<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
---------------
ANWORTH MORTGAGE ASSET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
1299 OCEAN AVENUE
SANTA MONICA, CALIFORNIA 90401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
LLOYD McADAMS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1299 OCEAN AVENUE
SANTA MONICA, CALIFORNIA 90401
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
BRIAN C. LECK, ESQ. THOMAS J. POLETTI, ESQ.
MARK J. KELSON, ESQ. KATHERINE J. BLAIR, ESQ.
ALLEN, MATKINS, LECK, GAMBLE & MALLORY LLP FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN
515 SOUTH FIGUEROA STREET, SEVENTH FLOOR 9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST
LOS ANGELES, CALIFORNIA 90017-3398 BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE: (213) 622-5555 TELEPHONE: (310) 273-1870
FACSIMILE: (213) 620-8816 FACSIMILE: (310) 274-8357
</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 number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED(1) PRICE PER UNIT OFFERING PRICE(2) FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value... 8,625,000 shares $10.00 $86,250,000 $26,136.36
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,125,000 shares which the Underwriters have the option to
purchase to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457.
---------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated October 24, 1997
7,500,000 SHARES
ANWORTH MORTGAGE ASSET CORPORATION
COMMON STOCK
----------
Anworth Mortgage Asset Corporation (the "Company") was organized as a
Maryland corporation in October 1997 to invest primarily in high quality,
adjustable-rate mortgage-backed securities financed by the proceeds of this
offering and by short-term borrowings. The Company's principal business
objective is to earn income for its stockholders from the spread between the
interest income on its mortgage securities and the costs of borrowing to
finance the investment portfolio ("Net Cash Flows"). The Company will elect to
be taxed as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). Anworth Mortgage Advisory Corporation
(the "Manager") will manage the day-to-day operations of the Company, pursuant
to policies established by the Company's Board of Directors and the authority
delegated to the Manager under a management agreement to be entered into
between the Company and the Manager effective upon the closing of this Offering
(the "Management Agreement").
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by the Company. Prior to this offering there has been no market for
the shares of Common Stock of the Company. It is currently anticipated that the
initial public offering price of the Common Stock will be between $9 and $11.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made to
list the Common Stock on the American Stock Exchange under the symbol "ANH."
----------
SEE "RISK FACTORS" STARTING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK
OFFERED HEREBY. THESE RISKS INCLUDE:
. Decrease in net interest income from Mortgage
Assets (as herein defined) due to interest
rate fluctuations;
. Failure to successfully manage interest rate
risks may adversely affect results of
operations;
. Substantial leverage and potential net
interest and operating losses in connection
with borrowings;
. Inability to obtain short-term debt financing
may limit acquisitions or require disposition
of Mortgage Assets and adversely affect
results of operations;
. Inability to acquire Mortgage Assets with
favorable interest rates and terms would
adversely affect net interest income;
. Increased levels of prepayments from Mortgage
Assets may adversely affect net interest
income;
. No operating history; performance of the
Manager and its Affiliates of limited
relevance in predicting future performance;
. Dependence on key personnel and the Manager
for successful operations;
. Conflicts of interest; Manager and its
affiliates will continue to purchase Mortgage
Assets for third-party accounts;
. Failure to maintain REIT status would result
in the Company being subject to tax as a
regular corporation;
. Failure to maintain an exemption from the
Investment Company Act would adversely affect
results or operations;
. Absence of public market; interest rate
fluctuations may adversely affect the market
price of the Common Stock
. Value of Mortgage Assets may be adversely
affected by defaults on underlying mortgage
obligations; and
. Investment in Short-Term Investments (as
herein defined)
pending acquisition of Mortgage Assets may
initially adversely affect results of
operations.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE 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>
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total...................................... $ $ $
- --------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-
Allotment Option (3)...................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $ payable by the
Company, which includes up to $30,000 for expenses to be reimbursed to
Cruttenden Roth Incorporated under certain circumstances. See
"Underwriting."
(3) Assuming exercise in full of the 45-day option granted by the Company to
the Underwriters to purchase up to 1,125,000 shares of Common Stock, on the
same terms and conditions, solely to cover over-allotments. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters, subject to their right to
reject any order in whole or in part and certain other conditions. It is
expected that delivery of such shares will be made against payment therefor in
on or about , 1997.
----------
Cruttenden Roth
I N C O R P O R A T E D
The date of this Prospectus is , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
---------------------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "INTEND," "CONTINUE," OR
"BELIEVES" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS
AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. THE SAFE
HARBORS PROVIDED BY SECTION 27A AND SECTION 21E DO NOT APPLY TO INITIAL PUBLIC
OFFERINGS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 4
The Company............................................................. 4
Mortgage REIT Industry.................................................. 5
Business and Strategy................................................... 5
Mortgage Assets......................................................... 7
The Manager............................................................. 7
Summary Risk Factors.................................................... 8
The Offering............................................................ 10
Tax Status of the Company............................................... 10
Dividend Policy and Distributions....................................... 10
RISK FACTORS............................................................. 11
Decrease in Net Interest Income from Mortgage Assets Due to Interest
Rate Fluctuations...................................................... 11
Failure To Successfully Manage Interest Rate Risks May Adversely Affect
Results of Operations.................................................. 11
Substantial Leverage and Potential Net Interest and Operating Losses in
Connection with Borrowings............................................. 12
Inability to Obtain Short-Term Debt Financing May Limit Acquisition or
Require Disposition of Mortgage Assets and Adversely Affect Results of
Operations............................................................. 13
Inability to Acquire Mortgage Assets with Favorable Interest Rates and
Terms Would Adversely Affect Net Interest Income....................... 14
Increased Levels of Prepayments from Mortgage Assets May Adversely
Affect Net Interest Income............................................. 14
Manager's Lack of Experience in Utilizing Leverage and Engaging in
Hedging Transactions................................................... 15
No Operating History; Performance of the Manager and PIA of Limited
Relevance in Predicting Future Performance............................. 15
Dependence on the Manager for Successful Operations..................... 15
Conflicts of Interest; Manager and PIA Will Continue to Purchase
Mortgage Assets for Third-Party Accounts............................... 16
Value of Mortgage Assets May Be Adversely Affected by Defaults on
Underlying Mortgage Obligations........................................ 17
Value of Mortgage Loans May Be Adversely Affected by Characteristics of
Underlying Property and Borrower Credit and Other Considerations....... 17
Failure to Maintain REIT Status Would Result in the Company Being
Subject to Tax as a Regular Corporation................................ 18
Failure to Maintain an Exemption from the Investment Company Act Would
Adversely Affect Results of Operations................................. 19
Absence of Public Market; Interest Rate Fluctuations May Adversely
Affect the Market Price of the Common Stock............................ 20
Investment in Short-Term Investments Pending Acquisition of Mortgage
Assets May Initially Adversely Affect Results of Operations............ 20
Active Formation and Operation of Competing Mortgage REITs May Adversely
Affect the Market Price of the Common Stock............................ 20
Risk of Adverse Tax Treatment of Excess Inclusion Income................ 20
Future Revisions in Policies and Strategies at the Discretion of the
Board of Directors..................................................... 21
Effect of Future Offerings of Debt and Equity on Market Price of the
Common Stock........................................................... 21
Restrictions on Ownership of the Common Stock........................... 21
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
USE OF PROCEEDS........................................................... 23
DIVIDEND AND DISTRIBUTION POLICY.......................................... 23
CAPITALIZATION............................................................ 24
BUSINESS AND STRATEGY..................................................... 25
General.................................................................. 25
Strategy................................................................. 25
Operating Policies and Programs.......................................... 26
Asset/Liability Management Policy........................................ 29
Description of Mortgage Assets........................................... 32
Competition for Mortgage Assets.......................................... 38
Other Policies........................................................... 38
Future Revisions in Policies and Strategies.............................. 39
Legal Proceedings........................................................ 39
MANAGEMENT OF THE COMPANY................................................. 40
Directors and Executive Officers......................................... 40
Limitation of Liability and Indemnification.............................. 41
Executive Compensation................................................... 42
Stock Options............................................................ 42
THE MANAGER............................................................... 44
The Management Agreement................................................. 45
Management Compensation.................................................. 46
Expenses................................................................. 47
Certain Relationships; Conflicts of Interest............................. 48
Limits of Responsibility................................................. 49
SECURITY OWNERSHIP........................................................ 50
DESCRIPTION OF CAPITAL STOCK.............................................. 50
General.................................................................. 50
Repurchase of Shares and Restrictions on Transfer........................ 50
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS................................................................... 52
Removal of Directors..................................................... 53
Business Combinations.................................................... 53
Control Share Acquisition................................................ 53
Amendment to the Charter................................................. 54
Dissolution of the Company............................................... 54
Advance Notice of Director Nominations and New Business.................. 54
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Charter and Bylaws............................................... 55
Transfer Agent........................................................... 55
FEDERAL INCOME TAX CONSIDERATIONS......................................... 55
General.................................................................. 55
Opinion of Special Tax Counsel........................................... 56
Requirements for Qualification as a REIT................................. 56
Termination or Revocation of REIT Status................................. 59
Taxation of the Company.................................................. 60
Taxable Subsidiaries..................................................... 60
Taxation of Stockholders................................................. 61
Taxation of Tax-Exempt Entities.......................................... 62
State and Local Taxes.................................................... 62
Certain United States Federal Income Tax Considerations Applicable to
Foreign Holders......................................................... 62
New Tax Legislation...................................................... 64
ERISA CONSIDERATIONS...................................................... 64
DIVIDEND REINVESTMENT PLAN................................................ 65
UNDERWRITING.............................................................. 66
LEGAL MATTERS............................................................. 67
EXPERTS................................................................... 67
ADDITIONAL INFORMATION.................................................... 68
GLOSSARY.................................................................. 69
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The summary information below should be read in conjunction with and is
qualified in its entirety by the detailed information appearing elsewhere in
this Prospectus. Capitalized terms used herein shall have the definitive
meanings assigned to them in the Glossary. Unless otherwise indicated, the
information in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised.
This prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
THE COMPANY
The Company was formed in October 1997 to invest primarily in adjustable-rate
mortgage securities that are issued or guaranteed by the United States
government or agencies thereof and other high-quality mortgage securities. The
Company will attempt to enhance its portfolio yield by also investing in a
variety of higher yielding mortgage securities, mortgage loans and short-term
investments that meet the Company's investment criteria. The Company will
utilize the equity capital raised in this Offering and short term borrowings to
seek to generate income based on the difference between the yield on its
mortgage assets and the cost of its borrowings. The Company will elect to be
taxed as a REIT under the Code, and therefore will not generally be subject to
federal taxes on its income to the extent it distributes its net income to its
stockholders and maintains its qualification as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Distribution
Requirement."
The goal of the Company is to provide its stockholders with an efficient
vehicle to participate in the mortgage securities market and to generate a
competitive yield through its prudent use of leverage and active management of
the asset/liability yield spread.
The Company intends to acquire Mortgage Assets primarily in the secondary
mortgage market through the operational expertise and market relationships of
the officers of its Manager, Anworth Mortgage Advisory Corporation. The Manager
will manage the day-to-day operations of the Company, pursuant to the policies
established by the Company's Board of Directors and the authority delegated to
the Manager under the Management Agreement. The Manager is under common control
with Pacific Income Advisers, Inc. ("PIA"), an investment advisory firm
organized in 1986 that manages an investment portfolio for institutional and
individual clients, which at September 30, 1997 totalled over $5 billion,
including over $900 million in mortgage securities. The Company's and the
Manager's management team are selected members of PIA's management, who have
significant experience and expertise in investing in mortgage securities.
Mr. Lloyd McAdams, the Company's founder, is the Chairman of the Board and
Chief Investment Officer of PIA and has 25 years of experience in investment
management, including management of mortgage-backed securities. In addition,
the management of the Company and the Manager have an average of 10 years of
experience in investment management. The Company has elected to be externally
managed by the Manager to take advantage of the expertise and economies of
scale associated with the Manager while avoiding having to duplicate
administrative functions and incurring the costs of creating a new
administrative infrastructure.
The Company will employ a strategy of attempting to increase profitability
through growth in asset volume achieved by leverage based upon short-term
borrowing. The Company intends to use short-term borrowings utilizing its
Mortgage Assets as collateral and then to acquire additional Mortgage Assets.
The Company expects these collateralized borrowings will result in a debt-to-
equity ratio of between 8:1 and 12:1, although the ratio may vary from time to
time based upon market conditions and other factors deemed relevant by the
Manager and the Company's Board of Directors. The Company intends to manage
actively, on an aggregate basis, both the interest rate indices and interest
rate adjustment periods of its borrowings against the interest rate indices and
interest rate adjustment periods on its Mortgage Assets.
4
<PAGE>
The Company may enter into hedging transactions to mitigate the effects of
interest rate fluctuations or other market movements. The Company may purchase
interest rate caps, interest rate swaps and similar instruments to mitigate the
risk of its short-term borrowings increasing at a greater rate than the yield
on its Mortgage Assets during a period of rising interest rates. The Company
does not intend to use hedging instruments for speculative purposes.
MORTGAGE REIT INDUSTRY
Management believes that the growth of the mortgage REIT industry is the
result of fundamental mortgage industry changes, including the growth of the
secondary mortgage market, new securitization techniques which facilitate
funding of leveraged mortgage portfolios and the ability of REITs to pass
through earnings to stockholders without incurring entity-level federal income
tax. Total residential mortgage debt securitized into mortgage securities has
grown from approximately $110 billion in 1980 to approximately $1.9 trillion in
1996, driven by growth in residential mortgage debt outstanding from
approximately $965 billion to approximately $3.9 trillion during the same
period, according to the Mortgage Market Statistical Annual for 1997.
Management believes that the maturity and growth of the secondary mortgage
market has resulted in the creation of higher-yielding and more complex
mortgage securities than comparable duration U.S. Government and agency issued
debt. Higher yields, however, come with risks (such as prepayment risk) that
are unique to these mortgage securities. The quantitative nature of the
analysis of these risks has imposed increasing emphasis on the mathematical
capabilities of the individuals that manage mortgage assets and the use of
sophisticated analytical tools for the management of mortgage risk.
BUSINESS AND STRATEGY
The principal business objective of the Company is to provide its
stockholders with an efficient vehicle to participate in the mortgage
securities market and to generate a competitive yield through its prudent use
of leverage and active management of the asset/liability yield spread.
Following is the Company's strategy to achieve its business objective:
Investment Strategy
The Company intends to apply a disciplined approach to managing its
investments in an attempt to achieve competitive yields while managing
portfolio risk. The Company will utilize the proceeds of this Offering and
short-term borrowings to seek to generate income based on the difference
between the yield on its Mortgage Assets and the cost of its borrowings.
Management believes that the experience of its officers in mortgage investment
management, their extensive mathematical training and their employment of
advanced mortgage analytical tools, should provide the Company with competitive
advantages in the analysis of and risk control of its mortgage investments. The
Company will seek to minimize prepayment risk by structuring a diversified
portfolio with a variety of prepayment characteristics and by analyzing the
prepayment duration of the Mortgage Assets, as well as the deviations between
projected and realized prepayment rates.
5
<PAGE>
Financing Strategy
The Company will employ a strategy of attempting to increase profitability
through growth in Mortgage Asset volume achieved by leverage based upon short-
term borrowings, primarily reverse repurchase agreements and dollar-roll
agreements. The Company generally expects to maintain a debt-to-equity ratio of
between 8:1 and 12:1, although the ratio may vary from time to time depending
on market conditions and other factors deemed relevant by the Manager and the
Company's Board of Directors. In financing its Mortgage Asset portfolio, the
Company will employ a maturity structure for its borrowed funds designed to
lower borrowing costs, preserve the Company's capital base and generate net
interest income. The Company's borrowings will be short-term and the Company
will attempt to actively manage, on an aggregate basis, the interest rate
indices and interest rate adjustment periods of its borrowings against the
interest rate indices and interest rate adjustment periods on its Mortgage
Assets.
Over time, to the extent the Company believes it can lower its cost of funds
or increase its return to investors, it may seek to raise additional capital
through accessing the capital markets. In addition, to the extent the Company
develops appropriate infrastructure, it may engage in securitizations to raise
additional funds for operations.
Risk Management Strategy
Interest Rate and Volatility Risk. The Company intends to use mathematical
modeling and quantitative analysis to monitor the interest rate sensitivity of
its Mortgage Asset portfolio. The analysis includes the use of mathematical
assumptions regarding the effect of mortgage loan prepayments and interest rate
caps incorporated in most adjustable-rate mortgage securities, as well as
interest rate volatility on its portfolio of Mortgage Assets. Comparison of
interest rate sensitivity factors to the quantitative and qualitative nature of
the Company's borrowings will provide the Company with a measure of the impact
that interest rate movements could have on the Company's net interest income
based on the difference between its yield on its Mortgage Assets and its
borrowing costs. Management intends to evaluate continually these mathematical
assumptions and, if necessary, adjust its Mortgage Asset portfolio accordingly.
Credit Risk. The Company will invest primarily in adjustable rate mortgage
securities that are issued or guaranteed by the United States government or an
agency thereof and other high-quality mortgage securities. The Company will
continually monitor the credit quality of its Mortgage Assets and attempt to
maintain appropriate capital levels for allowances and possible credit losses.
The Company will manage the credit risk of its Mortgage Assets through, among
other activities, (i) complying with the Company's policies with respect to
credit risk concentration, (ii) actively monitoring the ongoing credit quality
and servicing of its Mortgage Assets and (iii) attempting to maintain
appropriate capital levels and allowances for possible credit losses.
Hedging. The Company may enter into hedging transactions designed to protect
itself to varying degrees against interest rate changes. The Company may
purchase interest rate caps, interest rate swaps and similar instruments to
mitigate the risk of interest rates on its short-term borrowings increasing at
a greater rate than the yields on its Mortgage Assets during a period of rising
interest rates. The Company may also, to the extent consistent with its
qualifications as a REIT and Maryland law, utilize financial futures contracts
and put and call options on financial futures contracts and trade forward
contracts as a hedge against future interest rate changes. However, no hedging
strategy can completely insulate the Company from interest rate risks and
market movement, and the federal tax laws applicable to REITs may substantially
limit the Company's ability to engage in hedging transactions.
There can be no assurance that the Company will successfully implement its
strategies. See "Risk Factors" for a discussion of factors that could adversely
affect the Company's ability to successfully implement its strategies.
6
<PAGE>
MORTGAGE ASSETS
The Company's Mortgage Assets are currently expected to consist primarily of
adjustable-rate mortgage securities ("Mortgage Securities"). At least 70% of
the total assets to be acquired by the Company will be High Quality adjustable-
rate Mortgage Securities and Short-Term Investments (investments with an
average life of one year or less). "High Quality" as used herein means either
(i) securities that are rated within one of the two highest rating categories
by at least one of either Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") or Moody's Rating Service,
Inc. ("Moody's" and together with Standard & Poor's, the "Rating Agencies"), or
(ii) securities that are unrated but are either obligations the United States
or obligations guaranteed by the United States government or an agency or
instrumentality of the United States government, or (iii) securities that are
unrated or whose ratings have not been updated but are determined to be of
comparable quality (by the rating standards of at least one of the Rating
Agencies) to a High Quality rated mortgage security on the basis of credit
enhancement features that meet the High Quality credit criteria approved by the
Company's Board of Directors.
The remainder of the Company's investment portfolio, comprising not more than
30% of its total assets, may consist of Mortgage Assets which are unrated, or,
if rated, are less than High Quality, including (i) adjustable-rate mortgage
loans secured by first liens on single-family (one-to-four units) residential
properties ("Mortgage Loans"), (ii) Mortgage Securities backed by loans on
single-family, multi-family, commercial, or other real estate-related
properties which are rated at least Investment Grade (rated at least "BBB" or
"Baa" by Standard & Poor's or Moody's, respectively) or (as to single-family
and multi-family Mortgage Securities) the equivalent, if not rated, and (iii)
Other Mortgage Securities.
Fixed-rate Mortgage Assets may also be acquired, including the acquisition of
such assets for the purpose of being combined with hedging instruments to
obtain investment characteristics similar to adjustable-rate Mortgage Assets.
THE MANAGER
The Manager is an affiliate of PIA and its employees as of the date hereof
are also employees of PIA. Established in 1986, PIA engages in investment
management as its primary business and specializes in asset management for
corporate pension and profit-sharing funds, endowments and foundations. PIA
also manages assets for high net worth individuals and mutual funds. At
September 30, 1997, PIA had more than $5.0 billion in assets under management,
including over $900 million in mortgage securities as part of its overall
investment strategy for its clients. The members of PIA average approximately
10 years of service with PIA and PIA has managed mortgage capital and short-
duration mortgage securities for over 11 years. However, PIA does not leverage
any of its investment portfolios and has never managed an investment portfolio
with similar investment objectives as the Company's.
The Manager will implement the Company's business strategy on a day-to-day
basis and perform certain services for the Company, pursuant to policies
established by the Company's Board of Directors and the authority delegated to
the Manager under the Management Agreement. With respect to the Company's
investment strategy, the Manager will employ advanced mortgage analytical tools
to construct a diversified Mortgage Asset portfolio. With respect to the
Company's financing strategy, the Manager will arrange for various types of
financing for the Company and will manage actively the interest rate structure
of the Company's assets and liabilities and monitor the Company's portfolio
leverage. With respect to the Company's risk management strategy, the Manager
will continually evaluate the interest rate sensitivity and volatility of the
portfolio and the mathematical assumptions used to calculate such sensitivities
and, if necessary, attempt to adjust the portfolio accordingly. The Manager
will monitor the credit quality of each asset in the Company's portfolio and
will seek to ensure that the overall credit quality of the portfolio is in
keeping with the
7
<PAGE>
Company's credit policies as adopted by the Company's Board of Directors. The
Manager will evaluate the Company's interest rate risk levels and will perform
such analyses as may be required to determine what types and amounts of hedging
transactions are advisable for the Company given the configuration of its
portfolio and will seek to execute trades to maintain hedges. The Manager will
be required to perform other services as may be required in the operation of
the Company, such as (i) providing regular reports regarding the Company to the
Board of Directors, (ii) monitoring the Company's status as a REIT from tax and
compliance standpoints and (iii) providing managerial, administrative and
management information systems support for the Company.
Pursuant to a management agreement (the "Management Agreement") between the
Company and the Manager, the Company will pay the Manager an annual base
management fee based on Average Net Invested Assets, payable monthly in
arrears, equal to 1% of the first $300 million of Average Net Invested Assets,
plus 0.8% of the portion above $300 million of Average Net Invested Assets.
Average Net Invested Assets is generally defined as total assets less total
debt incurred to finance assets; accordingly, incurring debt to finance asset
purchases does not necessarily increase Average Net Invested Assets.
The Company will also pay the Manager, as incentive compensation for each
fiscal quarter, an amount equal to 20% of the Net Income of the Company, before
incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten Year U.S. Treasury Rate (average
of weekly average yield to maturity for U.S. Treasury securities (adjusted to a
constant maturity of 10 years), as published weekly by the Federal Reserve
Board during a quarter) plus 1%. A deduction for the Company's interest
expenses for borrowed money is taken in calculating Net Income. "Return on
Equity" is computed on Average Net Worth and has no necessary correlation with
the actual distributions received by stockholders. The incentive compensation
calculation and payment to the Manager will be made quarterly in arrears before
any income distributions are made to stockholders for the corresponding period.
See "The Manager --Management Compensation" for a more detailed explanation of
the management fee arrangements and the "Glossary" for definitions of the terms
"Average Net Invested Assets", "Average Net Worth", "Net Income" and "Return on
Equity".
The Company will enter into the Management Agreement with the Manager
effective upon the closing of the Offering for an initial term of five years.
Thereafter, the Management Agreement will be automatically renewed for
additional one-year terms unless terminated by the Company or the Manager upon
written notice. Except in the case of a termination or non-renewal by the
Company for cause, upon termination or non-renewal of the Management Agreement
by the Company, the Company is obligated to pay the Manager a termination or
non-renewal fee. See "The Manager--The Management Agreement."
SUMMARY RISK FACTORS
Each prospective purchaser of the Common Stock offered hereby should review
"Risk Factors" beginning on page 11 for a discussion of certain factors that
should be considered before investing in the Common Stock, including the
following:
. decrease in net interest income from Mortgage Assets due to interest
rate fluctuations;
. failure to successfully manage interest rate risks may adversely affect
results of operations;
. substantial leverage and potential net interest and operating losses in
connection with borrowings;
. inability to obtain short-term debt financing may limit acquisition or
require disposition of Mortgage Assets and adversely affect results of
operations;
8
<PAGE>
. inability to acquire Mortgage Assets with favorable interest rates and
terms would adversely affect net interest income;
. increased levels of prepayments from Mortgage Assets may adversely
affect net interest income;
. Manager's lack of experience in utilizing leverage and engaging in
hedging transactions;
. no operating history; performance of the Manager and PIA of limited
relevance in predicting future performance;
. dependence on key personnel and the Manager for successful operations;
. conflicts of interest; Manager and its affiliates will continue to
purchase Mortgage Assets for third-party accounts;
. value of Mortgage Assets may be adversely affected by defaults on
underlying mortgage obligations;
. value of Mortgage Loans may be adversely affected by characteristics of
underlying properties and borrower credit and other considerations;
. failure to maintain REIT status would result in the Company being
subject to tax as a regular corporation;
. failure to maintain an exemption from the Investment Company Act would
adversely affect results of operations;
. absence of public market; interest rate fluctuations may adversely
affect the market price of the Common Stock;
. investment in Short-Term Investments pending acquisition of Mortgage
Assets may initially adversely affect results of operations;
. active formation and operation of competing mortgage REITs may adversely
affect the market price of the Common Stock;
. risk of adverse tax treatment of excess inclusion income;
. future revisions in policies and strategies at the discretion of the
Board of Directors;
. effect of future offerings of debt and equity on market price of the
Common Stock; and
. restrictions on ownership of the Common Stock.
9
<PAGE>
THE OFFERING
Common Stock offered by the
Company............................ 7,500,000 Shares(1)
Common Stock to be outstanding
after the Offering................. 7,500,100 Shares(1)(2)
Use of Proceeds..................... To provide funding for the Company's
investment operations and for general
corporate purposes.
Proposed American Stock Exchange
Symbol............................. ANH
- --------
(1) Assumes that the Underwriters' option to purchase up to an additional
1,250,000 shares to cover overallotments is not exercised.
(2) Excludes 750,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Option and Awards Plan (the "Stock Option and Awards
Plan"). Options to acquire 370,000 shares will be granted to officers and
directors of the Company upon the effective date of this Offering at a
price equal to the initial public offering price. See "Management of the
Company--Stock Options."
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "REIT Provisions of the
Code"), commencing with its taxable year ending December 31, 1997, and believes
its organization and manner of operation will enable it to meet the
requirements for qualification as a REIT. To maintain REIT status, an entity
must meet a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its Taxable Income to
its stockholders. As a REIT, the Company generally will not be subject to
federal income tax on net income it distributes currently to its stockholders.
If the Company fails to qualify as a REIT in any taxable year, it will be
subject to federal income tax at regular corporate rates. See "Federal Income
Tax Considerations" and "Risk Factors--Failure to Maintain REIT Status Would
Result in the Company Being Subject to Tax as a Regular Corporation." Even if
the Company qualifies for taxation as a REIT, the Company may be subject to
Federal, state and local taxes on its income.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, the Company intends to make annual
distributions to its stockholders of at least 95% of its Taxable Income (which
does not necessarily equal net income as calculated in accordance with GAAP).
The dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions in excess of those required for the Company to
maintain REIT status will be made by the Company at the discretion of the Board
of Directors and will depend on the Taxable Income of the Company, the
financial condition of the Company and such other factors as the Board of
Directors deems relevant. The Board of Directors has not established a minimum
distribution level.
The Company anticipates adopting in the future a dividend reinvestment plan
("DRP") that allows stockholders of the Company that have enrolled in the DRP
to reinvest their dividends automatically in additional shares of Common Stock
at a discount from the current market price, in some cases. The shares of
Common Stock to be acquired for distribution under the DRP may be purchased by
the Company on the open market or may be issued directly by the Company at the
option of the Company. The shares issuable by the Company pursuant to the DRP
are not being registered by means of the Registration Statement of which this
Prospectus forms a part. See "Dividend Reinvestment Plan."
10
<PAGE>
RISK FACTORS
Before investing in the shares of Common Stock offered hereby, prospective
investors should give special consideration to the information set forth
below, in addition to the information set forth elsewhere in this Prospectus.
The following risk factors are interrelated and, consequently, investors
should treat such risk factors as a whole. This Prospectus may contain
forward-looking statements that may be identified by the use of forward-
looking terminology, such as "may," "will," "should," "expect," "anticipate,"
"estimate," "intend," "continue," or "believes" or the negative thereof or
other variations thereon or comparable terminology. The matters set forth
under "Risk Factors" constitute cautionary statements identifying important
factors with respect to any forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.
An investment in the Company involves various risks, including the risk that
an investor can lose capital. While the Company will strive to attain its
objectives through, among other things, the Manager's analysis and portfolio
management skills, there is no guarantee of successful performance, that such
objectives can be reached or that a positive return can be achieved.
DECREASE IN NET INTEREST INCOME FROM MORTGAGE ASSETS DUE TO INTEREST RATE
FLUCTUATIONS
Interest Rate Caps on Mortgage Assets. Adjustable-rate Mortgage Assets are
typically subject to periodic and lifetime interest rate caps that limit the
amount an adjustable-rate Mortgage Asset's interest rate can change during any
given period, as well as the minimum rate payable. The Company's borrowings
will not be subject to similar restrictions. Hence, in a period of increasing
interest rates on its borrowings could increase without limitation by caps,
while the interest rates on its Mortgage Assets could be so limited. This
problem will be magnified to the extent the Company acquires Mortgage Assets
that are not fully indexed. Further, some adjustable-rate Mortgage Assets may
be subject to periodic payment caps that result in some portion of the
interest being deferred and added to the principal outstanding. This could
result in receipt by the Company of less cash income on its adjustable-rate
Mortgage Assets than is required to pay interest on the related borrowings.
These factors could lower the Company's net interest income or cause a net
loss during periods of rising interest rates, which would negatively impact
the Company's financial condition, cash flows and results of operations.
Borrowings. The Company intends to fund the purchase of a substantial
portion of its adjustable-rate Mortgage Assets with borrowings that may have
interest rates based on indices and repricing terms similar to, but of
somewhat shorter maturities than, the interest rate indices and repricing
terms of the Mortgage Assets. Thus, the Company anticipates that in most cases
the interest rate indices and repricing terms of its Mortgage Assets and its
funding sources will not be identical, thereby creating an interest rate
mismatch between assets and liabilities. While the historical spread between
relevant short-term interest rate indices has been relatively stable, there
have been periods, especially during the 1979-1982 and 1994 interest rate
environments, when the spread between such indices was volatile. During
periods of changing interest rates, such interest rate mismatches could
negatively impact the Company's Net Income, dividend yield and the market
price of the Common Stock.
FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE RISKS MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS
Management will follow a policy intended to minimize the impact of interest
rate changes. However, developing an objective interest rate risk strategy is
complex and no strategy can completely insulate the Company from risks
associated with interest rate changes. In addition, hedging strategies
typically involve transaction costs that increase dramatically as the period
covered by the hedging transaction increases and that may also increase during
periods of rising and fluctuating interest rates. The REIT Provisions of the
Code may substantially limit Management's ability to engage in these hedging
transactions, and may prevent Management from effectively implementing hedging
strategies that it determines, absent such restrictions, would best insulate
the Company from the risks associated with changing interest rates.
11
<PAGE>
The adjustable-rate Mortgage Assets that the Company intends to acquire are
generally subject to periodic and lifetime interest rate caps. The Company may
purchase Mortgage Derivative Securities to seek to mitigate the negative
impacts of those interest-rate caps in a rising interest rate environment.
Hedging techniques involving the use of Mortgage Derivative Securities are
highly complex and may produce volatile returns. The financial futures
contracts and options thereon in which the Company may invest are subject to
periodic margin calls that would result in additional costs to the Company.
Financial futures held at fiscal year end are also required to be marked to
market and valued for tax purposes, which could result in taxable income to
the Company with no corresponding cash available for distribution. There can
be no assurance that these hedging techniques will have a beneficial impact on
the Net Income of the Company and the dividend yield of the Common Stock.
If the Company purchases interest rate caps or other interest rate
agreements to hedge against lifetime and periodic rate or payment caps, and
the provider of interest rate agreements becomes financially unsound or
insolvent, the Company may be forced to unwind its interest rate agreements
with such provider and may take a loss on such interest rate agreements.
Although the Company intends to purchase interest rate agreements only from
financially sound institutions and to monitor the financial strength of such
institutions on a periodic basis, no assurance can be given that the Company
can avoid such third party risks.
SUBSTANTIAL LEVERAGE AND POTENTIAL NET INTEREST AND OPERATING LOSSES IN
CONNECTION WITH BORROWINGS
The Company intends to employ a leveraging strategy of increasing the size
of its Mortgage Assets portfolio by borrowing against its existing Mortgage
Assets to acquire additional Mortgage Assets. The Company's financing strategy
is designed to increase the size of its Mortgage Asset investment portfolio by
borrowing a substantial portion (which may vary depending upon the mix of the
Mortgage Assets in the Company's portfolio and the Company's requirements to
such mix of Mortgage Assets) of the market value of its Mortgage Assets. If
the coupon 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 Company's substantial leverage.
The Company expects to maintain a debt-to-equity ratio of between 8:1 and
12:1, although the ratio may vary from time to time depending upon market
conditions and other factors deemed relevant by management. However, the
Company is not limited under its Bylaws in respect of the amount of its
borrowings, whether secured or unsecured, and the debt-to-equity ratio could
at times be greater than 12:1. For purposes of calculating the debt-to-equity
ratio, the Company's equity equals the value of the Company's investment
portfolio on a mark-to-market basis less the book value of the Company's
obligations under repurchase agreements, dollar-roll agreements and other
collateralized borrowings. In connection with its hedging strategy, the
Company from time to time will attempt to reduce the leverage associated with
its portfolio. Failure to successfully reduce leverage due to adverse market
conditions or other factors, could adversely affect Net Income.
The ability of the Company to achieve its investment objectives depends on
its ability to borrow money in sufficient amounts and on favorable terms.
Through increases in haircuts (i.e., the over-collateralization amount
required by a lender), 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, the Company may not be able to achieve the degree of leverage
it believes to be optimal, which any cause the Company to be less profitable
than it would be otherwise. In addition, as a result of the Company's
intention to structure its investment portfolio to qualify for an exemption
from regulation as an investment company, the Company may be limited in the
types and amounts of Mortgage Assets it can purchase which, in turn, may
affect the ability of the Company to achieve the degree of leverage it
believes to be optimal.
12
<PAGE>
A majority of the Company's borrowings are expected to be in the form of
collateralized borrowings, primarily reverse repurchase agreements and dollar-
roll agreements which will be "marked to market" based on the market value of
the Mortgage Assets pledged to secure the specific borrowings at a given time.
Certain of the Company's Mortgage Assets may be cross-collateralized to secure
multiple borrowing obligations of the Company to a particular lender. The
Company's leveraging strategy may create instability in the Company's
operations. A decline in the market value of such Mortgage Assets could limit
the Company's ability to borrow or result in lenders initiating margin calls.
The Company could be required to sell Mortgage Assets under adverse market
conditions in order to maintain liquidity. If these sales were made at prices
lower than the carrying value of the Mortgage Assets, the Company would
experience losses. A default by the Company under its collateralized
borrowings could also result in a liquidation of the collateral, including any
cross-collateralized Mortgage Assets, and resulting loss of the difference
between the value of the collateral and the amount borrowed. To the extent the
Company is compelled to liquidate Mortgage Assets qualifying as Qualified REIT
Real Estate Assets to repay borrowings, its compliance with the REIT rules
regarding asset and sources of income requirements could be negatively
affected, ultimately jeopardizing the Company's status as a REIT. See "Federal
Income Tax Considerations--Requirements for Qualification as a REIT."
INABILITY TO OBTAIN SHORT-TERM DEBT FINANCING MAY LIMIT ACQUISITION OR REQUIRE
DISPOSITION OF MORTGAGE ASSETS AND ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company will rely on short-term borrowings to fund acquisitions of
Mortgage Assets. Accordingly, the ability of the Company to achieve its
investment objectives depends on its ability to borrow money in sufficient
amounts and on favorable terms and on its ability to renew or replace on a
continuous basis its maturing short-term borrowings. The Company currently has
no commitments with lenders. In addition, the Company may be dependent upon a
few lenders to provide the primary credit facilities for its Mortgage Asset
purchases. Any failure to obtain or renew adequate funding under these
facilities or other financings on favorable terms could have a material
adverse effect on the Company's operations.
In the event the Company is not able to renew or replace maturing
borrowings, it could be required to sell Mortgage Assets under adverse market
conditions and could incur capital losses as a result. In addition, in such
event, the Company may be required to terminate hedge positions, which could
result in further losses to the Company. A number of such factors in
combination may cause difficulties for the Company, including a possible
liquidation of a major portion of its Mortgage Assets at disadvantageous
prices with consequent losses, which would have a material adverse effect on
the Company and could render it insolvent.
Any event or development such as a sharp rise in interest rates or
increasing market concern about the value or liquidity of a type or types of
Mortgage Assets in which the Company's Mortgage Assets portfolio is
concentrated will reduce the market value of the Mortgage Assets, which would
likely cause lenders to require additional collateral. In such event, the
Company's ability to raise additional funds through borrowings could be
limited, it may be required to purchase assets under unfavorable market
conditions to ensure the proper asset mix, or, if it was unable to fund
additional asset purchases, it could default under its lines of credit.
Substantially all of the Company's Mortgage Assets can be expected to be
pledged to secure reverse repurchase agreements, dollar-roll agreements, bank
borrowings or other credit arrangements. 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 Mortgage Assets. In the event of the bankruptcy of a counter-party with
whom the Company has a reverse repurchase agreement, the Company might
experience difficulty recovering its pledged Mortgage Assets.
Certain of the Company's Mortgage Assets may be cross-collateralized to
secure multiple borrowing obligations of the Company to a single lender. A
decline in the market value of such assets could limit the
13
<PAGE>
Company's ability to borrow or result in lenders initiating margin calls
(i.e., requiring a pledge of cash or additional Mortgage Assets to reestablish
the ratio of the amount of the borrowing to the value of the collateral). The
Company could be required to sell Mortgage Assets under adverse market
conditions in order to maintain liquidity. If these sales were made at prices
lower than the carrying value of its Mortgage Assets, the Company would
experience losses. A default by the Company under its collateralized
borrowings could also result in a liquidation of the collateral, including any
cross-collateralized assets, and a resulting loss of the difference between
the value of the collateral and the amount borrowed. Additionally, in the
event of a bankruptcy of the Company, certain reverse repurchase agreements
may qualify for special treatment under the Bankruptcy Code, the effect of
which is among other things, to allow the creditors under such agreement to
avoid the automatic stay provisions of the Bankruptcy Code and to liquidate
the collateral under such agreements without delay. Conversely, in the event
of a bankruptcy of a party with whom the Company had a reverse repurchase
agreement, the Company might experience difficulty repurchasing the collateral
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, if and when received, may be
substantially less than the damages actually suffered by the Company. Although
the Company intends to enter into reverse repurchase agreements with several
different parties to reduce such third party risks, no assurance can be given
that the Company will be able to avoid such risks. To the extent the Company
is compelled to liquidate Mortgage Assets classified as Qualified REIT Real
Estate Assets to repay borrowings, the Company may be unable to comply with
the REIT asset and income tests, possibly jeopardizing the Company's status as
a REIT.
INABILITY TO ACQUIRE MORTGAGE ASSETS WITH FAVORABLE INTEREST RATES AND TERMS
WOULD ADVERSELY AFFECT NET INTEREST INCOME
The Company's Net Income will depend, in large part, on Management's ability
to acquire Mortgage Assets on acceptable terms and at favorable spreads over
the Company's borrowing costs. As of the date of this Prospectus, no specific
Mortgage Assets have been identified for acquisition by Management. There can
be no assurance that Management will be able to acquire sufficient amounts of
Mortgage Assets at spreads above the Company's cost of funds. In acquiring
Mortgage Assets, the Company will compete with other REITs, investment banking
firms, savings and loan associations, banks, mortgage bankers, insurance
companies, mutual funds, other lenders, GNMA, Fannie Mae, FHLMC and other
entities purchasing Mortgage Assets, most of which have greater financial
resources than the Company. In addition, there are several REITs similar to
the Company, and others may be organized in the future. The effect of the
existence of additional REITs may be to increase competition for the available
supply of Mortgage Assets suitable for purchase by the Company. Increased
competition for the acquisition of eligible Mortgage Assets or a diminution in
the supply could result in higher prices and, thus, lower yields on such
Mortgage Assets that could further narrow the yield spread over borrowing
costs. It could also result in the Company's inability to deploy its funds in
acceptable investments.
The availability of Mortgage Assets meeting the Company's criteria is
dependent upon, among other things, the level of activity and quality of and
demand for securities in the mortgage securitization market. The market for
mortgage securities is dependent upon various factors including the size and
level of activity in the residential real estate lending market, the level of
and difference between short-term and long-term interest rates, incentives for
issuers to securitize and demand for Mortgage Securities by institutional
investors. The size and level of activity in the residential real estate
lending market depend on various factors, including the level of interest
rates, regional and national economic conditions and inflation and deflation
in residential real estate values. To the extent Management is unable to
acquire a sufficient volume of Mortgage Assets meeting the Company's criteria,
the Company's results of operations would be adversely affected.
INCREASED LEVELS OF PREPAYMENTS FROM MORTGAGE ASSETS MAY ADVERSELY AFFECT NET
INTEREST INCOME
Prepayments of Mortgage Assets could adversely affect the Company's results
of operations in several ways. Management anticipates that a substantial
portion of the adjustable-rate Mortgage Assets to be acquired by the Company
may bear initial "teaser" interest rates that are lower than their "fully
indexed" rates (the
14
<PAGE>
applicable index plus a margin). In the event that such an adjustable-rate
Mortgage Asset is prepaid prior to or soon after the time of adjustment to a
fully indexed rate, the Company will have held the Mortgage Asset while it was
less profitable and lost the opportunity to receive interest at the fully
indexed rate over the expected life of the adjustable rate Mortgage Asset. In
addition, the prepayment of any Mortgage Asset that had been purchased at a
premium by the Company would result in the immediate write-off of any
remaining capitalized premium amount and consequent reduction of the Company's
net interest income by such amount. Finally, in the event that the Company is
unable to acquire new Mortgage Assets to replace the prepaid Mortgage Assets,
its financial condition, cash flows and results of operations could be
materially adversely affected.
Prepayment rates generally increase when prevailing interest rates fall
below the interest rates on existing Mortgage Assets. Prepayment experience
also may be affected by the geographic location of the real estate securing
the Mortgage Assets, the assumability of the Mortgage Assets, the ability of
the borrower to obtain or convert to a fixed-rate Mortgage Loan, conditions in
the housing and financial markets, and general economic conditions. The level
of prepayments is also subject to the same seasonal influences as the
residential real estate industry, with prepayments generally being greatest in
the summer months and lower in the winter months.
MANAGER'S LACK OF EXPERIENCE IN UTILIZING LEVERAGE AND ENGAGING IN HEDGING
TRANSACTIONS
The Company will seek to generate earnings based upon the spread between the
yield on its Mortgage Assets and the cost of its borrowings, and by means of
increasing the volume of its Mortgage Asset portfolio through leverage. The
Company's ability to successfully implement its strategy may be limited by the
fact that the Company has never managed a portfolio using leverage to the
degree that the Company expects will be required in order to increase Mortgage
Asset volume. Additionally, the Manager's experience does not include engaging
in hedging transactions as it relates to the investment objectives of the
Company, and the Company anticipates that hedging will constitute a
significant part of its risk management strategy. There can be no assurance
that the Manager will be able to successfully acquire Mortgage Assets and
manage the interest rate risk of such Mortgage Assets through the use of
leverage and hedging. The inability of the Company to implement its strategies
with the use of leverage and hedging would have a material adverse affect on
the Company's results of operations.
NO OPERATING HISTORY; PERFORMANCE OF THE MANAGER AND PIA OF LIMITED RELEVANCE
IN PREDICTING FUTURE PERFORMANCE
The Company is newly organized with no operating history and will commence
operations only if the shares of Common Stock offered hereby are sold.
Accordingly, the Company has not yet developed an earnings history or
experienced a wide variety of interest rate fluctuations or market conditions.
Consequently, the Company lacks historical financial results.
The Manager has no experience in managing a REIT or an investment portfolio
with investment objectives similar to the Company's. There can be no assurance
that the past experience of the executive officers of the Company and the
Manager will be appropriate to the business of the Company.
Further, the past performance of PIA is not indicative of the Company's
future operating results.
DEPENDENCE ON THE MANAGER FOR SUCCESSFUL OPERATIONS
The Company will be wholly dependent for the selection, structuring and
monitoring of its Mortgage Assets and associated borrowings on the diligence
and skill of its officers and the officers and employees of the Manager,
including Lloyd McAdams. The Company does not anticipate having employment
agreements with its senior officers, or requiring the Manager to employ
specific personnel or dedicate employees solely to
15
<PAGE>
the Company. The Manager's loss of any key person, particularly Mr. McAdams,
would have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations. See "Management of the
Company--Directors and Executive Officers" and "The Manager."
CONFLICTS OF INTEREST; MANAGER AND PIA WILL CONTINUE TO PURCHASE MORTGAGE
ASSETS FOR THIRD-PARTY ACCOUNTS
Benefit to Insiders; Interlocking Relationships. The Company is subject to
conflicts of interest arising from its relationships with PIA and its
officers, directors and Affiliates. Following this Offering, the Manager will
render management services to the Company and will be paid a management fee on
a quarterly basis, resulting in a direct benefit to its owner, Lloyd McAdams,
who is an officer and director of the Company. The Manager will oversee the
day-to-day operations of the Company, pursuant to policies established by the
Board of Directors and the authority delegated to the Manager under the
Management Agreement. The Manager intends to enter into an administrative
services agreement with PIA upon the closing of this Offering, pursuant to
which PIA will render certain administrative services to the Manager.
Additionally, Mr. McAdams and Heather Baines, the Executive Vice President of
the Company, own beneficially the outstanding capital stock of PIA and Mr.
McAdams and Ms. Baines are husband and wife. Additionally, the officers and
employees of the Manager are also officers and employees of the Company and
PIA. Also, on the effective date of this Offering, all of the officers of the
Manager will be granted options to purchase shares of Common Stock in the
Company at an exercise price equal to the initial public offering price.
PIA's Management of Investments in Mortgage Securities. PIA has informed the
Company that it has, and expects to continue to purchase and manage Mortgage
Securities in the future for third-party accounts. PIA will have no obligation
to make investment opportunities available to the Company. As a result, there
may be a conflict of interest between the operations of Manager and the
operations of its affiliates in the acquisition and disposition of Mortgage
Securities. Such conflicts may result in decisions and/or allocations of
Mortgage Securities by Affiliates of the Manager that are not in the best
interests of the Company.
PIA's Management of Investments in Competing Entities. PIA has informed the
Company that it has purchased, and expects to continue to purchase equity
securities in companies organized for purposes substantially similar to those
of the Company, including competing mortgage REITs, in the normal course of
its investment management business.
Manager's Incentive Compensation. In addition to its base management
compensation, the Manager will have the opportunity to earn incentive
compensation under the Management Agreement for each fiscal quarter in an
amount equal to 20% of the Net Income of the Company (before payment of such
incentive compensation) in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
See "The Manager--Management Compensation." The Company's ability to achieve
the performance level required for the Manager to earn the incentive
compensation is dependent upon the level and volatility of interest rates, the
Company's ability to react to changes in interest rates and to utilize
successfully the operating strategies described herein, and other factors,
many of which are not within the Manager's control. In evaluating Mortgage
Assets for investment and in other management strategies, an undue emphasis on
the maximization of income at the expense of other criteria, such as
preservation of capital, in order to achieve a higher incentive compensation
could result in increased risk to the value of the Company's Mortgage Asset
portfolio.
Management May Render Services to Others. The Management Agreement does not
limit or restrict the right of the Manager or any of its officers, directors,
employees or Affiliates from engaging in any business or rendering services of
any kind to any other person, including the purchase of, or rendering advice
to others purchasing Mortgage Assets that meet the Company's policies and
criteria, except that neither the Manager nor its directors, officers or
employees will be permitted to provide any such services to any mortgage
securities REIT other than the Company. The ability of the Manager and its
directors, officers and employees to engage in other business activities could
reduce the time and effort spent on the management of the Company. See "The
Manager--The Management Agreement."
16
<PAGE>
VALUE OF MORTGAGE ASSETS MAY BE ADVERSELY AFFECTED BY DEFAULTS ON UNDERLYING
MORTGAGE OBLIGATIONS
The Company will bear the risk of loss on any Mortgage Securities it
purchases in the secondary mortgage market or otherwise. However, such
Mortgage Securities will generally be structured with one or more types of
credit enhancement. Such forms of credit enhancement are intended to provide
protection against risk of loss due to default on the underlying Mortgage
Loan, or bankruptcy, fraud and special hazard losses. To the extent third
parties have been contracted to insure against these types of losses, the
Company would be dependent in part upon the creditworthiness and claims-paying
ability of the insurer and the timeliness of reimbursement in the event of a
default on the underlying obligations. Further, the insurance coverage for
various types of losses is limited in amount, and losses in excess of the
limitation would be borne by the Company.
The yield derived from certain classes of mortgage-backed securities created
in connection with securitizations, including, but not limited to, "interest-
only," "principal-only" and subordinated securities, is particularly sensitive
to interest rate, prepayment and credit risks. The Company's investment
portfolio may include these classes of securities. Because subordinated
securities, in general, bear all credit losses prior to the related senior
securities, the amount of credit risk associated with any investment in such
subordinated securities is significantly greater than that associated with a
comparable investment in the related senior securities and, on a percentage
basis, the risk is greater than holding the underlying mortgage loans
directly.
The Company may also purchase Mortgage Assets issued by Fannie Mae, FHLMC or
GNMA. These entities provide guarantees against risk of loss for securities
they issue. Fannie Mae guarantees the scheduled payments of interest and
principal and the full principal amount of any mortgage loan foreclosed or
liquidated on its obligations. In the case of GNMA, the timely payment of
principal and interest on its certificates is guaranteed by the full faith and
credit of the United States government. FHLMC guarantees the timely payment of
interest and ultimate collection of principal on its obligations. For Fannie
Mae and FHLMC, payment of principal and interest on its certificates are
guaranteed only by the respective entity and not by the full faith and credit
of the United States government.
VALUE OF MORTGAGE LOANS MAY BE ADVERSELY AFFECTED BY CHARACTERISTICS OF
UNDERLYING PROPERTY AND BORROWER CREDIT AND OTHER CONSIDERATIONS
Mortgage Loan Risks. A portion of the Company's Mortgage Assets (subject to
the 30% policy on Limited Investment Assets) may consist of Mortgage Loans.
During the time it holds any Mortgage Loans, the Company will be subject to
increased credit risks, including risks of borrower defaults and bankruptcies
and special hazard losses that are not covered by standard hazard insurance
(such as those occurring from earthquakes or floods). In the event of a
default on any Mortgage Loan held by the Company, the Company will bear the
risk of loss of principal to the extent of any deficiency between the value of
the secured property, less any payments from an insurer or guarantor, and the
amount owing on the Mortgage Loan. Mortgage Loans in default will also cease
to be eligible collateral for borrowings, and will have to be financed by the
Company out of other funds until ultimately liquidated. Although the Company
intends to establish reserves in amounts it believes are adequate to cover
these risks, in view of the Company's lack of operating history, there can be
no assurance that reserves that are established will be sufficient to offset
losses on Mortgage Loans in the future.
Even assuming that properties secured by any Mortgage Loans held by the
Company provide adequate security for such Mortgage Loans, substantial delays
could be encountered in connection with the foreclosure of defaulted Mortgage
Loans, with corresponding delays in the receipt of related proceeds by the
Company. State and local statutes and rules may delay or prevent the Company's
foreclosure on or sale of the mortgaged property and may prevent it from
receiving proceeds sufficient to repay all amounts due on the related Mortgage
Loan. Some properties that may collateralize the Company's Mortgage Loans may
have unique characteristics or may be subject to seasonal factors that could
materially prolong the time period required to resell the property.
17
<PAGE>
Inability to Securitize Mortgage Loans. The Company anticipates that it may
in the future acquire and accumulate (subject to the 30% limitation on Limited
Investment Assets) Mortgage Loans as part of its investment strategy until a
sufficient quantity has been acquired for securitization into Mortgage
Securities. There can be no assurance that the Company will be successful in
securitizing the Mortgage Loans. During the accumulation period, the Company
will be subject to risks of borrower defaults and bankruptcies, fraud losses
and special hazard losses. In the event of any default under Mortgage Loans
held by the Company, the Company will bear the risk of loss of principal to
the extent of any deficiency between the value of the mortgage collateral and
the principal amount of the Mortgage Loan. Also during the accumulation
period, the costs of financing the Mortgage Loans through reverse repurchase
agreements, dollar-roll agreements and other borrowings and lines of credit
with warehouse lenders could exceed the interest income on the Mortgage Loans.
It may not be possible or economical for the Company to complete the
securitization of all Mortgage Loans that it acquires, in which case the
Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults and special hazard losses.
Sellers' Breach of Representations and Warranties with Respect to Mortgage
Loans. It is expected that when the Company acquires Mortgage Loans, the
seller will represent and warrant to the Company that there has been no fraud
or misrepresentation during the origination of the Mortgage Loans and will
agree to repurchase any Mortgage Loan with respect to which there is fraud or
misrepresentation. 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 seller
based on the seller's representations and warranties to the Company, the
Company will be at risk for loss to the extent the seller does not perform its
repurchase obligations.
Subservicing Risks. The Company intends to contract with third-party
subservicers for sub-servicing all Mortgage Loans it purchases, securitizes or
holds for sale or investment. As with any external service provider, the
Company will be subject to risks associated with inadequate or untimely
services, such as the risk that a sub-servicer becomes financially unsound and
cannot perform its duties. Additionally, each of the Company's sub-servicing
agreements with its third-party sub-servicers will likely provide a
termination fee if the sub-servicer is terminated without cause, limiting the
Company's alternatives in the event it desires to change sub-servicers. With
respect to such securitized loans, poor performance by a sub-servicer with
respect to any such securitization may result in greater than expected
delinquencies and losses on the related loans, which would adversely impact
the value of any "interest-only," "principal-only" and subordinated securities
held by the Company in connection with such securitization, which are more
sensitive to credit risk.
FAILURE TO MAINTAIN REIT STATUS WOULD RESULT IN THE COMPANY BEING SUBJECT TO
TAX AS A REGULAR CORPORATION
General. In order to maintain its qualification as a REIT for federal income
tax purposes, the Company must continually satisfy certain tests with respect
to the sources of its income, the nature and diversification of its Mortgage
Assets, the amount of its distributions to stockholders and the ownership of
its stock. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT." Among other things, these restrictions may limit the
Company's ability to acquire certain types of assets that it otherwise would
consider desirable, limit the ability of the Company to securitize Mortgage
Loans for sale to third parties, and require the Company to make distributions
to its stockholders at times when it may deem it more advantageous to utilize
the funds available for distribution for other corporate purposes (such as the
purchase of additional assets or the repayment of debt) or at times that the
Company may not have funds readily available for distribution. Even if the
Company qualifies for taxation as a REIT, it may be subject to certain federal
taxes based on certain activities, which could result in decreased dividend
income available for distribution to stockholders. See "Federal Income Tax
Considerations--Taxation of the Company."
Limitations on Hedging and Investments. The REIT Provisions of the Code may
substantially limit the ability of the Company to hedge its Mortgage Assets
and the related Company borrowings. The Company must limit its income in each
year from Qualified Hedges (together with any other income generated from
other than Qualified REIT Real Estate Assets) to less than 25% of the
Company's gross income. In addition, the Company must limit its aggregate
income from hedging and services from all sources (other than from Qualified
REIT Real Estate Assets or Qualified Hedges) to less than 5% of the Company's
gross income each
18
<PAGE>
year. As a result, the Company may have to limit its use of certain hedging
techniques that might otherwise have been advantageous. Any limitation on the
Company's use of hedging techniques may result in greater interest rate risk.
The Company intends to monitor closely any income from such swap or cap
agreements so as to comply with the 5% income limitation. If the Company were
to receive income in excess of the 25% or 5% limitation, it could incur
payment of a penalty tax equal to the amount of income in excess of those
limitations, or in the case of a willful violation, loss of REIT status for
federal tax purposes. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Gross Income Tests."
The Company must also ensure that at the end of each calendar quarter at
least 75% of the value of its assets consists of cash, cash items, government
securities and Qualified REIT Real Estate Assets, and of the investments in
securities not included in the foregoing, the Company does not hold more than
10% of the outstanding voting securities of any one issuer and no more than 5%
by value of the Company's assets consists of the securities of any one issuer.
Failure to comply with any of the foregoing tests would require the Company to
dispose of a portion of its assets within 30 days after the end of the
calendar quarter or face loss of REIT status and adverse tax consequences. See
"Federal Income Tax Considerations--Requirements for Qualification as a REIT--
Asset Tests."
Distribution Requirements. The Company's operations may from time to time
generate Taxable Income in excess of its Net Income for financial reporting
purposes (such as from amortization of capitalized purchase premiums). The
Company may also experience circumstances in which its Taxable Income is in
excess of cash flows available for distribution to stockholders. To the extent
that the Company does not otherwise have funds available, either situation
could result in the Company's inability to distribute substantially all of its
Taxable Income as required to maintain its REIT status. In either situation,
the Company could be required to borrow funds in order to make the required
distributions that could increase borrowing costs and reduce the yield to
stockholders, to sell a portion of its Mortgage Assets at disadvantageous
prices in order to raise cash for distributions, or to make a distribution in
the form of a return of capital, which would have the effect of reducing the
equity of the Company. See "Federal Income Tax Considerations--Requirements
for Qualification as a REIT--Distribution Requirement."
Disqualification as a REIT. If the Company should not qualify as a REIT in
any tax year, it would be taxed as a regular domestic corporation and, among
other consequences, distributions to the Company's stockholders would not be
deductible by it in computing its taxable income. Any resulting tax liability
could be substantial and would reduce the amount of cash available for
distribution to the Company's stockholders. In addition, the unremedied
failure of the Company to be treated as a REIT for any one year would
disqualify the Company from being treated as a REIT for four subsequent years.
See "Federal Income Tax Considerations--Termination or Revocation of REIT
Status."
FAILURE TO MAINTAIN AN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD
ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are primarily engaged in the business of purchasing or otherwise
acquiring Mortgages and other liens on and interests in real estate
("Qualifying Interests in Real Estate"). Under the current interpretation of
the staff of the Commission, in order to qualify for this exemption, the
Company must, among other things, maintain at least 55% of its assets directly
in Mortgage Loans, qualifying Pass-Through Certificates and certain other
Qualifying Interests in Real Estate. In addition, unless certain Mortgage
Securities represent all the certificates issued with respect to an underlying
pool of Mortgage Loans, such Mortgage Securities may be treated as securities
separate from the underlying Mortgage Loans and, thus, may not qualify as
Qualifying Interests in Real Estate for purposes of the 55% requirement. The
Company's ownership of certain Mortgage Assets, therefore, may be limited by
the provisions of the Investment Company Act. If the Company fails to qualify
for exemption from registration as an investment company, its ability to use
leverage would be substantially reduced, and it would be unable to conduct its
business as described herein. Any such failure to qualify for such exemption
would have a material adverse effect on the Company.
19
<PAGE>
ABSENCE OF PUBLIC MARKET; INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE
MARKET PRICE OF THE COMMON STOCK
Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that a regular trading market for the
shares of Common Stock offered hereby will develop or, if developed, that any
such market will be sustained. In the absence of a public trading market, an
investor may be unable to liquidate his investment in the Company. The initial
public offering price will be determined by the Company and representative of
the Underwriters. There can be no assurance that the price at which the shares
of Common Stock will sell in the public market after the closing of the
Offering will not be lower than the price at which they are sold by the
Underwriters. See "Underwriting." While there can be no assurance that a
market for the Common Stock will develop, the Company has applied to have the
Common Stock listed on the American Stock Exchange under the symbol "ANH."
In the event that a public market for the Common Stock exists, it is likely
that the market price of the shares of the Common Stock will be influenced by
any variation between the net yield on the Company's Mortgage Assets and
prevailing market interest rates. The Company's earnings will be derived
primarily from any positive spread between the yield on its Mortgage Assets
and the cost of its borrowings. Such positive spread will not necessarily be
larger in high interest rate environments than in low interest rate
environments. However, in periods of high interest rates, the Net Income of
the Company and, therefore, the dividend yield on the Common Stock, may be
less attractive compared with alternative investments, which could negatively
impact the price of the Common Stock. If the anticipated or actual net yield
on the Company's Mortgage Assets declines or if prevailing market interest
rates rise, thereby decreasing the positive spread between the net yield on
its Mortgage Assets and the cost of its borrowings, the market price of the
Common Stock may be adversely affected.
INVESTMENT IN SHORT-TERM INVESTMENTS PENDING ACQUISITION OF MORTGAGE ASSETS
MAY INITIALLY ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company's results of operations initially may be adversely affected
pending the purchase of Mortgage Assets and implementation of its investment
policies, particularly in the several-month period following the closing of
the Offering, during which time the Company will be primarily invested in
short-term government securities and other Short-Term Investments. The Company
anticipates that it may take up to 15 months to fully implement its leverage
strategy.
ACTIVE FORMATION AND OPERATION OF COMPETING MORTGAGE REITS MAY ADVERSELY
AFFECT THE MARKET PRICE OF THE COMMON STOCK
In addition to existing companies, other companies may be organized for
purposes similar to that of the Company, including companies organized as
REITs focused on purchasing High Quality Mortgage Assets. A proliferation of
such companies may increase the competition for equity capital and thereby
adversely affect the market price of the Common Stock. In addition, adverse
publicity affecting this sector of the capital market or significant operating
failures of a competitor may adversely affect the market price of the Common
Stock.
RISK OF ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME
In general, dividend income that a Tax-Exempt Entity receives from the
Company should not constitute unrelated trade or business income as defined in
Section 512 of the Code ("UBTI"). If, however, excess inclusion income were
realized by the Company and allocated to stockholders, such income cannot be
offset by net operating losses and, if the stockholder is a Tax-Exempt Entity,
is fully taxable as UBTI under Section 512 of the Code and, as to foreign
stockholders, would be subject to federal income tax withholding
20
<PAGE>
without reduction pursuant to any otherwise applicable income tax treaty. See
"Federal Income Tax Considerations--Taxation of Stockholders" and "--Taxation
of Tax-Exempt Entities," for discussions of the treatment of excess inclusion
income. Excess inclusion income would be generated if the Company were to
issue debt obligations with two or more maturities and the terms of the
payments on such obligations bore a relationship to the payments that the
Company received on its Mortgage Assets securing those debt obligations. The
Company intends to arrange its borrowings in a manner to avoid generating
significant amounts of excess inclusion income. The Company may, however,
enter into one or more master reverse repurchase agreements (i) pursuant to
which the Company would issue various reverse repurchase agreements that would
have differing maturity dates, and (ii) that would afford the counter-party
lender the right to sell any of the Company's Mortgage Securities that have
been pledged to the counter-party if the Company were to default on its to
that counter-party lender. There can be no assurance that the Service might
not successfully maintain that any such borrowing arrangements would give rise
to excess inclusion income that would be allocated among stockholders in some
appropriate fashion. See "Federal Income Tax Considerations--Taxation of
Stockholders." Furthermore, certain types of Tax-Exempt Entities, such as
voluntary employee benefit associations and entities that have borrowed to
acquire their shares of Common Stock, may be required to treat a portion of or
all of the dividends they may receive from the Company as UBTI. See "Federal
Income Tax Considerations--Taxation of Tax-Exempt Entities."
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
DIRECTORS
The Company's Board of Directors has established the investment policies,
the operating policies, and the strategies set forth in this Prospectus as the
investment policies, operating policies and strategies of the Company.
However, these policies and strategies may be modified or waived by the Board
of Directors of the Company, subject, in certain cases, to approval by a
majority of the Unaffiliated Directors, without stockholder consent.
EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE COMMON
STOCK
The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, Common Stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities, other borrowings and
classes of preferred stock will be senior to the Common Stock in a liquidation
of the Company. The effect of additional equity offerings may be the dilution
of the equity of stockholders of the Company or the reduction of the price of
shares of the Common Stock, or both. The Company is unable to estimate the
amount, timing or nature of additional offerings as they will depend upon
market conditions and other factors.
RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK
Preferred Stock. The authorized capital stock of the Company includes
preferred stock issuable in one or more series. The issuance of preferred
stock could have the effect of making an attempt to gain control of the
Company more difficult by means of a merger, tender offer, proxy contest or
otherwise. The preferred stock, if issued, could have a preference on dividend
payments that could affect the ability of the Company to make dividend
distributions to the common stockholders. See "Description of Capital Stock."
9.8% Ownership Restriction. In order that the Company may meet the
requirements for qualification as a REIT at all times, the Charter prohibits
any person from acquiring or holding, directly or indirectly, shares of
capital stock in excess of 9.8% in value of the aggregate of the outstanding
shares of capital stock or in excess of 9.8% (in value or in number of shares,
whichever is more restrictive) of the aggregate of the outstanding shares of
capital stock of the Company. The Charter further prohibits (i) any person
from beneficially or constructively owning shares of capital stock that would
result in the Company being Closely held under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT, and (ii) any person
from transferring shares of capital stock if such transfer would result in
shares of capital stock being owned by fewer than 100 persons. If any transfer
of shares of capital stock occurs which, if effective,
21
<PAGE>
would result in any violation of the transfer or ownership limitations, then
that number of shares of capital stock in excess or in violation of the above
transfer or ownership limitations, the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded
to the nearest whole shares) shall be automatically transferred to a Trustee
of a Trust for the exclusive benefit of one or more Charitable Beneficiaries,
and the intended transferee shall not acquire any rights in such shares.
Subject to certain limitations, the Company's Board of Directors may increase
or decrease the ownership limitations or waive the limitations for individual
investors. See "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer."
Notice of 5% Ownership. Every owner of more than 5% (or such lower
percentage as required by the Code or the regulations promulgated thereunder)
of all classes or series of the Company's capital stock, within 30 days after
the end of each taxable year, is required to give written notice to the
Company stating the name and address of such owner, the number of shares of
each class and series of stock beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to the
Company such additional information as the Company may request in order to
determine the effect, if any, of such beneficial ownership on the Company's
status as a REIT and to ensure compliance with the ownership limitations.
The foregoing provisions may inhibit market activity and the resulting
opportunity for the holders of the Common Stock to receive a premium for their
Common Stock that might otherwise exist in the absence of such provisions.
Such provisions also may make the Company an unsuitable investment vehicle for
any person seeking to obtain ownership of more than 9.8% of the outstanding
shares of the Company's Common Stock.
Provisions of Maryland Law Restricting Takeovers. Certain provisions of the
Maryland General Corporation Law relating to "business combinations" and a
"control share acquisition" and of the Charter and Bylaws of the Company may
also have the effect of delaying, deterring or preventing a takeover attempt
or other change in control of the Company that would be beneficial to
stockholders and might otherwise result in a premium over then prevailing
market prices. Although the Bylaws of the Company contain a provision
exempting the acquisition of Common Stock by any person from the control share
acquisition statute, there can be no assurance that such provision will not be
amended or eliminated at any time in the future. See "Certain Provisions of
Maryland Law and of the Company's Charter and Bylaws."
22
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately
$ million ($ if the Underwriters' overallotment option is
exercised in full), assuming an initial offering price of $10.00 per share of
Common Stock. The net proceeds from the Offering will be used by the Company
to purchase its initial portfolio of Mortgage Assets.
The Company may require up to six months to have the net proceeds of this
Offering fully invested in Mortgage Assets and up to an additional nine months
to fully implement its leverage strategy to increase the Mortgage Asset
investments to its desired level. Pending full investment in the desired mix
of Mortgage Assets, funds will be committed to short-term High Quality
Investments that are expected to provide a lower net return than the Company
hopes to achieve from its intended Mortgage Asset investments.
DIVIDEND AND DISTRIBUTION POLICY
The Company intends to distribute substantially all of its taxable income to
stockholders in each year (which does not ordinarily equal net income as
calculated in accordance with GAAP). The Company intends to declare four
regular quarterly dividends. In addition, taxable income, if any, not
distributed through regular quarterly dividends may be distributed annually,
at or near year end, in a special dividend. The dividend policy is subject to
revision at the discretion of the Board of Directors. All distributions will
be made by the Company at the discretion of the Board of Directors and will
depend on the 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--Requirements for
Qualification as a REIT--Distribution Requirement."
In order to qualify as a REIT under the Code, the Company must make
distributions to its stockholders each year in an amount at least equal to (i)
95% of its Taxable Income before deduction of dividends paid (less any net
capital gain), plus (ii) 95% of the excess of the net income from Foreclosure
Property over the tax imposed on such income by the Code, minus (iii) any
excess 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.
It is anticipated that distributions generally will be taxable as ordinary
income to stockholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain or may
constitute a return of capital. The Company will furnish annually to each of
its stockholders a statement setting forth distributions paid during the
preceding year and their characterization as ordinary income, return of
capital or capital gains. For a discussion of the federal income tax treatment
of distributions by the Company, see "Federal Income Tax Considerations--
Taxation of Stockholders."
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
October 22, 1997 and (ii) as adjusted to reflect the sale of the Common Stock
hereby at an assumed per share sale price at the mid-point of the offering
range set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)(2)
------ --------------
<S> <C> <C>
Stockholder's equity:
Preferred Stock, $0.01 par value per share; 20,000,000
shares authorized; no shares issued and outstanding
actual and as adjusted................................ -- --
Common Stock, $0.01 par value per share; 100,000,000
shares authorized; 100 shares issued and outstanding
actual; 7,500,100 shares issued and outstanding as
adjusted.............................................. $ 1 $ 75,001
Additional paid-in capital............................. 999 74,925,999
------ -----------
Total................................................ $1,000 $75,001,000
====== ===========
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions, and
estimated offering expenses of $ , payable by the Company and
assuming no exercise of the Underwriters' over-allotment option to
purchase up to an additional 1,125,000 shares of Common Stock.
(2) Does not include 750,000 shares reserved for issuance upon exercise of
options granted under the Stock Option and Awards Plan. Options to acquire
370,000 shares will be granted to officers and directors of the Company
upon the effective date of this Offering at a price equal to the initial
public offering price. See "Management of the Company--Stock Options."
24
<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company was incorporated in Maryland in October, 1997 and, upon
completion of this offering, will commence its business of purchasing and
managing for investment a portfolio of Mortgage Assets. The Company intends to
generate income for distribution to its stockholders primarily from the Net
Cash Flows on its Mortgage Assets qualifying as Qualified REIT Real Estate
Assets.
STRATEGY
The principal business objective of the Company is to provide its
stockholders with an efficient vehicle to participate in the mortgage
securities market and to generate a competitive yield through its prudent use
of leverage and active management of the asset/liability yield spread.
Following is the Company's strategy to achieve its business objective:
Investment Strategy
The Company intends to apply a disciplined approach to managing its
investments in an attempt to achieve competitive yields while managing
portfolio risk. The Company will utilize the proceeds of this Offering and
short-term borrowings to seek to generate income based on the difference
between the yield on its Mortgage Assets and the cost of its borrowings.
Management believes that the experience of its officers in mortgage investment
management, their extensive mathematical training and their employment of
advanced mortgage analytical tools, should provide the Company with
competitive advantages in the analysis of and risk control of its mortgage
investments. The Company will seek to minimize prepayment risk by structuring
a diversified portfolio with a variety of prepayment characteristics and by
analyzing the prepayment duration of the Mortgage Assets, as well as the
deviations between projected and realized prepayment rates.
Financing Strategy
The Company will employ a strategy of attempting to increase profitability
through growth in Mortgage Asset volume achieved by leverage based upon short-
term borrowings, primarily reverse repurchase agreements and dollar-roll
agreements. The Company generally expects to maintain a debt-to-equity ratio
of between 8:1 and 12:1, although the ratio may vary from time to time
depending on market conditions and other factors deemed relevant by the
Manager and the Company's Board of Directors. In financing its Mortgage Asset
portfolio, the Company will employ a maturity structure for its borrowed funds
designed to lower borrowing costs, preserve the Company's capital base and
generate net interest income. The Company's borrowings will be short-term and
the Company will attempt to actively manage, on an aggregate basis, the
interest rate indices and interest rate adjustment periods of its borrowings
against the interest rate indices and interest rate adjustment periods on its
Mortgage Assets.
Over time, to the extent the Company believes it can lower its cost of funds
or increase its return to investors, it may seek to raise additional capital
through accessing the capital markets. In addition, to the extent the Company
develops appropriate infrastructure it may access the securitization market to
raise additional funds for operations.
Risk Management Strategy
Interest Rate and Volatility Risk. The Company intends to use mathematical
modeling and quantitative analysis to monitor the interest rate sensitivity of
its Mortgage Asset portfolio. The analysis includes the use of mathematical
assumptions regarding the effect of mortgage loan prepayments and interest
rate caps incorporated in most adjustable-rate mortgage securities, as well as
interest rate volatility on its portfolio of
25
<PAGE>
Mortgage Assets. Comparison of interest rate sensitivity factors to the
quantitative and qualitative nature of the Company's borrowings will provide
the Company with a qualitative measure of the impact that interest rate
movements could have on the Company's net interest income. Management intends
to evaluate continually these mathematical assumptions and, if necessary,
adjust its Mortgage Asset portfolio accordingly.
Credit Risk. The Company will invest primarily in adjustable rate mortgage
securities that are issued or guaranteed by the United States government or an
agency thereof and other high-quality mortgage securities. The Company will
continually monitor the credit quality of its Mortgage Assets and attempt to
maintain appropriate capital levels for allowances and possible credit losses.
The Company will manage the credit risk of its Mortgage Assets through, among
other activities, (i) complying with the Company's policies with respect to
credit risk concentration, (ii) actively monitoring the ongoing credit quality
and servicing of its Mortgage Assets and (iii) attempting to maintain
appropriate capital levels and allowances for possible credit losses.
Hedging. The Company may enter into hedging transactions designed to protect
itself to varying degrees against interest rate changes. The Company may
purchase interest rate caps, interest rate swaps and similar instruments to
mitigate the risk of its short-term borrowings increasing at a greater rate
than the yields on its Mortgage Assets during a period of rising interest
rates. The Company may also, to the extent consistent with its qualifications
as a REIT and Maryland law, utilize financial futures contracts and put and
call options on financial futures contracts and trade forward contracts as a
hedge against future interest rate changes. However, no hedging strategy can
completely insulate the Company from interest rate risks and market movement,
and the federal tax laws applicable to REITs may substantially limit the
Company's ability to engage in hedging transactions.
There can be no assurance that the Company will successfully implement its
strategies. See "Risk Factors" for a discussion of factors that could affect
the Company's ability to successfully implement its strategy.
Management will seek to increase stockholder value by generating earnings
through selective Mortgage Asset acquisition based on market conditions,
mathematical analysis of mortgage security value and risk, the efficient and
prudent use of leverage, and the implementation of appropriate hedging
strategies. The Company will strive to increase its earnings by seeking to
lower its borrowing costs and attempting to maximize the yield and manage the
risk of its Mortgage Assets. The Company will also seek to increase its
earnings through increased Mortgage Asset volume generated from the use of
leverage in the form of short-term borrowings.
OPERATING POLICIES AND PROGRAMS
Asset Acquisition Policy
The principal business of the Company will be to provide investors with a
competitive yield through the management of Mortgage Assets and their risks,
the prudent use of leverage, the active management of the asset/liability
yield spread, and the employment of the Company's risk management strategies.
In addition, the Company's structure will provide investors with an efficient
vehicle to participate in the mortgage securities market, while providing
professional management of the mortgage market risks. The Company's Mortgage
Assets will be held primarily for investment. The Company intends generally to
buy and hold Mortgage Assets to maturity and, therefore, will seek to have a
low portfolio turnover rate. The Company's ability to sell Mortgage Assets for
gain is restricted by the REIT Provisions of the Code and the rules,
regulations and interpretations of the Service thereunder. See "Federal Income
Tax Considerations--Requirements for Qualification as a REIT--Gross Income
Tests."
The Company's Mortgage Assets are currently expected to consist primarily of
adjustable-rate Mortgage Securities. At least 70% of the total assets to be
acquired by the Company will be High Quality adjustable-rate Mortgage
Securities and Short-Term Investments (investments with maturities of one year
or less). "High
26
<PAGE>
Quality" as used herein means either (i) securities that are rated within one
of the two highest rating categories by at least one of either Standard &
Poor's or Moody's, or (ii) securities that are unrated but are either
obligations the United States or obligations guaranteed by the United States
government or an agency or instrumentality of the United States government, or
(iii) securities that are unrated or whose ratings have not been updated but
are determined to be of comparable quality (by the rating standards of at
least one of the Rating Agencies) to a High Quality rated mortgage security on
the basis of credit enhancement features that meet the High Quality credit
criteria approved by the Company's Board of Directors.
The remainder of the Company's investment portfolio, comprising not more
than 30% of its total assets, may consist of Mortgage Assets which are
unrated, or, if rated, are less than High Quality, including (i) Mortgage
Loans, (ii) Mortgage Securities backed by loans on single-family, multi-
family, commercial, or other real estate-related properties which are rated at
least Investment Grade (rated at least "BBB" or "Baa" by Standard & Poor's or
Moody's, respectively) or (as to single-family and multi-family Mortgage
Securities) the equivalent, if not rated, and (iii) Other Mortgage Securities.
Fixed-rate Mortgage Assets may also be acquired, including the acquisition
of such assets for the purpose of being combined with hedging instruments to
obtain investment characteristics similar to adjustable-rate Mortgage Assets.
The Company intends to purchase Mortgage Assets from mortgage bankers,
banks, savings and loans, investment banking firms, insurance companies and
other firms involved in originating and packaging mortgage loans. The Manager
on the Company's behalf will utilize the existing relationships of PIA in
purchasing Mortgage Securities from broker-dealers and banks that regularly
make markets in these securities. In acquiring Mortgage Assets, the Company
will compete with other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
other lenders, GNMA, Fannie Mae, FHLMC and other entities purchasing Mortgage
Assets, many of which have greater financial resources than the Company. There
are many REITs similar to the Company and others may be organized in the
future. The effect of the existence of additional REITs may be to increase
competition for the available supply of Mortgage Assets suitable for purchase
by the Company. Increased competition for the acquisition of eligible Mortgage
Assets or a diminution in the supply could result in higher prices and, thus,
lower yields on such Mortgage Assets that could further narrow the yield
spread over borrowing costs. It could also result in the Company's inability
to deploy its funds in acceptable investments.
The Company's Board of Directors has adopted the investment policies set
forth in this Prospectus as its initial investment policies. The policies may
be changed at any time by the Board of Directors (subject to approval by a
majority of Unaffiliated Directors) without the consent of stockholders. The
Company's Board of Directors will establish and approve (including approval by
a majority of Unaffiliated Directors) at least annually the investment
policies of the company, which will include investment criteria that each
Mortgage Asset must satisfy to be eligible for investment by the Company. The
Company will not purchase any Mortgage Assets from its Affiliates other than
Mortgage Securities that may be purchased from a taxable subsidiary of the
Company that may be formed in connection with the securitization of Mortgage
Loans.
Capital and Leverage Policy
The Company intends to finance its purchase of Mortgage Assets initially
through equity from the proceeds of this offering and thereafter primarily by
borrowing against existing Mortgage Assets and using the proceeds to acquire
additional Mortgage Assets. See "Use of Proceeds." The borrowings are expected
to be in the form of reverse repurchase agreements, dollar-roll agreements,
loan agreements, lines of credit and other credit facilities. The Company's
borrowings generally will be secured by Mortgage Assets owned by the Company.
The Company intends to employ a leveraging strategy to increase its
investment assets by borrowing against existing Mortgage Assets and using the
proceeds to acquire additional Mortgage Assets. The Company
27
<PAGE>
generally expects to maintain a debt-to-equity ratio of between 8:1 and 12:1,
although the ratio may vary from time to time depending on market conditions
and other factors deemed relevant by the Manager and Company's Board of
Directors. The Company believes that this will leave an adequate capital base
to protect against interest rate environments in which the Company's borrowing
costs might exceed its interest income from Mortgage Assets. For example,
these conditions could occur when the interest adjustments on Mortgage Assets
lag behind interest rate increases in the Company's short-term borrowings or
when the interest rate of the Company's short-term borrowings are mismatched
with the interest rate indices of the Company's Mortgage Assets. See "Risk
Factors--Failure to Successfully Manage Interest Rate Risks May Adversely
Affect Results of Operations" and "Risk Factors--Decrease in Net Interest
Income from Mortgage Assets Due to Interest Rate Fluctuations." The Company
will enter into the collateralized borrowings described herein only with
financially sound institutions meeting credit standards approved by the
Company's Board of Directors, including approval by a majority of Unaffiliated
Directors and will monitor the financial condition of such institutions on a
regular, periodic basis.
In financing its Mortgage Asset portfolio, the Company will employ a
maturity structure for its borrowed funds designed to lower borrowing costs,
preserve the Company's capital base and generate net interest income. The
Company's borrowings will be short-term and the Company intends to manage
actively, on an aggregate basis, both the interest rate indices and interest
rate adjustment periods of its borrowings against the interest rate indices
and interest rate adjustment periods on its Mortgage Assets.
Mortgage Assets will be financed primarily at short-term borrowing rates
through reverse repurchase agreements (a borrowing device evidenced by an
agreement to sell securities to a third party and a simultaneous agreement to
repurchase them at a specified future date and price, the difference
constituting the borrowing rate), dollar-roll agreements (an agreement to sell
a security for delivery on a specified future date and simultaneous agreement
to repurchase the same or substantially similar security on a specified future
date), and borrowings under lines of credit and other collateralized
financings which the Company may establish with approved institutional
lenders. It is expected that reverse repurchase agreements and dollar-roll
agreements will be the principal financing devices utilized by the Company to
leverage its Mortgage Assets portfolio. The Company anticipates that upon
repayment of each reverse repurchase agreement, or repurchase pursuant to a
dollar-roll agreement, the collateral will immediately be pledged to secure a
new reverse repurchase agreement or will be sold pursuant to a new dollar-roll
agreement. Since the Company is newly formed and has not yet started
operations, it has not yet established any collateralized financings or lines
of credit. The Company has conducted preliminary discussions with potential
lenders and believes, on the basis of these discussions, that it can obtain
these financings in amounts and at interest rates that are consistent with the
Company's financing objectives described herein.
A reverse repurchase agreement, although structured as a sale and repurchase
obligation, effects a financing under which the Company will pledge its
Mortgage Assets as collateral to secure a short term loan. Generally, the
creditor will make the loan pursuant to the repurchase agreement in an amount
equal to a percentage of the market value of the collateral, typically 80% to
98%. At the maturity of the reverse repurchase agreement, the Company will be
required to repay the loan pursuant to the agreement and correspondingly will
receive back its collateral. Under reverse repurchase agreements, the Company
generally will retain the incidents of beneficial ownership, including the
right to distributions on the collateral and the right to vote on matters as
to which certificate holders are entitled to vote. Upon a payment default
under a repurchase agreement, the lending party may liquidate the collateral.
Similar to a reverse repurchase agreement as a method of financing Mortgage
Securities, a dollar-roll is a transaction in which the Company sells Mortgage
Securities for delivery on a specified future date and simultaneously
contracts to repurchase the same or substantially the same type of security on
a specified future date. During the roll period, the Company forgoes the
principal and interest payments on the Mortgage Securities. The Company,
however, is compensated by the interest earned on the cash proceeds of the
initial sale and by the typically lower repurchase price at the future date.
Because the roll provides funds to the Company for the period of the roll, its
value can be expressed in terms of an "implied financing rate." This
28
<PAGE>
method of financing is favorable to the Company when the repurchase price is
low enough in comparison to the initial sale price so that the implied
financing rate is below other alternative short-term borrowing rates (e.g.,
the rate for reverse repurchase agreements or other short-term borrowings).
The Company's ability to enter into dollar-roll agreements may be limited in
order to maintain the Company's status as a REIT and to avoid the imposition
of tax on the Company. See "Federal Income Tax Considerations--Requirements
for Qualification as a REIT" and "--Taxation of the Company."
Reverse repurchase agreements take the form of a sale of pledged securities
to the lender at a discounted price in return for the lender's agreement to
resell the same or similar securities to the borrower at a future date (the
maturity of the borrowing) at an agreed price. In the event of the insolvency
or bankruptcy of a lender during the term of a reverse repurchase agreement,
provisions of the Federal Bankruptcy Code, if applicable, may permit the
lender to consider the agreement to resell the securities to be an executory
contract that, at the lender's option, may be either assumed or rejected by
the lender. If a bankrupt lender rejects its obligation to resell pledged
securities to the Company, the Company's claim against the lender for the
damages resulting therefrom may be treated as simply one of many unsecured
claims against the lender's assets. These claims would be subject to
significant delay and, if and when received, may be substantially less than
the damages actually suffered by the Company.
Credit Risk Management Policy
Management will review credit risk and other risks of loss associated with
each investment. In addition, Management will seek to diversify the Company's
portfolio of Mortgage Assets to avoid undue geographic, insurer, industry and
certain other types of concentrations. The Company will seek to reduce certain
risks from sellers and servicers through representations and warranties. The
Company's Board of Directors will monitor the overall portfolio risk and
determine appropriate levels of provision for loss.
With respect to its Mortgage Securities, the Company will be exposed to
various levels of credit and special hazard risk, depending on the nature of
the underlying Mortgage Assets and the nature and level of credit enhancements
supporting such securities. Agency Certificates are covered by credit
protection in the form of a 100% guarantee from a government sponsored entity
(GNMA, Fannie Mae or FHLMC). Privately Issued Certificates represent interests
in pools of residential mortgage loans with partial credit enhancement. Credit
loss protection for Privately Issued Certificates is achieved through the
subordination of other interests in the pool to the interest held by the
Company, through pool insurance or through other means. The degree of credit
protection varies substantially among Privately Issued Certificates.
Management will review the quality of Mortgage Loans at the time of
acquisition and on an ongoing basis. During the time it holds Mortgage Loans,
the Company will be subject to risks of borrower defaults and bankruptcies and
special hazard losses (such as those occurring from earthquakes or floods)
that are not covered by standard hazard insurance. However, individual
Mortgage Loans may be covered by FHA insurance, VA guarantees or private
mortgage insurance and, to the extent securitized into Agency Certificates, by
such government sponsored entity obligations or guarantees.
ASSET/LIABILITY MANAGEMENT POLICY
Interest-Rate Risk Management. To the extent consistent with its election to
qualify as a REIT, the Company will follow an interest rate risk management
program intended to protect its portfolio of Mortgage Assets and related debt
against the effects of major interest rate changes. Specifically, the
Company's interest rate management program is formulated with the intent to
offset to some extent the potential adverse effects resulting from rate
adjustment limitations on its Mortgage Assets and the differences between
interest rate adjustment indices and interest rate adjustment periods of its
adjustable-rate Mortgage Assets and related borrowings. The Company's interest
rate risk management program encompasses a number of procedures,
29
<PAGE>
including the following: (i) monitoring and adjusting, if necessary, the
interest rate sensitivity of its Mortgage Assets compared with the interest
rate sensitivities of its borrowings; and (ii) attempting to structure its
borrowing agreements relating to adjustable-rate Mortgage Assets to have a
range of different maturities and interest rate adjustment periods (although
substantially all will be less than a year). As a result, the Company expects
to be able to adjust the average maturity/adjustment period of such borrowings
on an ongoing basis by changing the mix of maturities and interest rate
adjustment periods as borrowings come due or are renewed. Through use of these
procedures, the Company intends to reduce the risk of any differences between
interest rate adjustment periods of adjustable-rate Mortgage Assets and
related borrowings.
Depending on market conditions and the cost of the transactions, the Company
will conduct certain hedging activities in connection with the management of
its Mortgage Asset portfolio. To the extent consistent with the Company's
election to qualify as a REIT, the Company will follow a hedging strategy
intended to mitigate the effects of interest rate changes and to enable the
Company to earn net interest income in periods of generally rising, as well as
declining or static, interest rates. Specifically, the Company's hedging
program is formulated with the intent to offset to some extent the potential
adverse effects of (i) changes in interest rate levels relative to the
interest rates on the Mortgage Assets held in the Company's investment
portfolio, and (ii) differences between the interest rate adjustment indices
and periods of the Company's Mortgage Assets and the borrowings of the
Company. As part of its hedging strategy, the Company will also monitor on an
ongoing basis the prepayment risks that arise in fluctuating interest rate
environments.
The Company's hedging policy will encompass a number of procedures. First,
the Company will attempt to actively manage, on an aggregate basis, the
interest rate indices and interest rate adjustment periods of its borrowings
against the interest rate indices and interest rate adjustment periods on its
Mortgage Assets. In addition, the Company intends to structure its reverse
repurchase borrowing agreements and dollar-roll agreements to have a range of
different maturities (although substantially all will have maturities of less
than one year). As a result, the Company expects to be able to adjust the
average maturity of its borrowings on an ongoing basis by changing the mix of
maturities as borrowings come due and are renewed. In this way, the Company
intends to reduce differences between the interest rate adjustment periods of
its Mortgage Assets and related borrowings that may occur due to prepayments
of Mortgage Loans or other factors.
The Company intends to hedge to some extent against the short-term
indebtedness incurred by the Company to finance its acquisition of Mortgage
Assets to mitigate the effects of interest rate fluctuations or other market
movements. With respect to assets, hedging can be used either to increase the
liquidity or decrease the risk of holding an asset by guaranteeing, in whole
or in part, the price at which such asset may be disposed of prior to its
maturity and may also be used to receive interest income in excess of
specified interest rate caps. With respect to indebtedness, hedging can be
used to limit, fix, or cap the interest rate on short-term indebtedness.
In a typical interest rate cap agreement, the cap purchaser makes an initial
lump sum cash payment to the cap seller in exchange for the seller's promise
to make cash payments to the purchaser on fixed dates during the contract term
if prevailing interest rates exceed the rate specified in the contract.
Financial futures contracts are the sale of a futures contract, typically on
Treasury Bills or Eurodollar contracts, creating a firm obligation to deliver
a specific financial instrument at a specified future date and price. Options
on financial futures contracts are similar to options on securities except
that a futures option gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract and obligates the seller to
deliver that position. Financial futures contracts and options on financial
futures contracts are classified as "commodities" under the federal Commodity
Exchange Act and may also be classified as "securities" for securities law
purposes. The Company does not intend to invest in any other types of
commodities and will not engage in commodities trading. The purchase of
Mortgage Derivative Securities and Excess Servicing Rights can be effective
hedging instruments in certain situations as these investments tend to
increase in value and their yields tend to increase as interest rates rise.
The Company intends to limit its purchases of Mortgage
30
<PAGE>
Derivative Securities and Excess Servicing Rights to those investments
qualifying as Qualified REIT Real Estate Assets. Income from such investments
qualifies for purposes of the 95% and 75% sources of income tests applicable
to REITs. See "Federal Income Tax Considerations--Requirements for
Qualification as a REIT--Gross Income Tests."
The Company may acquire Excess Servicing Rights, but only to the extent such
rights constitute a Qualified REIT Real Estate Asset. Excess Servicing Rights
would entitle the Company to receive the interest portion of monthly mortgage
payments not already allocated to either a pass-through certificate or the
administration of mortgage servicing. Because Excess Servicing Rights
represent interest only cash flows from mortgage loans, they behave in a
fashion similar to "interest only" Mortgage Derivative Securities. The Excess
Servicing Rights also will be subject to the general credit of the Servicer
(the entity performing the loan servicing function on Mortgage Loans or Excess
Servicing Rights owned by the Company) and the risk that the Servicer could be
terminated. As part of its loan servicing function, the Servicer collects and
is responsible for distributing the interest payments attributable to the
Excess Servicing Rights.
Fixed-rate Mortgage Assets may also be acquired for the purpose of being
combined with hedging instruments to obtain investment characteristics similar
to adjustable-rate Mortgage Assets.
These hedging transactions are designed to reduce the fluctuation in the
value of the Company's portfolio in changing interest rate environments. No
hedging strategy can completely insulate the Company from such risks, and
certain of the federal income tax requirements that the Company must satisfy
to qualify as a REIT limit the Company's ability to hedge. The Company intends
to carefully monitor and may have to limit its hedging strategies to assure
that it does not realize excessive hedging income, or hold hedging assets
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 as a REIT."
In addition, hedging involves transaction costs, and such costs increase
dramatically as the period covered by the hedging protection increases and
that may also increase during periods of rising and fluctuating interest
rates. Therefore, the Company may be prevented from effectively hedging or may
determine it is not advantageous to hedge its short-term indebtedness incurred
to acquire Mortgage Assets. 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.
Prepayment Risk Management. The Company will seek to minimize the effects of
faster or slower than anticipated prepayment rates through structuring a
diversified portfolio with a variety of prepayment characteristics, investing
in Mortgage Assets with prepayment prohibitions and penalties, investing in
certain Mortgage Security structures that have prepayment protections, and
balancing Mortgage Assets purchased at a premium with Mortgage Assets
purchased at a discount. The Company intends to invest in Mortgage Assets that
on a portfolio basis do not have significant purchase price premiums. Under
normal market conditions, the Company will seek to keep the aggregate
capitalized purchase premium of the portfolio to 3% or less. In addition, the
Company may in the future purchase Principal Only Derivatives to a limited
extent as a hedge against prepayment risks. Prepayment risk will be monitored
by Management and the Company's Board of Directors through periodic review of
the impact of a variety of prepayment scenarios on the Company's revenues, net
earnings, dividends, cash flow and net balance sheet market value.
The Company believes that it has developed cost-effective asset/liability
management policies to mitigate interest rate and prepayment risks. However,
no strategy can completely insulate the Company from interest rate changes,
prepayment risks and defaults by counter-parties. Further, as noted above,
certain of the federal income tax requirements that the Company must satisfy
to qualify as a REIT limit the Company's ability to fully hedge its interest
and prepayment risks. Management will monitor carefully, and may have to
limit, its
31
<PAGE>
asset/liability management program to assure that the Company does not realize
excessive hedging income, or hold hedging Mortgage Assets having excess value
in relation Mortgage Assets, which would result in the Company's
disqualification as a REIT or, in the case of excess hedging income, the
payment of a penalty tax for failure to satisfy certain REIT income tests
under the Code, provided such failure was for reasonable cause. See "Federal
Income Tax Considerations--Requirements for Qualification as a REIT." In
addition, asset/liability management involves transaction costs that increase
dramatically as the period covered by the hedging protection increases and
that may increase during periods of fluctuating interest rates. Therefore, the
Company may be prevented from effectively hedging its interest rate and
prepayment risks.
DESCRIPTION OF MORTGAGE ASSETS
The Company intends to invest principally in the following types of Mortgage
Assets subject to the operating restrictions described in "--Operating
Policies and Programs" above.
Pass-Through Certificates
General. The Company's investments in Mortgage Assets are expected to be
concentrated in Pass-Through Certificates. The Pass-Through Certificates to be
acquired by the Company will consist primarily of pass-through certificates
issued by Fannie Mae, FHLMC and GNMA, as well as High Quality privately issued
adjustable-rate mortgage pass-through certificates. The Pass-Through
Certificates to be acquired by the Company will represent interests in
mortgages that will be secured primarily by liens on single-family (one-to-
four units) residential properties, or on multi-family, commercial or other
real estate-related properties.
The ARM Pass-Through Certificates proposed to be acquired by the Company
will be subject to periodic interest rate adjustments which may be less
frequent that the increases or decreases in the borrowings or financings
utilized by the Company. In a period of increasing interest rates, the Company
could experience a decrease in Net Cash Flow because the interest rates on its
borrowings could increase faster than the interest rates on ARM Pass-Through
Certificates owned by the Company. Additionally, ARMs backed by loans secured
by liens on single-family (one-to-four) residences are subject to periodic and
lifetime interest rate caps which limit the amount an ARM interest rate can
change during any given period. The Company's borrowings will generally not be
subject to similar restrictions. The impact on Net Cash Flows of such interest
rate changes will depend on the adjustment features of the Mortgage Assets
owned by the Company and the maturity schedules of the Company's borrowings.
Privately Issued ARM Pass-Through Certificates. Privately issued ARM Pass-
Through Certificates are structured similarly to the Fannie Mae, FHLMC and
GNMA pass-through certificates discussed below and are issued by originators
of and investors in Mortgage Loans, including savings and loan associations,
savings banks commercial banks, mortgage banks, investment banks and special
purpose subsidiaries of such institutions. Privately issued ARM Pass-Through
Certificates are usually backed by a pool of conventional adjustable-rate
Mortgage Loans and are generally structured with credit enhancement such as
pool insurance or subordination. However, privately issued ARM Pass-Through
Certificates are typically not guaranteed by an entity having the credit
status of Fannie Mae, FHLMC or GNMA guaranteed obligations.
Existing Fannie Mae ARM Programs. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (12 U.S.C. (S) 1716 et seq.). Fannie Mae
provides funds to the mortgage market primarily by purchasing Mortgage Loans
on homes from local lenders, thereby replenishing their funds for additional
lending. Fannie Mae established its first ARM programs in 1982 and currently
has several ARM programs under which ARM certificates may be issued, including
programs for the issuance of securities through REMICs under the Code.
32
<PAGE>
Each Fannie Mae ARM Pass-Through Certificate issued to date has been issued
in the form of a pass-through certificate representing a fractional undivided
interest in a pool of ARMs formed by Fannie Mae. The ARMs included in each
pool are fully amortizing conventional Mortgage Loans secured by a first lien
on either one-to-four family residential properties or multifamily properties.
The original terms to maturities of the Mortgage Loans generally do not exceed
40 years. Currently, Fannie Mae has issued several different series of ARMs.
All of Fannie Mae's series of ARMs are in its lender (or Swaps) mortgage-
backed securities program where individual lenders swap pools of Mortgage
Loans that they originated or purchased for a Fannie Mae security backed by
those same Mortgage Loans. Each series bears an initial interest rate and a
margin tied to an index based on all Mortgage Loans in the related pool, less
a fixed percentage representing servicing compensation and Fannie Mae's
guarantee fee. The specified index used in each series has included the One-
Year U.S. Treasury Rate published by the Federal Reserve Board, the 11th
District Cost of Funds Index published by the Federal Home Loan Bank of San
Francisco and other indices. In addition, the majority of series of Fannie Mae
ARMs issued to date have had a monthly, semi-annual or annual interest rate
adjustment.
Adjustments to the interest rates on Fannie Mae ARMs are typically subject
to lifetime caps. In addition, some pools contain ARMs that are subject to
semi-annual or annual interest rate change limitations, frequently 1% to 2%,
respectively. Some pools contain ARMs that provide for limitations on the
amount by which monthly payments may be increased but have no limitation on
the frequency or magnitude of changes to the mortgage interest rate of the ARM
except for the lifetime cap. In cases where an increase in the rate cannot be
covered by the amount of the scheduled payment, the uncollected portion of
interest is deferred and added to the principal amount of the ARM. In such
cases, interest paid on the Fannie Mae Certificates is a monthly pass-through
of the amount of interest on each ARM rather than a weighted average pass-
through rate of interest.
Fannie Mae guarantees to the registered holder of a Fannie Mae Certificate
that it will distribute amounts representing scheduled principal and interest
(at the rate provided by the Fannie Mae Certificate) on the Mortgage Loans in
the pool underlying the Fannie Mae Certificate, whether or not received, and
the full principal amount of any such Mortgage Loan foreclosed or otherwise
finally liquidated, whether or not the principal amount is actually received.
The obligations of Fannie Mae under its guarantees are solely those of Fannie
Mae and are not backed by the full faith and credit of the United States. If
Fannie Mae were unable to satisfy such obligations, distributions to holders
of Fannie Mae Certificates would consist solely of payments and other
recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such Mortgage Loans.
Existing FHLMC ARM Programs. The Federal Home Loan Mortgage Corporation is a
corporate instrumentality of the United States created pursuant to an Act of
Congress (Title III of the Emergency Home Finance Act of 1970, as amended, 12
U.S.C. (S) 1451-1459), on July 24, 1970. The principal activity of FHLMC
currently consists of the purchase of Conforming Mortgage Loans or
participation interests therein and the resale of the loans and participations
so purchased in the form of guaranteed Mortgage Securities. FHLMC established
its first regular ARM program in 1986 and currently has several regular ARM
programs available for the issuance of ARM certificates and a number of
special programs that may be offered to Mortgage Loan sellers. All of the
Mortgage Loans evidenced by FHLMC Certificates are conventional Mortgage
Loans, and are not guaranteed or insured by, and are not obligations of, the
United States or any agency or instrumentality thereof, other than FHLMC.
Each FHLMC Certificate issued to date has been issued in the form of a Pass-
Through Certificate representing an undivided interest in a pool of ARMs
purchased by FHLMC. The ARMs included in each pool are fully amortizing,
conventional Mortgage Loans with original terms to maturity of up to 40 years
secured by first liens on one-to-four unit family residential properties or
multi-family properties. An ARM certificate issued by FHLMC may be issued
under one of two cash programs (comprised of Mortgage Loans purchased from a
number of sellers) or guarantor programs (comprised of Mortgage Loans
purchased from one seller in exchange for participation certificates
representing interests in the Mortgage Loans purchased).
33
<PAGE>
The interest rate paid on FHLMC Certificates adjusts on the first day of the
month following the month in which the interest rates on the underlying
Mortgage Loans adjust. The interest rates paid on ARM certificates issued
under FHLMC's standard ARM programs adjust annually in relation to the One-
Year U.S. Treasury Rate as published by the Federal Reserve Board. The
specified index used in each FHLMC series has also included the 11th District
Cost of Funds Index published by the Federal Home Loan Bank of San Francisco
and other indices. Interest rates paid on FHLMC Certificates equal the
applicable index rate plus a specified number of basis points ranging
typically from 125 to 250 basis points. In addition, the majority of series of
FHLMC Mortgage Securities issued to date have had a monthly, semi-annual or
annual interest adjustment. Adjustments in the interest rates paid are
generally limited to an annual increase or decrease of either 1% or 2% and to
a lifetime cap of 5% or 6% over the initial interest rate. Certain FHLMC
programs include Mortgage Loans that allow the borrower to convert the
adjustable mortgage interest rate of his ARM to a fixed rate. ARMs that are
converted into fixed-rate Mortgage Loans are repurchased by FHLMC or by the
seller of such Mortgage Loans to FHLMC, at the unpaid principal balance
thereof, plus accrued interest to the due date of the last adjustable rate
interest payment.
Some FHLMC pools contain ARMs that provide for limitations on the amount by
which monthly payments may be increased but have no limitation on the
frequency or magnitude of changes to the mortgage interest rate of the ARM
except for the lifetime cap. In cases where an increase in the rate cannot be
covered by the amount of the scheduled payment, the uncollected portion of
interest is deferred and added to the principal amount of the ARM. In such
cases, interest paid on the FHLMC Certificates is a monthly pass-through of
the amount of interest on each ARM rather than a weighted average pass-through
rate of interest.
FHLMC guarantees to each holder of its ARM certificates the timely payment
of interest at the applicable pass-through rate and ultimate collection of all
principal on the holder's pro rata share of the unpaid principal balance of
the related ARMs, but does not guarantee the timely payment of scheduled
principal of the underlying Mortgage Loans. The obligations of FHLMC under its
guarantees are solely those of FHLMC and are not backed by the full faith and
credit of the United States. If FHLMC were unable to satisfy such obligations,
distributions to holders of FHLMC Certificates would consist solely of
payments and other recoveries on the underlying Mortgage Loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such Mortgage Loans.
Existing GNMA ARM Programs. GNMA is a wholly owned corporate instrumentality
of the United States within the Department of Housing and Urban Development
("HUD"). Section 306(g) of Title III of the National Housing Act of 1934, as
amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment
of the principal of and interest on certificates that represent an interest in
a pool of Mortgage Loans insured by the FHA under the Housing Act or Title V
of the Housing Act of 1949, or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code and other loans eligible for inclusion in mortgage pools
underlying GNMA Certificates. Section 306(g) of the Housing Act provides that
"the full faith and credit of the United States is pledged to the payment of
all amounts which may be required to be paid under any guaranty under this
subsection." An opinion, dated December 12, 1969, of an Assistant Attorney
General of the United States, states that such guarantees under Section 306(g)
of mortgage-backed certificates of the type that may be purchased by the
Company or pledged as security for a series of Mortgage Securities are
authorized to be made by GNMA and "would constitute general obligations of the
United States backed by its full faith and credit."
The interest rate paid on the certificates issued under GNMA's standard ARM
program adjusts annually in relation to the One-Year U.S. Treasury Rate as
published by the Federal Reserve Board. Interest rates paid on GNMA
Certificates typically equal the index rate plus 150 basis points. Adjustments
in the interest rate are generally limited to an annual increase or decrease
of 1% and to a lifetime cap of 5%.
CMOs
The Company may, from time to time, invest in variable-rate and short-term
fixed-rate CMOs. CMOs ordinarily are issued in series, each of which consists
of several serially maturing classes ratably secured by a
34
<PAGE>
single pool of Mortgage Loans or Pass-Through Certificates. Generally,
principal payments received on the mortgage-related assets securing a series
of CMOs, including prepayments on such mortgage-related assets, are applied to
principal payments on one or more classes of the CMOs of such series on each
principal payment date for such CMOs. Scheduled payments of principal of and
interest on the mortgage-related assets and other collateral securing a series
of CMOs are intended to be sufficient to make timely payments of interest on
such CMOs and to retire each class of such CMOs by its stated maturity.
CMOs may be subject to certain rights of issuers thereof to redeem such CMOs
prior to their stated maturity dates, which may have the effect of diminishing
the Company's anticipated return on its investment. The Company will not
acquire any CMOs that do not qualify as Qualified REIT Real Estate Assets.
Mortgage Warehouse Participations
The Company also may from time to time acquire Mortgage Warehouse
Participations as an additional means of diversifying its sources of income,
provided that such investments, together with the Company's investments in
Limited Investment Assets, will not in the aggregate exceed 30% of its total
Mortgage Assets. These investments are participations in lines of credit to
Mortgage Loan originators that are secured by recently originated Mortgage
Loans that are in the process of being sold to investors. Mortgage Warehouse
Participations do not qualify as Qualified REIT Real Estate Assets.
Accordingly, this activity will be limited by the REIT Provisions of the Code.
See "Federal Income Tax Considerations--Requirements for Qualification as a
REIT."
Other Mortgage Securities
General. The Company may acquire Other Mortgage Securities or interests
therein if Management determines that it will be beneficial to do so and it
will not adversely affect qualification of the Company as a REIT. Such Other
Mortgage Securities may include non-High Quality Mortgage Assets and other
Mortgage Securities collateralized by single-family Mortgage Loans, Mortgage
Warehouse Participations, Mortgage Derivative Securities, Subordinated
Interests and other mortgage-backed and mortgage-collateralized obligations,
other than Pass-Through Certificates and CMOs.
Mortgage Derivative Securities. The Company may acquire Mortgage Derivative
Securities as market conditions warrant, either as an independent stand-alone
investment opportunity or to assist in the management of prepayment and other
risks. Mortgage Derivative Securities provide for the holder to receive
interest only, principal only, or interest and principal in amounts that are
disproportionate to those payable on the underlying Mortgage Loans. Payments
on Mortgage Derivative Securities are highly sensitive to the rate of
prepayments on the underlying Mortgage Loans. In the event of more rapid than
anticipated prepayments on such Mortgage Loans, the rates of return on
interests in Mortgage Derivative Securities representing the right to receive
interest only or a disproportionately large amount of interest ("Interest Only
Derivatives") would be likely to decline. Conversely, the rates of return on
Mortgage Derivative Securities representing the right to receive principal
only or a disproportionate amount of principal ("Principal Only Derivatives")
would be likely to increase in the event of rapid prepayments.
The Company presently intends to acquire Mortgage Derivative Securities,
including Principal and Interest Only Derivatives. Interest Only Derivatives
may be an effective hedging device since they generally increase in value as
Mortgage Securities representing interests in adjustable-rate mortgages
decrease in value. The Company also may invest in other types of floating-rate
derivatives that are currently available in the market. The Company also may
invest in other Mortgage Derivative Securities that may in the future be
developed if the Board of Directors, including a majority of Unaffiliated
Directors, determines that such investments would be advantageous to the
Company. The Company will not acquire REMIC residuals or other CMO residuals.
However, the Company may retain residual interests in its own securitizations
of Mortgage Loans. Moreover, the Company will not purchase any Mortgage
Derivative Securities that do not qualify as Qualified REIT Real Estate
Assets.
35
<PAGE>
Subordinated Interests. The Company also may acquire Subordinated Interests,
which are classes of Mortgage Securities that are junior to other classes of
such series of Mortgage Securities in the right to receive payments from the
underlying Mortgage Loans. The subordination may be for all payment failures
on the Mortgage Loans securing or underlying such series of Mortgage
Securities. The subordination will not be limited to those resulting from
certain types of risks, such as those resulting from war, earthquake or flood,
or the bankruptcy of a borrower. The subordination may be for the entire
amount of the series of Mortgage Securities or may be limited in amount.
Any Subordinated Interests acquired by the Company will be limited in amount
and bear yields that the Company believes are commensurate with the risks
involved. The market for Subordinated Interests is not extensive and may be
illiquid. In addition, the Company's ability to sell Subordinated Interests
will be limited by the REIT Provisions of the Code. Accordingly, the Company
intends to purchase Subordinated Interests for investment purposes only.
Although publicly offered Subordinated Interests generally will be rated, the
risks of ownership will be substantially the same as the ownership of unrated
Subordinated Interests because the rating does not address the possibility
that the Company might suffer a lower than anticipated yield or fail to
recover its initial investment. The Company will only purchase Subordinated
Interests that are consistent with its credit risk management policy and will
not purchase any Subordinated Interests that do not qualify as Qualified REIT
Real Estate Assets.
Mortgage Loans
General. In the future, following the development of an appropriate
infrastructure, the Company intends to acquire and accumulate Mortgage Loans
as part of its investment strategy until a sufficient quantity has been
accumulated for securitization into High Quality Mortgage Securities. The
Mortgage Loans acquired by the Company and not yet securitized, together with
the Company's investments in Limited Investment Assets, will not constitute
more than 30% of its total Mortgage Assets at any time. All Mortgage Loans
will be acquired with the intention of securitizing them into High Quality
Mortgage Securities. However, there can be no assurance that the Company will
be successful in securitizing the Mortgage Loans. After a pool of Mortgage
Loans has been securitized, the Mortgage Loans will no longer be considered
Limited Investment Assets. To meet the Company's investment criteria, the
Mortgage Loans to be acquired by the Company will generally conform to the
underwriting guidelines established by Fannie Mae, FHLMC or other credit
insurers. Applicable banking laws generally require that an appraisal be
obtained in connection with the original issuance of Mortgage Loans by the
lending institution. The Company does not intend to obtain additional
appraisals at the time of acquiring Mortgage Loans.
The Mortgage Loans may be originated by or purchased from various Suppliers
of Mortgage Assets throughout the United States, such as savings and loan
associations, banks, mortgage bankers, home builders, insurance companies and
other mortgage lenders. The Company may acquire Mortgage Loans directly from
originators and from entities holding Mortgage Loans originated by others. The
Board of Directors of the Company has not established any limits upon the
geographic concentration of Mortgage Loans to be acquired by the Company or
the credit quality of Suppliers of Mortgage Assets. See "Risk Factors--
Decrease in Net Interest Income from Mortgage Assets Due to Interest Rate
Fluctuations" and "--Inability to Acquire Mortgage Assets with Favorable
Interest Rates and Terms May Adversely Affect Net Interest Income."
The Company will acquire ARMs. The interest rate on ARMs is typically tied
to an index (such as the One-Year U.S. Treasury Rate published by the Federal
Reserve Board, the 11th District Cost of Funds Index published by the Federal
Home Loan Bank of San Francisco or LIBOR) and is adjustable periodically at
various intervals. Such Mortgage Loans may be subject to lifetime or periodic
interest rate or payment caps.
Conforming and Nonconforming Mortgage Loans. In the future, the Company may
acquire both Conforming and Nonconforming Mortgage Loans for securitization.
Conforming Mortgage Loans comply with the requirements for inclusion in a loan
guarantee program sponsored by GNMA, FHLMC or Fannie Mae. Under current
regulations, the maximum principal balance allowed on Conforming Mortgage
Loans
36
<PAGE>
ranges from $214,600 for one-unit residential loans ($321,000 for such
residential loans secured by mortgage properties located in either Alaska or
Hawaii) to $412,450 for four-unit residential loans ($618,875 for such
residential loans secured by mortgaged properties located in either Alaska or
Hawaii). Nonconforming Mortgage Loans are Mortgage Loans that do not qualify
in one or more respects for purchase by Fannie Mae or FHLMC under their
standard programs. The Company expects that a majority of Nonconforming
Mortgage Loans it purchases will be nonconforming primarily because they have
original principal balances which exceed the requirements for FHLMC or Fannie
Mae programs.
Commitments to Mortgage Loan Sellers. The Company may issue commitments
("Commitments") to originators and other sellers of Mortgage Loans who follow
policies and procedures that generally comply with Fannie Mae and FHLMC
regulations and guidelines and that comply with all applicable federal and
state laws and regulations for Mortgage Loans secured by single-family (one-
to-four units) residential properties. In addition, Commitments may be issued
for Agency Certificates as well as privately issued Pass-Through Certificates
and Mortgage Loans. Commitments will obligate the Company to purchase Mortgage
Assets from the holders of the Commitments for a specific period of time, in a
specific aggregate principal amount and at a specified price and margin over
an index. Although the Company may commit to acquire Mortgage Loans prior to
funding, all loans are to be fully funded prior to their acquisition by the
Company. Following the issuance of Commitments, the Company will be exposed to
risks of interest rate fluctuations similar to those risks on adjustable-rate
Mortgage Assets.
Securitization of Mortgage Loans. The Company anticipates that in the
future, if it obtains personnel with the appropriate expertise, it may create,
through securitization, High Quality Mortgage Securities with substantially
all Mortgage Loans it acquires. The Company's decision at any time to acquire
Mortgage Loans for securitization will be based on the Company's determination
that it can earn a higher yield on the Mortgage Securities created through
securitization than on comparable Mortgage Securities purchased in the market.
In making this determination, the Company will consider the demand for the
Mortgage Securities to be created from such Mortgage Loans, the cost of
securitization, the relative strength of issuers and other market participants
active in such securities, Rating Agency requirements and other factors
affecting the structure, cost, rating and benefits of such securities relative
to each other and to other investment alternatives.
The Company may elect to conduct its operations of acquiring and
securitizing Mortgage Loans through one or more taxable subsidiaries formed
for such purpose.
In connection with the creation of a new Mortgage Security through
securitization of Mortgage Loans, 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 agency that
regularly engages in this activity (the "Master Servicer"). At the present
time, the Company does not engage in this business and no Affiliates of the
Company or the Manager will be appointed as a Master Servicer for any issue of
Mortgage Securities created by the Company.
To the extent that Management determines that it is not in the best
interests of the Company to securitize mortgage loans, it may engage in whole
loan sale transactions with respect to loans accumulated in its portfolio.
Protection Against Mortgage Loan Risks. It is anticipated that any Mortgage
Loan purchased will have a commitment for mortgage pool insurance from a
mortgage insurance company with a claims-paying ability in one of the two
highest rating categories by either of the Rating Agencies. Mortgage pool
insurance insures the payment of certain portions of the principal and
interest on Mortgage Loans. In lieu of mortgage pool insurance, the Company
may arrange for other forms of credit enhancement such as letters of credit,
subordination of cash flows, corporate guaranties, establishment of reserve
accounts or over-collateralization. The Company expects that any Mortgage
Loans acquired will be reviewed by a mortgage pool insurer or other
37
<PAGE>
qualified Mortgage Loan underwriter to ensure that the credit quality of the
Mortgage Loans meets the insurer's guidelines. The Company intends to rely
primarily upon the credit evaluation of such third-party mortgage pool insurer
or underwriter issuing the commitment rather than make its own independent
credit review in determining whether to purchase a Mortgage Loan. Credit
losses covered by the pool insurance policies or other forms of credit
enhancement are restricted to the limits of their contractual obligations and
may be lower than the principal amount of the Mortgage Loan. The pool
insurance or credit enhancement will be issued when the Mortgage Loan is
subsequently securitized, and the Company will be at risk for credit losses on
that loan prior to its securitization.
In addition to credit enhancement, the Company anticipates that it will also
obtain a commitment for special hazard insurance on the Mortgage Loans, if
available at reasonable cost, to mitigate casualty losses that are not usually
covered by standard hazard insurance, such as vandalism, war, earthquake and
floods. This special hazard insurance is not in force during the accumulation
period, but is activated instead at the time the Mortgage Loans are pledged as
collateral for the Mortgage Securities. Accordingly, the risks associated with
such special hazard losses exist primarily between the times the Company
purchases a Mortgage Loan and the inclusion of such Mortgage Loan within a
newly created issue of Mortgage Securities.
It is expected that when the Company acquires Mortgage Loans, the seller
will represent and warrant to the Company that there has been no fraud or
misrepresentation during the origination of the Mortgage Loans. It will agree
to repurchase any loan with respect to which there is fraud or
misrepresentation. The Company will provide similar representations and
warranties when the Company sells or pledges the Mortgage Loans as collateral
for Mortgage Securities. If a Mortgage Loan becomes delinquent and the pool
insurer is able to prove that there was fraud or misrepresentation in
connection with the origination of the Mortgage Loan, the pool insurer will
not be liable for the portion of the loss attributable to such fraud or
misrepresentation. Although the Company will have recourse to the seller based
on the seller's representations and warranties to the Company, the Company
will be at risk for loss to the extent the seller does not perform its
repurchase obligations.
COMPETITION FOR MORTGAGE ASSETS
In acquiring Mortgage Assets, the Company will compete with other REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, GNMA, Fannie Mae,
FHLMC and other entities purchasing Mortgage Assets, most of which have
greater financial resources than the Company. In addition, there are several
REITs similar to the Company, and others may be organized in the future. The
effect of the existence of additional REITs may be to increase competition for
the available supply of Mortgage Assets suitable for purchase by the Company.
Increased competition for the acquisition of eligible Mortgage Assets or a
diminution in the supply could result in higher prices and, thus, lower yields
on such Mortgage Assets that could further narrow the yield spread over
borrowing costs. It could also result in the Company's inability to deploy its
funds in acceptable investments.
Management anticipates that the Company will be able to compete effectively
and generate competitive rates of return for stockholders due to Management's
expertise in investing in mortgage securities, its access to and experience in
secondary mortgage markets, its ability to utilize prudent amounts of leverage
through accessing wholesale markets for collateralized borrowings, its
exemption from certain forms of regulation and the tax advantages of its REIT
status.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act. The Company does not currently
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) originate loans, or (iv) offer securities in exchange for real
property.
38
<PAGE>
FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Board of Directors has established the investment policies, operating
policies and strategies set forth in this Prospectus. The Board of Directors
has the power to modify or waive such policies and strategies without the
consent of the stockholders to the extent that the Board of Directors
(including a majority of the Unaffiliated Directors) determines that such
modification or waiver is in the best interests of stockholders. Among other
factors, developments in the market that affect the policies and strategies
mentioned herein or which change the Company's assessment of the market may
cause the Company's Board of Directors to revise its policies and strategies.
However, if such modification or waiver relates to the relationship of, or any
transaction between, the Company and the Manager or any Affiliate of the
Manager, the approval of a majority of the Unaffiliated Directors is also
required.
The Company intends to monitor closely its purchases of Mortgage Assets and
the income from such assets, including from its hedging strategies, so as to
ensure at all times that it maintains its qualification as a REIT and its
exemption under the Investment Company Act. The Company intends to engage
qualified accountants and tax experts to assist in developing accounting
systems and testing procedures and to conduct quarterly compliance reviews
designed to determine compliance with the REIT Provisions of the Code and the
Company's exempt status under the Investment Company Act. See "Federal Income
Tax Considerations--Requirements for Qualification as a REIT" and "Risk
Factors--Failure to Maintain Exemption from the Investment Company Act Would
Adversely Affect Results of Operations" and "--Failure to Maintain REIT Status
Would Result in Company Being Subject to Tax as a Regular Corporation." No
changes in the Company's investment and operating policies, including credit
criteria for Mortgage Asset investments, may be made without the approval of
the Company's Board of Directors, including by a majority of the Unaffiliated
Directors.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or the
Manager is a party or to which any property of the Company or the Manager is
subject.
39
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Company was incorporated in the State of Maryland on October 16, 1997.
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Lloyd McAdams........... 52 Chairman of the Board, President and Chief Executive Officer
Heather U. Baines....... 55 Executive Vice President
Evangelos Karagiannis... 35 Executive Vice President
Pamela J. Watson........ 42 Executive Vice President, Chief Financial Officer and Secretary
Joe E. Davis............ 63 Director
Charles H. Black........ 71 Director
</TABLE>
LLOYD MCADAMS has been the Chairman of the Board, President and Chief
Executive Officer of the Company and of the Manager since their formation. Mr.
McAdams is also the Chairman of the Board and Chief Investment Officer of
Pacific Income Advisers, Inc. ("PIA"), an investment advisory firm organized
in 1986. Mr. McAdams is also the President of Syndicated Capital, Inc., a
registered broker-dealer that, among other things, acts as a distributor of
mutual funds managed by PIA. Mr. McAdams is an officer and a trustee of each
of the mutual funds managed by PIA. Before joining PIA, Mr. McAdams held the
position of President of Security Pacific Investment Managers, Inc. from 1981
to 1987, Senior Vice President of Trust Company of the West from 1975 to 1981,
and Investment Officer with the State of Tennessee from 1973 to 1975. Mr.
McAdams holds a Bachelor of Science in Statistics from Stanford University, a
Masters in Business Administration from the University of Tennessee and is a
Chartered Financial Analyst.
HEATHER U. BAINES has been an Executive Vice President of the Company and
the Manager since their formation. Since 1987 she has held the position of
President and Chief Executive Officer of PIA. From 1978 to 1987 Ms. Baines was
employed by Security Pacific Investment Managers, Inc., ultimately holding the
position of Sr. Vice President and Director. Ms. Baines holds a bachelors
degree from Antioch College.
EVANGELOS KARAGIANNIS has been an Executive Vice President of the Company
and the Manager since their formation. Mr. Karagiannis joined PIA in 1992 and
holds the position of Vice President. Mr. Karagiannis serves as Senior Fixed
Income Portfolio Manager with a specialty in mortgage-backed securities and is
also responsible for PIA's quantitative research. Mr. Karagiannis has been the
author and co-author, with Mr. McAdams, of articles on fixed income portfolio
management and for PIA's internal research. Mr. Karagiannis filed a petition
for bankruptcy under Chapter 7 of the Bankruptcy Code in 1996. Mr. Karagiannis
holds a Doctor of Philosophy degree in physics from the University of
California at Los Angeles ("UCLA") and, prior to joining PIA, was a post-
doctoral fellow at UCLA, where he was a Fulbright Scholar. Mr. Karagiannis is
also a Chartered Financial Analyst.
PAMELA J. WATSON has been an Executive Vice President and the Chief
Financial Officer and Secretary of the Company since its formation and an
Executive Vice President and the Chief Accounting Officer and Secretary of the
Manager since its formation. Ms. Watson joined PIA in 1996 and holds the
position of Vice President. Prior to joining PIA, from 1990 to 1995, Ms.
Watson served as Chief Financial Officer of Kleinwort Benson Cross Financing
Inc. and Kleinwort Benson Capital Management Inc., an interest rate swap
dealer and investment management firm owned by the British merchant bank
Kleinwort Benson Group plc. From 1989 to 1990, Ms. Watson was employed by
Security Pacific State Trust Company as a Business Manager and from 1986 to
1989 she held the position of Vice President of Capital Research and
Management Company, the mutual fund arm of The Capital Group. Ms. Watson holds
a Bachelor of Science degree from Lehigh University and a Masters in Business
Administration from Claremont Graduate School.
40
<PAGE>
JOE E. DAVIS has been a director of the Company since its formation. Since
1982, Mr. Davis has been a private investor. From 1974 to 1982, Mr. Davis
served as President and Chief Executive Officer of National Health Enterprises,
Inc. Mr. Davis serves as a director of BMC Industries, Inc and Wilshire
Technologies, Inc. and as a trustee of American Variable Insurance Trust.
CHARLES H. BLACK has been a director of the Company since its formation.
Since 1985 Mr. Black has been a private investor and financial consultant. From
1985 to 1987 he served as Vice Chairman and Director of Pertron Controls
Corporation. From 1982 to 1985 Mr. Black served as the Executive Vice
President, Director, Chief Financial Officer and Chairman of Investment
Committee for Kaiser Steel Corporation. From 1980 to 1982 Mr. Black served as
Executive Vice President and Chief Financial Officer of Great Western Financial
Corporation. From 1957 to 1980, Mr. Black served at Litton Industries where he
ultimately held the position of Corporate Vice President and Treasurer. Mr.
Black is a member of the Board of Governors of the Pacific Exchange, Inc. Mr.
Black serves as a director of Investment Company of America, AMCAP Fund,
Fundamental Investors, Inc., Orincon Corporation, James Mitchell & Co.,
Wilshire Technologies, Inc. and Windsor Capital Group, Inc. He is also a
trustee of American Variable Insurance Trust.
All directors will be elected at each annual meeting of the Company's
stockholders for a term of one year, and hold office until their successors are
elected and qualified. All officers serve at the discretion of the Board of
Directors. Although the Company may have salaried employees, it currently has
no such employees. The Company will pay an annual director's fee to each
Unaffiliated Director equal to $6,000, a fee of $1,000 for each meeting of the
Board of Directors attended by each Unaffiliated Director and reimbursement of
costs and expenses of all directors for attending such meetings. Affiliated
directors will not be separately compensated by the Company.
Directors and executive officers of the Company are required to devote only
so much of their time to the Company's affairs as is necessary or required for
the effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company, the officers of the
Company, in their capacities as such, are not expected to devote substantial
portions of their time to the affairs of the Company. However, in their
capacities as officers or employees of the Manager, or its Affiliates, they
will devote such portion of their time to the affairs of the Manager as is
required for the performance of the duties of the Manager under the Management
Agreement.
There are no family relationships between any of the directors and officers
of the Company, except that Mr. McAdams and Ms. Baines are husband and wife.
The Company's principal executive offices are located at 1299 Ocean Avenue,
Santa Monica, California, telephone (310) .
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the MGCL, the Charter obligates the Company to indemnify its
present and former directors and officers and to pay or reimburse reasonable
expenses for such individuals in advance of the final disposition of a
proceeding to the maximum extent permitted from time to time by Maryland law.
The MGCL permits a corporation to indemnify its present and former directors
and officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
such proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually received
an improper personal benefit in money, property or services, or (c) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. The Bylaws implement the
provisions relating to indemnification contained in the Charter. Maryland 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,
41
<PAGE>
except to the extent that (i) the person actually received an improper benefit
or profit in money, property or services, or (ii) a judgment or other final
adjudication is entered in a proceeding based on a finding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. The
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. In addition,
the officers, directors and controlling persons of the Company are indemnified
against certain liabilities by the Underwriters and the Underwriters are
indemnified against certain liabilities by the Company under the Underwriting
Agreement relating to the Offering. See "Underwriting." The Company maintains
for the benefit of its officers and directors, officers' and directors'
insurance.
EXECUTIVE COMPENSATION
The Company has not paid, and does not intend to pay, any annual compensation
to the Company's executive officers for their services as executive officers.
However, the Company may from time to time, in the discretion of the Board of
Directors, grant options to purchase shares of Company Common Stock to the
executive officers and directors pursuant to the Company's Stock Option and
Awards Plan. See "--Stock Options."
STOCK OPTIONS
In October 1997, the Company adopted the 1997 Stock Option and Awards Plan
(the "Stock Option and Awards Plan") which provides for the grant of qualified
incentive stock options ("ISOs") which meet the requirements of section 422 of
the Code, stock options not so qualified ("NQSOs"), deferred stock, restricted
stock, performance shares, stock appreciation and limited stock appreciation
rights awards ("Awards") and dividend equivalent rights ("DERs").
The purpose of the Stock Option and Awards Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to others whose job performance affects
the Company. The Stock Option and Awards Plan is administered by the Board of
Directors or a Committee, appointed by the Board of Directors (the
"Administrator"). ISOs may be granted to the officers and key employees of the
Company. NQSOs and Awards may be granted to the directors, officers, key
employees and agents and consultants of the Company, any of its subsidiaries or
parent corporation, and to the directors, officers and key employees of the
Manager.
The Stock Option and Awards Plan provides for granting of DERs in tandem with
all options granted under the Stock Option and Awards Plan. Such DERs accrue
for the account of the optionee shares of Common Stock upon the payment of cash
dividends on outstanding shares of Common Stock. The number of shares accrued
is determined by a formula and such shares are transferred to the optionee only
upon exercise of the related option. The Stock Option and Awards plan permits
DERs to be granted under the Stock Option and Awards Plan with certain
characteristics. First, DERs can be issued in "current-pay" form so that
payment can be made to the optionee at the same time as dividends are paid to
holders of outstanding Common Stock. Second, DERs can be made eligible to
participate not only in cash distributions but also distributions of stock or
other property made to holders of outstanding Common Stock. Shares of Common
Stock accrued for the account of the optionee pursuant to a DER grant may also
be made eligible to receive dividends and distributions. Finally, DERs can be
made "performance based" by conditioning the right of the holder of the DER to
receive any dividend equivalent payment or accrual upon the satisfaction of
specified performance objective.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option and Awards Plan currently authorizes the grant
of options to purchase, and Awards of, an aggregate of 750,000 shares. The
shares reserved for issuance pursuant to the Company's Stock Option and Awards
plan will be increased to an amount equal to 10% of the shares sold, if any,
pursuant to the Underwriters' over-allotment option. If an option granted under
the Stock Options and Awards Plan expires or terminates, or an Award is
42
<PAGE>
forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option and Awards Plan.
Unless previously terminated by the Board of Directors, the Stock Option and
Awards Plan will terminate in October 2007, and no options or Awards may be
granted under the Stock Option and Awards Plan thereafter.
Options granted under the Stock Option and Awards Plan will become
exercisable in accordance with the terms of the grant made by the
Administrator. Awards will be subject to the terms and restrictions of the
Award made by the Administrator. The Administrator has discretionary authority
to select participants from among eligible persons and to determine at the
time an option or Award is granted when and in what increments shares covered
by the option may be purchased and, in the case of options, whether it is
intended to be an ISO or a NQSO provided, however, that certain restrictions
applicable to ISOs are mandatory, including a requirement that ISOs not be
issued for less than 100% of the then fair market value of the Common Stock
(110% in the case of a grantee who holds more than 10% of the outstanding
Common Stock) and a maximum term of ten years (five years in the case of a
grantee who holds more than 10% of the outstanding Common Stock).
Under current law, ISOs may not be granted to any director of the Company
who is not also an employee, or to directors, officers and other employees of
entities unrelated to the Company. No options or Awards may be granted under
the Stock Option and Awards Plan to any person who, assuming exercise of all
options held by such person, would own or be deemed to own more than 9.8% of
the outstanding shares of equity stock of the Company.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
equity stock). Options may be granted on terms providing for exercise either
in whole or in any part at any time or times during their respective terms, or
only in specified percentages at stated time periods or intervals during the
term of the option.
The exercise price of any option granted under the Stock Option and Awards
Plan is payable in full in cash, or its equivalent as determined by the
Administrator. The Company may make loans available to option holders to
exercise options evidenced by a promissory note executed by the optionholder
and secured by a pledge of Common Stock with fair market value at least equal
to the principal of the promissory note unless otherwise determined by the
Administrator.
The Board of Directors may from time to time revise or amend the Stock
Option and Awards Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may impair the rights of any
participant under any outstanding Award without his consent or may, without
stockholder approval, increase the number of shares subject to the Stock
Option and Awards Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the
Stock Option and Awards Plan, materially increase the benefits accruing to
participants under the Stock Option and Awards Plan or extend the maximum
option term under the Stock Option and Awards Plan.
43
<PAGE>
The following table sets forth the stock options granted to Directors and
executive officers of the Company under the Stock Option and Awards Plan
effective upon the effective date of this Offering.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
NUMBER OF
SHARES PERCENTAGE
UNDERLYING OF OPTIONS
OPTIONS GRANTED TO EXERCISE EXPIRATION
NAME GRANTED(#) EMPLOYEES(%) PRICE($SH)(3) DATE(4)
---- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Lloyd McAdams............... 100,000(1) 27.0% $10.00 October 2007
Heather U. Baines........... 80,000(1) 21.6% $10.00 October 2007
Evangelos Karagiannis....... 80,000(1) 21.6% $10.00 October 2007
Pamela J. Watson............ 80,000(1) 21.6% $10.00 October 2007
Joe E. Davis................ 15,000(2) 4.1% $10.00 October 2007
Charles H. Black............ 15,000(2) 4.1% $10.00 October 2007
</TABLE>
- --------
(1) Such stock options vest 33.3% each year following the date of grant.
(2) Such stock options vest 100% six months following the date of grant.
(3) The exercise price for all options will equal the initial public offering
price.
(4) Such stock options expire ten years from the date of grant or earlier upon
termination of employment.
THE MANAGER
The Manager is an affiliate of PIA and will employ personnel who have
significant experience in the purchase and management of mortgage securities.
PIA is an investment advisory firm organized in 1986 that manages an
investment portfolio for institutional and individual clients which, at
September 30, 1997, totalled over $5 billion, including over $900 million in
mortgage securities. As of September 30, 1997, PIA had 40 full-time employees.
The Company has elected to be externally managed by the Manager to take
advantage of the expertise and economies of scale associated with the Manager
while avoiding having to duplicate administrative functions and incurring the
costs of creating a new administrative infrastructure. The Manager intends to
enter into an administrative services agreement with PIA upon the effective
date of this Offering to provide certain administrative functions required of
the Manager under the Management Agreement.
The Manager will implement the Company's business strategy on a day-to-day
basis and perform certain services for the Company pursuant to policies
established by the Company's Board of Directors and the authority delegated to
the Manager under the Management Agreement. With respect to the Company's
investment strategy, the Manager will employ advanced mortgage analytical
tools to construct a diversified Mortgage Asset portfolio. With respect to the
Company's financing strategy, the Manager will arrange for various types of
financing for the Company and intends to manage actively the interest rate
structure of the Company's assets and liabilities and to monitor the Company's
portfolio leverage. With respect to the Company's risk management strategy,
the Manager will continually evaluate the interest rate sensitivity and
volatility of the portfolio and the mathematical assumptions used to calculate
such sensitivities and, if necessary, will attempt to adjust the portfolio
accordingly. The Manager will monitor the credit quality of each asset in the
Company's portfolio and will seek to ensure that the overall credit quality of
the portfolio is in keeping with the Company's credit policies as adopted by
the Company's Board of Directors. The Manager will evaluate the Company's
interest rate risk levels and will perform such analyses as may be required to
determine what types and amounts of hedging transactions are advisable for the
Company given the configuration of its portfolio and will seek to execute the
required trades to maintain hedges. The Manager will be required to perform
other services as may be required in the operation of the Company, such as (i)
providing regular reports regarding the Company to the Board of Directors,
(ii) monitoring the Company's status as a REIT from tax and compliance
standpoints and (iii) providing managerial, administrative and management
information systems support for the Company.
44
<PAGE>
The Manager is a newly-formed entity and has no prior experience in managing
or operating a REIT. Mr. McAdams, Ms. Baines, Ms. Watson and Mr. Karagiannis
and certain other personnel have significant experience in mortgage finance
and in the purchase of mortgage securities. The executive officers of the
Manager that will assist in managing the Company have an average of 10 years
of mortgage related experience. The persons below who will become directors
and executive officers of the Manager upon the closing of the Offering are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Lloyd McAdams*.......... 52 Chairman of the Board, President and Chief Executive Officer
Heather U. Baines*...... 55 Executive Vice President
Evangelos Karagiannis*.. 35 Executive Vice President
Pamela J. Watson*....... 42 Executive Vice President, Chief Financial Officer and Secretary
</TABLE>
- --------
*These persons also serve as directors or officers of the Company.
For biographical information on these persons, see "Management of the
Company--Directors and Executive Officers."
Mr. McAdams and Ms. Baines beneficially own 100% of the stock of the
Manager.
The address of the Manager is 1299 Ocean Avenue, Suite 210, Santa Monica,
California 90401, telephone (310) .
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager
effective upon the Closing of this Offering for an initial term of five years.
The Management Agreement may be terminated by the Company without cause at any
time upon 60 days written notice by a majority vote of the Unaffiliated
Directors or by a vote of the holders of a majority of the outstanding shares
of capital stock having the right to vote. In addition, the Company has the
right to terminate the Management Agreement for "cause" upon the happening of
certain specified events, including a material breach by the Manager of any
provision contained in the Management Agreement, which events are not related
to the Manager's performance under the Management Agreement.
The Manager will report to the Company's Board of Directors and will have
only such functions and authority as the Company may delegate to it. The
Manager will be responsible for the day-to-day operations of the Company and
will perform such services and activities relating to the assets and
operations of the Company as may be appropriate, including:
(1) serving as the Company's consultant with respect to formulation of
investment criteria, interest rate risk management and preparation of
policy guidelines by the Board of Directors;
(2) advising the Company in developing criteria for Mortgage Asset
purchase commitments that are tailored to the Company's long-term
investment objectives, and making available to the Company its knowledge
and experience with respect to Mortgage Assets;
(3) representing the Company in connection with the purchase and
commitment to purchase Mortgage Assets meeting the Company's investment
criteria and the maintenance and administration of its portfolio of
Mortgage Assets;
(4) advising and negotiating with respect to the Company's agreements
with third-party lenders to provide borrowings to the Company;
(5) furnishing reports and statistical and economic analysis to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(6) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data, obtained from certain nationally
recognized dealers that maintain markets in Mortgage Assets identified by
the Board of Directors from time to time, and providing data and advice to
the Board of Directors in connection with the identification of such
dealers;
45
<PAGE>
(7) investing or reinvesting Company funds in accordance with policies
and procedures established from time to time by the Board of Directors;
(8) providing executive and administrative personnel, office space and
services required in rendering services to the Company; administering the
day-to-day operations of the Company; and performing and supervising the
performance of such other administrative functions necessary in the
management of the Company, which will include contracting with appropriate
third parties, which will include PIA and its Affiliates, to provide
various services, including facilities and costs associated therewith,
technology, management information systems and other similar operations or
administrative services;
(9) overseeing the day-to-day operations of the Company and performing
and supervising the performance of such other administrative functions
necessary in the management of the Company as may be agreed upon by the
Manager and the Board of Directors; including the collection of revenues
and payment of the Company's debts and obligations;
(10) counseling the Company in connection with policy decisions made by
the Board of Directors;
(11) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;
(12) evaluating and advising the Company's Board of Directors with
respect to hedging strategies and, upon approval by the Board of Directors,
engaging in hedging activities on behalf of the Company, consistent with
the Company's status as a REIT;
(13) advising, negotiating and overseeing the servicing and
securitization of Mortgage Loans and the issuance of Mortgage Securities
from pools of Mortgage Loans;
(14) counseling the Company regarding the maintenance of its exemption
from the Investment Company Act and monitoring compliance with the
requirements for maintaining exemption from that Act;
(15) counseling the Company regarding the maintenance of its status as a
REIT and monitoring compliance with the various REIT qualification tests
and other rules set out in the Code and the income tax regulations
promulgated thereunder; and
(16) performing such other services as may be required from time to time
for management and other activities relating to the assets of the Company
as the Manager shall deem appropriate under the particular circumstances.
Following the initial five-year term, the Management Agreement will be
automatically renewed for additional one-year terms, unless terminated by the
Company or the Manager upon written notice. Except in the case of a
termination or non-renewal by the Company for cause, upon termination or non-
renewal of the Management Agreement by the Company, the Company is obligated
to pay the Manager what could be a substantial termination or non-renewal fee.
The termination or non-renewal fee shall be equal to the fair market value of
the Management Agreement without regard to the Company's termination right, as
determined by an independent appraisal. The selection of the independent
appraiser shall be subject to the approval of the Unaffiliated Directors. The
payment of such a fee could adversely affect the results of the Company's
operations.
MANAGEMENT COMPENSATION
The Manager will receive a per annum base management fee based on the
Average Net Invested Assets of the Company and its subsidiaries for such year,
payable monthly in arrears, equal to 1% of the first $300 million of Average
Net Invested Assets, plus 0.8% of the portion above $300 million.
The term "Average Net Invested Assets" means for any period the difference
between (i) the aggregate book value of the consolidated assets of the Company
and its subsidiaries, before reserves for depreciation or bad debts or other
similar non cash reserves and (ii) the book value of average debt associated
with the Company's ownership of Mortgage Assets, computed by taking the
average of such net values at the end of each month during such period.
46
<PAGE>
The Manager shall be entitled to receive as incentive compensation for each
fiscal quarter, an amount equal to 20% of the Net Income of the Company,
before Incentive Compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten Year U.S. Treasury Rate (average
of weekly average yield to maturity for U.S. Treasury securities (adjusted to
a constant maturity of 10 years) as published weekly by the Federal Reserve
Board during a quarter) plus 1%. The incentive compensation calculation and
payment will be made quarterly in arrears. The term "Return on Equity" is
calculated for any quarter by dividing the Company's Net Income for the
quarter by its Average Net Worth for the quarter. For such calculations, the
"Net Income" of the Company means the taxable income of the Company before the
Manager's incentive compensation, net operating loss deductions arising from
losses in prior periods and deductions permitted by the Code in calculating
taxable income for a REIT plus the effects of adjustments, if any, necessary
to record hedging and interest transactions in accordance with generally
accepted accounting principles. A deduction for all of the Company's interest
expenses for borrowed money is taken in calculating Net Income. "Average Net
Worth" for any period means the arithmetic average of the sum of the gross
proceeds from any offering of its equity securities by the Company, before
deducting any underwriting discounts and commissions and other expenses and
costs relating to the offering, plus the Company's retained earnings (without
taking into account any losses incurred in prior periods) computed by taking
the average of such values at the end of each month during such period. For
purposes of calculating the incentive compensation payable, the definition,
Return on Equity, is not related to the actual distributions received by
stockholders. The incentive compensation payments to the Manager will be made
before any income distributions are made to stockholders.
The ability of the Company to achieve an annualized Return on Equity in
excess of the Ten Year U.S. Treasury Rate plus 1%, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is dependent
upon the level and volatility of interest rates, the Company's ability to
react to changes in interest rates and to utilize successfully the operating
strategies described herein, and other factors, many of which are not within
the Company's control. The Manager's base management fee shall be calculated
by the Manager within 15 days after the end of each month, and such
calculation shall be promptly delivered to the Company. The Company is
obligated to pay the base management fee within 30 days after the end of each
month. The Manager shall compute the quarterly incentive fee within 45 days
after the end of each fiscal quarter, and the Company shall pay the incentive
fee with respect to each fiscal quarter within 15 days following the delivery
to the Company of the Manager's written statement setting forth the
computation of the incentive fee for such quarter.
EXPENSES
The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, personnel, filing and other expenses)
incurred by the Company, the Manager or its Affiliates on behalf of the
Company in connection with the Offering, estimated at $ . This payment
will not be subject to the limitation on expenses to be borne by the Company
as described in the paragraph below.
Subject to the limitations set forth below, the Company will also pay all
operating expenses except those specifically required to be borne by the
Manager under the Management Agreement. The operating expenses required to be
borne by the Manager include the compensation of the Company's officers and
the cost of office space, equipment and other personnel required for the
Company's day-to-day operations. The expenses that will be paid by the Company
will include (but not necessarily be limited to) issuance and transaction
costs incident to the acquisition, disposition and financing of investments,
regular legal and auditing fees and expenses, the compensation and expenses of
the Company's Unaffiliated Directors, the costs of printing and mailing
proxies and reports to stockholders, costs incurred by employees of the
Manager for travel on behalf of the Company, costs associated with any
computer software or hardware that is used solely for the Company, costs to
obtain liability insurance to indemnify the Manager, the Company's directors
and the Underwriters, and the compensation and expenses of the Company's
custodian and transfer agent, if any. The expenses required to be paid by the
Company that are attributable to its operations shall be limited to an amount
per year equal to the greater of 2% of the Average Net Invested Capital of the
Company or 25% of its Net Income
47
<PAGE>
for that year. Expenses excluded from the expense limitation are those
incurred in connection with the servicing of Mortgage Loans, the issuance and
administration of Mortgage Securities from pools of Mortgage Loans, the
accumulation of Mortgage Loans, the raising of capital, the acquisition of
assets, interest expenses, taxes and license fees, non-cash costs, litigation,
the base and incentive management fee and other extraordinary and non-
recurring expenses. The determination of Net Income for purposes of
calculating the expense limitation will be the same as for calculating the
Manager's incentive compensation except that it will include any incentive
compensation payable for such period. The Company, rather than the Manager,
will also be required to pay expenses associated with litigation, the raising
of capital, and other extraordinary or non-recurring expenses.
Expenses in excess of such amount will be paid by the Manager, unless the
Unaffiliated Directors determine that, based upon unusual or non-recurring
factors, a higher level of expenses is justified for such fiscal year. In that
event, such expenses may be recovered by the Manager in succeeding years to
the extent that expenses in succeeding quarters are below the limitation of
expenses. Expense reimbursement will be made monthly, subject to adjustment at
the end of each year.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
In addition to its base management fee under the Management Agreement, the
Manager will have the opportunity to earn incentive compensation for each
fiscal quarter in an amount equal to 20% of the amount that the Company's
annualized Net Income (before payment of such incentive compensation) exceeds
the Ten Year U.S. Treasury Rate plus 1%. See "--Management Compensation." In
evaluating Mortgage Assets for investment and other operating strategies, an
undue emphasis on the maximization of income at the expense of other criteria,
such as preservation of capital, in order to achieve a higher incentive fee
could result in increased risk to the value of the Company's Mortgage Asset
portfolio. Any changes in the Company's investment and operating policies are
required to be approved by the Board of Directors, including a majority of the
Unaffiliated Directors.
The Company, on the one hand, and the Manager and its Affiliates, on the
other, do not presently expect to, but may in the future, enter into a number
of relationships other than those governed by the Management Agreement, some
of which may give rise to conflicts of interest between the Manager and its
Affiliates and the Company. Any such relationships or transactions will
require the approval of the Company's Board of Directors, including a majority
of the Unaffiliated Directors. The market in which the Company expects to
purchase Mortgage Assets is characterized by rapid evolution of products and
services and, thus, there may in the future be relationships between the
Company and the Manager and Affiliates of the Manager in addition to those
described herein.
Pursuant to the terms of the Management Agreement, the Manager and its
Affiliates will agree on the allocation of Mortgage Securities between the
Company and other accounts over which the Manager and its Affiliates have
control. Pursuant to such allocation, the Manager will base allocation
decisions on the procedures the Manager considers fair and equitable,
including, without limitation, such considerations as investment objectives,
restrictions and time horizon, availability of cash and the amount of existing
holdings. In some cases, some forms of pro rata allocations may be used and,
in other cases, random allocation processes may be used. In other cases,
neither may be used.
The Company is subject to additional conflicts of interest arising from its
relationships with PIA and their officers, directors and Affiliates. Following
this Offering, the Manager will render management services to the Company and
will be paid a management fee on a quarterly basis, resulting in a direct
benefit to its owner, who is an officer and director of the Company. The
Manager will oversee the day-to-day operations of the Company pursuant to
policies established by the Board of Directors and the authority delegated to
the Manager under the Management Agreement. The Manager intends to enter into
an administrative services agreement with PIA upon the closing of this
Offering, pursuant to which PIA will render certain administrative services to
the Manager. Mr. McAdams, the Company's Chairman of the Board, President and
48
<PAGE>
Chief Executive Officer, owns the Manager. Additionally, Mr. McAdams and
Heather Baines, Company Executive Vice President, own PIA and Mr. McAdams and
Ms. Baines are husband and wife. Additionally, the officers and employees of
the Manager are also officers and employees of the Company and PIA.
The Company has adopted the Stock Option and Awards Plan and the directors,
officers and employees of the Company and the Manager may be granted options
under the Company's Stock Option Plan. See "Management of the Company--Stock
Options."
As of the date of this Prospectus, the Company's 100 shares of Common Stock
outstanding are beneficially by Lloyd McAdams and Heather Baines. The shares
were issued for $1,000 cash. Mr. McAdams has represented that the shares were
purchased for investment purposes only and undertaken that they will be sold
only pursuant to a registration statement under the Securities Act of 1933, as
amended or an applicable exemption from the registration requirements thereof.
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 Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors and its officers will not be liable to the Company, any Mortgage
Security Issuer, any subsidiary of the Company, the Unaffiliated Directors,
the Company's stockholders or any subsidiary's stockholders for acts performed
in accordance with and pursuant to the Management Agreement, except by reason
of acts constituting bad faith, willful misconduct, gross negligence or
reckless disregard of their duties under the Management Agreement.
The Company has agreed to indemnify the Manager, its directors and its
officers with respect to any claims or demands made by third parties and all
expenses, losses, damages, liabilities and charges incurred in connection
therewith arising from any acts or omissions of the Manager made in good faith
in the performance of its duties under the Management Agreement. The
Management Agreement does not limit or restrict the right of the Manager or
any of its officers, directors, employees or Affiliates from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing Mortgage Assets which
meet the Company's polices and criteria, except that the Manager and its
officers, directors, or employees will not be permitted to provide any such
services to any residential mortgage REIT other than the Company. See "Risk
Factors--Conflicts of Interest; Manager and PIA Will Continue to Purchase
Mortgage Assets for Third-Party Accounts."
49
<PAGE>
SECURITY OWNERSHIP
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock at October 22,
1997, as adjusted to reflect the sale of Common Stock being offered hereby, by
(1) each person known to the Company to beneficially own more than five
percent of the Company's Common Stock, (2) each Director, (3) the Company's
executive officers and (4) all Directors and executive officers as a group.
Unless otherwise indicated in the footnotes to the table, Mr. McAdams has, 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>
PERCENTAGE OF
SHARES
BENEFICIALLY
NUMBER OF OWNED
SHARES -----------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Lloyd McAdams(2)................................ 100 100% *
All Directors and Executive Officers as a group
(6 persons).................................... 100 100% *
</TABLE>
- --------
* less than 1%.
(1) Ms. Baines is married to Mr. McAdams and may be deemed to beneficially own
the shares listed.
(2) Mr. McAdams address is 1299 Ocean Avenue, Suite 210, Santa Monica,
California 90401.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100 million shares
of Common Stock, $0.01 par value, and 20 million shares of Preferred Stock,
$0.01 par value, issuable in one or more series. Each share of Common Stock is
entitled to participate equally in dividends when and as declared by the Board
of Directors and in the distribution of assets of the Company upon
liquidation. Each share of Common Stock is entitled to one vote and will be
fully paid and non-assessable by the Company upon issuance. Shares of the
Common Stock of the Company have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized capital stock of the
Company may be increased and altered from time to time as permitted by
Maryland law.
The Preferred Stock may be issued from time to time in one or more classes
or series, with such distinctive designations, rights and preferences as shall
be determined by the Company's Board of Directors. Preferred Stock would be
available for possible future financings of, or acquisitions by, the Company
and for general corporate purposes without any legal requirement that further
stockholder authorization for issuance be obtained. The issuance of Preferred
Stock could have the effect of making an attempt to gain control of the
Company more difficult by means of a merger, tender offer, proxy contest or
otherwise. The Preferred Stock, if issued, could have a preference on dividend
payments that could affect the ability of the Company to make dividend
distributions to the common stockholders.
Meetings of the stockholders of the Company are to be held annually and
special meetings may be called by the Board of Directors, the Chairman of the
Board, the President or a majority of the Unaffiliated Directors. The Charter
reserves to the Company the right to amend any provision thereof in the manner
prescribed by law.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements of qualification for the tax benefits accorded by
the REIT Provisions of the Code are that (1) during the last half of each
taxable year not more than 50% in value of the outstanding
50
<PAGE>
shares may be owned directly or indirectly by five or fewer individuals (the
"50%/5 stockholder test") and (2) there must be at least 100 stockholders on
335 days of each taxable year of 12 months.
In order that the Company may meet these requirements at all times, the
Charter prohibits any person from acquiring or holding, directly or
indirectly, shares of Common Stock in excess of 9.8% in value 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. Subject to certain limitations, the
Company's Board of Directors may increase or decrease the ownership
limitations or waive the limitations for individual investors.
For purposes of the 50%/5 stockholder test, the constructive ownership
provisions applicable under Section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust
proportionately to its stockholders, partners or beneficiaries, attribute
ownership of securities owned by family members and partners to other members
of the same family, treat securities with respect to which a person has an
option to purchase as actually owned by that person, and set forth application
of such attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds shares of Common Stock in violation of the
ownership limitations set forth in the Charter, many types of entities may own
directly more than the 9.8% limit because such entities' shares are attributed
to its individual stockholders. On the other hand, a person will be treated as
owning not only shares of Common Stock actually or beneficially owned, but
also any shares of Common Stock attributed to such person under the
attribution rules described above. Accordingly, under certain circumstances,
shares of Common Stock owned by a person who individually owns less than 9.8%
of the shares outstanding may nevertheless be in violation of the ownership
limitations set forth in the Charter. Ownership of shares of Common Stock
through such attribution is generally referred to as constructive ownership.
The 100 stockholder test is determined by actual, and not constructive,
ownership. The Company will have greater than 100 stockholders of record upon
completion of the Offering.
The Charter further provides that if any transfer of shares of Common Stock
which, if effective, would result in any person beneficially or constructively
owning shares of Common Stock in excess or in violation of the above transfer
or ownership limitations, then that number of shares of Common Stock the
beneficial or constructive ownership of which otherwise would cause such
person to violate such limitations (rounded to the nearest whole shares) shall
be automatically transferred to a trustee (the "Trustee") as trustee of a
trust (the "Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the intended transferee
shall not acquire any rights in such shares. Shares of Common Stock held by
the Trustee shall be issued and outstanding shares of Common Stock. The
intended transferee shall not benefit economically from ownership of any
shares held in the Trust, shall have no rights to dividends, and shall not
possess any rights to vote or other rights attributable to the shares held in
the Trust. The Trustee shall have all voting rights and rights to dividends or
other distributions with respect to shares held in the Trust, which rights
shall be exercised for the exclusive benefit of the Charitable Beneficiary.
Any dividend or other distribution paid to the intended transferee prior to
the discovery by the Company that shares of Common Stock have been transferred
to the Trustee shall be paid with respect to such shares to the Trustee by the
intended transferee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Trustee. The Board of
Directors of the Company may, in its discretion, waive these requirements on
owning shares in excess of the ownership limitations.
Within 20 days of receiving notice from the Company that shares of Common
Stock have been transferred to the Trust, the Trustee shall sell the shares
held in the Trust to a person, designated by the Trustee, whose ownership of
the shares will not violate the ownership limitations set forth in the
Charter. Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds
of the sale to the intended transferee and to the Charitable Beneficiary as
follows. The intended transferee shall receive the lesser of (1) the price
paid by the intended transferee for the shares or, if the intended transferee
did not give value for the shares in connection with the event causing
51
<PAGE>
the shares to be held in the Trust (e.g., in the case of a gift, devise or
other such transaction), the Market Price (as defined below) of the shares on
the day of the event causing the shares to be held in the Trust, and (2) the
price per share received by the Trustee from the sale or other disposition of
the shares held in the Trust. Any net sales proceeds in excess of the amount
payable to the intended transferee shall be immediately paid to the Charitable
Beneficiary. In addition, shares of Common Stock transferred to the Trustee
shall be deemed to have been offered for sale to the Company, or its designee,
at a price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Trust (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift), and (ii)
the Market Price on the date the Company, or its designee, accepts such offer.
The Company shall have the right to accept such offer until the Trustee has
sold shares held in the Trust. Upon such a sale to the Company, the interest
of the Charitable Beneficiary in the shares sold shall terminate and the
Trustee shall distribute the net proceeds of the sale to the intended
transferee.
The term "Market Price" on any date shall mean, with respect to any class or
series of outstanding shares of the Company's stock, the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such shares, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the American Stock Exchange or, if such
shares are not listed or admitted to trading on the American Stock Exchange,
as reported on the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which such shares are listed or admitted to trading or, if such shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc., Automated Quotation Systems, or, if such system
is no longer in use, the principal other automated quotation system that may
then be in use or, if such shares are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in such shares selected by the Company's Board of
Directors or, in the event that no trading price is available for such shares,
the fair market value of the shares, as determined in good faith by the
Company's Board of Directors.
Every owner of more than 5%, in the case of 2,000 or more stockholders of
record and 1% in the case of more than 200 but fewer than 2,000 stockholders
of record, of all classes or series of the Company's stock, within 30 days
after the end of each taxable year, is required to give written notice to the
Company stating the name and address of such owner, the number of shares of
each class and series of stock 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.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of the Charter
and the Bylaws of the Company does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the
Charter and the Bylaws of the Company, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information." For a description of additional restrictions on
transfer of the Common Stock, see "Description of Capital Stock--Repurchase of
Shares and Restrictions on Transfer."
52
<PAGE>
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed from office at any time
but only by the affirmative vote of the holders of at least two-thirds of the
votes of the shares entitled to be cast in the election of directors.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and an "Interested Stockholder" are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. An "Interested Stockholder" is any person who
beneficially owns 10% or more of the voting power of the corporation's shares
or an affiliate of the corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding voting stock of the corporation or an
affiliate of such an Interested Stockholder. After the five-year period, any
such business combination must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation and (b) two-thirds of the votes entitled to be cast by holders
of voting stock of the corporation other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously
paid by the Interested Stockholder for its shares. 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 ACQUISITION
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 acquirer, by officers or by
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (1) one-fifth or more but less than one-third, (2) one-third or more
but less than a majority, or (3) a majority or more of all voting power.
Control Shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses
and delivery of an "acquiring person statement"), may compel the board of
directors of the corporation to call a special meeting of stockholders to be
held within 50 days of the 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.
Unless a corporation's charter or bylaws provide otherwise, if voting rights
are not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement as required by the statute, then, subject to
certain conditions and limitation, the corporation may redeem any or all of
the control shares (except those for which voting rights have previously been
approved) for fair value determined without regard to the absence of voting
rights for the Control Shares, as of the date of the last Control Share
Acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquiror
53
<PAGE>
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of stock. There can be no assurance that such provisions will
not be amended or eliminated at any time in the future.
AMENDMENT TO THE CHARTER
The Company reserves the right from time to time to make any amendment to
its Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights as expressly set forth in the Charter, of any
shares of outstanding stock. The Charter may be amended only by the
affirmative vote of holders of shares entitled to cast not less than a
majority of all the votes entitled to be cast on the matter; provided,
however, that provisions on removal of directors may be amended only by the
affirmative vote of holders of shares entitled to cast not less than two-
thirds of all the votes entitled to be cast in the election of directors.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
holders of shares entitled to cast not less than a majority of all the votes
entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Charter and 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
"Stockholder 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 the meeting by, or at the direction of, the Chairman or the
Board of Directors or by a stockholder who has given timely written notice to
the Secretary of the Company of such stockholder's intention to bring such
business before such meeting. In general, for notice of stockholder
nominations or proposed business (other than business to be included in the
Company's Proxy Statement under the Securities and Exchange 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 and not 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 a stockholder 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.
54
<PAGE>
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and, if the applicable provisions in the
Bylaws are rescinded, the control share acquisition provisions of the MGCL,
the provisions of the Charter on removal of directors and the advance notice
provisions of the Bylaws could delay, defer or prevent a change in control of
the Company or other transaction that might involve a premium price for
holders of Common Stock or otherwise be in their best interest.
TRANSFER AGENT
The Company intends to appoint Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004, (212) 509-4000, as its transfer agent and
registrar for the Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS THAT MAY BE RELEVANT TO A PROSPECTIVE HOLDER OF SHARES OF
COMMON STOCK OF THE COMPANY. THIS DISCUSSION IS BASED ON CURRENT LAW. THE
FOLLOWING DISCUSSION IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSIDERATIONS. IT
DOES NOT DISCUSS ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS, NOR DOES IT
DISCUSS ALL OF THE ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO
A PROSPECTIVE STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR
CIRCUMSTANCES OR TO CERTAIN TYPES OF STOCKHOLDERS (INCLUDING INSURANCE
COMPANIES, CERTAIN TAX-EXEMPT ENTITIES, FINANCIAL INSTITUTIONS,
BROKER/DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL
INCOME TAX LAWS.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK OF THE COMPANY IS URGED TO
CONSULT WITH HIS OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OF
THE PURCHASE, OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS
A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND THE
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion below summarizes the material
provisions applicable to the Company as a REIT for federal income tax purposes
and to its stockholders in connection with their ownership of shares of Common
Stock. However, it is impractical to set forth in this Prospectus all aspects
of federal, state, local and foreign tax law that may have tax consequences
with respect to an investor's purchase of the Common Stock. The discussion of
various aspects of federal taxation contained herein is based on the Code,
administrative regulations, judicial decisions, administrative rulings and
practice, all of which are subject to change. In brief, if certain detailed
conditions imposed by the Code are met, entities that invest primarily in real
estate assets, including Mortgage Loans, and that otherwise would be taxed as
corporations are, with certain limited exceptions, not taxed at the corporate
level on their taxable income that is currently distributed to their
stockholders. This treatment eliminates most of the "double taxation" (at the
corporate level and then again at the stockholder level when the income is
distributed) that typically results from the use of corporate investment
vehicles. A qualifying REIT, however, may be subject to certain excise and
other taxes, as well as normal corporate tax, on Taxable Income that is not
currently distributed to its stockholders. See "--Taxation of the Company"
below.
The Company plans to make an election to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1997.
55
<PAGE>
OPINION OF SPECIAL TAX COUNSEL
Allen, Matkins, Leck, Gamble & Mallory LLP, special tax counsel ("Special
Tax Counsel") to the Company, has advised the Company in connection with the
Offering of the Common Stock and its election to be taxed as a REIT. Based on
existing law and certain representations made to Special Tax Counsel by the
Company and assuming that the Company operates in the manner described in this
Prospectus, in the opinion of Special Tax Counsel, commencing with the
Company's taxable year ending December 31, 1997, the Company has been
organized in conformity with the requirements for qualification as a REIT
under the Code and the Company's actual and proposed method of operation
described in this Prospectus and as represented by the Company to Special Tax
Counsel will enable the Company to qualify as a REIT. However, whether the
Company will in fact so qualify will depend on actual operating results and
compliance with the various tests for qualification as a REIT relating to its
income, assets, distributions, ownership and certain administrative matters,
the results of which may not be reviewed by Special Tax Counsel. Moreover,
certain aspects of the Company's method of operations have not been considered
by the courts or the Service. There can be no assurance that the courts or the
Service will agree with this opinion. In addition, qualification as a REIT
depends on future transactions and events that cannot be known at this time.
Accordingly, Special Tax Counsel is unable to opine whether the Company will
in fact qualify as a REIT under the Code in all events. In the opinion of
Special Tax Counsel, the section of the Prospectus entitled "Federal Income
Tax Considerations" identifies and fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Common Stock
and to the extent such summaries involve matters of law, such statements of
law are correct under the Code. Counsel's opinions are based on various
assumptions and on the factual representations of the Company concerning its
business and assets. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy such
requirements. See "--Termination or Revocation of REIT Status" below.
The opinions of Special Tax Counsel are based upon existing law including
the Internal Revenue Code of 1986, as amended, existing Treasury Regulations,
Revenue Rulings, Revenue Procedures, proposed regulations and case law, all of
which is subject to change either prospectively or retroactively. Moreover,
relevant laws or other legal authorities may change in a manner that could
adversely affect the Company or its stockholders. Special Tax Counsel's
opinions also are based in part on the opinion of special Maryland counsel,
Piper & Marbury L.L.P., that the Company is duly organized and existing under
Maryland law.
In the event that the Company does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that the Company would, as a consequence, be
subject to potentially significant tax liabilities, the amount of earnings and
cash available for distribution to its stockholders would be reduced. See "--
Termination or Revocation of REIT Status" below.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must meet
certain tests which are described immediately below.
Stock Ownership Tests. For all taxable years after the first taxable year
for which a REIT election is made, the Company's shares of Common Stock must
be transferable and must be held by a minimum of 100 persons for at least 335
days of a 12 month year (or a proportionate part of a short tax year). The
Company must also use the calendar year as its taxable year. In addition, at
all times during the second half of each taxable year, no more than 50% in
value of the shares of any class of the stock of the Company may be owned
directly or indirectly by five or fewer individuals. If, for any taxable year,
the Company complies with regulations requiring the maintenance of records to
ascertain ownership of its outstanding stock and the Company does not know or
have reason to know that it failed to satisfy this test, it will be treated as
satisfying this test for any such taxable year. In determining whether the
Company's shares are held by five or fewer individuals, the attribution rules
of Sections 544 of the Code apply. For a description of these attribution
rules,
56
<PAGE>
see "Description of Capital Stock." The Company's Charter impose certain
repurchase provisions and transfer restrictions to avoid more than 50% by
value of any class of the Company's stock being held by five or fewer
individuals (directly or constructively) at any time during the last half of
any taxable year. Such repurchase and transfer restrictions will not cause the
stock not to be treated as "transferable" for purposes of qualification as a
REIT. The Company intends to satisfy both the 100 stockholder and 50%/5
stockholder individual ownership limitations described above for as long as it
seeks qualification as a REIT. See "Description of Capital Stock." The Company
will use the calendar year as its taxable year for income tax purposes.
Asset Tests. On the last day of each calendar quarter at least 75% of the
value of the Company's assets must consist of Qualified REIT Real Estate
Assets, government securities, cash and cash items (the "75% of Assets Test").
The Company expects that substantially all of its assets will be Qualified
REIT Real Estate Assets. Qualified REIT Real Estate Assets include interests
in real property, interests in Mortgage Loans secured by real property and
interests in REMICs.
On the last day of each calendar quarter, of the investments in securities
not included in the 75% of Assets Test, the value of any one issuer's
securities may not exceed 5% by value of the Company's total assets and the
Company may not own more than 10% of any one issuer's outstanding voting
securities. Hedging contracts (other than those which are Qualified REIT Real
Estate Assets) and certain types of other Mortgage Assets may be treated as
securities of the entity issuing such agreements or interests. The Company
will take measures to prevent the value of such contracts, interests or assets
issued by any one entity to exceed 5% of the value of the Company's assets as
of the end of each calendar quarter. Moreover, pursuant to its compliance
guidelines, the Company intends to monitor closely (on not less than a
quarterly basis) the purchase and holding of the Company's assets in order to
comply with the above assets tests. In particular, as of the end of each
calendar quarter the Company intends to limit and diversify its ownership of
hedging contracts and other Mortgage Securities that do not constitute
Qualified REIT Real Estate Assets to less than 25%, in the aggregate, by value
of its portfolio, to less than 5% by value as to any single issuer, and to
less than 10% of the voting stock of any single issuer (collectively the "25%
of Assets Test"). If such limits are ever exceeded, the Company intends to
take appropriate remedial action to dispose of such excess assets within the
30-day period after the end of the calendar quarter, as permitted under the
Code.
When purchasing Mortgage Securities, the Company may rely on certain
opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent
those securities (and the income therefrom) constitute Qualified REIT Real
Estate Assets (and income) for purposes of the 75% of Assets Test (and the
source of income tests discussed below). If the Company invests in a
partnership, it will be treated as receiving its share of the income and loss
of the partnership and owning a proportionate share of the assets of the
partnership and any income from the partnership will retain the character that
it had in the hands of the partnership. If the Company forms a taxable
affiliate to conduct mortgage origination and other activities, it will obtain
an opinion of counsel that the proposed organization and ownership of an
interest in the taxable affiliate will not adversely affect the Company's
status as a REIT.
Where a failure to satisfy any of the asset tests discussed above results
from an acquisition of securities or other property during a quarter, the
failure can be cured by a disposition of sufficient non-qualifying assets
within 30 days after the close of such quarter. The Company intends to
maintain adequate records of the value of its assets to determine its
compliance with the asset tests, and intends to take such action as may be
required to cure any failure to satisfy the test within 30 days after the
close of any quarter.
Gross Income Tests. The Company must meet two separate income-based tests
for each year in order to qualify as a REIT.
1. THE 75% TEST. At least 75% of the Company's gross income (the "75% of
Income Test") for the taxable year must be derived from the following sources:
(i) rents from real property, (ii) interest (other than
57
<PAGE>
interest based in whole or in part on the income or profits of any person) on
obligations secured by mortgages of real property or on interests in real
property; (iii) gains from the sale or other disposition of interests in real
property and real estate mortgages other than gain from stock in trade,
inventory or property held primarily for sale to customers in the ordinary
course of the Company's trade or business ("Dealer Property"); (iv) dividends
or other distributions on shares in other REITs and, provided such shares are
not Dealer Property, gain from the sale of such shares; (v) abatements and
refunds of real property taxes; (vi) income from the operation, and gain from
the sale, of property acquired at or in lieu of a foreclosure of the mortgage
secured by such property or as a result of a default under a lease of such
property ("Foreclosure Property"); (vii) income received as consideration for
entering into agreements to make loans secured by real property or to purchase
or lease real property (including interests in real property and interests in
mortgages on real property) (for example, commitment fees); (viii) gain from
the sale of other disposition of a real estate asset which is not a prohibited
transaction; and (ix) income attributable to stock or debt instruments
acquired with the proceeds from the sale of stock or certain debt obligations
("New Capital") of the Company received during the one-year period beginning
on the day such proceeds were received ("Qualified Temporary Investment
Income"). The investments that the Company intends to make (as described under
"Business and Strategy--Description of Mortgage Assets") will give rise
primarily to mortgage interest qualifying under the 75% of Income Test.
2. THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of the Company's gross income
for the taxable year must be derived from those sources, or from dividends,
interest or gains from the sale or disposition of stock or other securities
that are not dealer property (the "95% of Income Test"). Income attributable
to Mortgage Warehouse Participations. Mortgage Securities (other than
Qualified REIT Real Estate Assets) that the Company holds directly, dividends
on stock interest on any other obligations not secured by real property, and
gains from the sale or disposition of stock or other securities that are not
Qualified REIT Real Estate Assets will constitute qualified income for
purposes of the 95% of Income Test only, but will not be qualified income for
purposes of the 75% of Income Test. Income from mortgage servicing contracts,
loan guarantee fees (or other contracts under which the Company would earn
fees for performing services) and hedging (other than from Qualified REIT Real
Estate Assets) will not qualify for either the 95% or 75% of Income Tests. The
Company intends to severely limit such income and its acquisition of any
assets or investments the income from which does not qualify for purposes of
the 95% of Income Test. Moreover, in order to help ensure compliance with the
95% of Income Test and the 75% of Income Test, the Company intends to limit
substantially all of the assets that it acquires to Qualified REIT Real Estate
Assets. The policy of the Company to maintain REIT status may limit the type
of assets, including hedging contracts, that the Company otherwise might
acquire.
For purposes of determining whether the Company complies with the 75% of
Income Test and the 95% of Income Test detailed above, gross income does not
include gross income from "prohibited transactions." A "Prohibited
Transaction" is one involving a sale of Dealer Property, other than
Foreclosure Property. Net income from Prohibited Transactions is subject to a
100% tax. See "--Taxation of the Company" below.
The Company intends to maintain its REIT status by carefully monitoring its
income, including income from hedging transactions, futures contracts and
sales of Mortgage Assets to comply with the 75% of Income Test and the 95% of
Income Test. In order to help assure its compliance with the REIT Provisions
of the Code, the Company will adopt guidelines the effect of which will be to
limit its ability to earn certain types of income. See "Business--Operating
Policies and Strategies." If the Company fails to satisfy one or both of the
75% or 95% of Income Tests for any year, it may face either (a) assuming such
failure was for reasonable cause and not willful neglect, a 100% tax on the
greater of the amounts of income by which it failed to comply with the 75% of
Income Test or the 95% of Income Test, reduced by estimated related expenses
or (b) loss of REIT status. There can be no assurance that the Company will
always be able to maintain compliance with the gross income tests for REIT
qualification despite its periodic monitoring procedures. Moreover, there is
no assurance that the relief provisions for a failure to satisfy either the
95% or the 75% of Income Tests will be available in any particular
circumstance.
58
<PAGE>
Distribution Requirement. The Company must distribute to its stockholders on
a pro rata basis each year an amount equal to (i) 95% of its Taxable Income
before deduction of dividends paid and excluding net capital gain, plus (ii)
95% of the excess of the net income from Foreclosure Property over the tax
imposed on such income by the Code, less (iii) any excess noncash income (the
"95% Distribution Test"). See "Dividend and Distribution Policy." The Company
intends to make distributions to its stockholders in amounts sufficient to
meet this 95% distribution requirement. Such distributions must be made in the
taxable year to which they relate or, if declared before the timely filing of
the Company's tax return for such year and paid not later than the first
regular dividend payment after such declaration, in the following taxable
year. A nondeductible excise tax, equal to 4% of the excess of such required
distributions over the amounts actually distributed will be imposed on the
Company for each calendar year to the extent that dividends paid during the
year (or declared during the last quarter of the year and paid during January
of the succeeding year) are less than the sum of (i) 85% of the Company's
"ordinary income," (ii) 95% of the Company's capital gain net income, and
(iii) income not distributed in earlier years.
The Service has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions qualify under the
95% distribution test. The Company intends that the terms of the DRP which it
intends to adopt in the future will comply with this ruling. See "Dividend
Reinvestment Plan."
If the Company fails to meet the 95% Distribution Test as a result of an
adjustment to the Company's tax returns by the Service, the Company by
following certain requirements set forth in the Code, may pay a deficiency
dividend within a specified period that will be permitted as a deduction in
the taxable year to which the adjustment is made. The Company would be liable
for interest based on the amount of the deficiency dividend. A deficiency
dividend is not permitted if the deficiency is due to fraud with intent to
evade tax or to a willful failure to file a timely tax return.
Recordkeeping Requirements. A REIT is required to maintain records regarding
the actual and constructive ownership of its shares, and other information,
and within 30 days after the end of its taxable year, to demand statements
from persons owning above a specified level of the REIT's shares (e.g., if the
Company has over 200 but fewer than 2,000 stockholders of record, from persons
holding 1% or more of the Company's outstanding shares of stock and if the
Company has 200 or fewer stockholders of record, from persons holding 1/2% or
more of the stock) regarding their ownership of shares. The Company must
maintain, as part of its records, a list of those persons failing or refusing
to comply with this demand. Stockholders who fail or refuse to comply with the
demand must submit a statement with their tax returns setting forth the actual
stock ownership and other information. The Company also is required to
maintain permanent records of its assets as of the last day of each calendar
quarter. The Company intends to maintain the records and demand statements as
required by these Treasury Regulations.
TERMINATION OR REVOCATION OF REIT STATUS
The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet the requirements described above. In that
event, the Company will not be eligible again to elect REIT status until the
fifth taxable year that begins after the year for which its election was
terminated unless all of the following relief provisions apply: (i) the
Company did not willfully fail to file a timely return with respect to the
termination taxable year, (ii) inclusion of incorrect information in such
return was not due to fraud with intent to evade tax, and (iii) the Company
establishes that failure to meet the requirements was due to reasonable cause
and not willful neglect. The Company may also voluntarily revoke its election,
although it has no intention of doing so, in which event it will be
prohibited, without exception, from electing REIT status for the year to which
the revocation relates and the following four taxable years.
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable
59
<PAGE>
income at regular corporate rates. Distributions to stockholders of the
Company with respect to any year in which it fails to qualify as a REIT would
not be deductible by the Company nor would such distributions be required to
be made. Failure to qualify as a REIT would result in a reduction of the
Company's distributions to stockholders in order to pay the resulting taxes.
If, after forfeiting REIT status, the Company later qualifies and elects to be
taxed as a REIT again, the Company could face significant adverse tax
consequences.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it generally will not
be subject to federal income tax on that portion of its Taxable Income or net
capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any Net Income or
net capital gain not distributed. The Company intends to distribute at least
95% of its Taxable Income to its stockholders on a pro rata basis in each
year. See "Dividend and Distribution Policy."
In addition, the Company will also be subject to a tax of 100% of net income
from any prohibited transaction and will be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% of Income Tests,
reduced by estimated related expenses, if the failure to satisfy such tests is
due to reasonable cause and not willful neglect and if certain other
requirements are met. The Company may be subject to the alternative minimum
tax on certain items of tax preference.
If the Company acquires any real property as a result of foreclosure, or by
a deed in lieu of foreclosure, it may elect to treat such real properly as
Foreclosure Property. Net income from the sale of Foreclosure Property is
taxable at the maximum federal corporate rate, currently 35%. Income from
Foreclosure Property will not be subject to the 100% tax on prohibited
transactions. The Company has the right determine whether to treat such real
properly as foreclosure property on the tax return for the fiscal year in
which such properly is acquired.
If the Company itself were to sell Mortgage Securities on a regular basis,
there is a substantial risk that such Mortgage Securities would be deemed
Dealer Property with all of the profits from such sales subject to tax at the
rate of 100% as income from prohibited transactions. However, the Company,
subject to limitations, may invest in taxable subsidiaries which themselves
may securitize Mortgage Loans and sell such Mortgage Securities without being
subject to this 100% tax on income derived from prohibited transactions, as
such a tax is only applicable to a REIT. See "--Taxable Subsidiaries" below.
The Company may elect to retain and pay income tax on all or a portion of
its net long-term capital gains for any taxable year, in which case the
Company's stockholders would include in their income as long-term capital
gains their proportionate share of such undistributed capital gains. The
stockholders would be treated as having paid their proportionate share of the
capital gains tax paid by the Company, which amounts would be credited or
refunded to the stockholders.
The Company will also be subject to a nondeductible 4% excise tax if it
fails to make timely dividend distributions for each calendar year. See "--
Requirements for Qualification as a REIT--Distribution Requirement" above. The
Company intends to declare its fourth regular annual dividend, as well as a
fifth special dividend, if any, during the final quarter of the year and to
make such dividend distribution no later than 31 days after the end of the
year in order to avoid imposition of the excise tax. Such a distribution would
be taxed to the stockholders in the year that the distributions were declared,
not in the year paid. Imposition of the excise tax on the Company would reduce
the amount of cash available for distribution to its stockholders.
TAXABLE SUBSIDIARIES
The Company may, in the future, cause the creation and sale of Mortgage
Securities through a taxable corporation. The Company and one or more persons
or entities will own all of the capital stock of that taxable corporation,
sometimes referred to as a "taxable subsidiary." In order to ensure that the
Company will not
60
<PAGE>
violate the prohibition on ownership of more than 10% of the voting stock of a
single issuer and the prohibition on investing more than 5% of the value of
its assets in the stock or securities of a single issuer, the Company will own
only shares of nonvoting preferred stock of that taxable subsidiary
corporation and will not own any of the taxable subsidiary's common stock. The
Company will monitor the value of its investment in the taxable subsidiary on
a quarterly basis to limit the risk of violating any of the tests that
comprise the 25% of Assets Test. In addition, the dividends that the taxable
subsidiary pays to the Company will not qualify as income from Qualified REIT
Real Estate Assets for purposes of the 75% of Income Test, and in all events
would have to be limited, along with the Company's other interest, dividends,
gains on the sale of securities, hedging income, and other income not derived
from Qualified REIT Real Estate Assets to less than 25% of the Company's gross
revenues in each year. The taxable subsidiary will not elect REIT status, will
be subject to income taxation on its net earnings and will generally be able
to distribute only its net after-tax earnings to its stockholders, including
the Company, as dividend distributions. If the taxable subsidiary creates a
taxable mortgage pool, such pool itself will constitute a separate taxable
subsidiary of the taxable subsidiary. The taxable subsidiary would be unable
to offset the income derived from such a taxable mortgage pool with losses
derived from any other activities.
TAXATION OF STOCKHOLDERS
For any taxable year in which the Company is treated as a REIT for federal
income tax purposes, amounts distributed by the Company to its stockholders
out of current or accumulated earnings and profits will be includable by the
stockholders as ordinary income for federal income tax purposes unless such
distributions are properly designated by the Company as capital gain
dividends. In the latter case, the distributions will be taxable to the
stockholders as long-term capital gains. Any loss on the sale or exchange of
shares of the Common Stock held by a stockholder for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividend received on the Common Stock by such stockholders.
Distributions by the Company will not be eligible for the dividends received
deduction for corporations. Stockholders may not deduct any net operating
losses or capital losses of the Company. If the Company makes distributions to
its stockholders in excess of its current and accumulated earnings and
profits, those distributions will be considered first as a tax-free return of
capital, reducing the tax basis of a stockholder's shares until the tax basis
in such shares is zero. Thereafter, distributions in excess of the tax basis
will be taxable as gain realized from the sale of the Company's stock.
The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute ordinary
income and the portions that constitute either return of capital or capital
gain. Dividends and distributions declared in the last quarter of any year
payable to stockholders of record on a specified date in such month will be
deemed to have been received by the stockholders and paid by the Company on
December 31 of the record year, provided that such dividends are in fact paid
before February 1 of the following year.
The Company does not expect to acquire residual interests issued by REMICs.
Such residual interests, if acquired by a REIT, may generate excess inclusion
income. Excess inclusion income cannot be offset by net operating losses of a
stockholder. If the stockholder is a Tax-Exempt Entity, the excess inclusion
income is fully taxable as UBTI. If allocated to a foreign stockholder, the
excess inclusion income is subject to federal income tax withholding without
reduction pursuant to any otherwise applicable tax treaty. Potential
investors, and in particular Tax-Exempt Entities, are urged to consult with
their tax advisors concerning this issue.
The Company intends to finance the acquisition of Mortgage Assets by
entering into, among other things, reverse repurchase agreements, which are
essentially loans secured by the Company's Mortgage Assets. The Company may
enter into master repurchase agreements with secured lenders known as
"Counter-parties." Typically, such master repurchase agreements have cross-
collateralization provisions that afford the counter-party the right to
foreclose on the Mortgage Assets pledged as collateral. If the Service were to
successfully take the position that the cross-collateralization provisions of
the master repurchase agreements result in the
61
<PAGE>
Company having issued debt instruments (the reverse repurchase agreements)
with differing maturity dates secured by a pool of Mortgage Loans, a portion
of its income could be characterized as "excess inclusion income." See "Risk
Factors--Risk of Adverse Tax Treatment of Excess Inclusion Income."
TAXATION OF TAX-EXEMPT ENTITIES
In general, a Tax-Exempt Entity that is a stockholder of the Company is not
subject to tax on distributions. The Service has ruled that amounts
distributed by a REIT to an exempt employees' pension trust do not constitute
UBTI and thus should be nontaxable to such a Tax-Exempt Entity. Based on that
ruling, but subject to the discussion of excess inclusion income set forth
under "--Taxation of Stockholders" above, indebtedness incurred by the Company
in connection with the acquisition of real estate assets such as Mortgage
Loans will not cause dividends of the Company paid to a stockholder that is a
Tax-Exempt Entity to be UBTI. However, if a Tax-Exempt Entity has financed the
acquisition of any of its stock in the Company with "acquisition
indebtedness," within the meaning of the Code, distributions on such stock
could be treated as UBTI. Under certain conditions, if a tax-exempt employee
pension or profit sharing trust were to acquire more than 10% of the Company's
stock, a portion of the dividends on such stock could be treated as UBTI.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17)
and (c)(20), respectively, income from an investment in the Company will
constitute UBTI unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the UBTI
generated by its investment in the Company. Such entities should review Code
Section 512(a)(3) and should consult their own tax advisors concerning these
"set aside" and reserve requirements.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Common Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States tax consequences
of the acquisition, ownership and disposition of the Common Stock by an
initial purchaser of the Common Stock that, for United Stares income tax
purposes, is not a "United States person" (a "Foreign Holder"). For purposes
of discussion, a United States persons means: a citizen or resident of the
United States; a corporation, partnership, or other entity created or
organized in the United States or under the laws of the United States or of
any political subdivision thereof (unless, in the case of a partnership, the
Service provides otherwise by regulations); an estate whose income is
includable in gross income for United States income tax purposes regardless of
its source; or, a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. This discussion does not consider any specific facts
or circumstances that may apply to a particular Foreign Holder. Prospective
investors are urged to consult their tax advisors regarding the United States
tax consequences of acquiring, holding and disposing of the Common Stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
Dividends. Dividends paid by the Company out of earnings and profits, as
determined for United States income tax purposes, to a Foreign Holder will
generally be subject to withholding of United States federal income tax at the
rate of 30%, unless reduced or eliminated by an applicable tax treaty or
unless such dividends are treated as effectively connected with a United
States trade or business conducted by the Foreign
62
<PAGE>
Holder. A Foreign Holder eligible for a reduction in withholding under an
applicable treaty must so notify the Company by completing the appropriate IRS
form. Distributions paid by the Company in excess of its earnings and profits
will be treated as a tax-free return of capital to the extent of the holder's
adjusted basis in his Common Stock, and thereafter as gain from the sale or
exchange of a capital asset as described below. If it cannot be determined at
the time a distribution is made whether such distribution will exceed the
Company's earnings and profits, the distribution will be subject to
withholding at the same rate as dividends. Amounts so withheld, however, will
be refundable or creditable against the Foreign Holder's United States tax
liability if the Company subsequently determines that such distribution was,
in fact, in excess of the earnings and profits of the Company. If the receipt
of the dividend is treated as being effectively connected with the conduct of
a trade or business within the United States by a Foreign Holder, the dividend
received by such holder will be subject to the same United States federal
income tax on net income that applies to United States persons generally (and,
with respect to foreign corporate holders and under certain circumstances, the
30% branch profits tax).
For any year in which the Company qualifies as a REIT, distributions to a
Foreign Holder that are attributable to gain from the sales or exchanges by
the Company of "United States real property interests" will be treated as if
such gain were effectively connected with a United States business and will
thus be subject to tax at the normal capital gain rates applicable to United
States stockholders (subject to applicable alternative minimum tax) under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate stockholder not
entitled to a treaty exemption. The Company is required to withhold 35% of any
distribution that could be designated by the Company as a capital gains
dividend. This amount may be credited against the Foreign Holder's FIRPTA tax
liability.
Gain on Disposition. A Foreign Holder will generally not be subject to
United States federal income tax on gain recognized on a sale or other
disposition of the Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the
Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident
alien individual and holds the Common Stock as a capital asset, such holder is
present in the United States for 183 or more days (computed in part by
reference to days present in the 2 prior years) in the taxable year and
certain other requirements are met, or (iii) the Foreign Holder is subject to
tax under the FIRPTA rules discussed below. Gain that is effectively connected
with the conduct of a United States business will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will not be subject to withholding.
Foreign Holders should consult applicable treaties, which may provide for
different rules.
Gain recognized by a Foreign Holder upon a sale of its Common Stock will
generally not be subject to tax under FIRPTA if the Company is a "domestically
controlled REIT," which is defined generally as a REIT in which at all tines
during a specified testing period less than 50% in value of its shares were
held directly or indirectly by non-U.S. persons. Because only a minority of
the Company's stockholders are expected to be Foreign Holders, the Company
anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Foreign Holder should not be subject to U.S. tax from gains
recognized upon disposition of the Common Stock. However, because the Common
Stock will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT."
Information Reporting and Backup Withholding. Under temporary United States
Treasury regulations, United States information reporting requirements and
backup withholding tax will generally not apply to dividends paid on the
Common Stock to a Foreign Holder at an address outside the United States.
Payments by a United States office of a broker of the proceeds of a sale of
the Common Stock is subject to both backup withholding at a rate of 31% and
information reporting unless the holder certifies its Foreign Holder status
under penalties of perjury or otherwise establishes an exemption. Information
reporting requirements (but not backup withholding) will also apply to
payments of the proceeds of sales of the Common Stock by foreign
63
<PAGE>
offices of United States brokers, or foreign brokers with certain types of
relationships to the United States, unless the broker has documentary evidence
in its records that establishes that the holder is a Foreign Holder and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Foreign
Holder's United States federal income tax liability, provided that the
required information is furnished to the Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations.
NEW TAX LEGISLATION
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (the "1997 Act"). Effective for taxable years beginning after the date
of the enactment of the 1997 Act, the 1997 Act, among other things, (i)
extends the current two-year period during which property acquired at or in
lieu of foreclosure of the mortgage secured by such property (or as a result
of a default under a lease of such property) may be treated as Foreclosure
Property to the close of the third taxable year following the taxable year
during which such property was acquired, (ii) expands the types of interest
rate hedges that may be treated as Qualified Hedges, and (iii) reduces the
maximum federal long-term capital gains rate applicable to individuals to 20%.
ERISA CONSIDERATIONS
In considering an investment in the Common Stock, a fiduciary of a profit-
sharing, pension stock bonus plan, or individual retirement account ("IRA"),
including a plan for self-employed individuals and their employees or any
other employee benefit plan subject to prohibited transaction provisions of
the Code or the fiduciary responsibility provisions of ERISA (an "ERISA Plan")
should consider (a) whether the ownership of Common Stock is in accordance
with the documents and instruments governing such ERISA Plan, (b) whether the
ownership of Common Stock is consistent with the fiduciary's responsibilities
and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates
in, permits (by action or inaction) the occurrence of, or fails to remedy a
known breach of duty by another fiduciary and (d) the need to value the assets
of the ERISA Plan annually.
With regard to the "plan assets" issue noted in clause (c) above, Counsel is
of the opinion that, effective as of the date of the closing of the Offering
and the listing of the shares of Common Stock on the American Stock Exchange,
and based on certain representations of the Company, the Common Stock should
qualify as a "publicly offered security," and, therefore, the acquisition of
such Common Stock by ERISA Plans should not cause the Company's assets to be
treated as assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely
upon their own advisors in evaluating the consequences under the fiduciary
provisions of ERISA and the Code of an investment in Common Stock in light of
their own circumstances.
64
<PAGE>
DIVIDEND REINVESTMENT PLAN
The Company anticipates adopting in the future a dividend investment plan
for stockholders who wish to reinvest their dividend distributions in
additional shares of Common Stock. Stockholders owning 100 or more shares of
Common Stock will be eligible to participate in the DRP. Pursuant to the DRP,
dividends paid with respect to shares of the Company's Common Stock owned by
participants in the DRP will be automatically invested in additional shares of
Common Stock on the dividend payment date or not later than 15 days thereafter
at the DRP Purchase Price, which is 97% of the then current market price of
the Common Stock. Continental Stock Transfer & Trust Company, the Company's
transfer agent, will act as the trustee and administrator of the DRP (the
"Agent"). All dividends and cash distributions paid with respect to the Common
Stock owned by participants in the DRP will be paid directly to the Agent.
Dividends not immediately reinvested on the payment date will be held in a
non-interest bearing account pending the investment in the Common Stock not
later than 15 days thereafter. If the dividend paid to any stockholder is not
sufficient to purchase a whole number of shares of Common Stock, such
stockholder will be credited with fractional shares, computed to four decimal
places. DRP participants will generally be treated as having received a
taxable cash distribution or a taxable stock distribution, depending on
whether the Common Stock purchased with the reinvested dividends is purchased
in the open market or directly from the Company, respectively.
Shares of Common Stock will be acquired by the Agent in transactions on the
open market or purchased directly from the Company at the option of the
Company. All brokerage commissions and fees, if any, will be paid by
participants in the DRP from the amount of the dividend or distribution. No
brokerage commissions or discounts or fees will be paid to the Company with
respect to the purchase of Common Stock directly from the Company. To the
extent shares of Common Stock are not available for purchase, the Agent will
distribute the cash to participants in the DRP.
Stockholders will not be automatically enrolled in the DRP. Each stockholder
desiring to participate must complete and deliver to the Agent an enrollment
form, which will be sent to each eligible stockholder following this Offering
and the registration under the Securities Act of the shares to be offered by
the Company pursuant to the DRP. Participation in the DRP will commence with
all dividends and distributions payable after receipt of a participant's
authorization, provided that the authorization must be received by the Agent
prior to the record date for any dividends in order for any stockholder to be
eligible for reinvestment of such dividends. A participant may terminate
participation in the DRP at any time upon delivery of a written notice to that
effect to the Agent, provided that the termination notice must be received by
the Agent at least two business days prior to the record date for any
dividends in order for the termination to be effective with respect to such
dividends. Upon termination, the Agent will send to the participant
certificates evidencing the whole shares in the participant's account and a
check for any fractional shares based on the current market value of the
Common Stock on the date of termination.
Participants will be sent detailed statements showing the amount of
dividends or distributions received, the number and price of shares of the
Common Stock purchased for their accounts and the total number of shares held
by the Agent for their accounts. Tax information for each calendar year of the
DRP will be sent to participants by the Agent.
The DRP may be amended by the Board of Directors provided that notice of
such amendment is sent to participants not later than 10 days prior to the
effective date thereof. Any such amendment will be effective only with respect
to dividends or distributions paid subsequent to the delivery of such notice.
The Board of Directors may terminate the DRP for any reason by delivering
notice thereof to all participants.
The shares issuable by the Company pursuant to the DRP proposed to be
adopted are not being registered by means of the Registration Statement of
which this Prospectus forms a part. To the extent the Company adopts the DRP
and such shares are issued by the Company, such shares will be registered
under the Securities Act by means of a separate registration statement.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), represented by Cruttenden Roth Incorporated (the
"Representative"), have severally agreed to purchase, and the Company has
agreed to sell, the respective number of shares of Common Stock set forth
opposite their names below. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent
and that the Underwriters will be obligated to purchase all of the shares if
any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITER PURCHASED
----------- ---------
<S> <C>
Cruttenden Roth Incorporated.....................................
---------
Total.......................................................... 7,500,000
=========
</TABLE>
The several Underwriters, through the Representative, have advised the
Company that they propose to offer the shares to the public at the public
offering price set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than
$ per share; and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. After the shares of Common Stock are released for sale to the public,
the public offering price, concession and reallowance may be changed. No
change in such terms shall change the amount of proceeds to be received by the
Company as set forth on the cover page of this Prospectus. The Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted the Underwriters an option, exercisable for 45 days
after the date of this Prospectus, to purchase up to 1,125,000 additional
shares solely to cover over-allotments, if any, at the initial public offering
price less the underwriting discount. If the Underwriters exercise this
option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number of shares to be purchased by it shown in the
foregoing table bears to the shares initially offered hereby.
The Company has agreed to pay Cruttenden Roth Incorporated $30,000 under
certain circumstances on account of expenses in connection with this Offering.
The Underwriters' expenses in excess of such $30,000 will be borne by the
Underwriters. To the extent the expenses of the Underwriters are less than
$30,000, the excess will be deemed to be compensation to the Underwriters.
The Company, its stockholder and the officers and directors of the Company
have agreed that, for a period of 180 days from the date of this Prospectus,
they will not, without the prior written consent of Cruttenden Roth
Incorporated, which consent may be withheld in its sole discretion, directly
or indirectly, sell, offer to sell, grant any option for the sale of, or
otherwise dispose of, transfer, pledge or otherwise hypothecate any shares of
Common Stock or any security convertible into Common Stock, except for options
granted pursuant to the Company's Stock Option and Awards Plan, provided that
such options or awards shall not vest, or the Company shall obtain the written
consent of the grantee not to transfer such shares, until the end of such 180
day period.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the public offering price will be determined by
negotiation between the Company and the Underwriters and may not bear any
relation to the book value or assets of the Company or any other recognized
criteria of value. Among the factors considered in such negotiations, in
addition to prevailing market conditions, are the Company's future prospects,
the experience of its management, the economic condition of the financial
services industry
66
<PAGE>
in general, the demand for similar securities of companies considered
comparable to the Company and other relevant factors. There can be no
assurance, however, that an active trading market will develop for the Common
Stock or that the shares of Common Stock sold in the public market after the
offering will not be lower than the price at which they are sold by the
Underwriters.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in
accordance with the Securities Exchange Act of 1934 pursuant of which such
persons may bid for or purchase Common Stock for the purpose of stabilizing
its market price. The Underwriters also may create a short position for the
account of the Underwrites by selling more Common Stock in connection with the
offering than they are committed to purchase from the Company, and in such
case may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such shares of Common Stock or may
exercise the Underwriters' over-allotment option referred to above. In
addition, the Representative, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby
they may reclaim from Underwriters (or dealers participating in the Offering),
for the account of the other Underwriters, the selling concession with respect
to Common Stock that is distributed in the Offering but subsequently purchased
for the account of the Underwriters in stabilization or syndicate covering
transactions or otherwise. Any of these activities may stabilize or maintain
the price of the Common Stock at a level above that which might otherwise
prevail in the open market. None of the transactions described in this
paragraph are required, and if they are undertaken they may be discontinued at
any time.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
Certain of the Underwriters may from time to time in the future enter into
reverse repurchase agreements or other financing arrangements with the Company
to finance the purchase of Mortgage Assets.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Allen, Matkins,
Leck, Gamble & Mallory LLP, Los Angeles, California, and certain legal matters
with respect to Maryland law, including the validity of the issuance of the
Shares offered hereby, will be passed upon for the Company by Piper & Marbury
L.L.P., Baltimore, Maryland. Certain legal matters will be passed upon for the
Underwriters by Freshman, Marantz, Orlanski, Cooper & Klein, Beverly Hills,
California.
EXPERTS
The balance sheet of the Company as of October 22, 1997, included in this
Prospectus, has been examined by McGladrey & Pullen, LLP, independent
certified public accountants, as set forth in their report appearing elsewhere
herein, and has been included in reliance on their report upon their authority
as experts in auditing and accounting.
67
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement. A copy of the Registration Statement may be inspected
without charge at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and 7 World
Trade Center, New York, NY 10048. Copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed
by the Commission. The Commission maintains a Website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http:/www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of the year.
68
<PAGE>
GLOSSARY
There follows an abbreviated definition of certain capitalized terms used in
this Prospectus.
"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.
"Agency Certificates" means GNMA ARM Certificates, Fannie Mae ARM
Certificates and FHLMC ARM Certificates.
"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 Net Invested Assets" means for any period the difference between
(i) the aggregate book value of the consolidated assets of the Company and its
subsidiaries, before reserves for depreciation or bad debts or other similar
noncash reserves and (ii) the book value of average debt associated with the
Company's ownership of Mortgage Assets, computed by taking the average of such
net values at the end of each month during such period.
"Average Net Worth" means for any period the arithmetic average of the sum
of the gross proceeds from the offerings of its equity securities by the
Company, before deducting any underwriting discounts and commissions and other
expenses and costs relating to the offering, plus the Company's retained
earnings (without taking into account any losses incurred in prior periods)
computed by taking the average of such values at the end of each month during
such period.
"Bankruptcy Code" means Title 11 of the United States Code, as amended.
"Bylaws" means the bylaws of the Company, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
"Charitable Beneficiaries" means a charitable beneficiary of a Trust.
"Charter" means the charter of the Company, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
"Closing Price" on any date shall mean the last sale price for such shares,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, for such shares, in either case
as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the American Stock
Exchange or, if such shares are not listed or admitted to trading on the
American Stock Exchange, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such shares are listed or admitted to trading or,
if such shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or, if not so quoted, the average
of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc., Automated
Quotation Systems, or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such shares are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in such
shares selected by the
69
<PAGE>
Company's Board of Directors or, in the event that no trading pace is
available for such shares, the fair market value of the shares, as determined
in good faith by the Company's Board of Directors.
"CMOs" means variable-rate debt obligations (bonds) that are collateralized
by mortgage loans or mortgage certificates other than Mortgage Derivative
Securities and Subordinated Interests. CMOs are structured so that principal
and interest payments received on the collateral are sufficient to make
principal and interest payments on the bonds. Such bonds may be issued by
United States government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of subordination
which are characteristics designed for the investment objectives of different
bond purchasers. The Company will only acquire CMOs that constitute beneficial
interests in grantor trusts holding Mortgage Loans, or regular interests
issued by REMICs, or that otherwise constitute Qualified REIT Real Estate
Assets (provided that the Company has obtained a favorable opinion of counsel
or a ruling from the Service to that effect).
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means Mortgage Assets, debt service funds and reserve funds,
insurance policies, servicing agreements or master servicing agreements.
"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 the Company's shares of Common Stock, $0.01 par value
per share.
"Company" means Anworth Mortgage Asset Corporation, a Maryland corporation.
"Conforming Mortgage Loans" means conventional Mortgage Loans that either
comply with requirements for inclusion in credit support programs sponsored by
FHLMC, Fannie Mae or GNMA or are FHA or VA Loans, all of which are secured by
first mortgages or deeds of trust on single-family (one to four units)
residences.
"Control Shares" means voting shares of stock which, if aggregated with all
other shares of stock previously acquired by the acquirer or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval.
"Control Share Acquisition" means the acquisition of control shares, subject
to certain exceptions.
"Counsel" means Allen, Matkins, Leck, Gamble & Mallory LLP.
"Counter-party" means a third-party financial institution with which the
Company enters into an interest rate cap agreement or similar agreement.
"Dealer Property" means real property and real estate mortgages other than
stock in trade, inventory or property held primarily for sale to customers in
the ordinary course of the Company's trade or business.
70
<PAGE>
"Dollar-Roll Agreement" means an agreement to sell a security for delivery
on a specified future date and a simultaneous agreement to repurchase the same
or substantially similar security on a specified future date.
"DRP" means the dividend reinvestment plan which the Company anticipates
adopting.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan which is subject to ERISA.
"Excess Servicing Rights" means contractual rights to receive a portion of
monthly mortgage payments of interest remaining after those payments of
interest have already been applied, to the extent required, to Pass-Through
Certificates and the administration of mortgage servicing. The mortgage
interest payments are secured by an interest in real property.
"Excess Shares" means the number of shares of capital stock held by any
person or group of persons in excess of 9.8% of the outstanding shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"Fannie Mae" means the Federal National Mortgage Association.
"Fannie Mae Certificates" means guaranteed mortgage pass-through
certificates issued by Fannie Mae either in certified or book-entry form.
"FHA" means the United States Federal Housing Administration.
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Foreclosure Property" means property acquired at or in lieu of foreclosure
of that mortgage secured by such property or a result of a default under a
lease of such property.
"Foreign Holder" means an initial purchaser of Common Stock that, for United
States tax purposes, is not a United States person.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means fully modified pass-through mortgage backed
certificates guaranteed by GNMA and issued either in certificated or book-
entry form.
"High Quality" means either (i) securities which are rated within one of the
two highest rating categories by at least one of the Rating Agencies, or (ii)
securities that are unrated but are obligations of the United States or
obligations guaranteed by the United States government or an agency of the
United States government, or (iii) securities that are unrated or whose
ratings have not been updated but are determined to be of comparable quality
(by the rating standards of at least one of the Rating Agencies) to a High
Quality
71
<PAGE>
rated Mortgage Security on the basis of credit enhancement features that meet
High Quality credit criteria approved by the Company's Board of Directors
including approval by a majority of the Unaffiliated Directors.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the Department of Housing and Urban Development.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an affiliate of a corporation
who, at any time within the ten-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then
outstanding voting stock of the corporation.
"Interest Only Derivatives" mean Mortgage Derivative Securities representing
the right to receive interest only or a disproportionately large amount of
interest.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Grade" means a security rating of BBB or better by Standard &
Poor's or Baa or better by Moody's Investors Service, Inc., or, as to unrated
Pass-Through Certificates and CMOs backed by single-family or multi-family
properties, a determination that the security is of comparable quality (by the
rating of at least one of the Rating Agencies) to a rated Investment Grade
security on the basis of credit enhancement features that meet Investment
Grade credit criteria approved by the Company's Board of Directors, including
approval by a majority of the Unaffiliated Directors.
"IRAs" means Individual Retirement Accounts.
"ISOs" means incentive stock options granted under the Stock Option and
Awards Plan which meet the requirements of Section 422 of the Code.
"Issuers" means those entities that issue Mortgage Securities, including
trusts or subsidiaries organized by the Company and Affiliates of the Manager.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means London-Inter-Bank Offered Rate.
"Limited Investment Assets" means Mortgage Assets that are less than High
Quality, including (i) Mortgage Loans, (ii) Pass-Through Certificates and CMOs
which are not High Quality but are backed by single-family residential
mortgage loans, (iii) Pass-Through Certificates and CMOs backed by loans on
commercial, multi-family or other real estate-related properties if they are
at least "Investment Grade" and (iv) Other Mortgage Securities. Limited
Investment Assets may not comprise more than 30% of the Company's total
assets.
"Management" means the Company's and the Manager's management team.
"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 Anworth Mortgage Advisory Corporation, a California
corporation.
"Master Servicer" means an entity that will administer and supervise the
performance by servicers of the duties and responsibilities under Servicing
Agreements in respect of the Collateral for a series of Mortgage Securities.
"MGCL" means the Maryland General Corporations Law as amended.
72
<PAGE>
"Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans and
(iii) Short-Term Investments. All Mortgage Securities and Mortgage Loans shall
be Qualified REIT Real Estate Assets.
"Mortgage Derivative Securities" 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. The Company will only acquire Mortgage Derivative Securities
that constitute beneficial interests in grantor trusts holding Mortgage Loans,
or are regular interests issued by REMICs, or that otherwise constitute
Qualified REIT Real Estate Assets (provided the Company has obtained a
favorable opinion of counsel to that effect).
"Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA
Loans and VA Loans. All Mortgage Loans to be acquired by the Company will be
ARMs and will be secured by first mortgages or deeds of trust on single-family
(one-to-four units) residential properties.
"Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs and
(iii) Other Mortgage Securities.
"Mortgage Suppliers" means mortgage bankers, savings and loan associations,
investment banking firms, banks, home builders, insurance companies and other
concerns or lenders involved in mortgage finance and their Affiliates.
"Mortgage Warehouse Participations" means participations in lines of credit
to mortgage originators that are secured by recently originated Mortgage Loans
which are in the process of being either securitized or sold to permanent
investors.
"Net Cash Flows" means the difference between (i) the cash flows on Mortgage
Assets together with reinvestment income thereon and (ii) borrowing and
financing costs of the Company.
"Net Income" means the taxable income of the Company before the Manager's
incentive compensation, net operating loss deductions arising from losses in
prior periods and deductions permitted by the Code in calculating taxable
income for a REIT plus the effects of adjustments, if any, necessary to record
hedging and interest transactions in accordance with generally accepted
accounting principles.
"New Capital" means the proceeds from the sale of stock or certain debt
obligations.
"Nonconforming Mortgage Loans" means conventional Mortgage Loans that do not
conform to one or more requirements of FHA, FHLMC, Fannie Mae, GNMA or VA for
participation in one or more of such agencies' mortgage loan credit support
programs, such as the principal amounts financed or the underwriting
guidelines used in making the loan.
"Offering" means the 7,500,000 shares offered through the Underwriters in
connection with this Prospectus.
"One-Year U.S. Treasury Rate" means average of weekly average yield to
maturity for U.S. Treasury securities (adjusted to a constant maturity of one
year) as published weekly by the Federal Reserve Board during a yearly period.
"Other Mortgage Securities" means securities representing interests in, or
secured by Mortgages on, real property other than Pass-Through Certificates
and CMOs and may include non-High Quality certificates and other securities
collateralized by single-family loans, Mortgage Warehouse Participations,
Mortgage Derivative Securities, Subordinated Interests and other mortgage-
backed and mortgage-collateralized obligations.
"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinated Interests evidencing
undivided ownership interests in a pool of mortgage loans,
73
<PAGE>
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, multi-family,
commercial and/or other real estate related properties.
"Principal Only Derivatives" means Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal.
"Privately Issued Certificates" means mortgage participation certificates
issued by certain private institutions. These securities entitle the holder to
receive a pass-through of principal and interest payments in the underlying
pool of Mortgage Loans and are issued or guaranteed by the private
institution.
"Prohibited Transaction" means a transaction involving a sale of Dealer
Property, other than Foreclosure Property.
"Qualified Hedges" means bona fide interest rate swap or cap agreements
entered into by the Company to hedge short-term indebtedness only that the
Company incurred to acquire or carry Qualified REIT Real Estate Assets and any
futures and options, or other investments (other than Qualified REIT Real
Estate Assets) made by the Company to hedge its Mortgage Assets or borrowings
that have been determined by a favorable opinion of counsel to generate
qualified income for purposes of the 95% source of income test applicable to
REITs.
"Qualifying Interests in Real Estate" means "mortgages and other liens on
and interests in real estate," as defined in Section 3(c)(5)(C) under the
Investment Company Act.
"Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates, and other assets of the type described in
Section 856(c)(6)(B) of the Code.
"Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by the REIT at all times during such corporation's existence.
"Qualified Temporary Investment Income" means income attributable to stock
or debt instruments acquired with new capital of the Company received during
the one-year period beginning on the day such proceeds were received.
"Rating Agencies" means either Standard & Poor's or Moody's.
"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. The Company will
limit the REMIC interests that it acquires to interests issued by REMICs, at
least 95% of whose assets consist of Qualified REIT Real Estate Assets.
"Return on Equity" means an amount calculated for any quarter by dividing
the Company's Net Income for the quarter by its Average Net Worth for the
quarter.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans or Excess Servicing Rights owned by the Company.
74
<PAGE>
"Servicing Agreements" means the various agreements the Company may enter
into with Servicers.
"Short-Term Investments" means short-term bank certificates of deposit,
short-term United States treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements, short-
term CMOs, short-term asset-backed securities and other similar types of
short-term investment instruments, all of which will have maturities or
average lives of less than one (1) year. All Short Term Investments will be
High Quality.
"Special Tax Counsel" means Allen, Matkins, Leck, Gamble & Mallory LLP.
"Stock Option and Awards Plan" means the stock option plan adopted by the
Company.
"Suppliers of Mortgage Assets " means mortgage bankers, savings and loan
associations, investment banking firms, banks, home builders, insurance
companies and other concerns or lenders involved in mortgage finance or
originating and packaging Mortgage Loans, and their Affiliates.
"Subordinated Interests" means a class of Mortgage Securities that is
subordinated to one or more other classes of Mortgage Securities, all of which
classes share the same collateral. The Company will only acquire Subordinated
Interests that are beneficial interests in grantor trusts holding Mortgage
Loans, or are regular interests issued by REMICs, or that otherwise constitute
Qualified REIT Real Estate Assets (provided the Company has obtained a
favorable opinion of counsel to that effect).
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh plans, bank commingled trust funds
for such plans, and IRAs, and other similar entities intended to be exempt
from federal income taxation.
"Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held
primarily for sale to customers or from foreclosure property) subject to
certain adjustments provided in the REIT Provisions of the Code.
"Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury
fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is
not published by the Federal Reserve Board, any Federal Reserve Bank or agency
or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten Year U.S. Treasury Rate cannot
be calculated as provided above, then the rate shall be the arithmetic average
of the per annum average yields to maturities, based upon closing asked prices
on each business day during a quarter, for each actively traded marketable
U.S. Treasury fixed interest rate security with a final maturity date not less
than eight nor more than twelve years from the date of the closing asked
prices as chosen and quoted for each business day in each such quarter in New
York City by at least three recognized dealers in U.S. government securities
selected by the Company.
"Trust" means a trust that is the transferee of that number of shares of
Common Stock the beneficial or constructive ownership of which otherwise would
cause a person to acquire or hold, directly or indirectly, shares of Common
Stock in an amount that violates the Company's Charter, which trust shall be
for the exclusive benefit of one or more Charitable Beneficiaries.
"Trustee" means a trustee of a Trust for the Charitable Beneficiary.
"UBTI" means "unrelated trade or business income" as defined in Section 512
of the Code.
"Unaffiliated Directors" means those directors that are not affiliated,
directly, or indirectly, with the Manager, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or serving as an officer or director of the Manager or an affiliated
business entity of the Manager.
75
<PAGE>
"Underwriters" means the underwriters listed above under "Underwriting."
"Underwriting Agreement" means the underwriting agreement with respect to
the Common Stock offered through this Prospectus by and among the Company and
the Underwriters.
"United States Holder" means an initial purchaser of the Common Stock that,
for United States income tax purposes, is a United States person (i.e., is not
a Foreign Holder).
"VA" means the United States Veterans Administration.
"VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ANWORTH MORTGAGE ASSET CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report............................................... F-2
Balance Sheet.............................................................. F-3
Notes to Financial Statements.............................................. F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of
Anworth Mortgage Asset Corporation
We have audited the accompanying balance sheet of Anworth Mortgage Asset
Corporation as of October 22, 1997. This financial statement is the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Anworth Mortgage Asset
Corporation as of October 22, 1997 in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
New York, New York
October 23, 1997
F-2
<PAGE>
ANWORTH MORTGAGE ASSET CORPORATION
BALANCE SHEET
OCTOBER 22, 1997
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $1,000
======
Commitments and contingencies (Note 2)
STOCKHOLDER'S EQUITY
Preferred stock, par value $0.01 per share; authorized 20,000,000
shares; no shares issued and outstanding............................. --
Common stock, par value $0.01 per share; authorized 100,000,000
shares; 100 shares issued and outstanding............................ 1
Additional paid in capital............................................ 999
------
Total Stockholder's Equity.......................................... $1,000
======
</TABLE>
Notes to Financial Statement.
F-3
<PAGE>
ANWORTH MORTGAGE ASSET CORPORATION
NOTES TO FINANCIAL STATEMENT
NOTE 1. ORGANIZATION
Anworth Mortgage Asset Corporation (the "Company") was incorporated in
Maryland on October 16, 1997 and has had no operations to date other than
matters relating to its organization and registration under the Securities Act
of 1933 and the issuance of 100 shares of its common stock to its initial
stockholder. The Company intends to generate income for distribution to its
stockholders primarily from the net cash flows on Mortgage Assets as described
in the Prospectus.
NOTE 2. DEFERRED ORGANIZATION EXPENSES AND OFFERING COSTS
Contingent on the completion of the contemplated public offering for which a
Registration Statement will be filed with the Securities and Exchange
Commission, the Company will be liable for organization expenses estimated at
approximately $20,000, which will be deferred and amortized over a five year
period. Offering costs in connection with the public offering will be charged
against the proceeds of the offering.
NOTE 3. INCOME TAXES
The Company intends to elect to be taxed as a Real Estate Investment Trust
and to comply with the provisions of the Internal Revenue Code with respect
thereto. Accordingly, the Company will not be subject to Federal income tax to
the extent of its distributions to stockholders.
NOTE 4. TRANSACTIONS WITH AFFILIATES
The Company intends to enter into a Management Agreement with Anworth
Mortgage Advisory Corporation (the "Manager"). The Company has also adopted a
Stock Option and Awards Plan under which options may be granted to officers
and key employees of the Company and the Manager.
The Management Agreement and the Stock Option and Awards Plan arrangement
are described in the Prospectus.
F-4
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. 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 ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A
SOLICITATION OF AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 23
Dividend and Distribution Policy.......................................... 23
Capitalization............................................................ 24
Business and Strategy..................................................... 25
Management of the Company................................................. 40
The Manager............................................................... 44
Security Ownership........................................................ 50
Description of Capital Stock.............................................. 50
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 52
Federal Income Tax Considerations......................................... 55
ERISA Considerations...................................................... 64
Dividend Reinvestment Plan................................................ 65
Underwriting.............................................................. 66
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 68
Glossary.................................................................. 69
Index to Financial Statements............................................. F-1
</TABLE>
----------------
UNTIL 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
7,500,000 SHARES
ANWORTH
MORTGAGE
ASSET
CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
Cruttenden Roth
I N C O R P O R A T E D
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
------
<S> <C>
SEC registration fee............................................. $26,136
NASD filing fee.................................................. 9,125
American Stock Exchange listing fee.............................. *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Transfer agent and custodian fees................................ *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
* To be provided by amendment.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
In October 1997, the Registrant issued 100 shares of Common Stock to Lloyd
McAdams, in exchange for $1,000. The shares issued to Mr. McAdams were issued
in reliance on the exemption from registration contained in Section 4(2) of
the Securities Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the MGCL, the Charter obligates the Company to indemnify its
present and former directors and officers and to pay or reimburse reasonable
expenses for such individuals in advance of the final disposition of a
proceeding to the maximum extent permitted from time to time by Maryland law.
The MGCL permits a corporation to indemnify its present and former directors
and officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
such proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. The Bylaws implement
the provisions relating to indemnification contained in the Charter. Maryland
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) the person
actually received an improper benefit or profit in money, property or
services, or (ii) a judgment or other final adjudication is entered in a
proceeding based on a finding that the person's action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the proceeding. The Charter contains a provision
providing for elimination of the liability of its directors or officers to the
Company or its stockholders for money damages to the maximum extent permitted
by Maryland law from time to time. In addition, the officers, directors and
controlling persons of the Company are indemnified against certain liabilities
by the Underwriters and the Underwriters are indemnified against certain
liabilities by the Company under the Underwriting Agreement relating to the
Offering. The Company maintains for the benefit of its officers and directors,
officers' and directors' insurance.
II-1
<PAGE>
The Underwriting Agreement (Exhibit 1.1) also provides for indemnification
by the Underwriters of the Company, its Directors and officers and persons who
control the Company within the meaning of Section 15 of the Securities Act
with respect to certain liabilities, including liabilities arising under the
Securities Act.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements included in the Prospectus are:
Balance Sheet of the Company at October 22, 1997 (audited)
Notes to Financial Statements
All schedules have been omitted because they are either not applicable, not
required or the information required has been disclosed in the financial
statements and related notes or otherwise in the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Charter of the Registrant
3.2 Bylaws of the Registrant
*4.1 Form of Stock Certificate of the Registrant
*5.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP with
respect to legality
*5.2 Opinion of Piper & Marbury L.L.P.
*8.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP with
respect to certain tax matters
*10.1 Management Agreement between the Registrant and Anworth Mortgage
Advisory Corporation
*10.2 1997 Stock Option and Awards Plan
*23.1 Consent of Allen, Matkins, Leck, Gamble & Mallory LLP (included
as part of Exhibit 5.1 and Exhibit 8.1)
*23.2 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5.2)
23.3 Consent of McGladrey & Pullen, LLP regarding the Registrant
24.1 Power of Attorney (included in signature page of Registration
Statement)
</TABLE>
- --------
* To be supplied by amendment
II-2
<PAGE>
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS OF FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA, ON THE 24TH DAY
OF OCTOBER 1997.
ANWORTH MORTGAGE ASSET CORPORATION
By: /s/ Joseph Lloyd McAdams, Jr.
---------------------------------
Joseph Lloyd McAdams, Jr.
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Joseph Lloyd McAdams,
Jr. and Pamela J. Watson and each one of them, individual and without the
other, his or her attorney-in-fact, each with the power of substitution, for
him or her in any and all capacities to sign any and all amendments to this
Registration Statement (including post-effective amendments), and any
registration statement relating to the same offering as the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) of the
Securities Act of 1933, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes, may 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph Lloyd McAdams, Jr. Chairman of the Board and October 24, 1997
- ------------------------------------ Chief Executive Officer
Joseph Lloyd McAdams, Jr. (Principal Executive
Officer)
/s/ Pamela J. Watson Chief Financial Officer October 24, 1997
- ------------------------------------ (Principal Financial and
Pamela J. Watson Accounting Officer)
/s/ Joe E. Davis Director October 24, 1997
- ------------------------------------
Joe E. Davis
/s/ Charles H. Black Director October 24, 1997
- ------------------------------------
Charles H. Black
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
------- ----------------------- ----------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
3.1 Charter of the Registrant
3.2 Bylaws of the Registrant
*4.1 Form of Stock Certificate of the Registrant
*5.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP
with respect to legality
*5.2 Opinion of Piper & Marbury L.L.P.
*8.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP
with respect to certain tax matters
*10.1 Management Agreement between the Registrant and Anworth
Mortgage Advisory Corporation
*10.2 1997 Stock Option and Awards Plan
*23.1 Consent of Allen, Matkins, Leck, Gamble & Mallory LLP
(included as part of Exhibit 5.1 and Exhibit 8.1)
*23.2 Consent of Piper & Marbury L.L.P. (contained in Exhibit
5.2)
23.3 Consent of McGladery & Pullen, LLP regarding the
Registrant
24.1 Power of Attorney (included in signature page of
Registration Statement)
</TABLE>
- --------
*To be supplied by amendment
<PAGE>
EXHIBIT 3.1
ANWORTH MORTGAGE ASSET CORPORATION
AMENDED ARTICLES OF INCORPORATION
FIRST: THE UNDERSIGNED, Jason C. Harmon, whose address is Charles Center
South, 36 South Charles Street, Baltimore, Maryland 21201, being at least
eighteen years of age and the sole incorporator of Anworth Mortgage Asset
Corporation, does hereby file these Amended Articles of Incorporation pursuant
to Section 2-603 of the Maryland General Corporation Law.
SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is:
Anworth Mortgage Asset Corporation
THIRD: (a) The purposes for which and any of which the Corporation is
formed and the business and objects to be carried on and promoted by it are:
(1) To engage in the business of a real estate investment trust
("REIT") as that phrase is defined in the Internal Revenue Code of 1986, as
amended (the "Code"), and to engage in any lawful act or activity for which
corporations may be organized under the Maryland General Corporation Law.
(2) To engage in any one or more businesses or transactions, or to
acquire all or any portion of any entity engaged in any one or more
businesses or transactions which the Board of Directors may from time to
time authorize or approve, whether or not related to the business described
elsewhere in this Article or to any other business at the time or
theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any other
clause of this or any other Article of the Charter of the Corporation, and each
shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and shall
be in addition to and not in limitation of the general powers of corporations
under the General Laws of the State of Maryland.
FOURTH: The present address of the principal office of the Corporation in
this State is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202.
FIFTH: The name and address of the resident agent of the Corporation in
this State are The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. Said resident agent is a Maryland corporation.
1
<PAGE>
SIXTH: (a) The total number of shares of stock of all classes which the
Corporation has authority to issue is 120,000,000 shares of capital stock (par
value $.01 per share), of which 100,000,000 shares are initially classified as
"Common Stock" and 20,000,000 shares are initially classified as "Preferred
Stock." This amendment increases the aggregate par value of all shares of stock
of all classes from $10 to $1,200,000, as amended. The Board of Directors may
classify and reclassify any unissued shares of capital stock 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 of capital stock.
(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 of the Common Stock of the
Corporation:
(1) Each share of Common Stock shall have one vote, and, except as
otherwise provided in respect of any class of stock hereafter classified or
reclassified, the exclusive voting power for all purposes shall be vested
in the holders of the Common Stock. Shares of Common Stock shall not have
cumulative voting rights.
(2) Subject to the provisions of law and any preferences of any class
of stock hereafter classified or reclassified, dividends, including
dividends payable in shares of another class of the Corporation's stock,
may be paid ratably on the Common Stock 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, together with the holders of any other class of
stock hereafter classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of the
Corporation, to share ratably in the net assets of the Corporation
remaining, 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 stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the
Corporation shall be entitled.
(c) Subject to the foregoing, 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 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, and any shares of any class or series
which have been redeemed, purchased, otherwise acquired or converted into
shares of Common Stock or any other class or series shall become part of
the authorized capital stock and be subject to classification and
reclassification as provided in this sub-paragraph.
(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 stock, and the status of any such dividends as cumulative,
cumulative to a limited extent or non-cumulative and as participating or
non-participating.
(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 stock.
3
<PAGE>
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use
of moneys for purchase or redemption of, any stock of the Corporation, or
upon any other action of the Corporation, including action under this sub-
paragraph, 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 of the Corporation.
(d) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
capital stock or of any other Charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
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.
SEVENTH: The number of directors of the Corporation shall be three, which
number may be increased or decreased pursuant to the By-Laws of the Corporation,
but shall never be less than the minimum number permitted by the General Laws of
the State of Maryland now or hereafter in force. 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 two-thirds of
the combined voting power of all classes of shares of capital stock entitled to
vote in the election of directors voting together as a single class. The names
of the directors who will serve
4
<PAGE>
until the first annual meeting of stockholders and until their successors are
elected and qualify are as follows:
Lloyd McAdams
Joseph Davis
Charles Black
EIGHTH: (a) The following provisions are hereby adopted for the purpose
of defining, limiting, and regulating the powers of the Corporation and of the
directors and the stockholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class, whether now
or hereafter authorized, or securities convertible into shares of its 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.
(2) No holder of any stock or any other securities of the Corporation,
whether now or hereafter authorized, shall have any preemptive right to
subscribe for or purchase any stock or any other securities of the
Corporation other than such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and upon such other
terms as the Board of Directors, in its sole discretion, may fix; and any
stock or other securities which the Board of Directors may determine to
offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any class, series
or type of stock or other securities at the time outstanding to the
exclusion of the holders of any or all other classes, series or types of
stock or other securities at the time outstanding.
(3) 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 any funds of the Corporation such reserve or reserves
in such amount or amounts and for such proper purpose or purposes as it
shall determine and to abolish any such reserve or any part thereof; to
redeem or purchase its stock or to distribute and pay distributions or
dividends in stock, cash or other securities or property, out of surplus or
any other funds or amounts legally available therefor, at such times and to
the stockholders of record on such dates as it may, from time to time,
determine; to determine the amount, purpose, time of creation, increase or
decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which
such
5
<PAGE>
reserves or charges shall have been created shall have been paid or
discharged); to determine the fair value and any matters relating to the
acquisition, holding and disposition of any assets by the Corporation; 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 By-Laws,
and, except as so provided, no stockholder shall have any right to inspect
any book, account or document of the Corporation unless authorized so to do
by resolution of the Board of Directors.
(4) 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, except as otherwise provided in the Charter.
(5) The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or at its request any other entity, to the
full extent required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of expenses under
the procedures and to the full extent permitted by law and (B) other
employees and agents to such extent as shall be authorized by the Board of
Directors or the Corporation's By-Laws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled. The Board of
Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such by-laws, resolutions or contracts implementing
such provisions or such further indemnification arrangements as may be
permitted by law. No amendment of the Charter of the Corporation or repeal
of any of its provisions shall limit or eliminate the right to
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of the
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
limitation on liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment or repeal.
6
<PAGE>
(7) (A) Nominations for the election of directors and proposals for
any new business to be taken up at any annual or special meeting of
stockholders may be made by the Board of Directors of the Corporation or by
any stockholder of the Corporation entitled to vote generally in the
election of directors. In order for a stockholder of the Corporation to
make any such nominations and/or proposals, he or she shall give notice
thereof in writing, delivered or mailed by first class United States mail,
postage prepaid, to the Secretary of the Corporation not less than 30 days
nor more than 60 days prior to any such meeting; provided, however, that if
less than 31 days notice of the meeting is given to stockholders, such
written notice shall be delivered or mailed, as prescribed, to the
Secretary of the Corporation not later than the close of the tenth day
following the day on which notice of the meeting was mailed to
stockholders. Each such notice given by a stockholder with respect to
nominations for the election of directors shall set forth (i) the name,
age, business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment of
each such nominee, (iii) the number of shares of stock of the Corporation
which are beneficially owned by each such nominee, (iv) such other
information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended,
including, without limitation, such person's written consent to being named
in the proxy statement as a nominee and to serving as a director, if
elected, and (v) as to the stockholder giving such notice, his name and
address as they appear on the Corporation's books and the class and number
of shares of the Corporation which are beneficially owned by such
stockholder. In addition, the stockholder making such nomination shall
promptly provide any other information reasonably requested by the
Corporation.
(B) Each such notice given by a stockholder to the Secretary with
respect to business proposals to bring before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired
to be brought before the meeting and the reasons for conducting such
business at the meeting; (ii) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business; (iii) the
class and number of shares of the Corporation which are beneficially owned
by the stockholder; and (iv) any material interest of the stockholder in
such business. Notwithstanding anything in the Charter to the contrary, no
business shall be conducted at the meeting except in accordance with the
procedures set forth in this sub-paragraph (7).
(C) The Chairman of the annual or special meeting of stockholders
may, if the facts warrant, determine and declare to such meeting that a
nomination or proposal was not made in accordance with the foregoing
procedure, and, if he should so determine, he shall so declare to the
meeting and the defective
7
<PAGE>
nomination or proposal shall be disregarded and laid over for action at the
next succeeding adjourned, special or annual meeting of the stockholders
taking place 30 days or more thereafter. This provision shall not require
the holding of any adjourned or special meeting of stockholders for the
purpose of considering such defective nomination or proposal.
(8) The Corporation reserves the right from time to time to make any
amendments of the Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as
expressly set forth in the Charter, of any of its outstanding stock by
classification, reclassification or otherwise, but no such amendment which
changes such terms or contract rights of any of its outstanding stock shall
be valid unless such amendment shall have been authorized by not less than
a majority of the aggregate number of the votes entitled to be cast
thereon, by a vote at a meeting or in writing with or without a meeting;
provided, however, that any amendment to, repeal of or adoption of any
provision inconsistent with Article SEVENTH or this subparagraph of Article
EIGHTH, paragraph (a) shall have been authorized by not less than two-
thirds of the aggregate votes entitled to be cast thereon (considered for
this purpose as a single class), by vote at a meeting or in writing with or
without a meeting.
(b) The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
NINTH: The following are the restrictions on transfer, acquisition and
redemption of the shares of capital stock of the Corporation:
Section 9.1 Definitions. For the purpose of this Article NINTH, the
-----------
following terms shall have the following meanings:
Aggregate Stock Ownership Limit. The term "Aggregate Stock Ownership
-------------------------------
Limit" shall mean not more than 9.8 percent in value of the aggregate of the
outstanding shares of Capital Stock. The value of the outstanding shares of
Capital Stock shall be determined by the Board of Directors of the Corporation
in good faith, which determination shall be conclusive for all purposes hereof.
Beneficial Ownership. The term "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 Section 856(h)(1)(B) of the
8
<PAGE>
Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned"
shall have the correlative meanings.
Business Day. The term "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. The term "Capital Stock" shall mean the Common Stock,
-------------
Preferred Stock or stock of any class or series of preferred stock, preference
stock, special stock or other stock issued by the Corporation.
Charitable Beneficiary. The term "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), 2055 and 2522 of the Code.
Code. The term "Code" shall mean the Internal Revenue Code of 1986,
----
as amended from time to time.
Common Stock Ownership Limit. The term "Common Stock Ownership Limit"
----------------------------
shall mean 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. The term "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. The term "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. The term "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
established by the Board of Directors pursuant to Section 9.2.7.
9
<PAGE>
Initial Date. The term "Initial Date" shall mean the date upon which
------------
the Corporation shall close its initial issuance of shares of Capital Stock to
investors for an aggregate amount of gross proceeds of at least $15 million.
Market Price. The term "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
any 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. The term "NYSE" shall mean the New York Stock Exchange.
----
Person. The term "Person" shall mean an individual, corporation,
------
partnership, estate, 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.
Prohibited Owner. The term "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. The term "REIT" shall mean a real estate investment trust
----
within the meaning of Section 856 of the Code.
Restriction Termination Date. The term "Restriction Termination Date"
----------------------------
shall mean the first day after the Initial Date on which the Corporation
determines that it is no longer
10
<PAGE>
in the best interests of the Corporation to attempt to, or continue to, qualify
as a REIT or that compliance with the restriction and limitations as to
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. The term "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. The term "Trust" shall mean any trust provided for in Section
-----
9.3.1.
Trustee. The term "Trustee" shall mean the Person unaffiliated with
-------
the Corporation and a Prohibited Owner, that is appointed by the Corporation to
serve as trustee of the Trust.
Section 9.2 Capital Stock.
-------------
Section 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 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 a taxable year), or otherwise
failing to qualify as a REIT (including, but not limited to, Beneficial or
11
<PAGE>
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) Notwithstanding any other provisions contained herein,
any Transfer of shares of Capital Stock, 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 void ab initio,
-- ------
and the intended transferee shall acquire no rights in such shares of Capital
Stock.
(b) Transfer in Trust. If any Transfer of shares of Capital Stock
-----------------
occurs which, if effective, would result in any Person Beneficially Owning or
Constructively Owning shares of Capital Stock in violation of Section
9.2.1(a)(i) or (ii),
(i) then that number of shares 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) (rounded to the
nearest whole shares) 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 Transfer, and such Person shall acquire no rights in
such shares; or
(ii) if the transfer to the Trust describe in clause (i) of
this sentence would not be effective for any reason to prevent the
violation of Section 9.2.1(a)(i) or (ii), then the Transfer of that
number of shares of Capital Stock that otherwise would cause any
Person to violate Section 9.2.1(a)(i) or (ii) shall be void ab initio,
-- ------
and the intended transferee shall acquire no rights in such shares of
Capital Stock.
Section 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 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 automatically result in the transfer to the Trust
described above, and, where applicable, such
12
<PAGE>
Transfer (or other event) shall be void ab initio as provided above irrespective
-- ------
of any action (or non-action) by the Board of Directors of committee thereof.
Section 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.
Section 9.2.4 Owners Required to Provide Information. From the
---------------------------------------
Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than five percent (or such lower
percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding shares of Capital Stock, within 30 days after the
end of each taxable year, shall give written notice to the Corporation stating
the name and address of such owner, the number of shares of Capital Stock
Beneficially Owned and a description of the manner in which such shares are
held. Each such owner shall provide to the Corporation such additional
information as the Corporation may request in order to determine the effect, if
any, of such Beneficial Ownership on the Corporation's status as a REIT and
ensure compliance with the Aggregate Stock Ownership Limit.
(b) each Person who is a Beneficial or Constructive Owner of
Capital Stock and each Person (including the stockholder of record) who is
holding Capital Stock for a Beneficial 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.
Section 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.
Section 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. In the event Section 9.2 or 9.3 requires any action by the Board
of Directors and the Charter fails to provide specific guidance with respect to
such action, the Board of Directors shall
13
<PAGE>
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.
Section 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 or Constructive Ownership of such shares of
Capital Stock will violate Section 9.2.1(a)(ii);
(ii) such Person does not and represents that it will not
own, actually or Constructively, 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 own, actually or Constructively, more than a
9.9% 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 Person as 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 revenue shall not be treated as a
tenant of the Corporation if, in the opinion of the Board of Directors, it
would not affect the Corporation's ability to qualify as a REIT); 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) Subject to Section 9.2.1(a)(ii), an underwriter which
participates in a public offering or a private placement of Capital Stock (or
securities convertible into or exchangeable for Capital Stock) may Beneficially
Own or Constructively Own shares of Capital
14
<PAGE>
Stock (or securities convertible into or exchangeable for Capital Stock) in
excess of the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit,
or both such limits, but only to the extent necessary to facilitate such public
offering or private placement.
(d) 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.
Section 9.2.8 Increase in Aggregate Stock Ownership and Common Stock
------------------------------------------------------
Ownership Limits. The Board of Directors may from time to time increase or
- -----------------
decrease the Common Stock Ownership Limit and the Aggregate Stock Ownership
Limit; provided, however, that:
-------- -------
(a) Any decrease may be made only prospectively (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 REIT.
Section 9.2.9 Legend. Each certificate for shares of Capital Stock
------
or securities exercisable or exchangeable for or convertible into shares of
Capital Stock shall bear the following legend:
The securities represented by this certificate are subject to
restrictions on Beneficial and Constructive Ownership and Transfer for
the purpose of the Corporation's maintenance of its status as a Real
Estate Investment Trust under the Internal Revenue Code of 1986, as
amended (the "Code"). Subject to certain further restrictions and
except as expressly provided in the Corporation's Charter, (i) no
Person may Beneficially 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
15
<PAGE>
Excepted Holder (in which case the Excepted Holder Limit shall be
applicable); (ii) no Person may Beneficially 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 or Constructively Own 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 Capital Stock of the Corporation being owned by
fewer than 100 Persons. Any Person who Beneficially or Constructively
Owns or attempts to Beneficially or Constructively Own shares of
Capital Stock which causes or will cause a Person to Beneficially or
Constructively Own shares of Capital Stock in excess or in violation
of the above limitations must immediately notify the Corporation. 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 or 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.
Section 9.2.10 Settlements Permitted. Nothing contained in this
---------------------
Article NINTH 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 NINTH.
Section 9.3 Transfer of Capital Stock in Trust.
-----------------------------------
Section 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
16
<PAGE>
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 and any Prohibited
Owner. Each Charitable Beneficiary shall be designated by the Corporation as
provided in Section 9.3.6.
Section 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.
Section 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.
Section 9.3.4 Sale of Shares by Trustee. Within 20 days of receiving
--------------------------
notice from the Corporation that shares of Capital Stock have been transferred
to the Trust, the Trustee of the Trust shall sell the shares held in the Trust
to a person, designated by the trustee, whose ownership of the shares will not
violate the ownership limitations set forth in Section 9.2.1(a). Upon such
sale, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner and to the Charitable Beneficiary as provided in this Section
9.3.4. The Prohibited Owner shall receive the lesser of (i) 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
17
<PAGE>
on the day of the event causing the shares to be held in the Trust and (ii) 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 (1) such shares shall be deemed to have been sold on
behalf of the Trust and (2) 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.
Section 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.
Section 9.3.6 Designation of Charitable Beneficiaries. By written
----------------------------------------
notice to the Trustee, the Corporation 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), 2055 and 2522 of the
Code.
TENTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Amended Articles of Incorporation,
acknowledging the same to be my act, on October 20, 1997.
Witness:
/s/ Stephen J. Bolin /s/ Jason C. Harmon
- ----------------------------------- -----------------------------------
Stephen J. Bolin Jason C. Harmon
36 South Charles Street 36 South Charles Street
Baltimore, Maryland 21201 Baltimore, Maryland 21201
18
<PAGE>
EXHIBIT 3.2
ANWORTH MORTGAGE ASSET CORPORATION
BY-LAWS
ARTICLE I.
STOCKHOLDERS
SECTION 1.01. ANNUAL MEETING. The Corporation shall hold an annual
meeting of its stockholders to elect directors and transact any other business
within its powers, either at 10:00 a.m. on the last Thursday of May in each year
if not a legal holiday, or at such other time on such other day falling on or
before the 30th day thereafter as shall be set by the Board of Directors.
Except as the Charter or statute provides otherwise, any business may be
considered at an annual meeting without the purpose of the meeting having been
specified in the notice. Failure to hold an annual meeting does not invalidate
the Corporation's existence or affect any otherwise valid corporate acts.
SECTION 1.02. SPECIAL MEETING. At any time in the interval between annual
meetings, a special meeting of the stockholders may be called by the Chairman of
the Board or the President or by a majority of the Board of Directors by vote at
a meeting or in writing (addressed to the Secretary of the Corporation) with or
without a meeting. Special meetings of the stockholders shall be called by the
Secretary at the request of stockholders only on the written request of
stockholders entitled to cast at least a majority of all the votes entitled to
be cast at the meeting. A request for a special meeting shall state the purpose
of the meeting and the matters proposed to be acted on at it. The Secretary
shall inform the stockholders who make the request of the reasonably estimated
costs of preparing and mailing a notice of the meeting and, on payment of these
costs to the Corporation, shall notify each stockholder entitled to notice of
the meeting. Unless requested by stockholders entitled to cast a majority of
all the votes entitled to be cast at the meeting, a special meeting need not be
called to consider any matter which is substantially the same as a matter voted
on at any special meeting of stockholders held in the preceding 12 months.
SECTION 1.03. PLACE OF MEETINGS. Meetings of stockholders shall be held
at such place in the United States as is set from time to time by the Board of
Directors.
SECTION 1.04. NOTICE OF MEETINGS; WAIVER OF NOTICE. Not less than ten nor
more than 90 days before each stockholders' meeting, the Secretary shall give
written notice of the meeting to each stockholder entitled to vote at the
meeting and each other stockholder entitled to notice of the meeting. The
notice shall state the time and place of the meeting and, if the meeting is a
special meeting or notice of the purpose is required by statute, the purpose of
the meeting. Notice is given to a stockholder when it is personally delivered
to him or her, left at his or her residence or usual place of business, or
mailed to him or her at his or her address as it appears on
1
<PAGE>
the records of the Corporation. Notwithstanding the foregoing provisions, each
person who is entitled to notice waives notice if he or she before or after the
meeting signs a waiver of the notice which is filed with the records of
stockholders' meetings, or is present at the meeting in person or by proxy.
SECTION 1.05. QUORUM; VOTING. Unless any statute or the Charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting constitutes a quorum, and a majority of all the votes cast at a
meeting at which a quorum is present is sufficient to approve any matter which
properly comes before the meeting, except that a plurality of all the votes cast
at a meeting at which a quorum is present is sufficient to elect a director.
SECTION 1.06. ADJOURNMENTS. Whether or not a quorum is present, a meeting
of stockholders convened on the date for which it was called may be adjourned
from time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
SECTION 1.07. GENERAL RIGHT TO VOTE; PROXIES. Unless the Charter provides
for a greater or lesser number of votes per share or limits or denies voting
rights, each outstanding share of stock, regardless of class, is entitled to one
vote on each matter submitted to a vote at a meeting of stockholders. In all
elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted. A stockholder may vote the stock the stockholder
owns of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another
person to act as proxy by transmitting, or authorizing the transmission of, a
facsimile, telegram, cablegram, datagram, or other means of electronic
transmission to the person authorized to act as proxy or to a proxy solicitation
firm, proxy support service organization, or other person authorized by the
person who will act as proxy to receive the transmission. Unless a proxy
provides otherwise, it is not valid more than 11 months after its date. A proxy
is revocable by a 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 so long as it is coupled with an
interest. The interest with which a proxy may be coupled includes an interest
in the stock to be voted under the proxy or another general interest in the
Corporation or its assets or liabilities.
SECTION 1.08. LIST OF STOCKHOLDERS. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class of shares held by each and certified by
the transfer agent for such class or by the Secretary, shall be furnished by the
Secretary.
2
<PAGE>
SECTION 1.09. CONDUCT OF BUSINESS AND VOTING. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies, the acceptance or rejection of votes and
procedures for the conduct of business not otherwise specified by these By-Laws,
the Charter or law, shall be decided or determined by the chairman of the
meeting. If demanded by stockholders, present in person or by proxy, entitled to
cast 10% in number of votes entitled to be cast, or if ordered by the chairman,
the vote upon any election or question shall be taken by ballot and, upon like
demand or order, the voting shall be conducted by two inspectors, in which event
the proxies and ballots shall be received, and all questions touching the
qualification of voters and the validity of proxies and the acceptance or
rejection of votes shall be decided, by such inspectors. Unless so demanded or
ordered, no vote need be by ballot and voting need not be conducted by
inspectors. The stockholders at any meeting may choose an inspector or
inspectors to act at such meeting, and in default of such election the chairman
of the meeting may appoint an inspector or inspectors. No candidate for election
as a director at a meeting shall serve as an inspector thereat.
SECTION 1.10. INFORMAL ACTION BY STOCKHOLDERS. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of stockholders meetings an unanimous
written consent which sets forth the action and is signed by each stockholder
entitled to vote on the matter and a written waiver of any right to dissent
signed by each stockholder entitled to notice of the meeting but not entitled to
vote at it.
SECTION 1.11. MEETING BY CONFERENCE TELEPHONE. Stockholders may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. FUNCTION OF DIRECTORS. The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors. All
powers of the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by statute or
by the Charter or By-Laws.
SECTION 2.02. NUMBER OF DIRECTORS. The Corporation shall have at least
three directors; provided that, if there is no stock outstanding, the number of
Directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are less than three stockholders, the number of
Directors may be less than three but not less than the number of stockholders.
The Corporation shall have the number of directors provided in the charter until
changed as herein provided. A majority of the entire Board of Directors may
alter
3
<PAGE>
the number of directors set by the Charter to not exceeding 25 nor less than the
minimum number then permitted herein, but the action may not affect the tenure
of office of any director.
SECTION 2.03. ELECTION AND TENURE OF DIRECTORS. Subject to the rights of
the holders of any class of stock separately entitled to elect one or more
directors, at each annual meeting, the stockholders shall elect directors to
hold office until the next annual meeting and until their successors are elected
and qualify.
SECTION 2.04. REMOVAL OF DIRECTOR. 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 two-thirds of the
combined voting power of all classes of shares of capital stock entitled to vote
in the election of directors voting together as a single class.
SECTION 2.05. VACANCY ON BOARD. Subject to the rights of the holders of
any class of stock separately entitled to elect one or more directors, the
stockholders may elect a successor to fill a vacancy on the Board of Directors
which results from the removal of a director. A director elected by the
stockholders to fill a vacancy which results from the removal of a director
serves for the balance of the term of the removed director. Subject to the
rights of the holders of any class of stock separately entitled to elect one or
more directors, a majority of the remaining directors, whether or not sufficient
to constitute a quorum, may fill a vacancy on the Board of Directors which
results from any cause except an increase in the number of directors, and a
majority of the entire Board of Directors may fill a vacancy which results from
an increase in the number of directors. A director elected by the Board of
Directors to fill a vacancy serves until the next annual meeting of stockholders
and until his or her successor is elected and qualifies.
SECTION 2.06. REGULAR MEETINGS. After each meeting of stockholders at
which directors shall have been elected, the Board of Directors shall meet as
soon as practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board, the President or the Chairman, with notice in accordance with
Section 2.08, the Board of Directors shall meet immediately following the close
of, and at the place of, such stockholders' meeting. Any other regular meeting
of the Board of Directors shall be held on such date and at any place as may be
designated from time to time by the Board of Directors.
SECTION 2.07. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or the
President or by a majority of the Board of Directors by vote at a meeting, or in
writing with or without a meeting. A special meeting of the Board of Directors
shall be held on such date and at any place as may be designated from time to
time by the Board of Directors. In the absence of designation such meeting
shall be held at such place as may be designated in the call.
SECTION 2.08. NOTICE OF MEETING. Except as provided in Section 2.06, the
Secretary shall give notice to each director of each regular and special meeting
of the Board of Directors. The notice shall state the time and place of the
meeting. Notice is given to a director when it is
4
<PAGE>
delivered personally to him or her, left at his or her residence or usual place
of business, or sent by telegraph, facsimile transmission or telephone, at least
24 hours before the time of the meeting or, in the alternative by mail to his or
her address as it shall appear on the records of the Corporation, at least 72
hours before the time of the meeting. Unless these By-Laws or a resolution of
the Board of Directors provides otherwise, the notice need not state the
business to be transacted at or the purposes of any regular or special meeting
of the Board of Directors. No notice of any meeting of the Board of Directors
need be given to any director who attends except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened, or to any director who,
in writing executed and filed with the records of the meeting either before or
after the holding thereof, waives such notice. Any meeting of the Board of
Directors, regular or special, may adjourn from time to time to reconvene at the
same or some other place, and no notice need be given of any such adjourned
meeting other than by announcement.
SECTION 2.09. QUORUM; ACTION BY DIRECTORS. A majority of the entire Board
of Directors shall constitute a quorum for the transaction of business. In the
absence of a quorum, the directors present by majority vote and without notice
other than by announcement may adjourn the meeting from time to time until a
quorum shall attend. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally notified. Unless statute or the Charter or By-Laws
requires a greater proportion, the action of a majority of the directors present
at a meeting at which a quorum is present is action of the Board of Directors.
Any action required or permitted to be taken at a meeting of the Board of
Directors may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the Board and filed with the
minutes of proceedings of the Board.
SECTION 2.10. MEETING BY CONFERENCE TELEPHONE. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 2.11. COMPENSATION. By resolution of the Board of Directors a
fixed sum and expenses, if any, for attendance at each regular or special
meeting of the Board of Directors or of committees thereof, and other
compensation for their services as such or on committees of the Board of
Directors, may be paid to directors. Directors who are full-time employees of
the Corporation need not be paid for attendance at meetings of the board or
committees thereof for which fees are paid to other directors. A director who
serves the Corporation in any other capacity also may receive compensation for
such other services, pursuant to a resolution of the directors.
5
<PAGE>
ARTICLE III.
COMMITTEES
SECTION 3.01. COMMITTEES. The Board of Directors may appoint from among
its members an Executive Committee, an Audit Committee, a Compensation
Committee, and other committees composed of one or more directors and delegate
to these committees any of the powers of the Board of Directors, except the
power to authorize dividends on stock, elect directors, issue stock other than
as provided in the next sentence, recommend to the stockholders any action which
requires stockholder approval, amend these By-Laws, or approve any merger or
share exchange which does not require stockholder approval. If the Board of
Directors has given general authorization for the issuance of stock providing
for or establishing a method or procedure for determining the maximum number of
shares to be issued, a committee of the Board, in accordance with that general
authorization or any stock option or other plan or program adopted by the Board
of Directors, may authorize or fix the terms of stock subject to classification
or reclassification and the terms on which any stock may be issued, including
all terms and conditions required or permitted to be established or authorized
by the Board of Directors.
SECTION 3.02. COMMITTEE PROCEDURE. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority of
those present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of a
committee may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the committee and filed with
the minutes of the committee. The members of a committee may conduct any
meeting thereof by conference telephone in accordance with the provisions of
Section 2.10.
SECTION 3.03. EMERGENCY. In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its directors and officers as contemplated by the
Charter and these By-Laws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of Section 3.01. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section. This Section shall
be subject to implementation by resolution of the Board of Directors passed from
time to time for that purpose, and any provisions of these By-Laws (other than
this Section) and any resolutions which are contrary to the provisions of this
Section or to the provisions of any such
6
<PAGE>
implementary resolutions shall be suspended until it shall be determined by any
interim Executive Committee acting under this Section that it shall be to the
advantage of the Corporation to resume the conduct and management of its affairs
and business under all the other provisions of these By-Laws.
SECTION 3.04. AUDIT COMMITTEE. The principal functions of the Audit
Committee, if one shall be formed, shall include making recommendations to the
Board of Directors regarding the annual selection of independent public
accountants, reviewing the proposed scope of each annual audit and reviewing the
recommendations of the independent public accountants as a result of their audit
of the Corporation's financial Statements. In general, the Audit Committee shall
perform such duties as are customarily performed by an audit committee of a
corporation and shall perform such other duties and have such other powers as
are from time to time assigned to it by the Board of Directors.
SECTION 3.05. COMPENSATION COMMITTEE. The principal functions of the
Compensation Committee, if one shall be formed, shall include establishing the
compensation of officers of the Corporation and establishing and administering
the Corporation's compensation programs. In general, the Compensation Committee
shall perform such duties as are customarily performed by a compensation
committee of a corporation and shall perform such other duties and have such
other powers as are from time to time assigned to it by the Board of Directors.
ARTICLE IV.
OFFICERS
SECTION 4.01. EXECUTIVE AND OTHER OFFICERS. The Corporation shall have a
President, a Secretary, and a Treasurer. It may also have a Chairman of the
Board. The Board of Directors shall designate who shall serve as chief
executive officer, who shall have general supervision of the business and
affairs of the Corporation, and may designate a chief operating officer, who
shall have supervision of the operations of the Corporation. In the absence of
any designation the Chairman of the Board, if there be one, shall serve as chief
executive officer and the President shall serve as chief operating officer. In
the absence of the Chairman of the Board, or if there be none, the President
shall be the chief executive officer. The same person may hold both offices.
The Corporation may also have one or more Vice-Presidents, assistant officers,
and subordinate officers as may be established by the Board of Directors. A
person may hold more than one office in the Corporation except that no person
may serve concurrently as both President and Vice-President of the Corporation.
The Chairman of the Board shall be a director, and the other officers may be
directors.
SECTION 4.02. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one be
elected, shall preside at all meetings of the Board of Directors and of the
stockholders at which he or she shall be present. Unless otherwise specified by
the Board of Directors, he or she shall be the chief executive officer of the
Corporation. In general, he or she shall perform such duties as are
7
<PAGE>
customarily performed by the chief executive officer of a corporation and may
perform any duties of the President and shall perform such other duties and have
such other powers as are from time to time assigned to him or her by the Board
of Directors.
SECTION 4.03. PRESIDENT. Unless otherwise provided by resolution of the
Board of Directors, the President, in the absence of the Chairman of the Board,
shall preside at all meetings of the Board of Directors and of the stockholders
at which he or she shall be present. Unless otherwise specified by the Board of
Directors, the President shall be the chief operating officer of the Corporation
and perform the duties customarily performed by chief operating officers. He or
she may execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall have been expressly delegated to some other
officer or agent of the Corporation. In General, he or she shall perform such
other duties customarily performed by a president of a corporation and shall
perform such other duties and have such other powers as are from time to time
assigned to him or her by the Board of Directors or the chief executive officer
of the Corporation.
SECTION 4.04. VICE-PRESIDENTS. The Vice-President or Vice-Presidents, at
the request of the chief executive officer or the President, or in the
President's absence or during his or her inability to act, shall perform the
duties and exercise the functions of the President, and when so acting shall
have the powers of the President. If there be more than one Vice-President, the
Board of Directors may determine which one or more of the Vice-Presidents shall
perform any of such duties or exercise any of such functions, or if such
determination is not made by the Board of Directors, the chief executive
officer, or the President may make such determination; otherwise any of the
Vice-Presidents may perform any of such duties or exercise any of such
functions. Each Vice-President shall perform such other duties and have such
other powers, and have such additional descriptive designations in their titles
(if any), as are from time to time assigned to them by the Board of Directors,
the chief executive officer, or the President.
SECTION 4.05. SECRETARY. The Secretary shall keep the minutes of the
meetings of the stockholders, of the Board of Directors and of any committees,
in books provided for the purpose; he or she shall see that all notices are duly
given in accordance with the provisions of these By-Laws or as required by law;
he or she shall be custodian of the records of the Corporation; he or she may
witness any document on behalf of the Corporation, the execution of which is
duly authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and, when so affixed, may attest the
same. In general, he or she shall perform such other duties customarily
performed by a secretary of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him or her by
the Board of Directors, the chief executive officer, or the President.
SECTION 4.06. TREASURER. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by the Board of
8
<PAGE>
Directors; he or she shall render to the President and to the Board of
Directors, whenever requested, an account of the financial condition of the
Corporation. In general, he or she shall perform such other duties customarily
performed by a treasurer of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him or her by
the Board of Directors, the chief executive officer, or the President.
SECTION 4.07. ASSISTANT AND SUBORDINATE OFFICERS. The assistant and
subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary, or Treasurer. The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors, the chief executive officer, or the President.
SECTION 4.08. ELECTION, TENURE AND REMOVAL OF OFFICERS. The Board of
Directors shall elect the officers of the Corporation. The Board of Directors
may from time to time authorize any committee or officer to appoint assistant
and subordinate officers. Election or appointment of an officer, employee or
agent shall not of itself create contract rights. All officers shall be
appointed to hold their offices, respectively, during the pleasure of the Board.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may remove an officer at any time.
The removal of an officer does not prejudice any of his or her contract rights.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may fill a vacancy which occurs in
any office for the unexpired portion of the term.
SECTION 4.09. COMPENSATION. The Board of Directors shall have power to
fix the salaries and other compensation and remuneration, of whatever kind, of
all officers of the Corporation. No officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a director of the
Corporation. The Board of Directors may authorize any committee or officer,
upon whom the power of appointing assistant and subordinate officers may have
been conferred, to fix the salaries, compensation and remuneration of such
assistant and subordinate officers.
ARTICLE V.
DIVISIONAL TITLES
SECTION 5.01. CONFERRING DIVISIONAL TITLES. The Board of Directors may
from time to time confer upon any employee of a division of the Corporation the
title of President, Vice President, Treasurer or Controller of such division or
any other title or titles deemed appropriate, or may authorize the Chairman of
the Board or the President to do so. Any such titles so conferred may be
discontinued and withdrawn at any time by the Board of Directors, or by the
Chairman of the Board or the President if so authorized by the Board of
Directors. Any employee of a division designated by such a divisional title
shall have the powers and duties with respect to such division as shall be
prescribed by the Board of Directors, the Chairman of the Board or the
President.
9
<PAGE>
SECTION 5.02. EFFECT OF DIVISIONAL TITLES. The conferring of divisional
titles shall not create an office of the Corporation under Article IV unless
specifically designated as such by the Board of Directors; but any person who is
an officer of the Corporation may also have a divisional title.
ARTICLE VI.
STOCK
SECTION 6.01. CERTIFICATES FOR STOCK. The Board of Directors may
determine to issue certificated or uncertificated shares of capital stock and
other securities of the Corporation. For certificated stock, each stockholder
is entitled to certificates which represent and certify the shares of stock he
or she holds in the Corporation. Each stock certificate shall include on its
face the name of the Corporation, the name of the stockholder or other person to
whom it is issued, and the class of stock and number of shares it represents.
It shall also include on its face or back (a) a statement of any restrictions on
transferability and (b) a statement which provides in substance that the
Corporation will furnish to any stockholder on request and without charge a full
statement 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, of the differences in the relative rights
and preferences between the shares of each series of a preferred or special
class in series which the Corporation is authorized to issue, to the extent they
have been set, and of the authority of the Board of Directors to set the
relative rights and preferences of subsequent series of a preferred or special
class of stock and any restrictions on transferability. Such request may be
made to the Secretary or to its transfer agent. Upon the issuance of
uncertificated shares of capital stock, the Corporation shall send the
stockholder a written statement of the same information required above on the
certificate and by the Maryland Uniform Commercial Code - Investment Securities.
It shall be in such form, not inconsistent with law or with the Charter, as
shall be approved by the Board of Directors or any officer or officers
designated for such purpose by resolution of the Board of Directors. Each stock
certificate shall be signed by the Chairman of the Board, the President, or a
Vice-President, and countersigned by the Secretary, an Assistant Secretary, the
Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the
actual corporate seal or a facsimile of it or in any other form and the
signatures may be either manual or facsimile signatures. A certificate is valid
and may be issued whether or not an officer who signed it is still an officer
when it is issued. A certificate may not be issued until the stock represented
by it is fully paid.
SECTION 6.02. TRANSFERS. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates of stock; and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined.
10
<PAGE>
SECTION 6.03. RECORD DATES OR CLOSING OF TRANSFER BOOKS. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day
the record date is fixed nor, subject to Section 1.06, more than 90 days before
the date on which the action requiring the determination will be taken; the
transfer books may not be closed for a period longer than 20 days; and, in the
case of a meeting of stockholders, the record date or the closing of the
transfer books shall be at least ten days before the date of the meeting.
SECTION 6.04. STOCK LEDGER. The Corporation shall maintain a stock ledger
which contains the name and address of each stockholder and the number of shares
of stock of each class which the stockholder holds. The stock ledger may be in
written form or in any other form which can be converted within a reasonable
time into written form for visual inspection. The original or a duplicate of
the stock ledger shall be kept at the offices of a transfer agent for the
particular class of stock, or, if none, at the principal office in the State of
Maryland or the principal executive offices of the Corporation.
SECTION 6.05. CERTIFICATION OF BENEFICIAL OWNERS. The Board of Directors
may adopt by resolution a procedure by which a stockholder of the Corporation
may certify in writing to the Corporation that any shares of stock registered in
the name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Corporation; and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
SECTION 6.06. LOST STOCK CERTIFICATES. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen, or destroyed, or the
Board of Directors may delegate such power to any officer or officers of the
Corporation. In their discretion, the Board of Directors or such officer or
officers may require the owner of the certificate to give bond, with sufficient
surety, to indemnify the Corporation against any loss or claim arising as a
result of the issuance of a new certificate. In their discretion, the Board of
Directors or such officer or officers may refuse to issue such new certificate
save upon the order of some court having jurisdiction in the premises.
SECTION 6.07. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. The
provisions of Sections 3-701 to 3-709 of the Corporations and Associations
Article of the Annotated Code
11
<PAGE>
of Maryland shall not apply to any share of the capital stock of the
Corporation. Such shares of capital stock are exempted from such Sections to the
fullest extent permitted by Maryland law.
ARTICLE VII.
FINANCE
SECTION 7.01. CHECKS, DRAFTS, ETC. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the Chairman of the Board, the President, a Vice-
President or an Assistant Vice-President and countersigned by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary.
SECTION 7.02. 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 7.03. FISCAL YEAR. The fiscal year of the Corporation shall be
the 12 calendar months period ending December 31st in each year, unless
otherwise provided by the Board of Directors.
SECTION 7.04. DIVIDENDS. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter.
ARTICLE VIII.
INDEMNIFICATION
SECTION 8.01. 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 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 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 of 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 both (i) an
undertaking as
12
<PAGE>
required by law to repay such advances in the event it shall ultimately be
determined that the standard of conduct has not been met and (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 8.02. EXCLUSIVITY, ETC. The indemnification and advance of
expenses provided by the Charter and these By-Laws 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, 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. The Corporation shall not be
liable for any payment under this By-Law in connection with a claim made by a
director or officer to the extent such director or officer has otherwise
actually received payment under insurance policy, agreement, vote or otherwise,
of the amounts otherwise indemnifiable hereunder. 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
By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law,
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 By-Law 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 By-Law or any provision hereof
is in force.
SECTION 8.03. SEVERABILITY; DEFINITIONS. The invalidity or
unenforceability of any provision of this Article VIII shall not affect the
validity or enforceability of any other provision hereof. The phrase "this By-
Law" in this Article VIII means this Article VIII in its entirety.
ARTICLE IX.
SUNDRY PROVISIONS
SECTION 9.01. 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
13
<PAGE>
the form of a reproduction. The original or a certified copy of these By-Laws
shall be kept at the principal office of the Corporation.
SECTION 9.02. CORPORATE SEAL. The Board of Directors shall provide a
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the Secretary. The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof. If the Corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any law, rule, or regulation relating to a corporate seal to place the word
"(seal)" adjacent to the signature of the person authorized to sign the document
on behalf of the Corporation.
SECTION 9.03. BONDS. The Board of Directors may require any officer,
agent or employee of the Corporation to give a bond to the Corporation,
conditioned upon the faithful discharge of his or her duties, with one or more
sureties and in such amount as may be satisfactory to the Board of Directors.
SECTION 9.04. VOTING STOCK 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 9.05. MAIL. Any notice or other document which is required by
these By-Laws to be mailed shall be deposited in the United States mails,
postage prepaid.
SECTION 9.06. EXECUTION OF DOCUMENTS. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
SECTION 9.07. AMENDMENTS. In accordance with the Charter, these By-Laws
may be repealed, altered, amended or rescinded (a) by the stockholders of the
Corporation (considered for this purpose as one class) by the affirmative vote
of not less than majority of all the votes entitled to be cast by the
outstanding shares of capital stock of the Corporation generally in the election
of directors which are cast on the matter at any meeting of the stockholders
called for that purpose (provided that notice of such proposed repeal,
alteration, amendment or rescission is included in the notice of such meeting)
or (b) by affirmative vote of not less than two-thirds of the Board of Directors
at a meeting held in accordance with the provisions of these By-Laws.
SECTION 9.08. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
The directors shall have no responsibility to devote their full time to the
affairs of the corporation. Any director or officer, employee or agent of the
Corporation, in his or her personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to those
of or relating to the Corporation.
14
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent, in this Registration Statement on Form S-11, to the use
of our report dated October 23, 1997, relating to the balance sheet of Anworth
Mortgage Asset Corporation. We also consent to the reference to our Firm under
the heading "Experts" in the Prospectus.
McGLADREY & PULLEN, LLP
October 23, 1997
