% 0.66% 2.00% 0.32%
Aug-94 1.43% 1.21% 2.32% 0.32%
Sep-94 3.02% 0.96% 0.87% 0.13%
Oct-94 2.30% 1.21% 0.81% -0.02%
Nov-94 3.22% 0.78% 0.48% -0.50%
Dec-94 3.19% 0.98% 1.30% -0.91%
Jan-95 2.76% 2.39% 3.46% -0.37%
Feb-95 4.24% 3.50% 6.10% 0.63%
Mar-95 5.63% 4.38% 6.60% 1.23%
Apr-95 7.14% 5.31% 8.12% 1.89%
May-95 8.20% 7.18% 11.59% 2.98%
Jun-95 10.10% 7.73% 12.15% 3.04%
Jul-95 12.14% 8.17% 12.36% 3.27%
Aug-95 13.57% 8.82% 13.51% 3.85%
Sep-95 15.01% 9.35% 14.51% 4.12%
Oct-95 17.14% 10.27% 15.53% 4.19%
Nov-95 17.95% 11.24% 16.84% 4.86%
Dec-95 19.22% 12.10% 18.30% 5.33%
Jan-96 21.34% 13.05% 19.20% 6.02%
Feb-96 22.81% 12.87% 18.21% 8.10%
Mar-96 24.10% 12.47% 17.73% 8.28%
Apr-96 25.94% 12.57% 17.45% 6.57%
May-96 28.08% 12.80% 17.10% 6.94%
Jun-96 29.75% 13.81% 18.72% 7.55%
Jul-96 31.59% 14.06% 18.15% 8.00%
Aug-96 33.64% 14.45% 19.15% 8.40%
Sep-96 35.58% 15.48% 21.15% 9.14%
Oct-96 37.84% 16.79% 23.62% 9.85%
Nov-96 38.75% 17.68% 25.29% 10.58%
Dec-96 40.28% 17.88% 24.63% 11.01%
Jan-97 42.42% 18.23% 25.56% 11.08%
Feb-97 44.23% 18.50% 25.98% 12.04%
Mar-97 46.25% 18.46% 24.79% 12.38%
Apr-97 48.36% 19.43% 26.79% 13.17%
May-97 50.28% 20.24% 28.02% 13.81%
Jun-97 52.41% 21.07% 29.62% 14.47%
Jul-97 54.33% 22.40% 31.98% 15.28%
Aug-97 56.33% 22.51% 31.64% 16.52%
</TABLE>
A-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 COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS 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 COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 9
Use of Proceeds................................. 21
Capitalization.................................. 22
Dividend and Distribution Policy................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business........................................ 26
Description of Assets........................... 32
The Manager..................................... 38
The Company..................................... 44
Principal Stockholders.......................... 48
Dividend Reinvestment Plan...................... 49
Certain Federal Income Tax Considerations....... 51
ERISA Considerations............................ 60
Certain Legal Aspects of Mortgage Loans and Real
Property Investments.......................... 63
Certain Provisions of Maryland Law and the
Company's Charter and Bylaws.................. 72
Description of Capital Stock.................... 74
Shares Eligible for Future Sale................. 79
Underwriting.................................... 80
Private Placement............................... 81
Legal Matters................................... 81
Additional Information.......................... 82
Index of Terms.................................. 83
Appendix A--Past Performance Results............ A-1
</TABLE>
--------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
15,000,000 SHARES
LASER MORTGAGE
MANAGEMENT, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
, 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:
<TABLE>
<S> <C>
SEC registration fee............................................... $ 78,410
NASD filing fee.................................................... $ 26,375
NYSE listing fee................................................... $ *
Director's and Officer's insurance................................. $ *
Legal fees and expenses............................................ $ *
Accounting fees and expenses....................................... $ *
Blue Sky qualification fees and expenses (including counsel
fees)............................................................ $ *
Printing and engraving fees........................................ $ *
Transfer Agent and Registrar fees.................................. $ *
Miscellaneous...................................................... $ *
---------
Total.......................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
On September 15, 1997, the Registrant received commitments for the purchase
of 1,014,068 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 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 1,014,068 shares of Common Stock from certain directors, officers, employees
and Affiliates of the Company and the Manager. 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 which the
director shall have been
II-1
<PAGE>
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.
II-2
<PAGE>
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Charter of the Registrant
3.2 Bylaws of the Registrant
4.1 Specimen Common Stock Certificate*
5.1 Opinion of Stroock & Stroock & Lavan LLP (including consent)*
8.1 Opinion of Stroock & Stroock & Lavan LLP as to certain tax matters (including consent)*
10.1 Form of 1997 Stock Incentive Plan*
10.2 Management Agreement between the Company and Laser Capital LLC*
10.3 Form of Dividend Reinvestment Plan*
23.1 Consent of Stroock & Stroock & Lavan LLP (to be included in Exhibits 5.1 and 8.1)*
24.1 Power of Attorney (included in the signature page)
99.1 Consent to be named as a proposed Director.
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 37. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters specified in
the Underwriting Agreement at the closing, certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to 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 15th day of
September, 1997.
<TABLE>
<S> <C> <C>
LASER MORTGAGE MANAGEMENT, INC.
By: /s/ MICHAEL L. SMIRLOCK
-----------------------------------------
Michael L. Smirlock
CHIEF EXECUTIVE OFFICER
</TABLE>
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
- ------------------------------ --------------------------- -------------------
Chief Executive Officer,
/s/ MICHAEL L. SMIRLOCK Chairman of the Board and
- ------------------------------ Director (principal September 15, 1997
Michael L. Smirlock executive officer)
/s/ DAVID A. TEPPER
- ------------------------------ Director September 15, 1997
David A. Tepper
Chief Financial Officer and
/s/ THOMAS G. JONOVICH Treasurer (principal
- ------------------------------ financial and accounting September 15, 1997
Thomas G. Jonovich officer)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Charter of the Registrant
3.2 Bylaws of the Registrant
4.1 Specimen Common Stock Certificate*
5.1 Opinion of Stroock & Stroock & Lavan LLP (including consent)*
8.1 Opinion of Stroock & Stroock & Lavan LLP as to certain tax matters (including consent)*
10.1 Form of 1997 Stock Incentive Plan*
10.2 Management Agreement between the Company and Laser Capital LLC*
10.3 Form of Dividend Reinvestment Plan*
23.1 Consent of Stroock & Stroock & Lavan LLP (to be included in Exhibits 5.1 and 8.1)*
24.1 Power of Attorney (included in the signature page)
99.1 Consent to be named as a proposed Director.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
Exhibit 3.1
[FORM]
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
LASER MORTGAGE MANAGEMENT, INC.
LASER Mortgage Management, Inc., a Maryland corporation (the
"Corporation"), certifies as follows:
FIRST: The Corporation desires to amend and restate its charter as
currently in effect.
SECOND: The following are the provisions of the charter to the
Corporation currently in effect as amended:
ARTICLE I
The name of the Corporation is:
LASER MORTGAGE MANAGEMENT, INC.
ARTICLE II
The purposes for which the Corporation is formed are to invest in
mortgage-backed securities, mortgage loans and other real estate related assets
and to engage in any other lawful business. The Corporation shall have all the
general powers granted by law to Maryland corporations and all other powers not
inconsistent with law that are appropriate to promote and attain its purposes.
ARTICLE III
The present address of the principal office of the Corporation in the State
of Maryland is:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
<PAGE>
ARTICLE IV
The name and address of the resident agent of the Corporation are:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation actually residing in the
State.
ARTICLE V
A. The total number of shares of capital stock of all classes which
the Corporation has authority to issue is one hundred million (100,000,000)
shares of capital stock, of which seventy-five million (75,000,000) shall be
shares of common stock, par value one-tenth of one cent ($.001) per share,
amounting in aggregate par value to Seventy-Five Thousand Dollars ($75,000,000),
and twenty-five million (25,000,000) shall be shares of preferred stock, par
value one cent ($.01) per share, amounting in aggregate par value to Two Hundred
and Fifty Thousand Dollars ($250,000). The Board of Directors may classify and
reclassify any unissued shares of Common Stock, whether now or hereafter
authorized, by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares.
The Board of Directors of the Corporation may from time to time issue shares of
Preferred Stock, in such series and with such preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or other provisions as may be fixed by the Board of Directors. All persons who
acquire shares of Common Stock or securities exercisable for or convertible into
shares of Common Stock shall acquire such shares subject to the provisions of
the charter (including Article XI) and the bylaws of the Corporation.
B. The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and conversion of the
Common Stock of the Corporation.
(1) Each share of Common Stock shall have one vote.
(2) Subject to the provisions of law and any preferences of any
class of capital stock hereafter classified or reclassified, dividends,
including dividends payable in shares of the Corporation's capital stock, may be
paid on the Common Stock of the Corporation at such time and in such amounts as
the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Common
Stock shall be entitled, after payment or provision for payment of the debts and
other liabilities of the Corporation and the amount to which the holders of any
class of capital stock hereafter classified or reclassified having a preference
on distributions in the liquidation, dissolution or winding up of the
Corporation shall be entitled, together with the holders of any other class of
capital stock
2
<PAGE>
hereafter classified or reclassified not having a preference on distributions in
the liquidation, dissolution or winding up of the Corporation, to share ratably
in the remaining net assets of the Corporation.
C. The power of the Board of Directors to classify and reclassify
any of the shares of capital stock shall include, without limitation, subject to
the provisions of the charter, authority to classify or reclassify any unissued
shares of such capital stock into a class or classes of preferred stock,
preference stock, special stock, or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that, unless
otherwise prohibited by the terms of such or any other class or series, the
number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of unissued
shares and the number of shares of such class or series may be increased by the
Board of Directors in connection with any such classification or
reclassification.
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares of
such class or series, whether any such dividends shall rank senior or junior to
or on a parity with the dividends payable on any other class or series of
capital stock, and the status of any such dividends as cumulative to a limited
extent or noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series shall have
voting rights in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and whether or not there
shall be any sinking fund or purchase account in respect thereof, and if so, the
terms thereof.
(6) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of capital stock.
3
<PAGE>
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use of
moneys for purchase or redemption of, any capital stock of the Corporation, or
upon any other action of the Corporation, including action under this
subparagraph, and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the charter.
D. For the purposes hereof and of any articles supplementary hereto
providing for the classification or reclassification of any shares of capital
stock or of any other charter document of the Corporation (unless otherwise
provided in any such articles or document), any class or series of capital stock
of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation, dissolution
or winding up, as the case may be, in preference or priority to holders of such
other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation price per share thereof be different
from those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
4
<PAGE>
ARTICLE VI
A. The number of directors of the Corporation shall be five (5),
which number may be increased or decreased pursuant to the bylaws of the
Corporation, but shall never be less than the minimum number required by the
Maryland General Corporation Laws (the "MGCL") now or hereafter in force.
B. The names of the directors, serving at the time of the approval
of these Articles of Amendment and Restatement and who will serve until the
first annual meeting of stockholders and until their successors are elected and
qualify are as follows:
Director Class
-------- -----
__________________________ I
__________________________ II
__________________________ III
C. The directors shall be divided into three classes as follows:
(1) the term of office of Class I shall be until the 1998 annual meeting of
stockholders and until their successors shall be elected and have qualified
and thereafter shall be for three years and until their successors shall be
elected and have qualified; (2) the term of office of Class II shall be until
the 1999 annual meeting of stockholders and until their successors shall be
elected and have qualified and thereafter shall be for three years and until
their successors shall be elected and have qualified; and (3) the term of
office of Class III shall be until the 2000 annual meeting of stockholders
and until their successors shall be elected and have qualified and thereafter
shall be for three years and until their successors shall be elected and have
qualified. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible. A director elected by
stockholders shall hold office until the annual meeting for the year in which
his or her term expires and until his or her successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
D. Subject to the rights of the holders of any class of preferred
stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office, or other cause shall be filled by the required vote of the stockholders
or the directors then in office. A director so chosen by the stockholders shall
hold office for the balance of the term then remaining. A director so chosen by
the remaining directors shall hold office until the next annual meeting of
stockholders, at which time the stockholders shall elect a director to hold
office for the balance of the term then remaining. No decrease in the number of
directors constituting the Board of Directors shall affect the tenure of office
of any director.
5
<PAGE>
E. Subject to the rights of the holders of any class separately
entitled to elect one or more directors, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and then
only by the affirmative vote of the holders of at least a majority of the
combined voting power of all classes of shares of capital stock entitled to vote
in the election for directors voting together as a single class.
ARTICLE VII
The Corporation shall indemnify, to the fullest extent permitted by
Maryland law, as applicable from time to time, all persons who at any time
were or are directors or officers of the Corporation for any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) relating to any action alleged to have been
taken or omitted in such capacity as a director or an officer. The
Corporation shall pay or reimburse all reasonable expenses incurred by a
present or former director or officer of the Corporation in connection with
any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) in which the present or
former director or officer is a party, in advance of the final disposition of
the proceeding, to the fullest extent permitted by, and in accordance with
the applicable requirements of, Maryland law, as applicable from time to
time. The Corporation may indemnify any other persons permitted but not
required to be indemnified by Maryland law, as applicable from time to time,
if and to the extent indemnification is authorized an determined to be
appropriate in each case in accordance with applicable law by the Board of
Directors, the stockholders or special legal counsel appointed by the Board
of Directors. The Corporation shall not be required to purchase or maintain
insurance on behalf of any present or former directors or officers or other
persons required or permitted to be indemnified. No amendment of the charter
of the Corporation or repeal of any of its provisions shall limit or
eliminate any of the benefits provided to directors and officers under this
Article in respect of any act or omission that occurred prior to such
amendment or repeal.
ARTICLE VIII
To the fullest extent permitted by Maryland law, applicable from time
to time, no person who at any time was or is a director or officer of this
Corporation shall be personally liable to the Corporation or its stockholders
for money damages. No amendment of the charter of the Corporation or repeal of
any of its provisions shall limit or eliminate the benefits provided to
directors and officers under this provision with respect to any act or omission
which occurred prior to such amendment or repeal.
ARTICLE IX
Section 9.1. DEFINITIONS. For the purpose of this Article IX, the
following terms shall have the following meanings:
"AGGREGATE STOCK OWNERSHIP LIMIT" shall mean the Beneficial Ownership
of 9.8%, in number of shares or value, of each class of outstanding capital
stock of the Corporation, shall mean such greater percentage of the outstanding
capital stock as so adjusted. The number
6
<PAGE>
and value of shares of the outstanding capital stock of the Corporation shall be
determined by the Board of Directors in good faith, which determination shall be
conclusive for all purposes hereof.
"BENEFICIAL OWNERSHIP" shall mean ownership of capital stock by a
Person, whether the interest in the shares of capital stock is held directly or
indirectly (including by a nominee), and shall include interests that would be
treated as owned through the application of Section 544 of the Code, as modified
by Sections 856(h)(1)(B) and 856(h)(3)(A) of the Code. The terms "Beneficial
Owner," "Beneficially Owning," "Beneficially Own" and "Beneficially Owned" shall
have the correlative meanings.
"BUSINESS DAY" shall mean any day, other than a Saturday or Sunday,
that is neither a legal holiday nor a day on which banking institutions in New
York City are authorized or required by law, regulation or executive order to
close.
"CAPITAL STOCK" shall mean stock that is either Common Stock,
Preferred Stock or any other class of capital stock of the Corporation
classified or reclassified pursuant to Article VI or this Article IX.
"CHARITABLE BENEFICIARY" shall mean one or more beneficiaries of the
Trust as determined pursuant to Section 9.3.6, provided that each such
organization must be described in Section 501(c)(3) of the Code and
contributions to each such organization must be eligible for deduction under
each Sections 170(b)(1)(A) (without regard to clauses (vii) or (viii) thereof),
2055 and 2522 of the Code, provided selecting such beneficiary or beneficiaries
would not violate Section 9.2.1(a) hereof.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMON STOCK OWNERSHIP LIMIT" shall mean Beneficial Ownership or
Constructive Ownership of not more than 9.8 percent (in value or in number of
shares, whichever is more restrictive) of the aggregate of the outstanding
shares of Common Stock of the Corporation. The number and value of outstanding
shares of Common Stock of the Corporation shall be determined by the Board of
Directors of the Corporation in good faith, which determination shall be
conclusive for all purposes hereof.
"CONSTRUCTIVE OWNERSHIP" shall mean ownership of capital stock by a
Person, whether the interest in the shares of capital stock is held directly or
indirectly (including by a nominee), and shall include interests that would be
treated as owned through the application of Section 318(a) of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have the correlative
meanings.
"EXCEPTED HOLDER" shall mean a stockholder of the Corporation for whom
an Excepted Holder Limit is created by the Charter or by the Board of Directors
pursuant to Section 9.2.7.
7
<PAGE>
"EXCEPTED HOLDER LIMIT" shall mean, provided that the affected
Excepted Holder agrees to comply with the requirements established by the Board
of Directors pursuant to Section 9.2.7, and subject to adjustment pursuant to
Section 9.2.8, the percentage limit with respect to such holder established by
the Board of Directors pursuant to Section 9.2.7.
"INITIAL DATE" shall mean
"MARKET PRICE" on any date shall mean, with respect to any class or
series of outstanding shares of capital stock, the Closing Price for such
capital stock on such date. The "Closing Price" on any date shall mean the last
sale price for such capital stock, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
for such capital stock, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NYSE or, if such capital stock is not listed or admitted to
trading on the NYSE, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such capital stock is listed or admitted to trading
or, if such capital stock is not listed or admitted to trading on any national
securities exchange, the last quoted price, or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System,
or, if such system is no longer in use, the principal other automated quotation
system that may then be in use or, if such capital stock is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in such capital stock selected by
the Board of Directors of the Corporation or, in the event that no trading price
is available for such capital stock, the fair market value of the capital stock,
as determined in good faith by the Board of Directors of the Corporation.
"NYSE" shall mean the New York Stock Exchange.
"PERSON" shall mean an individual, corporation, joint venture, limited
liability company, unincorporated organization, partnership, estate, state or
political subdivision thereof, government agency, trust (including a trust
qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the purposes described
in Section 642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other entity, but
does not include an Underwriter participating in an offering of Common Stock,
Preferred Stock, and/or convertible securities of the Corporation, provided that
the ownership of such Common Stock, Preferred Stock and/or convertible
securities by such Underwriter would not result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code and would not
otherwise result in the Corporation's failure to qualify as a REIT.
"PROHIBITED OWNER" shall mean, with respect to any purported Transfer,
any Person who, but for the provisions of Section 9.2.1, would Beneficially Own
or Constructively Own shares of capital stock, and if appropriate in the
context, shall also mean any Person who would have been the record owner of the
shares that the Prohibited Owner would have so owned.
8
<PAGE>
"REIT" shall mean a real estate investment trust as defined under
Section 856 of the Code.
"RESTRICTION TERMINATION DATE" shall mean the first day on which the
Board of Directors of the Corporation determines that it is no longer in the
best interests of the Corporation to attempt to, or continue to, qualify as a
REIT or that compliance with the restrictions and limitations on Beneficial
Ownership, Constructive Ownership and Transfers of shares of capital stock set
forth herein is no longer required in order for the Corporation to qualify as a
REIT.
"TRANSFER" shall mean any issuance, sale, transfer, gift, assignment,
devise or other disposition, as well as any other event that causes any Person
to acquire Beneficial Ownership or Constructive Ownership, or any agreement to
take any such actions or cause any such events, of capital stock or the right to
vote or receive dividends on capital stock, including (a) the granting or
exercise of any option or warrant (or any disposition of any option or warrant),
(b) any disposition of any securities or rights convertible into or exchangeable
for capital stock or any interest in capital stock or any exercise of any such
conversion or exchange right and (c) Transfers of interests in other entities
that result in changes in Beneficial or Constructive Ownership of capital stock;
in each case, whether voluntary or involuntary, whether owned of record,
Constructively Owned or Beneficially Owned and whether by operation of law or
otherwise. The terms "Transferring" and "Transferred" shall have the
correlative meanings.
"TRUST" shall mean the trust created pursuant to this Article IX,
provided for in Section 9.3.1.
"TRUSTEE" shall mean the Person unaffiliated with the Corporation, a
Prohibited Owner and any Charitable Beneficiary, that is appointed by the
Corporation to serve as trustee of the Trust, and any successor or trustee
appointed by the Trustee.
"UNDERWRITER" shall mean a securities firm or other similar entity
only in its capacity as a party of an underwriting agreement with the
Corporation entered into with the intent of such firm or other entity acquiring
securities of the Corporation for resale.
Section 9.2 CAPITAL STOCK
9.2.1 OWNERSHIP LIMITATIONS. Subject to Section 9.2.10, during the
period commencing on the Initial Date and prior to the Restriction Termination
Date:
(a) BASIC RESTRICTIONS.
(i) (1) No Person, other than an Excepted Holder, shall
Beneficially Own or Constructively Own shares of capital stock in excess of the
Aggregate Stock Ownership Limit, (2) no Person, other than an Excepted Holder,
shall Beneficially Own or Constructively Own shares of Common Stock in excess of
the Common Stock Ownership Limit and (3) no Excepted Holder shall Beneficially
Own or Constructively Own shares of capital stock in excess of the Excepted
Holder Limit for such Excepted Holder.
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(ii) No Person shall Beneficially Own or Constructively Own
shares of capital stock to the extent that such Beneficial or Constructive
Ownership of capital stock would result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code (without regard to whether the
ownership interest is held during the last half of the taxable year), or
otherwise failing to qualify as a REIT (including, but not limited to,
Beneficial Ownership or Constructive Ownership that would result in the
Corporation owning (actually or Constructively) an interest in a tenant that is
described in Section 856(d)(2)(B) of the Code if the income derived by the
Corporation from such tenant would cause the Corporation to fail to satisfy any
of the gross income requirements of Section 856(c) of the Code).
(iii) Any Transfer of shares of capital stock that, if effective,
would result in any person Beneficially Owning or Constructively Owning any
shares of capital stock in violation of Section 9.2.1(a) or Section 9.2.1(a)(ii)
shall be null and void AB INITIO, and the purported transferee or purported
owner shall acquire no rights to, or economic interest in, any capital stock
held in violation of these restrictions.
(iv) Notwithstanding any other provisions contained herein, any
Transfer of shares of capital stock (whether or not such Transfer is the result
of a transaction entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system) that,
if effective, would result in the capital stock being beneficially owned by less
than 100 Persons (determined under the principles of Section 856(a)(5) of the
Code) shall be null and void AB INITIO, and the intended transferee shall
acquire no rights in such shares of capital stock.
(b) TRANSFER IN TRUST. If, notwithstanding the other provisions
contained in this Article IX, there is a purported Transfer, change in capital
structure or other event such that, if effective, any Person would Beneficially
Own or Constructively Own Shares of capital stock in violation of Section
9.2.1(a)(i) or Section 9.2.1(a)(ii), or, any Transfer of shares of capital stock
occurs which, if effective, would result in any Person Beneficially Owning or
Constructively Owning shares of capital stock in violation of Section
9.2.1(a)(i) or (ii),
(i) then that number of shares (rounded to the nearest whole
shares) of the capital stock, the Beneficial or Constructive Ownership of which
otherwise would cause such Person to violate Section 9.2.1(a)(i) or (ii) shall
be automatically transferred to a Trust for the benefit of a Charitable
Beneficiary, as described in Section 9.3, effective on the close of business on
the Business Day prior to the date of such purported Transfer or other event,
and such Person shall acquire no rights in such shares; and
(ii) upon the transfer of a share of capital stock to the Trust
described in clause (i) of this subsection 9.2.1(b), such share shall have such
voting, dividend, liquidation and other rights, and shall be subject to such
terms and limitations, as set forth in Section 9.3 of this Article IX.
9.2.2 REMEDIES FOR BREACH. If the Board of Directors of the
Corporation or any duly authorized committee thereof shall at any time determine
in good faith that a Transfer or other event has taken place that results in a
violation of Section 9.2.1 or that a Person intends to
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acquire or has attempted to acquire Beneficial Ownership or Constructive
Ownership of any shares of capital stock in violation of Section 9.2.1 (whether
or not such violation is intended), the Board of Directors or a committee
thereof shall take such action as it deems advisable to refuse to give effect to
or to prevent such Transfer or other event, including, without limitation,
causing the Corporation to redeem shares, refusing to give effect to such
Transfer on the books of the Corporation or instituting proceedings to enjoin
such Transfer or other event; PROVIDED, HOWEVER, that any Transfers or attempted
Transfers or other events in violation of Section 9.2.1 shall be null and void
and shall automatically result in the transfer to the Trust described above,
and, where applicable, such Transfer (or other event) shall be void AB INITIO as
provided above irrespective of any action (or non-action) by the Board of
Directors or a Committee thereof.
9.2.3 NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or
attempts or intends to acquire Beneficial Ownership or Constructive Ownership of
shares of capital stock that will or may violate Section 9.2.1(a), or any Person
who would have owned shares of capital stock that resulted in a transfer to the
Trust pursuant to the provisions of Section 9.2.1(b) shall immediately give
written notice to the Corporation of such event, or in the case of such proposed
or attempted transaction, give at least 15 days' prior written notice, and shall
provide to the Corporation such other information as the Corporation may request
in order to determine the effect, if any, of such Transfer on the Corporation's
status as a REIT.
9.2.4 OWNERS REQUIRED TO PROVIDE INFORMATION. From the Initial Date
and prior to the Restriction Termination Date:
(a) every owner of more than five percent (or such lower percentage
as required by the Code or the Treasury Regulations promulgated thereunder) of
the outstanding shares of capital stock, within 30 days after the end of each
taxable year, shall give written notice to the Corporation stating the name and
address of such owner, the number of shares of capital stock Beneficially Owned
and a description of the manner in which such shares are held. Each such owner
shall provide to the Corporation such additional information as the Corporation
may request in order to determine the effect, if any, of such Beneficial
Ownership on the Corporation's status as a REIT and ensure compliance with the
Aggregate Stock Ownership Limit; and
(b) each Person who is a Beneficial Owner or Constructive Owner of
capital stock and each Person (including the stockholder of record) who is
holding capital stock for a Beneficial Owner or Constructive Owner shall provide
to the Corporation such information as the Corporation may request, in good
faith, in order to determine the Corporation's status as a REIT and to comply
with requirements of any taxing authority or governmental authority or to
determine such compliance.
9.2.5 REMEDIES NOT LIMITED. Nothing contained in this Section 9.2
shall limit the authority of the Board of Directors of the Corporation to take
such other action as it deems necessary or advisable to protect the Corporation
and the interests of its stockholders in preserving the Corporation's status as
a REIT and to ensure compliance with Section 9.2.1(a).
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9.2.6 AMBIGUITY. In the case of an ambiguity in the application of
any of the provisions of this Section 9.2, Section 9.3, or any definition
contained in Section 9.1, the Board of Directors of the Corporation shall have
the power to determine the application of the provisions of this Section 9.2 or
Section 9.3 with respect to any situation based on the facts known to it. If
Section 9.2 or 9.3 requires an action by the Board of Directors and the charter
fails to provide specific guidance with respect to such action, the Board of
Directors shall have the power to determine the action to be taken so long as
such action is not contrary to the provisions of Sections 9.1, 9.2 or 9.3.
9.2.7 EXCEPTIONS.
(a) Subject to Section 9.2.1(a)(ii), the Board of Directors of the
Corporation, in its sole discretion, may exempt a Person from the Aggregate
Stock Ownership Limit and the Common Stock Ownership Limit, as the case may be,
and may establish or increase an Excepted Holder Limit for such Person, if:
(i) the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
individual's Beneficial Ownership or Constructive Ownership of such shares of
capital stock will violate Section 9.2.1(a) (i) or (ii);
(ii) such Person does not and represents that it will not,
actually own or Constructively Own, an interest in a tenant of the Corporation
(or a tenant of any entity owned or controlled by the Corporation) that would
cause the Corporation to, actually own or Constructively Own, more than a 9.8%
interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and
the Board of Directors obtains such representations and undertakings from such
Persons are reasonably necessary to ascertain this fact (for this purpose, a
tenant from whom the Corporation (or an entity owned or controlled by the
Corporation) derives (and is expected to continue to derive) a sufficiently
small amount of rent that, in the opinion of the Board of Directors of the
Corporation, rent from such tenant would not adversely affect the Corporation's
ability to qualify as a REIT, shall not be treated as a tenant of the
Corporation); and
(iii) such Person agrees that any violation or attempted
violation of such representations or undertakings (or other action which is
contrary to the restrictions contained in Sections 9.2.1 through 9.2.6) will
result in such shares of capital stock being automatically transferred to a
Trust in accordance with Sections 9.2.1(b) and 9.3.
(b) Prior to granting any exception pursuant to Section 9.2.7(a), the
Board of Directors of the Corporation may require a ruling from the Internal
Revenue Service, or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Directors in its sole discretion, as it may deem
necessary or advisable in order to determine or ensure the Corporation's status
as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of
Directors may impose such conditions or restrictions as it deems appropriate in
connection with granting such exception.
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(c) The Board of Directors may only reduce the Excepted Holder Limit
for an Excepted Holder: (1) with the written consent of such Excepted Holder at
any time, or (2) pursuant to the terms and conditions of the agreements and
understandings entered into with such Excepted Holder in connection with the
establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted
Holder Limit shall be reduced to a percentage that is less than the Common Stock
Ownership Limit.
9.2.8 INCREASE IN AGGREGATE STOCK OWNERSHIP AND COMMON STOCK
OWNERSHIP LIMITS. The Board of Directors may from time to time increase or
decrease the Common Stock Ownership Limit and the Aggregate Stock Ownership
Limit; PROVIDED, HOWEVER, that:
(a) Any decrease may be made only prospectively as to subsequent
holders (other than a decrease as a result of a retroactive change in existing
law, in which case such decrease shall be effective immediately);
(b) Neither ownership limitation may be increased if, after giving
effect to such increase, five Persons could Beneficially Own or Constructively
Own, in the aggregate, more than 50.0% in value of the shares of capital stock
then outstanding; and
(c) Prior to the modification of either of the ownership limitations,
the Board of Directors of the Corporation may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Corporation's status as a REIT.
9.2.9 LEGEND. Each certificate for shares of capital stock or
securities exercisable or exchangeable for or convertible into shares of capital
stock shall bear the following legend:
The securities represented by this certificate are subject to
restrictions on Beneficial and Constructive Ownership and Transfer.
Subject to certain further restrictions and except as expressly
provided in the Corporation's charter, (i) no Person may Beneficially
Own or Constructively Own shares of the Corporation's Common Stock in
excess of 9.8 percent (in value or number of shares) of the
outstanding shares of Common Stock of the Corporation unless such
Person is an Excepted Holder (in which case the Excepted Holder Limit
shall be applicable); (ii) no Person may Beneficially Own or
Constructively Own shares of capital stock of the Corporation in
excess of 9.8 percent of the value of the total outstanding shares of
capital stock of the Corporation, unless such Person is an Excepted
Holder (in which case the Excepted Holder Limit shall be applicable);
(iii) no Person may Beneficially Own or Constructively Own shares of
capital stock that would result in the Corporation being "closely
held" under Section 856(h) of the Code or otherwise cause the
Corporation to fail to qualify as a REIT; and (iv) no Person may
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Transfer shares of capital stock if such Transfer would result in the
shares of capital stock of the Corporation being owned by fewer than
100 Persons. Any Person who Beneficially Owns or Constructively Owns
or attempts to Beneficially Own or Constructively Own shares of
capital stock which causes or will cause a Person to Beneficially Own
or Constructively Own shares of capital stock in excess or in
violation of the above limitations must immediately notify the
Corporation. Attempted transfers of ownership in violation of these
restrictions shall be null and void AB INITIO. In addition, if any of
the restrictions on transfer or ownership are violated, the shares of
capital stock represented hereby may be automatically transferred to a
Trustee of a Trust for the benefit of one or more Charitable
Beneficiaries. In addition, upon the occurrence of certain events,
attempted Transfers in violation of the restrictions described above
may be void AB INITIO. All capitalized terms in this legend have the
meanings defined in the charter of the Corporation, as the same may be
amended from time to time, a copy of which, including the restrictions
on transfer and ownership, will be furnished to each holder of capital
stock of the Corporation on request and without charge.
9.2.10 SETTLEMENTS PERMITTED. Nothing contained in this Article IX or
in any provision hereof shall preclude the settlement of any transaction entered
into through the facilities of the NYSE or any other national securities
exchange or automated inter-dealer quotation system. Although settlement of any
transaction is permitted, any transferee in such transaction shall be subject to
all the provisions and limitations set forth in this Article IX.
9.3 TRANSFER OF CAPITAL STOCK IN TRUST.
9.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer or other
event described in Section 9.2.1(b) that would result in a transfer of shares of
capital stock to a Trust, such shares of capital stock shall be deemed to have
been transferred to the Trustee as trustee of a Trust for the exclusive benefit
of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be
deemed to be effective as of the close of business on the Business Day prior to
the purported Transfer or other event that results in the transfer to the Trust
pursuant to Section 9.2.1(b). The Trustee shall be appointed by the Corporation
and shall be a Person unaffiliated with the Corporation, any Prohibited Owner
and any Charitable Beneficiary. Each Charitable Beneficiary shall be designated
by the Trustee as provided in Section 9.3.6.
9.3.2 STATUS OF SHARES HELD BY THE TRUSTEE. Shares of capital stock
held by the Trustee shall be issued and outstanding shares of capital stock of
the Company. The Prohibited Owner shall have no rights in the shares held by the
Trustee. The Prohibited Owner shall not benefit economically from ownership of
any shares held in trust by the Trustee, shall have no rights to dividends and
shall not possess any rights to vote or other rights attributable to the shares
held in the Trust.
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9.3.3 DIVIDEND AND VOTING RIGHTS. The Trustee shall have all voting
rights and rights to dividends or other distributions with respect to shares of
capital stock held in the Trust, which rights shall be exercised for the
exclusive benefit of the Charitable Beneficiary. Any dividend or other
distribution paid prior to the discovery by the Corporation that the shares of
capital stock have been transferred to the Trustee shall be paid with respect to
such shares of capital stock to the Trustee upon demand and any dividend or
other distribution authorized but unpaid shall be paid when due to the Trustee.
Any dividends or distributions so paid over to the Trustee shall be held in
trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting
rights with respect to shares held in the Trust and, subject to Maryland law,
effective as of the date that the shares of capital stock have been transferred
to the Trustee, the Trustee shall have the authority (at the Trustee's sole
discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to
the discovery by the Corporation that the shares of capital stock have been
transferred to the Trustee and (ii) to recast such vote in accordance with the
desires of the Trustee acting for the benefit of the Charitable Beneficiary.
Notwithstanding the provisions of this Article IX, until the Corporation has
received notification that shares of capital stock have been transferred into a
Trust, the Corporation shall be entitled to rely on its share transfer and other
stockholder records for purposes of preparing lists of stockholders entitled to
vote at meetings, determining the validity and authority of proxies and
otherwise conducting votes of stockholders.
9.3.4 SALE OF SHARES BY TRUSTEE. Within 20 days of receiving notice
from the Corporation that shares of capital stock have been transferred to the
Trust, the Trustee of the Trust shall sell the shares held in the Trust to a
person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in Section 9.2.1(a). Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and the Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as provided in this Section 9.3.4. The
Prohibited Owner shall receive the lesser of (1) the price paid by the
Prohibited Owner for the shares or, if the Prohibited Owner did not give value
for the shares in connection with the event causing the shares to be held in the
Trust (E.G., in the case of a gift, devise or other such transaction), the
Market Price of the shares on the day of the event causing the shares to be held
in the Trust and (2) the price per share received by the Trustee from the sale
or other disposition of the shares held in the Trust. Any net sales proceeds in
excess of the amount payable to the Prohibited Owner shall be immediately paid
to the Charitable Beneficiary. If, prior to the discovery by the Corporation
that shares of capital stock have been transferred to the Trustee, such shares
are sold by a Prohibited Owner, then (i) such shares shall be deemed to have
been sold on behalf of the Trust and (ii) to the extent that the Prohibited
Owner received an amount for such shares that exceeds the amount that such
Prohibited Owner was entitled to receive pursuant to this Section 9.3.4, such
excess shall be paid to the Trustee upon demand.
9.3.5 PURCHASE RIGHT IN STOCK TRANSFERRED TO THE TRUSTEE. Shares of
capital stock transferred to the Trustee shall be deemed to have been offered
for sale to the Corporation, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Trust (or, in the case of a devise or gift, the Market Price at
the time of such devise or gift) and (ii) the Market Price on the date the
Corporation, or its
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designee, accepts such offer. The Corporation shall have the right to accept
such offer until the Trustee has sold the shares held in the Trust pursuant to
Section 9.3.4. Upon such sale to the Corporation, the interest of the Charitable
Beneficiary in the shares sold shall terminate and the Trustee shall distribute
the net proceeds of the sale to the Prohibited Owner.
9.3.6 DESIGNATION OF CHARITABLE BENEFICIARIES. The Trustee shall
designate one or more nonprofit organizations to be the Charitable Beneficiary
of the interest in the Trust such that (i) the shares of capital stock held in
the Trust would not violate the restrictions set forth in Section 9.2.1(a) in
the hands of such Charitable Beneficiary and (ii) each such organization must be
described in Section 501(c)(3) of the Code and contributions to each such
organization must be eligible for deduction under each of Sections 170(b)(1)(A)
(without regard to clauses (vii) or (viii) thereof), 2055 and 2522 of the Code.
ARTICLE X
The Corporation hereby expressly elects not to be governed by the
provisions of Title 3, Subtitle 6 of the Maryland General Corporation Law.
ARTICLE XI
Notwithstanding any provision of law requiring the authorization of
any action by a greater proportion than a majority of the total number of shares
of all classes of capital stock or of the total number of shares of any class of
capital stock, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all classes outstanding and entitled to vote thereon, or of the total number of
shares of a particular class, except as otherwise provided in the charter,
provided that any amendment to, repeal of or adoption of any provision
inconsistent with Article VI or this Article XI will be effective only if it is
advised by at least two-thirds of the Board of Directors and approved by the
affirmative vote of the holders of not less than two-thirds of the aggregate
votes entitled to be cast thereon.
ARTICLE XII
The Board of Directors is hereby empowered to authorize the issuance
from time to time of shares of capital stock of any class, whether now or
hereafter authorized, or securities exercisable or exchangeable for or
convertible into shares of its capital stock of any class or classes, whether
now or hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the stockholders.
ARTICLE XIII
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The Corporation reserves the right to amend, alter, change or repeal
any provision contained in the charter in the manner now or herafter permitted
or prescribed by statute, including any amendments changing the terms or
contract rights, as expressly set forth in the charter, of any of its
outstanding stock and all rights conferred on stockholders and others herin are
granted subject to this reservation.
ARTICLE XIV
The enumeration and definition of particular powers of the Board of
Directors included in the charter shall in no way be limited or restricted by
reference to or inference from the terms of any other provision of the charter,
or construed as or deemed by inference or otherwise in any manner to exclude or
limit any powers conferred upon the Board of Directors under Maryland law now or
hereafter in force.
The Board of Directors of the Corporation shall, consistent with
applicable law, have power in its sole discretion to determine from time to time
in accordance with sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits, earnings, surplus, or net
assets in excess of capital; to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; to set apart out of funds of the
Corporation such reserve or reserves in such amount or amounts and for such
proper purpose or purposes as it shall determine and to abolish any such reserve
or any part thereof; to distribute and pay distributions or dividends in capital
stock, cash or other securities or property, out of amounts legally available
therefor, at such times and to the stockholders of record on such dates as it
may, from time to time, determine; and to determine whether and to what extent
and at what times and places and under what conditions and regulations the
books, accounts and documents of the Corporation, or any of them, shall be open
to the inspection of stockholders, except as otherwise provided by statute or by
the bylaws, and, except as so provided, no stockholder shall have any right to
inspect any book, account or document of the Corporation unless authorized to do
so by resolution of the Board of Directors.
For any stockholder proposal to be presented in connection with an
annual meeting of stockholders of the Corporation, including any proposal
relating to the nomination of a director to be elected to the Board of Directors
of the Corporation, the stockholders must have given timely written notice
thereof in writing to the Secretary of the Corporation in the manner and
containing the information required by the bylaws. Stockholder proposals to be
presented in connection with a special meeting of stockholders will be presented
by the Corporation only to the extent required by Section 2-502 of the MGCL and
the bylaws.
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ARTICLE XV
The duration of the Corporation shall be perpetual.
ARTICLE XVI
Notwithstanding any provision of law to the contrary, a majority of
the stock issued and outstanding and represented by the holders of record
thereof in person or by proxy shall constitute a quorum at any meeting of
stockholders.
THIRD: The amendment and restatement of the charter of the
Corporation was approved and advised by the Board of Directors
and approved by the stockholder of the Corporation, all in accordance with
the MGCL.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President on this ___ day of ___________, 1997, who acknowledges that these
Articles of Amendment and Restatement are the act of the Corporation and that,
to the best of his knowledge, information and belief and under penalties of
perjury, all matters and facts contained in these Articles of Amendment and
Restatement are true in all material respects.
ATTEST: LASER MORTGAGE MANAGEMENT INC.
____________________ By: _______________________ (SEAL)
Robert J. Gartner Michael L. Smirlock
Secretary President
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Exhibit 3.2
[FORM]
BYLAWS
OF
LASER MORTGAGE MANAGEMENT, INC.
ARTICLE I
SEAL
The Board of Directors may provide a suitable seal for the Corporation,
which may be either facsimile or any other form of seal and shall remain in the
custody of the Secretary. If the Board so provides, it shall be affixed to all
certificates of the Corporation's stock and to other instruments requiring a
seal.
ARTICLE II
STOCK
SECTION 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number and
kind and class of shares owned by him in the Corporation. Each certificate
shall be signed by the Chairman of the Board or the President or a Vice
President and countersigned by the Secretary or an assistant secretary or the
Treasurer or an assistant treasurer.
The signatures may be either manual or facsimile signatures. If case any
officer who has signed any certificate ceases to be an officer of the
Corporation before the certificate is issued, the certificate may nevertheless
be issued by the Corporation with the same effect as if the officer had not
ceased to be such officer as of the date of its issue. Each stock certificate
shall include on its face the name of the Corporation, the name of the
stockholder and the class of stock and number of shares represented by the
certificate. If the Corporation has authority to issue stock of more than one
class, the stock certificate shall contain on its face or back a full statement
or summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of the stock of each class which the
Corporation is authorized to issue and if the Corporation is authorized to issue
any preferred or special class in series, the differences in the relative rights
and preferences between the shares of each series to the extent they have been
set, and the authority of the Board of Directors to set the relative rights and
preferences of subsequent series. In lieu of such full statement or summary,
there may be set forth upon the face or back of the certificate a statement that
the Corporation will furnish to any stockholder upon request and without
charge, a full statement of such information. A summary of such information
included in a registration statement permitted to become effective under the
Securities Act of 1933, as amended, shall be an acceptable summary for the
purposes of this Section. Every stock certificate representing shares of stock
which are restricted as to transferability by the
<PAGE>
Corporation shall contain a full statement of the restriction or state that the
Corporation will furnish information about the restriction to the stockholder on
request and without charge.
SECTION 2. LOST CERTIFICATES. The Board of Directors may order a new
certificate or certificates of stock to be issued in place of any certificates
shown to have been lost, stolen or destroyed under such terms and conditions as
the Board of Directors deems reasonable. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
stolen, lost or destroyed certificate or certificates, or his legal
representative, to give the Corporation a bond, with sufficient surety to the
Corporation to indemnify it against any loss or claim which may arise by reason
of the issuance of a new certificate.
SECTION 3. TRANSFER AGENTS AND REGISTRARS. At such time as the
Corporation lists its securities on a national securities exchange or NASDAQ,
the Board of Directors shall appoint one or more banks or trust companies in
such city or cities as the Board of Directors may deem advisable, from time to
time, to act as transfer agents and/or registrars of the shares of stock of the
Corporation; and, upon such appointments being made, no certificate representing
shares shall be valid until countersigned by one of such transfer agents and
registered by one of such registrars.
SECTION 4. TRANSFER OF STOCK. No transfers of shares of stock of the
Corporation shall be made if (i) void AB INITIO pursuant to any Article of the
Corporation's Charter, or (ii) the Board of Directors, pursuant to such Article,
shall have refused a tender of such shares. Permitted transfers of shares of
stock of the Corporation shall be made on the stock records of the Corporation
only upon the instruction of the registered holder thereof, or by his attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary or with a transfer agent or transfer clerk, and upon surrender of the
certificate or certificates, if issued, for such shares properly endorsed or
accompanied by a duly executed stock transfer power and the payment of all taxes
thereon. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, as to any transfers
not prohibited by such Article of the Charter or by action of the Board of
Directors thereunder, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
SECTION 5. FIXING OF RECORD DATES; CLOSING OF TRANSFER BOOKS. The Board
of Directors may fix, in advance, a date as the record date for the purpose of
determining stockholders entitled to notice of, or to vote at, any meeting of
stockholders, or stockholders entitled to receive payment of any dividend or the
allotment of any rights, or in order to make a determination of stockholders for
any other proper purpose. Such date, in any case, shall be not more than ninety
(90) days, and in case of a meeting of stockholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination of stockholders is to be taken.
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SECTION 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments, if any, a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
SECTION 7. REGULATIONS. The Board of Directors may make such additional
rules and regulations, not inconsistent with the Bylaws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation.
ARTICLE III
STOCKHOLDERS' MEETING
SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation shall be held in each year at the principal office of the
Corporation or at such other place in the United States as the Board of
Directors may determine, at a time and date determined by the Board of Directors
which time and date shall be within one hundred eighty (180) days after the last
day of the Corporation's fiscal year, for the purpose of electing Directors and
for the transaction of such other business as may lawfully be brought before the
meeting.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the President, the Chairman of
the Board of Directors, by a majority of the Board of Directors, by a majority
of the Independent Directors (as defined in Section 1 of Article IV hereof), or
the stockholders entitled to cast at least twenty-five percent (25%) of the
votes which all stockholders are entitled to cast at a particular meeting.
SECTION 3. NOTICES. Notice of the annual meeting and of any special
meeting of stockholders shall, at least ten (10) days but not more than ninety
(90) days prior to the date thereof, be mailed to each stockholder entitled to
vote thereat at his last known post office address as the same appears on the
records of the Corporation. Every notice of a special meeting shall state
briefly the purpose or purposes thereof, and no business, other than that
specified in such notice and matters germane thereto, shall be transacted at any
special meeting without further notice to stockholders not present in person or
by proxy.
SECTION 4. QUORUM; MANNER OF ACTING AND ADJOURNMENT. The charter of the
Corporation provides that a majority of the stock issued and outstanding and
entitled to vote and represented by the holders of record thereof in person or
by proxy shall constitute a quorum at any meeting of stockholders, but less than
such a majority may adjourn the meeting from time to time, and at any such
adjourned meeting, any business may be transacted which might have been
transacted if the meeting had been held as originally called.
If a meeting cannot be organized because a quorum has not attended, the
stockholders entitled to vote and present in person or represented by proxy may
adjourn the meeting to such time and place as they may determine. At any such
adjourned meeting at which a quorum may
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be present, such business may be transacted as might have been transacted at the
meeting as originally called. No notice of any adjourned meeting of the
stockholders of the Corporation shall be required to be given, except by
announcement at the meeting, unless the adjournment is for more than thirty (30)
days or, after the adjournment, a new record date is fixed for the adjourned
meeting.
Except as otherwise specified in the Charter or these Bylaws or provided by
applicable law, the acts, at a duly organized meeting, of stockholders present
in person or by proxy entitled to cast at least a majority of the votes which
all stockholders present in person or by proxy are entitled to cast, shall be
the acts of the stockholders.
SECTION 5. ORGANIZATION. At every meeting of the stockholders, (i) the
Chairman of the Board shall conduct the meeting or, in the case of vacancy in
office or absence of the Chairman of the Board, one of the following officers
present shall conduct the meeting in the order stated: the Vice Chairman of the
Board, if there be one, the President, the Vice Presidents in their order of
rank and seniority, or a Chairman chosen by the stockholders entitled to cast a
majority of the votes which all stockholders present in person or by proxy are
entitled to cast; and (ii) shall act as Chairman, and the Secretary or, in his
absence, an assistant secretary, or in the absence of both Secretary and
assistant secretaries, a person appointed by the Chairman, shall act as
Secretary.
SECTION 6. PROXIES. Any stockholder entitled to vote at a meeting of the
stockholders may be represented and vote thereat by proxy, authorized or
appointed by an instrument in writing subscribed by such stockholder or by his
duly authorized agent and submitted to the Secretary at or before such meeting.
A proxy is revocable by the stockholder at any time without condition or
qualification unless the proxy states that it is irrevocable and the proxy is
coupled with an interest. A proxy may be made irrevocable for such time as it
is coupled with an interest.
SECTION 7. VOTING. Each stockholder entitled to vote in accordance with
the terms and provisions of the Articles and these Bylaws, except the holder of
shares which have been called for redemption and with respect to which an
irrevocable deposit of funds has been made, shall be entitled to one vote, in
person or by proxy, for each share of stock entitled to vote held by such
stockholder. Upon the demand of any stockholder, the vote for directors and
upon any question before the meeting shall be by ballot.
SECTION 8. VOTING RIGHTS. The officer or agent of the Corporation having
charge of the transfer books for shares of the Corporation shall make, at least
ten (10) days before each meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each, which list shall be kept on file at the registered office of the
Corporation. Such list also shall be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any stockholder
during the whole time of the meeting. The original share ledger or transfer
book, or duplicate thereof, shall be prima facia evidence as to who are the
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stockholders entitled to examine such list or share ledger or transfer book, or
to vote, in person or by proxy, at any meeting of stockholders.
SECTION 9. INFORMAL ACTION BY STOCKHOLDERS. Unless otherwise provided by
law, any action required to be taken at a meeting of the stockholders, or any
other action which may be taken at a meeting of the stockholders, may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the stockholders entitled to vote with respect to the
subject matter thereof.
SECTION 10. NOTICE OF NOMINATIONS AND OTHER STOCKHOLDER BUSINESS AND
NOMINATIONS
(A) ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of other business to be considered by the
stockholders at an annual meeting of stockholders may be made (a) pursuant to
the Corporation's notice of meeting delivered pursuant to Section 3 of this
Article III, (b) by or at the direction of the Chairman of the Board of
Directors or (c) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complied with the notice procedures set forth in clauses (2)
and (3) of this paragraph (A) of this Bylaw and who is a stockholder of record
at the time such notice is delivered to the Secretary of the Corporation.
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered to the Secretary, at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the first anniversary of the preceding year's annual meeting; PROVIDED,
HOWEVER, that in the event that the date of the annual meeting is advanced by
more than thirty (30) days or delayed by more than sixty (60) days from such
anniversary date, notice by the stockholders to be timely must be so delivered
not earlier than the ninetieth (90th) day prior to such annual meeting and not
later than the close of business on the later of the sixtieth (60th) day prior
to such annual meeting or the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected; (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of
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such beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Bylaw to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the Corporation
at least seventy (70) days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this Bylaw shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of naming pursuant to Section 3
of this Article III. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which Directors
are to be elected pursuant to the Corporation's notice of meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
corporation who is entitled to vote at the meeting, who complies with the notice
procedures set forth in this Bylaw and who is a stockholder of record at the
time such notice is delivered to the Secretary of the Corporation. Nominations
by stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholder's. Notice required by paragraph (A)(2) of
this Bylaw shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the ninetieth (90th) day prior to
such special meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such special meeting and the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(C) GENERAL.
(1) Only persons who are nominated in accordance with the procedures
set forth in this Bylaw shall be eligible to be elected to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Bylaw. Except as otherwise provided by law, the Charter or these
Bylaws, the chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made in accordance with the procedures set forth in this Bylaw, and, if any
proposed nomination or business is not in compliance with this Bylaw, to declare
that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable
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national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act
(3) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE IV
DIRECTORS
SECTION 1. NUMBER AND CLASS.
(A) The affairs of the Corporation shall be under the direction of the
Board of Directors which shall be divided into three classes, designated Classes
I, II and III. Class I shall be comprised of one director, Class II of two
directors and Class III of two directors, provided that in the event the number
of directors comprising the board is increased or decreased at any time, the
number of directors shall be divided among the classes as nearly equal in number
as possible. The initial directors of Class I shall be elected to hold office
for a term expiring as of the 1998 annual meeting of stockholders of the
Corporation. The initial Class II directors shall be elected to hold office for
a term expiring at the 1999 annual meeting of stockholders of the Corporation.
The initial Class III directors shall be elected to hold office for a term
expiring at the 2000 annual meeting of stockholders of the Corporation. At each
annual meeting following the initial classification and election, the respective
successors of each class shall be elected for a three-year term.
(B) The number of directors comprising the Board of Directors shall be
five or such other number as shall be fixed from time to time by a vote of
eighty percent 80% of the entire Board of Directors; provided, however, the
number of directors shall not exceed seven (7) nor be less than three (3) except
as permitted by law and the Charter of the Corporation. The tenure of office of
a director shall not be affected by any decrease or increase in the number of
directors so made by the Board of Directors. In the event the number of
directors is increased in advance of any annual meeting of stockholders, the
Board of Directors shall elect a director or directors to fill such vacancies
until the next annual meeting of stockholders, and shall appoint then to a
class.
(C) During the time that the Corporation is to qualify as a real estate
investment trust ("REIT"), except in the case of a vacancy, a majority of the
Board of Directors shall be Independent Directors (as hereinafter defined). For
purposes of these Bylaws, "Independent Director" shall mean a director of the
Corporation who is not affiliated, directly or indirectly, with any person or
entity, if any, responsible for directing or performing the day-to-day business
affairs of the Corporation (the "Manager"), whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or service as an officer or director of the Manager or an affiliated
business entity of the Manager; PROVIDED, HOWEVER,
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that a director shall not be considered an Independent Director if he or she is
serving as a director of more than three REITs organized by the Manager or its
affiliated business entities. "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 five percent (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 five percent (5%) or more of any class of equity
securities ("person" includes any individual, corporation, partnership, trust,
or other entity). Directors need not be stockholders in the Corporation.
SECTION 2. POWER. All the powers of the Corporation are vested in and
shall be exercised by the Board of Directors except as otherwise prescribed by
statute, by the Articles or by these Bylaws. If the entire Board of Directors
should become vacant, any stockholder may call a special meeting and Directors
for the unexpired term may be elected at the said special meeting in the same
manner as provided for their election at annual meetings.
SECTION 3. VACANCIES. Any vacancy occurring on the Board of Directors for
any cause other than by reason of an increase in the number of directors may,
subject to the provisions of Section 5, be filled by a majority of the remaining
members of the Board of Directors, although such majority is less than a quorum;
provided, however, that if the Corporation has sought to qualify as a REIT and
in accordance with Section 1 of this Article IV a majority of the Board of
Directors are required to be Independent Directors, then Independent Directors
shall nominate replacements for vacancies among the Independent Directors, which
must be elected by a majority of the directors, including a majority of the
Independent Directors. Any vacancy occurring by reason of an increase in the
number of directors may be filled by action of a majority of the entire Board of
Directors including a majority of Independent Directors. If the stockholders of
any class or series are entitled separately to elect one or more directors, a
majority of the remaining directors elected by that class or series or the sole
remaining director elected by that class or series may fill any vacancy among
the number of directors elected by that class or series. A director elected by
the Board of Directors to fill a vacancy shall be elected to hold office until
the next annual meeting of stockholders and until his successor is elected and
qualified.
SECTION 4. RESIGNATIONS. Any director or member of a committee may resign
at any time. Such resignation shall be made in writing and shall take effect at
the time specified therein, or if no time be specified, at the time of the
receipt by the Chairman of the Board, the President or the Secretary.
SECTION 5. REMOVAL. At any meeting of stockholders duly called and at
which a quorum is present, the stockholders may, by the affirmative vote of the
holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office with cause, and
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may elect a successor or successors to fill any resulting vacancies for the
unexpired terms of removed directors.
SECTION 6. COMMITTEES OF THE BOARD. The Board of Directors may appoint
from among its members, an executive committee and other committees comprised of
two (2) or more directors. A majority of the members of any committee, except
the executive committee, so appointed shall be Independent Directors. If the
Corporation lists its shares on a national securities exchange or on the
National Association of Securities Dealers, Inc.'s Automated Quotation System
("NASDAQ"), the Board of Directors shall appoint an audit committee comprised of
not less than two (2) members, all of whom are Independent Directors. The Board
of Directors may delegate to any committee any of the powers of the Board of
Directors except the power to elect directors, declare dividends or
distributions on stock, recommend to the stockholders any action which requires
stockholder approval, amend or repeal the Bylaws, approve any merger or share
exchange which does not require stockholder approval or issue stock. If,
however, the Board of Directors has given general authorization for the issuance
of stock, a committee of the Board, in accordance with a general formula or
method specified by the Board of Directors by resolution or by adoption of a
stock option plan, may fix the terms of stock subject to classification or
reclassification and the terms on which any stock may be issued.
Notice of committee meetings shall be given in the same manner as notice
for special meetings of the Board of Directors.
The Board of Directors may designate a chairman of any committee, and such
chairman may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any such
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously, if there are
only two members, or by a majority, if there are more than two members, appoint
another director to act at the meeting in the place of such absent or
disqualified members; provided, however, that in the event of the absence or
disqualification of an Independent Director, such appointee shall be an
Independent Director.
Each committee shall keep minutes of its proceedings and shall report the
same to the Board of Directors at the meeting next succeeding, and any action by
the committees shall be subject to revision and alteration by the Board of
Directors, provided that no rights of third persons shall be affected by any
such revision or alteration.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified member, or to dissolve any such committee.
SECTION 7. MEETINGS OF THE BOARD OF DIRECTORS. Meetings of the Board of
Directors, regular or special, may be held at any place in or out of the State
of Maryland as the Board may from time to time determine or as shall be
specified in the notice of such meeting.
Members of the Board of Directors may participate in a meeting by means of
a conference telephone or similar communications equipment if all persons
participating in the
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meeting can hear each other at the same time. Participation in a meeting by
such means constitutes presence in person at a meeting.
The first meeting of each newly elected Board of Directors shall be held as
soon as practicable after the annual meeting of the stockholders at which the
directors were elected. The meeting may be held at such time and place as shall
be specified in a notice given as hereinafter provided for special meetings of
the Board of Directors, or as shall be specified in a written waiver signed by
all of the directors as provided in Section 8, except that no notice shall be
necessary if such meeting is held immediately after the adjournment, and at the
site, of the annual meeting of stockholders.
Special meetings of the Board of Directors may be called at any time by two
(2) or more directors or by a majority of the members of the executive
committee, if one be constituted, in writing with or without a meeting of such
committee, or by the Chairman of the Board or the President. Special meetings
may be held at such place or places in or out of the State of Maryland as may be
designated from time to time by the Board of Directors; in the absence of such
designation, such meetings shall be held at such places as may be designated in
the notice of meeting.
Notice of the place and time of every meeting of the Board of Directors
shall be delivered by the Secretary to each director either personally or by
telephone, telegraph, overnight courier or facsimile, or by leaving the same at
his residence or usual place of business at least twenty-four (24) hours before
the time at which such meeting is to be held or, if by first-class mail, at
least four (4) days before the day on which such meeting is to be held. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the director at his post office address as it appears
on the records of the Corporation, with postage thereon paid.
SECTION 8. INFORMAL ACTION BY DIRECTORS. Unless otherwise provided by
law, any action required to be taken at a meeting of the directors or any other
action which may be taken at a meeting of the directors may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 9. QUORUM AND VOTING. At all meetings of the Board, a majority of
the entire Board of Directors shall constitute a quorum for the transaction of
business, and the action of a majority of the directors present at any meeting
at which a quorum is present shall be the action of the Board of Directors
unless the concurrence of a greater proportion is required for such action by
law, the Corporation's Charter or these Bylaws. If a quorum shall not be
present at any meeting of the directors, the directors present thereat may, by a
majority vote, adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 10. ORGANIZATION. The Chairman of the Board shall preside at each
meeting of the Board of Directors. In the absence or inability of the Chairman
of the Board to preside at a meeting, the President or, in his absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside thereat. The
Secretary
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(or, in his absence or inability to act, any person appointed by the chairman of
the meeting) shall act as Secretary of the meeting and keep the minutes thereof.
SECTION 11. COMPENSATION OF DIRECTORS. Independent Directors shall receive
a stated salary for their services or a fixed sum, and expenses of attendance
for attendance at each regular or special meeting of the Board of Directors, or
of any committee thereof or both, as may be determined from time to time by the
Board. Nothing herein contained shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
SECTION 12. INVESTMENT POLICIES AND RESTRICTIONS. The Board of Directors,
including a majority of the Independent Directors, shall approve the investment
policies of the Corporation which initially shall be as set forth in the
Registration Statement (as defined below) on Form S-11 and this Section 12. The
investment policies and compliance therewith shall be reviewed by the
Independent Directors quarterly to determine that the policies then being
followed by the Corporation are in the best interest of the stockholders of the
Corporation. Each such determination and the basis therefor shall be set forth
in the minutes of the meeting of the Board of Directors.
It shall be the duty of the Board of Directors to ensure that the purchase,
sale, retention and disposal of the Corporation's assets, and the investment
policies of the Corporation and the limitations thereon or amendment thereof are
at all times:
(A) consistent with such policies, limitations and restrictions as are
contained in this Section 12, or recited in the registration statement on Form
S-11, as amended (the "Registration Statement"), filed with the Securities and
Exchange Commission in connection with this Corporation's initial public
offering of common stock (the "Initial Public Offering"); and
(B) in compliance with the restrictions applicable to REITs pursuant to
the Internal Revenue Code of 1986, as amended.
SECTION 13. MANAGEMENT ARRANGEMENTS. The Board of Directors may delegate
the duty of management of the assets and the administration of the Corporation's
day-to-day operations to a Manager pursuant to a written contract or contracts,
or any renewal thereof, which have obtained the requisite approvals of the Board
of Directors, including a majority of the Independent Directors, or the
stockholders of the Corporation, as provided in the Charter.
All transactions involving the Corporation in which the Manager has an
interest must be approved by a majority of the Independent Directors.
The Board of Directors shall evaluate the performance of the Manager before
entering into or renewing any management arrangement. The minutes of meetings
with respect to such evaluation shall reflect the criteria used by the Board of
Directors in making such evaluation. Upon any termination of the initial
management arrangements reflected in the Registration Statement, the Board of
Directors shall determine (a) to perform the management function for the
Corporation, and (b) to justify the compensation provided for in its contract
with the
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Corporation. The initial contract for the services of a Manager entered into by
the Board of Directors shall have a term of no more than two (2) years,
renewable at or prior to expiration of the contract. Each contract shall be
terminable without cause by a majority of the Independent Directors or the
Manager on sixty (60) days' written notice.
The Independent Directors shall determine at least annually, following the
Manager's initial term, that the compensation which the Corporation contracts to
pay the Manager is reasonable in relation to the nature and quality of services
performed and also shall supervise performance of the Manager and the
compensation paid to it by the Corporation to determine that the provisions of
such contract are being carried out. Each such determination shall be based
upon the following factors and all other factors the Independent Directors may
deem relevant and the findings of the Independent Directors on each of such
factors shall be recorded in the minutes of the Board of Directors:
(A) the size of the management fee in relation to the size, compensation
and profitability of the investment portfolio of the Corporation;
(B) the success of the Manager in generating opportunities that meet the
investment objectives of the Corporation;
(C) the rates charged to other Corporations similar to the Corporation and
to other investors by advisors performing similar services;
(D) additional revenues realized by the Manager and its affiliates through
their relationship with the Corporation, including loan administration,
underwriting or other commissions, fees for issuance and administration services
in connection with issuances of structured securities and other fees, whether
paid by the Corporation or by others with whom the Corporation does business;
(E) the quality and extent of service and advice furnished to the
Corporation;
(F) the performance of the investment portfolio of the Corporation,
including income, conservation or appreciation of capital, frequency of problem
investments and competence in dealing with distress situations; and
(G) the quality of the investment portfolio of the Corporation in
relationship to the investments generated by the Manager for its own account.
SECTION 14. TOTAL EXPENSES. The Independent Directors shall determine,
from time to time to time but at least annually, that the total fees and
expenses of the Corporation are reasonable in light of all relevant factors.
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ARTICLE V
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman
of the Board, a President, a Treasurer and a Secretary, who shall be elected by
the Board of Directors to serve for one year and until their respective
successors are elected and qualified, except as otherwise provided in any
employment agreement between the Corporation and any officer. The President
shall always be a member of the Board of Directors. The Board of Directors may
also appoint one or more Vice Presidents. The same person may hold any two or
more offices except those of President and Vice President.
SECTION 2. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The Board of
Directors may from time to time elect such officers and appoint such committees,
employees or other agents as the business of the Corporation may require,
including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws, or as the Board of
Directors may from time to time determine. The directors may delegate to any
officer or committee the power to elect subordinate officers and to retain or
appoint employees or other agents.
SECTION 3. PRESIDENT. The President shall, subject to the control of the
directors, in general supervise and control all of the business and affairs of
the Corporation. He may sign, with the Secretary or any other proper officer of
the Corporation thereunto authorized by the directors, certificates for shares
of the Corporation, any deeds, mortgages, bonds, contracts, or other instruments
which the directors have authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the directors or
by these Bylaws to some other officer or agent of the Corporation, or shall be
required by law to be otherwise signed or executed; and in general shall perform
all duties incident to the office of president and such other duties as may be
prescribed by the directors from time to time.
SECTION 4. VICE PRESIDENT. In the absence of the President or in event of
his death, inability or refusal to act, the Vice President shall perform all the
powers of and subject to all, the restrictions upon the President. The Vice
President shall perform such other duties as from to time may be assigned to him
by the President or by the directors.
SECTION 5. SECRETARY. The Secretary shall keep the minutes of the
stockholders' and of the directors' meetings in one or more books provided for
that purpose, see that all notices are duly given in accordance with the
provisions of these Bylaws or as required, be custodian of the corporate records
and of the seal of the Corporation and keep a register of the post office
address of each Stockholder which shall be furnished to the Secretary by such
stockholder, have general charge of the stock transfer books of the Corporation
and, in general, perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him by the President or by
the directors.
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SECTION 6. TREASURER. The Treasurer shall have charge and custody of and
be responsible for all funds and securities of the Corporation; receive and give
receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these Bylaws and in general perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him by the President or by the directors.
SECTION 7. OTHER OFFICERS. The other officers of the Corporation shall
perform such duties as the President may from time to time assign to them.
SECTION 8. REMOVAL. Any officer elected by the Board of Directors may be
removed, either for or without cause, at any time upon the vote of a majority of
the Board of Directors. Any other employee of the Corporation may be removed or
dismissed at any time by the President.
SECTION 9. RESIGNATION. Any officer or agent may resign at any time by
giving written notice to the Board of Directors, or to the President or to the
Secretary of the Corporation. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 10. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, shall be filled by
the Board of Directors or by the officer or remaining members of the committee
to which the power to fill such office has been delegated pursuant to Section 2
of this Article, as the case may be, and if the office is one for which these
Bylaws prescribe a term, shall be filled for the unexpired portion of the term.
SECTION 11. SALARIES. The salaries of the officers elected by the Board of
Directors shall be fixed from time to time by the Board of Directors or by such
officer as may be designated by resolution of the Board. The salaries or other
compensation of any other officers, employees and other agents shall be fixed
from time to time by the officer or committee to which the power to elect such
officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 2 of this Article. No officer shall be prevented
from receiving such salary or other compensation by reason of the fact that he
is also a director of the Corporation.
ARTICLE VI
SIGNATURES
SECTION 1. NEGOTIABLE INSTRUMENTS. All checks, drafts or notes of the
Corporation shall be signed and/or countersigned by such officer, officers,
agent or agents of the Corporation as may be so designated from time to time by
the Board of Directors of the Corporation.
SECTION 2. STOCK TRANSFER. All endorsements, assignments, stock powers or
other instruments of transfer of securities standing in the name of the
Corporation shall be executed for
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and in the name of the Corporation by the President or Vice President or by such
officer as the Board of Directors may designate.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall end on the last day of each year.
ARTICLE VIII
WAIVER OF NOTICE
Whenever, under the provisions of these Bylaws or of any law, the
stockholders or Directors are authorized to hold any meeting after notice, or
after the lapse of any prescribed period of time, such meeting may be held
without notice, or without such lapse of time, by the written waiver of such
notice signed by every person entitled to notice, or if every person entitled to
notice shall be present at such meeting.
ARTICLE IX
AMENDMENTS
SECTION 1. GENERAL AMENDMENTS. These Bylaws, except as otherwise provided
in Section 2 of this Article IX, may be amended, added to, rescinded or repealed
either: (1) by the vote of the stockholders entitled to cast at least a
majority of the votes which all stockholders are entitled to cast thereon at any
duly organized annual or special meeting of stockholders; or (2) with respect to
those matters which are not by statute reserved exclusively to the stockholders,
by vote of a majority of the Board of Directors, including a majority of the
Independent Directors in office at any regular or special meeting of directors
(except for provisions specifying that a majority vote of the Independent
Directors is required for the approval of certain matters, which provision may
be amended, added to, rescinded or repealed only with the approval of a majority
of the Independent Directors).
SECTION 2. CLASSIFIED BOARD AMENDMENTS. A vote of the stockholders
entitled to cast at least a two-thirds of all the votes entitled to cast thereon
at any duly held annual or special meeting of stockholders or a vote of 80% of
the Board of Directors is required to amend, alter, change, repeal or adopt any
provisions inconsistent Article IV, Section 1 of these Bylaws.
ARTICLE X
INDEMNIFICATION
SECTION l. PROCEDURE. Any indemnification, or payment of expenses in
advance of the final disposition of any proceeding, shall be made promptly, and
in any event within sixty (60) days, upon the written request of the director or
officer entitled to seek indemnification (the "Indemnified Party"). The right
to indemnification and advances hereunder shall be enforceable
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by the Indemnified Party in any court of competent jurisdiction, if (i) the
Corporation denies such request, in whole or in part, or (ii) no disposition
thereof is made within sixty (60) days. The Indemnified Party's costs and
expenses incurred in connection with successfully establishing his or her right
to indemnification, in whole or in part, in any such action shall also be
reimbursed by the Corporation. It shall be a defense to any action for advance
for expenses that (a) a determination has been made that the facts then known to
those making the determination would preclude indemnification or (b) the
Corporation has not received either (i) an undertaking as required by law to
repay such advances in the event it shall ultimately be determined that the
standard of conduct has not been met or (ii) a written affirmation by the
Indemnified Party of such Indemnified Party's good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met.
SECTION 2. EXCLUSIVITY, ETC. The indemnification and advance of expenses
provided by the Charter and these Bylaws shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advance of expenses
may be entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors or other provision that is consistent
with law, both as to action in his or her official capacity and as to action in
another capacity while holding office or while employed by or acting as agent
for the Corporation and such rights, shall continue in respect of all events
occurring while a person was a director or officer after such person has ceased
to be a director or officer, and shall inure to the benefit of the estate,
heirs, executors and administrators of such person. All rights to
indemnification and advance of expenses under the Charter of the Corporation and
hereunder shall be deemed to be a contract between the Corporation and each
director or officer of the Corporation who serves or served in such capacity at
any time while this Bylaw is in effect. Nothing herein shall prevent the
amendment of this Bylaw, provided that no such amendment shall diminish the
rights of any person hereunder with respect to events occurring or claims made
before its adoption or as to claims made after its adoption in respect of events
occurring before its adoption. Any repeal or modification of this Bylaw shall
not in any way diminish any rights to indemnification or advance of expenses of
such director or officer or the obligations of the Corporation arising hereunder
with respect to events occurring, or claims made, while this Bylaw or any
provision hereof is in force.
SECTION 3. SEVERABILITY; DEFINITIONS. The invalidity or unenforceability
of any provision of this Article X shall not affect the validity or
enforceability of any other provision hereof.
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 1. BOOKS AND RECORDS. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors.
The books and records of the Corporation may be in written form or in any other
form which can be converted within a reasonable time into written
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form for visual inspection. Minutes shall be recorded in written form but may
be maintained in the form of a reproduction. The original or a certified copy
of the Bylaws shall be kept at the principal office of the Corporation.
SECTION 2. VOTING SHARES IN OTHER CORPORATIONS. Stock of other
corporations or associations, registered in the name of the Corporation, may be
voted by the President, a Vice President, or a proxy appointed by either of
them. The Board of Directors, however, may by resolution appoint some other
person to vote such shares, in which case such person shall be entitled to vote
such shares upon the production of a certified copy of such resolution.
SECTION 3. ANNUAL STATEMENT OF AFFAIRS. The President or chief accounting
officer shall prepare annually a full and correct statement of the affairs of
the Corporation, to include a balance sheet and a financial statement of
operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
SECTION 4. MAIL. Except as herein expressly provided, any notice or other
document which is required by these Bylaws to be mailed shall be deposited in
the United States mails, postage prepaid.
SECTION 5. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his or her duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon the opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
SECTION 6. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation, in his or her personal capacity or in a capacity as an affiliate,
employee or agent of any other person, or otherwise, may have business interests
and engage in business activities similar to or in addition to those of or
relating to the Corporation.
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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
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Name: William Marshall
Date: September 14, 1997
