<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997
REGISTRATION NO. 333-35673
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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; 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; DISTRIBUTION POLICY; PRINCIPAL
STOCKHOLDERS
18. Description of Registrant's Securities............... OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS
SUMMARY; DESCRIPTION OF CAPITAL STOCK; 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>
- ------------------------
* Not Applicable
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 29, 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 specialty finance
company, organized in September 1997, 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 Advisers Inc., a Delaware corporation and
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. It is currently anticipated that the initial public offering price for
the Common Stock will be $15.00 per share. The Company's Common Stock has been
approved for listing on the New York Stock Exchange (the "NYSE"), subject to
official notice of issuance, and is expected to trade under the symbol LMM.
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK,
INCLUDING, AMONG OTHERS:
- The Company was organized in September 1997 and has no operating history,
no assets, no identified investments and no established financing sources
- Conflicts of interest of the Manager, including with other accounts it
manages; incentive fee that may encourage speculative investments
- The Chief Executive Officer of the Company and the Manager is subject to a
cease and desist order of the Securities and Exchange Commission arising
out of trading activities in Mortgage Securities
- Total reliance on the Manager, which has significant operating discretion,
including as to the use of proceeds of the Offering
- Highly leveraged investments; no limitations on borrowings
- Volatile investments, including mortgage derivatives, are sensitive to
interest rates and mortgage prepayments
- Complex hedging strategies; no significant credit risk or hedging policies
- Significant potential dilution from future equity offerings
- Adverse consequences for failing REIT tests
- Board of Directors may change certain policies without stockholder consent
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 offered subject to prior sale, when, as and
if delivered to, and accepted by, the Underwriters and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167 on or about
, 1997.
--------------------------
BEAR, STEARNS & CO. INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 6
RISK FACTORS................................... 12
Operating Risks................................ 12
GENERAL...................................... 12
NEWLY-ORGANIZED CORPORATION; NO ESTABLISHED
FINANCING.................................. 12
NO IDENTIFIED ASSETS; DISCRETIONARY USE OF
PROCEEDS................................... 12
CONFLICTS OF INTEREST OF THE MANAGER......... 12
INVOLVEMENT OF OFFICERS IN CERTAIN LEGAL
PROCEEDINGS................................ 13
RELIANCE ON THE MANAGER; TERMINATION OF THE
MANAGEMENT AGREEMENT....................... 13
SUBSTANTIAL LEVERAGE AND POTENTIAL NET
INTEREST AND OPERATING LOSSES.............. 14
LEVERAGING STRATEGY........................ 14
BORROWING RISKS; MARGIN CALLS.............. 14
NO RESTRICTION ON THE INCURRENCE OF
ADDITIONAL INDEBTEDNESS.................... 15
RISK OF POTENTIAL FUTURE OFFERINGS;
DILUTION................................... 15
INTEREST RATE FLUCTUATIONS................... 15
GENERAL.................................... 15
INTEREST RATE MISMATCH BETWEEN ASSET YIELDS
AND BORROWING RATES...................... 15
YIELD CURVE RESHAPING...................... 15
CHANGING PREPAYMENT RATES.................. 16
CONSEQUENCE AND COSTS OF HEDGING
TRANSACTIONS............................... 17
COMPETITION FOR MORTGAGE ASSETS AT FAVORABLE
YIELDS AND FOR FINANCING................... 18
SENSITIVITY TO LOSSES AND FLUCTUATIONS IN
INTEREST RATES OF CERTAIN MORTGAGE
SECURITIES................................. 18
CMOS....................................... 18
IOS........................................ 18
INVERSE IOS................................ 18
SUB IOS.................................... 18
FLOATING RATE MORTGAGE DERIVATIVES......... 19
SUBORDINATE INTERESTS...................... 19
OTHER FIXED-INCOME ASSETS.................. 19
POSSIBLE LOSSES ON MORTGAGE LOANS............ 20
CREDIT RISKS................................. 20
Legal, Tax and Other Risks..................... 21
FAILURE TO MAINTAIN REIT STATUS WOULD SUBJECT
COMPANY TO ADDITIONAL TAX.................. 21
<CAPTION>
PAGE
-----
<S> <C>
PLEDGED ASSETS AND RISK OF BANKRUPTCY IN
REVERSE REPURCHASE AGREEMENTS.............. 21
POSSIBLE ENVIRONMENTAL LIABILITIES........... 22
CONSEQUENCES OF FAILURE TO MAINTAIN
INVESTMENT COMPANY ACT EXCEPTION........... 22
TAXABLE MORTGAGE POOL RISK; INCREASED
TAXATION TO TAX EXEMPT ENTITIES AND OTHER
INVESTORS.................................. 22
PHANTOM INCOME............................... 23
OWNERSHIP LIMITATION MAY RESTRICT BUSINESS
COMBINATION OPPORTUNITIES.................. 23
PLANS SHOULD CONSIDER ERISA RISKS OF
INVESTING IN COMMON STOCK.................. 24
General Risks.................................. 24
PREFERRED STOCK MAY PREVENT CHANGE IN
CONTROL.................................... 24
BOARD OF DIRECTORS MAY CHANGE CERTAIN
POLICIES WITHOUT STOCKHOLDER CONSENT....... 25
LACK OF POLICY REGARDING HEDGING OR CREDIT
RISK; FUTURE REVISIONS IN POLICIES AND
STRATEGIES................................. 25
LIMITATION ON LIABILITY OF DIRECTORS AND
OFFICERS AND MANAGER INDEMNIFICATION....... 25
NO PRIOR TRADING MARKET; FAILURE TO DEVELOP
OR SUSTAIN AN ACTIVE TRADING MARKET........ 25
COMMON STOCK PRICE VOLATILITY RISK........... 25
ILLIQUIDITY OF CERTAIN INVESTMENTS........... 26
CERTAIN BENEFITS TO EXISTING STOCKHOLDER,
DIRECTORS AND OFFICERS..................... 26
USE OF PROCEEDS................................ 27
CAPITALIZATION................................. 28
DISTRIBUTION POLICY............................ 29
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 30
General........................................ 30
Leverage....................................... 30
Hedging........................................ 30
Liquidity and Capital Resources................ 31
Inflation...................................... 31
Certain Accounting Policies and Procedures..... 31
MORTGAGE SECURITY ACCOUNTING TREATMENT....... 31
TAXABLE INCOME AND GAAP INCOME............... 31
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
BUSINESS....................................... 32
General........................................ 32
Investment Strategy............................ 32
Operating Policies and Strategies.............. 33
OPERATING POLICIES........................... 33
CAPITAL AND LEVERAGE POLICIES................ 33
SHORT-TERM BORROWING......................... 34
SECURITIZATION............................... 35
HEDGING ACTIVITIES........................... 36
INTEREST RATE RISK MANAGEMENT STRATEGY....... 37
Employees...................................... 37
Facilities..................................... 38
Legal Proceedings.............................. 38
DESCRIPTION OF PROPOSED ASSETS................. 39
Mortgage Loans................................. 39
Pass-Through Certificates...................... 40
FHLMC CERTIFICATES........................... 40
FNMA CERTIFICATES............................ 41
GNMA CERTIFICATES............................ 42
PRIVATELY-ISSUED CERTIFICATES................ 42
CMOs........................................... 42
Mortgage Derivatives........................... 42
Subordinate Interests.......................... 43
Other Fixed-Income Assets...................... 44
THE MANAGER.................................... 45
Involvement of Officers in Certain Legal
Proceedings.................................. 46
The Management Agreement....................... 46
Management Fees................................ 48
Stock Options and Other Awards................. 49
Limits of Responsibility....................... 49
THE COMPANY.................................... 50
Directors and Executive Officers............... 50
Committees of the Board of Directors........... 50
Compensation of Directors...................... 51
Executive Compensation......................... 51
Stock Incentive Plan........................... 51
Grants of Awards............................... 54
Compensation Committee Interlocks.............. 54
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS AND CONFLICTS OF INTEREST....... 55
PRINCIPAL STOCKHOLDERS......................... 57
DIVIDEND REINVESTMENT PLAN..................... 58
FEDERAL INCOME TAX CONSIDERATIONS.............. 60
General........................................ 60
Requirements for Qualification................. 61
STOCK OWNERSHIP TESTS........................ 61
<CAPTION>
PAGE
-----
<S> <C>
ASSET TESTS.................................. 61
GROSS INCOME TESTS........................... 62
Distribution Requirement....................... 63
Taxation of the Company........................ 64
Taxation of Stockholders....................... 64
Taxation of Stockholders on the Disposition of
the Common Stock............................. 66
Capital Gains and Losses....................... 66
Information Reporting Requirement and Backup
Withholding.................................. 67
Taxation of Tax-Exempt Stockholders............ 67
Taxation of Non-U.S. Stockholders.............. 67
State and Local Taxes.......................... 68
ERISA CONSIDERATIONS........................... 69
Employee Benefit Plans, Tax-Qualified
Retirement Plans and IRA's................... 69
Status of the Company Under ERISA.............. 69
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
REAL PROPERTY INVESTMENTS.................... 72
General........................................ 72
Types of Mortgage Instruments.................. 72
Leases and Rents............................... 72
SECONDARY FINANCING: DUE-ON-ENCUMBRANCE
PROVISIONS................................. 73
DUE-ON-SALE PROVISIONS....................... 73
Condemnation and Insurance..................... 73
Foreclosure.................................... 74
GENERAL...................................... 74
JUDICIAL FORECLOSURE......................... 74
NON-JUDICIAL FORECLOSURE/POWER OF SALE....... 74
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF
CERTAIN PROVISIONS......................... 74
POST-SALE REDEMPTION......................... 75
ANTI-DEFICIENCY LEGISLATION.................. 75
COOPERATIVES................................. 76
Bankruptcy Laws................................ 76
Default Interest and Limitations on
Prepayments.................................. 77
Forfeitures in Drug and RICO Proceedings....... 78
Environmental Risks............................ 78
GENERAL...................................... 78
CERCLA....................................... 78
CERTAIN OTHER FEDERAL AND STATE LAWS......... 79
SUPERLIEN LAWS............................... 79
ADDITIONAL CONSIDERATIONS.................... 79
ENVIRONMENTAL SITE ASSESSMENTS............... 80
Applicability of Usury Laws.................... 80
Americans with Disabilities Act................ 80
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CERTAIN PROVISIONS OF MARYLAND LAW AND THE
COMPANY'S CHARTER AND BYLAWS................. 81
Certain Anti-Takeover Provisions............... 81
Staggered Board of Directors................... 81
Number of Directors, Removal, Filling
Vacancies.................................... 81
Advance Notice Provisions for Stockholder
Nominations and Stockholder Proposals........ 81
Rights to Purchase Securities and Other
Property..................................... 82
Indemnification................................ 82
Limitation of Liability........................ 82
Business Combinations.......................... 82
Control Share Acquisitions..................... 83
DESCRIPTION OF CAPITAL STOCK................... 83
General........................................ 83
<CAPTION>
PAGE
-----
<S> <C>
Common Stock................................... 83
Preferred Stock................................ 83
Registration Rights............................ 83
Repurchase of Shares and Restrictions on
Transfer..................................... 84
Transfer Agent and Registrar................... 86
SHARES ELIGIBLE FOR FUTURE SALE................ 87
UNDERWRITING................................... 88
PRIVATE PLACEMENT.............................. 89
LEGAL MATTERS.................................. 89
EXPERTS........................................ 90
ADDITIONAL INFORMATION......................... 90
GLOSSARY....................................... 91
INDEPENDENT AUDITORS' REPORT................... F-1
APPENDIX A--PAST PERFORMANCE RESULTS........... A-1
</TABLE>
5
<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. ANY DEFINED TERMS USED HEREIN AND NOT
OTHERWISE DEFINED SHALL HAVE THE MEANINGS GIVEN IN THE GLOSSARY.
AN INVESTMENT IN THE COMMON STOCK IS HIGHLY SPECULATIVE. IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS, INVESTORS SHOULD CAREFULLY CONSIDER THE
RISK FACTORS SET FORTH IN THIS SUMMARY AND "RISK FACTORS" BEGINNING ON PAGE 12.
THE COMPANY
GENERAL
LASER Mortgage Management, Inc. (the "Company") is a specialty finance
company, organized in September 1997, that will invest primarily in
mortgage-backed securities and mortgage loans. The mortgage-backed securities
include mortgage pass-through certificates, collateralized mortgage obligations
and other securities representing interests in, or obligations backed by, pools
of mortgage loans (collectively, the "Mortgage Securities"). The mortgage loans
will be secured by first or second liens on single-family residential,
multi-family residential, commercial or other real property (the "Mortgage
Loans" and, together with the Mortgage Securities, the "Mortgage Assets"). See
"DESCRIPTION OF PROPOSED ASSETS."
The Company will seek to generate net income for distribution to
stockholders from the spread between the interest income earned on its
investment portfolio and the cost of financing and hedging the portfolio. The
Company will elect to be taxed as a real estate investment trust (a "REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"). The Company
generally will not be subject to federal income tax provided that it distributes
its income to its stockholders and maintains its qualification as a REIT. See
"FEDERAL INCOME TAX CONSIDERATIONS." LASER Advisers Inc. (the "Manager"), which
specializes in managing investments in Mortgage Securities for institutions and
other sophisticated investors, will manage the Company's day-to-day operations.
The Manager is a newly-organized registered investment adviser. 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 be designed to generate income for distribution to
its stockholders while preserving the Company's capital base.
The Company intends to acquire the following types of investments: (i) fixed
and adjustable rate mortgage pass-through certificates ("Pass-Through
Certificates"), which are securities collateralized by pools of Mortgage Loans
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
6
<PAGE>
to receive payments from the underlying Mortgage Loans; and (vi) other
fixed-income securities in an amount not to exceed 5% of total assets. See
"DESCRIPTION OF PROPOSED ASSETS." Consistent with the Company's policy of
maintaining its status as a REIT for federal income tax purposes, substantially
all of the Company's assets will consist of 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") or (ii) unrated but are guaranteed by the U.S.
government or an agency or instrumentality thereof. 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 attempt to minimize the potentially higher level of credit and liquidity risk
of these securities, the Company will limit its investments in, and diversify
its portfolio of, 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. See "RISK
FACTORS--General Risks--Board of Directors May Change Certain Policies Without
Stockholder Consent."
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus and, in
particular, should evaluate the factors set forth in "RISK FACTORS." These risks
include, among others:
- The Company was organized in September 1997 and has no operating history,
no assets, no identified investments and no established financing sources.
- The Company may be negatively affected by conflicts of interest of the
Manager, including with the Manager's other accounts; and the Manager will
be entitled to receive an incentive fee that may encourage speculative
investments.
- The Chief Executive Officer of the Company and the Manager is subject to a
cease and desist order of the Securities and Exchange Commission arising
out of trading activities in Mortgage Securities.
- The Company is totally reliant on the Manager, which has significant
operating discretion, including as to the use of proceeds of the Offering.
- The Company's investments are expected to be highly leveraged.
- The Company will invest in volatile investments, including Mortgage
Derivatives, that are sensitive to interest rates and mortgage
prepayments.
- The Company intends to implement complex hedging strategies and will have
no significant credit risk or hedging policies.
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- Stockholders may experience significant potential dilution from future
equity offerings of the Company.
- The Board of Directors may change certain policies without stockholder
consent.
- Failing the REIT tests would result in the Company being taxed as a
corporation.
- The Company will purchase Mortgage Loans which are subject to the risk of
losses.
- The Company will be subject to the risk of possible environmental
liabilities.
- There is no prior trading market for the Company's Common Stock, and such
a market may fail to develop or be sustained.
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--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, subject to
the review of the Company's Board of Directors.
HEDGING AND RISK MANAGEMENT
The Company will endeavor to protect itself against interest rate
fluctuations through its asset acquisition, borrowing and hedging strategies.
The Company's asset acquisition and borrowing strategies are intended to offset
the potential adverse effects resulting from the differences between fixed-rates
or other limitations on coupon rate adjustment, such as interest rate caps,
associated with its investment portfolio, and the shorter term variable nature
of the Company's related borrowings. The Company intends to enter into hedging
transactions in an effort to further protect its portfolio of Mortgage Assets
and related debt from interest rate fluctuations. These transactions may include
interest rate swaps, the purchase or sale of interest rate collars, caps or
floors, options and IOs. See "BUSINESS--Operating Policies and Strategies."
The Company intends to manage the credit risk associated with its investment
portfolio by maintaining a substantial portion of its assets in 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 and a registered investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), specializes in managing investments in Mortgage Securities for
institutions and other sophisticated investors. The Manager employs
professionals who have significant experience in mortgage finance and in the
purchase and administration of Mortgage Securities; however, neither the Manager
nor its investment professionals have previously managed a REIT. Michael L.
Smirlock, Ph.D., the President and Chief Executive Officer of the Manager and
Chairman of the Board, Chief Executive Officer and President of the Company, and
the Manager's other investment professionals, each have at least ten years'
experience
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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."
In 1993, Mr. Smirlock was the subject of a cease-and-desist order issued by
the Securities and Exchange Commission (the "Commission") arising out of
Mortgage Securities trading activities supervised by Mr. Smirlock. The details
of such order are described under "RISK FACTORS--Operating Risks-- Involvement
of Officers in Certain Legal Proceedings" and "THE MANAGER--Involvement of
Officers in Certain Legal Proceedings."
PAST PERFORMANCE
Accounts managed by Mr. Smirlock and other investment professionals of the
Manager have 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."
MANAGEMENT AGREEMENT
The Company will enter into a management agreement (the "Management
Agreement") with the Manager pursuant to which the Manager, subject to the
supervision of the Company's Board of Directors, will formulate operating
strategies for the Company, oversee the acquisition of assets by the Company,
arrange for various types of financing for the Company, including the issuance
of CMOs, monitor the performance of the Company's assets and provide certain
administrative and managerial services in connection with the Company's
operations. For its performance of these services, the Manager will receive an
annual base management fee, payable monthly, as set forth below:
<TABLE>
<CAPTION>
ANNUAL FEE AS A PERCENTAGE OF
AVERAGE STOCKHOLDERS' EQUITY AVERAGE STOCKHOLDERS' EQUITY
- ----------------------------------- -------------------------------------
<S> <C>
$0 to $500 million................. 1.0%
$500 million to $1 billion......... $5 million plus 0.8% of amounts in
excess of $500 million
$1 billion or more................. $9 million plus 0.6% of amounts in
excess of $1 billion
</TABLE>
The Manager also will receive a quarterly incentive fee in an amount equal
to 20% of the Net Income of the Company for the preceding fiscal quarter, in
excess of the amount that would produce an annualized Return on Average
Stockholders' Equity for such fiscal quarter equal to the Ten-Year U.S. Treasury
Rate plus 1%. The Board of Directors of the Company, with the approval of a
majority of the Company's Board of Directors who are unaffiliated with the
Manager (the "Independent Directors"), is authorized to change the fees from
time to time as agreed with the Manager. The Manager will be reimbursed for
certain out-of-pocket expenses incurred on behalf of the Company. See "THE
MANAGER--Management Fees."
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CONFLICTS OF INTEREST OF THE MANAGER
The Company is subject to various 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) 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 monitor the Company's
investments, borrowings and operations. See "RISK FACTORS--Operating
Risks--Conflicts of Interest of the Manager."
CERTAIN BENEFITS TO EXISTING STOCKHOLDER, DIRECTORS AND OFFICERS
Through the date hereof, the Company has issued to Michael L. Smirlock, the
Company's Chief Executive Officer and President, an aggregate of 73,000 shares
of Common Stock for an aggregate purchase price of $1,020,005, or $13.97 per
share. This price per share is less than the assumed initial offering price of
$15.00 per share.
The Company also has received irrevocable commitments to purchase a total of
1,014,000 shares in the Private Placement. The purchasers in the Private
Placement have agreed to purchase the shares of Common Stock at a purchase price
equal to the initial public offering price. Of the 1,014,000 shares sold in the
Private Placement, Mr. Smirlock may be deemed to have shared or sole voting and
dispositive power over a total of 67,000 shares. A total of 730,000 shares of
Common Stock will be purchased by entities over which David A. Tepper, a
Director of the Company and the Manager, may be deemed to have shared or sole
voting and dispositive power. Frederick N. Khedouri, a proposed Director of the
Company and a Senior Managing Director of Bear, Stearns & Co. Inc. ("Bear,
Stearns"), one of the Representatives, has committed to purchase 10,000 shares
in the Private Placement. See "PRINCIPAL STOCKHOLDERS" and "PRIVATE PLACEMENT."
The Company also has granted to its directors and officers options to
purchase an aggregate of shares of Common Stock at an exercise price equal
to the initial public offering price. The Company has granted to the directors,
officers and employees of the Manager options to purchase an aggregate of
shares of Common Stock at an exercise price equal to the initial public offering
price. See "THE MANAGER--Stock Options and Other Awards" and "THE COMPANY--Stock
Incentive Plan."
The Company will enter into the Management Agreement with the Manager
pursuant to which the Manager will be entitled to receive an annual base
management fee and a quarterly incentive fee. Mr. Smirlock, the President and
Chief Executive Officer of the Manager, is also the Chairman of the Board, Chief
Executive Officer and President of the Company. See "THE MANAGER--The Management
Agreement."
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under
the REIT Provisions of the Code commencing with its short taxable year ending
December 31, 1997. If the Company qualifies as a REIT, the Company generally
will not be subject to federal corporate income tax on taxable income that is
distributed to its stockholders. See "RISK FACTORS--Legal, Tax and Other Risks,"
"FEDERAL INCOME TAX
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CONSIDERATIONS--Taxation of the Company" and "DESCRIPTION OF CAPITAL
STOCK--Repurchase of Shares and Restrictions on Transfer."
DISTRIBUTION POLICY
To maintain its qualification as a REIT, the Company must distribute
substantially all of its taxable income to stockholders each year, which the
Company intends to do. Each year, the Company intends to 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 "DISTRIBUTION POLICY" and "DIVIDEND REINVESTMENT PLAN."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby (1).............. 15,000,000 shares
Common Stock to be Outstanding
after the Offering (1)(2).................. 16,014,000 shares
Use of Proceeds.............................. The Company intends to use the net proceeds
of the Offering principally to acquire
Mortgage Assets. See "USE OF PROCEEDS."
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 1,014,000 shares subscribed for in the Private Placement, but
excludes 1,500,000 shares of Common Stock subject to options granted to
employees, officers and directors of the Company and the Manager at a per
share exercise price equal to the initial public offering price. See "THE
COMPANY--Stock Incentive Plan" and "PRIVATE PLACEMENT."
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES VARIOUS RISKS. IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE
CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
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. 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 "--Consequences and
Costs of Hedging Transactions," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS--Operating Policies
and Strategies."
NEWLY-ORGANIZED CORPORATION; NO ESTABLISHED FINANCING
The Company was organized in September 1997 and, therefore, has no operating
history and will commence operations only if it receives the proceeds of the
Offering and the Private Placement. The results of the Company's operations
depend on many factors, including the availability of opportunities for the
acquisition of assets, the level and volatility of interest rates, conditions in
the financial markets and economic conditions. The Company has not established
any lines of credit or collateralized financing facilities. There can be no
assurance that the Company will be able to obtain adequate financing and, if
such financing is available, that it will be available on favorable terms.
Furthermore, no assurance can be given that the Company will be able
successfully to operate its business as described in this Prospectus.
NO IDENTIFIED ASSETS; DISCRETIONARY USE OF PROCEEDS
The Company has not yet purchased or entered into any commitments to
purchase any Mortgage Assets or other securities. The Manager will exercise
significant discretion in investing and allocating the proceeds of the Offering
and the Private Placement.
CONFLICTS OF INTEREST OF THE MANAGER
The Company is subject to various 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. Michael L. Smirlock is the 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 also are employed by the Manager or its
Affiliates. See "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND
CONFLICTS OF INTEREST."
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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 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.
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.
INVOLVEMENT OF OFFICERS IN CERTAIN LEGAL PROCEEDINGS
In 1993, Michael L. Smirlock, the Chief Executive Officer of the Company and
the Manager, was the subject of a cease-and-desist order issued by the
Commission arising out of Mortgage Securities trading activities supervised by
Mr. Smirlock. The details of such order are described under "THE MANAGER--
Involvement of Officers in Certain Legal Proceedings."
RELIANCE ON THE MANAGER; TERMINATION OF THE MANAGEMENT AGREEMENT
The Company's day-to-day operations will be administered by the Manager,
subject to the supervision of the Company's Board of Directors. Thus, the
Company is totally reliant on the services of the Manager and its officers,
directors and employees for the success of the Company. The Company is subject
to the risk that the Manager will terminate the Management Agreement and that no
suitable replacement will be found to manage the Company. The Company and the
Manager may terminate the Management Agreement at any time upon 60 days' written
notice to the other party. The Company would be materially and adversely
affected if it were unable to engage an appropriate replacement for the Manager.
The Manager and its investment professionals have no prior experience in
managing a REIT, and there can be no assurance that the past experience of the
Manager's investment management personnel will be appropriate to the Company's
business or strategy. See "THE MANAGER."
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<PAGE>
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, depending on
market conditions and other factors deemed relevant by the Manager, subject to
the review of the Company's Board of Directors. For purposes of calculating the
equity-to-assets ratio, the Company's assets equal the value of the Company's
investment portfolio on a marked-to-market basis. For purchased Mortgage Assets,
the Company obtains market quotes for its Mortgage Assets from independent
broker-dealers that make markets in securities similar to those in the Company's
portfolio or from pricing services approved by the Company's Independent
Directors. The Company's equity, for purposes of this calculation, equals the
Company's stockholders' equity in accordance with generally accepted accounting
principles. 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.
BORROWING RISKS; MARGIN CALLS. A substantial portion of the Company's
borrowings are expected to be in the form of collateralized borrowings,
primarily reverse repurchase agreements. The amount borrowed under a reverse
repurchase agreement is based on the market value of the Mortgage Assets pledged
to secure specific borrowings. Under adverse market conditions, the value of
pledged Mortgage Assets would decline, and lenders could initiate margin calls
(I.E., the Company could be required to post additional collateral or to reduce
the amount borrowed to restore the ratio of the amount of the borrowing to the
value of the collateral). The Company may be required to sell Mortgage Assets to
reduce the amount borrowed. If these sales were made at prices lower than the
carrying value of the Mortgage Assets, the Company would experience losses. A
default by the Company under its collateralized borrowings also could result in
a liquidation of the collateral. If the Company is forced to liquidate Mortgage
Assets that qualify as Qualified Real Estate Assets to repay borrowings, there
can be no assurance that it will be able to maintain compliance with the REIT
Provisions of the Code regarding asset and source of income requirements. See
"FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification."
NO RESTRICTION ON THE INCURRENCE OF ADDITIONAL INDEBTEDNESS
The Company's investment policy and operating strategy does not restrict the
Company from incurring additional indebtedness. The Company is not subject to
any other restriction on the incurrence of additional indebtedness. The Company
intends to borrow against or "leverage" its Mortgage Assets in order to acquire
additional Mortgage Assets. The Company expects to incur debt such that it will
maintain
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<PAGE>
an equity-to-assets ratio of between 6% to 10%, although the actual ratio may be
higher or lower from time to time depending on market conditions and other
factors deemed relevant by the Manager, subject to the review of the Company's
Board of Directors. See "--Substantial Leverage and Potential Net Interest and
Operating Losses--Leveraging Strategy."
RISK OF POTENTIAL FUTURE OFFERINGS; DILUTION
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 Dividend Reinvestment Plan) 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.
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 "--Consequences and Costs of
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. The Company intends to invest primarily in fixed-rate
securities; however, to the extent it invests in adjustable-rate securities
which are subject to periodic rate adjustments, such adjustments may not be
matched with increases or decreases in rates borne by the Company's borrowings.
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 (such as LIBOR) and Mortgage Assets
will likely bear interest at medium-term to long-term rates (such as those
calculated based on the Ten-Year U.S. Treasury Rate), a flattening of the yield
curve will tend to decrease the Company's net income and the mark-to-market
value of its net assets. Additionally, to the extent cash
15
<PAGE>
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 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.
CHANGING PREPAYMENT RATES. The value of Mortgage Assets may be affected
substantially by prepayment rates on the related Mortgage Loans. Prepayments are
unscheduled payments of principal made by mortgage borrowers, who generally are
permitted to prepay their borrowings at any time. Mortgage Securities traders
have statistically modelled borrower prepayment patterns over time, and Mortgage
Securities typically are valued based on these models and estimated prepayments.
Actual prepayments may vary significantly from estimates and, as a result,
Mortgage Security prices may fluctuate significantly as expectations of
prepayment rates change. Prepayment risk must be considered in conjunction with
the credit risk associated with certain Mortgage Assets. See "--Possible Losses
on Mortgage Loans" and "-- Credit Risks."
Prepayment rates on Mortgage Assets are influenced by changes in current
interest rates and a variety of economic, geographic and other factors beyond
the control of the Company and cannot be predicted with certainty. In periods of
declining mortgage interest rates, prepayments on Mortgage Assets generally
increase. If general interest rates decline as well, the proceeds of such
prepayments received during such periods are likely to be reinvested by the
Company in assets yielding less than the yields on the Mortgage Assets that were
prepaid. In addition, the mark-to-market value of the Mortgage Assets may,
because of the risk of prepayment, benefit less than other fixed-income
securities from declining interest rates. Conversely, in periods of rising
interest rates, prepayments on Mortgage Assets generally decrease; therefore,
the Company will not have the proceeds from prepayments available to invest in
assets with higher yields. If interest rates decrease and prepayment rates
increase, the Company may fail to recoup fully its cost of acquisition of
certain investments.
The Company may acquire classes of Mortgage Securities that are entitled to
no (or only nominal) payments of principal, but only to payments of interest,
such as IOs. The yield to maturity of IOs is very sensitive to the rate of
prepayments on the underlying Mortgage Loans. If the rate of prepayments is
faster than anticipated, the yield on IOs will be negatively affected, and, in
extreme cases, the IO investment could become worthless. Some IOs bear interest
at a floating rate that varies inversely with (and often at a multiple of)
changes in a specified interest rate index ("Inverse IOs"). Therefore, the yield
to maturity of an Inverse IO is extremely sensitive to changes in the related
index. The Company also expects to invest in subordinated IOs ("Sub IOs").
Interest amounts otherwise allocable to Sub IOs generally are used to make
payments on more senior classes or to fund a reserve account for the protection
of senior classes until overcollateralization occurs or the balance in the
reserve account reaches a specified level. The yield to maturity of Sub IOs is
very sensitive not only to default losses but also to the rate and timing of
prepayment on the underlying loans. See "BUSINESS--Operating Policies and
Strategies." Under certain interest rate and prepayment scenarios, the Company
may fail to recoup fully the cost of acquiring IOs, Inverse IOs and Sub IOs.
CONSEQUENCES AND COSTS OF HEDGING TRANSACTIONS
The Company intends to enter into hedging transactions in an effort to
protect its portfolio of Mortgage Assets and related debt from interest rate
fluctuations. These transactions may include interest rate swaps, the purchase
or sale of interest rate collars, caps or floors, options and IOs. There can be
no assurance that the Company's hedging activities will have the desired
beneficial impact on the Company's results of operations or financial condition.
Moreover, no hedging activity can completely insulate the Company from the risks
associated with changes in interest rates and prepayment rates.
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Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs, during
such periods when interest rates are volatile or rising and hedging costs have
increased. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Hedging" and "BUSINESS--Operating Policies and
Strategies--Hedging Activities."
The Company intends generally to hedge as much of the interest rate risk as
the Manager determines is in the best interests of the stockholders of the
Company given the cost of such hedging transactions and the need to maintain the
Company's status as a REIT. The Company has not established specific policies as
to the extent of the hedging transactions in which it will engage; however, the
Independent Directors will be responsible for reviewing at their regular
meetings the extent and effect of hedging activities. The amount of income the
Company may earn from its hedging instruments is subject to substantial
limitations under the REIT Provisions of the Code. In particular, when the
Company earns income under such instruments, it will seek advice from Special
Tax Counsel as to whether such income constitutes qualifying income for purposes
of the 95% Gross Income Test and as to the proper characterization of such
arrangements for purposes of the REIT Asset Tests. The "95% Gross Income Test"
means the requirement for each taxable year that at least 95% of the Company's
gross income for each taxable year must be derived from certain specified real
estate sources including interest income and gain from the disposition of
Qualified Real Estate Assets or "qualified temporary investment income" (I.E.,
income derived from "new capital" within one year of the receipt of such
capital), dividends, interest and gains from the sale of stock or other
securities (including certain interest rate swap or cap agreements, options,
forward rate agreements and similar financial instruments entered into to reduce
the interest rate risk with respect to debt incurred to acquire Qualified Real
Estate Assets) not held for sale in the ordinary course of business. See
"FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification--Gross Income
Tests." This determination may result in the Manager electing to have the
Company bear a level of interest rate risk that could otherwise be hedged when
the Manager believes, based on all relevant facts, that bearing such risk is
advisable to maintain the Company's status as a REIT.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. 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
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the Company's competitors for Mortgage Assets may have access to greater capital
and other resources and may have other advantages over the Company.
There can be no assurance that the Company will be able to obtain financing
at borrowing rates below the asset yields of its Mortgage Assets. In such event,
the Company may incur losses or may be forced to reduce the size of its Mortgage
Asset portfolio. The Company will face competition for financing sources which
may limit the availability of, and affect the cost of funds to, the Company.
SENSITIVITY TO LOSSES AND FLUCTUATIONS IN INTEREST RATES OF CERTAIN MORTGAGE
SECURITIES
CMOS. CMOs are a series of bonds or certificates, each of which typically
consists of several classes with different maturities and often complex
priorities of payment, secured by a single pool of Mortgage Loans, Pass-Through
Certificates, other CMOs or other Mortgage Assets. Principal prepayments on
collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturities or final distribution dates. The principal and
interest on underlying Mortgages Loans may be allocated among the several
classes of a series of a CMO in many ways. Depending on the type of CMOs in
which the Company invests, the investment may be more sensitive to interest rate
fluctuations and prepayment rates than other types of Mortgage Securities.
IOS. The Company may acquire IOs which provide for the holder to receive no
(or only nominal) payments of principal, but only payments of interest. Payments
on IOs are highly sensitive to the rate of prepayment on the underlying Mortgage
Loans. In periods of declining interest rates, rates of prepayments on the
Mortgage Loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on IOs will be adversely affected. Under extreme
prepayment scenarios, the Company may not be able to recoup fully the costs of
acquiring an IO and, consequently, incur a loss on the investment.
INVERSE IOS. Some IOs in which the Company may invest, such as Inverse IOs,
bear interest at a floating rate that varies inversely to (and often at a
multiple of) changes in a specific index. The Company also may invest in inverse
floating rate Mortgage Derivatives which are similar in structure and risk to
Inverse IOs, except they generally are issued with a greater stated principal
amount than Inverse IOs. The Company may invest in Inverse IOs for the purpose
of, among other things, hedging its portfolio of IOs. The yield to maturity of
an Inverse IO is extremely sensitive to changes in the related index.
SUB IOS. The Company also expects to invest in Sub IOs, a class of
securities for which interest generally is withheld and used to make principal
payments on more senior classes or to fund a reserve account for the protection
of senior classes until overcollateralization or the balance in the reserve
account reaches a specified level. Interest on a Sub IO generally will be paid
only after the overcollaterization or the balance in the reserve account reaches
the specified level. Sub IOs provide credit support to the senior classes, and
thus bear substantial credit risk. Moreover, because Sub IOs receive only
interest payments, their yields are extremely sensitive to the rate of
prepayments (including prepayments as a result of defaults) on the underlying
Mortgage Loans. In addition, Sub IOs often generate taxable income in excess of
cash received.
FLOATING RATE MORTGAGE DERIVATIVES. The Company may invest in variable and
floating rate securities that provide for a periodic adjustment in the interest
rate paid on the other obligations. The Company may not be able to match these
periodic rate adjustments with increases or decreases in rates borne by the
borrowings or financings utilized by the Company. Accordingly, in a period of
increasing interest rates, the Company could experience a decrease in net
interest income or a net loss because the interest rates on borrowings could
adjust faster than the interest rates of the Company's floating rate securities.
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. Subordinate
Interests bear significant credit risks because they are structured to absorb
losses from defaults or foreclosures on the related Mortgage Loan collateral
before losses are allocated to more senior
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classes. Subordinate Interests will be more sensitive than other Mortgage
Securities to the frequency and the severity of losses on the underlying
Mortgage Loans. Loss frequency will depend upon a number of factors, including
economic conditions and interest rate fluctuations, beyond the control of the
Company. There can be no assurance that the Company's investment in a
Subordinate Interest will be returned in full or at all.
OTHER FIXED-INCOME ASSETS. The Company may invest in other fixed-income
assets, including securities issued or guaranteed by foreign governments, high
yield bonds and non-real estate loans. Investing in securities issued by foreign
governments or foreign companies involves considerations and potential risks not
typically associated with investing in obligations issued by the U.S.
government, agencies thereof and domestic corporations. Such obligations are
often unsecured and are subject to greater credit and liquidity risk than is
typically associated with investment grade corporate obligations. They are also
subject to, and may be adversely affected by, risks associated with political
and economic uncertainty, fluctuations of currency exchange rates, lower levels
of disclosure and regulation in foreign securities markets than in the United
States, risks of nationalization, expropriation, confiscatory taxation, taxation
of income earned in foreign nations or other taxes imposed with respect to
investments in foreign nations, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country and
repatriation of investments) and uncertainties as to the status, interpretation
and application of laws. In addition, there is often less publicly available
information about foreign issuers than those in the United States. Foreign
issuers may not be subject to uniform accounting, auditing and financial
reporting standards and auditing practices, and even in the case of issuers that
are subject to uniform standards and practices, such standards and practices
will generally not be comparable to those applicable to U.S. companies.
High yield corporate debt obligations rated below investment grade are
generally unsecured, may be subordinated to other obligations of the issuer and
generally have greater credit and liquidity risk than is typically associated
with investment grade corporate obligations. High yield obligations are often
issued in connection with leveraged acquisitions or recapitalizations in which
the issuers incur a substantially higher amount of indebtedness than the level
at which they had previously operated. High yield debt obligations have
historically experienced greater default rates than has been the case for
investment grade securities.
Investing in a non-real estate loans involves greater liquidity risk because
they are generally not traded in organized exchange markets but are traded by
banks and other institutional investors. In some cases, non-real estate loans
are subject to greater credit risks than is typically associated with investment
grade corporate obligations. Such loans may be subject to, and may be adversely
affected by, risks associated with lender liability. In addition, such loans may
be sold without recourse to the selling institutions, and the selling
institutions will generally make no representations and warranties about the
underlying loan, the borrower, the documentation of the loans or any collateral
securing the loans. See "DESCRIPTION OF PROPOSED ASSETS."
POSSIBLE LOSSES ON MORTGAGE LOANS
The Company intends to acquire and accumulate Mortgage Loans as part of its
investment strategy until a quantity, determined, in the Manager's discretion,
to be sufficient for securitization (generally at least $100 million) 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. Typically, third parties
insure against these types of losses, and the Company would be dependent on the
creditworthiness of the insurer and timeliness of the reimbursement in the event
of a default on the underlying obligations. Further, the insurance coverage for
various type of losses is limited in amount, and losses in excess of the
limitation would be the responsiblity of the Company. In the event of any
default under Mortgage Loans held by the Company, the Company will bear the risk
of loss of principal to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the Mortgage Loan. Also, during
the accumulation or warehousing period, the costs of
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financing and hedging the Mortgage Loans could exceed the interest income on the
Mortgage Loans. No assurance can be given that any mortgage, fraud or hazard
insurance will adequately cover a loss suffered by the Company. It may not be
possible or economical for the Company to securitize all of the Mortgage Loans
which it acquires, in which case the Company will continue to hold the Mortgage
Loans and bear the risks of borrower defaults, bankruptcies, fraud losses and
special hazard losses. Furthermore, if the Company retains a Subordinate
Interest in the securitizations, it will retain many of these risks. See
"DESCRIPTION OF PROPOSED ASSETS--Mortgage Loans" 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.
In addition, substantial delays could be encountered in connection with the
foreclosure of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by the Company. State and local statutes and rules
may delay or prevent the Company's foreclosure on or sale of the mortgaged
property and may prevent the Company from receiving new proceeds sufficient to
repay all amounts due on the related Mortgage Loan. Moreover, the Company's
servicing agent may be entitled to receive all expenses reasonably incurred in
attempting to recover amounts due and not yet repaid on liquidated Mortgage
Loans, thereby reducing amounts available to the Company.
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.
The Company will not perform an independent credit review of the Mortgage Loans
it intends to purchase.
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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, upon consummation of the
Offering, the Company will receive an opinion of its Special Tax Counsel that,
based on certain assumptions and representations, it will so qualify. Investors
should be aware, however, that opinions of counsel are not binding on the
Service or any court. The REIT qualification opinion only represents the view of
Special Tax Counsel to the Company based on counsel's review and analysis of
existing law, which includes no controlling precedent. Furthermore, both the
validity of the opinion and the continued qualification of the Company as a REIT
will depend on the Company's satisfaction of certain asset, income,
organizational, distribution and stockholder ownership requirements on a
continuing basis. If the Company were to fail to qualify as a REIT in any
taxable year, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to stockholders would not be deductible by the Company
in computing its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for distribution to
stockholders, which in turn could have an adverse impact on the value of, and
trading prices for, the Common Stock. Unless entitled to relief under certain
Code provisions, the Company also would be disqualified from taxation as a REIT
for the four taxable years following the year during which the Company ceased to
qualify as a REIT. See "FEDERAL INCOME TAX CONSIDERATIONS."
The Company must distribute at least 95% of its net taxable income annually
(excluding any net capital gain and certain non-cash income) to avoid corporate
income taxation of the earnings that it distributes (the "95% Distribution
Requirement"). In addition, the Company will be subject to a 4% non-deductible
excise tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of (i) 85% of its ordinary
income for that year, (ii) 95% of its capital gain net income for that year, and
(iii) 100% of its undistributed taxable income from prior years.
The Company intends to make distributions to its stockholders to comply with
the 95% Distribution Requirement and to avoid the nondeductible excise tax.
However, differences in timing between the recognition of taxable income and the
actual receipt of cash could require the Company to borrow funds or sell assets
on a short-term basis to satisfy the 95% Distribution Requirement or to avoid
the non-deductible excise tax. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company (i) to sell
assets in adverse market conditions, (ii) to distribute amounts that represent a
return of capital, or (iii) to distribute amounts that would otherwise be spent
on future investments or repayment of debt.
Gain from the disposition of any asset held primarily for sale to customers
in the ordinary course of business generally will be subject to a 100% tax.
PLEDGED ASSETS AND RISK OF BANKRUPTCY IN REVERSE REPURCHASE AGREEMENTS
Substantially all of the Mortgage Assets will be pledged to secure reverse
repurchase agreements, bank borrowings or other credit arrangements, including
securitizations. Therefore, such Mortgage Assets may not be available to the
stockholders in the event of the liquidation of the Company, except to the
extent that the market value thereof exceeds the amounts due to the Company's
creditors. The market value of the Mortgage Assets will fluctuate as a result of
numerous market factors (including interest rates and prepayment rates) as well
as the supply of and demand for such assets. In the event of the bankruptcy of a
party with whom the Company has a reverse repurchase agreement, the Company
could experience difficulty recovering the pledged assets under such agreement
if it were to be repudiated and the Company's claim against the bankrupt lender
for damages resulting therefrom were to be treated simply as one of an unsecured
creditor. Should this occur, the Company's claims would be subject to
significant delay and any recoveries, if and when received, may be substantially
less than the damages actually suffered by the Company. Although the Company
intends to enter into reverse repurchase agreements with several
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different parties and has developed policies to reduce its exposure to such
risks, no assurance can be given that the Company will be able to avoid such
third party risks. See "BUSINESS--Operating Policies and Strategies--Capital and
Leverage Policies."
POSSIBLE ENVIRONMENTAL LIABILITIES
The Company may become subject to environmental risks when taking an
interest in real property upon foreclosure of a Mortgage Loan. Such
environmental risks include the risk of the diminution of the value of a
contaminated property or liability for the costs of compliance with
environmental regulatory requirements or the costs of clean-up or other remedial
actions. The costs of investigation, remediation or removal of hazardous
substances could be substantial. These compliance or clean-up costs could exceed
the value of the property or the amount of the Mortage Loan. There can be no
assurance that the Company will not incur any material costs or liabilites with
respect to such matters. See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND REAL
PROPERTY INVESTMENTS--Environmental Risks."
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
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 "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.
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 "FEDERAL INCOME TAX
CONSIDERATIONS."
OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES
For the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). For the purpose, among others, of preserving the Company's
REIT status, the Charter generally prohibits direct or indirect ownership by any
person of more than 9.8% of the number of outstanding shares of Common Stock
(the "Ownership Limit"). For this purpose, the term "ownership" is defined as
either direct ownership or constructive ownership in accordance with the
constructive ownership provisions of Section 544 of the Code. Any transfer of
shares of capital stock that would result in disqualification of the Company as
a REIT or that would (a) create a direct or constructive ownership of shares of
stock in excess of the Ownership Limit, (b) result in the shares of stock being
beneficially owned (within the meaning Section 856(a) of the Code) by fewer than
100 persons (determined without reference to any rules of attribution), or (c)
result in the Company being "closely held" within the meaning of Section 856(h)
of the Code (a "purported transfer"), will be null and void, and the intended
transferee (the "purported transferee") will acquire no rights to such shares.
Any purported transfer of shares that would result in a person owning (directly
or constructively) shares in excess of the Ownership Limit (except as otherwise
waived by the Board of Directors) due to the unenforceability of the transfer
restrictions set forth above will constitute "Excess Securities." Excess
Securities will be transferred by operation of law to a trust to be established
by the Company for the exclusive benefit of a charitable organization, until
such time as the trustee of the trust, which shall be a banking institution
designated as trustee by the Company, which is unaffiliated with either the
Company or the purported transferee, retransfers the Excess Securities. Subject
to the Ownership Limit, Excess
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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 "FEDERAL INCOME TAX CONSIDERATIONS-- Requirements for
Qualifications."
Subject to certain limitations, the Board of Directors may increase or
decrease the Ownership Limit. In addition, to the extent consistent with the
REIT Provisions of the Code, the Board of Directors has the right, in its sole
discretion and pursuant to the Company's Charter, to waive the Ownership Limit
for, and at the request of, a purchaser of the Common Stock. However, the
Company's Board of Directors has waived the Ownership Limitation for certain
institutional investors participating in the Private Placement. See "DESCRIPTION
OF CAPITAL STOCK" and "PRIVATE PLACEMENT." In connection with any such waiver,
the Company may require that the stockholder requesting such a waiver enter into
an agreement with the Company providing for the repurchase by the Company of
shares from the stockholder under certain circumstances to ensure compliance
with the REIT Provisions of the Code. Such repurchase would be at fair market
value as set forth in the agreement between the Company and such stockholder.
The consideration received by the stockholder in such repurchase might be
characterized as the receipt by the stockholder of a dividend from the Company,
and any stockholder entering into such an agreement with the Company should
consult its tax advisor in connection with its entering into such an agreement.
The provisions described above may inhibit market activity and any takeover
or other transaction in which holders of some or a majority of the Company's
capital stock might receive a premium for their shares or which such holders
might believe to be otherwise in their best interests. Such provisions also may
make the Company an unsuitable investment vehicle for any person seeking to
obtain ownership of more than 9.8% of the outstanding shares of capital stock.
See "DESCRIPTION OF CAPITAL STOCK--Repurchase of Shares and Restrictions on
Transfer."
In addition, certain provisions of the Maryland General Corporation Law (the
"MGCL") relating to "business combinations" and of the Charter and Bylaws may
also have the effect of delaying, deterring or preventing a takeover attempt or
other change in control of the Company which may be beneficial to stockholders
and might otherwise result in a premium over then prevailing market prices. See
"CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS."
PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK
Fiduciaries of employee benefit plans subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), should consider
the ERISA fiduciary investment standards before authorizing an investment by a
plan in the Common Stock. In addition, fiduciaries of employee benefit plans or
other retirement arrangements (such as an individual retirement account ("IRA")
or certain H.R. 10 Plans or Keogh plans) which are subject to Title I of ERISA,
and/or Section 4975 of the Code, as well as any entity, including an insurance
company general account, whose underlying assets include plan assets by reason
of a plan or account investing in such entity, should consult with their legal
counsel to determine whether an investment in the Common Stock will cause the
assets of the Company to be considered plan assets pursuant to the plan asset
regulations set forth at 29 C.F.R. Section 2510.3-101, thereby subjecting the
Plan to the prohibited transaction rules and the Company's assets to the
fiduciary investment standards of ERISA, or cause the excise tax provisions of
Section 4975 of the Code, to apply to the Company's assets, unless some
exception or exemption granted by the Department of Labor applies to the
acquisition, holding or transfer of the Common Stock.
GENERAL RISKS
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
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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.
LACK OF POLICY REGARDING HEDGING OR CREDIT RISK; FUTURE REVISIONS IN
POLICIES AND STRATEGIES
The Board of Directors has not established any significant credit risk or
hedging policy; consequently, the Manager will exercise broad discretion
concerning credit risk and hedging strategies. The investment policies and
operating policies and strategies of the Company set forth in this Prospectus
may be modified or waived by the Board of Directors, subject in certain cases to
approval by a majority of the Independent Directors.
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; FAILURE TO DEVELOP OR SUSTAIN AN ACTIVE 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,
such as Mortgage Loans, Subordinate Interests and Mortgage Derivatives, for
which the secondary trading market is not as well developed as the market for
certain other Mortgage Assets, such as Agency Certificates (or which are
otherwise considered less marketable or illiquid). Although the Company expects
that most of the Company's investments will be in Mortgage Assets for which a
resale market exists, certain of the Company's investments may lack a regular
trading market and may be illiquid. In addition, during adverse market
conditions, the liquidity of all of the Company's Mortgage Assets may be
adversely impacted. There is no limit on the percentage of the Company's
investments that may be invested in illiquid assets.
CERTAIN BENEFITS TO EXISTING STOCKHOLDER, DIRECTORS AND OFFICERS
Through the date hereof, the Company has issued to Michael L. Smirlock, the
Company's Chief Executive Officer and President, an aggregate of 73,000 shares
of Common Stock for an aggregate purchase price of $1,020,005, or $13.97 per
share. This average per share purchase price is less than the assumed initial
public offering price of $15.00 per share.
The Company has also received irrevocable commitments to purchase a total of
1,014,000 shares in the Private Placement. The purchasers in the Private
Placement have agreed to purchase the shares of Common Stock at a purchase price
equal to the initial public offering price. Of the 1,014,000 shares sold in the
Private Placement, Mr. Smirlock may be deemed to have shared or sole voting and
dispositive power over a total of 67,000 shares. A total of 730,000 shares of
Common Stock will be purchased by entities for which David A. Tepper, a Director
of the Company and the Manager, may be deemed to have shared or sole voting and
dispositive power. Frederick N. Khedouri, a proposed director of the Company and
a Senior Managing Director of Bear, Stearns, one of the Representatives, has
committed to purchase 10,000 shares in the Private Placement. See "PRINCIPAL
STOCKHOLDERS" and "PRIVATE PLACEMENT."
The Company has also granted to its directors and officers options to
purchase an aggregate of shares of Common Stock at an exercise price equal
to the initial public offering price. The Company has granted to the directors,
officers and employees of the Manager options to purchase an aggregate of
shares of Common Stock at an exercise price equal to the initial public offering
price. See "THE MANAGER--Stock Options and Other Awards" and "THE COMPANY--Stock
Incentive Plan."
The Company will enter into the Management Agreement with the Manager
pursuant to which the Manager will be entitled to receive an annual base
management fee and a quarterly incentive fee. Mr. Smirlock, the President and
Chief Executive Officer of the Manager, is also the Chairman of the Board, Chief
Executive Officer and President of the Company. See "THE MANAGER--The Management
Agreement."
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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 $15.00 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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<PAGE>
CAPITALIZATION
The capitalization of the Company at September 26, 1997 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 26, 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; 6,000
shares outstanding; shares, as adjusted(3).............................. $ 0 $
Additional paid-in capital............................................................ 0
--------- ------
Total............................................................................... $ 0 $
--------- ------
--------- ------
</TABLE>
- ------------------------
(1) Includes 1,014,000 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 2,066,666 shares reserved for issuance upon the exercise of
options granted under the Company's Stock Incentive Plan. Options to acquire
1,500,000 shares at the initial public offering price have been granted to
employees, officers and directors of the Company and the Manager. See "THE
COMPANY--Stock Incentive Plan."
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<PAGE>
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
dividends will depend on, among other things, the taxable earnings of the
Company, the financial condition of the Company, maintenance of REIT status and
such other factors as the Board of Directors deems relevant. See "FEDERAL INCOME
TAX CONSIDERATIONS--Distribution Requirement."
To qualify as a REIT under the Code, the Company must make distributions to
its stockholders each year in an amount at least equal to (i) 95% of its Taxable
Income before deduction of dividends paid (less any net capital gain), plus (ii)
95% of the excess of the net income from foreclosure property over the tax
imposed on such income by the Code, minus (iii) any excess noncash income. The
"Taxable Income" of the Company for any year means the taxable income of the
Company for such year (excluding any net income derived either from property
held primarily for sale to customers or from foreclosure property) subject to
certain adjustments provided in the REIT Provisions of the Code.
Distributions to stockholders will generally be subject to tax as ordinary
income, although a portion of such distributions may be designated by the
Company as capital gain or may constitute a tax-free return of capital. The
Company will furnish annually to each of its stockholders a statement setting
forth distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital. For a discussion of the
federal income tax treatment of distributions by the Company, see "FEDERAL
INCOME TAX CONSIDERATIONS."
The Company has adopted a Dividend Reinvestment Plan that will allow
stockholders to reinvest their dividends automatically in additional shares of
Common Stock. See "DIVIDEND REINVESTMENT PLAN."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized in September 1997 and has no operating history and
will commence operations only if it receives the proceeds of the Offering and
the Private Placement. The Company's day-to-day operations will be managed by
the Manager, subject to the supervision of the Board of Directors. The Manager
and its investment professionals have no prior experience in managing a REIT,
and the past performance of the Manager's investment management personnel in
respect of the Affiliated Funds is not necessarily representative of what the
Manager's performance may be in the future or with respect to managing the
Company. 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
"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. 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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<PAGE>
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
Interest rates will be expected to have a much greater effect on the
Company's financial condition and results of operations than inflation because
some of the assets the Company proposes to purchase will have variable interest
rates. 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 a substantial portion of the Company's Mortgage Securities will be
classified for accounting purposes as "trading securities," unrealized
fluctuations in market values of the Mortgage Securities will change income
calculated according to GAAP ("GAAP income"), but not taxable income. As a
result of this mark-to-market accounting treatment, the book value and book
value per share of the Company are likely to fluctuate far more than if the
Company used amortized cost accounting. As a result, comparisons with companies
using historical cost accounting may be misleading.
Positive mark-to-market changes will increase the Company's equity base and
allow the Company to increase its spread lending activities while negative
changes will limit spread lending growth under the Company's leveraging
strategy. A very large negative change in the net market value of Mortgage
Assets and interest rate agreements might impair the Company's liquidity
position, requiring the Company to sell Mortgage Assets.
TAXABLE INCOME AND GAAP INCOME
Taxable income differs from GAAP income for certain reasons. Certain
Mortgage Securities and Mortgage Derivatives will be marked-to-market for GAAP,
but not tax purposes. 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 "FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification."
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BUSINESS
GENERAL
The Company is a specialty finance company, organized in September 1997,
that will invest primarily in Mortgage Securities and Mortgage Loans. The
Mortgage Securities include Pass-Through Certificates, CMOs and other securities
representing interests in, or obligations backed by, pools of Mortgage Loans.
The Mortgage Loans will be secured by first or second liens on single-family
residential, multi-family residential, commercial or other real property. See
"DESCRIPTION OF PROPOSED ASSETS."
The Company seeks to generate net income for distribution to stockholders
from the spread between the interest income earned on its investment portfolio
and the cost of financing and hedging the portfolio. The Company will elect to
be taxed as a REIT under the Code. The Company generally will not be subject to
federal income tax provided that it distributes its income to its stockholders
and maintains its qualification as a REIT. See "FEDERAL INCOME TAX
CONSIDERATIONS." LASER Advisers Inc., which specializes in managing investments
in Mortgage Securities for institutions and other sophisticated investors, will
manage the Company's day-to-day operations. The Manager is a newly organized
registered investment adviser. 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 be designed to generate income for distribution to
its stockholders while preserving the Company's capital base.
The Company intends to acquire the following types of investments: (i) fixed
and adjustable rate Privately-Issued Certificates and Agency Certificates; (ii)
CMOs; (iii) Mortgage Loans, which will be pooled and securitized to provide
long-term, non-recourse financing for the Company; (iv) Mortgage Derivatives,
including IOs; (v) Subordinate Interests; and (vi) other fixed-income securities
which are non-Qualified Real Estate Assets, in an amount not to exceed 5% of
total assets. See "DESCRIPTION OF PROPOSED ASSETS." Consistent with the
Company's policy of maintaining its status as a REIT for federal income tax
purposes, substantially all of the Company's assets will consist of Qualified
Real Estate Assets.
The Company will invest at least 70% of its 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 attempt to minimize the potentially higher level of credit and
liquidity risk of these securities, the Company will limit its investments in,
and diversify its portfolio of, non-High Quality securities.
References to ratings of Mortgage Assets apply only at the time a
transaction is entered into by the Company. Any subsequent change in a rating
assigned to a Mortgage Asset or change in the percentage of Company assets
invested in certain Mortgage Assets or other instruments resulting from market
fluctuations or other changes in the Company's total assets will not require the
Company to dispose of an investment. If different Rating Agencies assign
different ratings to the same Mortgage Assets, the Company will determine which
rating it believes most accurately reflects the Mortgage Asset's quality and
risk at that time. A rating is not a recommendation to buy, sell or hold a
security, inasmuch as such rating does not comment as to the market price of the
security or the suitability of the security for a particular investor. There is
no assurance that a rating will continue for any given period of time or that a
rating will not be lowered or withdrawn entirely by a Rating Agency if, in its
judgment, circumstances so warrant.
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.
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 "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 "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 Company's operating policies are as set forth in this Prospectus. 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, from time to time, in response to changes in market
conditions without stockholder approval. Any such revisions to operating
policies and financing strategies are subject to approval of the Independent
Directors.
The Company will adopt compliance guidelines, including restrictions on
acquiring, holding and selling assets, to ensure that the Company continues to
qualify as a REIT. Before acquiring any asset, the Manager will determine
whether such asset would constitute a Qualified Real Estate Asset. Substantially
all of the assets that the Company intends to acquire are expected to be
Qualified Real Estate Assets. The Company will regularly monitor purchases of
Mortgage Assets and the income generated from such assets, including income from
its hedging activities, in an effort to ensure that at all times the Company
maintains its qualification as a REIT and its exemption under the Investment
Company Act. The Company has engaged a nationally recognized independent public
accounting firm to assist it in developing internal accounting and testing
procedures and to assist in monitoring and conducting quarterly compliance
reviews to determine compliance with the REIT Provisions of the Code.
CAPITAL AND LEVERAGE POLICIES
The Company's operations are expected to be highly leveraged. Initially, the
Company intends to finance its acquisition of Mortgage Assets through the
proceeds of the Offering and, thereafter, primarily by borrowing against or
"leveraging" its existing portfolio and using the proceeds to acquire additional
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Mortgage Assets. The Company expects to incur debt such that it will maintain an
equity-to-assets ratio of between 6% to 10%, although the actual ratio may be
higher or lower from time to time depending on market conditions and other
factors deemed relevant by the Manager. The Board of Directors has discretion to
deviate from or change the Company's indebtedness policy at any time. However,
the Company intends to maintain an adequate capital base to protect against
interest rate environments in which the Company's financing and hedging costs
might exceed interest income from its Mortgage Assets. These conditions could
occur, for example, when, due to interest rate fluctuations, interest income on
the Company's Mortgage Assets (which occur during periods of rapidly rising
interest rates or during periods when the Mortgage Loans in the portfolio are
prepaying rapidly) lags behind interest rate increases in the Company's variable
rate borrowings. The Company intends to enter into hedging transactions in an
effort to protect its portfolio of Mortgage Assets and related debt from
interest rate fluctuations. These transactions may include interest rate swaps,
the purchase or sale of interest rate collars, caps or floors, options and IOs.
See "--Securitization."
SHORT-TERM BORROWING
Mortgage Assets, other than securitized Mortgage Loans, will be financed
primarily at short-term borrowing rates through reverse repurchase agreements,
dollar roll agreements, loan agreements, lines of credit, commercial paper
borrowings and other credit facilities with institutional lenders. Reverse
repurchase agreements and dollar roll agreements are sales of pledged securities
to a lender at discounted prices in return for an agreement by the lender to
resell the same or substantially similar securities to the borrower on some
future date at an agreed price.
Reverse repurchase agreements are structured as sale and repurchase
obligations which allow a borrower to pledge purchased Mortgage Assets as
collateral securing short-term loans to finance the purchase of such Mortgage
Assets. Typically, the lender in a reverse repurchase arrangement makes a loan
in an amount equal to a percentage of the market value of the pledged
collateral. At maturity, the borrower is required to repay the loan and the
pledged collateral is released. Pledged Mortgage Assets continue to pay
principal and interest to the borrower.
A dollar roll agreement provides for the sale and delayed delivery of
Mortgage Securities and a simultaneous forward repurchase commitment by the
borrower to repurchase the same or a substantially similar security on a future
date. During the roll period, the borrower foregoes principal and interest
payments on the Mortgage Securities, but is compensated by the interest earned
on the cash proceeds of the initial sale of the Mortgage Securities and the
spread on the forward repurchase price. Because the dollar roll provides a
borrower with funds for the roll period, its value may be expressed as an
"implied financing rate." Dollar rolls are a favorable means of financing when
the forward repurchase price is low compared to the initial sale price, making
the implied financing rate lower than alternative short-term borrowing rates.
The Company's ability to enter into dollar roll agreements may be limited in
order to maintain the Company's status as a REIT or to avoid the imposition of
tax on the Company. See "FEDERAL INCOME TAX CONSIDERATIONS."
The Company expects that reverse repurchase agreements and, to the extent
consistent with the REIT Provisions of the Code, dollar roll agreements will be,
together with Mortgage Loan securitizations, the principal means of leveraging
its Mortgage Assets. 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
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these discussions, that it will be able to obtain financing in amounts and at
interest rates consistent with the Company's financing objectives.
The reverse repurchase and dollar roll agreements also would require the
Company to deposit additional collateral (a "margin call") or reduce its
borrowings thereunder, if the market value of the pledged collateral declines.
This may require the Company to sell Mortgage Assets to provide such additional
collateral or to reduce the amount borrowed. If these sales were made at prices
lower than the carrying value of the Mortgage Assets, the Company would
experience losses. The Company intends to maintain an equity cushion sufficient
to provide liquidity in the event of interest rate movements and other market
conditions affecting the market value of the pledged Mortgage Assets. However,
there can be no assurance that the Company will be able to safeguard against
being required to sell Mortgage Assets in the event of a change in market
conditions. If the Company were forced to liquidate Mortgage Assets, there can
be no assurance that it would be able to maintain compliance with the REIT
Provisions of the Code regarding asset and source of income. See "FEDERAL INCOME
TAX CONSIDERATIONS--Requirements for Qualification."
SECURITIZATION
The Company intends to acquire and accumulate Mortgage Loans for
securitization. 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, such as through the issuance of multi-class pass-through
certificates, under which a "sale" for accounting purposes 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.
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
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servicing Mortgage Loans (the "Master Servicer"). If, in the future, the Company
decides to engage in this business, it will do so only through Qualified REIT
Subsidiaries.
The Company intends to structure its securitizations so as to avoid the
attribution of any Excess Inclusion Income to the Company's stockholders. See
"FEDERAL INCOME TAX CONSIDERATIONS-- Taxation of Stockholders."
HEDGING ACTIVITIES
The Company intends to enter into hedging transactions to protect its
investment portfolio from interest rate fluctuations and other changes in market
conditions. These transactions may include interest rate swaps, the purchase or
sale of interest rate collars, caps or floors, options and IOs. These
instruments may be used to hedge as much of the interest rate risk as the
Manager determines is in the best interest of the Company's stockholders, given
the cost of such hedges and the need to maintain the Company's status as a REIT.
The Company has not established specific policies as to the extent of the
hedging transactions in which it will engage; however, the Independent Directors
will be responsible for reviewing the extent and effect of hedging activities at
their regular meetings. The Manager may elect to have the Company bear a level
of interest rate risk that could otherwise be hedged when the Manager believes,
based on all relevant facts, that bearing such risk is advisable.
Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. The business failure of a counterparty with which the Company has
entered into a hedging transaction will most likely result in a default. The
default of a counterparty with which the Company has entered into a hedging
transaction may result in the loss of unrealized profits and force the Company
to cover its resale commitments, if any, at the then current market price.
Although generally the Company will seek to reserve for itself the right to
terminate its hedging positions, it may not always be possible to dispose of or
close out a hedging position without the consent of the counterparty, and the
Company may not be able to enter into an offsetting contract in order to cover
its risk. There can be no assurance that a liquid secondary market will exist
for hedging instruments purchased or sold, and the Company may be required to
maintain a position until exercise or expiration, which could result in losses.
The Company intends to seek to protect its investment portfolio against the
effects of significant interest rate fluctuations and to preserve the net income
flows and capital value of the Company. Specifically, the Company's asset
acquisition and borrowing strategies are intended to offset the potential
adverse effects resulting from the differences between fixed-rates or other
limitations on coupon rate adjustment, such as interest rate caps, associated
with its Mortgage Assets and the shorter term variable nature of the Company's
related borrowings.
The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between yields from Mortgage Assets and the Company's borrowing costs across a
reasonable range of adverse interest rate environments. Capital preservation
refers to maintaining a relatively steady level in the market value of the
Company's capital across a reasonable range of adverse interest rate scenarios.
To monitor and manage capital preservation risk, the Company will measure the
"duration" of its capital. The duration of capital is the expected change in the
market value of the Company's capital caused by a 1% change in interest rate. To
monitor duration and the related risks of fluctuations in the liquidation value
of the Company's equity, the Company will model the impact of various economic
scenarios on the market value of the Company's Mortgage Assets, liabilities and
hedging instruments.
The Company believes its hedging activities will provide a level of income
and capital protection against reasonable interest rate risks. However, no
strategy can insulate the Company completely from such risks, and certain of the
federal income tax requirements that the Company must satisfy to qualify as a
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REIT limit the Company's ability to hedge. The Company intends to monitor its
hedging activity carefully and may have to limit its hedging strategies so that
it does not realize excessive income from hedging activities or hold hedging
instruments having excess value in relation to total assets, which would result
in the Company's disqualification as a REIT or, in the case of excess hedging
income, the payment of a penalty tax for failure to satisfy certain REIT income
tests under the Code, provided such failure was for reasonable cause. See
"FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification."
Hedging activity involves transaction costs, and such costs can increase
significantly as the period covered by such activity increases. Therefore, the
Company may be prevented from effectively hedging all of its interest rate risk.
Certain losses incurred in connection with hedging activities may be capital
losses that would not be deductible to offset ordinary REIT income. In such a
situation, the Company would have incurred an economic loss of capital that
would not be deductible to offset the ordinary income from which dividends must
be paid.
INTEREST RATE RISK MANAGEMENT STRATEGY
The Company intends to follow an interest rate risk management strategy to
protect against the adverse effects of major interest rate changes. The
Company's interest rate risk management strategy is formulated with the intent
to offset the potential adverse effects resulting from the fixed rate nature or
other rate adjustment limitations of its assets and related changes in the
short-term borrowing costs. This encompasses a number of procedures including:
(i) purchasing interest caps and interest rate caps to attempt to mitigate the
risk of the cost of variable rate liabilities increasing at a faster rate than
the earnings on the assets, (ii) purchasing IOs to attempt to offset the adverse
effects of rising interest rates, and (iii) monitoring the effect of changes in
interest rates on the earnings and the value of the Company.
The Company may purchase interest rate caps, interest swaps and similar
securities to attempt to mitigate the risk of the cost of its variable rate
liabilities increasing at a faster rate than the earnings on its assets. The
Company intends generally to hedge as much of the interest rate risk as the
Manager determines is in the best interest of the Company, given the cost of
such hedging transactions and the need to maintain the Company's status as a
REIT. This determination may result in the Manager having the Company bear a
level of interest rate risk that could otherwise be hedged when the Manager
believes, based on all relevant facts, that bearing such risk is advisable. The
Company also may, to the extent consistent with its compliance with the REIT
gross income tests and applicable law, utilize options and forward contracts as
a hedge against future interest rate changes.
Interest rate caps are legal contracts between the Company and a third party
firm (the "counterparty") in which, in exchange for an initial premium, the
counterparty agrees to make payments to the Company if interest rates rise above
the rate specified in the contract.
Interest rate swaps are legal contracts between the Company and a
counterparty in which the Company pays a fixed rate of interest to the
counterparty and the counterparty pays a variable rate of interest to the
Company. These and other similar securities have the effect of offsetting the
increasing cost of variable rate liabilities during periods of rising interest
rates.
The Company intends to purchase IOs to endeavor to offset the effects of
rising interest rates. These securities can be effective in hedging the
investment portfolio as the values and yields of these securities tend to
increase as interest rates rise and to decrease as interest rates fall.
EMPLOYEES
The Company initially expects to have seven employees. The Manager will
employ the four executive officers of the Company and four additional employees.
Each of the investment professionals of the Manager has at least ten years'
experience in mortgage research, mortgage finance and investment management.
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FACILITIES
The Company's executive offices are located at 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party or to
which any property of the Company is subject.
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DESCRIPTION OF PROPOSED ASSETS
The Company intends to acquire the following types of investments subject to
the operating restrictions described in "BUSINESS--Operating Policies and
Strategies."
MORTGAGE LOANS
The Company intends to acquire and accumulate fixed and adjustable-rate
Mortgage Loans secured by first or second liens on single-family (one-to-four
unit) residential, multi-family residential, commercial or other real property
as part of its investment strategy.
The Company may acquire Mortgage Loans directly from Mortgage Sellers which
include originators, and entities holding Mortgage Loans originated by others
throughout the United States, such as savings and loans associations, banks,
mortgage bankers, home builders, insurance companies and other mortgage lenders.
The Board of Directors of the Company has not established any limits upon the
geographic concentration of Mortgage Loans to be acquired by the Company or the
credit quality of the Mortgage Sellers.
The Company may issue commitments ("Commitments") to purchase Mortgage Loans
to Mortgage Sellers that follow policies and procedures that generally comply
with FHLMC, FNMA and GNMA regulations and guidelines and with all applicable
federal and state laws and regulations for loans secured by single-family
residential properties. In addition, Commitments may be issued for Agency
Certificates, Privately-Issued Certificates and Mortgage Loans. These
Commitments will obligate the Company to purchase Mortgage Assets from the
holders of the Commitment for a specific period of time, in a specific aggregate
principal amount and at a specified price and margin over an index. Although the
Company may commit to acquire Mortgage Loans prior to funding, all loans are
expected to be fully funded prior to their acquisition by the Company. Following
the issuance of Commitments, the Company will be exposed to risks of interest
rate fluctuations similar to those risks on the Company's Mortgage Assets.
The Mortgage Loans will be acquired by the Company and held until a quantity
sufficient for securitization has been accumulated. During the accumulation
period, the Company will be subject to risks of borrower defaults, bankruptcies,
fraud losses and special hazard losses that are not covered by standard hazard
insurance. In the event of any default under Mortgage Loans held by the Company,
the Company will bear the risk of loss of principal to the extent of any
deficiency between the value of the mortgage collateral and the principal amount
of the Mortgage Loan. Also, during the accumulation period, the costs of
financing and hedging the Mortgage Loans could exceed the interest income on the
Mortgage Loans. No assurance can be given that any mortgage, fraud or hazard
insurance will adequately cover a loss suffered by the Company. 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, lack of encumbrances, enforceability, validity of the lien,
recordation of the Mortgage Loans and as to the accuracy of information. In the
event of a breach of these representations and warranties, the Mortgage Sellers
may become liable for certain damages or be required to repurchase such loans.
The Company will provide similar representations and warranties when the Company
sells or pledges the Mortgage Loans as collateral for Mortgage Securities.
Although the Company will have recourse to the Mortgage Sellers based on the its
representations and warranties, the Company will be at risk for loss to the
extent the 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
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from one seller in exchange for participation certificates representing an
interest in the Mortgage Loans purchased). FHLMC certificates may pay interest
at a fixed or adjustable rate. The interest rate paid on FHLMC adjustable rate
mortgage ("ARM") certificates adjusts periodically within 60 days prior to the
month in which the interest rates on the underlying Mortgage Loans adjust. The
interest rates paid on FHLMC ARM certificates issued under FHLMC's standard ARM
programs adjust in relation to the Treasury Index. Other specified indices used
in FHLMC ARM programs include the 11th District Cost of Funds Index published by
the Federal Home Loan Bank of San Francisco (the "11th District Index") and
LIBOR. Interest rates paid on fully-indexed FHLMC ARM certificates equal the
applicable index rate plus a specified number of basis points ranging typically
from 125 to 250 basis points. In addition, the majority of series of FHLMC ARM
certificates issued to date have evidenced pools of Mortgage Loans with monthly,
semi-annual or annual interest adjustments. Adjustments in the interest rates
paid are generally limited to an annual increase or decrease of either 100 or
200 basis points and to a lifetime cap of 500 or 600 basis points over the
initial interest rate. Certain FHLMC programs include Mortgage Loans which allow
the borrower to convert the adjustable mortgage interest rate of its ARMs to a
fixed rate. ARMs which are converted into fixed rate Mortgage Loans are
repurchased by FHLMC, or by the seller of such loan to FHLMC, at the unpaid
principal balance thereof plus accrued interest to the due date of the last
adjustable rate interest payment.
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 and
LIBOR. Interest rates paid on fully-indexed FNMA ARM certificates equal the
applicable index rate plus a specified number of basis points ranging typically
from 125 to 250 basis points. In addition, the majority of series of FNMA ARM
certificates issued to date have evidenced pools of Mortgage Loans with monthly,
semi-annual or annual interest rate adjustments. Adjustments in the interest
rates paid are generally limited to an annual increase or decrease of either 100
or 200 basis points and to a lifetime cap of 500 or 600 basis points over the
initial interest rate. Certain FNMA programs include Mortgage Loans which allow
the borrower to convert the adjustable mortgage interest rate of its ARM to a
fixed rate. ARMs which are converted into fixed rate Mortgage Loans are
repurchased by FNMA, or by the seller of such loans to FNMA, at the unpaid
principal balance thereof plus accrued interest to the due date of the last
adjustable rate interest payment. Adjustments to the interest rates on FNMA ARM
certificates are typically subject to lifetime caps and periodic rate or payment
caps.
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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
disproportionate amount of principal, I.E. POs, would be likely to increase in
the event of rapid prepayments.
Some IOs in which the Company may invest, such as Inverse IOs, bear interest
at a floating rate that varies inversely with (and often at a multiple of)
changes in a specific index. The yield to maturity of an Inverse IO is extremely
sensitive to changes in the related index. The Company also may invest in
inverse floating rate Mortgage Derivatives which are similar in structure and
risk to Inverse IOs, except they generally are issued with a greater stated
principal amount than Inverse IOs.
Other IOs in which the Company may invest, such as Sub IOs, have the
characteristics of a Subordinate Interest. A Sub IO is entitled to no payments
of principal; moreover, interest on a Sub IO often is withheld in a reserve fund
or spread account to fund required payments of principal and interest on more
senior tranches of Mortgage Securities. Once the balance in the spread account
reaches a certain level, excess funds are paid to the holders of the Sub IO.
These Sub IOs provide credit support to the senior classes and thus bear
substantial credit risks. In addition, because a Sub IO receives only interest
payments, its yield is extremely sensitive to the rate of prepayments (including
prepayments as a result of defaults) on the underlying Mortgage Loans.
IOs can be an effective hedging device because they generally increase in
value as fixed rate Mortgage Securities decrease in value. The Company also may
invest in other types of derivatives currently available in the market and other
Mortgage Derivatives that may be developed in the future if the Manager
determines that such investments would be advantageous to the Company. The
Company does not intend to purchase REMIC residuals or other CMO residuals.
SUBORDINATE INTERESTS
The Company intends to retain a Subordinate Interest in the pools of
Mortgage Loans it securitizes and to acquire Subordinate Interests in pools of
Mortgage Loans securitized by others. The credit quality of Mortgage Loans and
the Mortgage Securities utilizing Mortgage Loans as the underlying collateral,
depends on a number of factors, including their loan-to-value ratio, their terms
and the geographic diversification of the location of the properties securing
the Mortgage Loans and, in the case of multi-family and commercial properties,
the creditworthiness of tenants.
In a securitization, the principal of and interest on the underlying
Mortgage Loans may be allocated among several classes of Mortgage Securities in
many ways and the credit quality of a particular class depends primarily on its
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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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 FIXED-INCOME ASSETS
The Company may invest in fixed-income securities that are not Mortgage
Assets, including securities issued by corporations or issued or guaranteed by
the U.S. government or its agenices or instrumentalities, 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.
The Company may invest in debt securities issued or guaranteed by foreign
governments, including debt securities rated below investment grade. Obligations
of governments of emerging market countries are often subject to, or may be
adversely affected by, risks associated with political and economic uncertainty,
fluctuations of currency exchange rates, lower levels of disclosure and
regulation in foreign securities markets than in the United States, risks of
nationalization, expropriation and confiscatory taxation, taxation of income
earned in foreign nations or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls and uncertainties as to the status,
interpretation and application of laws.
The Company also may invest in high yield corporate debt obligations rated
below investment grade. High yield debt obligations are generally unsecured, may
be subordinated to other obligations of the issuer and generally have greater
credit and liquidity risk than is typically associated with investment grade
corporate obligations.
The Company also may acquire interests in non-real estate loans. Such loan
interests may be purchased either directly (by way of assignment from the
selling institution) or indirectly (by way of the purchase of a participation
interest from the selling institution). The purchaser of an assignment of an
interest in a loan typically succeeds to all rights and obligations of the
assigning selling institution and becomes a lender under the loan agreement.
Participations typically result in a contractual relationship only with the
selling institution, not with the borrower.
In addition, the Company may invest in asset-backed securities which have
structural characteristics similar to Mortgage Securities but relate to assets
other than Mortgage Assets, including credit card, automobile and other
receivables. Asset-backed securities may be rated or unrated and, if rated, may
be above or below investment grade. They may bear coupons at a fixed or floating
interest rate and also may be subject to prepayment risk.
44
<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, a Delaware corporation and a
registered investment adviser under the Advisers Act, specializes in managing
investments in Mortgage Securities. The stockholders of the Manager are
directors of the Company. The Manager employs investment professionals each of
whom has at least ten years' experience in mortgage research, mortgage finance
and investment management; however, neither the Manager nor its investment
professionals have previously managed a REIT. The Manager's investment
professionals currently manage over $300 million of capital invested primarily
in $3.9 billion of Mortgage Securities. 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
David A. Tepper*..................................... 40 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 until he resigned in 1993, Mr. Smirlock was Domestic Fixed
Income Chief Investment Officer for Goldman Sachs Asset Management ("GSAM"), a
division of Goldman, Sachs & Co., and a partner of Goldman, Sachs & Co. From
1988 to 1990, Mr. Smirlock served as the head of the Asset Acquisition Group at
Franklin Savings Association. Mr. Smirlock was an Associate Professor of Finance
at the Wharton School of Business of the University of Pennsylvania from 1982 to
1990.
THOMAS G. JONOVICH has been the Chief Financial Officer of the Manager since
its inception. 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 was employed as a certified
public accountant 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, 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
45
<PAGE>
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.
DAVID A. TEPPER has been a Director of the Manager since its inception. Mr.
Tepper is the chief principal and founder of Appaloosa which specializes in
investments in high yield securities Mortgage Securities and bank loans. Before
forming Appaloosa in 1993, Mr. Tepper was head trader in the High-Yield
Department of Goldman, Sachs & Co. Mr. Tepper was a director of the Stone Street
Funds, a private investment fund, from 1987 to 1992, and managed the high-yield
portion of those funds during that period. Mr. Tepper is the indirect minority
owner of the Manager.
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 Mr. Smirlock. The
remaining equity of the Manager is owned by Appaloosa Partners Inc. Mr. Tepper
owns all of the equity of Appaloosa Partners Inc.
INVOLVEMENT OF OFFICERS IN CERTAIN LEGAL PROCEEDINGS
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 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 caused and aided and abetted violations of the Advisers Act by (i)
causing to be executed a series of purchase transactions in Mortgage Securities
for which he failed to promptly prepare order tickets allocating the securities
to specific client accounts and (ii) causing to be executed two Mortgage
Securities transactions between client accounts without obtaining independent
evaluations of the prices at which he instructed the transactions to be executed
in order to ensure that the best price and execution were obtained for the
clients. The Commission found that Mr. Smirlock caused and aided and abetted
violations of these recordkeeping provision by failing to write tickets
allocating trades on the days the trades were executed. The Commission (i)
ordered Mr. Smirlock to cease and desist from committing or causing any
violation of the provisions of the Advisers Act set forth in the Order, (ii)
suspended him from association with any broker, dealer, investment adviser,
investment company or municipal securities dealer for a three-month period and
(iii) required him to pay a penalty of $50,000. Contemporaneously with the
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. On November 30, 1993, Mr. Smirlock resigned from GSAM and
Goldman, Sachs & Co.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager for an
initial term expiring on December 31, 2002. The Manager Agreement shall continue
automatically for successive three-year periods, provided such continuance is
specifically approved by the Board of Directors, including a majority of the
Independent Directors. The Management Agreement is terminable by either the
Company, pursuant to a majority vote of the Independent Directors or a vote of
the holders of 66 2/3% of the outstanding shares of Common Stock, or the
Manager, without cause at any time upon 60 days' written notice to the other
party. In addition, the Company has the right to terminate the Management
46
<PAGE>
Agreement upon the occurrence of certain specified events, including a breach by
the Manager of any material provision contained in the Management Agreement. The
Management Agreement also will terminate automatically in the event of its
assignment (as defined in the Advisers Act), unless the assignment is consented
to by the non-assigning party. The Manager has agreed that, during the term of
the Management Agreement, it shall not to serve as an investment adviser to any
entity, the securities of which are publicly traded, organized and operated in
compliance with the REIT Provisions of the Code, that invests primarily in
Mortgage Assets and follows investment strategies similar to those employed by
the Company, other than the Company, without the prior written approval of the
Independent Directors. In connection with such forbearance on the Manager's
part, the Company has agreed that if the Company terminates the Management
Agreement without cause or the Board of Directors fails to approve a
continuation of the Management Agreement, or the Company engages another person
to manage a portion of its assets or to manage assets internally with personnel
other than those previously employed by the Manager, the Manager will be
entitled to receive a "Non-Competition Payment" in an amount equal to the fair
market value of the Management Agreement (without giving effect to any
termination and assuming it is renewed in accordance with its terms), to be
determined in accordance with the provisions of the Management Agreement.
The Manager at all times will be subject to the supervision of the Company's
Board of Directors and will have only such functions and authority as the
Company may delegate to it. The Manager will be authorized to invest the assets
of the Company according to the strategy set forth in this Prospectus and with
the written instructions of the Company's Board of Directors. The Manager will
be responsible for the day-to-day operations of the Company and will perform (or
cause to be performed) such services and activities relating to the assets and
operations of the Company as may be appropriate, including, among other things:
(i) serving as the Company's consultant with respect to formulation of
investment criteria by the Board of Directors;
(ii) advising the Company in connection with the purchase and commitment
to purchase Mortgage Assets, the sale and commitment to sell Mortgage
Assets, and the maintenance and administration of its portfolio of Mortgage
Assets;
(iii) arranging for the securitization of Mortgage Loans;
(iv) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(v) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the Board
of Directors from time to time, and providing data and advice to the Board
of Directors in connection with the identification of such dealers;
(vi) providing executive and administrative personnel, office space and
office services required in rendering services to the Company;
(vii) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary to the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues and the payment of the Company's debts and obligations and
maintenance of appropriate computer systems to perform such administrative
functions;
(viii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
47
<PAGE>
(ix) to the extent not otherwise subject to an agreement executed by the
Company, designating a servicer for Mortgage Loans purchased by the Company
and arranging for the monitoring and administering of such servicer,
including negotiating servicing agreements, collecting information and
submitting reports pertaining to the Mortgage Loans and to monies remitted
to the Manager or the Company;
(x) counseling the Board of Directors in connection with policy
decisions;
(xi) engaging in hedging activities on behalf of the Company, consistent
with the Company's status as a REIT;
(xii) arranging financing of the type described under
"BUSINESS--Operating Policies and Strategies--Capital and Leverage
Policies;"
(xiii) supervising compliance with the REIT Provisions of the Code and
Investment Company Act requirements;
(xiv) upon request by, and in accordance with the directions of, the
Board of Directors, investing or reinvesting any monies of the Company;
(xv) qualifying and causing the Company to qualify to do business in all
applicable jurisdictions; and
(xvi) causing the Company to retain qualified accountants and tax experts
for at least a two-year period to assist in developing appropriate
accounting procedures and testing systems and to conduct quarterly
compliance reviews.
MANAGEMENT FEES
The Manager will receive an annual base management fee, payably monthly, as
set forth below:
<TABLE>
<CAPTION>
ANNUAL FEE AS A PERCENTAGE OF
AVERAGE STOCKHOLDERS' EQUITY AVERAGE STOCKHOLDERS' EQUITY
- ----------------------------------- -------------------------------------
<S> <C>
$0 to $500 million................. 1.0%
$500 million to $1 billion......... $5 million plus 0.8% of amounts in
excess of $500 million
$1 billion or more................. $9 million plus 0.6% of amounts in
excess of $1 billion
</TABLE>
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 incentive fees and before deduction of
dividends paid. The incentive fee payments to the Manager will be computed
before any income distributions are made to stockholders. As used in calculating
the Manager's fee, the term "Ten-Year U.S. Treasury Rate" means the arithmetic
average of the weekly yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of ten
years) published by the Federal Reserve Board during a quarter, or, if such rate
is not published by the Federal Reserve Board, published by any Federal Reserve
48
<PAGE>
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 securities from
brokers-dealers making a market in the securities or from pricing services.
These valuations will be made available to the Board of Directors. The Board of
Directors, with the approval of a majority of Independent Directors, is
authorized to change the rate at which fees are payable to the Manager from time
to time. The Manager will be reimbursed for out-of-pocket expenses paid to third
parties on behalf of the Company.
The management fees are payable in arrears. The Manager's base fee will be
calculated by the Manager as promptly as practicable after the month-end. The
Manager's incentive fee and expenses will be calculated by the Manager within 45
days after the end of each quarter. Such calculations shall be promptly
delivered to the Company. The Company is obligated to pay such fees and expenses
within 15 days after delivery of such calculation.
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 from time to time. Upon consummation of the Offering,
options will be granted at the initial public offering price in the amounts
indicated to the following executive officers and directors: Michael L. Smirlock
(270,000 shares); Peter T. Zimmermann (60,000 shares); Robert J. Gartner (30,000
shares); and Thomas G. Jonovich (8,000 shares). 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.
49
<PAGE>
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
Martin Bernstein..................................... 60 Director(1)
Frederick N. Khedouri................................ 47 Director(1)
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. Bernstein,
Khedouri and Marshall, see "THE MANAGER."
MARTIN BERNSTEIN is a private investor who has been managing family funds
since 1988. Mr. Bernstein also currently serves on the Board of Directors of
Astro Communications, Inc., a public company specializing in strobe lighting,
and MBO Properties, Inc., a real estate mortgage investment trust, and on the
Board of Trustees of Value Property Trust, a real estate investment trust.
FREDERICK N. KHEDOURI is a Senior Managing Director of Bear, Stearns, one of
the Representatives, and head of the firm's Financial Institutions Group, which
provides investment banking services to the banking, thrift, insurance,
investment management and specialty finance industries. Prior to joining Bear,
Stearns at the end of 1986, Mr. Khedouri was Associate Director of the White
House Office of Management and Budget from 1981 to 1985 and Deputy Chief of
Staff for Vice President George Bush in 1985 and 1986. After joining Bear,
Stearns, he was appointed by President Ronald Reagan to the Board of Directors
of the Securities Investor Protection Corporation in 1987.
WILLIAM MARSHALL, PH.D. has been the Chief Operating Officer of NISA
Investment Advisors since 1994. From 1991 to 1994 Mr. Marshall was the Senior
Vice President of National Investment Services of America, Inc., a registered
investment adviser.
The Company's Board of Directors will, upon closing of the Offering, consist
of five directors, and at all times, a majority will be Independent Directors.
The directors will be divided as evenly as possible into three classes,
denominated Class I, Class II and Class III, with the terms of office of each
class expiring at the 1998, 1999 and 2000 annual meeting of stockholders,
respectively. At each annual meeting following such initial classification and
election, directors elected to succeed those directors whose terms expire will
be elected for a term to expire at the third succeeding annual meeting of
stockholders after their election. The directors in each class are as follows:
Class I-- Mr. Bernstein, Class II-- Messrs. Tepper and Khedouri, and Class III--
Messrs. Smirlock and Marshall. All officers are appointed by and serve at the
discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will have three standing committees: the Executive
Committee, the Compensation Committee and the Audit Committee. Messrs. Smirlock
and Tepper will serve on the Executive
50
<PAGE>
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. Messrs. Bernstein and Marshall will serve on the
Compensation Committee. The Independent Directors will serve on the Compensation
Committee and the Audit Committee. The Compensation Committee will be
responsible for recommending to the Board of Directors the Company's executive
compensation policies for the Chief Executive Officer and other senior officers
and for administering the Stock Incentive Plan. See "--Stock Incentive Plan."
Messrs. Bernstein and Khedouri will serve on the Audit Committee. The Audit
Committee is responsible for recommending independent auditors, reviewing the
audit plan, the adequacy of internal controls, the audit report and the
management letter, and performing such other duties as the Board of Directors
may from time to time prescribe.
COMPENSATION OF DIRECTORS
The Company will pay each non-employee director compensation of $20,000 per
annum and a fee of $500 for each meeting of the Board of Directors that he
attends. However, the directors may be granted awards from time to time pursuant
to the Stock Incentive Plan. See "--Stock Incentive Plan." The Company will
reimburse each director for ordinary and necessary expenses related to such
director's attendance at Board of Directors and committee meetings.
EXECUTIVE COMPENSATION
The Company has not paid, and does not intend to pay, any annual
compensation to the Company's executive officers for their services as executive
officers. However, the executive officers and directors may be granted awards
from time to time pursuant to the Stock Incentive Plan. See "--Stock Incentive
Plan."
STOCK INCENTIVE PLAN
The Company adopted the 1997 Stock Incentive Plan (the "Stock Incentive
Plan") in October 1997. The Stock Incentive Plan will be administered by the
Compensation Committee. All employees and directors of, and consultants to, the
Company (including employees and directors of the Manager), as may be determined
from time to time by the Compensation Committee, are eligible to receive awards
under the Stock Incentive Plan (each, a "SIP Participant").
Awards under the Stock Incentive Plan may include: (i) options to purchase
shares of Common Stock, including incentive stock options, non-qualified stock
options or both, which options may contain automatic reload features; (ii) stock
appreciation rights, whether in connection with the grant of stock options or
independent of such grant, or stock appreciation rights that are only
exercisable in the event of a Change of Control of the Company (as defined in
the Stock Incentive Plan) or upon other events; (iii) restricted stock, in which
Common Stock is granted to or purchased by SIP Participants for a purchase price
determined by the Compensation Committee, subject to restrictions on
transferability and other restrictions, which lapse over time; (iv) deferred
stock, in which delivery of Common Stock occurs upon expiration of a deferral
period; (v) bonus stock, consisting of a right to receive Common Stock in an
amount determined with reference to a fixed bonus amount; (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
Compensation Committee currently does not intend to award any dividend
equivalents.
51
<PAGE>
A total of 2,066,666 shares of Common Stock were authorized for issuance
under the Stock Incentive Plan; however, stock appreciation rights and any other
awards that are exercisable only for cash are not counted against the foregoing
limitation. Not more than 1,300,000 shares of Common Stock may be the subject of
options and stock appreciation rights (including stock appreciation rights that
are exercisable only for cash) granted to any individual during any calendar
year. Prior to the Offering, the Compensation Committee will grant awards with
respect to the issuance of an aggregate of 1,500,000 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 incentive 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 must be at least equal to the
fair market value of the Common Stock at the date of grant. The base value of a
stock appreciation right granted in connection with a stock option is equal to
the exercise price of the related option. The base value of a stock appreciation
right granted independently of an option is equal to the fair market value of a
share of Common Stock on the date of grant. Upon any exercise of a stock
appreciation right, the holder is entitled to receive an amount equal to the
spread (or a portion of such spread, as determined by the Compensation
Committee) between the fair market value of the Common Stock on the date of
exercise and the base value of the stock appreciation right. Such amount is
payable by the Company in the form of cash or shares of Common Stock, as
determined by the Compensation Committee.
Stock options and stock appreciation rights are exercisable for a duration
determined by the Compensation Committee, but in no event more than ten years
after the date of grant. Options and rights shall be exercisable at such rate
and times as may be fixed by the Compensation Committee on the date of grant.
The aggregate fair market value (determined at the time the option is granted)
of the Common Stock with respect to which incentive stock options are
exercisable for the first time by a SIP Participant during any calendar year
(under all stock incentive plans of the Company) shall not exceed $100,000; to
the extent this limitation is exceeded, such excess options shall be treated as
non-qualified stock options for purposes of the Stock Incentive Plan and the
Code.
The Company shall obtain such consideration for granting awards under the
Stock Incentive Plan as the Compensation Committee in its discretion may
request. Each award may be subject to provisions to assure that the grant, or
any exercise or disposition of Common Stock, will not violate federal and state
securities laws.
No award may be granted under the Stock Incentive Plan after the day
preceding the tenth anniversary of the adoption of the Stock Incentive Plan. No
awards may be granted under the Stock Incentive Plan to any person who, assuming
exercise or settlement of all options and rights held by such person, would own
or be deemed to own more than 9.8%, in number of shares or value, of any class
of capital stock of the Company.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months. Payment of the purchase
price to purchase restricted shares pursuant to a restricted stock award shall
be made in cash or by check payable to the order of the Corporation.
Stock options and stock appreciation rights terminate at the end of the 30th
business day following the SIP Participant's termination of employment or
service. This period is extended to one year in the case of
52
<PAGE>
the disability or death of the SIP Participant and, in the case of death, the
stock option is exercisable by the SIP Participant's estate. The
post-termination exercise period for any individual may be extended by the Board
of Directors, but not beyond the expiration of the original term of the option.
The awards granted under the Stock Incentive Plan generally become
immediately vested and exercisable in full in the following circumstances (each
an "Acceleration Event"): (i) upon the occurrence of special circumstances
determined in the opinion of the Board of Directors of the Company to merit
special consideration, (ii) upon a termination by the Company of the holder's
employment or service without cause (as defined in the Stock Incentive Plan),
(iii) in the case of an employee or director of the Manager, if the Management
Agreement terminates without the occurrence of a Termination Event (as defined
in the Stock Incentive Plan), or (iv) upon a Change of Control (as defined in
the Stock Incentive Plan) of the Company, except that vesting and exercisability
in the event of such a Change of Control shall be limited to the extent
necessary to permit pooling of interests accounting treatment if such treatment
is desired.
The awards granted under the Stock Incentive Plan are not transferable,
except that the Compensation Committee may authorize a transfer of an award
(other than an incentive stock option) by the holder to certain family members
or trusts or other entities specified in the Plan or permitted by the
Compensation Committee, subject to such terms and conditions as the Compensation
Committee approves.
The awards granted under the Stock Incentive Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
awards in the event of a stock dividend, split-up, conversion, exchange,
reclassification or substitution. In the event of any other change in the
corporate structure or outstanding shares of Common Stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Incentive Plan or any outstanding
awards as it shall deem appropriate to prevent dilution or enlargement of
rights.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Incentive Plan and may, with the consent of the
affected holder of an outstanding award at any time withdraw or amend the terms
and conditions of outstanding awards. Any amendment which would increase the
number of shares issuable pursuant to the Stock Incentive Plan or to any
individual thereunder or change the class of individuals to whom awards may be
granted shall be subject to the approval of the stockholders of the Company.
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<PAGE>
GRANTS OF AWARDS
In connection with the Offering, awards to acquire 1,500,000 shares of
Common Stock will be granted under the Stock Incentive Plan, to certain
individuals and groups of individuals, as follows:
<TABLE>
<CAPTION>
TYPES OF AWARDS AND NUMBER OF SHARES OF
COMMON STOCK SUBJECT TO AWARDS
-------------------------------------------------
CONJUNCTIVE
PERFORMANCE STOCK
DEFERRED BASED STOCK APPRECIATION
NAME OR GROUP STOCK(1) OPTIONS(2) OPTIONS(3) RIGHTS(4)
- --------------------------------------------------------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Michael L. Smirlock............................................ 400,000 370,000 270,000 640,000
Thomas G. Jonovich............................................. 17,000 8,000 25,000
Peter T. Zimmermann............................................ 75,000 80,000 60,000 140,000
Robert J. Gartner.............................................. 25,000 45,000 30,000 75,000
Martin Bernstein............................................... 10,000 10,000
Frederick N. Khedouri.......................................... 10,000 10,000
William Marshall............................................... 10,000 10,000
David A. Tepper................................................ 10,000 10,000
All other employees of the Company or the Manager, as a
group........................................................ 48,000 32,000 80,000
</TABLE>
- ------------------------
(1) The deferral period will expire at the rate of 25% on each of January 2,
1998, January 2, 1999, January 2, 2000, and January 2, 2001, subject to the
holder's continued employment or service, or upon the earlier occurrence of
an Acceleration Event.
(2) The per share exercise price under the performance-based options, which will
be non-qualified options, will be equal to the initial public offering price
and will be adjusted downward by the amount by which the Company's per share
dividends exceed certain performance targets. The performance-based options
become exercisable at the rate of 25% on each of January 2, 1998, January 2,
1999, January 2, 2000 and January 2, 2001, subject to the holder's continued
employment or service, and will become exercisable in full upon the earlier
occurrence of an Acceleration Event.
(3) The options will be non-qualified options with a per share exercise price
under each option equal to the initial public offering price. The options
become exercisable at the rate of 25% on each of January 2, 1998, January 2,
1999, January 2, 2000, and January 2, 2001, subject to the holder's
continued employment or service, and will become exercisable in full upon
the earlier occurrence of an Acceleration Event.
(4) The conjunctive stock appreciation rights will be granted in connection with
each option and will be exercisable if, and to the extent that, the related
option is exercised. Such rights will be exercisable only for cash and will
entitle the holder to receive an amount equal to the spread between the fair
market value of the Common Stock on the date of exercise of the related
option and the exercise price under the related option.
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.
54
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
AND CONFLICTS OF INTEREST
The Company will be subject to various 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 owner of a
minority of the capital stock of the Manager.
The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or Affiliates from engaging in any
business or rendering services of any kind to any other person, except that,
during the term of the Management Agreement, the Manager may not manage another
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 for the Company. The Manager may aggregate
orders of the Company with orders for its other accounts. Such aggregation of
orders may not always be to the benefit of the Company with regard to the price
or quantity executed.
The Manager will not permit the Affiliated Funds or its other clients to
sell securities or other assets to, or purchase securities or other assets from,
the Company.
The incentive fee payable to the Manager is based upon the net income
received by the Company. This may create an incentive for the Manager to
recommend investments with greater income potential, which generally are riskier
or more speculative than would be the case if such fees did not include a
"performance" component. Such incentives may result in increased risk to the
value of the Company's investment portfolio. See "THE MANAGER--Management Fees."
The Manager, its Affiliates and the funds managed by Appaloosa have
committed to purchase an aggregate of 730,000 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 4.6% 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 funds managed by Appaloosa may dispose of
their shares any time after the lock-up period pursuant to the resale
registration statement and otherwise in compliance with all applicable
restrictions. See "SHARES ELIGIBLE FOR FUTURE SALE" and "UNDERWRITING."
55
<PAGE>
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.
Fredrick N. Khedouri, a Senior Managing Director of Bear, Stearns, is a
proposed Director of the Company and has committed to purchase 10,000 shares at
the initial public offering price in the Private Placement. Bear, Stearns
provides financial advisory services to the Company and its Affiliates.
56
<PAGE>
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................................................ 6,000 100% 73,000 *
Thomas G. Jonovich....................................................... -- -- 1,000 *
Peter T. Zimmermann...................................................... -- -- 25,000 *
Robert J. Gartner........................................................ -- -- 10,000 *
Martin Bernstein (4)..................................................... -- -- *
Frederick N. Khedouri (4)................................................ -- -- 10,000 *
William Marshall, Ph.D. (4).............................................. -- -- *
David A. Tepper.......................................................... -- -- 833,000(3) 5.2%
All directors and executive officers as a group (6 persons).............. 6,000 100% 942,000 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. Bernstein's address is 85 Shrewsbury Drive,
Livingston, New Jersey 07039. Mr. Khedouri's address is c/o Bear, Stearns &
Co. Inc., 245 Park Avenue, New York, New York 10167. Mr. Marshall's address
is c/o NISA Investment Advisors, L.L.C., 150 N. Meramec, Suite 640, St.
Louis, Missouri 63105.
(2) Does not include 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
private investment funds over which Mr. Tepper exercises dispositive
control.
(4) To become a director upon and subject to the closing of the Offering.
57
<PAGE>
DIVIDEND REINVESTMENT PLAN
The Company has adopted a Dividend Reinvestment Plan (the "Plan") to provide
stockholders of the Company and interested investors who are not stockholders
with a convenient and economical method to automatically reinvest all or a
portion of their cash dividends in, and, subject to the Board of Directors'
determination, make periodic cash subscriptions for, shares of the Company's
Common Stock.
The Plan will be administered by ChaseMellon Shareholder Services LLC (the
"Plan Administrator"). The Plan Administrator will keep records, send statements
of account to each person who participates in the Plan and provide safekeeping
for the shares and perform other duties relating to the Plan. The Plan
Administrator also will act as the dividend disbursing agent, transfer agent and
registrar for the Company's Common Stock.
All stockholders owning at least 100 shares or making a minimum optional
subscription of $250 are eligible to participate in the Plan. A stockholder who
owns shares of the Company's Common Stock in his or its own name (a "Stockholder
of Record") may participate directly in the Plan by delivering a completed
authorization form (the "Authorization Form") to the Plan Administrator. A
stockholder who beneficially owns shares of the Company's Common Stock that are
registered in a name other than such stockholder's name (a "Beneficial Owner")
may participate in the plan by instructing its broker, bank or other nominee to
complete and sign the Authorization Form and forward it to its securities
depository, which will provide the Plan Administrator with the information
necessary to allow the Beneficial Owner to participate in the Plan. In addition
to the reinvestment of dividends, the Plan provides current stockholders and
non-stockholders with the opportunity to make monthly investments in the
Company's Common Stock through optional cash purchases ("Cash Purchases"),
subject to a minimum of $250 and a maximum of $5,000 per month (or such larger
amount as to which the Company may consent), after receipt of a prospectus
forming part of a Registration Statement on Form S-3 filed with the Commission
concurrently with the filing of the Registration Statement of which this
Prospectus forms a part and relating solely to the shares to be sold pursuant to
the Plan.
Shares purchased directly from the Company through dividend reinvestment
under the Plan will be issued without a sales commission and may be issued at a
discount, ranging from 0% to 5%. If the Company should elect that the shares of
the Company's Common Stock to be purchased under the Plan are to be purchased in
the open market instead of directly from the Company, the Company will pay any
brokerage fees or commissions on such purchases, up to 5% of the fair market
value of the shares of the Company's Common Stock at the time of such purchase.
Any commissions in excess of 5% will be paid by the Plan participants on a pro
rata basis. No discount will apply to open market purchases or to privately
negotiated purchases of the Company's Common Stock. A Plan participant with a
$5.00 fee and brokerage commissions in the event the Plan participant asks the
Plan Administrator to sell all of such Plan participant's shares, or a $15.00
fee and brokerage commissions for each partial sale.
The Authorization Form provides for the purchase of shares of the Company's
Common Stock through the following participation options: (i) Full Dividend
Reinvestment -- the Plan Administrator will apply all cash dividends on all
shares of the Company's Common Stock then or subsequently registered in the Plan
participant's name, including all whole and fractional shares of the Company's
Common Stock, together with any voluntary cash contributions for Cash Purchases
towards the purchase of additional shares of the Company's Common Stock; (ii)
Partial Dividend Reinvestment -- the Plan Administrator will apply all cash
dividends on the number of shares of the Company's Common Stock then registered
in the Plan participant's name and designated in the appropriate space on the
Authorization Form and all cash dividends on shares of the Company's Common
Stock purchased by the Plan participant pursuant to the Plan, together with any
voluntary cash contributions towards the purchase of additional shares of the
Company's Common Stock; or (iii) Cash Purchases Only -- the Plan Administrator
will only apply the voluntary cash contributions received from the Plan
participant towards the purchase of shares of the Company's Common Stock.
58
<PAGE>
Dividends shall be reinvested within fifteen days after the Dividend Payment
Date (such date being the "Dividend Reinvest Date"), except where reinvestment
of such funds at a later date is necessary under applicable securities laws or
advisable. Under normal market conditions, the funds are expected to be
reinvested on the Dividend Payment Date. The "Average Market Price for Dividend
Reinvestments" per share of the Company's Common Stock acquired directly from
the Company under the Plan shall be the average of the daily high and low sales
prices, computed to seven decimal places, of the shares of the Company's Common
Stock as reported on the NYSE on the Dividend Reinvestment Date, or if no
trading occurs in the Company's Common Stock on the Dividend Reinvestment Date,
the average of the high and low sales prices for the first trading day
immediately preceding the Dividend Reinvestment Date for which trades are
reported. If the Company elects to purchase the shares on the open market or in
privately negotiated transactions, the price per share of the Company's Common
Stock acquired through such open market or privately negotiated transactions
will be the weighted average purchase price for all the Company's Common Stock
purchased by the Plan Administrator in connection with such open market
purchases, without application of a discount.
The "Average Market Price for Cash Purchases" per share shall be the average
of the daily high and low sales prices, computed to seven decimal places, of the
shares of the Company's Common Stock as reported on the NYSE during the twelve
trading days prior to the date scheduled for investment of Cash Purchases for
that month (the "Pricing Period"). No commission shall be paid with respect to
purchases of authorized but unissued shares of the Company's Common Stock
directly from the Company. If the Company elects to purchase the shares on the
open market or in privately negotiated transactions, the price per share of the
Company's Common Stock acquired through such open market or privately negotiated
transactions will be the weighted average of the actual prices paid, computed to
seven decimal places, for all the Company's Common Stock purchased by the Plan
Administrator in connection with such open market purchases, without application
of a discount. Cash Purchases in excess of $5,000 may be made only upon
acceptance in writing by the Company of a completed written request for waiver
form from the Plan participant. It is solely within the Company's discretion as
to whether any such approval for cash investments in excess of $5,000 will be
granted.
As soon as practical after the purchase of the shares has been completed,
the Plan Administrator will send each Plan participant a statement of account
confirming the transaction and itemizing the previous reinvestment activity for
the calendar year. Plan participants will receive tax information annually for
their personal records and to assist in the preparation of their federal income
tax returns. Plan participants generally will be treated as having received a
dividend distribution equal to the fair market value of the shares of the
Company's Common Stock that are purchased with the Plan participant's reinvested
dividends generally on the date that the Company credits such shares to the Plan
participant's account, plus the brokerage commissions, if any, allocable to the
purchase of such shares, and Participants will have a tax basis in the shares
equal to such value. See "FEDERAL INCOME TAX CONSIDERATIONS."
59
<PAGE>
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 IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSIDERATIONS TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSIDERATIONS OF
SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
The Company will elect to become subject to tax as a REIT under the REIT
Provisions of the Code, for federal income tax purposes, commencing with the
taxable year ending December 31, 1997. The Company currently expects that it
will operate in a manner that will permit the Company to maintain its
qualification as a REIT for the taxable year ending December 31, 1997, and in
each taxable year thereafter. This treatment will permit the Company to deduct
dividend distributions to its stockholders for Federal income tax purposes, thus
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to its stockholders in the
form of dividends.
In the opinion of Special Tax Counsel to the Company, the Company's
contemplated method of operation described in this Prospectus and as represented
by the Company will enable it to satisfy the requirements for qualification as a
REIT under the Code commencing with the taxable year ending December 31, 1997.
This opinion is based on various assumptions relating to the organization and
operation of the Company and is conditioned upon certain representations made by
the Company as to certain factual matters. The continued qualification and
taxation of the Company as a REIT will depend upon the Company's ability to
meet, on a continuing basis, distribution levels and diversity of stock
ownership, and the various qualification tests imposed by the Code as discussed
below.
There can be no assurance, however, that the Company will qualify as a REIT
in any particular taxable year, given the highly complex nature of the rules
governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in the circumstances of the Company. If the
Company were not to qualify as a REIT in any particular year, it would be
subject to federal income tax as a regular, domestic corporation, and its
stockholders would be subject to tax in the same manner as stockholders of such
corporation. In this event, the Company could be subject to potentially
substantial
60
<PAGE>
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 provides restrictions regarding the transfer
of the Company's shares to assist in meeting the stock ownership requirements.
See "DESCRIPTION OF CAPITAL STOCK."
ASSET TESTS
The Company must generally meet the following asset tests (the "REIT Asset
Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets must consist
of Interests in Real Property (as defined below), 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 during the one year period following the Company's receipt of
certain new capital cash, and cash items (the "75% Asset Test"). For
purposes of the 75% Asset Test, the term "Interest in Real Property"
includes an interest in Mortgage Loans 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 be treated as qualifying assets for purposes of the 75%
Asset Test, except to the extent that less than 95%
61
<PAGE>
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 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
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 interest, original issue
discount, and market discount income that the Company derives from its
investments in Subordinate Interests, IOs and Inverse IOs.
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<PAGE>
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. The Company intends to structure its dollar roll transactions such that
income or gain from such transactions will not cause it to violate the 75% and
95% Gross Income Tests.
To ensure that the Company does not violate the REIT Gross Income Tests,
certain hedging activities, the creation of Mortgage Securities through
securitizations, and certain financing techniques may be conducted through 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 to customers Mortgage Assets
or hedging instruments on a regular basis, there is a substantial risk that such
assets would be deemed "dealer property" and that all of the profits from such
sales would be subject to tax at the rate of 100% as income from prohibited
transactions. Although the Company does not presently intend to make regular
sales to customers of such Mortgage Securities or other assets, if this
intention changes in the future, any such sales would be made through a taxable
subsidiary formed for such purpose. Any such subsidiary would not be subject to
this 100% tax, which is only applicable to REITs.
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 has issued regulations regarding the backup withholding rules as
applied to non-U.S. stockholders that unify current certification procedures and
forms and unify reliance standards but generally do not substantially alter the
current system of backup withholding compliance. These regulations will be
generally effective with respect to distributions made after December 31, 1998,
subject to certain transition rules.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their UBTI. While many investments in real estate generate UBTI, the Service
has issued a published ruling that dividend distributions from a REIT to an
exempt employee pension trust do not constitute UBTI, provided that the shares
of the REIT are not otherwise used in an unrelated trade or business of the
exempt employee pension trust. Based on that ruling, amounts distributed by the
Company to Exempt Organizations generally should not constitute UBTI. However,
if an Exempt Organization finances its acquisition of the Common Stock with
debt, a portion of its income from the Company will constitute UBTI pursuant to
the "debt-financed property" rules. Furthermore, social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans that are exempt from taxation under
paragraphs (7), (9), (17), and (20), respectively, of Section 501(c) of the Code
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, in certain
circumstances, a pension trust that 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 ARE ADVISED TO CONSULT WITH THEIR
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, FOREIGN AND LOCAL
INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY
REPORTING REQUIREMENTS.
Distributions to Non-U.S. stockholders that are not designated by the
Company as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Stock is treated as effectively connected with the
Non-U.S. stockholder's conduct of a U.S. trade or business, the Non-U.S.
stockholder generally will be subject to federal income tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such
distributions (and also may be subject to 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 has issued regulations regarding the backup withholding
rules as applied to non-U.S. stockholders that unify current certification
procedures and forms and unify reliance standards but generally do not
substantially alter the current system of backup withholding compliance. These
regulations will be generally effective with respect to distributions made after
December 31, 1998, subject to certain transition rules.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state and local tax in
various states and localities, including those states and localities in which it
or they transact business, own property, or reside. The state and local tax
treatment of the Company and its stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently, prospective
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Stock.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA,
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser subject to ERISA. The discussion does not
purport to deal with all aspects of ERISA or Section 4975 of the Code that may
be relevant to particular stockholders in light of their particular
circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
subject to Title I of ERISA (a "Plan") should consider carefully whether an
investment in the Common Stock is consistent with his fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of
ERISA require a Plan's investment to be (i) prudent and in the best interests of
the plan, its participants, and its beneficiaries, (ii) diversified in order to
minimize the risk of large losses, unless it is clearly prudent not to do so,
and (iii) authorized under the terms of the Plan's governing documents (provided
the documents are consistent with ERISA). In determining whether an investment
in the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary
of a Plan should consider all of the facts and circumstances, including whether
the investment is reasonably designed, as a part of the plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow, and funding
requirements of the plan's portfolio. A fiduciary also should take into account
the nature of the Company's business, the management of the Company, the length
of the Company's operating history, the fact that certain investment assets may
not have been identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the equity interests in the entity is a Plan. A Plan fiduciary also
should consider the relevance of those principles to ERISA's prohibition on
improper delegation of control over or responsibility for "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach by another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA would
be applicable to any transactions involving the Company's assets, (ii) persons
who exercise any authority over the Company's assets, or who provide investment
advice to the Company, would (for purposes of the fiduciary responsibility
provisions of ERISA) be fiduciaries of each Plan that acquires Common Stock, and
transactions involving the Company's assets undertaken at their direction or
pursuant to their advice might violate their fiduciary responsibilities under
ERISA, especially with regard to conflicts of interest, (iii) a fiduciary
exercising his
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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" with respect to an Plan or with respect to
a Plan subject to Section 4975 of the Code is subject to (i) an
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initial 15% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan and (ii) an excise tax equal to 100% of the
amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its
tax-exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs as
a result of the transaction or for any profits earned by the fiduciary in the
transaction. In this regard Prohibited Transaction Class Exemption 75-1 may be
applicable.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
As summarized in "DESCRIPTION OF PROPOSED ASSETS," Mortgage Assets will
include Mortgage Loans and Mortgage Securities which are backed by or represent
an interest in Mortgage Loans. The following discussion describes 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). It generally summarizes certain legal
aspects of Mortgage Loans and real property. Because certain of 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.
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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
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
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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 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
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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 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
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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 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
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schedule (with or without affecting the unpaid principal balance of the loan),
and/or by an extension (or shortening) of the term to maturity.
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
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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 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"
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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 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."
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws divide the Board of Directors into three classes
of directors, each class constituting approximately one-third of the total
number of directors, with the classes serving staggered three-year terms. The
classification of the Board of Directors will make it more difficult for
stockholders to change the composition of the Board of Directors because only a
minority of the directors can be elected at once. The Company believes, however,
that the staggered Board of Directors will help to ensure continuity and
stability of the Company's management and policies. The classification
provisions could also discourage a third party from accumulating the Company's
stock or attempting to obtain control of the Company, even though this attempt
might be beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances stockholders could be deprived of
opportunities to sell their shares of Common Stock at a higher price than might
otherwise be available.
NUMBER OF DIRECTORS, REMOVAL, FILLING VACANCIES
The Charter and Bylaws provide that the number of directors will be five, a
majority of whom will at all times be Independent Directors, and may be changed
by a majority of the entire Board of Directors. In addition, the 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 "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
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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.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Charter provides that the Board of Directors may create and authorize
the Company to issue rights entitling the holders thereof to purchase from the
Company shares of capital stock or other securities or property. The times at
which and terms upon which such rights are to be issued are within the
discretion of the Board of Directors. The provision is intended to confirm the
Board of Directors' authority to issue share purchase rights which could have
terms that would impede a merger, tender offer or other takeover attempt, or
other rights to purchase securities of the Company or any other entity.
INDEMNIFICATION
The Company's Charter obligates the Company to indemnify its directors and
officers and to pay or reimburse expenses for such individuals in advance of the
final disposition of a proceeding to the maximum extent permitted from time to
time by Maryland law. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities, unless it is established that (a)
the act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith, or (ii) was a result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. As permitted by the
MGCL, the Company's Charter obligates the Company to indemnify its present and
former directors and officers and to pay or reimburse reasonable expenses for
such individuals in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time by Maryland law.
LIMITATION OF LIABILITY
The MGCL permits the Charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and to its stockholders for money damages, except to the extent that
(i) it is proved that the person actually received an improper benefit or profit
in money, property or services, or (ii) a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Company's Charter contains a provision providing for elimination
of the liability of its directors and officers to the Company or its
stockholders for money damages to the maximum extent permitted by Maryland law
as amended or interpreted.
BUSINESS COMBINATIONS
Under 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
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Maryland corporation and any person who beneficially owns 10% or more of the
voting power of the corporation's shares or an affiliate or associate of the
corporation which, at any time within the two-year period prior to the date in
question, beneficially owned 10% or more of the voting power of the
corporation's shares (an "Interested Stockholder") or an affiliate thereof, are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such 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 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.
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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, 16,020,000 shares of Common
Stock will be issued and outstanding (or 18,270,000 shares if the Underwriters'
over-allotment option is exercised in full), and 2,066,666 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.
REGISTRATION RIGHTS
The Company has agreed that it will file and use its best efforts to have
declared a resale registration statement covering the sale of the shares sold in
the Private Placement. The Company has agreed with certain officers and
directors and certain other stockholders holding an aggregate of 1,014,000
shares of Common Stock that it shall keep the resale registration statement
effective until such time as sales may be made in reliance on Rule 144(k) under
the Securities Act. See "THE PRIVATE PLACEMENT."
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REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements of qualification for the tax benefits afforded by
the REIT Provisions of the Code are that (i) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals (the "5/50 Rule") and (ii)
there must be at least 100 stockholders during 335 days of each taxable year of
12 months.
So that the Company may meet these requirements at all times, the Charter
prohibits any person from acquiring or holding, directly or indirectly, shares
of Common Stock in excess of 9.8% in value of the aggregate of the outstanding
shares of Common Stock or in excess of 9.8% (in value or in number of shares,
whichever is more restrictive) of the aggregate of the outstanding shares of
Common Stock of the Company. For this purpose, the term "ownership" is defined
in accordance with the REIT Provisions of the Code and the constructive
ownership provisions of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code.
For purposes of the 5/50 Rule, the constructive ownership provisions
applicable under Section 544 of the Code attribute ownership of securities owned
by a corporation, partnership, estate or trust proportionately to its
stockholders, partners or beneficiaries, attribute ownership of securities owned
by family members and partners to other members of the same family, treat
securities with respect to which a person has an option to purchase as actually
owned by that person, and set forth rules as to when securities constructively
owned by a person are considered to be actually owned for the application of
such attribution provisions (I.E., "reattribution"). Thus, for purposes of
determining whether a person holds shares of Common Stock in violation of the
ownership limitation set forth in the Charter, many types of entities may own
directly more than the 9.8% limit because such entities' shares are attributed
to its individual stockholders. On the other hand, a person will be treated as
owning not only shares of Common Stock actually or beneficially owned, but also
any shares of Common Stock attributed to such person under the attribution rules
described above. Accordingly, under certain circumstances, shares of Common
Stock owned by a person who individually owns less than 9.8% of the shares
outstanding nevertheless may be in violation of the ownership limitations set
forth in the Charter. Ownership of shares of the Company's Common Stock through
such attribution is generally referred to as constructive ownership. The 100
stockholder test is determined by actual, and not constructive, ownership. It is
contemplated that, following the Offering, the Company will have greater than
100 stockholders of record.
The Charter further provides that any transfer of shares of Common Stock
that would result in disqualification of the Company as a REIT or that would (a)
create a direct or constructive ownership of shares of stock in excess of the
Ownership Limit, or (b) from and after the earlier of January 1, 1998 and the
date of closing of the sale of Common Stock pursuant to the Offering (the "One
Hundred Stockholder Date"), result in the shares of stock being beneficially
owned (within the meaning Section 856(a) of the Code) by fewer than 100 persons
(determined without reference to any rules of attribution), or (c) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
will be null and void, and the intended transferee (the "purported transferee")
will acquire no rights to such shares. Any purported transfer of shares that
would result in a person owning (directly or constructively) shares in excess of
the Ownership Limit (except as otherwise waived by the Board of Directors) due
to the unenforceability of the transfer restrictions set forth above will
constitute "Excess Securities." Excess Securities will automatically be deemed
to have been transferred by operation of law to a trust to be established by the
Company for the exclusive benefit of a charitable organization, until such time
as the trustee of the trust, which shall be a banking institution designated as
trustee by the Company, which is unaffiliated with either the Company or the
purported transferee, retransfers the Excess Securities. Subject to the
Ownership Limit, Excess Securities may be transferred by the trust to any person
(if such transfer would not result in Excess Securities) at a price not to
exceed the price paid by the purported transferee, the fair market value of the
Excess Securities on the date of the purported transfer), at which point the
Excess Securities will automatically cease to be Excess Securities. See "FEDERAL
INCOME TAX CONSIDERATIONS--Requirements for Qualification."
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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 the
Company, and any stockholder entering into such an agreement with the Company
should consult its tax advisor in connection with its entering into such an
agreement. The Board of Directors intends to waive the Ownership Limit for
several mutual funds (the "Funds") and such Funds intend to enter into an
agreement with the Company to purchase shares of Common Stock in a private
placement at the initial public offering price. This waiver of the Ownership
Limit applies only to the Funds, and any subsequent transferee of Shares
purchased from a Fund will be subject to the Ownership Limit.
Every owner of more than five percent (or such lower percentage as required
by the Code or the regulations promulgated thereunder) of all classes or series
of the Company's stock, within 30 days after the end of each taxable year, is
required by the Company's Charter to give written notice to the Company stating
the name and address of such owner, the number of shares of each class and
series of stock of the Company beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on the Company's
status as a REIT and to ensure compliance with the ownership limitations.
The provisions described above may inhibit market activity and the resulting
opportunity for the holders of the Company's Common Stock to receive a premium
for their shares or warrants that might otherwise exist in the absence of such
provisions. Such provisions also may make the Company an unsuitable investment
vehicle for any person seeking to obtain ownership of more than 9.8% of the
outstanding shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
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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 2,066,666 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 1,014,000 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 1,500,000 shares of
Common Stock 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., Friedman, Billings, Ramsey & Co., Inc.,
EVEREN Securities, Inc. and Stifel, Nicolaus & Company, Incorporated 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. .......................................................
Friedman, Billlings, Ramsey & Co., Inc..........................................
EVEREN Securities, Inc..........................................................
Stifel, Nicolaus & Company, Incorporated........................................
------------
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
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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 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, its officers and directors and
certain other stockholders who have purchased an aggregate of 1,014,000 shares
of Common Stock in the Private Placement have 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, on behalf of the Underwriters, and (ii) in the case of the
Company, for issuances under the terms of the Stock Incentive Plan or the
Dividend Reinvestment Plan.
Frederick N. Khedouri, a proposed Director of the Company and a Senior
Managing Director of Bear Stearns, one of the Representatives, has committed to
purchase 10,000 shares at the initial public offering price in the Private
Placement.
PRIVATE PLACEMENT
The Company received commitments on September 15, 1997 for the purchase, in
a private placement, of 1,014,000 shares of Common Stock at the initial public
offering price from certain officers, directors, proposed directors, employees
and Affiliates of the Company and the Manager. 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 &
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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.
EXPERTS
The statement of financial condition of the Company as of September 25,
1997, included in this Prospectus is included in reliance on the report of
Deloitte & Touche LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
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.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"ADA" means the Americans with Disabilities Act of 1990.
"Advisers Act" means the Investment Advisers Act of 1940, as amended.
"Affiliate" means, when used with reference to a specified person, (i) any
person that directly or indirectly controls or is controlled by or is under
common control with the specified person, (ii) any person that is an officer of,
partner in or trustee of, or serves in a similar capacity with respect to, the
specified person or of which the specified person is an officer, partner or
trustee, or with respect to which the specified person serves in a similar
capacity, and (iii) any person that, directly or indirectly, is the beneficial
owner of 5% or more of any class of equity securities of the specified person or
of which the specified person is directly or indirectly the owner of 5% or more
of any class of equity securities.
"Affiliated Funds" means the private investment funds advised by the Manager
which invest in Mortgage Assets.
"Agency Certificates" means FHLMC Certificates, FNMA Certificates and GNMA
Certificates.
"Appaloosa" means Appaloosa Management L.P.
"ARM" means a Mortgage Loan or any mortgage loan underlying a Mortgage
Security that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index. An ARM is
usually subject to periodic and lifetime interest rate and/or payment caps.
"Average Market Price" means the average of the daily high and low sales
prices, computed to seven decimal places, of the Company's Common Stock on the
NYSE, as reported in The Wall Street Journal, during the pricing period (the ten
days on which the NYSE is open and for which trades in the Company's Common
Stock are reported immediately preceding the relevant investment date).
"Average Stockholders' Equity" means, for any period, stockholders' equity,
calculated in accordance with GAAP, excluding any mark-to-market adjustments of
the investment portfolio.
"Bear, Stearns" means Bear, Stearns & Co. Inc., one of the Representatives.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws, as amended, of the Company.
"CERCLA" means the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charter" means the Articles of Incorporation, as amended, of the Company.
"CMOs" means fixed- or adjustable-rate debt obligations (bonds) that are
collateralized by Mortgage Loans or other Mortgage Assets. Such bonds may be
issued by U.S. government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of subordination
which are characteristics designed for the investment objectives of different
bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitments" means commitments issued by the Company which will obligate
the Company to purchase Mortgage Assets from, or sell them to, the holders of
the commitment for a specified period of time, in a specified aggregate
principal amount and at a specified price.
"Common Stock" means shares of the Company's common stock, $.001 par value
per share.
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"Company" means LASER Mortgage Management, Inc., a Maryland corporation.
"control shares" means voting shares of stock which, if aggregated with all
other shares of stock owned by such person, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third; (ii) one-third
or more but less than a majority or (iii) a majority or more of all voting
power.
"control share acquisition" means, subject to certain exceptions, the
acquisition of, ownership of, or the power to direct the exercise of voting
power with respect to "control shares."
"Crime Control Act" means the Comprehensive Crime Control Act of 1984.
"dealer property" means assets such as Mortgage Securities that the Company
creates through securitization of Mortgage Loans or Mortgage Assets or hedging
instruments in which any of the profits made from selling such assets would be
subject to tax at the rate of 100% as income from prohibited transactions.
"DOL" means the U.S. Department of Labor.
"DRP" means the Dividend Reinvestment Plan adopted by the Company.
"11th District Index" means the 11th District Cost of Funds Index published
by the Federal Home Loan Bank of San Francisco.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"excess inclusion" means taxable income that is generated by the Mortgage
Assets constituting a "taxable mortgage pool" under regulations to be issued by
the Treasury Department.
"Excess Securities" means shares of the Company owned by a person (directly
or indirectly) in excess of the Ownership Limit due to the unenforceability of
transfer restrictions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"FASIT" means a Financial Asset Securitization Investment Trust.
"FHA" means the U.S. Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form. An FHLMC ARM Certificate is an
FHLMC Certificate collateralized by adjustable-rate FHLMC Certificates.
"55% Requirement" means the requirement under the Investment Company Act
that the Company must, among other things, maintain at least 55% of its assets
in Qualifying Interests in order to qualify for the Investment Company Act
exemption.
"5/50 Rule" means that, for the Company to maintain its qualification as a
REIT, during the last half of each taxable year, not more than 50% in value of
its outstanding shares may be owned directly or indirectly by five or fewer
individuals.
"FNMA" means the Federal National Mortgage Association.
"FNMA Certificates" means guaranteed mortgage-pass-through certificates
issued by FNMA either in certified or book-entry form. An FNMA ARM Certificate
is an FNMA Certificate collateralized by adjustable-rate FNMA Certificates.
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"GAAP" means generally accepted accounting principles.
"GAAP income" means income calculated according to GAAP.
"Garn-St. German Act" means the Garn-St. Germain Depository Institutions Act
of 1982.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means fully modified pass-through mortgage backed
certificates guaranteed by GNMA and issued either in certificated or book-entry
form. A GNMA ARM Certificate is a GNMA Certificate collateralized by
adjustable-rate GNMA Certificates.
"haircut" means the over-collateralization amount required by a lender in
connection with a collateralized borrowing.
"High Quality" means securities which are (i) rated within one of the two
highest rating categories by one of the Rating Agencies or (ii) unrated but are
guaranteed by the U.S. government or any agency or instrumentality thereof. As
to Mortgage Loans, "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.
"HUD" means the Department of Housing and Urban Development.
"Independent Directors" means those directors that are not affiliated,
directly, or indirectly, with the Company or the Manager, whether by ownership
of, ownership interest in, employment by, any material business or professional
relationship with, or serving as an officer or director of the Company or the
Manager or an affiliated business entity of the Company or the Manager.
"Interest in Real Property" means an interest in Mortgage Loans or land and
improvements thereon, such as buildings or other inherently permanent
structures, a leasehold of real property, and an option to acquire real
property.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the Company's shares or an affiliate or associate of the
Company which, at any time within the two-year period prior to the date in
question, beneficially owned 10% or more of the voting power of the Company's
shares.
"Inverse IOs" means IOs that bear interest at a floating rate that varies
inversely with (and often at a multiple of ) changes in a specified index.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRAs" means Individual Retirement Accounts.
"Interest-only security" or "IO" means a type of Mortgage Security which
receives a portion of the interest payments from an underlying pool of Mortgage
Loans but will receive little or no principal payments and hence will have
little or no face value.
"1996 Lender Liability Act" means the Lender Liability and Deposit Insurance
Act of 1996.
"Management Agreement" means the agreement by and between the Company and
the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain fees.
"Manager" means Laser Advisers Inc., a Delaware corporation.
"margin call" means additional collateral that the Company would be required
to deposit due to potential reverse repurchase and dollar roll agreements.
"Master Servicer" means an entity that will administer and supervise the
performance by servicers of the duties and responsibilities under Servicing
Agreements in respect of the collateral for a series of Mortgage Securities.
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"MGCL" means the Maryland General Corporation Law.
"Mortgage Assets" means (i) Mortgage Securities and (ii) Mortgage Loans.
"Mortgage Derivatives" means Mortgage Securities which provide for the
holder to receive interest only, principal only, or interest and principal in
amounts that are disproportionate to those payable on the underlying Mortgage
Loans.
"Mortgage Loans" means mortgage loans secured by first or second liens on
single-family residential, multi-family residential, commercial or other real
property.
"Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs, and
(iii) other securities representing interests in, or obligations backed by,
pools of Mortgage Loans.
"Mortgage Sellers" means entities such as savings and loan associations,
banks, mortgage bankers, home builders, insurance companies and other mortgage
lenders which sell Mortgage Loans.
"Net Income" means the taxable income of the Company within the meaning of
the Code, less capital gains and capital appreciation included in taxable
income, but before the Manager's fees and before deduction of dividends paid.
"95% Distribution Requirement" means the requirement of the Company to
distribute 95% of its net taxable income annually (excluding any net capital
gain and certain non-cash income) in order to avoid corporate income taxation of
the earnings that it distributes.
"95% Gross Income Test" means the requirement for each taxable year that at
least 95% of the Company's gross income for each taxable year must be derived
from certain specified real estate sources including interest income and gain
from the disposition of Qualified Real Estate Assets or "qualified temporary
investment income" (I.E., income derived from "new capital" within one year of
the receipt of such capital), dividends, interest, and gains from the sale of
stock or other securities (including certain interest rate swap or cap
agreements, options, forward rate agreements, and similar financial instruments
entered into to reduce the interest rate risk with respect to debt incurred to
acquire Qualified Real Estate Assets) not held for sale in the ordinary course
of business.
"Non-ERISA Plan" means an IRA or a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees.
"Non-U.S. stockholders" means nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign stockholders
"NYSE" means the New York Stock Exchange.
"Offering" means the initial public offering of the Company's Common Stock
pursuant to this Prospectus.
"OID" means, with respect to a debt instrument, the excess of its stated
redemption price at maturity over its issue price; provided that such excess is
more than a defined DE MINIMIS amount.
"One Hundred Stockholder Date" means the earlier of (i) January 1, 1998 and
(ii) the date of closing of the sale of Common Stock pursuant to the Offering.
"Order" the order the Commission issued on November 29, 1993 pursuant to
Sections 203(f) and 203(k) of the Advisers Act in connection with certain
securities transactions executed between December 1992 and February 1993 while
Mr. Smirlock was Chief Investment Officer for Goldman Sachs Asset Management.
"Ownership Limit" means the limit set forth by the Charter of the Company
which prohibits direct or indirect ownership by any person of more than 9.8% of
the number of outstanding shares of Common Stock.
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"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of Mortgage Loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying Mortgage Loans in accordance with the holders' respective,
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family residential, multi-family residential, commercial
and/or other real property.
"passive activity losses" means losses like those from certain types of
limited partnerships in which a U.S. stockholder is a limited partner.
"phantom income" means that the Company's investment in Subordinate
Interests and certain types of Mortgage Securities may cause it under certain
circumstances to recognize taxable income in excess of its economic income.
"Plan Administrator" means the entity which administers the DRP.
"Plan Asset Regulations " means regulations of the DOL defining "plan
assets."
"Plan" means any pension, profit-sharing or other employee benefit plan
subject to Title I of ERISA.
"Preferred Stock" means the Company's preferred stock, par value $0.01.
"Principal-only Derivative," or "PO"' means a type of Mortgage Security
which receives only principal payments.
"Private Placement" means the private placement described herein under the
caption "PRIVATE PLACEMENT."
"Privately-Issued Certificates" means privately-issued Pass-Through
Certificates issued by a third party issuer which is not an Agency Certificate.
"prohibited transaction" means a transaction involving a sale of dealer
property, other than foreclosure property.
"Prospectus" means this Prospectus.
"purported transfer" means any transfer of shares of capital stock that
would result in disqualification of the Company as a REIT or that would (a)
create a direct or constructive ownership of shares of stock in excess of the
Ownership Limit, (b) result in the shares of stock being beneficially owned by
fewer than 100 persons or (c) result in the Company being "closely held" within
the meaning of Section 856(h) of the Code.
"purported transferee" means any intended transferee of a purported
transfer.
"Qualified Real Estate Assets" means real estate assets of the type
described in Section 856(c)(6)(B) of the Code.
"Qualified REIT Subsidiaries" means subsidiaries that meet the requirements
under the REIT Provisions of the Code.
"Qualifying Interests" means "mortgages and other liens on and interests in
real estate," as defined in Section 3(c)(5)(C) under the Investment Company Act.
"Rating Agencies" means the nationally recognized rating agencies.
"REIT" means Real Estate Investment Trust.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code.
"REMIC" means real estate mortgage investment conduit.
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"REO" means real estate owned property.
"Representatives" means Bear, Stearns & Co. Inc., Friedman, Billings, Ramsey
& Co., Inc., EVEREN Securities, Inc. and Stifel, Nicolaus & Company
Incorporated.
"Return on Average Stockholders' Equity" means an amount calculated for any
quarter by dividing the Company's Net Income for the quarter by its Average
Stockholders' Equity for the quarter.
"RICO" means the Racketeer Influenced and Corrupt Organizations Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"75% Asset Test" means at the close of each quarter of each taxable year
that at least 75% of the value of the Company's total assets must consist of
Interests in Real Property, interests in mortgages on real property to the
extent the principal balance of a mortgage does not exceed the fair market value
of the associated real property, regular or residual interests in a REMIC
(except that, if less than 95% of the assets of a REMIC consists of real estate
assets (determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), shares of other REITs, government securities, temporary investments in
stock or debt instruments closing the one year period following the Company's
receipt of certain new capital cash and cash items.
"75% Gross Income Test" means for each taxable year that at least 75% of the
Company's gross income must be derived from certain specified real estate
sources including interest income on Mortgage Loans and gain from the
disposition of Qualified Real Estate Assets or "qualified temporary investment
income," I.E., income derived from "new capital" within one year of the receipt
of such capital.
"SIP Participant" means all employees and directors of, and consultants to,
the Company, as well as all employees and directors of the Manager, eligible to
receive awards under the Stock Incentive Plan.
"Special Tax Counsel" means the law firm of Stroock & Stroock & Lavan LLP.
"Stock Incentive Plan" means the stock incentive plan adopted by the
Company.
"Stockholders Notice Procedure" means the advance notice procedure for
stockholders to make nominations of candidates for director or bring other
business before an annual meeting of stockholders of the Company established in
the Bylaws.
"Sub IO" means a subordinated interest-only security.
"Subordinate Interests" means a class of Mortgage Securities that is junior
to other classes of Mortgage Securities in the right to receive payments from
the underlying Mortgage Loans.
"Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held primarily
for sale to customers or from foreclosure property) subject to certain
adjustments provided in the REIT Provisions of the Code.
"taxable mortgage pool" means a REIT that incurs debt obligations with two
or more maturities and which are secured by assets such as the Mortgage Assets.
"Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company.
"Title V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980.
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"UBTI" means "unrelated business taxable income" as defined in Section 512
of the Code.
"UBTI Percentage" means that, in certain circumstances, a pension trust that
owns more than 10% of the Company's stock is required to treat a percentage of
the dividends from the Company as UBTI.
"UCC" means the Uniform Commercial Code.
"Underwriters" means the underwriters named in this Prospectus acting as
underwriters of the Offering.
"Underwriting Agreement" means the underwriting agreement by and among the
Company and the Representatives on behalf of the Underwriters.
"yield curve" means the relationship between short-term and long-term
interest rates.
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INDEPENDENT AUDITORS' REPORT
To the Stockholders of
LASER Mortgage Management, Inc.
We have audited the accompanying statement of financial condition of LASER
Mortgage Management, Inc. (the "Company") as of September 25, 1997. This
statement of financial condition is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
financial condition based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opionion.
In our opinion, the statement of financial condition presents fairly, in all
material respects, the financial position of LASER Mortgage Management, Inc. as
of September 25, 1997 in conformity with generally accepted accounting
principals.
Deloitte & Touche LLP
New York, New York
September 26, 1997
F-1
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LASER MORTGAGE MANAGEMENT, INC.
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 25, 1997
<TABLE>
<S> <C>
Asset
Cash............................................................................... $ 15,005
---------
---------
Stockholders' Equity
Common Stock, par value $.001 per share, authorized 75,000,000 shares; 6,000
shares issued and outstanding; Preferred Stock, par value $.01 per share,
authorized 25,000,000 shares; no shares issued and outstanding................. $ 6
Additional paid-in capital......................................................... 14,999
---------
Total Stockholders' Equity......................................................... $ 15,005
---------
---------
</TABLE>
See accompanying Notes to Statement of Financial Condition
F-2
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LASER MORTGAGE MANAGEMENT, INC.
NOTES TO STATEMENT OF FINANCIAL CONDITION
NOTE 1. ORGANIZATION
LASER Mortgage Management, Inc. (the "Company") was incorporated in Maryland
on September 3, 1997 but has had no operations to date other than matters
relating to its organization and the issuance of 6,000 shares of Common Stock,
par value $.001 per share ("Common Stock"), to its initial stockholder.
The Company is a newly organized specialty finance company that will invest
primarily in mortgage-backed securities and mortgage loans. The mortgage-backed
securities will include mortgage pass-through certificates, collateralized
mortgage obligations and other securities representing interests in, or
obligations backed by, pools of mortgage loans. The mortgage loans will be
secured by first or second liens on single-family residential, multi-family
residential, commercial or other real property.
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The books and records of the Company are maintained on an accrual basis, in
accordance with generally accepted accounting principles.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results may differ from those estimates.
INCOME TAXES
The Company intends to elect to be taxed as a real estate investment trust
(a "REIT") and to comply with the provisions of the Internal Revenue Code of
1986, as amended, with respect thereto. Accordingly, the Company will not be
subject to Federal income tax to the extent of its distributions to
stockholders.
PROFIT AND LOSS ALLOCATIONS AND DISTRIBUTIONS
As a REIT, the Company intends to distribute substantially all its taxable
income to stockholders each year. The Company intends to declare regular
quarterly dividends.
NOTE 3. FEES
ORGANIZATIONAL, OFFERING, GENERAL AND ADMINISTRATIVE COSTS
The Company will be required to pay all of its organizational and offering
expenses.
NOTE 4. RELATED PARTIES
The day-to-day business and investment affairs of the Company will be
managed by LASER Advisers Inc. ("LASER Advisers"), an investment adviser
registered under the Investment Advisers Act of 1940, as amended, subject to the
supervision of the Company's Board of Directors and pursuant to a management
agreement between the Company and LASER Advisers (the "Management Agreement").
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LASER MORTGAGE MANAGEMENT, INC.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
NOTE 4. RELATED PARTIES (CONTINUED)
Under the Management Agreement, the Company will pay LASER Advisers: (i) an
annual base management fee equal to 1.0% of the first $500 million of average
stockholders' equity, plus 0.8% of the next $500 million of average
stockholders' equity, plus 0.6% of average stockholders' equity exceeding $1
billion and (ii) a quarterly incentive fee in an amount equal to 20% of the net
income of the Company for the preceding fiscal quarter (less capital gains and
capital appreciation included in taxable income, but before LASER Advisers'
incentive fee and before deduction of dividends paid) in excess of the amount
that would produce an annualized return on average stockholders' equity for such
fiscal quarter equal to the Ten-Year Treasury Rate plus 1%.
The Company and LASER Advisers will share office space. The officers of the
Company are also officers of LASER Advisers. Messrs. Michael L. Smirlock and
David A. Tepper, directors of the Company, together own all of the equity of
LASER Advisers.
F-4
<PAGE>
APPENDIX A
PAST PERFORMANCE RESULTS
The Manager acts as (i) the general partner of one fund ("Fund A"), and (ii)
the investment adviser to three funds ("Fund B," "Fund C" and "Fund D") and a
master fund (the "Master Fund" and, together with Funds A, B, C and D,
collectively, the "Affiliated Funds"). Prior to the formation of the Manager,
the investment management professionals of the Manager managed the investment
accounts of the Affiliated Funds at Appaloosa, which was then the general
partner of Fund A and the investment adviser of Funds B, C and D and the Master
Fund.
Substantially all of the assets of Funds A, B, C and D are invested,
directly or indirectly, in the Master Fund whose sole purpose is to serve as a
"master" trading vehicle for the other Affiliated Funds. As a result, the
investment objective and activities of Funds A, B, C and D are, and have been
since the formation of the Master Fund, substantially identical.
The Master Fund currently has, and the Manager currently manages, in the
Affiliated Funds over $300 million of capital invested primarily in $3.9 billion
of Mortgage Securities, similar to those in which the Company will be investing.
The Affiliated Funds have 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 the Affiliated Funds has
been to create a portfolio principally 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 Affiliated Funds have invested primarily in Pass-Through Certificates,
CMOs, Mortgage Derivatives, Subordinate Interests and U.S. government
fixed-income securities. See "DESCRIPTION OF PROPOSED ASSETS." The Affiliated
Funds have also invested in asset-backed securities, derivative securities and
other fixed-income and equity securities.
The total returns for the Affiliated Funds 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.
A-1
<PAGE>
The following information sets forth the composite performance record of
these funds for the periods indicated. (composite gross returns for Funds A and
B from inception to July 1, 1995 and for the Affiliateds Funds from July 1, 1995
to present). 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 first column presents the composite gross returns produced by the
Manager since inception for the Affiliated Funds The second column presents the
actual net returns received by investors, after deduction of the fees paid to
the Manager. The third column presents, on a pro forma basis, the net returns
calculated with the Company's base management and incentive fees, which are less
in aggregate than the fees actually paid. The next three columns present the
monthly returns for three traditional fixed-income indices. The last column is
the aggregate capital under management for the Affiliated Funds.
<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% (0.03%) (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%) (0.56%) (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% (0.02%) (0.03%) 0.23% 0.80% (0.41%)
Jan-95................. (0.34) (0.34%) (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% 2.92% 3.19% 0.99% 1.30%
1995 Return............................................ 19.03% 13.35% 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% 46.09% 56.34% 22.51% 31.64%
Annualized............................................. 18.56% 12.72% 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) Composite Return as Adjusted for Estimated Management Fees is calculated by
reducing Composite Gross Return by the estimated fees payable under the
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>
TABLE I
TABLE I. EXPERIENCE IN RAISING AND INVESTING FUNDS (ON A PERCENTAGE BASIS).
Table I shows the costs of raising funds for investment by the Affiliated
Funds. All information is shown from inception through October 1, 1997.
<TABLE>
<CAPTION>
FUND B FUND D
-------------------------- ------------
FUND A A SHARES (1) B SHARES (1) FUND C A SHARES (2)
---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Dollar amount offered (3)..................... n/a n/a n/a n/a n/a
Dollar amount raised
(100 percent)............................... $78,736,201 2$29,939,836 $22,756,452 $11,485,103 $15,807,543
Less offering expenses:
Selling commissions and discounts retained
by affiliates............................. 0.00% 0.00% 0.00% 0.00% 0.00%
Organizational expenses..................... 0.04% 0.50% 0.12% 0.50% 0.00%
Other (explain)............................. n/a n/a n/a n/a n/a
Reserves (4).................................. n/a n/a n/a n/a n/a
Percent available for investment (4).......... n/a n/a n/a n/a n/a
Acquisition costs:
Prepaid items and fees related to purchase
of property (5)........................... n/a n/a n/a n/a n/a
Cash down payment........................... n/a n/a n/a n/a n/a
Acquisition fees (5)........................ n/a n/a n/a n/a n/a
Other (explain) (6)......................... 99.96% 99.50% 99.88% 99.50% 100.00%
Total acquisition cost (7).................... 99.96% 99.50% 99.88% 99.50% 100.00%
Percent leverage (asset financing divided by
total acquisition cost) (7)............... 1000.00% 1000.00% 1000.00% 1000.00% 1000.00%
Date offering began........................... 6/22/94 7/1/95 6/22/94 10/1/95 2/1/96
Length of offering (in months) (3)............ 40 28 40 25 21
Month(s) to invest 90% of amount available for
investment (measured from beginning of
offering)................................... 1 1 1 1 1
</TABLE>
- ------------------------
(1) Fund B has two classes of shares. Although both classes participate on a pro
rata basis in Fund B's investments, these classes have different fee
structures pursuant to an agreement with Fund B's sponsor, which is
unaffiliated with the Manager.
(2) Fund D has two classes of shares, Class A and Class B Shares. Holders of
Class B Shares are not charged a performance fee. Class B Shares are held
only by Affiliates of the Manager.
(3) The Affiliated Funds are open-ended, and the offering continues through the
date hereof. There is no limit on the amount offered.
(4) The Affiliated Funds do not currently have any reserves and are fully
invested.
(5) The Affiliated Funds do not purchase real property, but purchase securities
which trade at bid/ask spreads which incorporate dealers' fees.
(6) The Affiliated Funds do not purchase real property, but purchase securities;
therefore, this item represents the acquisition cost of such securities.
(7) The acquisition of investment assets of the Affiliated Funds is financed.
The leverage of the Affiliated Funds is approximately 10 times net capital,
although there is no leverage limit.
A-4
<PAGE>
TABLE II
TABLE II. COMPENSATION TO THE MANAGER.
Table II shows the compensation of the Manager, with respect to the
operations of the Affiliated Funds. The Manager receives a management fee based
upon the net assets of the particular Affiliated Fund and an incentive fee based
on the net returns of such Fund. All amounts are shown from inception through
October 1, 1997.
<TABLE>
<CAPTION>
FUND B FUND D
----------------------- ----------
FUND A A SHARES B SHARES FUND C A SHARES
---------- ----------- ---------- ---------- ----------
Date offering commenced......................... 6/22/94 7/1/95 6/22/94 10/1/95 2/1/96
<S> <C> <C> <C> <C> <C>
Dollar amount raised............................ $78,736,201 $229,939,836 $22,756,452 $11,485,103 $15,807,543
Amount paid to the Manager from proceeds of
offering (1):
Underwriting fees........................... n/a n/a n/a n/a n/a
Acquisition fees:
Real estate commissions................... n/a n/a n/a n/a n/a
Advisory fees............................. n/a n/a n/a n/a n/a
Other (identify and quantify)............. n/a n/a n/a n/a n/a
Other....................................... n/a n/a n/a n/a n/a
Dollar amount of cash generated from operations
before deducting payments to the Manager...... $16,333,015 $30,682,498 $5,703,205 $1,874,872 $1,250,864
Amount paid to the Manager from operations:
Property management fees.................. n/a n/a n/a n/a n/a
Fund management fees (2).................. $ 908,879 $ 1,677,645 $ 236,239 $ 90,861 $ 58,554
Reimbursements............................ n/a n/a n/a n/a n/a
Leasing commissions....................... n/a n/a n/a n/a n/a
Fund incentive fees (3)................... $2,794,615 $ 5,164,253 $1,093,393 $ 297,705 $ 198,718
Dollar amount of property sales and refinancing
before deducting payments to the Manager
Cash...................................... n/a n/a n/a n/a n/a
Notes..................................... n/a n/a n/a n/a n/a
Amount paid to the Manager from
Property sales and refinancing.............. n/a n/a n/a n/a n/a
Real estate commissions..................... n/a n/a n/a n/a n/a
Incentive fees.............................. n/a n/a n/a n/a n/a
Other (identity and quantity)............... n/a n/a n/a n/a n/a
</TABLE>
- ------------------------
(1) The Manager does not receive any fees or commissions with respect to
offerings by the Affiliated Funds.
(2) The Manager receives a management fee equal to (a) 1% of the net assets of
Fund A and the Class B Shares of Fund B and (b) 0.75% of the net assets of
Fund C and the Class A Shares of Funds B and D.
(3) The Manager receives an incentive fee equal to (a) 20% of the net return on
the partnership interests of Fund A and the Class B Shares of Fund B and (b)
15% of the net return on the partnership interests of Fund C and the Class A
Shares of Funds B and D.
A-5
<PAGE>
TABLE III. OPERATING RESULTS OF PRIOR PROGRAMS.
<TABLE>
<CAPTION>
FUND A
------------------------------------
1994 (6) 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Gross revenues (1)........................................................ $ 4,435,727 $10,998,673 $ 4,393,292
Profit on sales of properties............................................. n/a n/a n/a
Less:Operating expenses (2)............................................... 134,697 1,181,749 987,471
Interest expense........................................................ 3,328,970 6,566,400 --
Depreciation............................................................ n/a n/a n/a
Net income--GAAP Basis.................................................... 972,060 3,250,524 3,405,821
Taxable income
from operations....................................................... 2,183,954 3,612,251 4,365,631
from gain on sale..................................................... n/a n/a n/a
Cash generated from operations (3)........................................ 1,058,065 2,646,958 (183,815)
Cash generated from sales................................................. n/a n/a n/a
Cash generated from refinancing........................................... n/a n/a n/a
Cash generated from operations, sales and refinancing..................... 1,058,065 2,646,958 (183,815)
Less: Cash distributions to investors
from operating cash flow.............................................. n/a n/a n/a
from sales and financing.............................................. n/a n/a n/a
from other (4)........................................................ (24,282,305) 1,211,808 (4,957,035)
Cash generated (deficiency) after cash distributions...................... 25,340,370 1,435,150 4,773,220
Less: Special items (not including sales and refinancing)
Cash used in investing activities..................................... 20,214,976 6,488,411 4,693,158
Cash generated (deficiency) after cash distributions and special items.... 5,125,394 (5,053,261) 80,062
TAX AND DISTRIBUTION DATE PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)..................................................
from operations (5)................................................... 44 188 216
from recapture........................................................ n/a n/a n/a
Capital gain (loss)..................................................... 9 (101) (44)
Source (on GAAP Basis)
Investment income..................................................... 29 113 163
Return of capital..................................................... n/a n/a n/a
Source (on cash basis)
Sales................................................................. n/a n/a n/a
Refinancing........................................................... n/a n/a n/a
Operations............................................................ n/a n/a n/a
Other................................................................. n/a n/a n/a
Amount (in percentage terms) remaining invested in program properties
at the end of the last year reported in the Table (original total
acquisition cost of properties retained divided by original total
acquisition cost of all properties in program)...................... n/a n/a n/a
</TABLE>
- ------------------------
(1) Includes realized and unrealized investment income.
(2) Includes management and incentive fees paid to the Manager.
(3) Cash generated from investment activities, which are the "operations" of
Fund A.
(4) Net cash distributed (received) from investors through redemptions
(subscriptions).
(5) Includes Ordinary income (loss) from trade or business activities and
Investment expense on investment debts.
(6) Fund A commenced operations June 22, 1994.
A-6
<PAGE>
TABLE III. OPERATING RESULTS OF PRIOR PROGRAMS.
<TABLE>
<CAPTION>
FUND B
------------------------------------
1994 (6) 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Gross revenues (1)........................................................ $ 1,441,960 $9,160,186 $10,493,882
Profit on sales of properties............................................. n/a n/a n/a
Less: Operating expenses (2).............................................. 159,276 1,267,404 3,403,932
Interest expense........................................................ 1,030,055 4,660,585 --
Depreciation............................................................ n/a n/a n/a
Net income--GAAP Basis.................................................... 252,630 3,262,197 7,089,950
Taxable income (3)
from operations......................................................... n/a n/a n/a
from gain on sale....................................................... n/a n/a n/a
Cash generated from operations (4)........................................ 118,458 10,530,526 1,584,015
Cash generated from sales................................................. n/a n/a n/a
Cash generated from refinancing........................................... n/a n/a n/a
Cash generated from operations, sales and refinancing..................... 118,458 10,530,526 1,584,015
Less: Cash distributions to investors
from operating cash flow................................................ n/a n/a n/a
from sales and financing................................................ n/a n/a n/a
from other (5).......................................................... (17,756,452) (1,444,923) (84,471,734)
Cash generated (deficiency) after cash distributions...................... 17,874,910 11,975,449 86,055,749
Less: Special items (not including sales and refinancing)
Cash used in investing activities....................................... 6,362,987 21,558,541 84,000,000
Cash generated (deficiency) after cash distributions and special Items.... 11,511,923 (9,610,092) 2,055,749
TAX AND DISTRIBUTION DATE PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss).................................................. n/a n/a n/a
from operations (5)................................................... n/a n/a n/a
from recapture........................................................ n/a n/a n/a
Capital gain (loss)..................................................... n/a n/a n/a
Source (on GAAP Basis)
Investment income..................................................... n/a n/a n/a
Return of capital..................................................... n/a n/a n/a
Source (on cash basis)
Sales................................................................. n/a n/a n/a
Refinancing........................................................... n/a n/a n/a
Operations............................................................ n/a n/a n/a
Other................................................................. n/a n/a n/a
Amount (in percentage terms) remaining invested in program properties at
the
end of the last year reported in the Table (original total acquisition
cost of
properties retained divided by original total acquisition cost of all
properties
in program)............................................................. n/a n/a n/a
</TABLE>
- ------------------------
(1) Includes realized and unrealized investment income.
(2) Includes management and incentive fees paid to the Manager.
(3) Fund B is a British Virgin Islands company and is not subject to taxation in
any jurisdiction.
(4) Cash generated from investment activities, which are the "operations" of
Fund B.
(5) Net cash distributed (received) from investors through redemptions
(subscriptions).
(6) Fund B commenced operations June 22, 1994.
A-7
<PAGE>
TABLE III. OPERATING RESULTS OF PRIOR PROGRAMS.
<TABLE>
<CAPTION>
FUND C
--------------------
1995 (6) 1996
--------- ---------
<S> <C> <C>
Gross revenues (1)......................................................................... 59,649 782,170
Profit on sales of properties.............................................................. n/a n/a
Less: Operating expenses (2)............................................................... 24,234 254,143
Interest expense......................................................................... -- --
Depreciation............................................................................. n/a n/a
Net income--GAAP Basis..................................................................... 35,415 528,027
Taxable income
from operations.......................................................................... 41,780 528,027
from gain on sale........................................................................ n/a n/a
Cash generated from operations (3)......................................................... (18,738) (43,934)
Cash generated from sales.................................................................. n/a n/a
Cash generated from refinancing............................................................ n/a n/a
Cash generated from operations, sales and refinancing...................................... (18,738) (43,934)
Less: Cash distributions to investors
from operating cash flow................................................................. n/a n/a
from sales and financing................................................................. n/a n/a
from other (4)........................................................................... (2,197,129) (1,808,149)
Cash generated (deficiency) after cash distributions....................................... 2,178,391 1,764,215
Less: Special items (not including sales and refinancing)
Cash used in investing activities........................................................ 2,125,000 1,700,000
Cash generated (deficiency) after cash distributions and special Items..................... 53,391 64,215
TAX AND DISTRIBUTION DATE PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)
from operations (5).................................................................... 6 141
from recapture......................................................................... n/a n/a
Capital gain (loss)...................................................................... n/a n/a
Source (on GAAP Basis)
Investment income...................................................................... 8 141
Return of capital...................................................................... n/a n/a
Source (on cash basis)
Sales.................................................................................. n/a n/a
Refinancing............................................................................ n/a n/a
Operations............................................................................. n/a n/a
Other.................................................................................. n/a n/a
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the Table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program).............................................................................. n/a n/a
</TABLE>
- ------------------------
(1) Includes realized and unrealized investment income.
(2) includes management and incentive fees paid to the Manager.
(3) Cash generated from investment activities, which are the "operations" of
Fund C.
(4) Net cash distributed (received) from investors through redemptions
(subscriptions).
(5) Includes Ordinary income (loss) from trade or business activities, Interest
and Dividends.
(6) Fund C commenced operations October 1, 1995.
A-8
<PAGE>
TABLE III. OPERATING RESULTS OF PRIOR PROGRAMS.
<TABLE>
<CAPTION>
FUND D
1996 (6)
---------
<S> <C>
Gross revenues (1)..................................................................................... 507,408
Profit on sales of properties.......................................................................... n/a
Less: operating expenses (2)........................................................................... 158,746
Interest expense..................................................................................... --
Depreciation........................................................................................... n/a
Net income--GAAP Basis............................................................................... 348,661
Taxable income (3)
from operations...................................................................................... n/a
from gain on sale.................................................................................... n/a
Cash generated from operations (4)..................................................................... --
Cash generated from sales.............................................................................. n/a
Cash generated from refinancing n/a
Cash generated from operations, sales and refinancing.................................................. --
Less: cash distributions to investors
from operating cash flow............................................................................. n/a
from sales and financing............................................................................. n/a
from other (5)....................................................................................... (3,104,477)
Cash generated (deficiency) after cash distributions................................................... 3,104,477
Less: special items (not including sales and refinancing)
cash used in investing activities.................................................................... 3,000,000
Cash generated (deficiency) after cash distributions and special items................................. 104,477
TAX AND DISTRIBUTION DATE PER $1000 INVESTED
Federal Income Tax Results:
Ordinary income (loss)............................................................................... n/a
from operations (5).............................................................................. n/a
from recapture................................................................................... n/a
Capital gain (loss).................................................................................. n/a
Source (on GAAP Basis)
Investment income................................................................................ n/a
Return of capital................................................................................ n/a
Source (on cash basis)
Sales............................................................................................ n/a
Refinancing...................................................................................... n/a
Operations....................................................................................... n/a
Other............................................................................................ n/a
Amount (in percentage terms) remaining invested in program properties at the
end of the last year reported in the Table (original total acquisition cost of
properties retained divided by original total acquisition cost of all properties
in program).......................................................................................... n/a
</TABLE>
- ------------------------
(1) Includes realized and unrealized investment income.
(2) Includes management and incentive fees paid to the Manager.
(3) Fund D is a British Virgin Islands company and is not subject to taxation in
any jurisdiction.
(4) Cash generated from investment activities, which are the "operations" of
Fund D.
(5) Net cash distributed (received) from investors through redemptions
(subscriptions).
(6) Fund D--Class A Shares commenced operations February 1, 1996.
A-9
<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.
--------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................. 6
Risk Factors.................................... 12
Use of Proceeds................................. 27
Capitalization.................................. 28
Distribution Policy............................. 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 30
Business........................................ 32
Description of Proposed Assets.................. 39
The Manager..................................... 45
The Company..................................... 50
Certain Relationships and Related Party
Transactions and Conflicts of Interest........ 55
Principal Stockholders.......................... 57
Dividend Reinvestment Plan...................... 58
Federal Income Tax Considerations............... 60
ERISA Considerations............................ 69
Certain Legal Aspects of Mortgage Loans and Real
Property Investments.......................... 72
Certain Provisions of Maryland Law and the
Company's Charter and Bylaws.................. 81
Description of Capital Stock.................... 84
Shares Eligible for Future Sale................. 87
Underwriting.................................... 88
Private Placement............................... 89
Legal Matters................................... 89
Experts......................................... 90
Additional Information.......................... 90
Glossary........................................ 91
Statement of Financial Condition................ F-1
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.
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
EVEREN SECURITIES, INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 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.................................................. $ *
Legal fees and expenses........................................... $ *
Accounting fees and expenses...................................... $ 100,000
Blue Sky qualification fees and expenses (including counsel
fees)........................................................... $ 10,000
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 1,014,000 shares of Common Stock at the initial public offering price from
certain directors, officers, employees and Affiliates of the Company and the
Manager. These sales are contingent upon and will be consummated concurrent with
the closing of the Offering. The foregoing shares were sold without registration
under the Securities Act, in reliance on the exemption provided by Section 4(2)
thereof.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On September 15, 1997, the Registrant received commitments for the purchase
of 1,014,000 shares of Common Stock from certain directors, officers, employees
and Affiliates of the Company and the Manager. 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 adjudged to be liable to the corporation. Such
indemnification may not be made unless authorized for a
II-1
<PAGE>
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 Form of Opinion of Miles & Stockbridge LLP (including consent)**
8.1 Form of 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 Advisers Inc.**
10.3 Form of Dividend Reinvestment Plan**
23.1 Consent of Stroock & Stroock & Lavan LLP (to be included in Exhibit 8.1)**
23.2 Consent of Independent Auditors**
23.3 Consent of Miles & Stockbridge LLP (to be included in Exhibit 5.1)**
24.1 Power of Attorney (included in the signature page)+
99.1 Consent of William Marshall to be named as a proposed Director**
99.2 Consent of Martin Bernstein to be named as a proposed Director**
99.3 Consent of Frederick N. Khedouri to be named as a proposed Director**
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed herewith.
+ Previously filed.
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 Amendment No. 2 to
the 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 28th day of October, 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 October 28, 1997
Michael L. Smirlock executive officer)
/s/ DAVID A. TEPPER
- ------------------------------ Director October 28, 1997
David A. Tepper
Chief Financial Officer and
/s/ THOMAS G. JONOVICH Treasurer (principal
- ------------------------------ financial and accounting October 28, 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 Form of Opinion of Miles & Stockbridge LLP (including consent)**
8.1 Form of 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 Advisers Inc.**
10.3 Form of Dividend Reinvestment Plan**
23.1 Consent of Stroock & Stroock & Lavan LLP (to be included in Exhibit 8.1)**
23.2 Consent of Independent Auditors**
23.3 Consent of Miles & Stockbridge LLP (to be included in Exhibit 5.1)**
24.1 Power of Attorney (included in the signature page)+
99.1 Consent of William Marshall to be named as a proposed Director**
99.2 Consent of Martin Bernstein to be named as a proposed Director**
99.3 Consent of Frederick N. Khedouri to be named as a proposed Director**
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed herewith.
+ Previously filed.
<PAGE>
EXHIBIT 1.1
15,000,000 SHARES OF COMMON STOCK
LASER MORTGAGE MANAGEMENT, INC.
UNDERWRITING AGREEMENT
__________,1997
BEAR, STEARNS & CO. INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, INC.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
LASER Mortgage Management, Inc., a corporation organized and existing
under the laws of Maryland (the "Company"), whose assets are managed by LASER
Advisers Inc., a corporation organized and existing under the laws of Delaware
(the "Manager"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the several underwriters named in Schedule I attached hereto
(the "Underwriters") an aggregate of 15,000,000 shares (the "Firm Shares") of
its common stock, par value $.001 per share (the "Common Stock"), and for the
sole purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional 2,250,000 shares
(the "Additional Shares") of Common Stock on the terms set forth in
Section 2(c). The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares." Bear, Stearns & Co. Inc.
("Bear Stearns"), Friedman, Billings, Ramsey & Co., Inc., EVEREN Securities,
Inc. and Stifel, Nicolaus & Company, Incorporated have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the purchase of the Shares. The Shares
are more fully described in the Registration Statement referred to below.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES.
1.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, and may have filed an amendment or
amendments thereto, on Form S-11 (No. 333-35673), for the registration of the
Shares under the Securities Act of 1933, as amended (the "Securities Act").
Such registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Securities Act (the "Securities Act Regulations") and
including any registration statement filed pursuant to Rule 462(b) of the
Securities Act Regulations (a "Rule 462(b) Registration Statement") increasing
the size of the offering, is herein called the "Registration Statement" and the
prospectus, in the form first filed with the Commission pursuant to Rule 424(b)
of the Securities Act Regulations or filed as part of the Registration Statement
at the time of effectiveness if no Rule 424(b) or Rule 434 filing is required,
is herein called the "Prospectus." The term "Preliminary Prospectus" as used
herein means any preliminary prospectus relating to the Registration Statement
as described in Rule 430 of the Securities Act Regulations. In addition, all
references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a Preliminary Prospectus and the Prospectus, or any
amendments or supplements to any of the foregoing, shall be deemed to include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis, and Retrieval System.
(b) At the time of the effectiveness of the Registration Statement or the
effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Securities Act Regulations, when any supplement to or
amendment of the Prospectus is filed with the Commission and at the Closing Date
and the Additional Closing Date, if any (as hereinafter respectively defined),
the Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Securities Act and the Securities Act Regulations
and do not or will not contain an untrue statement of a material fact and do not
or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i) in the case of the
Registration Statement, not misleading and (ii) in the case of the Prospectus,
in light of the circumstances under which they were made, not misleading. When
any related Preliminary Prospectus was first filed with the Commission (whether
filed as part of the Registration Statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Securities Act
Regulations) and when any amendment thereof or supplement thereto was first
filed with the Commission, such Preliminary Prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Securities Act and the Securities Act
2
<PAGE>
Regulations and did not contain an untrue statement of a material fact and did
not omit to state any material fact required to be stated therein or necessary
in order to make the statements therein in light of the circumstances under
which they were made not misleading. No representation and warranty is made in
this subsection (b), however, with respect to any information contained in or
omitted from the Registration Statement or the Prospectus or any related
Preliminary Prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. If Rule 434 is
used, the Company will comply with the requirements of Rule 434.
(c) Deloitte & Touche, LLP, whose reports are contained in the
Registration Statement, are independent public accountants with respect to the
Company as required by the Securities Act and the Securities Act Regulations.
(d) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as set forth in the
Registration Statement and the Prospectus, there has been no material adverse
change in the business, business prospects, properties, operations, financial
condition or results of operations (any such change being referred to herein as
a "Material Adverse Change") of the Company whether or not arising from
transactions in the ordinary course of business, and since the date of the
latest statement of financial condition included in the Registration Statement
and the Prospectus, the Company has not incurred or undertaken any liabilities
or obligations, direct or contingent, which are material to the Company except
for liabilities or obligations which are set forth in or contemplated by the
Registration Statement and the Prospectus.
(e) This Agreement and the Management Agreement (the "Management
Agreement") to be entered into on or prior to the Closing Date between the
Company and the Manager and the transactions contemplated herein and therein
have been duly and validly authorized by the Company, and this Agreement has
been and the Management Agreement has been or will be duly and validly executed
and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement and the
Management Agreement and the consummation of the transactions contemplated
hereby and thereby do not and will not (i) conflict with or result in a breach
of any of the terms and provisions of, or constitute a default (or an event
which with notice or lapse of time, or both, would constitute a default) under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to any agreement, instrument,
franchise, license or permit to which the Company is a party or by which it or
any of its properties or assets may be bound or (ii) violate or conflict with
any provision of the articles of incorporation or bylaws of the Company or (iii)
violate or conflict with any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its properties or assets, except,
with respect to clauses (i) and (iii) above, for those violations or conflicts
that would not have a material adverse effect on the business, business
prospects, properties,
3
<PAGE>
operations, financial condition or results of operations (any such effect being
referred to herein as a "Material Adverse Effect") of the Company, or a material
adverse effect on the transactions contemplated by this Agreement. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any of its properties or assets is
required for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the issuance,
sale and delivery of the Shares to be issued, sold and delivered by the Company
hereunder, and such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters.
(g) Except as otherwise disclosed in the Prospectus, all of the
outstanding shares of Common Stock are duly and validly authorized and issued,
fully paid and nonassessable and were not issued and are not now in violation of
or subject to any preemptive rights. The Shares, when issued, delivered and
sold in accordance with this Agreement, will be duly and validly issued and
outstanding, fully paid and nonassessable, and will not have been issued in
violation of or be subject to any preemptive rights. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Prospectus under
the caption "Capitalization." The Common Stock, including the Shares, conforms
to the description thereof contained in the Registration Statement and the
Prospectus.
(h) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland. The
Company has been duly qualified and is in good standing as a foreign corporation
in each jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which will not in the aggregate have a Material Adverse Effect on the
Company or a material adverse effect on the transactions contemplated by this
Agreement. The Company has all requisite power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or governmental agencies
and bodies, to own, lease and operate its properties and conduct its business as
now being conducted and as described in the Registration Statement and the
Prospectus, except for the absence of which in the aggregate would not have a
Material Adverse Effect on the Company or a material adverse effect on the
transactions contemplated by this Agreement, and no such consent, approval,
authorization, order, registration, qualification, license or permit contains a
materially burdensome restriction not adequately disclosed in the Registration
Statement and the Prospectus.
(i) The Company has no subsidiaries.
(j) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company is a party or to which any property
of the Company is subject or which is pending or, to the knowledge of the
Company, contemplated against the Company which might result in any Material
Adverse Change of the Company,
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which might materially and adversely affect the transactions contemplated by
this Agreement or which is required to be disclosed in the Registration
Statement or the Prospectus and is not so disclosed. The description of
litigation matters in the Prospectus under the caption "Business--Legal
Proceedings" is complete and accurate in all material respects.
(k) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which constitutes or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(l) The statement of financial condition, including the notes thereto,
included in the Registration Statement and the Prospectus present fairly the
financial position of the Company on the dates indicated and the results of
operations for the periods specified; said statement of financial condition have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and no other statement of financial condition,
financial statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus under
the caption "Capitalization" fairly present the information set forth therein on
a basis consistent with that of the audited financial statements contained in
the Registration Statement.
(m) Except as otherwise disclosed in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company or securities of any other person that are convertible, exchangeable
or exercisable for securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(n) The Company has good and marketable title to all the properties and
assets reflected as owned in the financial statements referred to in
subsection (l) above or elsewhere in the Prospectus, in each case free and clear
of any security interests, mortgages, liens, encumbrances, equities, claims and
other defects, except such as are described in the Prospectus and such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company. The real property, improvements, equipment and personal property held
under lease by the Company are held under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not materially interfere
with the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company.
(o) The Company has filed all necessary federal, state and foreign income
and franchise tax returns and have paid all taxes required to be paid by any of
them and, if due and payable, any related or similar assessment, fine or penalty
levied against any of them, except insofar as the failure to file such returns
would not have a Material Adverse Effect on the Company or a material adverse
effect on the transactions contemplated by this Agreement. The Company has made
adequate charges, accruals and reserves in their respective financial statements
in respect of all federal, state and foreign income and franchise taxes for all
periods
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as to which the tax liability of the Company has not been finally determined,
except to the extent of any inadequacy that would not have a Material Adverse
Effect on the Company or a material adverse effect on the transactions
contemplated by this Agreement.
(p) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) Except as otherwise disclosed in the Prospectus, there are no business
relationships or related-party transactions of the type described in Item 404 of
Regulation S-K of the Commission involving the Company, except for such
transactions that would be considered immaterial under such Item 404. The
descriptions in the Prospectus under the caption "Certain Relationships and
Related Party Transactions and Conflicts of Interest" are complete and accurate
in all material respects.
(r) The Company has elected to be taxed as a "real estate investment
trust" (a "REIT") under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"), effective beginning in its taxable year 1997.
The Company has not taken any action that would prevent it from qualifying as a
REIT under the Code, and from and after the Closing Date, the Company shall
conduct its operations in a manner so as to enable it to elect to be qualified,
and thereafter maintain its qualification, as a REIT under the Code.
(s) Prior to the date of the Preliminary Prospectus, the Shares were duly
authorized (subject to issuance thereof) for listing on the New York Stock
Exchange (the "NYSE").
(t) The Company is not, and after giving effect to the issue and sale of
the Shares by the Company will not be, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(u) Neither the Company nor its officers, directors, employees and agents
have distributed or will distribute prior to the Closing Date any offering
material in connection with the offering and sale of the Shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement or other
materials permitted by the Securities Act.
(v) The conditions for use of Form S-11, as set forth in the General
Instructions thereto, have been satisfied.
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(w) The Company is not and will not be a "broker" within the meaning of
Section 3(a)(4) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or a "dealer" within the meaning of Section 3(a)(5) of the
Exchange Act or required to be registered pursuant to Section 15(a) of the
Exchange Act.
(x) Neither the Company nor any affiliate has incurred any liability for a
fee, commission or other compensation on account of the employment of a broker
or finder in connection with the transactions contemplated by this Agreement,
other than as disclosed in the Prospectus.
Any certificate signed by an officer of the Company and delivered to the
Representatives or their counsel shall be deemed to be a representation and
warranty by the Company as to the matters covered thereby.
1.2 REPRESENTATIONS AND WARRANTIES OF THE MANAGER. The Manager represents
and warrants to, and agrees with, the Underwriters that:
(a) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as set forth in the
Registration Statement and the Prospectus, there has been no Material Adverse
Change of the Manager whether or not arising from transactions in the ordinary
course of business.
(b) This Agreement and the Management Agreement to be entered into on or
prior to the Closing Date between the Company and the Manager and the
transactions contemplated herein and therein have been duly and validly
authorized by the Manager and this Agreement has been, and the Management
Agreement has been or will be duly and validly executed and delivered by the
Manager.
(c) The execution, delivery, and performance of this Agreement and the
Management Agreement and the consummation of the transactions contemplated
hereby and thereby do not and will not (i) conflict with or result in a breach
of any of the terms and provisions of, or constitute a default (or an event
which with notice or lapse of time, or both, would constitute a default) under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Manager pursuant to any agreement, instrument,
franchise, license or permit to which the Manager is a party or by which it or
any of its properties or assets may be bound or (ii) violate or conflict with
any provision of the certificate of incorporation or bylaws of the Manager or
(iii) violate or conflict with any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Manager or any of its properties or assets, except,
with respect to clauses (i) and (iii) above, for those violations or conflicts
that would not have a Material Adverse Effect on the Manager, or a material
adverse effect on the transactions contemplated by this Agreement. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory agency or
body having jurisdiction over the Manager or any of its
7
<PAGE>
properties or assets is required for the execution, delivery and performance of
this Agreement by the Manager.
(d) The Manager has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. The
Manager has been duly qualified and is in good standing as a foreign
corporation, in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a Material Adverse
Effect on the Manager or a material adverse effect on the transactions
contemplated by this Agreement. The Manager has all requisite power and
authority, and all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and operate its
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus, except for the absence of which
in the aggregate would not have a Material Adverse Effect on the Manager or a
material adverse effect on the transactions contemplated by this Agreement, and
no such consent, approval, authorization, order, registration, qualification,
license or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus.
(e) The Manager has no subsidiaries.
(f) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Manager is a party or to which any property
of the Manager is subject or which is pending or, to the knowledge of the
Manager, contemplated against the Manager which might result in any Material
Adverse Change of the Manager, which might materially and adversely affect the
transactions contemplated by this Agreement or which is required to be disclosed
in the Registration Statement or the Prospectus and is not so disclosed.
(g) The Manager has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which constitutes or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(h) The Manager has filed all necessary federal, state and foreign income
and franchise tax returns and have paid all taxes required to be paid by any of
them and, if due and payable, any related or similar assessment, fine or penalty
levied against any of them, except insofar as the failure to file such returns
would not have a Material Adverse Effect on the Manager or a material adverse
effect on the transactions contemplated by this Agreement. The Manager has made
adequate charges, accruals and reserves in its financial statements in respect
of all federal, state and foreign income and franchise taxes for all periods as
to which the tax liability of the Manager has not been finally determined,
except to the extent of any inadequacy that would not have a Material Adverse
Effect on the Manager or a material adverse effect on the transactions
contemplated by this Agreement.
8
<PAGE>
(i) The Manager is insured by recognized financially sound and reputable
institutions with policies in such amounts and with such deductibles and
covering such risks that the Manager believes are adequate to insure against
potential losses, with such policies including, without limitation, policies
covering errors and omissions and fidelity bonds. The Manager has no reason to
believe that it will not be able (i) to renew their existing insurance coverage
as and when such policies expire or (ii) to obtain comparable coverage from
similar institutions as may be necessary or appropriate to conduct its business
as now conducted and at a cost that would not result in a Material Adverse
Change of the Manager. The Manager has not been denied any insurance coverage
for which it has sought or applied.
(j) The Manager maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) Except as otherwise disclosed in the Prospectus, there are no business
relationships or related-party transactions of the type described in Item 404 of
Regulation S-K of the Commission involving the Company and the Manager, except
for such transactions that would be considered immaterial under such Item 404.
The descriptions in the Prospectus under the caption "Certain Relationships and
Related Party Transactions and Conflicts of Interest" are complete and accurate
in all material respects.
(l) The Manager is not and will not be an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act.
(m) The Manager is not and will not be a "broker" within the meaning of
Section 3(a)(4) of the Exchange Act or a "dealer" within the meaning of
Section 3(a)(5) of the Exchange Act or required to be registered pursuant to
Section 15(a) of the Exchange Act.
Any certificate signed by an officer of the Manager and delivered to the
Representatives or their counsel shall be deemed to be a representation and
warranty by the Manager as to the matters covered thereby.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $_________, the number of Firm Shares set forth opposite the
respective names of the Underwriters in
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<PAGE>
Schedule I hereto plus any additional number of Shares which such Underwriter
may become obligated to purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates for,
the Shares shall be made at the office of Bear Stearns, 245 Park Avenue, New
York, New York, or at such other place as shall be agreed upon by you and the
Company, at 10:00 a.m. on the third or fourth business day (as permitted under
Rule 15c6-1 of the rules and regulations of the Commission under the Exchange
Act (the "Exchange Act Regulations")) (unless postponed in accordance with the
provisions of Section 9 hereof) following the date of the effectiveness of the
Registration Statement (or, if the Company has elected to rely upon Rule 430A of
the Securities Act Regulations, the third or fourth business day (as permitted
under Rule 15c6-1 of the Exchange Act Regulations) after the determination of
the public offering price of the Shares), or such other time not later than ten
business days after such date as shall be agreed upon by you and the Company
(such time and date of payment and delivery being herein called the "Closing
Date"). Payment shall be made to the Company by wire transfer in same-day
funds, against delivery to you for the respective accounts of the Underwriters
of certificates for the Shares to be purchased by them. Certificates for the
Shares shall be registered in such name or names and in such authorized
denominations as you may request in writing at least 48 hours prior to the
Closing Date. The Company will permit you to examine and package such
certificates for delivery at least 24 hours prior to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the option
to purchase up to 2,250,000 Additional Shares at the same purchase price per
share to be paid by the Underwriters to the Company for the Firm Shares as set
forth in this Section 2, for the sole purpose of covering over-allotments in the
sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part, on or before the thirtieth day following the date of
the Prospectus, by written notice by you to the Company. Such notice shall set
forth the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); PROVIDED, HOWEVER, that the
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full business day after the date on which the option shall have
been exercised nor later than the eighth full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least 48 hours prior
to the Additional Closing Date. The Company will permit you to examine and
package such certificates for delivery at least 24 hours prior to the Additional
Closing Date.
(d) The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to the total
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<PAGE>
number of Firm Shares being purchased from the Company, subject, however, to
such adjustments to eliminate any fractional shares as you in your sole
discretion shall make.
(e) Payment for the Additional Shares shall be made by wire transfer in
same-day funds at the office Bear Stearns, 245 Park Avenue, New York, New York,
or such other location as may be mutually acceptable, upon delivery of the
certificates for the Additional Shares to you for the respective accounts of the
Underwriters.
3. OFFERING. Upon your authorization of the release of the Firm Shares,
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriters that:
(a) The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when any post-effective amendment to
the Registration Statement becomes effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of the Prospectus or any amendment of or
supplement to the Registration Statement or the Prospectus or any document to be
filed pursuant to the Exchange Act during any period when the Prospectus is
required to be delivered under the Securities Act, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto or of the initiation, or the
threatening, of any proceedings therefor, (v) of the receipt of any comments or
inquiries from the Commission relating to the Registration Statement or the
Prospectus, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any post-effective amendment to the
Registration Statement or use any amendment of or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs from
the prospectus filed with the Commission pursuant to Rule 424(b) of the
Securities Act Regulations, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Securities Act Regulations) to which
the Representatives or counsel for the Underwriters shall reasonably object, and
will furnish the Representatives with copies of any such amendment or supplement
a reasonable amount of time prior to such proposed filing or use, as the case
may be.
(b) If any event shall occur as a result of which the Prospectus would, in
the judgment of the Underwriters or the Company include an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, if it
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<PAGE>
shall be necessary at any time to amend or supplement the Prospectus or
Registration Statement to comply with the Securities Act or the Securities Act
Regulations, the Company will notify you promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form and substance
satisfactory to you) which will correct such statement or omission or which will
effect such compliance.
(c) The Company has delivered to each of you one signed copy of the
Registration Statement as originally filed, including exhibits and all
amendments thereto, and the Company will promptly deliver to each of the
Underwriters, from time to time during the period that the Prospectus is
required to be delivered under the Securities Act or the Exchange Act, such
number of copies of the Prospectus and the Registration Statement, and all
amendments of and supplements to such documents, if any, as you may reasonably
request.
(d) The Company will endeavor in good faith, in cooperation with you, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; PROVIDED, HOWEVER, that in no event shall the Company be
obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs (or if such fiscal quarter is the Company's fourth fiscal
quarter, not later than 90 days after the end of such quarter), an earnings
statement (in form complying with the provisions of Rule 158 of the Securities
Act Regulations) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement (as defined in
Rule 158(c) of the Securities Act Regulations).
(f) During the period of 180 days from the date of the Prospectus, the
Company will not, directly or indirectly without your prior written consent,
issue, sell, offer or agree to sell, grant any option to purchase, or otherwise
dispose (or announce any offer, sale, grant of an option to purchase or other
disposition) of, any shares of Common Stock (or any securities convertible into,
exchangeable or exercisable for shares of Common Stock), other than the
Company's sale of Shares hereunder, the Company's issuance of Common Stock upon
the exercise of presently outstanding stock options and the grant of options
under the Company's 1997 Stock Incentive Plan.
(g) The Company will obtain the undertaking of each of its officers and
directors, the Manager and its officers and directors, the purchasers in the
private placement described in the Prospectus under the caption "Private
Placement," and such other persons as have been heretofore designated by you and
listed on Schedule II attached hereto that, during the period of 180 days (or
such shorter period as expressly agreed to by Bear Stearns) from the date of the
Prospectus, each of them will not, directly or indirectly, without your prior
written
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<PAGE>
consent, issue, sell, offer or agree to sell, grant any option to purchase, or
otherwise dispose (or announce any offer, sale, grant of an option to purchase
or other disposition) of, any shares of Common Stock (or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock).
(h) During a period of three years from the date of the Prospectus, the
Company will furnish to you copies of (i) all reports to its stockholders; and
(ii) all reports, financial statements and proxy or information statements filed
by the Company with the Commission or any national securities exchange or
quotation system.
(i) The Company will apply the proceeds from the sale of the Shares as set
forth under the caption "Use of Proceeds" in the Prospectus.
(j) If the Company elects to rely upon Rule 462(b) of the Securities Act
Regulations, the Company shall file the Rule 462(b) Registration Statement with
the Commission in compliance with Rule 462(b) of the Securities Act Regulations
by 10:00 p.m., Washington, D.C. time, on the date of this Agreement, and the
Company shall at the time of filing, either pay to the Commission the filing fee
for the Rule 462(b) Registration Statement or give irrevocable instructions for
the payment of such fee pursuant to Rule 111(b) of the Securities Act
Regulations.
(k) The Company, during the period when the Prospectus is required to be
delivered under the Securities Act or the Exchange Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15 of the
Exchange Act within the time periods required by the Exchange Act and the
Exchange Act Regulations.
(l) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(m) The Company will continue to meet the requirements to qualify as a
REIT and will not revoke its election to be a REIT unless and until the Board
determines that such revocation is advantageous to the Company.
(n) The Company will use its best efforts to effect the quotation of the
Common Shares on the NYSE.
5. PAYMENT OF EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any Preliminary Prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement,
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<PAGE>
the Agreement Among Underwriters and the Selling Agreement) and all other
documents related to the public offering of the Shares (including those supplied
to the Underwriters in quantities as hereinabove stated), (ii) the issuance,
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the qualification of the Shares under
state or foreign securities or Blue Sky laws, including the costs of printing
and mailing a preliminary and final "Blue Sky Memorandum" and the fees of
counsel in connection therewith and such counsel's disbursements in relation
thereto, (iv) listing the Shares on the NYSE, (v) filing fees of the Commission
and the National Association of Securities Dealers, Inc. (the "NASD"), (vi) the
cost of printing certificates representing the Shares and (vii) the cost and
charges of any transfer agent.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Manager herein contained, as of the date
hereof and as of the Closing Date (for purposes of this Section 6 "Closing Date"
shall refer to the Closing Date for the Firm Shares and any Additional Closing
Date, if different, for the Additional Shares), to the absence from any
certificates, opinions, written statements or letters furnished to you or to
Cadwalader, Wickersham & Taft ("Underwriters' Counsel") pursuant to this
Section 6 of any misstatement or omission, to the performance by the Company and
the Manager of their respective obligations hereunder, and to the following
additional conditions:
(a) On the Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Securities Act or
proceedings therefor initiated or threatened by the Commission. The Prospectus
shall have been filed or transmitted for filing with the Commission pursuant to
Rule 424(b) of the Securities Act Regulations within the prescribed time period,
and prior to the Closing Date the Company shall have provided evidence
satisfactory to the Underwriters of such timely filing or transmittal.
(b) On the Closing Date you shall have received the opinion of Stroock &
Stroock & Lavan LLP, counsel for the Company and the Manager, dated the Closing
Date addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Maryland.
(ii) The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location
of its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those failures
to be so qualified or in good standing which will not in the aggregate have
a Material Adverse Effect on the Company or a material adverse effect on
the transactions contemplated by this Agreement.
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<PAGE>
(iii) The Company has all requisite corporate power and authority to
own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the
Prospectus.
(iv) The Manager has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware.
(v) The Manager is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location
of its properties (owned, leased or licensed) or the nature or conduct of
its business makes such qualification necessary, except for those failures
to be so qualified or in good standing which will not in the aggregate have
a Material Adverse Effect on the Manager or a material adverse effect on
the transactions contemplated by this Agreement.
(vi) The Manager has all requisite power and authority to own,
lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the
Prospectus.
(vii) Neither the Company nor the Manager has any subsidiaries.
(viii) The Company has an authorized capital stock as set forth in
the Registration Statement and the Prospectus. All of the outstanding
shares of Common Stock are duly and validly authorized and issued, are
fully paid and nonassessable. The Shares to be delivered on the Closing
Date have been duly and validly authorized and, when delivered by the
Company in accordance with this Agreement, will be duly and validly issued,
fully paid and nonassessable and will not have been issued in violation of
or subject to any preemptive rights, except as otherwise disclosed in the
Prospectus. The Common Stock, including the Shares, conforms to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(ix) The Shares to be sold under this Agreement to the Underwriters
are duly authorized for listing on the NYSE and such authorization has been
in effect since a date prior to the date of the Preliminary Prospectus.
(x) This Agreement and the Management Agreement and the
transactions contemplated herein and therein have been duly and validly
authorized by the Company and the Manager and this Agreement and the
Management Agreement have been duly and validly executed and delivered by
the Company and the Manager.
(xi) To the best knowledge of such counsel and except as described
in the Prospectus, there is no litigation or governmental proceeding to
which the Company or the Manager is a party or to which any property of the
Company or the Manager is subject or which is threatened against the
Company or the Manager which might result in any Material Adverse Change,
or any development involving a Material Adverse Change, of the Company or
the Manager, which might materially and adversely affect the transactions
contemplated by this Agreement or which is required
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to be disclosed in the Registration Statement and the Prospectus and is not
so disclosed. The descriptions of litigation matters in the Prospectus
under the caption "Business--Legal Proceedings" are complete and accurate
in all material respects.
(xii) The execution, delivery, and performance of this Agreement and
the Management Agreement and the consummation of the transactions
contemplated hereby and thereby do not and will not (A) conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
the Manager pursuant to any agreement, instrument, franchise, license or
permit known to such counsel to which the Company or the Manager is a party
or by which any of such entities or their respective properties or assets
may be bound that is material to the Company or the Manager (collectively,
the "Material Contracts") or (B) violate or conflict with any provision of
the articles of incorporation or bylaws of the Company or the certificate
of incorporation or bylaws of the Manager or (C) to the best knowledge of
such counsel, violate or conflict with any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or the
Manager or any of their respective properties or assets, except, with
respect to clauses (A) and (C) above, for those violations or conflicts
that would not have a Material Adverse Effect on the Company or the Manager
or a material adverse effect on the transactions contemplated by this
Agreement. To the best knowledge of such counsel, no consent, approval,
authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or the Manager or any
of their respective properties or assets is required for the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, except for (x) such as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel
need express no opinion) and (y) such as have been made or obtained under
the Securities Act or the rules of the NYSE.
(xiii) At the time the Registration Statement became effective and on
the date hereof, the Registration Statement and the Prospectus as amended
or supplemented (other than the financial statements and schedules and
other financial data included therein, as to which no opinion need be
expressed) compiled and comply as to form in all material respects with the
requirements of the Securities Act and the Securities Act Regulations.
(xiv) The Registration Statement, including any Rule 462(b)
Registration Statement, is effective under the Securities Act, and to the
best knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereof or
the Rule 462(b) Registration Statement has been issued and no proceedings
therefor have been initiated or threatened
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by the Commission. Any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) under the Securities Act
Regulations has been made in the manner and within the time period required
by such Rule.
(xv) To the best knowledge of such counsel and except as described
in the Prospectus, no holder of securities of the Company has any rights to
the registration of securities of the Company or securities of any other
person that are convertible, exchangeable or exercisable for securities of
the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated hereby.
(xvi) To the best knowledge of such counsel and except as described
in the Prospectus, there are no business relationships or related-party
transactions of the type described in Item 404 of Regulation S-K of the
Commission involving the Company or the Manager, except for such
transactions that would be considered immaterial under such Item. To the
best knowledge of such counsel, the descriptions in the Prospectus under
the caption "Certain Relationships and Related Party Transactions and
Conflicts of Interest" are complete and accurate in all material respects.
(xvii) The Company has been organized in conformity with the
requirements for qualification as a REIT under Sections 856 through 860 of
the Code, and, to the best knowledge of such counsel, the Company has not
taken any action that would prevent it from qualifying as a REIT under the
Code, and the Company conducts its operations in a manner so as to enable
it to elect to be qualified, and thereafter maintain its qualification, as
a REIT under the Code.
(xviii) The Company is not, and after giving effect to the issue and
sale of the Shares by the Company will not be, an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act, or a "broker" within the meaning of Section 3(a)(4)
of the Exchange Act or a "dealer" within the meaning of Section 3(a)(5) of
the Exchange Act or required to be registered pursuant to Section 15(a) of
the Exchange Act.
(xix) The statements in the Prospectus under the captions "Risk
Factors--Legal, Tax and Other Risks," "Certain Federal Income Tax
Considerations," "ERISA Considerations," "Certain Legal Aspects of Mortgage
Loans and Real Property Investments," "Certain Provisions of Maryland Law
and the Company's Charter and Bylaws" and "Description of Capital Stock"
and in Item 34 of the Registration Statement, insofar as such statements
constitute matters of law, summaries of legal matters, the Company's
charter or bylaw provisions, legal documents or legal proceedings, or legal
conclusions, have been reviewed by such counsel and, as of the date of the
Prospectus and as of the date hereof, fairly present and summarize, in all
material respects, the matters referred to therein.
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In addition, such opinion shall also contain a statement that such counsel
has participated in conferences with officers and representatives of the Company
and the Manager, representatives of the independent public accountants for the
Company and the Underwriters at which the contents of the Registration Statement
and the Prospectus and related matters were discussed and, although they are not
passing upon, and do not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus, and they have not made any independent check or
verification thereof, on the basis of the foregoing, no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (except for financial
statements and schedules and other financial statistical data included therein,
as to which such counsel need express no opinion) or any subsequent amendment
thereof made prior to the Closing Date as of the date of such amendment
contained an untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (except for financial statements
and schedules and other financial or statistical data included therein, as to
which counsel need express no opinion) as of its date (or any subsequent
amendment thereof or subsequent supplement thereto made prior to the Closing
Date as of the date of such amendment or supplement) and as of the Closing Date
contained or contains an untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely as to matters involving
the application of laws other than the laws of the United States, New York and
any other jurisdictions in which they are admitted to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; PROVIDED, that such opinion shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them. In rendering such opinion, such counsel may rely as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and the Manager and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the existence or good standing of the Company and the
Manager; PROVIDED that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel and such opinion shall state that such
counsel and the Underwriters are justified in so relying upon any such
certificate. The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel and,
in their opinion, you and they are justified in relying thereon.
(c) All proceedings taken in connection with the sale of the Firm Shares
and the Additional Shares as herein contemplated shall be satisfactory in form
and substance to you and to Underwriters' Counsel, and the Underwriters shall
have received from said Underwriters' Counsel a favorable opinion, dated as of
the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to
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Underwriters' Counsel such documents as they request for the purpose of enabling
them to pass upon such matters.
(d) At the Closing Date you shall have received a certificate of the Chief
Executive Officer and Chief Financial Officer of the Company on behalf of the
Company and a certificate of the Chief Executive Officer and Chief Financial
Officer of the Manager on behalf of the Manager, each dated the Closing Date, to
the effect that (i) the condition set forth in subsection (a) of this Section 6
has been satisfied, (ii) as of the date hereof and as of the Closing Date the
representations and warranties of the Company and the Manager, respectively, set
forth in Section 1 hereof are accurate, (iii) as of the Closing Date the
obligations of the Company and the Manager, respectively, to be performed
hereunder on or prior thereto have been duly performed and (iv) subsequent to
the respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company and the Manager, respectively, have
not sustained any material loss or interference with their respective businesses
or properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any Material Adverse Change, or
any development involving a Material Adverse Change, of the Company and the
Manager, respectively, except in each case as described in or contemplated by
the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date, you
shall have received (i) a letter from Deloitte & Touche, LLP, independent public
accountants for the Company, dated as of the date of this Agreement and as of
the Closing Date, respectively, addressed to the Underwriters and in form and
substance satisfactory to you, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to financial statements and certain information of the Company and its
subsidiaries contained in the Registration Statement and the Prospectus and
(ii) letters from Deloitte & Touche, LLP, Arthur Andersen LLP and Anchin, Block
and Anchin, LLP, each dated as of the date of this Agreement and the Closing
Date, respectively, addressed to the Underwriters and in form and substance
satisfactory to you, containing statements and information of the type
ordinarily included in "agreed upon procedures letters" to underwriters with
respect to the information contained in "Appendix A--Past Performance Results"
to the Prospectus.
(f) Prior to the Closing Date the Company and the Manager shall have
furnished to you such further information, certificates and documents as you may
reasonably request.
(g) You shall have received from each person who is a director or officer
of the Company, the Manager and its officers and directors, the purchasers in
the private placement described in the Prospectus under the caption "Private
Placement," and such other persons as have been heretofore designated by you and
listed on Schedule II hereto an agreement to the effect that such person will
not, directly or indirectly, without Bear Stearns's prior written consent,
issue, sell, offer or agree to sell, grant any option to purchase, or otherwise
dispose (or announce any offer, sale, grant of an option to purchase or other
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disposition) of, any shares of Common Stock (or any securities convertible into,
exchangeable or exercisable for shares of Common Stock) for a period of 180 days
(or such shorter period as expressly agreed to by Bear Stearns) after the date
of the Prospectus.
(h) At the Closing Date, the Shares shall have been approved for listing
on the NYSE.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Underwriters'
Counsel pursuant to this Section 6 shall not be in all material respects
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, all obligations of the Underwriters hereunder may be canceled by you
at, or at any time prior to, the Closing Date and the obligations of the
Underwriters to purchase the Additional Shares may be canceled by you at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company in writing, or by telephone, telecopy, telex or
telegraph, confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including, without limitation, attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, as originally filed or any amendment thereof, or any
related Preliminary Prospectus or the Prospectus, or in any supplement thereto
or amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that
the Company will not be liable in any such case (i) to the extent, but only to
the extent, that any such loss, liability, claim, damage or expense arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of any
Underwriter through you expressly for use therein and (ii) with respect to any
Preliminary Prospectus to the extent that any such loss, claim, damage or
liability results from the fact that an Underwriter sold Shares to a person as
to whom there was not sent or given, at or prior to written confirmation of such
sale, a copy of the Prospectus as then amended or supplemented in any case where
such delivery is required by the Securities Act if the Company has previously
furnished copies thereof to such Underwriter and the loss, claim, damage or
liability of the Underwriters results from an untrue statement or omission of a
material fact contained in the Preliminary Prospectus which was
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corrected in the Prospectus as then amended. This indemnity agreement will be
in addition to any liability which the Company may otherwise have including
under this Agreement.
(b) The Manager agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including, without limitation, attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, as originally filed or any amendment thereof, or any
related Preliminary Prospectus or the Prospectus, or in any supplement thereto
or amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein under the caption
"The Manager" in the Prospectus and in "Appendix A--Past Performance Results" to
the Prospectus; PROVIDED, HOWEVER, that the Manager will not be liable in any
such case with respect to any Preliminary Prospectus to the extent that any such
loss, claim, damage or liability results from the fact that an Underwriter sold
Shares to a person as to whom there was not sent or given, at or prior to
written confirmation of such sale, a copy of the Prospectus as then amended or
supplemented in any case where such delivery is required by the Securities Act
if the Company has previously furnished copies thereof to such Underwriter and
the loss, claim, damage or liability of the Underwriters results from an untrue
statement or omission of a material fact contained in the Preliminary Prospectus
which was corrected in the Prospectus as then amended. This indemnity agreement
will be in addition to any liability which the Manager may otherwise have
including under this Agreement.
(c) Each Underwriter severally, and not jointly, agrees to indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever as incurred
(including, without limitation, attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending, against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, as originally filed or any amendment thereof, or any
related Preliminary Prospectus
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or the Prospectus, or in any amendment thereof or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
any such loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein; PROVIDED, HOWEVER, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page, the stabilization language on page 2 and the statements set forth in the
first and seventh paragraphs under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement, as originally filed
or in any amendment thereof, any related Preliminary Prospectus or the
Prospectus or in any amendment thereof or supplement thereto, as the case may
be.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7, except to the extent that it
has been prejudiced in any material respect by such failure, or from any
liability that it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded (based on an
opinion of counsel) that there may be defenses available to it or them which are
different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; PROVIDED, HOWEVER,
that such consent was not unreasonably withheld.
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8. CONTRIBUTION. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, the Manager and the
Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company or the Manager
any contribution received by the Company or the Manager from persons, other than
the Underwriters, who may also be liable for contribution, including persons who
control the Company or the Manager within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, officers of the Company who
signed the Registration Statement and directors of the Company) as incurred to
which the Company, the Manager and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and the Manager on the one hand and the Underwriters on
the other hand from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Manager on the one hand and the Underwriters on the other hand in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Manager on the one hand
and the Underwriters on the other hand shall be deemed to be in the same
proportion as (x) the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
and (y) the underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and the Manager on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Manager on the one hand or the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Manager on the one hand and the Underwriters on
the other hand agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by PRO RATA allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter
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shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each person, if
any, who controls the Company or the Manager within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company or the
Manager, as the case may be, subject in each case to clauses (i) and (ii) of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties, notify each party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
PROVIDED, HOWEVER, that such consent was not unreasonably withheld.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, the Firm Shares or Additional Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase shall be
purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their respective
names on Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the Firm
Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within five calendar days
after such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement, or in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares, shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their
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liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which the
default relates are to be purchased by the non-defaulting Underwriters, or are
to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares or Additional Shares.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Underwriters, the Company and the
Manager contained in this Agreement, including the agreements contained in
Section 5 hereof, the indemnity agreements contained in Section 7 hereof, and
the contribution agreements contained in Section 8 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company, any of its officers and directors, the Manager or any
controlling person of the Company or the Manager, and shall survive delivery of
and payment for the Shares to and by the Underwriters. The representations
contained in Section 1 hereof and the agreements contained in Sections 5, 7, 9
and 11(d) hereof shall survive the termination of this Agreement, including
termination pursuant to Section 9 or 11 hereof.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective upon the execution of this
Agreement.
(b) You shall have the right to terminate this Agreement at any time prior
to the Closing Date or terminate the obligations of the Underwriters to purchase
the Additional Shares at any time prior to the Additional Closing Date, as the
case may be, if (i) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(ii) if trading on the NYSE, the American Stock Exchange (the "AMEX") or the
Nasdaq National Market ("Nasdaq") shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required, on the NYSE, the AMEX or Nasdaq by such
exchanges or by order of the Commission or any other governmental authority
having jurisdiction; or (iii) if a banking moratorium has been declared by a
state or federal authority or if any new restriction materially adversely
affecting the distribution of the Firm Shares or the Additional Shares, as the
case may be, shall have become effective; or (iv) there shall have occurred any
Material
25
<PAGE>
Adverse Change with respect to the Company or the Manager; or (v) (A) if the
United States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (B) if there shall have been such
change in political, financial or economic conditions, if the effect of any such
event in clause (A) or (B) in your judgment makes it impracticable or
inadvisable to proceed with the offering, sale and delivery of the Firm Shares
or the Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telecopy, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to Section 9(b) hereof), or if the
sale of the Shares provided for herein is not consummated because any condition
to the obligations of the Underwriters set forth herein is not satisfied or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or comply with any provision hereof, the Company
will, subject to demand by you, reimburse the Underwriters for up to $75,000 of
out-of-pocket expenses (including the fees and expenses of their counsel)
incurred by the Underwriters in connection herewith.
12. NOTICES. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, telecopied, telexed or telegraphed and
confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention: Stephen M. Parish; if sent to the
Company or the Manager, shall be mailed, delivered, telecopied, telexed or
telegraphed and confirmed in writing to the Company or the Manager, 51 John F.
Kennedy Parkway, Short Hills, New Jersey 07078, Attention: Michael L. Smirlock.
13. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company, the Manager and the
controlling persons, directors, officers, employees and agents referred to in
Sections 7 and 8 hereof, and their respective successors and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The "term successors and assigns" shall not include
a purchaser, in its capacity as such, of Shares from any of the Underwriters.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
[Signatures Commence on the Following Page]
26
<PAGE>
If the foregoing correctly sets forth the understanding among you, the Company
and the Manager, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
LASER MORTGAGE MANAGEMENT, INC.
By: _____________________________
Name:
Title:
LASER ADVISERS INC.
By:_______________________________
Name:
Title:
Accepted as of the date first above written:
BEAR, STEARNS & CO. INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
EVEREN SECURITIES, INC.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
On behalf of themselves and the other Underwriters named in Schedule I hereto.
BEAR, STEARNS & CO. INC.
By: _________________________
Name:
Title:
<PAGE>
SCHEDULE I
NAME OF UNDERWRITER NUMBER OF FIRM
SHARES TO BE PURCHASED
Bear, Stearns & Co. Inc.. . . . . . . . . . . . . . .
Friedman, Billings, Ramsey & Co., Inc.. . . . . . . .
EVEREN Securities, Inc. . . . . . . . . . . . . . . .
Stifel, Nicolaus & Company, Incorporated. . . . . . .
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000
----------
----------
I-1
<PAGE>
SCHEDULE II
[List persons subject to lock-up]
II-1
<PAGE>
Exhibit 3.1
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 of 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
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.
<PAGE>
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 ($75,000), and twenty-five
million (25,000,000) shall be shares of preferred stock, par value one cent
($.01) per share, amounting in aggregate par value to Two Hundred and Fifty
Thousand Dollars ($250,000). The total par value of all shares of capital stock
which the Corporation has authority to issue is $325,000. The Board of
Directors may classify and reclassify any unissued shares of capital 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 capital stock
acquire such shares subject to the provisions of the charter (including Article
IX) 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 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 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:
2
<PAGE>
(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.
(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.
3
<PAGE>
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.
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 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.
4
<PAGE>
C. The names of the directors, serving at the time of the approval of
these Articles of Amendment and Restatement and their respective classes 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
Mr. David A. Tepper II
Mr. Michael L. Smirlock and
Mr. William Marshall III
D. 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
and 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 may but 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.
5
<PAGE>
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 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.
6
<PAGE>
"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.
"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 October , 1997
"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.
7
<PAGE>
"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.
"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.
8
<PAGE>
"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.
(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
9
<PAGE>
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 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
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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).
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
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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.
(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, in its discretion, 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:
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"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 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.
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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.
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
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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 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
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.
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ARTICLE XI
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 XII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in the charter in the manner now or hereafter 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 XIII
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
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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.
ARTICLE XIV
The duration of the Corporation shall be perpetual.
ARTICLE XV
Notwithstanding any provision of law to the contrary, 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.
THIRD. The amendments effected hereby increase the authorized capital
stock of the Corporation. Before the amendments, the total number of stock of
all classes which the Corporation had authority to issue was 30,000 shares of
capital stock, par value $.001 per share, with an aggregate par value of $30.
After the amendments effected hereby, the total number of shares of capital
stock of all classes which the Corporation has authority to issue is as set
forth in paragraph A of Article V above.
FOURTH: The amendment and restatement of the charter of the Corporation
was approved and advised by the Board of Directors and approved by the
stockholders of the Corporation all in accordance with Section 2-60408 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
Vice President and Secretary President
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Exhibit 3.2
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 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 thirty-three percent
(33%) 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.
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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 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 (or by any other method permitted by
Maryland law) 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
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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 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
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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 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 provided that 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.
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(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 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 them 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,
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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, 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 Charter 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 may be 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 or her
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.
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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, but not without, cause, and 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
one 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.
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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 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
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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 (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.
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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 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
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(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.
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
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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.
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
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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 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 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 with Article IV, Section 1 of these Bylaws.
ARTICLE X
15
<PAGE>
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 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
16
<PAGE>
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 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. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. The
provisions of Title 3, Subtitle 7 of the Corporations and Associations Articles
of the Annotated Code of Maryland (or any successor statute) shall not apply to
any acquisition by any person of shares of stock of the Corporation. Any
amendment, alteration or repeal of this Section 2 shall not cause that statute
to apply to any acquisition of shares of stock of the Corporation by any person
made before such amendment, alteration or repeal.
SECTION 3. 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 4. 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 5. 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 6. 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 7. 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
17
business interests and engage in business activities similar to or in addition
to those of or relating to the Corporation.
18
<PAGE>
Exhibit 5.1
[MILES & STOCKBRIDGE LETTERHEAD]
October __, 1997
LASER Mortgage Management, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933 (the
"Act") of 17,250,000 shares of common stock (the "Common Stock") of LASER
Mortgage Management, Inc., a Maryland corporation, on its Registration Statement
on Form S-11 (No. 333-35673) (the "Registration Statement"), we have examined
such corporate records, certificates and documents as we deemed necessary for
the purpose of this opinion. Based on that examination, we advise you that in
our opinion the Common Stock has been duly and validly authorized and, when
issued upon the terms and in the manner set forth in the Registration Statement,
will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving our consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission
thereunder. The opinion expressed herein is limited to the matters set forth in
this letter and no other opinion should be inferred beyond the matters expressly
stated.
Very truly yours,
Miles & Stockbridge
a Professional Corporation
By:
-------------------------------
Principal
<PAGE>
Exhibit 8.1
[Form of Tax Opinion]
STROOCK & STROOCK & LAVAN LLP
____________, 1997
Laser Mortgage Management, Inc.
51 John F. Kennedy Parkway
Shorthills, New Jersey 07078
Ladies and Gentlemen:
We have acted as counsel to Laser Mortgage Management Inc., a Maryland
corporation (the "Company"), in connection with the preparation of a Form S-11
registration statement (the "Registration Statement") filed with the Securities
and Exchange Commission on September 26, 1997 (No. 333-35673), as amended
through the date hereof, with respect to the offering and sale (the "Offering")
of up to 15,000,000 shares of common stock, par value $0.01 per share, of the
Company (the "Common Stock"). You have requested our opinion regarding certain
U.S. federal income tax matters in connection with the Offering.
In giving this opinion letter, we have examined (i) the Company's Articles of
Incorporation, as duly filed with the Secretary of State of the Commonwealth of
Maryland on September 3, 1997; (ii) the Company's Restated and Amended Articles
of Incorporation, a form of which is filed as an exhibit to the Registration
Statement; (iii) the Company's Bylaws; (iv) the Registration Statement,
including the prospectus contained as part of the Registration Statement (the
"Prospectus"); and such other documents as we have deemed necessary or
appropriate for purposes of this opinion.
<PAGE>
Laser Mortgage Management, Inc.
_________, 1997
Page 2
In connection with the opinions rendered below, we have assumed, that (i)
each of the documents referred to above has been duly authorized, executed, and
delivered (ii) each of the documents referred to above is authentic, if an
original, or is accurate, if a copy, and has not been amended; (iii) during its
short taxable year ending December 31, 1997 and future taxable years, the
Company will operate in a manner consistent with the representations contained
in the certificate, dated ,1997 and executed by a duly appointed
officer of the Company (the "Officer's Certificate"), (iv) the Company will not
make any amendments to its organizational documents after the date of this
opinion that would affect its qualification as a real estate investment trust (a
"REIT") for any taxable year; and (v) no action will be taken by the Company,
after the date hereof, that would have the effect of altering the facts upon
which we have based the opinions set forth below.
In connection with the opinions rendered below, we also have relied upon
the correctness of the representations contained in the Officer's Certificate.
No facts have come to our attention, however, that would cause us to question
the accuracy and completeness of the facts contained in the documents and
assumptions set forth above, the representations set forth in the Officer's
Certificate, or the Prospectus in a material way.
Based on the documents and assumptions set forth above, the representations
set forth in the Officer's Certificate, and the discussion in the Prospectus
under the caption "Federal Income Tax Considerations" (which is incorporated
herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year ending December
31, 1997, the Company will qualify to be taxed as a REIT pursuant to
sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Company's organization and proposed method of
operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code;
(b) the descriptions of the law and the legal conclusions contained
in the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion thereunder fairly
summarizes the federal income tax considerations that are likely to be
material to a holder of the Common Stock.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
<PAGE>
Laser Mortgage Management, Inc.
_________, 1997
Page 3
We note that our opinion expressed herein is based on our examination of
the law, our review of the documents described above, the statements and
representations referred to above, the provisions of the Code, the regulations,
published rulings and announcements thereunder, and the judicial interpretations
thereof currently in effect. This opinion will not be binding on the Internal
Revenue Service (the "Service"), and there can be no assurance that the Service
will not challenge the conclusion stated herein or that, if the issue were
decided in court, such a challenge would not ultimately succeed. Further, there
can be no assurance that future legislative or administrative changes or future
court decisions or the inaccuracy of any statements or representations on which
we have relied may not significantly affect the continuing validity of this
opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Stroock & Stroock
& Lavan LLP under the caption "Federal Income Tax Considerations" in the
Prospectus. In giving this consent, we do not admit that we are in the category
of persons whose consent is required by Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
The foregoing opinions are limited to the U.S. federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any other
country, or any state or locality. We undertake no obligation to update the
opinions expressed herein after the date of this letter.
Very truly yours,
Stroock & Stroock & Lavan LLP
<PAGE>
EXHIBIT 10.1
1997 STOCK INCENTIVE PLAN
OF
LASER MORTGAGE MANAGEMENT, INC.
1. Purpose. The purpose of this Stock Incentive Plan is to advance the
interests of the Corporation by encouraging and enabling the acquisition of a
larger personal proprietary interest in the Corporation by directors and key
employees of the Corporation and its Subsidiaries upon whose judgment and keen
interest the Corporation is largely dependent for the successful conduct of its
operations and by providing such directors and key employees with incentives to
put forth maximum efforts for the success of the Corporation's business. It is
anticipated that the acquisition of such proprietary interest in the Corporation
and such incentives will stimulate the efforts of such directors and key
employees on behalf of the Corporation and its Subsidiaries and strengthen their
desire to remain with the Corporation and its Subsidiaries. It is also expected
that such incentives and the opportunity to acquire such a proprietary interest
will enable the Corporation and its Subsidiaries to attract desirable personnel.
2. Definitions. When used in this Plan, unless the context otherwise
requires:
(a) "Alternative Rights" shall have the meaning set forth in Section
7.
(b) "Board of Directors" shall mean the Board of Directors of the
Corporation, as constituted at any time.
(c) "Bonus Award" shall mean an Incentive Award granted in accordance
with Section 14.
(d) "Cause" shall mean, with respect to the holder of an Incentive
Award, the holder's violation of the duties of such employment or service
with the Corporation or a Subsidiary as he may from time to time have, the
existence of which violation shall be determined by the Committee in its
sole discretion (which determination by the Committee shall be conclusive).
(e) "Chairman of the Board" shall mean the person who at the time
shall be Chairman of the Board of Directors.
(f) "Change of Control" shall be deemed to have occurred if (x) any
"person" or group of "persons" (as the term "person" is used in Sections
13(d) and 14(d) of the Exchange Act) ("Person"), acquires (or has acquired
during the twelve-month period ending on the date of the most recent
acquisition by such Person) direct or indirect beneficial ownership of
securities of the Corporation representing [50%] or more of the combined
voting power of the then outstanding securities of the Corporation or (y) a
<PAGE>
Person acquires (or has acquired during the twelve-month period ending on
the date of the most recent acquisition by such Person) assets from the
Corporation that have a total fair market value equal to or more than
[one-third] of the total fair market value of all of the assets of the
Corporation immediately prior to such acquisition; provided, however, that
if any transaction or event or series of transactions or events resulting
in a Change of Control is approved by a majority of the members of the
Board of Directors holding office prior to the transaction or event or
series of transactions or events, then the transaction or event or series
of transactions or events shall not be deemed to be a Change of Control.
Notwithstanding the foregoing, for purposes of subsection (x), a Change of
Control will not be deemed to have occurred if the power to control
(directly or indirectly) the management and policies of the Corporation is
not transferred from a Person to another Person; and, for purposes of
subsection (y), a Change of Control will not be deemed to occur if the
assets of the Corporation are transferred: (i) to a shareholder in exchange
for his stock, (ii) to an entity in which the Corporation has (directly or
indirectly) 50% ownership, or (iii) to a Person that has (directly or
directly) at least 50% ownership of the Corporation with respect to its
stock outstanding, or to any entity in which such Person possesses
(directly or indirectly) 50% ownership.
(g) "Committee" shall mean the Committee hereinafter described in
Section 3.
(h) "Conjunctive Rights" shall have the meaning set forth in Section
7.
(i) "Corporation" shall mean LASER Mortgage Management, Inc.
(j) "Deferred Stock Award" shall mean an Incentive Award granted in
accordance with Section 13.
(k) "Dividend Equivalent" shall mean an Incentive Award granted in
accordance with Section 15.
(l) "Eligible Persons" shall mean those persons described in Section
4 who are potential recipients of Incentive Awards.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "Fair Market Value" on a specified date shall mean the closing
price at which a Share is traded on the stock exchange, if any, on which
Shares are primarily traded or, if the Shares are not then traded on a
stock exchange, the closing price of a Share as reported on the Nasdaq
National Market System or, if the Shares are not then traded on the Nasdaq
National Market System, the average of the closing bid and asked prices at
which a Share is traded on the over-the-counter market, but if no Shares
were traded on such date, then on the last previous date on which a Share
was so traded, or, if none of the above are applicable, the value of a
Share as established by the Board of
2
<PAGE>
Directors for such date using any reasonable method of valuation.
(o) "Incentive Award" shall mean an Option, Restricted Stock Award,
Rights, Deferred Stock Award, Bonus Award, Dividend Equivalent, or Other
Stock-Based Award granted pursuant to this Plan.
(p) "Incentive Stock Option" shall have the meaning set forth in
section 422 of the Internal Revenue Code.
(q) "Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended.
(r) "Manager" shall mean Laser Advisers Inc.
(s) "Options" shall mean the stock options granted pursuant to this
Plan.
(t) "Other Stock-Based Award" shall mean an Incentive Award granted
in accordance with Section 16.
(u) "Plan" shall mean this 1997 Stock Incentive Plan of LASER
Mortgage Management, Inc., as adopted by the Board of Directors on
__________, 1997, and approved by the sole shareholder of the Corporation
on _________, 1997 as such Plan from time to time may be amended.
(v) "President" shall mean the person who at the time shall be the
President of the Corporation.
(w) "Restricted Shares" shall mean the Shares issued as a result of a
Restricted Stock Award.
(x) "Restricted Stock Award" shall mean a grant of Shares or of the
right to purchase Shares pursuant to Section 12 hereof. Such Shares, when
and if issued, shall be subject to such transfer restrictions and risk of
forfeiture as the Committee shall determine at the time the Award is
granted, until such specific conditions are met. Such conditions may be
based on continuing employment or achievement of pre-established
performance objectives, or both.
(y) "Rights" shall mean stock appreciation rights granted pursuant to
the Plan, which shall entitle the holder thereof to receive from the
Corporation cash or Shares or a combination of cash and Shares based upon
the excess of the Fair Market Value of Shares at the time of exercise over
the purchase price of the Shares subject to the related Option, or the Fair
Market Value of Shares on the date the Rights were granted, as the case may
be, subject to the terms and conditions of the Plan.
3
<PAGE>
(z) "Reload Option" shall have the meaning set forth in Section 6.
(aa) "Share" shall mean a share of common stock of the Corporation.
(bb) "Spread" shall mean (i) with respect to Conjunctive Rights and
Alternative Rights, the excess of the Fair Market Value of one Share on the
date of exercise of such Rights over the purchase price per Share payable
under the related Option and (ii) with respect to Rights not granted in
connection with an Option, the excess of the Fair Market Value of one Share
on the date of exercise of such Rights over the Fair Market Value of one
Share on the date such Rights were granted.
(cc) "Subsidiary" shall mean any corporation 50% or more of whose
stock having general voting power is owned by the Corporation, or by
another Subsidiary as herein defined, of the Corporation.
3. Administration. The Plan shall be administered by a Committee of the
Board of Directors which shall consist of two or more directors of the
Corporation, each of whom shall be a "Non-Employee Director" within the meaning
of Rule 16b-3 under the Exchange Act and an "outside director" within the
meaning of Section 162(m) of the Internal Revenue Code. The Committee shall
establish such rules and procedures as are necessary or advisable to administer
the Plan.
Determinations of the Committee as to any question which may arise with
respect to the interpretation of the provisions of the Plan and Incentive Awards
shall be final. The Committee may authorize and establish such rules,
regulations and revisions thereof not inconsistent with the provisions of the
Plan, as it may deem advisable to make the Plan and Incentive Awards effective
or provide for their administration, and may take such other action with regard
to the Plan and Incentive Awards as it shall deem desirable to effectuate their
purpose.
4. Participants. Except as hereinafter provided, the class of persons who
are potential recipients of Incentive Awards granted under this Plan shall
consist of (i) the directors of, and consultants to, the Corporation or a
Subsidiary (including employees and directors of the Manager who perform
services for the Corporation) and (ii) key employees of the Corporation or a
Subsidiary, as determined by the Committee. The parties to whom Incentive
Awards are granted under this Plan, and the number of Shares subject to each
such Incentive Award, shall be determined by the Committee in its sole
discretion, subject, however, to the terms and conditions of this Plan.
Notwithstanding any other provision of the Plan, no Incentive Award may be
granted to any Eligible Person who, assuming the exercise or settlement of any
Incentive Awards held by such Eligible Person, would own or be deemed to own
more than 9.8% of the number of shares or value of any class of capital stock of
the Corporation.
5. Shares. Subject to the provisions of Section 20 hereof, the Committee
may grant Incentive Awards with respect to an aggregate of up to 2,066,666
Shares, all of which Shares may be either Shares held in treasury or authorized
but unissued Shares. The maximum
4
<PAGE>
number of Shares which may be the subject of Options and Rights granted during
any calendar year to any individual shall not exceed __________ Shares. If the
Shares that would be issued or transferred pursuant to any Incentive Awards are
not issued or transferred and cease to be issuable or transferable for any
reason, or if Restricted Shares which are subject to a Restricted Stock Award
are forfeited, the number of Shares subject to such Incentive Award will no
longer be charged against the limitation provided for herein and may again be
made subject to Incentive Awards; provided, however, that Shares as to which an
Option has been surrendered in connection with the exercise of an Alternative
Right shall not again be available for the grant of any further Incentive
Awards. Notwithstanding the preceding, with respect to any Option and/or any
Rights granted to any individual who is a "covered employee" within the meaning
of Section 162(m) of the Internal Revenue Code that is canceled, the number of
shares subject to such Option and/or Rights shall continue to count against the
maximum number of shares which may be the subject of Options and Rights granted
to such individual. For purposes of the preceding sentence, if, after grant,
the exercise price of an Option and/or the base amount of any Rights is reduced,
such reduction shall be treated as a cancellation of such Option and/or Rights
and the grant of a new Option and/or Rights (if any), and both the cancellation
of the Option and/or Rights and the new Option and/or Rights shall reduce the
maximum number of shares for which Options and Rights may be granted to the
holder of such Option and/or Rights.
6. Grant of Options. The number of Options to be granted to any Eligible
Person shall be determined by the Committee in its sole discretion. At the time
an Option is granted, the Committee may, in its sole discretion, designate
whether such Option (a) is to be considered as an Incentive Stock Option, or (b)
is not to be treated as an Incentive Stock Option for purposes of this Plan and
the Internal Revenue Code. No Option which is intended to qualify as an
Incentive Stock Option shall be granted under this Plan to any individual who,
at the time of such grant, is not an employee of the Corporation or a
Subsidiary.
Notwithstanding any other provision of this Plan to the contrary, to the
extent that the aggregate Fair Market Value (determined as of the date an Option
is granted) of the Shares with respect to which Options which are designated as
(or deemed to be) Incentive Stock Options granted to an employee (and any
incentive stock options granted to such employee under any other stock option
plan maintained by the Corporation or any Subsidiary that meets the requirements
of Section 422 of the Internal Revenue Code) first become exercisable in any
calendar year exceeds $100,000, such Options shall be treated as Options which
are not Incentive Stock Options. Options with respect to which no designation
is made by the Committee shall be deemed to be Incentive Stock Options to the
extent that the $100,000 limitation described in the preceding sentence is met.
This paragraph shall be applied by taking options into account in the order in
which they are granted.
Nothing herein contained shall be construed to prohibit the issuance of
Options at different times to the same person.
An Option may, in the discretion of the Committee, include a reload option
right which shall entitle the holder, upon (i) the exercise of such original
Option prior to the holder's
5
<PAGE>
termination of employment or service and (ii) payment of the appropriate
exercise price in Shares that have been owned by such holder for at least six
months prior to the date of exercise, to receive a new Option (the "Reload
Option") to purchase, at the Fair Market Value per Share on the date of the
exercise of the original Option, the number of Shares equal to the number of
whole Shares delivered by the holder as payment of the exercise price of the
original Option. A Reload Option may, in the discretion of the Committee, also
allow that, upon the exercise of an Option (using any method of payment) prior
to the holder's termination of employment or service, the holder shall receive a
new Option to purchase at the Fair Market Value per Share on the date of
exercise of the original Option, the number of Shares equal to the number of
Shares issued upon exercise of the original Option. Any Reload Option shall be
subject to the same expiration date, and shall be exercisable at the same time
or times as, the original Option with respect to which it is granted. A Reload
Option shall not itself include any reload option rights.
The form of Option shall be determined from time to time by the Committee.
A certificate of Option signed by the Chairman of the Board or the President or
a Vice President of the Corporation, shall be issued to each person to whom an
Option is granted. The certificate of Option for an Option shall be legended to
indicate whether or not the Option is an Incentive Stock Option.
7. Grant of Rights. The Committee shall have the authority to grant to
any Eligible Person, in its sole discretion, Rights which may be granted
separately, or in connection with an Option at the time of the grant of an
Option. Rights granted in connection with an Option shall be granted with
respect to the same number of Shares as are covered by the Option, subject to
adjustment pursuant to the provisions of Section 20 hereof, and may be
exercised, as determined by the Committee in its discretion at the time of the
grant of the Rights, either in conjunction with, or as an alternative to, the
exercise of the related Option.
Conjunctive Rights ("Conjunctive Rights") granted in connection with an
Option shall entitle the holder thereof to receive payment from the Corporation,
determined as hereinafter provided, only if and to the extent that the related
Option is exercisable and is exercised. Upon any exercise of an Option in
respect of which Conjunctive Rights shall have been granted, the holder of the
Rights shall be entitled to receive payment of an amount equal to the product
obtained by multiplying (i) the Spread, or a portion of the Spread determined by
the Committee at the time of grant, by (ii) the number of Shares in respect of
which the related Option shall have then been so exercised. Notwithstanding any
other provision of the Plan, Conjunctive Rights shall not be granted in
connection with an Option that is an Incentive Stock Option.
Alternative Rights ("Alternative Rights") granted in connection with an
Option shall entitle the holder thereof to receive payment from the Corporation,
determined as hereinafter provided, only if and to the extent that the related
Option is exercisable, by surrendering the Option with respect to the number of
Shares as to which such Rights are then exercised. Such Option, to the extent
surrendered, shall be deemed exercised for purposes of the limitations under
Section 5. Upon any exercise of Alternative Rights, the holder thereof shall be
entitled to receive payment of an amount equal to the product obtained by
multiplying (i) the Spread, or a
6
<PAGE>
portion of the Spread determined by the Committee at the time of grant, by (ii)
the number of Shares in respect of which the Rights shall have then been so
exercised. Notwithstanding anything contained herein, Alternative Rights
granted in connection with an Option that is an Incentive Stock Option may not
be exercised at any time when the Fair Market Value of the Shares subject
thereto is less than the exercise price of such Option.
Rights granted without relationship to an Option shall be exercisable for a
duration determined by the Committee, but in no event more than ten years from
the date of grant. Such Rights shall entitle the holder, upon the exercise
thereof, to receive payment from the Corporation of an amount equal to the
product obtained by multiplying (i) the Spread, or a portion of the Spread
determined by the Committee at the time of grant, by (ii) the number of Shares
in respect of which the Rights shall have then been so exercised.
Limited Rights that may only be exercised upon the occurrence of a Change
of Control may be granted, either in connection with an Option or without
relationship to an Option, on such terms, not inconsistent with this Section 7,
as the Committee may determine.
Notwithstanding anything contained herein, the Committee may, in its sole
discretion, limit the amount payable upon the exercise of Rights. Any such
limitation shall be determined as of the date of grant and noted on the
certificate evidencing the grant of the Rights.
Payment of the amount determined hereunder upon the exercise of Rights may
be made solely in cash, or solely in Shares valued at their Fair Market Value on
the date of exercise of Rights, or in a combination of cash and Shares, as
determined by the Committee. No fractional Shares shall be issued by the
Corporation, and settlement therefor shall be made in cash.
The form of Rights shall be as determined from time to time by the
Committee. A certificate of Rights signed by the Chairman of the Board or the
President of the Corporation shall be delivered to each Eligible Person to whom
Rights are granted.
8. Purchase Price Under Options and Restricted Stock. The price per Share
of the Shares to be purchased pursuant to the exercise of any Option shall be
fixed by the Committee at the time of grant; provided, however, that the
purchase price per Share for the Shares to be purchased pursuant to the exercise
of an Incentive Stock Option shall not be less than the Fair Market Value of a
Share on the day on which the Option is granted.
The purchase price per Share for Restricted Shares to be purchased pursuant
to Restricted Stock Awards shall be fixed by the Committee at the time of the
grant of the Restricted Stock Award; provided, however, that such purchase price
shall not be less than the par value of such Shares. Payment of such purchase
price shall be made in cash or by check payable to the order of the Corporation,
or by such other method as the Committee may permit.
9. Duration of Options and Related Rights. The duration of any Option
granted under this Plan shall be fixed by the Committee at the time of grant;
provided, however, that no
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Option shall remain in effect for a period of more than ten years from the date
upon which the Option is granted. The duration of any Rights granted in
connection with any Option shall be coterminous with the duration of the related
Option.
10. Ten Percent Stockholders. Notwithstanding any other provision of this
Plan to the contrary, no Option which is intended to qualify as an Incentive
Stock Option may be granted under this Plan to any employee who, at the time the
Option is granted, owns shares possessing more than 10 percent of the total
combined voting power or value of all classes of stock of the Corporation,
unless the exercise price under such Option is at least 110% of the Fair Market
Value of a Share on the date such Option is granted and the duration of such
Option is no more than five years.
11. Exercise of Options and Rights. Except as otherwise provided herein,
Options and Rights, after the grant thereof, shall be exercisable by the holder
at such rate and times as may be fixed by the Committee.
Notwithstanding the foregoing, all or any part of any remaining unexercised
Options or Rights granted to any person may be exercised upon the occurrence of
such special circumstance or event as in the opinion of the Board of Directors
merits special consideration.
An Option shall be exercised by the delivery of a written notice duly
signed by the holder thereof to such effect ("Exercise Notice"), together with
the Option certificate and the full purchase price of the Shares purchased
pursuant to the exercise of the Option, to the Chairman of the Board or an
officer of the Corporation appointed by the Chairman of the Board for the
purpose of receiving the same. Payment of the full purchase price shall be made
as follows: in cash or by check payable to the order of the Corporation; by
delivery to the Corporation of Shares which shall be valued at their Fair Market
Value on the date of exercise of the Option (provided, that a holder may not use
any Shares acquired pursuant to this Plan or any other plan maintained by the
Corporation or a Subsidiary unless the holder has beneficially owned such Shares
for at least six months); or by such other methods as the Committee may permit
from time to time. Any Conjunctive Rights granted in connection with such
Option shall be exercised by the inclusion in the Exercise Notice of a notice of
exercise of Rights, together with the Rights certificate.
Within a reasonable time after the exercise of an Option, the Corporation
shall cause to be delivered to the person entitled thereto, a certificate for
the Shares purchased pursuant to the exercise of the Option and, if Conjunctive
Rights have been exercised in connection therewith, the amount of cash and/or a
certificate for the number of Shares determined in accordance with Section 7
hereof. If the Option and any Conjunctive Rights shall have been exercised with
respect to less than all of the Shares subject to the Option and Rights, the
Corporation shall also cause to be delivered to the person entitled thereto a
new Option certificate and a new Rights certificate in replacement of the
certificates surrendered at the time of the exercise of the Option and Rights,
indicating the number of Shares with respect to which the Option and Rights
remain available for exercise, or the original Option certificate and Rights
certificate shall be
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endorsed to give effect to the partial exercise thereof.
Alternative Rights or Rights not granted in connection with an Option shall
be exercised by the delivery of a duly signed notice in writing to such effect,
together with the Rights certificate. Holders of Alternative Rights shall also
surrender the related Option certificate. Within a reasonable time thereafter,
the Corporation shall cause to be delivered to the person entitled thereto, the
amount of cash and/or a certificate for the number of Shares determined in
accordance with Section 7 hereof. Upon the exercise of Alternative Rights, the
number of Shares subject to exercise under the related Option or portion thereof
shall be reduced by the number of Shares represented by the Option or portion
thereof surrendered. Shares subject to Options or portions thereof surrendered
upon the exercise of Alternative Rights shall not be available for subsequent
Incentive Awards under the Plan. If the Rights shall have been exercised with
respect to less than all of the Shares subject thereto (or to the related
Option, if any), the Corporation shall also cause to be delivered to the person
entitled thereto a Rights certificate (and an Option certificate, in the case of
Alternative Rights) with respect to the difference between the number of Shares
of the Rights certificate (and related Option certificate, if any) surrendered
at the time of the exercise of the Rights and the number of Shares with respect
to which the Rights were so exercised (and the related Option, if any, was so
surrendered), or the original Rights certificate (and related Option
certificate, if any) shall be endorsed to give effect to the partial exercise
(and surrender) thereof.
Notwithstanding any other provision of the Plan or of any Option or Rights,
no Option or Rights granted pursuant to the Plan may be exercised at any time
when the Option or Rights or the granting or exercise thereof violates any law
or governmental order or regulation.
12. Terms and Conditions of Restricted Stock Awards.
(a) All Restricted Shares granted to or purchased by an Eligible
Person pursuant to the Plan shall be subject to the following conditions:
(i) the Restricted Shares may not be sold, transferred, or otherwise
alienated or hypothecated until the restrictions are satisfied, removed or
expire;
(ii) each certificate representing Restricted Shares issued pursuant
to a Restricted Stock Award under this Plan shall bear a legend making
appropriate reference to the restrictions imposed; and
(iii) the Committee may impose such other conditions as it may deem
advisable on any Restricted Shares granted to or purchased by an Eligible
Person pursuant to a Restricted Stock Award under this Plan, including,
without limitation, restrictions under the requirements of any stock
exchange upon which such Shares or shares of the same class are then
listed, and under any securities law applicable to such Shares.
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<PAGE>
(b) The restrictions imposed under subsection (a) hereof upon
Restricted Stock Awards shall lapse in accordance with a schedule or such other
conditions as shall be determined by the Committee, subject to the provisions of
Section 19 hereof.
(c) Prior to the satisfaction, expiration or lapse of all of the
restrictions and conditions imposed upon Restricted Shares, a stock certificate
or certificates representing such Restricted Shares shall be registered in the
holder's name but shall be retained by the Corporation for the holder's account.
The holder shall have the right to vote such Restricted Shares and shall have
all other rights and privileges of a beneficial and record owner with respect
thereto, including, without limitation, the right to receive dividends,
distributions and adjustments with respect thereto; provided, however, that such
dividends, distributions and adjustments shall be retained by the Corporation
for the holder's account and for delivery to the holder, together with the stock
certificate or certificates representing such Restricted Shares, as and when
said restrictions and conditions shall have been satisfied, expired or lapsed.
13. Deferred Stock Awards. The Committee shall have the authority to
grant to any Eligible Person a Deferred Stock Award, subject to the following
terms and conditions:
(i) Delivery of, and the issuance of certificates representing,
Shares issuable pursuant to a Deferred Stock Award shall occur upon
expiration of the deferral period specified by the Committee (or, if
permitted by the Committee, as elected by the Eligible Person);
(ii) Deferred Stock Awards shall be subject to such restrictions as
the Committee may impose, which restrictions may lapse at the expiration of
the deferral period or at earlier specified times, separately or in
combination, in installments, or otherwise, as the Committee may determine.
14. Bonus Awards. The Committee shall have the authority to grant to any
Eligible Person Shares as a bonus, subject to such terms as shall be determined
by the Committee.
15. Dividend Equivalents. The Committee may grant to any Eligible Person
Dividend Equivalents entitling the holder to receive cash, Shares, other
Incentive Awards, or other property equal in value to dividends paid with
respect to a specified number of Shares. Dividend Equivalents may be awarded in
connection with another Incentive Award or without relationship to any other
Incentive Award. The Committee may provide that Dividend Equivalents shall be
paid or distributed when accrued or shall be deemed to have been reinvested in
additional Shares, Incentive Awards, or other investment vehicles, and subject
to such restrictions on transferability and risks of forfeiture, as the
Committee may specify.
16. Other Stock Awards. The Committee may, subject to limitations under
applicable law, grant to Eligible Persons such other Incentive Awards that may
be denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Shares and factors that may influence the
value of Shares, as deemed by the Committee to be consistent
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<PAGE>
with the purposes of the Plan, including, without limitation, convertible or
exchangeable debt securities, other rights convertible or exchangeable into
Shares, purchase rights for Shares, Incentive Awards with value and payment
contingent upon performance of the Corporation or any other factors designated
by the Committee, and Incentive Awards valued by reference to the book value of
Shares or the value of securities of or the performance of specified
subsidiaries. The Committee shall determine the terms and conditions of such
Incentive Awards. Shares issued pursuant to an Incentive Award in the nature of
a purchase right granted under this Section 16 shall be purchased for such
consideration, paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Shares, other Incentive Awards, or other
property, as the Committee shall determine. Cash awards, as an element of or
supplement to any other Incentive Award under the Plan, may be granted pursuant
to this Section 16.
17. Consideration for Incentive Awards. The Corporation shall obtain such
consideration for the grant of an Incentive Award as the Committee in its
discretion may determine.
18. Restrictions on Transferability of Incentive Awards. An Incentive
Award shall not be transferable otherwise than by will or the laws of descent
and distribution or as provided in this Section 18. Notwithstanding the
preceding, the Committee may, in its discretion and subject to such terms and
conditions as the Committee shall approve, authorize a transfer of any Incentive
Award, other than an Option which is an Incentive Stock Option, by the initial
holder to (i) the spouse, children, step children, grandchildren or other family
members of the initial holder ("Family Members"), (ii) a trust or trusts for the
exclusive benefit of such Family Members, (iii) a corporation or partnership in
which such Family Members and the initial holder are the only shareholders or
partners, or (iv) such other persons or entities which the Committee may permit;
provided, however, that subsequent transfers of such Incentive Awards shall be
prohibited except by will or the laws of descent and distribution. Following
any transfer of such an Incentive Award, such Incentive Award shall continue to
be subject to the same terms and conditions of the Incentive Award and of the
Plan. An Option which is intended to be an Incentive Stock Option shall not be
transferable otherwise than by will or the laws of descent and distribution and
shall be exercisable during the holder's lifetime only by the holder thereof.
19. Termination of Employment or Service. All or any part of any Option
and/or Rights, to the extent unexercised, shall terminate immediately, upon the
cessation or termination for any reason of the holder's employment by, or
service as a director of or consultant to, the Corporation or any Subsidiary,
except that the holder shall have until the end of the 30th business day
following the cessation of his employment or service with the Corporation or its
Subsidiaries, and no longer, to exercise any unexercised Option and/or Rights
that he could have exercised on the day on which such employment or service
terminated; provided, that such exercise must be accomplished prior to the
expiration of the term of such Option and Rights. Notwithstanding the
foregoing, if the cessation of employment or service is due to disability (to an
extent and in a manner as shall be determined
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<PAGE>
in each case by the Committee in its sole discretion) or to death, the holder or
the representative of the Estate or the heirs of a deceased holder shall have
the privilege of exercising the Options and Rights which are exercisable but
unexercised at the time of such disability or death; provided, however, that
such exercise must be accomplished prior to the expiration of the term of such
Option and Rights and within one year of the holder's disability or death, as
the case may be. The Board of Directors may, in its sole discretion extend the
post-termination exercise period under this Section 19 with respect to any
Option or Rights, but in no event beyond the expiration of the term of such
Option or Rights. If the employment or service of any holder of an Option or
Rights with the Corporation or a Subsidiary shall be terminated for Cause, all
unexercised Options and Rights of such holder shall terminate immediately upon
such termination of the holder's employment or service with the Corporation and
all Subsidiaries, and a holder of Options or Rights whose employment or service
with the Corporation and Subsidiaries is so terminated, shall have no right
after such termination to exercise any unexercised Option or Rights he might
have exercised prior to the termination of his employment or service with the
Corporation and Subsidiaries.
Except as hereinafter provided, if a holder of a Restricted Stock Award or
Deferred Stock Award shall voluntarily or involuntarily leave the employ of the
Corporation or any Subsidiary, then (i) all Restricted Shares subject to
restrictions at the time his employment terminates (and any dividends,
distributions and adjustments retained by the Corporation with respect thereto),
and (ii) any Shares subject to a Deferred Stock Award with respect to which the
deferral period has not expired, shall be forfeited and any consideration
received therefor from the holder shall be returned to the holder.
Notwithstanding the foregoing, all restrictions to which Restricted Stock Awards
are subject shall lapse, and the deferral period under a Deferred Stock Award
shall expire, upon the occurrence of such special circumstance or event as in
the opinion of the Board of Directors merits special consideration.
The consequence of a termination of employment or service with respect to
the holder of a Bonus Award, Dividend Equivalents or an Other Stock-Based Award
shall be as determined by the Committee at the time of grant of any such
Incentive Award, subject, however, to any determination by the Board of
Directors upon the occurrence of such special circumstance or event as in the
opinion of the Board of Directors merits special consideration.
Notwithstanding any other provision of this Plan to the contrary, (i) if
the employment or service of any holder of an Incentive Award with the
Corporation or a Subsidiary shall be terminated by the Corporation or Subsidiary
other than for Cause and without the occurrence of a Change of Control, then all
conditions and/or restrictions relating to the continued employment or
performance of services and/or achievement of performance objectives with
respect to the exercisability or full enjoyment of an Incentive Award granted to
such holder shall immediately lapse upon such termination, and (ii) if the
management agreement between the Corporation and the Manager terminates without
the occurrence of a Termination Event (as hereinafter defined) or a Change of
Control, then all conditions and/or restrictions relating to the continued
performance of services and/or the achievement of performance objectives with
respect to the exercisability or full enjoyment of an Incentive Award granted to
the Manager or
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<PAGE>
to an individual in his capacity as an employee or director of the Manager shall
immediately lapse upon such termination. For purposes of this paragraph, a
"Termination Event" shall mean the occurrence of any of the following events:
(1) the Manager violating any material provision of its management
agreement with the Corporation, if, after notice of such violation, it
shall not have cured such violation within 30 days; or
(2) the Manager ceasing to be registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, if such registration
is required as a matter of law; or
(3)(i) the Manager generally not paying its obligations as such
obligations become due, or admitting in writing its inability to pay its
obligations generally, or making a general assignment for the benefit of
creditors; or (ii) any proceeding being instituted by or against the
Manager seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its obligations under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors,
or seeking the entry of any order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property and, in the case of any such proceeding
instituted against it (but not instituted by it), such proceeding remaining
undismissed or unstayed for a period of sixty days; or (iii) any of the
actions sought in any proceeding described in (ii) above (including an
order for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for, it or any substantial part of its
property) occurring or (iv) the Manager taking any action to authorize any
of the actions set forth above in this subsection.
20. Adjustment Provision; Acceleration Upon Change of Control. If prior
to the complete exercise of any Option, or prior to the satisfaction, expiration
or lapse of all of the restrictions and conditions imposed pursuant to a
Restricted Stock Award, a Deferred Stock Award, or Bonus Stock Award, there
shall be declared and paid a stock dividend upon the Shares or if the Shares
shall be split up, converted, exchanged, reclassified, or in any way substituted
for,
(a) in the case of an Option, then the Option, to the extent that it has
not been exercised, shall entitle the holder thereof upon the future exercise of
the Option to such number and kind of securities or cash or other property
subject to the terms of the Option to which he would have been entitled had he
actually owned the Shares subject to the unexercised portion of the Option at
the time of the occurrence of such stock dividend, split-up, conversion,
exchange, reclassification or substitution, and the aggregate purchase price
upon the future exercise of the Option shall be the same as if the originally
optioned Shares were being purchased thereunder;
(b) in the case of a Restricted Share issued pursuant to a Restricted
Stock Award, the
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holder of such Award shall receive, subject to the same restrictions and other
conditions of such Award as determined pursuant to the provisions of Section 12,
the same securities or other property as are received by the holders of the
Corporation's Shares pursuant to such stock dividend, split-up, conversion,
exchange, reclassification or substitution; and
(c) in the case of a Deferred Stock Award or Bonus Stock Award, the holder
shall receive, at such time as would otherwise apply under such Award, such
number and kind of securities or cash or other property to which he would have
been entitled had he actually owned the Shares subject to the Deferred Stock
Award or Bonus Stock Award at the time of the occurrence of such stock dividend,
split-up, conversion, exchange, reclassification or substitution.
Any fractional shares or securities issuable upon the exercise of the Option as
a result of such adjustment shall be payable in cash based upon the Fair Market
Value of such shares or securities at the time of such exercise. If any such
event should occur, the number of Shares with respect to which Incentive Awards
remain to be issued, or with respect to which Incentive Awards may be reissued,
shall be adjusted in a similar manner.
In addition to the adjustments provided for in the preceding paragraph,
upon the occurrence of any of the events referred to in said paragraph prior to
the complete exercise of any Rights or the complete payment of any Dividend
Equivalents or payments pursuant to an Other Stock-Based Award, the Committee,
in its sole discretion, shall determine the amount of cash and/or number of
Shares or other property to which the holder of the Rights shall be entitled
upon their exercise, or which shall be paid to the holder of Dividend
Equivalents or an Other Stock-Based Award at such time as payment would
otherwise be made, so that there shall be no increase or dilution in the cash
and/or value of the Shares or other property to which the holder shall be
entitled by reason of such events.
Notwithstanding any other provision of the Plan, all conditions and/or
restrictions relating to the continued employment or performance of services
and/or the achievement of performance objectives with respect to the
exercisability or full enjoyment of an Incentive Award shall immediately lapse
upon a Change of Control; provided, however, that if it is intended that the
transaction constituting such Change of Control be eligible for pooling of
interests accounting treatment and the operation of this paragraph would
otherwise cause such transaction to be ineligible for such pooling of interests
accounting treatment, then this paragraph shall be applicable only to such
extent, if any, as would not cause such transaction to be ineligible for such
pooling of interests accounting treatment.
In the event of a recapitalization, merger, consolidation, rights offering,
separation, reorganization or liquidation, or any other change in the corporate
structure or outstanding Shares, the Committee may make such equitable
adjustments to the number of Shares and the class of shares available hereunder
or to any outstanding Incentive Awards as it shall deem appropriate to prevent
dilution or enlargement of rights.
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21. Issuance of Shares and Compliance with Securities Act. The
Corporation may postpone the issuance and delivery of Shares pursuant to the
grant or exercise of any Incentive Award until (a) the admission of such Shares
to listing on any stock exchange on which Shares of the Corporation of the same
class are then listed, and (b) the completion of such registration or other
qualification of such Shares under any State or Federal law, rule or regulation
as the Corporation shall determine to be necessary or advisable. Any holder of
an Incentive Award shall make such representations and furnish such information
as may, in the opinion of counsel for the Corporation, be appropriate to permit
the Corporation, in the light of the then existence or non-existence with
respect to such Shares of an effective Registration Statement under the
Securities Act of 1933, as from time to time amended (the "Securities Act"), to
issue the Shares in compliance with the provisions of the Securities Act or any
comparable act. The Corporation shall have the right, in its sole discretion,
to legend any Shares which may be issued pursuant to the grant or exercise of
any Incentive Award, or may issue stop transfer orders in respect thereof.
22. Income Tax Withholding. If the Corporation or a Subsidiary shall be
required to withhold any amounts by reason of any Federal, State or local tax
rules or regulations in respect of the issuance of Shares pursuant to the grant
or exercise of any Incentive Award, the Corporation or the Subsidiary shall be
entitled to deduct and withhold such amounts from any cash payments to be made
to the holder of such Incentive Award. In any event, the holder shall make
available to the Corporation or Subsidiary, promptly when requested by the
Corporation or such Subsidiary, sufficient funds to meet the requirements of
such withholding; and the Corporation or Subsidiary shall be entitled to take
and authorize such steps as it may deem advisable in order to have such funds
made available to the Corporation or Subsidiary out of any funds or property due
or to become due to the holder of such Incentive Award.
23. Amendment of the Plan. Except as hereinafter provided, the Board of
Directors or the Committee may at any time withdraw or from time to time amend
the Plan as it relates to, and the terms and conditions of, any Incentive Awards
not theretofore granted, and the Board of Directors or the Committee, with the
consent of the affected holder of an Incentive Award, may at any time withdraw
or from time to time amend the Plan as it relates to, and the terms and
conditions of, any outstanding Incentive Award. Notwithstanding the foregoing,
any amendment by the Board of Directors or the Committee which would increase
the number of Shares issuable under the Plan or with respect to Options and
Rights granted to any individual during any calendar year or change the class of
Eligible Persons shall be subject to the approval of the shareholders of the
Corporation.
24. No Right of Employment or Service. Nothing contained herein or in an
Incentive Award shall be construed to confer on any employee, director or
consultant any right to be continued in the employ of the Corporation or any
Subsidiary or as a director of, or consultant to, the Corporation or a
Subsidiary or derogate from any right of the Corporation and any Subsidiary to
retire, request the resignation of, discharge or cease its consulting
arrangement with such employee, director or consultant (without or with pay), at
any time, with or without cause.
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25. Effective Date of the Plan. This Plan is effective as of _________,
1997.
26. Final Issuance Date. No Incentive Award shall be granted under the
Plan after __________, 2007.
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Exhibit 10.2
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT, dated as of October , 1997, by and between
LASER MORTGAGE MANAGEMENT, INC., a Maryland corporation (the "Company"), and
LASER ADVISERS INC., a Delaware corporation (the "Manager").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the business of investing in mortgage
assets, including whole mortgage loans (or participations therein),
mortgage-backed securities, such as mortgage pass-through certificates,
collateralized mortgage obligations and other securities representing interests
in, or obligations backed by, pools of mortgage loans and other fixed income
securities, and has elected to be taxed as a real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to manage the
investments and day-to-day operations of the Company and to perform
administrative services for the Company in the manner and on the terms set forth
herein;
NOW, THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined herein
shall have the respective meanings assigned to them in the Prospectus, dated
_________ __, 1997 (the "Prospectus"), of the Company included in the Company's
Registration Statement on Form S-11, filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended. In addition, the
following terms shall have the meanings assigned to them:
<PAGE>
(a) "Average Stockholders' Equity" means, with respect to any period, the
arithmetic average of stockholders' equity, calculated in accordance with GAAP,
excluding any mark-to-market adjustments in the Company's portfolio of
investments, as of the end of the immediately preceding calculation period (or
for any period including the Closing Date, as of a time immediately following
the Closing Date) and as of each month-end within such period.
(b) "Closing Date" means the date of closing of the Company's initial
public offering of common stock.
(c) "GAAP" means generally accepted accounting principles, consistently
applied by the Company.
(d) "Governing Instruments" means the Company's articles of incorporation
and bylaws, as each may be amended from time to time.
(e) "Incentive Fee" shall have the meaning set forth under Section 6(a)(2)
hereof.
(f) "Management Fee" shall have the meaning set forth under Section
6(a)(1) hereof.
(g) "Mortgage REIT" means an entity the securities of which are publicly
traded, organized and operated in compliance with the REIT Provisions of the
Code, that invests primarily in Mortgage Assets and follows investment
strategies substantially similar to those employed by the Company.
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(h) "Net Income" means the taxable income of the Company within the
meaning of the Code, less capital gains and capital appreciation included in
taxable income, but before the Manager's Incentive Fee and before deduction of
dividends paid.
(i) "Non-Competition Payment" shall equal the fair market value of this
Agreement (without giving effect to any termination and assuming it is renewed
in accordance with its terms), determined by a nationally recognized accounting
or investment banking firm experienced in the valuation of investment advisory
agreements. Such valuation shall be conducted by a nationally recognized
accounting or investment banking firm mutually agreed upon by the parties and
the costs of such appraisal shall be borne equally by the parties. If the
parties are unable to agree upon such firm within 30 days following delivery of
the notice of termination, then each party shall, as soon as reasonably
practicable, but in no event more than 45 days following delivery of the notice
of termination, choose a nationally-recognized accounting or investment banking
firm to conduct an appraisal and such firms shall mutually agree upon a third
nationally-recognized accounting or investment banking firm. In such event, (i)
the fair market value amount shall be deemed to be the average of the appraisals
as conducted by each of the three firms; provided, however, that if the
appraisal by any firm is more than 15% greater or lesser than the average, such
firm's appraisal shall be disregarded and the fair market value amount shall be
deemed to be the average of the remaining appraisal(s) and (ii) each party shall
pay the costs of its chosen accounting or investment banking firm. Any
appraisal conducted hereunder shall be performed no later than 45 days following
selection of the accounting or investment banking firm. The Non-Competition
Payment payable by the
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Company shall be paid within 30 days following receipt of the final appraisal
obtained hereunder.
(j) "REIT Provisions of the Code" shall mean Sections 856 through 860 of
the Code, or any successor provisions thereto, and the regulations thereunder.
(k) "Return on Average Stockholders' Equity" means the result obtained by
dividing the Company's Net Income for a period by its Average Stockholders'
Equity for such period.
(l) "Ten-Year U.S. Treasury Rate" shall mean 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) as
published weekly by the Federal Reserve Board in "Federal Reserve Statistical
Release H.15(519)--Selected Interest Rates" or, if such rate is not published by
the Federal Reserve Board, as published by any Federal Reserve Bank or agency or
department of the federal government selected by the Company.
(m) "Termination Event" shall mean the occurrence of any of the following
events:
(1)the Manager violating any material provision of this Agreement, and
if after notice of such violation and such violation is curable, it shall
not have cured such violation within 30 days; or
(2)the Manager ceasing to be registered as an investment adviser under
the Advisers Act, if such registration is required as a matter of law; or
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(3)(i) the Manager generally not paying its obligations as such
obligations become due, or admitting in writing its inability to pay its
obligations generally, or making a general assignment for the benefit of
creditors; or (ii) any proceeding being instituted by or against the
Manager seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its obligations under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors,
or seeking the entry of any order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property and, in the case of any such proceeding
instituted against it (but not instituted by it), such proceedings
remaining undismissed or unstayed for a period of sixty days; or (iii) any
of the actions sought in any proceeding described in (ii) above (including
an order for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for, it or any substantial part of its
property) occurring or (iv) the Manager taking any action to authorize any
of the actions set forth above in this subsection; or
(4)an assignment (as defined in the Advisers Act) of this Agreement
without the approval of the Company; or
(5)the commission by the Manager of fraud, dishonesty, gross
negligence or willful misconduct in connection with this Agreement.
SECTION 2. INVESTMENT MANAGEMENT DUTIES OF THE MANAGER.
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(a) Under the ultimate supervision of the Company's Board of Directors
(the "Directors"), the Manager is authorized to invest the assets of the Company
according to the strategies and restrictions set forth from time to time by the
Directors, initially including those set forth in the Prospectus. In
furtherance of such general grant of authority, the Manager shall have full
discretion and authority, without obtaining the Company's prior approval, to
manage the investment and reinvestment of the assets of the Company in such
manner as the Manager considers appropriate, consistent with the Prospectus and
written instructions of the Directors.
(b) The Manager shall select brokers, dealers, banks and intermediaries to
effect transactions for the Company, and may agree to such commissions, fees and
other charges on behalf of the Company as the Manager shall deem reasonable
under the circumstances taking into account all such factors it deems relevant.
All brokerage commissions and related transaction costs for transactions on
behalf of the Company will be borne by the Company. The Manager agrees to
select brokers and dealers on the basis of obtaining the best overall terms
available, which the Manager shall evaluate based on a variety of factors,
including the ability to achieve prompt and reliable executions at favorable
prices; the operational efficiency with which transactions are effected; the
financial strength, integrity and stability of the broker, the quality,
comprehensiveness and frequency of available research and related services
considered to be of value; and the competitiveness of commissions and similar
charges compared to other brokers satisfying the Manager's other selection
criteria. Research and related services furnished by brokers to the Manager may
be used for the benefit of clients other than the Company and may include:
written information and analyses concerning specific securities, companies or
sectors;
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market, financial and economic studies and forecasts, statistics, tax matters
and pricing services; discussions with legal and research personnel; and news,
technical and telecommunications services and equipment utilized in the
investment management process. Subject to seeking the best execution, the
Manager also may consider referrals of potential investors in the Company and
research provided about the Company as factors in the selection of brokers. The
Manager may cause the Company to pay a broker a commission in excess of that
which another broker might have charged for effecting the same transaction in
recognition of the value of the brokerage, research and related services
provided by the broker.
SECTION 3. GENERAL DUTIES OF THE MANAGER. Subject to the supervision of
the Directors, the Manager shall provide services to the Company and 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:
(a) serving as the Company's consultant with respect to formulation
of investment criteria by the Directors;
(b) 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;
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(c) arranging for the securitization of Mortgage Loans;
(d) 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;
(e) monitoring and providing to the Directors on an ongoing basis
price information and other data obtained from certain nationally recognized
dealers that maintain markets in assets identified by the Directors, and
providing data and advice to the Directors in connection with the identification
of such dealers;
(f) providing executive and administrative personnel, office space
and office services required in rendering services to the Company;
(g) 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 Directors, including collection of the Company's revenues
and payment of the Company's debts and obligations and maintenance of
appropriate computer systems to perform such administrative functions;
(h) 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;
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(i) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for Mortgage Loans purchased by the Company
and arranging for the monitoring and administering of such servicer, including
negotiating servicing agreements, collecting information and submitting reports
pertaining to the Mortgage Loans and to monies remitted to the Manager or the
Company;
(j) counseling the Directors in connection with policy decisions;
(k) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT;
(l) arranging financing of the type described in the Prospectus under
the caption "BUSINESS--Operating Policies and Strategies--Capital and Leverage
Policies;"
(m) supervising compliance with the REIT Provisions of the Code and
Investment Company Act requirements;
(n) upon request by, and in accordance with the directions of, the
Directors, investing or reinvesting any monies of the Company;
(o) qualifying and causing the Company to qualify to do business in
all applicable jurisdictions; and
(p) causing the Company to retain qualified accountants and tax
experts to assist in developing appropriate accounting procedures and testing
systems and to conduct quarterly compliance reviews.
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SECTION 4. ADDITIONAL ACTIVITIES OF MANAGER. Nothing herein shall prevent
the Manager or any of its Affiliates from engaging in other businesses or from
rendering services of any kind to any other person or entity, except that the
Manager agrees, during the term of this Agreement, not to serve as an investment
adviser to any Mortgage REIT, other than the Company, without the prior written
approval of the Independent Directors.
SECTION 5. INVESTMENTS FOR THE ACCOUNTS OF OTHERS AND ALLOCATION OF
OPPORTUNITIES. The Company understands that the Manager, from time to time,
will purchase and sell Mortgage Assets and other securities of the type in which
the Company may invest for the accounts of others for whom it may provide
investment advisory or other services (collectively, "Managed Accounts"). The
Company understands that when the Manager determines that it would be
appropriate for the Company and one or more Managed Accounts to participate in
an investment opportunity, the Manager will seek to execute orders for the
Company and for such Managed Accounts on an equitable basis. In such
situations, the Manager may place orders for the Company and each Managed
Account simultaneously, and if all such orders are not filled at the same price,
the Manager may cause the Company and each Managed Account to pay or receive the
average of the prices at which the orders were filled for the Company and all
Managed Accounts. If all such orders cannot be fully executed under prevailing
market conditions, the Manager may allocate the securities traded among the
Company and the Managed Accounts in a manner which it considers equitable,
taking into account the size of the order placed for the Company and each such
Managed Account, as well as any other factors which it deems relevant.
SECTION 6. COMPENSATION AND EXPENSES.
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(a) For services rendered under this Agreement, the Company agrees to pay
to the Manager the following:
(1)an annual base management fee (the "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;
(2)an incentive fee (the "Incentive Fee") for each fiscal quarter in
an amount equal to 20% of the Company's Net Income for such 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 for such quarter plus 1%; and
(3)in consideration of the Manager's agreement in Section 4, the
Non-Competition Payment, if the Company terminates, or the Directors fail
to approve a continuation of, this Agreement or the Company engages
another person to manage a portion of its assets or manages its assets
internally with personnel other than those previously employed by the
Manager, and, at the time of such action, no Termination Event has occurred
and is continuing.
(b) The Company agrees to pay directly or reimburse the Manager for (i)
all expenses incurred in connection with transactions effected or positions held
on behalf of the Company pursuant to the Manager's exercise of its duties
hereunder (including, without limitation, custodial fees, clearing fees,
brokerage commissions and related transaction costs, interest and
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commitment fees on loans and debit balances and withholding or transfer taxes);
and (ii) out-of-pocket expenses paid or payable to third parties on behalf of
the Company.
(c) The Management Fee and Incentive Fee shall be paid in arrears. The
Management Fee and expenses will be calculated by the Manager as promptly as
practicable after month-end. The Manager's incentive fee will be calculated by
the Manager within 45 days after the end of each quarter. Such calculations
shall be promptly delivered to the Company. The Company agrees to pay all such
fees and expenses within 15 days of delivery of such calculation. In the
absence of manifest error, the Manager's calculations of such amounts shall
control.
(d) No Management or Incentive Fee shall accrue or be payable in respect
of any period before the Closing Date. Management Fees for any partial period
shall be pro-rated according to the proportion which such partial period bears
to the full period.
SECTION 7. LIMITS OF MANAGER RESPONSIBILITY.
(a) The Company agrees that the Manager shall not be liable to the
Company, its Affiliates or their directors, officers or stockholders for any
losses, damages, expenses or claims occasioned by any act or omission of the
Manager, its directors, officers, stockholders, employees or agents in
connection with the performance of its services hereunder, other than as a
result of its own willful misconduct, gross negligence or reckless disregard of
its duties hereunder, or as otherwise required by applicable law.
(b) The Company agrees to indemnify the Manager, its stockholders,
directors, officers, employees or agents against and hold them harmless from any
and all
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liabilities, losses, damages, expenses or claims arising out of any claim
asserted or threatened to be asserted by any third party in connection with the
Manager's serving or having served as such pursuant to this Agreement; provided,
however, that the Manager shall not be entitled to indemnification with respect
to any liabilities or losses or damages, expenses or claims which were found by
a court of competent jurisdiction (in a final judgment from which no appeal may
be taken) to have been caused by its own gross negligence, willful misconduct or
reckless disregard of its duties hereunder. The Company shall advance to the
Manager the reasonable costs and expenses of investigating and/or defending any
such claim, subject to receiving a written undertaking from the Manager to repay
any such amounts advanced to it in the event and to the extent of such
determination that the Manager was not entitled to indemnification hereunder.
In the event that the Manager is or becomes a party to any action or proceeding
in respect of which indemnification may be sought hereunder, the Manager shall
promptly notify the Company thereof. Following such notice, the Company shall
be entitled to participate therein and, to the extent that it may wish, to
assume the defense thereof with counsel reasonably satisfactory to the Manager.
After notice from the Company to the Manager of an election so to assume the
defense thereof, the Company will not be liable to the Manager hereunder for any
legal or other expenses subsequently incurred by the Manager in connection with
the defense thereof, other than reasonable costs of investigation, unless
counsel for the Manager reasonably shall determine that there is a conflict of
interest which requires separate representation of the parties. The Company
shall not be liable hereunder for any settlement of any action or claim effected
without its written consent, which consent shall not be unreasonably withheld,
nor shall
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the Company enter into any settlement which shall impose any obligation on the
Manager without its written consent.
(c) At any time, the Manager may consult with counsel, accountants and tax
advisers for the Company with respect to any matter arising in connection with
the Manager's duties and obligations under this Agreement, and the Manager shall
not be liable for any action taken or omitted by it in good faith in accordance
with the advice of such persons.
SECTION 8. TERM: TERMINATION. This Agreement shall commence on the date
hereof and shall continue for an initial term expiring on December 31, 2002,
and, thereafter, shall continue automatically for successive three-year periods,
provided such continuance is specifically approved by the Directors, including a
majority of the Independent Directors. This Agreement is terminable, by either
the Company, pursuant to a majority vote of the Independent Directors or a vote
of the holders of a majority of the outstanding shares of common stock, or the
Manager, without cause at any time upon 60 days' written notice to the other
party. This Agreement will also terminate automatically in the event of its
assignment (as defined in the Advisers Act), unless the assignment is consented
to by the non-assigning party.
SECTION 9. ACTION UPON TERMINATION. From and after the date of
termination of this Agreement, the Manager shall not be entitled to compensation
for further services hereunder, except pursuant to any separate written
management termination agreement that may be negotiated by the parties, but
shall be paid any compensation accruing through the date of termination,
including the Non-Competition Payment. Upon such termination, the Manager shall
forthwith:
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(a) after deducting any accrued compensation and reimbursement for its
expenses to which it is then entitled, pay over to the Company or any subsidiary
of the Company any money collected and held for the account of the Company or
any subsidiary of the Company pursuant to this Agreement;
(b) deliver to the Directors a full accounting, including a statement
showing all payments collected by it and a statement of all money held by it,
covering the period following the date of the last accounting furnished to the
Directors with respect to the Company or any subsidiary of the Company;
(c) pay to the Company all sums set forth on the accounting referenced in
(b) above; and
(d) deliver to the Directors all property and documents of the Company or
any subsidiary of the Company then in the custody of the Manager.
SECTION 10. NOTICES. Unless expressly provided otherwise herein, any
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested. The
parties may deliver to each other notice by electronically transmitted facsimile
copies provided that such notice is followed within twenty-four hours by any
type of notice otherwise provided for in this Section. Any notice shall be duly
addressed to the parties as follows:
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(a) If to the Company:
LASER Mortgage Management, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Attention: Dr. Michael L. Smirlock
with a copy given in the manner prescribed above, to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
(b) If to the Manager
LASER Advisers Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Attention: Dr. Michael L. Smirlock
with a copy given in the manner prescribed above, to:
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section for the giving of notice.
SECTION 11. MISCELLANEOUS.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns as provided
herein.
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(b) This Agreement contains the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements, understandings, inducements
and conditions, express or implied, oral or written, of any nature whatsoever
with respect to the subject matter hereof. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent with any
of the terms hereof. This Agreement may not be modified or amended other than
by an agreement in writing approved by the Company (including a majority of the
Independent Directors) and the Manager.
(c) This Agreement and all questions relating to its validity,
interpretation, performance and enforcement shall be governed by and construed,
interpreted and enforced in accordance with the internal laws of the State of
New York, without giving effect to principles of conflicts of law.
(d) Neither the failure nor any delay on the part of a party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
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(e) The titles of Sections contained in this Agreement are for
convenience only and they neither form a part of this Agreement nor are they to
be used in the construction or interpretation hereof.
(f) This Agreement may be executed in counterparts, each of which
when so executed and delivered shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
(g) The provisions of this Agreement are independent of and separable
from each other, and no provision shall be affected or rendered invalid or
unenforceable by virtue of the fact that for any reason any other or others of
them may be invalid or unenforceable in whole or in part.
(h) Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
(i) The Company and the Manager are not partners or joint venturers
with each other and nothing herein shall be construed to make them such partners
or joint venturers or impose any liability as such on either of them.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
LASER MORTGAGE MANAGEMENT, INC.
By:
-------------------------------
Title:
LASER ADVISERS INC.
By:
-------------------------------
Title:
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EXHIBIT 10.3
LASER MORTGAGE MANAGEMENT, INC.
DIVIDEND REINVESTMENT PLAN
1. PURPOSE OF THE PLAN.
The purpose of the Dividend Reinvestment Plan (the "Plan") of LASER
Mortgage Management, Inc. (the "Company") is to provide existing stockholders
(the "Stockholders") of the Company's outstanding common stock (the "Common
Stock") and interested investors who are not Stockholders with a convenient and
economical method to automatically reinvest all or a portion of their cash
dividends in, and, subject to the Company's Board of Directors' determination,
make periodic cash subscriptions for, shares of Common Stock. The Plan provides
the Company with a means of raising additional capital for operations on an
economical basis. The Plan was authorized by the Company's Board of Directors
on October , 1997 and became effective on October , 1997.
2. ADMINISTRATION.
The Plan will be administered by (the "Plan
Administrator"). An investor who participates in any feature of the Plan is
hereafter referred to as a "Participant". The Plan Administrator keeps records,
sends statements of account to each Participant, provides safekeeping for the
shares and performs other duties relating to the Plan.
The Plan Administrator will establish an account under the Plan for each
Participant ("Participant's Account"). The Company will pay to the Plan
Administrator all cash dividends payable with respect to shares of Common Stock
owned by the Participants, including shares and fractional shares previously
acquired under the Plan. The Plan Administrator will apply such funds toward
the purchase of additional shares of Common Stock for the Participant's Account
either directly from the Company or on the open market, as instructed by the
Company.
As soon as practicable after the purchases of shares of Common Stock have
been completed, the Plan Administrator will send each Participant a statement of
their account ("Account Statement"). The Account Statement will confirm the
transaction and itemize any previous investment activity for the calendar year.
ACCOUNT STATEMENTS SHOULD BE RETAINED BY THE PARTICIPANT FOR HIS OR HER OWN
RECORDS.
3. ADVANTAGES AND DISADVANTAGES OF THE PLAN.
(a) Advantages
- The Plan provides Participants with the opportunity to purchase
additional shares of Common Stock, if desired, by automatically
reinvesting all or a
<PAGE>
portion of their cash dividends paid on the shares of Common
Stock in the Plan.
In addition to the reinvestment of dividends, the Plan provides
Stockholders with the opportunity to make monthly investments in
Common Stock through optional cash purchases ("Optional Cash
Purchases"), subject to a minimum and maximum amount. Optional
Cash Purchases may be made occasionally or at regular intervals
on Cash Purchase Investment Dates (as defined herein), as the
Participant desires. Participants may make Optional Cash
Purchases even if dividends on their shares of Common Stock are
not being reinvested.
- The Plan also provides non-Stockholders of the Company the
opportunity to become Participants by making an initial cash
investment (referred to as "Initial Cash Purchases" and,
collectively with Optional Cash Purchases, as "Cash Purchases")
in shares of Common Stock, subject to a minimum and maximum
amount.
- Shares purchased directly from the Company through dividend
reinvestment under the Plan will be issued without a sales
commission and may be issued at a discount, ranging from 0% to 5%
(the "Discount Rate") of the Average Market Price for Dividend
Reinvestments (as defined herein). If the Company should elect
that the shares of Common Stock to be purchased under the Plan
are to be purchased in the open market instead of directly from
the Company, the Company will pay any brokerage fees or
commissions on such purchases, up to 5% of the fair market value
of the shares of Common Stock at the time of such purchase. Any
commissions in excess of 5% will be paid by the Participants on a
pro rata basis. The Discount Rate will not apply to open market
purchases or to privately negotiated purchases of Common Stock.
- Funds invested in the Plan are fully invested through the
purchase of fractions of shares, as well as full shares, and
proportionate cash dividends on fractions of shares are used to
purchase additional shares.
- Participants may direct the Plan Administrator to transfer, at
any time and at no cost to the Participant, all or a portion of
the Participant's shares in the Plan to a Participant Account for
another person.
- The Plan offers a "share safekeeping" service whereby, at no
cost, Participants may deposit their Common Stock certificates
with the Plan Administrator and have their ownership of such
Common Stock maintained on the Plan Administrator's records as
part of their Participant Account.
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- Participants will receive statements containing year-to-date
information on all Plan transactions in a Participant's Account
within a reasonable time after a transaction occurs, designed to
simplify the Participants' record keeping.
(b) Disadvantages
- Participants in the Plan who reinvest dividends will be treated
for federal income tax purposes as having received a dividend on
the dividend payment date, as declared from time to time by the
Company, which occurs generally on the ____ day of the first
month following the last month of each calendar quarter (the
"Dividend Payment Date"); such dividend may give rise to a tax
payment obligation without providing the Participant with
immediate cash to pay such tax when it becomes due.
- No interest will be paid by the Company or the Plan Administrator
on dividends or funds for Cash Purchases held pending
reinvestment or investment or to be returned to the Participant.
In addition, Cash Purchases exceeding $5,000 per month may be
subject to return to the Participant (in whole or proportionate
part) without interest in the event that (i) a threshold price
has been established with respect to shares to be purchased from
the Company, and (ii) such threshold price is not met for any day
on which the New York Stock Exchange ("NYSE") is open for trading
("Trading Day") during the twelve Trading Days prior to the date
scheduled for investment of Cash Purchases for that month (the
"Pricing Period").
- Participants will have limited control regarding the specific
timing of purchases and sales under the Plan. Cash Purchases
under the Plan will be made at the end of the Pricing Period;
thus, Participants may be unable to achieve the same level of
control over purchase and sale timing that they might have for
investments made outside the Plan.
- The Company, in its sole discretion without prior notice to
Participants, may change its determination as to whether shares
of Common Stock will be purchased by the Plan Administrator
directly from the Company or through open market or privately
negotiated purchases. No Discount Rate will be applied on shares
purchased under the Plan in the open market or in privately
negotiated purchases, instead of directly from the Company. The
Company, without prior notice to Participants, may lower or
eliminate the Discount Rate on shares to be purchased directly
from the Company for future investment periods. As a result,
Participants will generally be unable to depend on the
availability of a market discount regarding shares acquired under
the Plan.
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<PAGE>
4. ELIGIBILITY.
All Stockholders owning at least 100 shares or making a minimum optional
subscription of $250 are eligible to participate in the Plan. A Stockholder who
owns shares of Common Stock in his or its own name is referred to herein as a
"Stockholder of Record." A Stockholder of Record may participate directly in
the Plan. A Stockholder who beneficially owns shares of Common Stock that are
registered in a name other than such Stockholder's name (for example, where
shares are held in the name of a broker, bank or other nominee) is referred to
herein as a "Beneficial Owner." Beneficial Owners may participate in the Plan
by either (i) becoming a Stockholder of Record by having one or more shares
transferred into their own name, or (ii) coordinating their participation with
their broker, bank or other nominee who is the record holder to participate on
their behalf.
Stockholders of Record having addresses outside the United States and
Stockholders beneficially owning Common Stock in an amount equal to or greater
than 9.8% of the outstanding Common Stock (the "Ownership Limit") will not be
eligible to participate in the Plan. In addition, to the extent consistent with
the Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"), and in accordance with the provisions of the Company's Amended and
Restated Articles of Incorporation, the Company's Board of Directors may waive
the Ownership Limit for, and at the request of, certain purchasers to allow
participation in the Plan.
A Stockholder may make Optional Cash Purchases of shares of Common Stock,
subject to a minimum of $250 and a maximum of $5,000, and new investors, not
currently Stockholders, may make Initial Cash Purchases (as defined herein)
subject to a minimum of $250 and a maximum of $5,000. The Plan is intended for
the benefit of investors in the Company and not for persons or entities that
accumulate accounts under the Plan over which they have control for the purpose
of exceeding the $5,000 per month maximum without seeking the advance approval
of the Company or who engage in transactions that cause or are designed to cause
aberrations in the price or trading volume of the Common Stock. Notwithstanding
anything in the Plan to the contrary, the Company reserves the right to exclude
from participation in the Plan, at any time, (i) persons or entities that
attempt to circumvent the Plan's standard $5,000 per month maximum by
accumulating accounts over which they have control or (ii) any other persons or
entities, as determined in the sole discretion of the Company. For purposes of
this limitation, the Company reserves the right to aggregate all Cash Purchases
for Participants with more than one account using the same name, address or
social security or taxpayer identification number. For Participants unable to
supply a social security or taxpayer identification number, participation may be
limited by the Company to only one Participant Account. Also for the purpose of
such limitations, all Participant Accounts that the Company believes to be under
common control or management or to have common ultimate beneficial ownership may
be aggregated. In the event the Company exercises its right to aggregate
investments and the result would be an investment in excess of $5,000 without a
completed and approved written Request for Waiver pursuant to Section 8(b)(iii)
below (a "Request for Waiver"), the Company will return, without interest, as
promptly as practicable, any amount in excess of the investment limitations.
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<PAGE>
5. ENROLLMENT PROCEDURES.
(a) Stockholders of Record. Stockholders of Record may participate in the
Plan by delivering a completed authorization form (the "Authorization Form") to
the Plan Administrator.
(b) Beneficial Owners. Beneficial Owners may participate in the Plan; by
instructing their broker, bank or other nominee to complete and sign the
Authorization Form and forward it to its securities depository, which will
provide the Plan Administrator with the information necessary to allow the
Beneficial Owner to participate in the Plan. To facilitate participation by
Beneficial Owners, the Plan is eligible for the Depository Trust Dividend
Reinvestment Services. A broker and nominee form (the "Broker and Nominee
Form") is required to be used for Cash Purchases of a Beneficial Owner whose
broker, bank or other nominee holds the Beneficial Owner's shares in the name of
a major securities depository. See "Broker and Nominee Form" below.
(c) Non-Stockholders. Non-Stockholders of the Company may become
Participants by directly delivering a completed Authorization Form to the Plan
Administrator, or through coordination with their broker, bank or other nominee
for Beneficial Owners, along with an Initial Cash Purchase of not less than $250
and not more than $5,000; provided, that Initial Cash Purchases of more than
$5,000 may be made only if a Request for Waiver therefor is approved by the
Company, as provided in 8(b)(ii) below.
Participation in the Plan will begin upon receipt of a properly completed
Authorization Form and/or Broker and Nominee Form. Thereafter, it will not be
necessary to submit an additional Authorization Form and Cash Purchases may be
made monthly or, periodically, at the election of the Participant.
6. PARTICIPATION OPTIONS.
The Authorization Form provides for the purchase of shares of Common Stock
through the following participation options:
(a) Full Dividend Reinvestment. If the "Full Dividend Reinvestment"
option is elected, the Plan Administrator will apply all cash dividends on all
shares of Common Stock then or subsequently registered in the Participant's
name, including all whole and fractional shares of Common Stock, together with
any voluntary cash contributions for Cash Purchases towards the purchase of
additional shares of Common Stock;
(b) Partial Dividend Reinvestment. If the "Partial Dividend Reinvestment"
option is elected, the Plan Administrator will apply all cash dividends on the
number of shares of Common Stock then registered in the Participant's name and
designated in the appropriate space on the Authorization Form and all cash
dividends on shares of Common Stock purchased for the
-5-
<PAGE>
Participant's Account pursuant to the Plan, together with any voluntary cash
contributions for Cash Purchases towards the purchase of additional shares of
Common Stock; and
(c) Cash Purchases Only. If "Cash Purchases Only" is elected the Plan
Administrator will only apply the voluntary cash contributions for Cash
Purchases received from the Participant towards the purchase of shares of Common
Stock. The investment date for Cash Purchases will occur on or about the third
from the last business day of each month, or in the case of purchases in the
open market, no later than the last business day of each month (the "Cash
Purchase Investment Date").
Under each of the options, any future cash dividends on shares of Common
Stock credited to the Participant's Account will be automatically reinvested,
including dividends on shares of Common Stock purchased with any voluntary cash
contributions for Cash Purchases, until the Participant specifies otherwise or
the Participant's Account is terminated. Participants may change their
participation options at any time by requesting a new Authorization Form and
returning it to the Plan Administrator at the address set forth below.
7. BROKER AND NOMINEE FORM.
The Broker and Nominee Form provides the only means by which a broker, bank
or other nominee holding shares of a Beneficial Owner, or planning to hold
shares of an interested investor who is not currently a Stockholder of the
Company, in the name of a major securities depository may invest Cash Purchases
within the minimum and maximum investment limitation established for the Plan
(see "Purchase of and Price of Shares" below) on behalf of such Beneficial Owner
or interested investor. A Broker and Nominee Form must be delivered to the Plan
Administrator each time such broker, bank or other nominee transmits Cash
Purchases. Broker and Nominee Forms will be furnished by the Plan Administrator
at any time upon request.
If a non-stockholder wishes to purchase Shares through the Plan and such
Shares are to be held by a broker, bank or other nominee, the Broker and Nominee
Form and appropriate instructions must be received by the Plan Administrator not
later than 12:00 noon, New York City time, on the business day immediately
preceding the relevant Pricing Period in order to be invested on the Cash
Purchase Investment Date. If the Broker and Nominee Form is not timely received
the Cash Purchase will be returned, without interest.
Shares issued pursuant to a properly completed Broker and Nominee Form will
not be deemed Plan Shares; therefore, subsequent dividends will be paid in cash
unless otherwise instructed by the Beneficial Owner (See "Enrollment Procedures"
above for a discussion of the requirements for Beneficial Owner participation in
the reinvestment of dividends).
-6-
<PAGE>
8. PURCHASE OF AND PRICE OF SHARES.
(a) Dividend Reinvestment. Dividends shall be reinvested within fifteen
days after the Dividend Payment Date (such date being the "Dividend Reinvestment
Date") except where reinvestment of such funds at a later date is necessary or
advisable under applicable securities laws. Under normal market conditions, the
funds are expected to be reinvested on the Dividend Payment Date. With respect
to the dividend reinvestment portion of the Plan, the Authorization Form (and
the Broker Nominee Form if necessary) must be received by the Plan Administrator
at least two business days prior to the Dividend Payment Date established for a
particular dividend for a Stockholder to be eligible for reinvestment of such
dividends under the Plan for that related dividend. If the Authorization Form
(and Broker Nominee Form, if necessary) is not timely received, reinvestment
will begin on the Dividend Reinvestment Date following the next Dividend Payment
Date.
(i) Discount Rate on Dividend Reinvestments. The price of the
authorized but unissued shares of Common Stock purchased by the Plan
Administrator directly from the Company pursuant to the reinvestment of
dividends will be issued at the Discount Rate to the then current Average Market
Price for Dividend Reinvestments (as defined below) as of the Dividend
Reinvestment Date. The Discount Rate is subject to change for future dividend
reinvestments, or complete discontinuance at the Company's discretion, without
prior notice to the Participants after a review of current market conditions,
the level of participation in the Plan and the Company's current and projected
capital needs. The Discount Rate will be in effect only for purchases of shares
of Common Stock directly from the Company. If the Company elects to purchase
the shares in the open market or in privately negotiated transactions, the
Discount Rate will not apply to such purchases for the Participant's Account.
(ii) Price per Share for Reinvested Dividends. The "Average Market
Price for Dividend Reinvestments" per share of Common Stock acquired directly
from the Company under the Plan shall be the average of the daily high and low
sales prices, computed to seven decimal places, of the shares of Common Stock as
reported on the NYSE on the Dividend Reinvestment Date, or if no trading occurs
in the Common Stock on the Dividend Reinvestment Date, the average of the high
and low sales prices for the first Trading Day immediately preceding the
Dividend Reinvestment Date for which trades are reported. If the Company elects
to purchase the shares on the open market or in privately negotiated
transactions, the price per share of Common Stock acquired through such open
market or privately negotiated transactions will be the weighted average
purchase price for all the Common Stock purchased by the Plan Administrator in
connection with such open market purchases, without application of the Discount
Rate. The Plan Administrator shall pay brokerage commissions in an amount
determined by the prevailing rates at the time of purchase. Such commissions
will be reimbursed by the Company, but in no event shall the Company be
obligated to pay commissions in excess of five percent (5%) of the purchase
price of the shares of Common Stock. Any commissions in excess of five percent
(5%) will be paid by the Participants on a pro rata basis. Such open market
purchases may be made, at the Plan Administrator's option, on any securities
exchange
-7-
<PAGE>
where the shares of Common Stock are traded, in the over-the-counter
market or in negotiated transactions with third persons, and may be on such
terms as to price, delivery and otherwise as the Plan Administrator may
determine.
(b) Cash Purchases. A Stockholder also may make Optional Cash Purchases of
shares of Common Stock, subject to a minimum of $250 and a maximum of $5,000
(except in cases covered by a Request for Waiver as discussed below). New
investors, not currently Stockholders of the Company, may make Initial Cash
Purchases subject to a minimum of $250 and a maximum of $5,000 (except in cases
covered by a Request for Waiver). Optional Cash Purchases may be made by check,
money order, wire transfer, or electronic funds transfer from a predesignated
bank account. For purposes of the amount limitations on Cash Purchases, all
Participant Accounts under the common control or management of a Participant may
be aggregated at the Company's sole discretion. For Cash Purchases, the Plan
Administrator must receive the Authorization Form and good funds at least one
business day prior to the commencement of the Pricing Period for a Participant's
Cash Purchase to be invested on the related Cash Purchase Investment Date.
Otherwise, such authorization will be effective as of the next Cash Purchase
Investment Date and the funds will be returned to the Participant as provided in
Section 8(b)(iv).
(i) Price per Share for Cash Purchases. The "Average Market Price
for Cash Purchases" per share shall be the average of the daily high and low
sales prices, computed to seven decimal places, of the shares of Common Stock as
reported on the NYSE during the Pricing Period prior to the related Cash
Purchase Investment Date. No commission shall be paid with respect to purchases
of authorized but unissued shares of Common Stock directly from the Company. If
the Company elects to purchase the shares on the open market or in privately
negotiated transactions, the price per share of Common Stock acquired through
such open market or privately negotiated transactions will be the weighted
average of the actual prices paid, computed to seven decimal places, for all the
Common Stock purchased by the Plan Administrator in connection with such open
market purchases, without application of the Discount Rate. The Plan
Administrator shall pay brokerage commissions in an amount determined by the
prevailing rates at the time of purchase. Such commissions will be reimbursed
by the Company, but in no event shall the Company be obligated to pay
commissions in excess of five percent (5%) of the purchase price of the shares
of Common Stock. Any commissions in excess of five percent (5%) will be paid by
the Participants on a pro rata basis. Such open market purchases may be made,
at the Plan Administrator's option, on any securities exchange where the shares
of Common Stock are traded, in the over-the-counter market or in negotiated
transactions with third persons, and may be on such terms as to price, delivery,
and otherwise as the Plan Administrator may determine.
(ii) Waiver of Maximum Cash Purchase Limitation. Cash Purchases in
excess of $5,000 may be made only upon acceptance in writing by the Company of a
completed written Request for Waiver form from the Participant. A Request for
Waiver must be received by the Company at its corporate address or by facsimile
at (201) 376-5415 no later than 2:00 p.m., New
-8-
<PAGE>
York City time, two business days prior to the first day of the relevant
Pricing Period. Request for Waiver forms may be obtained from the Company.
The Company may establish a discount rate different than the Discount Rate,
ranging from 0% to 5% (the "Waiver Discount") regarding shares purchased from
the Company for Cash Purchases exceeding $5,000 per month and approved by the
Company pursuant to a Request for Waiver. Participants may obtain the
applicable Waiver Discount by telephoning the Company three business days prior
to the first day of the Pricing Period. It is solely within the Company's
discretion as to whether any such approval for cash investments in excess of
$5,000 will be granted. In deciding whether to approve a Request for Waiver,
the Company will consider relevant factors including, but not limited to:
whether the Plan is then acquiring newly issued or treasury shares directly
from the Company or acquiring shares from third parties in the open market or
in privately negotiated transactions; the Company's need for additional funds;
the attractiveness of obtaining such additional funds through the sale of
Common Stock as compared to other sources of funds; the purchase price likely
to apply to any sale of Common Stock under the Plan; the Participant submitting
the request; the extent and nature of such Participant's prior participation in
the Plan; the number of shares of Common Stock held by such Participant and the
aggregate amount of cash investments for which Requests for Waiver have been
submitted by all Participants. If such requests are submitted for any Cash
Purchase Investment Date for an aggregate amount in excess of the amount the
Company is then willing to accept, the Company may honor such requests in order
of receipt, pro rata or by any other method that the Company determines in its
sole discretion to be appropriate. The Company anticipates that it will
respond to each Request for Waiver no later than the close of business
(7:00 p.m., New York City time) two days prior to the first day of the relevant
Pricing Period.
(iii) Threshold Price. Notwithstanding anything contained herein
to the contrary, the Company may establish for each Pricing Period a threshold
price applicable to the purchase of newly issued shares of Common Stock
purchased through cash investments made pursuant to Requests for Waiver approved
by the Company (the "Threshold Price"). The Threshold Price, if any, will be
established by the Company at least three business days prior to the first day
of the Pricing Period, and will be established in the Company's sole discretion
after a review of current market conditions and other relevant factors.
Participants may obtain the applicable Threshold Price and Waiver Discount by
telephoning the Company. The Threshold Price will be a stated dollar amount that
the average of the high and low sale prices of the Common Stock on the NYSE for
a Trading Day of the Pricing Period must equal or exceed. In the event that
such Threshold Price is not satisfied for a Trading Day of the Pricing Period,
then such Trading Day and the trading prices for that day will be excluded from
(A) the Pricing Period and (B) the determination of the purchase price of the
Common Stock for all cash investments made pursuant to Requests for Waiver
approved by the Company. Thus, for example, if the Threshold Price is not
satisfied for three of the twelve Trading Days of the Pricing Period, then the
purchase price of the Common Stock will be based upon the remaining nine Trading
Days for which the Threshold Price was satisfied.
-9-
<PAGE>
Each Trading Day of a Pricing Period for which the Threshold Price is not
satisfied will cause the return of a portion of any cash investments made
pursuant to Requests for Waiver approved by the Company. The returned amount
will equal one-twelfth of such cash investments for each Trading Day that the
Threshold Price is not satisfied. Thus, for example, if the Threshold Price is
not satisfied for three Trading Days, then 3/12 (i.e., 25%) of such cash
investments will be returned without interest.
The Threshold Price and return procedure discussed above apply only to Cash
Purchases made pursuant to Requests for Waiver approved by the Company and not
to the reinvestment of dividends or Cash Purchases that do not exceed $5,000.
(iv) Timing and Procedure for Cash Purchases. Each month the Plan
Administrator will apply a Cash Purchase for which good funds are timely
received to the purchase of shares of Common Stock for the account of the
Participant on the next Cash Purchase Investment Date. For funds to be invested
on the next Cash Purchase Investment Date, the Plan Administrator must have
received the following in a timely fashion: (i) the Authorization Form (if
purchaser has not yet enrolled as a Participant) and the Broker and Nominee Form
(if necessary) at least one business day before the commencement of the Pricing
Period; (ii) the Request for Waiver (if applicable) no later than 2:00 p.m. New
York City time two business days before the commencement of the Pricing Period;
and (iii) a check, money order or wire transfer no later than one business day
prior to the commencement of the related Pricing Period (the "Cash Purchase Due
Date"). However, the Company, in its sole discretion, may accept funds for Cash
Purchases after the Cash Purchase Due Date in the event of unanticipated delays
or inadvertence by the Participant. Such check, money order or wire transfer
must have cleared before the related Cash Purchase Investment Date. Wire
transfers may be used only if approved verbally in advance by the Plan
Administrator, and instructions for Wire Transfers can be obtained from the Plan
Administrator. Checks and money orders are accepted subject to timely
collection as good funds and verification of compliance with the terms of the
Plan. Checks or money orders should be made payable to ________________
"______________________". Checks returned for any reason will not be
resubmitted for collection. Generally, funds received for Cash Purchases which
are not invested under the Plan will be returned to Participants without
interest at the end of the Pricing Period; such Cash Purchases may be
resubmitted by a Participant prior to the commencement of the next or a later
Pricing Period. Upon a Participant's written request received by the Plan
Administrator no later than two business days prior to the Pricing Period, a
timely Cash Purchase not already invested under the Plan will be canceled or
returned to the Participant as soon as practical. However, in the latter event,
no refund of a check or money order will be made until the funds have been
actually received by the Plan Administrator. In making purchases for the
Participant's Account, the Plan Administrator may commingle the Participant's
funds with those of other Participants in the Plan. NO INTEREST WILL BE PAID ON
FUNDS HELD BY THE PLAN ADMINISTRATOR PENDING INVESTMENT OR RETURN TO THE
PARTICIPANT. FUNDS FOR CASH PURCHASES DO NOT CONSTITUTE DEPOSITS OR SAVINGS
-10-
<PAGE>
ACCOUNTS AND ARE NOT INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
9. INCOME TAX.
The following discussion summarizes the principal federal income tax
consequences, under current law, of participation in the Plan. It does not
address all potentially relevant federal income tax matters, including
consequences peculiar to persons subject to special provisions of the federal
income tax law (such as banks, insurance companies, and foreign persons). The
discussion is based on various rulings of the Internal Revenue Service (the
"IRS") regarding several types of dividend reinvestment plans. No ruling,
however, has been issued or requested regarding the Plan. THE FOLLOWING
DISCUSSION IS GENERAL INFORMATION ONLY, AND PARTICIPANTS MUST CONSULT THEIR OWN
TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES THAT MAY RESULT FROM
PARTICIPATION IN THE PLAN AND THE DISPOSITION OF ANY SHARES OF COMMON STOCK
PURCHASED PURSUANT TO THE PLAN.
(a) Reinvested Dividends. Participants in the Plan will be treated for
federal income tax purposes as having received, on the Dividend Reinvestment
Date, a distribution in an amount equal to the fair market value on the date the
shares of Common Stock are acquired with reinvested dividends (plus a pro rata
portion of any brokerage cost incurred in the open market purchases of the
shares of Common Stock). For tax purposes, the dividend received will equal the
amount of the cash dividend plus the amount of the discount on the purchase of
the stock. When shares of Common Stock are purchased directly from the Company,
the amount of the dividend will be the full fair market value of the shares of
Common Stock as of the Dividend Reinvestment Date, although the Participant may
have acquired such shares of Common Stock at the Discount Rate.
Shares of Common Stock acquired for Participants in the Plan will have an
initial tax basis to the Participant equal to the amount the Participant is
treated as having received as a dividend. The holding period for a share of
Common Stock (including a fractional share) generally will begin on the day
after the Dividend Reinvestment Date upon which the share of Common Stock was
acquired.
The reinvestment of dividends does not relieve the Participant of any
income tax and will constitute a dividend to the same extent that a cash
distribution would be so treated. Participants who are Qualified Plans or IRAs
should be able to continue to exclude the reinvested dividends from unrelated
business taxable income unless such Participants have borrowed to acquire their
shares of Common Stock. The Plan Administrator will report to each Participant
for tax purposes the dividends to be credited to the account as well as any
discounts or costs incurred by the Company. Such information will also be
furnished to the IRS to the extent required by law. In addition, the Code
imposes certain reporting obligations on brokers and other intermediaries.
-11-
<PAGE>
As a result, the Plan Administrator will be required to report to the IRS and
the Participant any sale of Common Stock by it on behalf of a Participant.
(b) Cash Purchases. As of the date hereof, the IRS is considering the
appropriate treatment of Cash Purchases pursuant to a dividend reinvestment
plan. If the proper treatment of the discount afforded such Cash Purchases is
determined to be a distribution, Participants will be treated as having received
a distribution upon the purchase of Cash Purchases in an amount equal to the
excess, if any, of the fair market value of the shares of Common Stock on the
date on which they were acquired (plus a pro rata portion of the brokerage costs
incurred in open market purchases) over the amount of the Cash Purchases. Such
shares of Common Stock will have an initial tax basis equal to the amount of the
Cash Purchases plus the excess, if any, of the fair market value of the shares
of Common Stock purchased over the amount of the Cash Purchases. The fair
market value on an acquisition date is likely to differ from the Average Market
Price for Cash Purchases for the pricing period immediately preceding the
related Cash Purchase (which determines the number of shares of Common Stock
acquired). The amount treated as a distribution will constitute a dividend for
federal income tax purposes to the same extent that a cash distribution would be
so treated. The holding period for a share of Common Stock (including fractions
thereof) generally begins on the day after the Cash Purchase Investment Date
upon which the share of Common Stock was acquired.
If the IRS determines that stock purchased at a discount through the Cash
Purchases is not a distribution, then the amount of the discount would not
represent a dividend and the Participant would take a tax basis in the purchased
stock equal to the actual purchase price paid to the Participant.
10. VOTING.
The Plan Administrator will not vote shares of Common Stock that it holds
for a Participant's Account except as directed by the Participant.
11. CERTIFICATES.
Shares of Common Stock purchased under the Plan are registered in the name
of a nominee and shown on each Participant's Account Statement. However, a
Participant may request a certificate for any of the whole shares of Common
Stock which have accumulated in such Participant's Account by writing a letter
of instruction to the Plan Administrator. Each certificate issued will be
registered in the name or names in which the account is maintained, unless
otherwise instructed in writing. If the certificate is to be issued in a name
other than the name on the Participant's Account, the Participant or
Participants must have his or her signature(s) guaranteed by a commercial bank
or a broker. Certificates for fractional shares of Common Stock will not be
issued in any case. Dividends will continue to be paid on the cumulative
holdings of both full and fractional shares of Common Stock remaining in the
Participant's Account and will automatically be reinvested.
-12-
<PAGE>
Participants who wish to do so may deposit Common Stock certificates
registered in their names with the Plan Administrator for credit under the Plan.
There is no charge for such deposits and by making such deposit the Participant
will be relieved of the responsibility for loss, theft or destruction of the
certificate.
Shares of Common Stock credited to a Participant's Account may not be
pledged or assigned, and any attempted pledge or assignment is void. A
Participant who wishes to pledge or assign shares of Common Stock credited to
the Participant's Account must first withdraw such shares of Common Stock from
such Participant's Account.
12. TERMINATION OF PARTICIPATION.
A Participant's Account may be terminated at any time by notifying the Plan
Administrator in writing. With respect to the reinvestment of dividends, unless
the termination notice is received by the Plan Administrator at least two
business days prior to any Dividend Payment Date, it cannot be processed until
after purchases made from the dividends paid have been completed and credited to
Participant's Account. All dividends with a record date after the receipt of
notice of termination will be sent directly to the Participant. With respect to
the investment of Cash Purchases, unless the termination notice is received by
the Plan Administrator at least two business days prior to the commencement of
the Pricing Period, it cannot be processed until after any funds received for
Cash Purchases for that Cash Purchase Investment Date have been invested. The
Plan Administrator may terminate a Participant's Account by notice in writing
mailed to the Participant. Once termination has been effected, the Plan
Administrator will issue to the Participant, without charge, certificates for
the full shares of Common Stock held in the Participant's Account or, if the
Participant so requests, sell the full shares of Common Stock held under the
Plan, deduct brokerage commissions, transfer taxes and a service charge (if any)
and deliver the proceeds to the Participant. The Participant's interest in any
fractional share of Common Stock held in such Participant's Account at
termination will be paid in cash based on the average of the daily high and low
sales price, computed to seven decimal places, of the shares of Common Stock as
reported on the NYSE on the date of termination. A Participant also will be
entitled to the uninvested portion of any funds received for Cash Purchases if
notice of termination is received prior to the date when the Plan Administrator
becomes obligated to pay for purchased shares of Common Stock.
If a Participant disposes of all shares of Common Stock represented by
certificates registered in his own name on the books of the Company but does not
give notice of termination under the Plan, the Plan Administrator may continue
to reinvest the dividends on such Participant's shares of Common Stock under the
Plan until otherwise directed. A Participant will pay a $5.00 fee and brokerage
commissions in the event the Participant asks the Plan Administrator to sell all
of the Participant's shares of Common Stock, or a $15.00 fee and brokerage
commissions for each partial sale.
-13-
<PAGE>
A Participant who changes his or her address must notify the Plan
Administrator immediately. If a Participant changes residence to a state where
the shares of Common Stock offered pursuant to the Plan are not registered or
exempt from registration under applicable securities laws, the Company may deem
the Participant to have terminated participation in the Plan.
13. STOCK DIVIDENDS.
Any stock dividends or stock splits distributed by the Company on shares of
Common Stock held by the Plan Administrator for the Participant will be credited
to the Participant's Account. In the event the Company makes available to its
Stockholders rights to purchase additional shares of Common Stock or other
securities, the Participant will receive appropriate instructions in connection
with all such rights directly from the Plan Administrator in order to permit a
Participant to determine what action he desires to take.
14. RESPONSIBILITY OF THE PLAN ADMINISTRATOR.
The Plan Administrator shall not be liable hereunder for any act done in
good faith, or for any good faith omission to act, including without limitation,
any claims of liability (1) arising out of failure to terminate any
Participant's Account upon such Participant's death prior to receipt of notice
in writing of such death and (2) with respect to the prices at which shares of
Common Stock are purchased or sold for the Participant's Account and the times
such purchases or sales are made.
15. AMENDMENT OF PLAN.
The Plan may be amended or supplemented by the Plan Administrator or the
Company at any time or times, including the period between Dividend Payment Date
and the related Dividend Reinvestment Date. Any such amendment may include an
appointment by the Plan Administrator in its place and stead a successor bank or
other Plan Administrator under these terms and conditions. Notice will be sent
to Participants of any amendments as soon as practicable after such action by
the Company.
16. APPLICABLE LAW.
The terms and conditions of this authorization shall be governed by the
internal laws of the State of Maryland, without giving effect to principles of
conflicts of law.
17. EFFECTIVE DATE.
The date of the adoption of the Plan is October __, 1997.
-14-
<PAGE>
18. PLAN OF DISTRIBUTION.
Except to the extent the Plan Administrator purchases Common Stock in open
market transactions, the Common Stock acquired under the Plan will be sold
directly by the Company through the Plan. The Company may sell Common Stock to
Stockholders (including brokers or dealers) who, in connection with any resales
of such shares, may be deemed to be underwriters. Such shares, including shares
acquired pursuant to Request for Waivers granted with respect to the Cash
Purchase feature of the Plan, may be resold in market transactions (including
coverage of short positions) on any national securities exchange on which shares
of Common Stock trade or in privately negotiated transactions. Under certain
circumstances, it is expected that a portion of the shares of Common Stock
available for issuance under the Plan will be issued pursuant to such waivers.
The difference between the price such owners pay to the Company for shares of
Common Stock acquired under the Plan, after deduction of the applicable discount
from the Average Market Price for Cash Purchases, and the price at which such
shares are resold, may be deemed to constitute underwriting commissions received
by such owners in connection with such transactions.
Common Stock may not be available under the Plan in all states. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any Common Stock or other securities in any state or any other
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
19. INQUIRIES REGARDING THE PLAN
All correspondence and questions regarding the Plan, a Participant's
Account or the Discount Rate, Waiver Rate or Threshold Price should be directed
to:
LASER Mortgage Management, Inc.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Telephone: (973) 912-8770
Facsimile: (973) 564-7824
Attn: President
or
[Plan Administrator]
-15-
<PAGE>
20. EXECUTION.
To record the adoption of the Plan as of October __, 1997, the Company has
caused this Plan to be executed in the name and on behalf of the Company by a
duly authorized officer.
LASER MORTGAGE MANAGEMENT, INC., a
Maryland corporation
By: /s/ Michael L. Smirlock
------------------------------
Michael L. Smirlock, President
<PAGE>
Exhibit 23.1
We hereby consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus. We further consent to your filing a copy of this consent as
an exhibit to the Registration Statement. In giving such consent, we do not
admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
STROOCK & STROOCK & LAVAN LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Registration Statement No. 333-35673 of LASER
Mortgage Management, Inc. of our report dated September 26, 1997, and to the
reference to us under the heading "EXPERTS" both of which are included in the
Prospectus, which is also included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
October 28, 1997
<PAGE>
EXHIBIT 99.1
CONSENT OF WILLIAM MARSHALL
I hereby consent to the reference to me as a person who has been designated
to serve as a director of LASER Mortgage Management, Inc. under the heading "THE
COMPANY" in the Prospectus constituting a part of the Registration Statement on
Form S-11 with which this consent is filed.
<TABLE>
<S> <C>
/s/ WILLIAM MARSHALL
---------------------------------------------
Name: William Marshall
</TABLE>
Date: October 28, 1997
<PAGE>
EXHIBIT 99.2
CONSENT OF MARTIN BERNSTEIN
I hereby consent to the reference to me as a person who has been designated
to serve as a director of LASER Mortgage Management, Inc. under the heading "THE
COMPANY" in the Prospectus constituting a part of the Registration Statement on
Form S-11 with which this consent is filed.
<TABLE>
<S> <C>
/s/ MARTIN BERNSTEIN
---------------------------------------------
Name: Martin Bernstein
</TABLE>
Date: October 27, 1997
<PAGE>
EXHIBIT 99.3
CONSENT OF FREDERICK N. KHEDOURI
I hereby consent to the reference to me as a person who has been designated
to serve as a director of LASER Mortgage Management, Inc. under the heading "THE
COMPANY" in the Prospectus constituting a part of the Registration Statement on
Form S-11 with which this consent is filed.
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<S> <C>
/s/ FREDERICK N. KHEDOURI
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Name: Frederick N. Khedouri
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Date: October 28, 1997
