As filed with the Securities and Exchange Commission on December 11, 1997
Registration No. 333-40813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ANTHRACITE MORTGAGE CAPITAL, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
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345 Park Avenue, 29th Floor, New York, New York 10154
(212) 754-5560
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
-----------------
Hugh R. Frater
President
Anthracite Mortgage Capital Inc.
345 Park Avenue, 29th Floor
New York, New York 10154
(212) 754-5560
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
-----------------
COPIES TO:
RICHARD T. PRINS, ESQ. [TO COME]
SKADDEN, ARPS, SLATE
MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE: (212) 735-2790
FACSIMILE: (212) 735-2000
-----------------
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, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) SHARE PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value 330,000 shares $20.00 $6,600,000 $0(3)
$0.01 per share
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</TABLE>
(1) Includes 0 shares of Common Stock which may be purchased by
the Underwriters to cover over-allotments, if any (the
"Underwriting).
(2) Estimated based on a bona fide estimate of the maximum
offering price of $20.00 solely for the purpose of calculating
the registration fee pursuant to Rule 457(a) of the Securities
Act of 1933.
(3) A fee of $2,000.00 was paid on November 21, 1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
ANTHRACITE MORTGAGE CAPITAL, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OR REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS 1-30
<TABLE>
<CAPTION>
FORM S-11 CAPTION IN PROSPECTUS OR
ITEM NUMBER AND CAPTION PAGE REFERENCE
---------------------------------------------------- ---------------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front FOREPART OF REGISTRATION STATEMENT, OUTSIDE FRONT
Cover Page of Prospectus......................... COVER PAGE OF PROSPECTUS
2. Inside Front and Outside Back Cover Pages of INSIDE FRONT COVER PAGE OF PROSPECTUS; OUTSIDE
Prospectus....................................... BACK COVER PAGE OF PROSPECTUS
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ PROSPECTUS SUMMARY; RISK FACTORS
4. Determination of Offering Price..................... OUTSIDE FRONT COVER PAGE OF PROSPECTUS; UNDERWRITING
5. Dilution............................................ *
6. Selling Security Holders ........................... *
7. Plan of Distribution................................ OUTSIDE FRONT COVER PAGE OF PROSPECTUS; UNDERWRITING
8. Use of Proceeds..................................... PROSPECTUS SUMMARY; USE OF PROCEEDS
9. Selected Financial Data............................. *
10. Management's Discussion and Analysis of Financial MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
Condition and Results of Operations.............. CONDITION AND RESULTS OF OPERATIONS
11. General Information as to Registrant................ PROSPECTUS SUMMARY; BUSINESS; THE MANAGER; THE
COMPANY
12. Policy with Respect to Certain Activities........... BUSINESS; THE MANAGER; DESCRIPTION OF CAPITAL STOCK;
ADDITIONAL INFORMATION
13. Investment Policies of Registrant................... PROSPECTUS SUMMARY; BUSINESS; THE MANAGER; THE
COMPANY
14. Description of Real Estate.......................... *
15. Operating Data...................................... *
16. Tax Treatment of Registrant and Its Security Holders PROSPECTUS SUMMARY; RISK FACTORS; CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS; ERISA CONSIDERATIONS
17. Market Price of and Dividends on the Registrant's RISK FACTORS; DIVIDEND AND DISTRIBUTION POLICY;
Common Equity and Related Stockholder Matters.... PRINCIPAL STOCKHOLDERS
18. Description of Registrant's Securities.............. OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS
SUMMARY; DESCRIPTION OF CAPITAL STOCK, CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS; ERISA
CONSIDERATIONS
19. Legal Proceedings................................... BUSINESS
20. Security Ownership of Certain Beneficial Owners and OUTSIDE FRONT COVER PAGE OF PROSPECTUS; THE MANAGER;
Management....................................... THE COMPANY; PRINCIPAL STOCKHOLDERS
21. Directors and Executive Officers.................... THE MANAGER; THE COMPANY
22. Executive Compensation.............................. THE MANAGER; THE COMPANY
23. Certain Relationships and Related Transactions...... RISK FACTORS; THE MANAGER
24. Selection, Management and Custody of Registrant's
Investments...................................... RISK FACTORS; THE MANAGER
25. Policies with Respect to Certain Transactions....... RISK FACTORS; THE MANAGER
26. Limitations of Liability............................ THE MANAGER; THE COMPANY; DESCRIPTION OF CAPITAL
STOCK
27. Financial Statements and Information................ INDEX TO FINANCIAL STATEMENTS
28. Interests of Named Experts and Counsel.............. LEGAL MATTERS; EXPERTS
29. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities................... *
Quantitative and Qualitative Disclosures About Market *
Risk.............................................
+++
30. *
- ----------------------
* Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY __, 1998
PROSPECTUS
__________ SHARES
ANTHRACITE MORTGAGE CAPITAL, INC.
COMMON STOCK
Anthracite Mortgage Capital, Inc. (the "Company") is a newly
organized Maryland corporation created to invest in a diversified
portfolio of multifamily, commercial and residential mortgage loans,
mortgage-backed securities and other real estate related assets in U.S.
and non U.S. markets financed by the proceeds of this offering and
borrowings. The Company will seek to achieve strong investment returns by
maximizing the spread of investment income (net of credit losses) earned
on its real estate assets over the cost of financing and hedging these
assets and/or liabilities. The Company's business decisions will depend
on changing market factors and the Company will pursue various strategies
and opportunities in different market environments. 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"), and generally
will not be subject to federal taxes on its income to the extent that it
distributes its net income to stockholders and maintains its
qualification as a REIT.
The Company's business plan and associated risk profile will
be similar to that of a bank or savings association. However, the REIT
structure will provide tax benefits for the Company's investors that are
not available to investors in a bank or savings association. The
Company's operations will be managed by BlackRock Financial Management
Inc. (the "Manager"), a wholly owned subsidiary of PNC Bank Corp ("PNC").
The Manager has more than $50 billion in assets under management,
including over $15 billion of mortgage-backed securities and other real
estate related assets.
All of the shares of common stock (the "Common Stock") offered
hereby are being sold by the Company. The Common Stock offered to the
public hereby will represent substantially all of the equity ownership of
the Company.
Prior to the Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering
price for the Common Stock will be between $____ and $____ per share. See
"Underwriting" for information relating to the determination of the
initial public offering price. Application has been made to list the
Common Stock on the [New York Stock Exchange] under the symbol "[ ]MC."
--------------
SEE "RISK FACTORS" COMMENCING ON PAGE __ FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY, INCLUDING:
o The Company intends to acquire significant amounts of mortgage
loans and non-investment grade mortgage-backed securities,
including Interest only securities (IOs), which are likely to
be subject to significant risk of loss of principal and
non-payment of interest;
o The Company may invest in distressed mortgage loans and
properties, including real properties with known environmental
problems, which may not generate sufficient revenues to meet
operating expenses and debt service and may expose the Company
to liabilities substantially in excess of the Company's
investment;
o Borrower defaults, casualty losses and state or foreign law
enforceability issues, as well as other events and
circumstances, may result in losses on the Company's
investments;
o The Company's operations are expected to be highly leveraged,
which is likely to increase the volatility of the Company's
income and net asset value and could result in operating or
capital losses;
o The Company's investments and income will be sensitive to
changes in prevailing interest rates, reshaping of the yield
curve and changes in prepayment rates, which may result in a
mismatch between the Company's borrowing rates and asset
yields;
o The Company intends to acquire Mortgage Loans and mortgage
backed securities ("MBS") secured by real property located
outside the U.S. which will be subject to sovereign, political
and currency risks in addition to usual real estate risks.
o The Company intends to use hedging strategies that involve
risk and that may not be successful in insulating the Company
from exposure to changing interest and prepayment rates;
o The Company will be dependent on the Manager for successful
operations;
o Conflicts of interest between the Manager and its Affiliates
and the Company could result on decisions that do not fully
reflect the interests of the Company's stockholders;
o The Company has no operating history and will have many
competitors; and
o The Company will be taxed as a corporation if it fails to
maintain its qualification as a REIT.
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.
UNDERWRITING DIS- PROCEEDS TO
PRICE TO PUBLIC COUNT(1) COMPANY
- -------------------------------------------------------------------------
PER SHARE $ $ $
TOTAL (3) $ $ $
- -------------------------------------------------------------------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE SEVERAL UNDERWRITERS AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING ESTIMATED EXPENSES OF $_______, PAYABLE BY THE COMPANY.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
1,500,000 ADDITIONAL SHARES OF COMMON STOCK AT THE INITIAL
PRICE TO PUBLIC PER SHARE LESS THE UNDERWRITING DISCOUNT, FOR
THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF SUCH
OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNT AND PROCEEDS TO THE COMPANY WILL BE
$_______, $_______, AND $______, RESPECTIVELY. SEE
"UNDERWRITING."
-----------------
THE SHARES OF COMMON STOCK ARE BEING OFFERED BY THE SEVERAL UNDERWRITERS,
SUBJECT TO PRIOR SALE, WHEN, AS AND IF ISSUED TO AND ACCEPTED BY THE
UNDERWRITERS AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY COUNSEL
FOR THE UNDERWRITERS AND CERTAIN OTHER CONDITIONS. THE UNDERWRITERS RESERVE
THE RIGHT TO WITHDRAW, CANCEL OR MODIFY SUCH OFFER AND TO REJECT ORDERS IN
WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE SHARES OF COMMON
STOCK WILL BE MADE IN NEW YORK, NEW YORK ON OR ABOUT _______, 1998.
----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
----------------
The date of this Prospectus is _________, 1998.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF
SHARES OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. 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 COMPANY MAY PROVIDE PROJECTIONS, FORECASTS OR ESTIMATES OF
FUTURE PERFORMANCE OR CASH FLOWS OF THE COMPANY. PROJECTIONS, FORECASTS
AND ESTIMATES ARE ALSO FORWARD-LOOKING STATEMENTS AND WILL BE BASED UPON
CERTAIN ASSUMPTIONS. ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE
BEYOND THE COMPANY'S CONTROL. ACTUAL EVENTS MAY DIFFER FROM THOSE
ASSUMED. SOME IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENTS INCLUDE CHANGES
IN INTEREST RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR
LEGAL CONDITIONS; DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF
THE COMPANY FROM THOSE ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED
AND THE EFFECTIVENESS OF THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE
OF RISK WILL BE INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT ANY ESTIMATED RETURNS OR
PROJECTIONS CAN BE REALIZED OR THAT ACTUAL RETURNS OR RESULTS WILL NOT BE
MATERIALLY LOWER THAN THOSE THAT MAY BE ESTIMATED.
PROSPECTUS SUMMARY
The following summary should be read in conjunction with and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Prospectus. Certain capitalized and other terms used
herein shall have the meanings assigned to them in the Glossary, which,
starts at page __. Unless otherwise indicated, the information in this
Prospectus assumes that the Underwriters, over-allotment option is not
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 the information set forth under the heading
"Risk Factors" and within the Prospectus generally.
THE COMPANY
Anthracite Mortgage Capital Inc. (the "Company"), a Maryland
corporation, was formed on January ___, 1998, to invest in multifamily,
commercial and residential mortgage loans, mortgage-backed securities and
other real estate related assets in both U.S. and non U.S. markets. The
Company will use its equity capital and borrowed funds to seek to achieve
strong investment returns by maximizing the spread of investment income
(net of credit losses) earned on its real estate assets over the cost of
financing and hedging these assets. The Company will elect to be taxed as
a real estate investment trust ("REIT") under the Code. The Company
generally will not be subject to federal taxes on its income to the
extent that it distributes its net income to its stockholders and
maintains its qualification as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification as a REIT--Distribution
Requirement."
The day-to-day operations of the Company will be managed by
BlackRock Financial Management, Inc. (the "Manager") subject to the
direction and oversight of the Company's Board of Directors, a majority
of whom will be unaffiliated with PNC Bank Corp ("PNC" and, together with
its subsidiaries and Affiliates, the "PNC Group") and the Manager. The
Manager, a Delaware corporation, is a wholly owned subsidiary of PNC. The
Manager provides discretionary investment management services for over
$50 billion in assets, including over $15 billion of multifamily,
commercial and residential mortgage-backed securities and provides non
discretionary risk management advisory services for over $150 billion in
mortgage assets. See "The Manager." The Company has elected to be
externally managed by the Manager to take advantage of the existing
business relationships, operational and risk management systems,
expertise and economies of scale associated with the Manager's current
business operations.
The Company intends to purchase and originate multifamily,
commercial and residential term loans ("Mortgage Loans") and interests in
multifamily and commercial mortgage-backed securities ("CMBS"). The
Company also may invest in interests in residential mortgage-backed
securities ("RMBS" and, together with CMBS, "MBS"). The Company may hold
its Mortgage Loans or utilize them as collateral to create its own MBS.
Initially, one of the Company's primary investment focuses
will be the acquisition of non-investment grade MBS. These MBS offer the
potential of a higher yield than relatively more senior classes of MBS,
but carry greater credit and prepayment risk. The Company believes that a
prudently managed portfolio of non-investment grade MBS can produce
attractive returns in a variety of interest rate environments.
The Company will take an opportunistic approach to its
investments and, accordingly, the Company may invest in assets other than
Mortgage Loans and MBS. The Company may invest in or provide loans used to
finance construction ("Construction Loans"), loans secured by real property
and used as temporary financing ("Bridge Loans") and loans secured by
junior liens on real property ("Mezzanine Loans"). The Company may invest
in multifamily and commercial Mortgage Loans that are in default
("Nonperforming Mortgage Loans") or for which default is likely or imminent
or for which the borrower is making monthly payments in accordance with a
forbearance plan ("Subperforming Mortgage Loans" and, together with
Nonperforming Mortgage Loans and other distressed mortgage loans,
"Distressed Mortgage Loans").
The Company may also invest, for hedging and other purposes,
in derivative mortgage securities such as Interest only (IO) strips,
Principal only (PO) strips and other securities with significant exposure
to changes in mortgage prepayment rates. The Company may invest in
mortgage assets secured by real property located outside the United
States.
The Company may invest in multifamily, commercial and other
real property, including Net Leased Real Estate, properties acquired at
foreclosure or by deed-in-lieu of foreclosure ("REO Property") and other
underperforming or otherwise distressed real property (all of such
underperforming and distressed real property, together with REO Property,
being referred to collectively as "Distressed Real Property"). The
Company expects that a portion of its mortgage assets will consist of
mortgage-based derivative securities and foreign MBS and Mortgage Loans.
In addition, the Company may invest in Real Property located outside the
United States. The Company may invest in registered investment companies,
partnerships and other investment funds and other types of non-mortgage
related assets and intends to engage in hedging transactions to reduce
interest rate, prepayment and any currency exchange rate risks.
PNC Bank, a subsidiary of PNC and the 13th largest bank in the
U.S., will enter into an agreement granting the Company, so long as the
Management Agreement (as hereinafter defined) with the Manager remains in
effect, a right of first offer to purchase not less than $500 million
annually of multifamily and commercial Mortgage Loans typical of Loans
originated by PNC Bank. Although not contractually committed to do so,
the Company intends to purchase pools of Mortgage Loans offered to it
pursuant to the foregoing right of first offer, provided such purchase
would comply with the Company's guidelines and underwriting criteria as
established and modified from time to time. The Company believes that
pools of PNC Bank's Mortgage Loans will be appropriate investments for
the Company given the Company's investment strategy.
PNC Bank's Real Estate Line of Business provides credit for
all commercial and multifamily property types to middle market and
institutional clients throughout the U.S. including commercial and
residential developers, investors, mortgage brokers and property
management companies. Over 350 employees in 12 offices are focused into
four segments: Institutional, Regional, Affordable Housing and Warehouse
Lending. Also included within the business are Capital Markets units
devoted to Loan Syndications, Commercial Mortgage Backed Securitization
and Permanent Mortgages Placement. As of September 30, 1997, PNC Bank's
Real Estate Line of Business had commitments to the real estate industry
exceeding $8.5 billion. Originations, net of syndications, for the nine
months ended September 30, 1997 were in excess of $2.7 billion.
The Company will finance its assets with the net proceeds of
this offering (the "Offering") and borrowings and expects that it will,
employ significant leverage consistent with the type of assets acquired
and the desired level of risk in various investment environments, in
general. The Company will leverage primarily with reverse repurchase
agreements, dollar rolls, securitizations of its Mortgage Loans and
secured and unsecured loans including issuance of commercial paper. The
Company may also issue preferred stock as a source of longer term capital
to finance asset growth.
The Company's policy is to acquire those mortgage assets which
it believes are likely to generate the highest returns on capital invested,
after considering the amount and nature of anticipated cash flows from the
asset, the credit risk of the borrower, the Company's ability to pledge the
asset to secure collateralized borrowings, the capital requirements
resulting from the purchase and financing of the asset, the potential for
appreciation and the costs of financing, hedging and managing the asset.
Prior to acquisition, potential returns on capital employed will be
assessed over the expected life of the asset and in a variety of interest
rate, yield spread, financing cost, credit loss and prepayment scenarios.
In managing the Company's portfolio, the Manager will establish stringent
credit standards and credit monitoring procedures and will also consider
balance sheet management and risk diversification issues. The Company will
employ proprietary risk management tools developed by the Manager to
continually monitor the risks of its assets and liabilities.
The Company intends to manage the credit risk associated with
its investment portfolio by regularly monitoring the individual credit
exposures associated with its investment portfolio, diversifying its
portfolio of non-investment grade investments and maintaining a portion
of its assets in high quality investments. The Company will implement
various hedging strategies, primarily to protect itself from the effects
of interest rate fluctuations on its variable rate liabilities. However,
no hedging strategy will insulate the Company completely from such risks
and the Company's ability to enter into hedging transactions may be
limited by the Code and the transaction costs associated with entering
into such transactions.
THE MANAGER
The Manager is a wholly owned subsidiary of PNC. Established
in 1988, the Manager is one of the largest fixed income investment
management firms in the United States. The Manager's staff includes over
200 investment and administrative professionals. The professional
investment staff includes more than 30 portfolio managers and analysts,
and approximately 80 research and software development personnel. The
Manager engages in investment and risk management as its sole businesses
and specializes in the management of domestic and offshore fixed income
assets for pension and profit sharing plans, financial institutions such
as banking and insurance companies and mutual funds for retail and
institutional investors. The Manager also provides risk management and
asset/liability advisory services on over $150 billion of complex assets
and liabilities including mortgage securities, loans and servicing
rights. Many of the Manager's senior professionals were pioneers in the
mortgage and structured finance markets and average over ten years
experience in raising and managing mortgage capital.
The Manager has more than $50 billion in assets under
management, including over $15 billion in commercial, multifamily and
residential mortgage-backed securities and other real estate related
assets. The Manager and its Affiliates have significant experience in
underwriting originating, servicing and securitizing commercial,
multifamily and residential Mortgage Loans and has participated in
several non U.S. mortgage and MBS transactions. Since the beginning of
1996, Affiliates of the Manager have acquired or originated over $10
billion in mortgage assets and, to date, have issued over $5.8 billion in
securities collateralized by such assets.
At all times, the Manager will be subject to the direction and
oversight of the Company's Board of Directors. 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. The Manager will be primarily involved in
three primary activities: (i) underwriting, originating and acquiring
Mortgage Loans and other real estate related assets; (ii) asset/liability
and risk management, hedging of floating rate liabilities, and financing,
management and disposition of assets, including credit and prepayment
risk management; and (iii) capital management, structuring, analysis,
capital raising and investor relations activities. In conducting these
activities, the Manager will formulate operating strategies for the
Company, arrange for the acquisition of assets by the Company, arrange
for various types of financing and hedging strategies for the Company,
monitor the performance of the Company's assets and provide certain
administrative and managerial services in connection with the operation
of the Company.
The Manager will receive a quarterly base management fee
calculated as a percentage of the Average Invested Assets of the Company
for each calendar quarter and equal to 1% per annum of the first $1 billion
of such Average Invested Assets, 0.75% of the next $250 million of such
Average Invested Assets, and 0.50% of Average Invested Assets above $1.25
billion. The term "Average Invested Assets" for any period means the
average of the aggregate book value of the assets of the Company, including
the assets of all of its direct and indirect subsidiaries, before reserves
for depreciation or bad debts or other similar noncash reserves, computed
by taking the daily average of such values during such period. The Manager
will not receive any management fee for the period prior to the sale of the
shares of Common Stock offered hereby. The base management fee is intended
to compensate the Manager, among other things, for its costs in providing
management services to the Company.
The Manager will be entitled to receive incentive compensation
for each fiscal quarter in an amount equal to the product of (A) 25% of
the dollar amount by which (1)(a) Funds From Operations of the Company
(before the incentive fee) per share of Common Stock (based on the
weighted average number of shares outstanding) plus (b) gains (or minus
loses) from debt restructuring and sales of property per share of Common
Stock (based on the weighted average number of shares outstanding),
exceed (2) an amount equal to (a) the weighted average of the price per
share of the initial offering and the prices per share of any secondary
offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate plus two percent per annum multiplied by (B) the weighted average
number of shares of Common Stock outstanding during such quarter.
Notwithstanding the foregoing, accrual and payment of any portion of the
incentive compensation that is attributable to net capital gains of the
Company will be delayed to the extent, if any, required by the Investment
Advisers Act of 1940 as in effect at that time. "Funds From Operations"
as defined by the National Association of Real Estate Investment Trusts
("NAREIT") means net income (computed in accordance with generally
accepted accounting principals ("GAAP") excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and
amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. Funds from Operations
does not represent cash generated from operating activities in accordance
with GAAP and should not be considered as an alternative to net income as
an indication of the Company's performance or to cash flows as a measure
of liquidity or ability to make distributions. As used in calculating the
Manager's compensation, the term "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 constant maturities of ten years) published by the Federal
Reserve Board during a quarter, or, if such rate is not published by the
Federal Reserve Board, any Federal Reserve Bank or agency or department
of the federal government selected by the Company. 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. See "The
Manager -- Management Compensation" for a more detailed explanation of
the management compensation arrangements.
The ability of the Company to generate Funds From Operations
in excess of the Ten Year U.S. Treasury Rate, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is
dependent upon the level of credit losses, 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 is expected to use the proceeds from its base
management fee and incentive compensation in part to pay compensation to
its officers and employees who, notwithstanding that certain of them also
are officers of the Company, will receive no cash compensation directly
from the Company.
The Company expects to rely primarily on the facilities,
personnel and resources of the Manager to conduct its operations. The
Company expects to contract with third parties for the ongoing servicing
of certain assets. The Manager will be reimbursed by the Company for (or
charge the Company directly for) the Manager's costs and expenses in
employing third-parties to perform due diligence tasks on assets
purchased or considered for purchase.
Expense reimbursement will be made quarterly.
The management fees are payable in arrears. The Manager's base
and incentive fees and reimbursable costs and expenses will be calculated
by the Manager within 45 days after the end of each quarter, and such
calculation will be promptly delivered to the Company. The Company is
obligated to pay such fees, costs and expenses within 60 days after the end
of each fiscal quarter. If requested by the Manager, the Company will make
advance payments of the base management fee as often as semi-monthly at the
rate of 75% of the amount estimated by the Manager.
The Company will enter into the Management Agreement with the
Manager at the closing of the Offering. Except in the case of a termination
by the Company for cause, upon termination of the Management Agreement by
the Company, the Company will be obligated to pay the Manager a substantial
termination fee. See "The Manager -- The Management Agreement."
INDUSTRY TRENDS
Management believes fundamental changes are occurring in the
U.S. mortgage market, resulting in the shifting of investment capital and
mortgage assets out of traditional lending and savings institutions and
into the development and growth of new forms of mortgage banking and
mortgage investment firms, including those that qualify as REITs under
the Code. Management believes that traditional mortgage investment
companies, such as banks, thrifts and insurance companies, provide less
attractive investment structures for investing in mortgage assets because
of the costs associated with regulation, infrastructure, and corporate
level taxation. Additionally, with the development of highly competitive
national mortgage markets (which the Company believes is partly due to
the expansion of government sponsored enterprises such as GNMA, FNMA and
FHLMC), local and regional mortgage originators have lost market share to
more efficient mortgage originators who compete nationally. The Manager
also anticipates that these trends will ultimately be reflected
throughout the world markets. The growth of the secondary mortgage
market, including new securitization techniques, has also resulted in
financing structures that can be utilized efficiently to fund leveraged
mortgage portfolios and better manage interest rate risk.
As a REIT, the Company can generally pass through earnings to
stockholders without incurring an entity-level federal income tax,
thereby allowing the Company to pay higher dividends than financial
institutions and mortgage banking competitors that are subject to federal
income tax on their earnings. In addition, recent changes to federal tax
laws provide REITs with greater flexibility to manage and hedge their
floating rate liabilities. See "Federal Income Tax Considerations --
Taxation of the Company."
The U.S. residential and commercial mortgage markets have
experienced considerable growth over the past 15 years with total U.S.
residential mortgage debt outstanding growing from approximately $965
billion in 1980 to approximately $3.9 trillion in 1996, according to the
Mortgage Market Statistical Annual for 1997, and total U.S. commercial
mortgage debt outstanding growing from approximately $955 billion in 1993
to approximately $1.06 trillion in 1996, according to The Federal
Reserve. In addition, according to the same sources, the total U.S.
residential mortgage debt securitized into MBS has grown from
approximately $110 billion in 1980 to approximately $1.9 trillion in
1996, and total U.S. commercial MBS outstanding has grown from
approximately $34.2 billion in 1993 to approximately $97.2 billion in
1996.
Foreign mortgage loan and securitization markets have also
grown rapidly in recent years. For example, in Europe commercial and
residential Mortgage Loans outstanding have grown by over $200 billion
since 1993 to reach $1.6 trillion in 1996. This global growth of the
supply and demand for mortgage capital is expected to continue and the
REIT investment structure is expected to be the most efficient vehicle
for financing such growth.
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 the
Company's Taxable Income (which does not necessarily equal net income as
calculated in accordance with GAAP), determined without regard to the
deduction for dividends paid and by excluding any net capital gains. The
foregoing dividend policy is subject to revision at the discretion of the
Company's 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
earnings of the Company, its financial condition and such other factors as
the Board of Directors deems relevant.
SUMMARY RISK FACTORS
Each prospective purchaser of the Common Stock offered hereby
should review "Risk Factors" beginning on page __ for a discussion of
certain factors that should be considered before investing in the Common
Stock, including the following:
o The Company intends to acquire significant amounts
of Mortgage Loans and non-investment grade
mortgage-backed securities, including Interest only
securities (IOs), which are subject to greater risk
of loss of principal and non-payment of interest
than investments in Mortgage Loans or senior
investment grade securities;
o The Company may invest in distressed Mortgage Loans
and properties, including real properties with known
environmental problems, which may not generate
sufficient revenues to meet operating expenses and
debt service and may expose the Company to
liabilities substantially in excess of the Company's
investment;
o Borrower defaults, casualty losses and state or
foreign law enforceability issues, as well as other
events and circumstances, may result in losses on
the Company's investments;
o The Company's operations are expected to be highly
leveraged, which is likely to increase the
volatility of the Company's income and net asset
value and could result in operating or capital
losses;
o The Company's investments and income will be
sensitive to changes in prevailing interest rates,
reshaping of the yield curve and changes in
prepayment rates which may result in a mismatch
between the Company's borrowing rates and asset
yields;
o The Company intends to acquire Mortgage Loans and
mortgage backed securities secured by real property
located outside the U.S., which will be subject to
sovereign, political and foreign currency risks in
addition to usual real estate risks;
o The Company intends to use hedging strategies that
involve risk and that may not be successful in
insulating the Company from exposure to changing
interest and prepayment rates;
o The Company will contract with the Manager to advise
the Board of Directors and direct the day-to-day
business affairs of the Company. Thus, the Company's
success will depend to a large degree on the skill
and experience of the Manager's employees. In
particular, the Unaffiliated Directors will rely on
information provided by the Manager to review
transactions of the Company with PNC Bank Corp. and
its Affiliates;
o Conflicts of interest between the Manager and its
Affiliates and the Company, including the purchase
from Affiliates of term loans originated by such
Affiliates, could result on decisions that do not
fully reflect the interests of the Company's
stockholders;
o The Company has no operating history and will have
many competitors;
o The Company will be taxed as a corporation if it fails
to maintain its qualification as a REIT;
o Failure to maintain an exception from the Investment
Company Act would adversely affect results of
operations;
o Active formation and operation of competing mortgage
REITs may adversely affect the ability of the
Company to acquire assets and the market price of
the Common Stock.
o Future revisions in policies and strategies may be
made at the discretion of the Board of Directors;
o Future offerings of debt and equity may have an
adverse effect on market price of the Common Stock;
and
o Restrictions on ownership of the Common Stock may make
it more difficult to change control of the Company.
THE OFFERING
Common Stock Offered........................ __________ shares(1)
Common Stock to be Outstanding
After the offering.......................... __________ shares(1)(2)
Use of Proceeds............................. Purchase of the Company's
initial portfolio of mortgage
and other assets. The Company
intends to temporarily invest
proceeds of the Offering in
readily marketable interest
bear ing assets until
appropriate real estate
assets are identified and
acquired. Pending full
investment in the desired mix
of assets, funds will be
committed to short-term
investments that are expected
to provide a lower net return
than the Company hopes to
achieve from its intended
primary investments.
Proposed [NYSE] Symbol...................... "[ ]MC"
- ---------------
(1) Assumes that the Underwriters' option to purchase up to an
additional _________ shares to cover over-allotments is not
exercised. See "Underwriting."
(2) Includes 100 shares of Common Stock issued to the Manager in
connection with the initial organization of the Company.
Excludes _________ shares of Common Stock reserved for
issuance under the Company's 1998 Stock Option Plan. Options
to acquire _____ shares of Common Stock have been granted to
the Manager and Unaffiliated Directors of the Company. See
"Management of the Company--Stock Options."
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 its investment. While the Company will
strive to attain its objectives through, among other things, the
Manager's research 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. In addition to the information set forth
elsewhere in this Prospectus, the following risk factors should be
considered.
GENERAL
The results of the Company's operations will be affected by
various factors, many of which are beyond the control of the Company. The
Company's Net Income will vary primarily as a result of credit
experience, changes in short-term interest rates and borrowing costs, the
behavior of which involve various risks and uncertainties. Prepayment
rates, interest rates and borrowing costs depend upon the nature and
terms of the mortgage assets, the geographic location of the real estate
securing the Mortgage Loans included in or underlying the mortgage
assets, conditions in financial markets, the fiscal and monetary policies
of the countries in which the Company invests (particularly the United
States government and the Federal Reserve Board), competition and other
factors, none of which can be predicted with any certainty.
OPERATING RISKS
CREDIT RISKS FROM OWNERSHIP OF NON-INVESTMENT GRADE MORTGAGE
ASSETS. The Company intends to acquire a significant amount of
non-investment grade mortgage assets, including unrated "first loss" credit
support subordinated interests. A first loss security is the most
subordinated class in a structure and accordingly is the first to bear the
loss upon a default on, restructuring or liquidation of the underlying
collateral and the last to receive payment of interest and principal. Such
classes are subject to special risks, including a substantially greater
risk of loss of principal and non-payment of interest than more senior,
rated classes. The market values of subordinated interests tend to be more
sensitive to changes in economic conditions and less sensitive to changes
than more senior, rated classes. As a result of these and other factors,
subordinate interests generally are not actively traded and may not provide
holders thereof with liquidity of investment.
The yield to maturity on subordinated interests of the type
the Company intends to acquire will be extremely sensitive to the default
and loss experience of the underlying mortgage loans and the timing of
any such defaults or losses. Because the subordinate interests of the
type the Company intends to acquire generally have no credit support, to
the extent there are realized losses on the mortgage loans, the Company
may not recover the full amount or, in extreme cases, any of its initial
investment in such subordinate interests.
RISK OF LOSS ON MORTGAGE LOANS. The Company intends to acquire,
accumulate and securitize Mortgage Loans as part of its investment
strategy. While holding Mortgage Loans, the Company will be subject to
risks of borrower defaults, bankruptcies, fraud and losses and special
hazard losses that are not covered by standard hazard insurance. Also, the
costs of financing and hedging the Mortgage Loans could exceed the interest
income on the Mortgage Loans. 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. It may not be
possible or economical for the Company to securitize all of the mortgage
loans which it acquires, in which case the Company will continue to hold
the mortgage loans and bear the risks of borrower defaults, bankruptcies,
fraud losses and special hazard losses. Furthermore, the Company would
expect to retain a subordinate interest in securitizations of such mortgage
loans, in which case it would retain substantially all of these risks in a
more concentrated form up to the amount of its subordinated interest.
Multifamily and Commercial Loans Involve a Greater Risk of
Loss Than Single Family Loans. Multifamily and commercial real estate
lending is considered to involve a higher degree of risk than single
family residential lending because of a variety of factors, including
generally larger loan balances, dependency for repayment on successful
operation of the mortgaged property and tenant businesses operating
therein, and loan terms that include amortization schedules longer than
the stated maturity which provide for balloon payments at stated maturity
rather than periodic principal payments. In addition, the value of
multifamily and commercial real estate can be affected significantly by
the supply and demand in the market for that type of property.
Volatility of Values of Mortgaged Properties May Affect
Adversely the Company's Mortgage Loans. Commercial and multifamily
property values and net operating income derived therefrom are subject to
volatility and may be affected adversely by a number of factors,
including, but not limited to, national, regional and local economic
conditions (which may be adversely affected by plant closings, industry
slowdowns and other factors); local real estate conditions (such as an
oversupply of housing, retail, industrial, office or other commercial
space); changes or continued weakness in specific industry segments;
perceptions by prospective tenants, retailers and shoppers of the safety,
convenience, services and attractiveness of the property; the willingness
and ability of the property's owner to provide capable management and
adequate maintenance; construction quality, age and design; demographic
factors; retroactive changes to building or similar codes; and increases
in operating expenses (such as energy costs).
Construction, Bridge and Mezzanine Loans Involve Greater Risks
of Loss Than Loans Secured by Income Producing Properties. The Company
may acquire Construction Loans, Bridge Loans and Mezzanine Loans. These
types of Mortgage Loans are considered to involve a higher degree of risk
than long-term senior mortgage lending secured by income-producing real
property. This is because of a variety of factors, including, in the case
of Construction Loans, dependency on successful completion and operation
of the project for repayment, difficulties in estimating construction or
rehabilitation costs and loan terms that often require little or no
amortization, providing instead for additional advances to be made and
for a balloon payment at a stated maturity date. In the case of Mezzanine
Loans, the factors would include, among other things, that a foreclosure
by the holder of the senior loan could result in a Mezzanine Loan
becoming unsecured. Accordingly, the Company may not recover some or all
of its investment in such Mezzanine Loan. In addition, Construction
Loans, Bridge Loans and Mezzanine Loans may have higher loan to value
ratios than conventional Mortgage Loans because of shared appreciation
provisions.
Distressed Mortgage Loans May Have Greater Default Risks Than
Performing Loans. The Company may acquire Nonperfoming and Subperforming
Mortgage Loans, as well as Mortgage Loans that have had a history of
delinquencies. These Mortgage Loans presently may be in default or may
have a greater than normal risk of future defaults and delinquencies, as
compared to newly originated, high quality loans. Returns on an
investment of this type depend on the borrower's ability to make required
payments or, in the event of default, the ability of the loan's servicer
to foreclose and liquidate the mortgaged property underlying the Mortgage
Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully or in a timely fashion.
RISKS RELATED TO INVESTMENTS IN REAL PROPERTY. Distressed Real
Properties may have significant amounts of unleased space and thus may not
generate revenues sufficient to pay operating expenses and meet debt
service obligations. The value of the Company's investments in real
property and the Company's income and ability to make distributions to its
stockholders will be dependent upon the ability of the Manager to hire and
supervise capable property managers to operate the real property in a
manner that maintains or increases revenues in excess of operating expenses
and debt service. Revenues from real property may be affected adversely by
changes in national or local economic conditions, competition from other
properties offering the same or similar attributes, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact
of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements (particularly
in older structures), changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured or underinsured losses), acts of
war, adverse changes in zoning laws, and other factors which will be beyond
the control of the Company.
Although the Company's insurance will not cover all losses,
the Company intends to maintain comprehensive casualty insurance on its
real property, including liability and fire and extended coverage, in
amounts sufficient to permit replacement in the event of a total loss,
subject to applicable deductibles.
All real property owned by the Company will be subject to real
property taxes and, in some instances, personal property taxes. Such real
and person property taxes may increase or decrease as property tax rates
change and as the properties are assessed or reassessed by taxing
authorities. An increase in property taxes on the Company's real property
could affect adversely the Company's income and ability to make
distributions to its stockholders and could decrease the value of that
real property.
The operating costs and values of real property owned by the
Company may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations,
as well as the cost of complying with future legislation. Under various
federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable
for the costs of removal or remediation of hazardous or toxic substances
in, on, under or in the vicinity of such real property. Such laws often
impose liability whether or not the owner or operator know of, or was
responsible for, the presence of such hazardous or toxic substances. The
Company's income and ability to make distributions to its stockholders
could be affected adversely by the existence of an environmental
liability with respect to its properties.
The Company may invest in real property with known material
environmental problems or Mortgage Loans secured by such real property.
If it does so, the Company may take certain steps to limit its liability
for such environmental problems, such as creating a special purpose
entity to own such Real Property. Despite these steps, there are risks
associated with such an investment. The Manager has only limited
experience in investing in Real Property with environmental problems.
LEVERAGING STRATEGY. The Company expects to employ significant
leverage consistent with the type of assets acquired and the desired
level of interest rate risk in various investment environments. The
Company's Charter and By laws do not limit the amount of indebtedness the
Company may incur.
Leverage can reduce the net income available for distributions
to stockholders. If the interest income on the 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 and
erosion or elimination of its equity.
The ability of the Company to achieve its investment
objectives depends to a significant extent on its ability to borrow money
in sufficient amounts and on sufficiently favorable terms to earn
incremental returns. The Company may not be able to achieve the degree of
leverage it believes to be optimal due to decreases in the proportion of
the value of its assets that it can borrow against, decreases in the
market value of the Company's assets, increases in interest rates,
changes in the availability of financing in the market, conditions then
applicable in the lending market and other factors. This may cause the
Company to experience losses or less profits than would otherwise be the
case.
A substantial portion of the Company's borrowings are expected
to be in the form of collateralized borrowings. If the value of the assets
pledged to secure such borrowings were to decline, the Company would be
required post additional collateral, to reduce the amount borrowed or
suffer forced sales of the collateral. If sales were made at prices lower
than the carrying value of the collateral, the Company would experience
additional losses. If the Company is forced to liquidate Qualified REIT
Real Estate Assets to repay borrowings, there can be no assurance that it
will be able to maintain compliance with the REIT provisions of the Code
regarding asset and source of income requirements.
INTEREST RATE MISMATCH BETWEEN ASSET YIELDS AND BORROWING RATES. The
Company's operating results will depend in a large part on differences
between the income from its assets (net of credit losses) and its
borrowing costs. The Company intends to fund a substantial portion of its
assets with borrowings having interest rates that reset relatively
rapidly, such as monthly or quarterly. The Company anticipates that, in
most cases, the income from its assets will respond more slowly to
interest rate fluctuations than the cost of its borrowings, creating a
potential mismatch between asset yields and borrowing rates.
Consequently, changes in interest rates, particularly short-term interest
rates, may significantly influence the Company's net income. Increases in
these rates will tend to decrease the Company's net income and market
value of the Company's net assets. Interest rate fluctuations resulting
in the Company's interest expense exceeding interest income would result
in the Company incurring operating losses.
YIELD CURVE RESHAPING. The relationship between short-term and
long-term interest rates is often referred to as the "yield curve."
Ordinarily, short-term interest rates are lower than long-term interest
rates. If short-term interest rates rise disproportionately relative to
long-term interest rates (a flattening of the yield curve), the borrowing
costs of the Company may increase more rapidly than the interest income
earned on its assets. Because the Company's borrowings will primarily
bear interest at short-term rates and its assets will primarily bear
interest at medium-term to long-term rates, a flattening of the yield
curve will tend to decrease the Company's net income and market value of
its net assets. Additionally, to the extent cash flows from long-term
assets that return scheduled and unscheduled principal are reinvested,
the spread between the yields of the new assets and available borrowing
rates may decline and also may intend to decrease the net income and
market value of the Company's net assets. It is also possible that
short-term interest rates may adjust relative to long-term interest rates
such that the level of short-term rates exceeds the level of long-term
rates (a yield curve inversion). In this case, borrowing costs may exceed
the interest income and operating losses could be incurred.
RISK OF CHANGING PREPAYMENT RATES. The value of mortgage
assets may be affected substantially by prepayment rates on the related
Mortgage Loans. Prepayment rates on mortgage assets are influenced by
changes in current interest rates and a variety of economic, geographic
and other factors beyond the control of the Company and cannot be
predicted with certainty. In periods of declining mortgage interest
rates, prepayments on mortgage assets generally increase. If general
interest rates decline as well, the proceeds of such prepayments received
during such periods are likely to be reinvested by the Company in assets
yielding less than the yields on the mortgage assets that were prepaid.
In addition, the market value of the mortgage assets may, because of the
risk of prepayment, benefit less than other fixed-income securities from
declining interest rates. Conversely, in periods of rising interest
rates, prepayments on mortgage assets generally decrease, in which the
Company would not have the prepayment proceeds available to invest in
assets with higher yields. Under certain interest rate and prepayment
scenarios the Company may fail to recoup fully its cost of acquisition of
certain investments.
The Company may acquire classes of mortgage assets that are
entitled to no (or only nominal) payments of principal, but only to
payments of interest, such as IOs. The yield to maturity of IOs is very
sensitive to the rate of prepayments on the underlying mortgage loans. If
the rate of prepayments is faster than anticipated, the yield on IOs will
be negatively affected, and, in extreme cases, the initial investment
amount may not be recovered and the IO investment could become worthless.
Some IOs bear interest at a floating rate that varies inversely with (and
often at a multiple of) changes in a specified interest rate index
("Inverse IOs"). Therefore, the yield to maturity of an Inverse IO is
extremely sensitive to changes in the related index. The Company also
expects to invest in subordinated IOs ("Sub IOs"). Interest amounts
otherwise allocable to Sub IOs generally are used to make payments on more
senior classes or to fund a reserve account for the protection of senior
classes until overcollateralization occurs or the balance in the reserve
account reaches a specified level. The yield to maturity of Sub IOs is very
sensitive not only to default losses but also to the rate and timing of
prepayment on the underlying loans. Under certain interest rate and
prepayment scenarios, the Company may fail to recoup fully the cost of
acquiring IOs, Inverse IOs and Sub IOs.
RISKS ASSOCIATED WITH HEDGING TRANSACTIONS. The Company intends
to enter into hedging transactions primarily to protect itself from the
effect of interest rate fluctuations on its floating rate debt and also to
protect its portfolio of mortgage assets from interest rate and prepayment
rate fluctuations. There can be no assurance that the Company's hedging
activities will have the desired beneficial impact on the Company's results
of operations or financial condition. Moreover, no hedging activity can
completely insulate the Company from the risks associated with changes in
interest rates and prepayment rates.
Hedging involves risk and typically involves costs, including
transaction costs. Such costs increase dramatically as the period covered
by the hedging increases and during periods of rising and volatile
interest rates. The Company may increase its hedging activity and, thus,
increase its hedging costs, during such periods when interest rates are
volatile or rising and hedging costs have increased. The Company intends
generally to hedge as much of the interest rate risk as the Manager
determines is in the best interests of the stockholders of the Company
given the cost of such hedging transactions and the need to maintain the
Company's status as a REIT.
Hedging instruments often are not traded on regulated
exchanges, guaranteed by an exchange or its clearing house, or regulated
by any U.S. or foreign governmental authorities. Consequently, there are
no requirements with respect to record keeping, financial responsibility
or segregation of customer funds and positions. The business failure of a
counterparty with which the Company has entered into a hedging
transaction will most likely result in a default. Default by a party with
which the Company has entered into a hedging transaction may result in
the loss of unrealized profits and force the Company to cover its resale
commitments, if any, at the then current market price. Although generally
the Company will seek to reserve for itself the right to terminate its
hedging positions, it may not always be possible to dispose of or close
out a hedging position without the consent of the counterparty, and the
Company may not be able to enter into an offsetting contract in order to
cover its risk. There can be no assurance that a liquid secondary market
will exist for hedging instruments purchased or sold, and the Company may
be required to maintain a position until exercise or expiration, which
could result in losses.
There can be no assurance that the Company will be able to
obtain financing at borrowing rates below the asset yields of its
mortgage assets. The Company will face competition for financing sources
which may limit the availability of, and adversely affect the cost of
funds to, the Company.
INVESTMENTS MAY BE ILLIQUID AND THEIR VALUE MAY DECREASE. Many
of the Company's assets are and will be relatively illiquid. In addition,
certain of the MBS that the Company will acquire will include interests
that have not been registered under the relevant securities laws, resulting
in a prohibition against transfer, sale, pledge or other disposition of
those MBS except in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, those laws. The
ability of the Company to vary its portfolio in response to changes in
economic and other conditions may be relatively limited. No assurances can
be given that the fair market value of any of the Company's assets will not
decrease in the future.
NO OPERATING HISTORY. 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. There can be
no assurance that the past experience of the Manager will be sufficient
to successfully manage the business of the Company. Further, the past
performance of the Manager is not indicative of future results of the
Company.
COMPETITION FOR MORTGAGE ASSETS AND FINANCING. The Company's net
income depends, in large part, on the Company's ability to acquire mortgage
assets at favorable spreads over the Company's borrowing costs. In
acquiring mortgage assets, the Company competes with other mortgage REITS,
specialty finance companies, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, institutional investors,
investment banking firms, other lenders, governmental bodies and other
entities. In addition, there are several mortgage REITS with asset
acquisition objectives similar to the Company, and others may be organized
in the future. The effect of the existence of additional REITs may be to
increase competition for the available supply of mortgage assets suitable
for purchase by the Company. Many of the Company's competitors for mortgage
assets may have access to greater capital and other resources and may have
other advantages over the Company.
DEPENDENCE ON THE MANAGER. 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 the officers and
employees of the Manager. 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 the Company. The Manager
in turn is dependent on its ability to attract, retain and motivate
qualified personnel. The loss of key personnel could have a material
adverse effect on the Company's business, financial condition, cash flows
and results of operations.
CONFLICTS OF INTEREST. The Manager has informed the Company
that it expects to continue to purchase and manage mortgage assets and
other real estate related assets in the future for third-party accounts.
The Manager and its Affiliates will have no obligation to make any
particular investment opportunities available to the Company. As a
result, there may be a conflict of interest between the operations of the
Manager and its Affiliates in the acquisition and disposition of mortgage
assets. In addition, the Manager and its Affiliates may from time to time
purchase mortgage assets for their own account and may purchase or sell
assets from or to the Company. The Company expects to acquire mortgage
assets, including subordinate interests, from the Manager's Affiliates
and will have a right of first offer to purchase up to $500 million
annually in multifamily and commercial Mortgage Loans originated by the
PNC Bank.. In addition, the Company may, but has no current plans to,
invest as a co-participant with Affiliates of the Manager in loans
originated or acquired by such Affiliates. Although such investments will
be subject to prior review by a committee of Unaffiliated Directors, it
is anticipated that they will rely primarily on information provided by
the Manager. Such conflicts may result in decisions and/or allocations of
mortgage assets by the Manager that are not in the best interests of the
Company although the Manager seeks to allocate investment opportunities
in a fair manner among accounts for which particular opportunities are
suitable and to achieve the most favorable price in all transactions.
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 25% of
the Funds From Operations of the Company (before payment of such
incentive compensation) plus gains (or minus losses) from certain
transactions in excess of the amount that would produce an annualized
return on invested common stock capital equal to the Ten-Year U.S.
Treasury Rate plus 2%. In evaluating mortgage assets for investment and
in other management strategies, the opportunity to earn a performance fee
based on net income may lead the Manager to place 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 and could result in increased risk to the value of the
Company's portfolio.
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 other REITS. The ability of the Manager and its
employees to engage in other business activities could reduce the time
and effort spent on the management of the Company.
TAX, LEGAL AND OTHER RISKS
FAILURE TO MAINTAIN REIT STATUS. 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 of its assets, the amount of its distributions to
stockholders and the ownership of its stock. If the Company fails to
qualify as a REIT in any tax year, it would be taxed as a regular
domestic corporation. In such a case, the Company would be subject to
federal income tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates, and distributions to the
Company's stockholders would not be deductible by the Company in
computing its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for
distribution to the Company's stockholders, which in turn could have an
adverse impact on the value of, and trading prices for, the Common Stock.
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.
The REIT provisions of the Code may limit the ability of the
Company to hedge its assets and the related Company borrowings. Under the
REIT provisions, the Company must limit its income in each year from
"Qualified Hedges" (together with any other income generated from other
than qualifying real estate assets) to less than 25% of the Company's
gross income. As a result, the Company may have to limit its use of
certain hedging techniques that might otherwise be advantageous. Any
limitation on the Company's use of hedging techniques may result in
greater interest rate risk. If the Company were to receive income from
Qualified Hedges in excess of the 25% 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.
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 qualifying 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.
The Company must generally distribute at least 95% of its
Taxable Income each year. The Company's operations may from time to time
generate Taxable Income in excess of cash flows. To the extent that the
Company does not otherwise have funds available, the Company may need to
borrow money, receive additional capital or sell assets to obtain the
cash needed for distribution to its stockholders.
FAILURE TO MAINTAIN EXCLUSION FROM THE INVESTMENT COMPANY ACT.
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
excludes from regulation entities that are primarily engaged in the
business of purchasing or otherwise acquiring "mortgages and other liens on
and interests in real estate." Under the current interpretations of the
staff of the Commission, in order to qualify for this exception, 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 backed securities represent all the certificates issued
with respect to an underlying pool of mortgage loans, such 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 many mortgage assets,
therefore, will be limited by the provisions of the Investment Company Act.
If the Company fails to qualify for exception 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.
ABSENCE OF PUBLIC MARKET. 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 representatives 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 [New York Stock Exchange] under
the symbol "[ ]MC."
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 strongly influenced by any variation between the gross yield on the
Company's assets (net of credit losses) and prevailing market interest
rates, with any narrowing of the spread between yield and cost adversely
affecting the price of the Common Stock. In addition, since any positive
spread between the yield on its assets and the cost of its borrowings
will not necessarily be larger in high interest rate environments than in
low interest rate environments, the Net Income of the Company and,
therefore, the dividend yield on its Common Stock, may be less attractive
compared with alternative investments, which could negatively affect the
price of the Common Stock.
TEMPORARY INVESTMENT IN SHORT-TERM INVESTMENTS. The Company's
results of operations may be adversely affected during the period in which
the Company is initially implementing its investment, leveraging and
hedging strategies since during this time the Company will be primarily
invested in short-term investments.
ACTIVE FORMATION AND OPERATION OF COMPETING MORTGAGE REITS. 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 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 markets or significant
operating failures of competitors 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
without reduction pursuant to any otherwise applicable income tax treaty.
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 assets securing those debt obligations. The Company intends
to arrange its borrowings in a manner to avoid generating significant
amounts of Excess Inclusion income.
FUTURE REVISIONS IN POLICIES AND STRATEGIES. 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 without stockholder consent, subject, in certain cases, to
approval by a majority of the Unaffiliated Directors.
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 and other borrowings, as well as all 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. In order for the
Company to meet the requirements for qualification as a REIT at all times,
the Articles of Incorporation prohibit any person from acquiring or
holding, directly or indirectly, shares of capital stock in excess of 9.8%
(in value or in number of shares, whichever is more restrictive) of the
aggregate of the outstanding shares of any class of capital stock of the
Company (other than the Manager and its Affiliates, with respect to whom
such percentages are __% in the aggregate) ("Excess Shares"). The Articles
of Incorporation 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 would
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, would
result in any transfer or ownership limitations, then that number of shares
of capital 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
of a Trust for the exclusive benefit of one or more Charitable
Beneficiaries, and the Intended Transferee may not acquire any rights in
such shares; provided, however, that any transfer occurs which, if
effective, would result in shares of capital stock being owned by fewer
than 100 persons, the transfer shall be null and void and the Intended
Transferee shall acquire no rights to the stock. Subject to certain
limitations, the Company's Board of Directors may increase or decrease the
ownership limitations or waive the limitations for certain investors. See
"Description of Capital Stock -- Repurchase of Shares and Restrictions on
Transfer."
Every owner of more than 5% (or such lower percentage as
required by the Code or the Regulations promulgated thereunder) of the
outstanding shares of any class 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
ownership on the Company's status as a REIT and to ensure compliance with
the ownership limitations.
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, would have a preference on
dividend payments that could affect the ability of the Company to make
dividend distributions to the common stockholders.
The provisions of the Company's Articles of Incorporation or
relevant Maryland law 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.
Certain provisions of the Maryland General Corporation Law
("MGCL") relating to "business combinations" and a "control share
acquisition" and of the Articles of Incorporation 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.
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be
approximately $_______ ($________ if the Underwriters, overallotment
option is exercised in full), assuming an initial offering price of
$_____ per share of Common Stock. The net proceeds from the Offering will
be used by the Company to purchase its initial portfolio of Assets.
The Company intends temporarily to invest proceeds of the
offering in readily marketable interest bearing assets until appropriate
real estate assets are identified and acquired. The Company may require
up to six months to have the net proceeds of the Offering fully invested
in mortgage assets and up to an additional nine months to fully implement
the leveraging strategy to increase the mortgage asset investments to its
desired level. Pending full investment in the desired mix of assets,
funds will be committed to short-term Investments that are expected to
provide a lower net return than the Company hopes to achieve from its
intended primary investments.
DIVIDEND AND DISTRIBUTION POLICY
The Company intends to distribute substantially all of its net
Taxable Income (which does not ordinarily equal net income as calculated
in accordance with GAAP) to stockholders in each year. The Company
intends to declare four regular quarterly dividends. The Company's
dividend policy is subject to revision at the discretion of its Board of
Directors. All distributions will be made by the Company at the
discretion of its Board of Directors and will depend on the earnings and
financial condition of the Company, maintenance of REIT status and such
other factors as the Company's Board of Directors deems relevant.
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."
CAPITALIZATION
The capitalization of the Company, as of _________ __, 1997
and as adjusted to reflect the sale of the shares of Common Stock offered
hereby at an assumed per share price at the mid-point of the offering
range set forth on the cover page of this Prospectus, is as follows:
As Adjusted(1)(2)
Actual (in thousands)
------------ -----------------
Common Stock, par value $.01 $ $
Authorized -- 100,000,000 shares
Outstanding -- 100 shares
(as adjusted _______ shares)
Additional Paid-in Capital ------------ -----------------
Total ============ =================
(1) Before deducting offering expenses estimated to be $_______,
payable by the Company, and assuming no exercise of the
Underwriters' overallotment option to purchase up to an
additional _______ shares of Common Stock.
(2) Does not include _______ shares of Common Stock reserved for
issuance upon exercise of options granted under the Company's
1998 Stock Option Plan. See "Management of the Company --
Stock Options."
BUSINESS
GENERAL
The Company was recently organized to invest in a diversified
portfolio multifamily, commercial and residential Mortgage Loans,
mortgage backed securities and other real estate related assets.
The Company expects to use its equity and borrowed funds to
seek to generate net income for distribution to stockholders based
primarily on the spread between the yield on its assets (net of credit
losses) and the cost of its borrowings and hedging activities. The
Company will elect to be taxed as a REIT under the Code. The Company
generally will not be subject to federal income tax to the extent that it
distributes its income to its stockholders and maintains its
qualification as a REIT. See "Certain Federal Income Tax Considerations."
The day-to-day operations of the Company will be managed by the Manager
subject to the direction and oversight of the Company's Board of
Directors, a majority of whom will be unaffiliated with PNC and the
Manager.
INVESTMENT STRATEGY
The Company's investment strategy will be to maximize its net
income by investing in a diversified portfolio of Mortgage Loans, MBS and
other real estate related assets. In creating and managing its investment
portfolio, the Company will utilize the Manager's expertise and
significant business relationships of the Manager with its Affiliates, as
well as unrelated participants in the real estate industry. The Company
intends to trade its assets actively but does not intend to acquire, hold
or sell assets in such a manner that such assets would be characterized
as dealer property for tax purposes.
The Company intends to acquire the following types of
investments: (i) Mortgage Loans; (ii) MBS, including CMBS and RMBS; (iii)
fixed and adjustable rate Privately-Issued Certificates and Agency
Certificates; (iv) CMOs and REMIC interests; (v) Mortgage Derivatives,
including IOs; (v) multifamily and commercial real properties; (vi)
Non-U.S. Mortgage Loans, Non-U.S. MBS and real properties; and (vii) other
assets. Consistent with the Company's policy of maintaining its status as a
REIT for federal income tax purposes, substantially all of the Company's
assets will consist of Qualified REIT Real Estate Assets under the REIT
Provisions of the Code. See "Description of Mortgage Assets" for a
description of these instruments.
The Company will finance its assets with the net proceeds of
the Offering and borrowings and expects that it will maintain an
equity-to-assets ratio of 10% to 20%, although the actual ratio may be
higher or lower than this range from time to time. The Company will
leverage primarily with reverse repurchase agreements, dollar rolls,
securitizations of its Mortgage Loans, secured and unsecured borrowings,
commercial paper and issuance of Preferred Stock.
The Company's policy is to acquire those mortgage assets which
it believes are likely to generate the highest returns on capital
invested, after considering the amount and nature of anticipated cash
flows from the asset, the Company's ability to pledge the asset to secure
collateralized borrowings, the capital requirements resulting from the
purchase and financing of the asset, the potential for appreciation and
the costs of financing, hedging and managing the asset. Prior to
acquisition, potential returns on capital employed will be assessed over
the expected life of the asset and in a variety of interest rate, yield
spread, financing cost, credit loss and prepayment scenarios. In managing
the Company's portfolio, the Manager also will consider balance sheet
management and risk diversification issues.
Although the Company intends to invest primarily in Mortgage
Loans and CMBS, the Company's business decisions will depend on changing
market factors. Thus the company cannot anticipate with any certainty the
percentage of its assets that will be invested in each category of real
estate related assets. The Company has a great deal of discretion as to
the manner in which it may invest, leverage and hedge its assets. The
Company may change any of its policies without stockholder approval.
There can be no assurance that the Company will be successful in its
investment strategy.
As a requirement for maintaining REIT status, the Company
generally intends to distribute to stockholders aggregate dividends
equaling at least 95% of its Taxable Income each year. See "Certain Federal
Income Tax Considerations"
OPERATING POLICIES AND STRATEGIES
OPERATING POLICIES. The Board of Directors has established
certain operating policies for the Company. Except as specifically
prohibited by the Company's Charter or Bylaws, the Board of Directors
may, in its discretion, revise the guidelines from time to time in
response to changes in market conditions or opportunities without
stockholder approval.
The Company also has adopted compliance guidelines, including
restrictions on acquiring, holding and selling assets, to ensure that the
Company continues to qualify as a REIT and is excluded from regulation as
an investment company. Before acquiring any asset, the Manager will
determine whether such asset would constitute a Qualified REIT Real
Estate Asset under the REIT Provisions of the Code. Substantially all of
the assets that the Company intends to acquire are expected to be
Qualified REIT Real Estate Assets. The Company will regularly monitor
purchases of mortgage assets and the income generated from such assets,
including income from its hedging activities, in an effort to ensure that
at all times the Company maintains its qualification as a REIT and its
exclusion under the Investment Company Act.
CAPITAL AND LEVERAGE POLICIES. The Company's operations are
expected to be highly leveraged. Initially, the Company intends to finance
its acquisition of mortgage assets through the proceeds of the Offering
and, thereafter, primarily by borrowing against or "leveraging" its
existing portfolio and using the proceeds to acquire additional mortgage
assets. See "Risk Factors--Operating Risks--Leveraging Strategy." The
Company expects to incur debt such that it will maintain an
equity-to-assets ratio of 10% to 20%,although the actual ratio may be
higher or lower from time to time depending on market conditions and other
factors deemed relevant by the Manager. The Company's Charter and Bylaws do
not limit the amount of indebtedness the Company can incur, and the Board
of Directors has discretion to deviate from or change the Company's
indebtedness policy at any time. However, the Company intends to maintain
an adequate capital base to protect against various business environments
in which the Company's financing and hedging costs might exceed interest
income (net of credit losses) from its mortgage assets. These conditions
could occur, for example, due to credit losses or when, due to interest
rate fluctuations, interest income on the Company's mortgage assets lags
behind interest rate increases in the Company's borrowings, which are
expected to be predominantly variable rate. See "Risk Factors--Operating
Risks.
LIABILITIES. Mortgage assets, other than securitized Mortgage
Loans, will be financed primarily at short-term borrowing rates through
reverse repurchase agreements, dollar roll agreements, loan agreements,
lines of credit, commercial paper borrowings and other credit facilities
with institutional lenders. The Company may also borrow long term and
issue preferred stock.
Reverse repurchase agreements are structured as sale and
repurchase obligations and have the economic effect of allowing a
borrower to pledge purchased mortgage assets as collateral securing
short-term loans to finance the purchase of such mortgage assets.
Typically, the lender in a reverse repurchase arrangement makes a loan in
an amount equal to a percentage of the market value of the pledged
collateral. At maturity, the borrower is required to repay the loan and
the pledged collateral is released. Pledged mortgage assets continue to
pay principal and interest to the borrower.
A dollar roll agreement provides for the sale and delayed
delivery of mortgage assets and a simultaneous forward repurchase
commitment by the borrower to repurchase the same or a substantially
similar security on a future date. During the roll period, the borrower
forgoes principal and interest payments on the mortgage assets, but is
compensated by the interest earned on the cash proceeds of the initial
sale of the mortgage assets and the spread on the forward repurchase
price. Because the dollar roll provides a borrower with funds for the
roll period, its value may be expressed as an "implied financing rate."
Dollar rolls are a favorable means of financing when the forward
repurchase price is low compared to the initial sale price, making the
implied financing rate lower than alternative short-term borrowing rates.
The Company's ability to enter into dollar roll agreements may be limited
in order to maintain the Company's status as a REIT or to avoid the
imposition of tax on the Company.
The Company expects that reverse repurchase agreements and, to
the extent consistent with the REIT Provisions of the Code, dollar roll
agreements will be, together with Mortgage Loan securitizations, the
principal means of leveraging its mortgage assets. However, the Company
may also utilize warehouse lines of credit, issue preferred stock or
secured or unsecured notes of any maturity if it appears advantageous to
do so. The Company intends to enter into reverse repurchase agreements
with financially sound institutions, including broker/dealers, commercial
banks and other lenders, which meet credit standards approved by the
Board of Directors. Upon repayment of a reverse repurchase agreement, or
a repurchase pursuant to a dollar roll agreement, the Company intends to
pledge the same collateral promptly to secure a new reverse repurchase
agreement or will sell similar collateral pursuant to a new dollar roll
agreement. Since the Company is newly-formed and has not commenced
operations, it has not yet established any lines of credit or
collateralized financing facilities. The Company has conducted
preliminary discussions with potential lenders and believes, on the basis
of these discussions, that it will be able to obtain financing in amounts
and at interest rates consistent with the Company's financing objectives.
The reverse repurchase and dollar roll agreements also would
require the Company to deposit additional collateral (a "margin call") or
reduce its borrowings thereunder, if the market value of the pledge
collateral declines. This may require the Company to sell mortgage assets
to provide such additional collateral or to reduce its borrowings. The
Company intends to maintain an equity cushion sufficient to provide
liquidity in the event of interest rate movements and other market
conditions affecting the market value of the pledged mortgage assets.
However, there can be no assurance that the Company will be able to
safeguard against being required to sell mortgage assets in the event of a
change in market conditions.
RELATIONSHIP WITH PNC. PNC Bank will enter into an agreement
granting to the Company, for as long as the Management Agreement with the
Manger remains in effect, a right of first offer to purchase not less
than $___ million annually of multifamily and commercial Mortgage Loans
typical of those originated by PNC Bank. Although not contractually
committed to do so, the Company presently intends to purchase the
Mortgage Loans offered to it pursuant to the foregoing right of first
offer, subject to compliance with the Company's policy guidelines and
underwriting criteria as established and modified from time to time.
The Company expects to maintain a relationship with PNC Bank
in which the Company will be a ready, willing and able purchaser of not
only Mortgage Loans, but also other assets that may be offered from time
to time by PNC Bank. Although no binding commitment will exist on the
part of PNC Bank or the Company regarding the sale and purchase of such
other assets, the Company expects to be able to purchase such other
assets from PNC Bank on terms and at prices that will be fair to both
parties and that meet the Company's investment criteria. If an asset that
otherwise meets all of the Company's criteria for asset acquisition is
being offered to the Company by PNC Bank or one of its Affiliates at a
price that is greater, or on terms that are less favorable, than would be
available from third parties for similar assets in bona fide arms' length
transactions, the Manger would be expected to recommend that the Company
decline to acquire that asset at the quoted price and terms,
notwithstanding the relationship among the Company, PNC Bank and its
Affiliates.
The Manager will determine fair transfer prices for the
Company's acquisitions of assets from PNC Bank and its Affiliates based
on guidelines approved by the Unaffiliated Directors. The Unaffiliated
Directors will review those transactions on a quarterly basis to insure
compliance with the guidelines.
In deciding whether to approve an acquisition of any assets,
including acquisitions of Mortgage Loans, MBS and other assets from PNC
Bank or its Affiliates, the Manager may consider such information as it
deems appropriate to determine whether the acquisition is consistent with
the guidelines, such as whether the price is fair and the investment
otherwise is suitable and in the best interests of the Company. In
addition, the Manager may consider, among other factors, whether the
acquisition of that asset will enhance the Company's ability to achieve
or exceed the Company's risk adjusted target rate of return, if any,
whether the asset otherwise is well-suited for the Company and whether
the Company financially is able to take advantage of the investment
opportunity presented thereby. There is no geographic limitation or
requirement of geographic diversification (either as to size,
jurisdictional boundary, zip code or other geographic measure) as to the
properties that secure repayment of the Mortgage Loans or underlying the
MBS contemplated to be acquired or created by the Company; the only
limitations as to the type of assets that the Company may acquire and the
characteristics thereof being limitations either (i) imposed by law, (ii)
set forth in the Guidelines or (iii) with which the Company must comply
as a condition of maintaining both its status as a REIT and its exemption
from regulation under the Investment Company Act.
When possible, the price that the Company will pay for
Mortgage Loans, MBS and other assets acquired from PNC Bank or its
Affiliates will be determined by reference to the prices most recently
paid to PNC Bank or its Affiliates for similar assets, adjusted for
differences in the terms of such transactions and for changes in market
conditions between the dates of the relevant transactions. If no previous
sales of similar assets have occurred, the Company will attempt to
determine a market price for the asset by an alternative method, such as
obtaining a broker's price opinion or an appraisal, if it can do so at a
reasonable cost. Investors should understand, however, that such
determinations are estimates and are not bona fide third party offers to
buy or sell.
It is the intention of the Company that the agreements and
transactions, including the sale of pools of Mortgage Loans, MBS and real
property, between the Company on the one hand and PNC Bank and its
Affiliates on the other hand are fair to both parties. However, there can
be no assurance that each of such agreements and transactions will be on
terms at least as favorable to the Company as it could have obtained from
unaffiliated third parties.
The Company anticipates that the price it pays for assets
acquired from PNC Bank or its Affiliates, in certain cases, may be lower
than the price that a third party would pay for those assets if economic
benefits would inure to PNC Bank and its Affiliates by selling to the
Company, rather than a third party. For example, PNC Bank and its
affiliates generally would not incur any broker's fees in connection with
a sale of Mortgage Loans and MBS to the Company. In addition, if PNC Bank
and its affiliates engage in repetitive sales of assets to the Company,
the purchase and sale agreement used in the successive transactions is
likely to contain standard terms and conditions that previously will have
been negotiated by the parties, resulting in reduced legal costs.
SECURITIZATION. The Company intends to acquire and accumulate
Mortgage Loans for securitization. Securitization is the process of
pooling Mortgage Loans and other fixed income assets in a trust or other
special purpose vehicle and issuing securities, such as MBS or other debt
securities, from the special purpose vehicle. The Company intends to
securitize Mortgage Loans primarily by issuing structured debt. Under
this approach, for accounting purposes, the securitized Mortgage Loans
will remain on the Company's balance sheet as assets and the debt
obligations (such as the CMOs) will appear as liabilities. The proceeds
of securitizations by the Company will be used to reduce preexisting
borrowings relating to such assets and to purchase additional assets.
Issuing structured debt in this manner locks in potentially less
expensive, long-term, non-recourse financing that better matches the
terms of the Mortgage Loans and fixed income instruments serving as
collateral for such debt.
The Company also may employ, from time to time to the extent
consistent with the REIT Provisions of the Code, other forms of
securitization under which a "sale" of an interest in the Mortgage Loans
occurs, and a resulting gain or loss is recorded on the Company's balance
sheet for accounting purposes at the time of sale. In a "sale"
securitization, only the net retained interest in the securitized
Mortgage loans would remain on the Company's balance sheet. The Company
may elect to conduct certain of its securitization activities, including
such sales, through one or more taxable subsidiaries or through
"Qualified REIT Subsidiaries", as defined under the REIT Provisions of
the Code, formed for such purpose. In most cases, the special purpose
vehicle would elect to be taxed as a Real Estate Mortgage Investment
Conduit ("REMIC") or a Financial Asset Securitization Investment Trust
("FASIT").
The Company expects that it will retain interests in the
underlying Mortgage Loans which will be subordinated with respect to
payments or principal and interest on the underlying Mortgage Loans to
the classes of securities issued to investors in such securitizations.
Accordingly, any losses incurred on the underlying Mortgage Loans will be
applied first to reduce the remaining amount of the Company's retained
interest, until reduced to zero.
Thereafter, the Company would have no further exposure to losses.
Typically, in connection with the creation of a new Mortgage
Loan securitization, the issuer generally will be required to enter into
a master servicing agreement with respect to such series of mortgage
securities with an entity acceptable to the Rating Agencies, that
regularly engages in the business of servicing Mortgage Loans (the
"Master Servicer"). Currently, the Company does not engage in this
business. In order to assist the Company in maintaining its exclusion
from investment company regulation, the Company expects that it will
retain the right to initiate, direct or forbear foreclosure proceedings
in connection with defaults on any of the underlying Mortgage Loans and
may retain special servicers to maintain borrower performance and to
exercise available remedies, including foreclosure, at the direction of
the Company. Exercise of such rights may require the company to be
responsible for advancing payments to investors in such securitizations
as if such default has not occurred.
The Company intends to structure its securitizations so as to
avoid the attribution of any Excess Inclusion Income to the Company's
stockholders. See "Certain Federal Income Tax Considerations--Taxation of
Stockholders."
CREDIT RISK MANAGEMENT. With respect to its assets, the Company
will be exposed to various levels of credit and special hazard risk,
depending on the nature of the underlying assets and the nature and level
of credit enhancements supporting such assets. The Company will originate
or purchase mortgage loans which meet minimum debt service coverage
standards established by the Company. The Manager will review and monitor
credit risk and other risks of loss associated with each investment. In
addition, the Manager will seek to diversify the Company's portfolio of
assets to avoid undue geographic, issuer, industry and certain other types
of concentrations. The Company's Board of Directors will monitor the
overall portfolio risk and review levels of provision for loss.
ASSET/LIABILITY MANAGEMENT. To the extent consistent with its
election to qualify as a REIT, the Company will follow an interest rate
risk management policy intended to mitigate the negative effects of major
interest rate changes. The Company intends to minimize its interest rate
risk from borrowings both through hedging activities and by attempting to
structure the key terms of its borrowings to generally correspond (in the
aggregate for the entire portfolio, and not on an asset-by-asset basis)
to the interest rate and maturity parameters of its assets.
HEDGING ACTIVITIES. The Company intends to enter into hedging
transactions to protect its investment portfolio from interest rate
fluctuations and other changes in market conditions. These transactions
may include interest rate swaps, the purchase or sale of interest rate
collars, caps or floors, options, Mortgage Derivatives and other hedging
instruments. These instruments may be used to hedge as much of the
interest rate risk as the Manager determines is in the best interest of
the Company's stockholders, given the cost of such hedges and the need to
maintain the Company's status as a REIT. The Manager may elect to have
the Company bear a level of interest rate risk that could otherwise be
hedged when the Manager believes, based on all relevant facts, that
bearing such risk is advisable. The Manager has extensive experience in
hedging real estate assets with these types of instruments.
Hedging instruments often are not traded on regulated
exchanges, guaranteed by an exchange or its clearing house, or regulated
by any U.S. or foreign governmental authorities. Consequently, there may
be no requirements with respect to record keeping, financial
responsibility or segregation of customer funds and positions. The
Company will enter into these transaction only with counterparties with
long term debt rated 'A' or better by at least one of the Rating
Agencies. The business failure of a counterparty with which the Company
has entered into a hedging transaction will most likely result in a
default, which may result in the loss of unrealized profits and force the
company to cover its resale commitments, if any, at the then current
market price. Although generally the Company will seek to reserve for
itself the right to terminate its hedging positions, it may not always be
possible to dispose of or close out a hedging position without the
consent of the counterparty, and the Company may not be able to enter
into an offsetting contract in order to cover its risk. There can be no
assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and the Company may be required to
maintain a position until exercise or expiration, which could result in
losses.
The Company intends to protect its investment portfolio
against the effects of significant interest rate fluctuations and to
preserve the net income flows and capital value of the Company.
Specifically, the Company's asset acquisition and borrowing strategies
are intended to offset the potential adverse effects resulting from the
differences between fixed rates or other limitations on coupon rate
adjustment, such as interest rate caps, associated with its mortgage
assets and the shorter term predominantly variable nature of the
Company's related borrowings.
The Company's hedging activities are intended to address both
income and capital preservation. Income preservation refers to
maintaining a stable spread between yields from mortgage assets and the
Company's borrowing costs across a reasonable range of adverse interest
rate environments. Capital preservation refers to maintaining a
relatively steady level in the market value of the Company's capital
across a reasonable range of adverse interest rate scenarios. To monitor
and manage capital preservation risk, the Company will model and measure
the sensitivity of the market value of its capital (i.e., the combination
of its assets, liabilities and hedging positions) to various changes in
interest rates in various economic scenarios. The Company will not enter
into these types of the transactions for speculative purposes.
The Company believes its hedging activities will provide a
level of income and capital protection against reasonable interest rate
risks. However, no strategy can insulate the Company completely from
changes in interest rates.
OTHER POLICIES. The Company intends to operate in a manner
that will not subject it to regulation under the Investment Company Act.
The Company may (i) underwrite securities of other issuers, particularly
in the course of disposing of its assets, (ii) originate loans and (iii)
issue securities in exchange for real property or other assets.
FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board
of Directors has approved the investment policies, the operating policies
and the 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 interest of the Company or its
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.
DESCRIPTION OF REAL ESTATE RELATED ASSETS
The Company intends to invest principally in the following
types of mortgage assets subject to the operating restrictions described
in "Operating Policies and Strategies" above and the additional policies
described below.
MORTGAGE LOANS. The Company intends to acquire and accumulate
fixed and adjustable-rate Mortgage Loans secured by first or second liens
on multifamily residential, commercial, single-family (one-to-four unit)
residential or other real property as a significant part of its
investment strategy.
The Mortgage Loans may be originated by or purchased from
various suppliers of mortgage assets throughout the United States and
abroad, 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 Company may
also originate its own Mortgage Loans, particularly bridge financing of
Mortgage Loan and real property portfolios. 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.
In considering whether to acquire a pool of Mortgage Loans,
the Company's policy is to request that the Manager perform certain due
diligence tasks on behalf of the Company that reasonably may be expected
to provide relevant and material information as to the value of the
Mortgage Loans within that pool and whether the Company should acquire
that pool.
The Company's policy is to acquire Mortgage Loans only at
prices that are fair to the Company and that meet the Company's
investment criteria. In determining the price of a Mortgage Loan, the
Company may request that the Manager review and analyze a number of
factors. These factors include market conditions (market interest rates,
the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors). They also include a yield to
maturity of the Mortgage Loan, the liquidity of the Mortgage Loan, the
limitations on the obligations of the seller with respect to the Mortgage
Loan, the rate and timing of payments to be made with respect to the
Mortgage Loan, the mortgaged property underlying the Mortgage Loan, the
risk of adverse fluctuations in the market values of that mortgaged
property as a result of economic events or governmental regulations, the
historical performance and other attributes of the property manager
responsible for managing the mortgaged property, relevant laws limiting
actions that may be taken with respect to loans secured by real property
and limitations on recourse against the obligors following realization on
the collateral through various means, risks of timing with respect to
Mortgage Loan prepayments, risks associated with geographic concentration
of underlying assets constituting the mortgaged property for the relevant
Mortgage Loan, environmental risks, pending and threatened litigation,
junior liens and other issues relating to title, a prior history of
defaults by affiliated parties on similar and dissimilar obligations, and
other factors.
Distressed Mortgage Loans. The Company may acquire
Nonperforming or Subperforming Mortgage Loans secured by multifamily and
commercial properties. In general, the Company expects to foreclose on
such Mortgage Loans in an attempt to acquire title to the underlying
Distressed Real Properties. If the Company acquires pools of Distressed
Mortgage Loans (or pools of Mortgage Loans that are primarily Distressed
Mortgage Loans), the Company's policy is that the due diligence to be
performed before acquiring such Distressed Mortgage Loans or pools is to
be substantially similar to the due diligence process described above in
connection with the acquisition of performing Term Loans and the due
diligence process described below to be performed in connection with the
acquisition of Distressed Real Properties.
Construction Financing, Bridge Financing and Loans Subject to
Prior Liens. The Company may invest in or provide Construction Loans. The
Company will be permitted to make a Construction Loan of up to 90% of
total project costs if the Construction Loan is secured by a first lien
mortgage, deed of trust or deed to secure debt, as collateral security
for the borrower's obligations with respect to the Construction Loan. In
addition, the Company may invest in or provide Mezzanine Loans to owners
of real properties that are encumbered by first lien mortgages, deeds of
trust or deeds to secure debt, but only if the Company's Mezzanine Loans
are to be secured by junior liens on the subject properties. The policy
of the Company is that, at the time of origination of a Mezzanine Loan,
the value of the subject property should not exceed the sum of the
outstanding balances of the debt secured by the first lien and the
maximum amount contemplated to be advanced by the Company under the
Mezzanine Loan. With respect to both Construction Loans and Mezzanine
Loans, the Company may receive not only a stated fixed or variable
interest rate on the loan, but also a percentage of gross revenues or a
percentage of the increase in the fair market value of the property
securing repayment of that Construction Loan or Mezzanine Loan, payable
upon maturity or refinancing of the applicable Construction Loan or
Mezzanine Loan or upon the sale of the property. The Company may also
provide bridge financing, generally in the form of secured loans, for the
acquisition of Mortgage Loan portfolios, real properties or other real
estate related assets.
Commitments to Mortgage Loan Sellers. The Company may issue
commitments ("Commitments") to originators and other sellers of Mortgage
Loans and MBS who follow policies and procedures that comply with all
applicable federal and state laws and regulations and satisfy the
Company's underwriting criteria. 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 required
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.
Mortgage Loans acquired by the Company will generally be held
until a sufficient quantity has been accumulated for securitization.
During the accumulation period, the Company will be subject to risks of
borrower defaults and bankruptcies, fraud losses and special hazard
losses (such as those occurring from earthquakes, floods or windstorms)
that are not covered by standard hazard insurance. in the event of a
default on any Mortgage Loan held by the Company, the Company will bear
the risk of loss of principal to the extent of any deficiency between the
value of the collateral underlying the Mortgage Loan and the principal
amount of the Mortgage Loan. No assurance can be given that any such
mortgage, fraud or hazard insurance will adequately cover a loss suffered
by the Company. Also during the accumulation period, the costs of
financing the Mortgage Loans through reverse repurchase agreements and
other borrowings and lines of credit with warehouse lenders could exceed
the interest income on the Mortgage Loans. It may not be possible or
economical for the Company to complete the securitization for all
Mortgage Loans that the Company acquires, in which case the Company will
continue to bear the risks of borrower defaults and special hazard
losses.
The Company may obtain commitments for mortgage pool insurance
on the Mortgage Loans it acquires 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 overcollateralization. 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 may 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, floods and windstorm. This special hazard insurance is
generally 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 only 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 a
fraud or misrepresentation in connection with the origination of the
Mortgage Loan, the pool insurer will not be liable for the portion of the
loss attributable to such fraud or misrepresentation. Although the
Company will 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.
The Company intends to acquire new mortgage assets, and will
also seek to expand its capital base in order to further increase the
Company's ability to acquire new mortgage assets, when the potential
returns from new mortgage assets appear attractive relative to the return
expectations of stockholders (as expressed principally by the effective
dividend yield of the Common Stock). The Company may in the future
acquire mortgage assets by offering its debt or equity securities in
order to acquire such mortgage assets.
The Company intends to retain a subordinate interest in the
pools of Mortgage Loans it securitizes and to acquire subordinate
interests in pools of Mortgage Loans securitized by others. The credit
quality of Mortgage Loans and the mortgage securities utilizing Mortgage
Loans as the underlying collateral, depends on a number of factors,
including their loan-to-value ratio, their terms and the geographic
diversification of the location of the properties securing the Mortgage
Loans and, in the case of multi-family and commercial properties, the
creditworthiness of tenants and debt service coverage ratios.
BRIDGE LOANS. Bridge loans are short-term loans (generally 2-4
years) secured by liens on real property or by a pledge of partnership
interests in a portfolio of properties. Bridge loans are not intended to
be permanent debt capital but rather, interim financing prior to the sale
of the property or its refinancing with bank debt or mortgage loans. The
loans generally pay a floating rate of interest based on LIBOR or a
similar floating rate index.
Bridge loans carry a high sensitivity to default or extension
of principal repayment terms due to the need for refinancing and minimal
principal amortization. As they are associated with transfers of equity
ownership, property repositioning and tenant lease-up, bridge loans bear
the risk that operating strategies may not be successful, economic
conditions may deteriorate and competitors may undertake competing
strategies.
MORTGAGE-BACKED SECURITIES. The Company intends to acquire
MBS, primarily non-investment grade classes, from various sources. MBS
typically are divided into two or more interests, sometimes called
"tranches" or "classes." The Senior classes are often securities which,
if rated, would have ratings ranging from low investment grade "BBB" to
higher investment grades "A," "AA" or "AAA." The junior, subordinated
classes typically would include one or more non-investment grade classes
which, if rated, would have ratings below investment grade "BBB." Such
subordinated classes also typically include an unrated higher-yielding,
credit support class (which generally is required to absorb the first
losses on the underlying Mortgage Loans).
MBS generally are issued either as CMOs or Pass-Through
Certificates. "CMOs" are debt obligations of special purpose
corporations, owner trusts or other special purpose entities secured by
commercial Mortgage Loans or MBS. Pass-Through Certificates evidence
interests in trusts, the primary assets of which are Mortgage Loans. CMO
Bonds and Pass-Through Certificates may be issued or sponsored by
agencies or instrumentalities of the United States Government or private
originators of, or investors in, Mortgage Loans, including savings and
loan associations, mortgage bankers, commercial banks, investment banks
and other entities. MBS may not be guaranteed by an entity having the
credit status of a governmental agency or instrumentality and in this
instance are generally structured with one or more of the types of credit
enhancement described below. In addition, MBS may be illiquid.
In most non-government mortgage loan securitizations, MBS are
issued in multiple classes in order to obtain investment-grade credit
ratings for the senior classes and thus increase their marketability.
Each class of MBS may be issued with a specific fixed or variable coupon
rate and has a stated maturity or final scheduled distribution date.
Principal prepayments on the Mortgage Loans comprising the mortgage
collateral may cause the MBS to be retired substantially earlier than
their stated maturities or final scheduled distribution dates, although,
with respect to commercial Mortgage Loans, there generally are penalties
for or limitation on the ability of the borrower to prepay the loan.
Interest is paid or accrued on MBS on a periodic basis, typically
monthly.
The credit quality of MBS depends on the credit quality of the
underlying mortgage collateral. Among the factors determining the credit
quality of the mortgage collateral will be a government or agency
guarantee ratio of the Mortgage Loan balances to the value of the
properties securing the Mortgage Loans, the purpose of the Mortgage Loans
(e.g., refinancing or new purchase), the amount of the Mortgage Loans,
their terms, the geographic diversification of the location of the
properties securing the Mortgage Loans, and, in the case of commercial
Mortgage Loans, the credit-worthiness of tenants.
The principal of and interest on the underlying Mortgage Loans
may be allocated among the several classes of a MBS in many ways, and the
credit quality of a particular class results primarily from the order and
timing of the receipt of cash flow generated from the underlying Mortgage
Loans. Subordinated interests in MBS carry significant credit risks.
Typically, in a "senior-subordinated" structure, the subordinated
interest provide credit protection to the senior classes by absorbing
losses form loan defaults or foreclosures before such losses are
allocated to senior classes. As long as the more senior classes of
securities are outstanding, all prepayments on the Mortgage Loans
generally are paid to those senior classes, at least until the end of a
lock-out period, which typically is five years or more. In some
instances, particularly with respect to subordinated interests in
commercial mortgage securitizations, the holders of subordinated
interests are not entitled to receive scheduled payments of principal
until the more senior classes are paid in full or until the end of a
lock-out period. Because of this structuring of the cash flows from the
underlying Mortgage Loans, subordinated interests in a typical
securitization are subject to a substantially greater risk of non-payment
than are the more senior classes. Accordingly, the subordinated interests
are assigned lower credit ratings, or no ratings at all.
As a result of the typical "senior-subordinated" structure,
the subordinated classes of MBS will be extremely sensitive to losses on
the underlying Mortgage Loans. For example, if the Company owns a $20
million first loss subordinated class of MBS consisting of $100 million
of underlying Mortgage Loans, a 7% loss on the underlying Mortgage Loans
generally will result in a 70% loss of the stated principal amount of the
subordinated interest. Accordingly, the holder of the subordinated
interest is particularly interested in minimizing the loss frequency (the
percentage of the loan balances that default over the life of the
mortgage collateral) and the loss severity (the amount of loss on
defaulted Mortgage Loans, i.e., the principal amount of the Mortgage Loan
unrecovered after applying any recovery to the expenses of foreclosure
and accrued interest) on the underlying Mortgage Loans.
Losses on the mortgage collateral underlying the Company's MBS
will depend upon a number of factors, many of which will be beyond the
control of the Company or the applicable servicer. Among other things,
the default frequency on the mortgage collateral will reflect broad
conditions in the economy generally and real property particularly,
economic conditions in the economy generally and real property
particularly, economic conditions in the local area in which the
underlying mortgaged property is located, the loan-to-value ratio of the
Mortgage Loan, the purpose of the loan, and the debt service coverage
ratio (with respect to commercial and multifamily Mortgage Loans). The
loss severity on the mortgage collateral will depend upon many of the
same factors described above, and will also be influenced by certain
legal aspects of Mortgage Loans that underlie the MBS acquired by the
Company, including the servicer's ability to foreclose on the defaulted
Mortgage Loan and sell the underlying mortgaged property. Various legal
issues affect the ability to foreclose on a Mortgage Loan or sell the
mortgaged property. These legal issues may extend the time of foreclosure
proceedings or may require the expenditure of additional sums to sell the
underlying Mortgaged Property, in either case increasing the amount of
loss with respect to the Mortgage Loans.
In considering whether to acquire an MBS, the Company's policy
is to determine, in consultation with the Manager, the scope of review to
be performed before the Company acquires that MBS, which will be designed
to provide to the Company such information regarding that MBS as the
Company and Manager determine to be relevant and material to the
Company's decision regarding the acquisition of that MBS. The Company's
policy generally is to request that the Manager perform due diligence
substantially similar to that described above in connection with the
acquisition of performing Mortgage Loans. The due diligence may include
an analysis of (i) the underlying collateral pool, (ii) the prepayment
and default history of the originator's prior loans, (iii) cash flow
analyses under various prepayment and interest rate scenarios (including
sensitivity analyses) and (iv) an analysis of various default scenarios.
The Company also may request that the Manager determine and advise the
Company as to the price at which the Manager would recommend acquisition
of the MBS by the Company, and the Manager's reasons for such advice.
However, which of these characteristics (if any) are important and how
important each characteristic may be to the evaluation of a particular
MBS depends on the individual circumstances. Because there are so many
characteristics to consider, each MBS must be analyzed individually,
taking into consideration both objective data as well as subjective
analysis.
Many of the MBS to be acquired by the Company will not have
been registered under the Securities Act, but instead initially will have
been sold in private placements. These MBS will be subject to
restrictions on resale and, accordingly, will have substantially more
limited marketability and liquidity.
CMO Residuals are derivative mortgage securities issued by
agencies of the U.S. Government or by private originators of, or investors
in, Mortgage Loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries
of the foregoing. Many special purpose trusts or corporations that issue
multi-class MBS elect to be treated, for federal income tax purposes, as
REMICs. The Company may acquire not only MBS that are treated as regular
interests in REMICs, but also those that are designated as REMIC Residual
Interests or as Non-REMIC Residual Interests. The cash flow generated by
the Mortgage Loans underlying a series of CMOs is first applied to the
required payments of principal and interest on the CMOs and second to pay
the related administrative expenses of the issuer. The Residual Interests
generally receives excess cash flows, if any, after making the foregoing
payments. The amount of Residual Interests cash flow will depend on, among
other things, the characteristics of the Mortgage Loans, the coupon rate of
the CMOs, prevailing interest rates, and particularly the prepayment
experience of the Mortgage Assets. Regular Interest in a CMO are treated as
debt for tax purposes. Unlike regular interests, CMO Residual Interests
typically generate Excess Inclusion or other forms of taxable income
(including the accretion of market discount) that bear no relationship to
the actual economic income that is generally a REMIC. CMO Residuals that
are required to report taxable income or loss but receive no cash flow from
the Mortgage Loans are called "Non-Economic."
Any purchases and sales of CMO Residuals will be conducted in a
fully taxable corporate subsidiary to prevent the liability for Excess
Inclusion Income from being passed to the Company's Shareholders. See
"Federal Income Tax Considerations - Taxation of Taxable U.S.
Stockholders."
Any securitizations carried out by the Company will generally
create a Residual Interest. If the residual is a Non-Economic Residual, the
Company may incur a negative purchase price to dispose of it, or the
Company may retain it in a fully taxable corporate subsidiary. See
"Operating Policies and Strategies-Securitizations."
Subordinated MBS generally are issued at a significant
discount to their outstanding principal balance, which gives rise to OID
for federal income tax purposes. The Company will be required to accrue
the OID as taxable income over the life of the related subordinated MBS
on a level-yield method whether or not the Company receives the related
cash flow. The OID income attributable to a subordinated MBS generally
will increase the Company's REIT distribution requirement in the early
years of the Company's ownership of the MBS even though the Company may
not receive the related cash flow from the MBS until a later taxable
year. As a result, the Company could be required to borrow funds, to
issue capital stock or to liquidate assets in order to satisfy the REIT
distribution requirements for any taxable year.
COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that
many of the MBS acquired by the Company will be interests in CMBS. The
mortgage collateral supporting CMBS may be pools of whole loans or other
MBS, or both. Of the interests in CMBS that the Company acquires, most
will be subordinated or IO classes of MBS Interests, but the Company also
may acquire more senior classes or combined classes of first-loss and
more senior CMBS.
Unlike RMBS, which typically are collateralized by thousands
of single family Mortgage Loans, CMBS are collateralized generally by a
more limited number of commercial or multifamily Mortgage Loans with
larger principal balances than those of single family Mortgage Loans. As
a result, a loss on a single Mortgage Loan underlying a CMBS will have a
greater negative effect on the yield of such CMBS, especially the
subordinated MBS in such CMBS.
With respect to CMBS, the Company will use sampling and other
appropriate analytical techniques to determine on a loan-by-loan basis
which loans will undergo a full-scope review and which loans will undergo
a more streamlined review process. Although the choice is a subjective
one, considerations that influence the choice for scope of review often
include loan size, debt service coverage ratio, loan to value ratio, loan
maturity, lease rollover, property type and geographic location. A
full-scope review may include, among other factors, a property site
inspection, tenant-by-tenant rent roll analysis, review of historical
income and expenses for each property securing the loan, a review of
major leases for each property (if available); recent appraisals (if
available), engineering and environmental reports (if available), and the
price paid for similar CMBS by unrelated third parties in arms' length
purchases and sales (if available) or a review of broker price opinions
(if the price paid by a bona fide third party for similar CMBS is not
available and such price opinions are available). For those loans that
are selected for the more streamlined review process, the Manager's
evaluation may include a review of the property operating statements,
summary loan level data, third party reports, and a review of prices paid
for similar CMBS by bona fide third parties or broker price opinions,
each as available. If the Manager's review of such information does not
reveal any unusual or unexpected characteristics or factors, no further
due diligence is performed.
FHA AND GNMA PROJECT LOANS. The Company intends to invest in
loan participations and pools of loans insured under a variety of programs
administered by the Department of Housing and Urban Development ("HUD").
These loans will be insured under the National Housing Act and will provide
financing for the purchase, construction or substantial rehabilitation of
multifamily housing, nursing homes and intermediate care facilities,
elderly and handicapped housing, and hospitals.
Similar to CMBS, investments in FHA and GNMA Project Loans
will be collateralized by a more limited number of loans, with larger
average principal balances, than RMBS, and will therefore be subject to
greater performance variability. Loan participations are most often
backed by a single FHA-insured loan. Pools of insured loans, while more
diverse, still provide much less diversification than pools of single
family loans.
FHA insured loans will be reviewed on a case by case basis to
identify and analyze risk factors which may materially impact investment
performance. Property specific data such as debt service coverage ratio,
loan to value ratio, HUD inspection reports, HUD financial statements and
rental subsidies will be analyzed in determining the appropriateness of a
loan for investment purposes. The Manager will also rely on the FHA
insurance contracts and their anticipated impact on investment
performance in evaluating and managing the investment risks. FHA
insurance covers 99% of the principal balance of the underlying project
loans. Additional GNMA credit enhancement may cover 100% of the principal
balance.
PASS-THROUGH CERTIFICATES. 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 FNMA, FHLMC
and GNMA, as well as privately issued adjustable-rate and fixed-rate
mortgage pass-through certificates. The Pass-Through Certificates to be
acquired by the Company will represent interests in mortgages that will
be secured by liens on single-family (one-to-four units) residential
properties, multifamily residential properties and commercial properties.
Pass-Through Certificates backed by adjustable-rate Mortgage
Loans are subject to lifetime interest rate caps and to periodic interest
rate caps that limit the amount an interest rate can change during any
given period. The Company's borrowings are generally not subject to
similar restrictions. In a period of increasing interest rates, the
Company could experience a decrease in Net Income or incur losses because
the interest rates on its borrowings could exceed the interest rates on
ARM Pass-Through Certificates owned by the Company. The impact on Net
Income of such interest rate changes will depend on the adjustment
features of the Mortgage Assets owned by the Company, the maturity
schedules of the Company's borrowings and related hedging.
Privately Issued Pass-through Certificates. Privately issued
Pass-Through Certificates are structured similarly to the FNMA, 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 Pass-Through Certificates are usually backed by a pool
of conventional Mortgage Loans and are generally structured with credit
enhancement such as pool insurance or subordination. However, privately
issued Pass-Through Certificates are typically not guaranteed by an
entity having the credit status of FNMA, FHLMC or GNMA guaranteed
obligations.
FNMA Certificates. FNMA is a federally chartered and privately
owned corporation. FNMA provides funds to the mortgage market primarily
by purchasing Mortgage Loans on homes from local lenders, thereby
replenishing their funds for additional lending.
FNMA certificates may be backed by pools of Mortgage Loans
secured by single-family or multi-family residential properties. The
original terms to maturities of the Mortgage Loans generally do not
exceed 40 years. FNMA certificates may pay interest at a fixed rate or
adjustable rate. Each series of FNMA ARM certificates bears an initial
interest rate and margin tied to an index based on all loans in the
related pool, less a fixed percentage representing servicing compensation
and FNMA's guarantee fee. The specified index used in each such series
has included the Treasury Index, the 11(th) District Index, LIBOR and
other indices. Interest rates paid on fully-indexed FNMA ARM certificates
equal the applicable index rate plus a specified number of basis points
ranging typically from 125 to 250 basis points. In addition, the majority
of series of FNMA ARM certificates issued to date have evidenced
pools of Mortgage Loans with monthly, semi-annual or annual interest rate
adjustments. Adjustments in the interest rates paid are generally limited
to an annual increase or decrease of either 100 or 200 basis points and
to a lifetime cap of 500 or 600 basis points over the initial interest
rate. Certain FNMA programs include Mortgage Loans which allow the
borrower to convert the adjustable mortgage interest rate of its ARM to a
fixed rate. ARMs which are converted into fixed rate Mortgage Loans are
repurchased by FNMA, or by the seller of such loans to FNMA, at the
unpaid principal balance thereof plus accrued interest to the due date of
the last adjustable rate interest payment.
FNMA guarantees to the registered holder of a FNMA Certificate
that it will distribute amounts representing scheduled principal and
interest (at the rate provided by the FNMA Certificate) on the Mortgage
Loans in the pool underlying the FNMA Certificate, whether or not
received, and the full principal amount of any such Mortgage Loan
foreclosed or otherwise finally liquidated, whether or not the principal
amount is actually received. The obligations of FNMA under its guarantees
are solely those of FNMA and are not backed by the full faith and credit
of the United States. If FNMA were unable to satisfy such obligations,
distributions to holders of FNMA Certificates would consist solely of
payments and other recoveries on the underlying Mortgage Loans and,
accordingly, monthly distributions to holders of FNMA Certificates would
be affected by delinquent payments and defaults on such Mortgage Loans.
FHLMC Certificates. FHLMC is a privately owned corporate
instrumentality of the United States created pursuant to an Act of
Congress. 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 MBS.
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 Mortgage Loans purchased by FHLMC. The Mortgage Loans 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.
FHLMC guarantees to each holder of its certificates the timely
payment of interest at the applicable pass-through rate and ultimate
collection of all principal on the holder's pro rata share of the unpaid
principal balance of the related Mortgage Loans, but does not guarantee
the timely payment of scheduled principal of the underlying Mortgage
Loans. 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.
GNMA Certificates. GNMA is a wholly owned corporate
instrumentality of the United States within HUD. GNMA guarantees 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 and
other loans eligible for inclusion in mortgage pools underlying GNMA
Certificates. GNMA Certificates constitute general obligations of the
United States backed by its full faith and credit.
CMOs. The Company may invest, from time to time, in adjustable
rate and fixed rate CMOs issued by private issuers or FHLMC, FNMA or
GNMA. CMOs are a series of bonds or certificates ordinarily issued in
multiple classes, each of which consists of several classes with
different maturities and often complex priorities of payment, secured by
a single pool of Mortgage Loans, Pass-Through Certificates, other CMOs or
other mortgage assets. Principal prepayments on collateral underlying a
CMO may cause it to be retired substantially earlier than the stated
maturities or final distribution dates. Interest is paid or accrues on
all interest bearing classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on underlying Mortgages
Loans may be allocated among the several classes of a series of a CMO in
many ways, including pursuant to complex internally leveraged formulas
that may make the CMO class especially sensitive to interest rate or
prepayment risk.
CMOs may be subject to certain rights of issuers thereof to
redeem such CMOs prior to their stated maturity dates, which may have the
effect of diminishing the Company's anticipated return on its investment.
Privately-issued single-family, multi-family and commercial CMOs are
supported by private credit enhancements similar to those used for
Privately-Issued Certificates and are often issued as senior-subordinated
mortgage securities. The Company intends to only acquire CMOs or
multi-class Pass-Through certificates that constitute debt obligations or
beneficial ownership in grantor trusts holding Mortgage Loans, or regular
interests and residual interests in real estate mortgage investment
conduits ("REMICs"), or that otherwise constitute Qualified REIT Real
Estate Assets.
MORTGAGE DERIVATIVES. The Company may acquire Mortgage
Derivatives, including IOs, Inverse IOs, Sub IOs and floating rate
derivatives, as market conditions warrant. Mortgage Derivatives provide
for the holder to receive interest only, principal only, or interest and
principal in amounts that are disproportionate to those payable on the
underlying Mortgage Loans. Payments on Mortgage Derivatives are highly
sensitive to the rate of prepayments on the underlying Mortgage Loans. In
the event of more rapid than anticipated prepayments on such Mortgage
Loans, the rates of return on Mortgage Derivatives representing the right
to receive interest only or a disproportionately large amount of
interest, i.e., IOs, would be likely to decline. Conversely, the rates of
return on Mortgage Derivatives representing the right to receive
principal only or a disproportional amount of principal, i.e., POs, would
be likely to increase in the event of rapid prepayments.
Some IOs in which the Company may invest, such as Inverse IOs,
bear interest at a floating rate that varies inversely with (and often at
a multiple of) changes in a specific index. The yield to maturity of an
Inverse IO is extremely sensitive to changes in the related index. The
Company also may invest in inverse floating rate Mortgage Derivatives
which are similar in structure and risk to Inverse IOs, except they
generally are issued with a greater stated principal amount than Inverse
IOs.
Other IOs in which the Company may invest, such as Sub IOs,
have the characteristics of a Subordinate Interest. A Sub IO is entitled
to no payments of principal; moreover, interest on a Sub IO often is
withheld in a reserve fund or spread account to fund required payments of
principal and interest on more senior trenches of mortgage securities.
Once the balance in the spread account reaches a certain level, excess
funds are paid to the holders of the Sub IO. These Sub IOs provide credit
support to the senior classes and thus bear substantial credit risks. In
addition, because a Sub IO receives only interest payments, its yield is
extremely sensitive to the rate of prepayments (including prepayments as
a result of defaults) on the underlying Mortgage Loans.
IOs can be an effective hedging device because they generally
increase in value as fixed rate mortgage securities decrease in value.
The Company also may invest in other types of derivatives currently
available in the market and other Mortgage Derivatives that may be
developed in the future if the Manager determines that such investments
would be advantageous to the Company.
MULTIFAMILY AND COMMERCIAL REAL PROPERTIES. The Company believes
that under appropriate circumstances the acquisition of multifamily and
commercial real properties, including REO Properties and other Distressed
Real Properties, may offer significant opportunities to the Company. The
Company's policy will be to conduct an investigation and evaluation of the
real properties in a portfolio of real properties before purchasing such a
portfolio. Prior to purchasing real estate related assets, the Manager
generally will identify and contact real estate brokers and/or appraisers
in the relevant market areas to obtain rent and sale comparables for the
assets in a portfolio contemplated to be acquired. This information will be
used to supplement due diligence that will be performed by the Manager's
employees.
The Company's policy is to conduct an investigation and
evaluation of the properties in a portfolio of real properties before
acquiring such a portfolio. Prior to acquiring such a portfolio, the
Company's policy generally is to request that the Manager identify and
contact real estate brokers and appraisers in the market are of the real
properties within the portfolio to obtain information regarding rental
rates and sales prices of comparable real property. The Company's policy is
to determine, in consultation with the Manager, whether to obtain a Phase I
environmental assessment (or, if available to the Company or the Manager,
to request that the Manager review a previously obtained Phase I
environmental assessment) for each real property, certain real properties,
or none of the real properties within the portfolio prior to its
acquisition by the Company. The policy of the Company is to use the
information contained in such comparables and environmental assessments to
supplement the due diligence that is to be performed by the Manager with
respect to that portfolio.
The Company's policy generally is to request that the Manager
include within its due diligence review and analysis of those real
properties contemplated to be acquired by the Company a review of market
studies for each geographic market designated by the Company in which the
real properties within a portfolio are concentrated. The Company may
request that such studies include area economic data, employment trends,
absorption rates and market rental rates. The Company's policy is that
such due diligence analyses generally also include (i) site inspections
of the most significant properties in a portfolio of real properties
(and, if the Company determines that such a review will be
cost-effective, a random sampling of the less significant properties),
and (ii) a review of all property files and documentation that are made
available to the Company or the Manager. The Company generally will
require that such reviews include, to the extent possible, examinations
of available legal documents, litigation files, correspondence, title
reports, operating statements, appraisals and engineering and
environmental reports.
The Company's policy is that the process of determining the
fair market value of a real property is to utilize those procedures that
the Company and the Manager deem relevant for the specific real property
being evaluated, which procedures need not be the same for each real
property being evaluated. Sources of information that may be examined in
determining the fair market value of a real property may include one or
more of the following: (a) current and historical operating statements;
(b) existing or new appraisals; (c) sales comparables; (d) industry
statistics and reports regarding operating expenses, such as those
compiled by the Institute of Real Estate Management and the Building
Owners and Managers Association; (e) existing leases and market rates for
comparable leases; (f) deferred maintenance observed during site
inspections or described in structural and engineering reports; and (g)
correspondence and other documents and memoranda found in the files of
the seller of that Real Property or other relevant parties.
The Manager is expected to develop projections of net
operating income and cash flows taking into account lease rollovers,
tenant improvement costs and leasing commissions. The Manager will
compare its estimates of revenue and expenses to historical operating
statements and estimates provided in appraisals and general industry and
regional statistics. Market capitalization rates and discount rates are
then applied to the cash flow projections to estimate values. These
values are then compared to available appraisals and market sale
comparables to determine recommended bid prices for each asset. The
amount offered by the Company generally will take into account projected
holding periods, capital costs and projected profit expectations, and
will be the price that the Manager estimates is sufficient to generate an
acceptable risk-adjusted return on the Company's investment.
After the Company acquires Distressed Real Property, the
Company's goal will be to improve management of that real property so as
to increase its cash flow. If cash flows can be increased and the net
operating income stabilized, the Company may seek an opportunity to sell
the real property. The length of time the Company will hold Distressed
Real Properties may vary considerably from asset to asset, and will be
based on the Manager's analysis and conclusions as to the best time to
sell some or all of them.
If the Company is offered the opportunity to acquire real
property that is likely to be held for fewer than four years, the Company
intends to establish a taxable corporation in which the Company will hold
a 95% non-voting ownership interest to make the acquisition. Such a
corporation will not be eligible for taxation as a Qualified REIT
Subsidiary, and any profits that it earns on its activities will be
subject to federal corporate income tax before they are distributable to
the Company. If the Company acquires real property with the intent to
hold it for more than four years, but an opportunity arises to sell the
property sooner, the Company will consider certain strategies, such as a
like-kind exchange, to reduce any negative tax consequences relating to
the sale.
FOREIGN REAL PROPERTIES. In addition to acquiring Distressed
Real Properties, the Company may acquire or originate Mortgage Loans
secured by real property located outside the United States or acquire
such real property, but the Company does not intend to invest more than
__% of its portfolio in foreign real property and Mortgage Loans secured
by foreign real property. Investing in real estate related assets located
in foreign countries creates risks associated with the uncertainty of
foreign laws and markets and risks related to currency conversion. The
Company may be subject to foreign income tax with respect to its
investments in foreign real estate related assets. However, any foreign
tax credit that otherwise would be available to the Company for U.S.
federal income tax purposes will not flow through to the Company's
stockholders.
When acquiring real properties located outside the United
States or Mortgage Loans secured by foreign real properties, the Company
will perform, or request that the Manager perform, a due diligence review
and analysis of such foreign Mortgage Loans or real properties
substantially similar to that described above in connection with the
acquisition of performing Mortgage Loans and real properties. In
addition, the Company will hire, or request that the Manager hire, a
local law firm to advise the Company concerning the applicable laws,
including real property laws, of the local jurisdiction and to provide a
legal opinion about the Company's rights with respect to the Mortgage
Loans or real properties. If the country in which the relevant real
property is located is subject to political instability, the Company may
request that the Manager investigate the availability of, cost of, and
benefits that reasonably can be expected to be provided to the Company
by, obtaining insurance against such political risks. The Company's
policy is to purchase such insurance only if the Manager advises the
Company that based on the Manager's analysis of the relevant factors, the
Manager has determined that the Company should purchase such insurance.
The Company may request that the Manager consider ways to minimize
currency conversion risks that may be associated with the investment in
foreign Mortgage Loans or foreign real properties, such as the purchase
of currency swaps, and make a recommendation to the Company with respect
thereto.
REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS. The Company
may acquire real properties with known material environmental problems
and Mortgage Loans secured by such real properties subsequent to an
environmental assessment that would reasonably indicate that the present
value of the cost of clean-up or remediation would not exceed the
realizable value from the disposition of the mortgage property. In
considering whether to acquire real properties with known material
environmental problems and Mortgage loans secured by such real
properties, the Company will perform, or request that the Manager
perform, a due diligence review and analysis substantially similar to
that described above in connection with the acquisition of Distressed
Mortgage Loans and real property. In addition, the Company will hire, or
request that the Manager hire, an environmental engineering consultant to
estimate the extent and cost of possible environmental remediation or
monitoring if title was acquired to a property with a material
environmental problem and the time required to effect such remediation or
complete such monitoring. The Manager has no experience in investing in
Mortgage Loans secured by environmental distressed real property, or in
such environmentally distressed real property.
The Company's policy is generally to avoid acquiring in its
own name real property with known material environmental problems (other
than such real property acquired by the Company through foreclosure, or
deed-in-lieu of foreclosure, when an "innocent lender" defense appears to
be available to the Company). The Company's policy instead is to
establish a special purpose entity to hold such real property. If the
Company determines that to do so would be appropriate, such special
purpose entity could hold other real properties with known material
environmental problems that the Company thereafter may wish to acquire.
The Company may acquire environmental risk hazard insurance from
time-to-time when commercially available.
NET LEASED REAL ESTATE. The Company intends to invest in net
leased real estate on a leveraged basis. Net leased real estate is
generally defined as real estate that is net leased on a long-term basis
(ten years or more) to tenants who are customarily responsible for paying
all costs of owning, operating, and maintaining the leased property
during the term of the lease, in addition to the payment of a monthly net
rent to the landlord for the use and occupancy of the premises ("Net
Leased Real Estate"). The Company expects to acquire Net Leased Real
Estate on a leveraged basis with triple-net rents that will provide
sufficient cash flow to provide an attractive cash return on its
investment therein after debt service. Although the time during which the
Company will hold Net Leased Real Estate will vary, the Company
anticipates holding most Net Leased Real Estate for more than ten years.
The Company will focus on Net Leased Real Estate that is either leased to
creditworthy tenants or is real estate that can be leased to other
tenants in the event of a default of the initial tenant.
The Company expects to have the tax depreciation associated
with such investments to offset the non-cash accrual of interest on
certain MBS Interests and Mortgage Loans, including the original issue
discount ("OID") generally associated with either MBS Interests that are
issued at a discount from par or participating Mortgage Loans and the
"phantom" taxable income associated with other MBS derivatives.
OTHER ASSETS. The Company may invest in fixed-income securities
that are not mortgage assets, including securities issued by corporations
or issued or guaranteed by U.S. or sovereign foreign entities, loan
participations, emerging market debt, high yield debt and collateralized
bond obligations, denominated in U.S. dollars.
The Company may also purchase the stock of other mortgage
REITs or similar companies when Management believes that such purchase
will yield attractive returns on capital employed. When the stock market
valuations of such companies are low in relation to the market value of
their assets, such stock purchases can be a way for the Company to
acquire an interest in a pool of mortgage assets at an attractive price.
The Company may also invest in securities issued by investment companies
or other investment funds.
EMPLOYEES
The Company initially expects not to have any employees other
than officers, each of whom will be full-time employees of the Managers
whose duties will include performing administrative activities for the
Company.
FACILITIES
The Company's executive offices are located at 345 Park
Avenue, New York, New York 10017.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is
a party or to which any property of the Company is subject.
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Name Age Position
Hugh R. Frater 42 President and Chief Executive
Officer
Richard M. Shea 38 Chief Operating Officer
Mark Warner 36 Vice President
Susan Wagner 36 Secretary
The directors of the Company
are as follows:
Name Age Position
Laurence D. Fink 45 Chairman of the Board of Directors
LAURENCE D. FINK, Chairman, is also Chairman and Chief
Executive Officer of the Manager, Chairman of the Manager's Management
Committee and co-chair of the Investment Strategy Group. Mr. Fink serves
on the Asset Liability Committee of PNC Bank and on the oversight board
of PNC Asset Management Group. He is also Chairman of the Board and a
Director of BlackRock's family of closed-end mutual funds, and a Director
of BlackRock's offshore funds.
Prior to founding BlackRock in 1988, Mr. Fink was a member of
the Management Committee and a Managing Director of The First Boston
Corporation. Mr. Fink joined First Boston in 1976 and quickly became one of
the first mortgage-backed securities traders on Wall Street. During his
tenure at First Boston, Mr. Fink was co- head of the Taxable Fixed Income
Division, which was responsible for trading and distribution of all
government, mortgage and corporate securities. Mr. Fink also started the
Financial Futures and Options Department and headed the Mortgage and Real
Estate Products Group. Under Mr. Fink's direction, First Boston developed
the first collateralized mortgage obligation (CMO), the first asset-backed
security (ABS) and the first securities credit enhanced through a
senior/subordinate structure.
Mr. Fink was featured in The Wall Street Journal Centennial
Edition (June 1989) as one of 28 businessmen, all under 45 years old,
"...who could be among the business leaders of tomorrow." Mr. Fink was
also featured in Investment Dealers' Digest (November 1987) as head of
the mortgage-related securities group of "The Ultimate Brokerage Firm".
Currently, Mr. Fink is a member of the Boards of Trustees of New
York University Medical Center, Dwight- Englewood School in Englewood, New
Jersey, the National Outdoor Leadership School (NOLS), and a member of the
Boards of Directors of VIMRx Pharmaceuticals Inc. and Innovir Laboratories,
Inc. Previously, Mr. Fink was a member of Fannie Mae's Advisory Council.
Mr. Fink earned a BA degree in political science from the University of
California at Los Angeles in 1974 and an MBA degree with a concentration in
real estate from U.C.L.A. in 1976.
HUGH R. FRATER, President and Chief Executive Officer, is a
Managing Director of the Manager, where he is co-head of the BlackRock
Account Management Group and a member of the firm's Management Committee.
During Mr. Frater's tenure as co-head of Account Management BlackRock's
institutional assets under management have grown by almost $30 billion.
Mr. Frater's primary responsibilities include providing strategic and
risk management advice to BlackRock's financial services clients and
developing and marketing portfolio management services for tax-exempt and
taxable clients. His areas of expertise include general corporate finance
and bank and insurance company regulatory, accounting and investment
issues.
Prior to joining BlackRock in 1988, Mr. Frater was a Vice
President in Investment Banking at Lehman Brothers in the financial
institutions department. Mr. Frater joined Lehman in 1985 as a generalist
in the Mortgage and Savings Institutions Group. During his tenure at
Lehman, he was responsible for executing over $3 billion in structured
mortgage financing and advising on merger transactions valued at over $2
billion for clients including REITs, mortgage bankers, savings
institutions, insurance companies and commercial banks. From 1980 to
1983, Mr. Frater was Director of Programming for The Learning Channel, an
educational cable television network.
Mr. Frater earned a B.A. degree in English from Dartmouth
College in 1978 and an MBA degree in finance from Columbia University in
1985.
RICHARD SHEA, ESQ., Chief Operating Officer, is a Principal of
the Manager and a member of the Risk Management and Analytics Group. Mr.
Shea is responsible for the overall management of BlackRock's eight
taxable term trusts with total assets of $5.6 billion, as of September
30, 1997. The term trusts are fixed income closed-end mutual funds that
terminate on a specific date with a specific targeted net asset value at
termination. Mr. Shea is also responsible for tax and regulatory issues
for all of BlackRock's funds and partnerships. Mr. Shea has established
tax analytics, including a proactive CMO tax model, and procedures to
optimize fund performance within the framework of relevant tax laws. He
currently uses these systems to trade REMIC residuals and to support
trading of other MBS derivatives. He also works with clients that have
special tax situations and assists in designing investment strategies
that take these special needs into account.
Prior to joining BlackRock in 1993, Mr. Shea was an Associate
Vice President and tax counsel at Prudential Securities, Inc. Mr Shea
joined Prudential in 1988 and was responsible for corporate tax planning,
tax-oriented investment strategies and tax issues of CMOs and original
issue discount obligations. Mr. Shea previously worked as a Senior Tax
Specialist at Laventhol and Horwath for over four years where he
structured real estate limited partnership investments for the private
placement market.
Mr. Shea earned a BS degree, cum laude, in accounting from the
State University of New York at Plattsburgh in 1981 and a JD degree from
New York Law School in 1984.
MARK S. WARNER, CFA, Vice President, is also a Vice President
and portfolio manager of the Manager, where his primary responsibility is
managing client portfolios, specializing in the commercial mortgage
(CMBS) and non-agency residential mortgage sectors.
Prior to joining BlackRock in 1993, Mr. Warner was a Director in
the Capital Markets Unit of the Prudential Mortgage Capital Company. Mr.
Warner joined Prudential in 1987, and was initially responsible for
asset/liability strategies for the $7 billion participating annuity
segment. Mr. Warner joined Prudential's Commercial Real Estate Division in
1989, where he was responsible for the sale of commercial whole loans,
purchases of private placement mortgage-backed securities and
securitization opportunities within Prudential's $25 billion
non-residential portfolio. Between 1989 and 1993, Mr. Warner successfully
structured and executed securitization of approximately $2 billion of
non-residential mortgages. Mr. Warner previously worked in the fixed income
department at PaineWebber.
Mr. Warner authored the chapter entitled "Commercial
Mortgage-Backed Securities Portfolio Management" in Whole-Loan CMOs,
published by Frank J. Fabozzi Associates in 1995 and, most recently,
co-authored with Wesley Edens, a Managing Director of BlackRock, the
article entitled "The ABC's of CMBS" for the Pension Real Estate
Association's Fourth Quarter 1996 magazine. Mr. Warner earned a BA degree
in political science from Columbia University in 1983 and an MBA degree
in finance and marketing from Columbia Business School in 1987.
Mr. Warner received his Chartered Financial Analyst (CFA) designation in 1993.
SUSAN L. WAGNER, Secretary, is a Managing Director of the
Manager, where she heads the International Business and Strategic Product
Development Departments and is a member of the Management Committee. Ms.
Wagner is primarily responsible for creating asset management products for
international investors and developing and maintaining relationships with
international clients. Ms. Wagner has also been responsible for several
special advisory assignments. Ms. Wagner serves as a Director of
BlackRock's offshore funds.
Prior to founding BlackRock in 1988, Ms. Wagner was a vice
president in the Mortgage and Savings Institutions Group at Lehman
Brothers. Ms. Wagner joined Lehman in 1984 in the Capital Markets
Division and in 1986 was given responsibility for overseeing all
subsidiaries through which Lehman issued structured mortgage securities.
During her tenure at Lehman, Ms. Wagner worked on a wide variety of
projects including structured financings, portfolio restructuring,
conventional debt and equity offerings, and merger and acquisition
transactions. Of particular note is her work in structured financing
product development where she created the first floating rate
collateralized mortgage obligation (CMO), which was named "Deal of the
Month" and "Deal of the Year" in Investment Dealers' Digest (November
1986 and January 1987, respectively).
Ms. Wagner authored several articles for Lehman and assisted
in writing and editing Conversations with Economists which was named as
one of the ten best business and economics books published in 1984 by
both Business Week and Forbes. Ms. Wagner earned a BA degree, magna cum
laude, in economics and English from Wellesley College in 1982 and an MBA
degree in finance from the University of Chicago in 1984.
Directors will be elected for a term of three years, and hold
office until their successors are elected and qualified. All officers
serve at the discretion of the Company's 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 of $______, a fee of $_______ 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
other than through the Company's Option Plan.
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 time to the affairs of the
Company. However, in their or employees of the Manager, or its
Affiliates, they will their time to the affairs of the Manager as is
required the duties of the Manager under the Management Agreement.
The Bylaws of the Company provide that the Board of Directors
shall have not less than three or more than nine members, as determined
from time to time by the existing Board of Directors. The Board of
Directors will initially have _____ members consisting of ______ directors
affiliated with the Manager and ____ Unaffiliated Directors. The
Unaffiliated Directors of the Company will be named prior to the
commencement of the Offering. The Bylaws further provide that except in the
case of a vacancy, the majority of the members of the Board of Directors
and of any committee of the Board of Directors must at all times after the
issuance of the shares of Common Stock in this Offering be Unaffiliated
Directors. Vacancies occurring on the Board of Directors among the
Unaffiliated Directors will be filled by the vote of a majority of the
directors, including the Unaffiliated Directors. The term "Unaffiliated
Directors" refers to those directors that are not affiliated, directly, or
indirectly, with the Manager or PNC, 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
PNC or an Affiliated business entity of the Manager or PNC.
The Charter of the Company also provides for three classes of
directors with staggered terms to provide for the election of one class
each year. Each class of directors will contain one affiliated director
and at least one Unaffiliated Director. After the initial staggering
period (the first three years), all directors will serve for a term of
three years.
The Charter of the Company provides for the indemnification of
the directors and officers of the Company and the Manager and its
employees, officers, directors and controlling persons to the fullest
extent permitted by Maryland law. Maryland law generally permits
indemnification of directors and officers against certain costs,
liabilities and expenses that any such person may incur by reason of
serving in such positions unless it is proved that: (i) the act or
omission of the director or officer was material to the cause of action
adjudicated in the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the director or officer
actually received an improper personal benefit in money, property or
services; or (iii) in the case of criminal proceedings, the director or
officer had reasonable cause to believe that the act or omission was
unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company
has been informed 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.
The Charter of the Company provide that the personal liability
of any director or officer of the Company to the Company or its
stockholders for money damages is limited to the fullest extent allowed
by the statutory or decisional law of the State of Maryland as amended or
interpreted. Maryland law authorizes the limitation of liability of
directors and officers to corporations and their stockholders for money
damages except (i) to the extent that it is proved that the person
actually received an improper benefit in money, property, or services for
the amount of the benefit or profit in money, property or services
actually received, or (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a
finding that the person's action, or failure to act, was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated. Maryland law does not affect the potential liability of
directors and officers to third parties, such as creditors of the
Company.
EXECUTIVE COMPENSATION
The Company has not paid, but may in the future pay, annual
compensation to the Company's executive officers for their services as
executive officers. The Company may from time to time, in the discretion
of the Board of Directors, grant options to purchase shares of the
Company's Common Stock to the Manager, executive officers and directors
pursuant to the Company's 1998 Stock Option Plan. See "--Stock Options"
below.
STOCK OPTIONS
The Company has adopted a stock option plan (the "1998 Stock
Option Plan") that provides for the grant of both qualified incentive
stock options ("ISOs") that meet the requirements of Section 422 of the
Code, and non-qualified stock options, stock appreciation rights and
dividend equivalent rights. ISOs may be granted to the officers and key
employees of the Company, if any. Nonqualified stock options may be
granted to the Manager, directors, officers and any key employees of the
Company and to the directors, officers and key employees of the Manager.
The exercise price for any qualified option granted under the 1998 Stock
Option Plan may not be less than 100% of the fair market value of the
shares of Common Stock at the time the option is granted. The purpose of
the 1998 Stock Option Plan is to provide a means of performance-based
compensation to the Manager in order to attract and retain qualified
personnel and to provide an incentive to others whose job performance
affects the Company. The 1998 Stock Option Plan will become effective
upon the closing of the Offering.
Subject to anti-dilution provisions for stock splits, stock
dividends and similar events, the 1998 Stock Option Plan authorizes the
grant of options to purchase an aggregate of up to 10% of the outstanding
shares of the Company's Common Stock, but not more than__________ shares
of Common Stock. If an option granted under the 1998 Stock Option Plan
expires or terminates, the shares subject to any unexercised portion of
that option will again become available for the issuance of further
options under the 1998 Stock Option Plan. Excluding the initial stock
option grants discussed in the succeeding section, option grants shall be
limited annually to the purchase of the lesser of __% of the outstanding
shares of Common Stock or ________ shares. Unless previously terminated
by the Board of Directors, the 1998 Stock Option Plan will terminate ten
years from its effective date, and no options may be granted under the
1998 Stock Option Plan thereafter.
The 1998 Stock Option Plan will be administered by a committee
of the Board of Directors comprised entirely of Unaffiliated Directors
(the "Compensation Committee"). options granted under the 1998 Stock
Option Plan will become exercisable in accordance with the terms of the
grant made by the Compensation Committee. The Compensation Committee has
discretionary authority to determine at the time an option is granted
whether it is intended to be an ISO or a non-qualified option, and when
and in what increments shares of Common Stock covered by the option may
be purchased.
Under current law, ISOs may not be granted to any director of
the Company who is not also a full-time employee or to directors,
officers and other employees of entities unrelated to the Company. In
addition, no options may be granted under the 1998 Stock Option 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
Common Stock of the Company.
Each option must terminate no more than ten years from the
date it is granted. Options may be granted on terms providing that they
will be exercisable in whole or in 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 1998 Stock
Option Plan is payable in full (i) by cash, (ii) by surrender of shares
of the Company's Common Stock having a market value equal to the
aggregate exercise price of all shares to be purchased, (iii) by
cancellation of indebtedness owed by the Company to the optionholder,
(iv) by any combination of the foregoing, or (v) by a full recourse
promissory note executed by the optionholder. The terms of the promissory
note may be changed from time to time by the Company's Board of Directors
to comply with applicable regulations or other relevant pronouncements of
the Service or the Commission.
The Company's Board of Directors may, without affecting any
outstanding options, from time to time revise or amend the 1998 Stock
Option Plan, and may suspend or discontinue it at any time. However, no
such revision or amendment may increase the number of shares of Common
Stock subject to the 1998 Stock Option Plan (with the exception of
adjustments resulting from changes in capitalization), change the class
of participants eligible to receive options granted under the 1998 Stock
Option Plan or modify the period within which or the terms upon which the
options may be exercised without stockholder approval.
STOCK OPTIONS OUTSTANDING
The following table sets forth the stock options granted under
the 1998 Stock Option Plan effective on the closing of the Offering.
</TABLE>
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN FISCAL 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------- -----------------------
OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE(2) EXPIRATION
NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE 5% ($) 10% (S)
- -------------------- --------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$
</TABLE>
(1) The options granted are exercisable starting one year after the
date of grant.
(2) The exercise price and tax withholding obligations incurred
upon exercise of the options may be paid by the option holder
by delivering already owned shares of Company Common Stock,
including those which are issuable upon exercise of the
options.
In addition, upon the closing of the offering, each
unaffiliated director may receive an initial grant of options to purchase
up to _____ shares of Common Stock at the initial public offering price.
These options will expire ten years from the effective date of the 1998
Stock Option Plan. Any unaffiliated director newly elected to the Board
of Directors thereafter may receive an identical initial grant at the
fair market value on the date of grant.
THE MANAGER
The Manager is a wholly owned subsidiary of PNC. The Manager
was formed in 1988 by its Chairman, Laurence D. Fink, its President,
Ralph L. Schlosstein, and several other experienced Wall Street
professionals. The Manager's key personnel include several individuals
with extensive experience in creating, evaluating and investing in a
broad range of fixed income instruments, including complex mortgage
related securities. These professionals were instrumental in many of the
major innovations in the mortgage and asset-backed securities markets,
including the creation of fixed and floating rate CMOs, asset-backed
securities and the senior/subordinated mortgage passthrough.
The Manager provides asset management services with respect to
fixed income instruments, including mortgage assets, corporate bonds,
government securities and hedging products. The Manager currently serves
as discretionary investment manager to institutional and individual fixed
income investors in the U.S. and overseas through numerous investment
funds and separately managed accounts with combined total assets in
excess of $50 billion.
The Manager has more than $50 billion in assets under
management, including over $15 billion in commercial, multifamily and
residential mortgage-backed securities and other real estate related
assets. The Manager and its Affiliates have significant experience in
underwriting originating, servicing and securitizing commercial,
multifamily and residential Mortgage Loans and has participated in several
non U.S. mortgage and MBS transactions. Since the beginning of 1996,
Affiliates of the Manager have acquired or originated over $5.8 billion in
mortgage assets and, to date, have issued over $4 billion in securities
collateralized by such assets.
In addition, the officers of the Company have significant
experience in raising and managing mortgage capital, mortgage finance
and the purchase and administration of mortgage assets. Further, each
executive officer of the Manager that will assist in managing the Company
has at least 10 years of mortgage-related experience. See "Management of
the Company -- Directors and Officers of the Company" for certain
biographical information regarding the Officers and Directors of the
Company. The Manager has not previously managed or operated a REIT.
The Manager is a wholly owned subsidiary of PNC Bank N.A., which
is itself a wholly owned subsidiary of PNC Bank Corp. PNC Bank N.A. is the
13th largest bank in the U.S.
The address of the Manager is 345 Park Avenue, New York, New
York 10017.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the
Manager at the closing of the Offering. The Manager will be primarily
involved in three activities: (i) underwriting, originating and acquiring
Mortgage Loans and other real estate related assets; (ii) asset/liability
management, financing, hedging, management and disposition of mortgage
assets, including credit and prepayment risk management; and (iii)
capital management, oversight of the Company's structuring, analysis,
capital raising and investor relations activities. In conducting these
activities, the Manager will formulate operating strategies for the
Company, arrange for the acquisition of assets by the Company, arrange
for various types of financing for the Company, monitor the performance
of the Company's mortgage assets and provide certain administrative and
managerial services in connection with the operation of the Company. The
Manager will be required to manage the business affairs of the Company in
conformity with the policies that are approved and monitored by the
Company's Board of Directors. The Manager will be required to prepare
regular reports for the Company's Board of Directors that will review the
Company's acquisitions of assets, portfolio composition and
characteristics, credit quality, performance and compliance with the
policies approved by the Company's Board of Directors.
At all times, the Manager will be subject to the direction and
oversight of the Company's Board of Directors and will have only such
functions and authority as the Company may delegate to it. The Manager
will be responsible for the day-to-day operations of the Company and will
perform such services and activities relating to the Mortgage Assets and
operations of the Company as may be appropriate, including:
(i) providing a complete program of investing and
reinvesting the capital and assets of the Company in pursuit
of its investment objective and in accordance with policies
adopted by the Company's Board of Directors from time to time;
(ii) serving as the Company's consultant with
respect to formulation of investment criteria and preparation
of policy guidelines by the Company's Board of Directors;
(iii) assisting the Company in developing criteria
for mortgage asset purchase commitments that are specifically
tailored to the Company's investment objectives and making
available to the Company its knowledge and experience with
respect to mortgage assets and other real estate related
assets;
(iv) counseling the Company in connection with
policy decisions made by the Board of Directors;
(v) evaluating and recommending hedging strategies
to the Company's Board of Directors 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;
(vi) supervising compliance with the REIT Provisions
of the Code and maintenance of an exclusion from regulation as
an investment company;
(vii) representing the Company in connection with
the purchase and commitment to purchase or sell mortgage
assets, including the accumulation of Mortgage Loans for
securitization and the incurrence of debt;
(viii) arranging for the issuance of MBS from pools
of Mortgage Loans owned by the Company;
(ix) furnishing reports and statistical and economic
research to the Company regarding the Company's activities and
the services performed for the Company by the Manager;
(x) monitoring and providing to the Company's 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;
(xi) 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 as may be agreed upon by the Manager and the
Company's Board of Directors;
(xii) contracting, as necessary, with third parties
for master and special servicing of assets acquired by the
Company;
(xiii) 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;
(xiv) causing the Company to qualify to do business
in all applicable jurisdictions;
(xv) causing the Company to retain qualified
accountants and legal counsel to assist in developing
appropriate accounting procedures, compliance procedures and
testing systems and to conduct quarterly compliance reviews;
(xvi) assisting the Company in complying with all
regulatory requirements applicable to the Company in respect
of its business activities, including preparing or causing to
be prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and
documents, if any, required under the Exchange Act;
(xvii) assisting the Company in making required tax
filings and reports and maintaining its status as a REIT,
including soliciting stockholders for required information to
the extent provided in the REIT Provisions of the Code;
(xviii) 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 Board of
Directors shall reasonably request or the Manager shall deem
appropriate under the particular circumstances; and
(xix) using all reasonable efforts to cause the
Company to comply with all applicable laws.
Upon termination of the Management Agreement by the Company,
the Company is obligated to pay the Manager what could be a substantial
termination fee other than in the case of termination by the Company for
cause. The termination fee will 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 after taking into account the
performance and growth of the Company over the prior three years and
utilizing a discount factor for the appraiser's estimate of future cash
flows equal to __% over the Ten-Year Treasury Rate. The selection of the
independent appraiser will be subject to the approval of the Unaffiliated
Directors. The payment of such a fee would adversely affect the results
of the Company's operations.
The Management Agreement may not be assigned (within the
meaning of the Investment Advisers Act of 1940 and the rules thereunder)
by either party without the consent of the other party. For the foregoing
purposes, "assigned" shall have.
MANAGEMENT COMPENSATION
The Manager will receive a quarterly base management fee
calculated as a percentage of the Average Invested Assets of the Company
for each calendar quarter and equal to 1% per annum of the first $1
billion of such Average Invested Assets, 0.75% of the next $250 million
of such Average Invested Assets, and 0.50% of Average Invested Assets
above $1.25 billion. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the assets of the
Company, including the assets of all of its direct and indirect
subsidiaries, before reserves for depreciation or bad debts or other
similar noncash reserves, computed by taking the daily average of such
values during such period. The Manager will not receive any management
fee for the period prior to the sale of the shares of Common Stock
offered hereby. The base management fee is intended to compensate the
Manager, among other things, for its costs in providing management
services to the Company.
The Manager will be entitled to receive incentive compensation
for each fiscal quarter in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) Funds from Operations of the Company (before
the incentive fee) per share of Common Stock (based on the weighted average
number of shares outstanding) plus (b) gains (or minus loses) from debt
restructuring and sales of property per share of Common Stock (based on the
weighted average number of shares outstanding), exceed (2) an amount equal
to (a) the weighted average of the price per share of the initial offering
and the prices per share of any secondary offerings by the Company
multiplied by (b) the Ten-Year U.S. Treasury Rate plus two percent per
annum multiplied by (B) the weighted average number of shares of Common
Stock outstanding during such quarter. Notwithstanding the foregoing, no
payment of any portion of the incentive compensation that is attributable
to net capital gains of the Company prior to the end of the first full
fiscal quarter of the Company's operations following any minimum
calculation period longer than a quarter required by Rule 205-3 of the
Investment Advisers Act of 1940 at the time of such calculation, will
accrue or be payable until completion of such fiscal quarter, at which time
the cumulative net capital gains of the Company through the end of such
quarter will be computed and incentive compensation will be paid on such
net gains at the rate provided above and after which time the net capital
gains includible above for each quarter will be the excess of such net
capital gains for such minimum calculation period through the end of such
quarter (the "Total Period") over the net capital gains (if any) for the
portion of the Total Period other than such quarter. For any period less
than a quarter during which this Agreement is in effect, the incentive fee
will be prorated according to the proportion which such period bears to a
full quarter of 90, 91 or 92 days, as the case may be. "Funds From
Operations" as defined by NAREIT means net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and
after adjustments for unconsolidated partnerships and joint ventures. Funds
from Operations does not represent cash generated from operating activities
in accordance with GAAP and should not be considered as an alternative to
net income as an indication of the Company's performance or to cash flows
as a measure of liquidity or ability to make distributions. As used in
calculating the Manager's compensation, the term "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 constant maturities of ten years) published by the
Federal Reserve Board during a quarter, or, if such rate is not published
by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the
Company determines in good faith that the Ten Year U.S. Treasury Rate
cannot be calculated as provided above, then the rate will 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.
The ability of the Company to generate Funds From Operations
in excess of the Ten Year U.S. Treasury Rate, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is
dependent upon the level of credit losses, 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 is expected to use the proceeds from its base
management fee and incentive compensation in part to pay compensation to
its officers and employees who, notwithstanding that certain of them also
are officers of the Company, will receive no cash compensation directly
from the Company.
The Company expects to rely primarily on the facilities,
personnel and resources of the Manager to conduct its operations. The
Manager will be reimbursed for (or charge the Company directly for) the
Manager's costs and expenses in employing third-parties to perform due
diligence tasks on assets purchased or considered for purchase by the
Company. Further, the Manager will be reimbursed for any expenses
incurred in contracting with third parties for the master or special
servicing of assets acquired by the Company. Such arrangements may also
be made using an income sharing arrangement such as a joint venture.
Expense reimbursement will be made quarterly.
The management fees are payable in arrears. The Manager's base
and incentive fees and reimbursable costs and expenses will be calculated
by the Manager within 45 days after the end of each quarter, and such
calculation will be promptly delivered to the Company. The Company is
obligated to pay such fees, costs and expenses within 60 days after the
end of each fiscal quarter. If requested by the Manger, the Company will
make advance payments of the base management fee as often as semi-monthly
at the rate of 75% of such fee estimated by the Manager.
The Company has adopted a 1998 Stock Option Plan. The Manager
and the directors, officers and any employees of the Company and the
Manager may be granted options under the Company's 1998 Stock Option
Plan. See "Management of the Company -- Stock Options."
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 costs and expenses of its
officers and employees and any overhead incurred in connection with its
duties under the Management Agreement, the cost of office space and
equipment required for the Company's day-to-day operations and the costs of
any salaries or directors fees of any officers or directors of the Company
who are affiliated persons of the Manager except that the Board of
Directors of the Company may approve reimbursement to the Manager of the
Company's pro rata portion of the salaries, bonuses, health insurance,
retirement benefits and similar employment costs for the time spent on
Company operations and administration other than for the provision of
investment advisory services. 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 invest-
ments, legal and auditing fees 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 Company's directors and
officers, the Manager and its employees and directors and the Underwriters,
and the compensation and expenses of the Company's custodian and transfer
agent, if any. The Company will also be required to pay all expenses
incurred in connection with due diligence, the accumulation of Mortgage
Loans, the master and special servicing of Mortgage Loans, the issuance and
administration of MBS from pools of Mortgage Loans or otherwise, the
raising of capital, incurrence of debt, the acquisition of assets, interest
expenses, taxes and license fees, non-cash costs, litigation, the base and
incentive management fee and extraordinary or non-recurring expenses. Such
services may be provided to the Company by Affiliates of the Manager if the
Manager believes such services are of comparable or superior quality to
those provided by third parties and can be provided at comparable cost. The
Board of Directors will periodically review the Company's expenses levels,
the division of expenses between the Company and the Manager and
reimbursements of expenses advanced by the Manager.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
In evaluating mortgage assets for investment and in other
operating strategies, an undue emphasis on the maximization of income at
the expense of other criteria, such as preservation of capital, in order
to achieve a higher incentive fee could result in increased risk to the
value of the Company's portfolio. However, the Board of Directors will
evaluate the performance of the Manager before entering into or renewing
any management arrangement and the unaffiliated directors will review in
connection with each renewal of the Management Agreement that the
Manager's compensation is reasonable in relation to the nature and
quality of services performed. Any material changes in the Company's
investment and operating policies are required to be approved by the
Board of Directors. See "Risk Factors--Conflicts of Interest"; and "--
Future Revisions of Policies and Strategies."
The Company, on the one hand, and the Manager and its
Affiliates, on the other, do not presently expect to, but may in the
future, enter into a number of relationships other than those governed by
the Management Agreement, some of which may give rise to conflicts of
interest between the Manager and its Affiliates and the Company. The
market in which the Company will seek to purchase mortgage 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. Any such relationships or transactions will require the approval
of the Company's Board of Directors, including a majority of the
unaffiliated directors.
CONFLICTS OF INTEREST. The Manager has informed the Company
that it expects to continue to purchase and manage mortgage assets and
other real estate related assets in the future for third-party accounts.
The Manager and its Affiliates will have no obligation to make any
particular investment opportunities available to the Company. As a
result, there may be a conflict of interest between the operations of the
Manager and its Affiliates in the acquisition and disposition of mortgage
assets. In addition, the Manager and its Affiliates may from time to time
purchase mortgage assets for their own account and may purchase or sell
assets from or to the Company. The Company expects to acquire mortgage
assets from the Manager's Affiliates. In addition, the Company may, but
has no current plans to, invest as a co-participant with Affiliates of
the Manager in loans originated or acquired by such Affiliates. Although
such investments will be subject to prior review by a committee of
Unaffiliated Directors, it is anticipated that they will rely primarily
on information provided by the Manager. Such conflicts may result in
decisions and/or allocations of mortgage assets by the Manager that are
not in the best interests of the Company although the Manager seeks to
allocate investment opportunities in a fair manner among accounts for
which particular opportunities are suitable and to achieve the most
favorable price in all transactions.
Pursuant to the terms of the Management Agreement, the Manager
will allocate investment and disposition opportunities in accordance with
policies and 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.
As of the date of this Prospectus, the Company's 100 shares of
Common Stock outstanding are held by the Manager. The shares of Common
Stock were issued for $1,500 cash. The Manager may be deemed to control
the Company prior to the closing of this Offering.
The Manager and its employees and the unaffiliated directors may
also receive stock options pursuant to the Company's 1998 Stock Option
Plan. See "Management of the Company -- Stock Options."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not
assume any responsibility other than to under take 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 issuer of MBS, 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. There can be no
assurance that the Company would be able to recover any damages for
claims it may have against the Manager.
The Company has agreed to indemnify the Manager and its
directors, officers, employees and controlling persons with respect to
all expenses, losses, damages, liabilities, demands, charges and claims
arising from any acts or omissions of the Manager or its employees made
in good faith in the performance of the Manager's 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 that meet the Company's policies
and criteria. See "Risk Factors -- Conflicts of Interest."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of
_______, 1997, relating to the beneficial ownership of the Company's
Common Stock by (i) all persons known by the Company to beneficially own
more than 5% of the outstanding shares of the Company's Common Stock,
(ii) each director of the Company, and (iii) all officers and directors
of the Company as a group.
Name and Address of Amount and Nature Percent
Beneficial Owner (1)(2) of Beneficial Ownership of Class
- ----------------------------------- -------------------------- ---------
BlackRock Financial Management Inc... 100 shares 100%
Officers and Directors as a
Group (__ persons)................... -- --
(1) Unless otherwise noted, the Company believes that each person
named in the table has sole voting and investment power with
respect to all shares of Common Stock owned by them.
(2) A person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days from the date of
this Prospectus upon the exercise of warrants or options. Each
beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person
(but not those held by any other person) and which are
exercisable within 60 days from the date of this Prospectus have
been exercised. None of the outstanding options to acquire
Common Stock of the Company are exercisable within 60 days of
this Prospectus.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations that may be relevant to a prospective holder of the Common
Stock. Skadden, Arps, Slate, Meagher & Flom LLP has acted as counsel to
the Company and has reviewed this summary and has rendered an opinion
that the descriptions of the law and the legal conclusions contained
herein are correct in all material respects, and the discussions
hereunder fairly summarize the federal income tax considerations that are
likely to be material to the Company and a holder of the Common Stock.
The discussion contained herein does not address all aspects of taxation
that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of
stockholders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, foreign corporations, and
persons who are not citizens or residents of the United States) subject
to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Skadden,
Arps, Slate, Meagher & Flom LLP are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Internal Revenue Service (the
"IRS"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any statements
in this Prospectus with respect to the transactions entered into or
contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE,
OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO
BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION,
AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company plans to make an election to be taxed as a REIT
under sections 856 through 860 of the Code, commencing with its taxable
year ending on December 31, 1998.
The sections of the Code relating to qualification and
operation as a REIT are highly technical and complex. The following
discussion sets forth the material aspects of the Code sections that
govern the federal income tax treatment of a REIT and its stockholders.
The discussion is qualified in its entirety by the applicable Code
provisions, Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all of which are
subject to change prospectively or retroactively.
Skadden, Arps, Slate, Meagher & Flom LLP ("Counsel") has acted
as counsel to the Company in connection with the Offering and the
Company's election to be taxed as a REIT. In the opinion of Counsel,
assuming that the elections and other procedural steps described in this
discussion of "Federal Income Tax Considerations" are completed by the
Company in a timely fashion, commencing with the Company's taxable year
ending December 31, 1997, the Company will qualify to be taxed as a REIT
pursuant to sections 856 through 860 of the Code, and the Company's
organization and proposed method of operation will enable it to continue
to meet the requirements for qualification and taxation as a REIT under
the Code. Investors should be aware, however, that opinions of counsel
are not binding upon the IRS or any court. It must be emphasized that
Counsel's opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters,
including representations regarding the nature of the Company's
properties and the future conduct of its business. Such factual
assumptions and representations are described below in this discussion of
"Federal Income Tax Considerations" and are set out in the federal income
tax opinion that will be delivered by Counsel at the closing of the
Offering. Moreover, such qualification and taxation as a REIT depends
upon the Company's ability to meet on a continuing basis, through actual
annual operating results, asset ownership, distribution levels, and stock
ownership, the various qualification tests imposed under the Code
discussed below. Counsel will not review the Company's compliance with
those tests on a continuing basis. Accordingly, no assurance can be given
that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failure to qualify as a REIT, see "-- Failure to
Qualify."
If the Company qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income tax on its net income
that is distributed currently to its stockholders. This treatment
substantially eliminates the "double taxation" (i.e., taxation at both
the corporate and stockholder levels) that generally results from an
investment in a corporation. However, the Company will be subject to
federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the "alternative
minimum tax" on its undistributed items of tax preference, if any. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income
will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as
discussed below), and nonetheless has maintained its qualification as a
REIT because certain other requirements have been met, it will be subject
to a 100% tax on the net income attributable to the greater of the amount
by which the Company fails the 75% or 95% gross income test. Sixth, if
the Company should fail to distribute during each calendar year at least
the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Seventh, if the Company acquires
any asset from a C corporation (i.e., a corporation generally subject to
full corporate-level tax) in a merger or other transaction in which the
basis of the asset in the Company's hands is determined by reference to
the basis of the asset (or any other asset) in the hands of the C
corporation and the Company recognizes gain on the disposition of such
asset during the 10-year period beginning on the date on which it
acquired such asset, then to the extent of such asset's "built-in-gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such
time), the Company will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have
not yet been promulgated). The results described above with respect to
the tax on "built-in-gain" assume that the Company will elect pursuant to
IRS Notice 88-19 to be subject to the rules described in the preceding
sentence if it were to make any such acquisition. Finally, the Company
will be subject to tax at the highest marginal corporate rate on the
portion of any Excess Inclusion derived by the Company from REMIC
Residual Interests equal to the percentage of the stock of the Company
held by the United States, any state or political subdivision thereof,
any foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any other tax-exempt
organization (other than a farmer's cooperative described in section 521
of the Code) that is exempt from taxation under the unrelated business
taxable income provisions of the Code, or any rural electrical or
telephone cooperative (each, a "Disqualified Organization"). Any such tax
on the portion of any Excess Inclusion allocable to stock of the Company
held by a Disqualified Organization will reduce the cash available for
distribution from the Company to all stockholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association
(i) that is managed by one or more trustees or directors; (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (iii) that would be
taxable as a domestic corporation, but for sections 856 through 860 of the
Code; (iv) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (v) the beneficial ownership of
which is held by 100 or more persons; (vi) not more than 50% in value of
the outstanding shares of which is owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of each taxable year (the "5/50 Rule"); (vii) that
makes an election to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order to elect
and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the
Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income
and assets. Conditions (i) to (iv), inclusive, must be met during the
entire taxable year and condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) will not apply until
after the first taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of determining stock ownership under
the 5/50 Rule, a supplemental unemployment compensation benefits plan, a
private foundation, or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual.
A trust that is a qualified trust under Code section 401(a), however,
generally is not considered an individual and beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule.
Prior to the consummation of the Offering, the Company did not
satisfy conditions (v) and (vi) in the preceding paragraph. The Company
anticipates issuing sufficient Common Stock with sufficient diversity of
ownership pursuant to the Offering to allow it to satisfy requirements
(v) and (vi). In addition, the Charter provides for restrictions
regarding the transfer of the Common Stock that are intended to assist
the Company in continuing to satisfy the share ownership requirements
described in clauses (v) and (vi) above. See "Description of Capital
Stock--Restrictions on Transfer."
Code section 856(i) provides that a corporation that is a
"Qualified REIT Subsidiary" shall not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction,
and credit of a "Qualified REIT Subsidiary" shall be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. A
"Qualified REIT Subsidiary" is a corporation, all of the capital stock of
which is owned by the REIT. Thus, in applying the requirements described
herein, any "Qualified REIT Subsidiaries" of the Company will be ignored,
and all assets, liabilities, and items of income, deduction, and credit
of such subsidiaries will be treated as assets, liabilities, and items of
income, deduction, and credit of the Company.
In the case of a REIT that is a partner in a partnership,
Treasury Regulations provide that the REIT will be deemed to own its
proportionate share of the assets of the partnership and will be deemed
to be entitled to the gross income of the partnership attributable to
such share. In addition, the assets and gross income of the partnership
will retain the same character in the hands of the REIT for purposes of
section 856 of the Code, including satisfying the gross income and asset
tests described below.
INCOME TEST. In order for the Company to qualify and to
maintain its qualification as a REIT, two requirements relating to the
Company's gross income must be satisfied annually. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real
property" and interest on obligations secured by mortgages on real
property or on interests in real property) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property, mortgages on real property, or temporary
investments, and from dividends, other types of interest, and gain from
the sale or disposition of stock or securities, or from any combination
of the foregoing.
The term "interest," as defined for purposes of the 75% and 95%
gross income tests, generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount
depends in whole or in part on net income or profits of any person.
However, an amount received or accrued generally will not be excluded from
the term "interest" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. In addition, an amount received or
accrued generally will not be excluded from the term "interest" solely by
reason of being based on the income or profits of a debtor if the debtor
derives substantially all of its gross income from the related property
through the leasing of substantially all of its interests in the property,
to the extent the amounts received by the debtor would be characterized as
rents from real property if received by a REIT.
Interest on obligations secured by mortgages on real property
or on interests in real property is qualifying income for purposes of the
75% gross income test. Any amount includible in gross income with respect
to a regular or residual interest in a REMIC generally is treated as
interest on an obligation secured by a mortgage on real property. If,
however, less than 95% of the assets of a REMIC consists of real estate
assets (determined as if the Company held such assets), the Company will
be treated as receiving directly its proportionate share of the income of
the REMIC. In addition, if the Company receives interest income with
respect to a mortgage loan that is secured by both real property and
other property and the highest principal amount of the loan outstanding
during a taxable year exceeds the fair market value of the real property
on the date the Company purchased the mortgage loan, the interest income
will be apportioned between the real property and the other property,
which apportionment may cause the Company to recognize income that is not
qualifying income for purposes of the 75% gross income test.
Counsel is of the opinion that the interest, original issue
discount, and market discount income that the Company derives from its
investments in MBS Interests, IOs and Inverse IOs generally will be
qualifying interest income for purposes of both the 75% and the 95% gross
income tests, except to the extent that less than 95% of the assets of a
REMIC in which the Company holds an interest consists of real estate
assets (determined as if the Company held such assets), and the Company's
proportionate share of the income of the REMIC includes income that is
not qualifying income for purposes of the 75% and 95% gross income tests.
Most of the income that the Company recognizes with respect to its
investments in Mortgage Loans will be qualifying income for purposes of
both the 75% and 95% gross income tests. In some cases, however, the loan
amount of a Mortgage Loan may exceed the value of the real property
securing the loan, which will result in a portion of the income from the
loan being classified as qualifying income for purposes of the 95% gross
income test, but not for purposes of the 75% gross income test. It is
also possible that, in some instances, the interest income from a
Distressed Mortgage Loan may be based in part on the borrower's profits
or net income, which generally will disqualify the income from the loan
for purposes of both the 75% and the 95% gross income tests.
The Company may acquire Construction Loans or Mezzanine Loans
that have shared appreciation provisions. To the extent interest from a
loan that is based on the cash proceeds from the sale of property
constitutes a "shared appreciation provision" (as defined in the Code),
income attributable to such participation feature will be treated as gain
from the sale of the secured property, which generally is qualifying
income for purposes of the 75% and 95% gross income tests.
The Company may acquire and originate Mortgage Loans and
securitize such loans through the issuance of non-REMIC CMOs. As a result
of such transactions, the Company will retain an ownership interest in
the Mortgage Loans that has economic characteristics similar to those of
a MBS Interest. In addition, the Company may resecuritize MBS (or
non-REMIC CMOs) through the issuance of non-REMIC CMOs, retaining an
interest in the MBS used as collateral in the resecuritization
transaction. Such transactions will not cause the Company to fail to
satisfy the gross income tests or the asset tests described below.
The Company may receive income not described above that is not
qualifying income for purposes of the 75% and 95% gross income tests. The
Company will monitor the amount of nonqualifying income produced by its
assets and has represented that it will manage its portfolio in order to
comply at all times with the gross income tests.
The rent received by the Company from the tenants of its real
property ("Rent") will qualify as "rents from real property" in satisfying
the gross income tests for a REIT described above only if several
conditions are met. First, the amount of Rent must not be based, in whole
or in part, on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. Second, the Code provides that the
Rent received from a tenant will not qualify as "rents from real property"
in satisfying the gross income tests if the Company, or a direct or
indirect owner of 10% or more of the Company, owns 10% or more of the
ownership interests in such tenant, taking into account both direct and
constructive ownership (a "Related Party Tenant"). Third, if Rent
attributable to personal property, leased in connection with a lease of
Real Property, is greater than 15% of the total Rent received under the
lease, then the portion of Rent attributable to such personal property will
not qualify as "rents from real property." Finally, for the Rent to qualify
as "rents from real property," the Company generally must not operate or
manage the Real Property or furnish or render services to the tenants of
such Real Property, other than through an "independent contractor" who is
adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent
the services provided by the Company are "usually or customarily rendered"
in connection with the rental or space for occupancy only and are not
otherwise considered "rendered to the occupant." In addition, the Company
may render a "de minimis" amount of impermissible services without
violating the independent contractor requirement.
The Company has represented that it will not charge Rent for
any portion of any real property that is based, in whole or in part, on
the income or profits of any person (except by reason of being based on a
fixed percentage or percentages of receipts or sales, as described above)
to the extent that the receipt of such Rent would jeopardize the
Company's status as a REIT. In addition, the Company has represented
that, to the extent that it receives Rent from a Related Party Tenant,
such Rent will not cause the Company to fail to satisfy either the 75% or
95% gross income test. The Company also has represented that it will not
allow the Rent attributable to personal property leased in connection
with any lease of real property to exceed 15% of the total Rent received
under the lease, if the receipt of such Rent would cause the Company to
fail to satisfy either the 75% or 95% gross income test. Furthermore, as
a result of restrictions on the ownership of stock in the Company, no
person may own, directly or indirectly, more than 9.8% of the Company so
that the Related Party Tenant limitation will be avoided. Finally, the
Company has represented that it will not operate or manage its real
property or furnish or render noncustomary services to the tenants of its
real property other than through an "independent contractor," to the
extent that such operation or the provision of such services would
jeopardize the Company's status as a REIT.
REITs generally are subject to tax at the maximum corporate
rate on any income from foreclosure property (other than income that
would be qualifying income for purpose of the 75% gross income test),
less expenses directly connected with the production of such income.
"Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to such
real property (i) that is acquired by a REIT as the result of such REIT
having bid in such property at foreclosure, or having otherwise reduced
such property to ownership or possession by agreement or process of law,
after there was a default (or default was imminent) on a lease of such
property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a
time when default was not imminent or anticipated, and (iii) for which
such REIT makes a proper election to treat such property as foreclosure
property. The Company does not anticipate that it will receive any income
from foreclosure property that is not qualifying income for purposes of
the 75% gross income test, but, if the Company does receive any such
income, the Company will make an election to treat the related property
as foreclosure property. If property is not eligible for the election to
be treated as foreclosure property because the related loan was acquired
by the REIT at a time when default was imminent or anticipated, income
received with respect to such Ineligible Property may not be qualifying
income for purposes of the 75% or 95% gross income test.
The Company will generally be subject to a 100% tax on net
income derived from a prohibited transaction. The term "prohibited
transaction" generally includes a sale or other disposition of property
(other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. The Company
believes that no asset owned by the Company will be held for sale to
customers and that a sale of any such asset will not be in the ordinary
course of the Company's business. Whether property is held "primarily for
sale to customers in the ordinary course of a trade or business" depends,
however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company
will attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company
can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company will enter
into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including an interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or similar financial instrument
(collectively, a "Qualified Hedge"). To the extent that the Company
enters into a Qualified Hedge to hedge any interest rate risk on
indebtedness incurred to acquire or carry Real Estate Assets, any
periodic income or gain from the disposition of such Qualified Hedge
should be qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test.
If the Company fails to satisfy one or both of the 75% and 95%
gross income tests for any taxable year, it nevertheless may qualify as a
REIT for such year if it is entitled to relief under certain provisions
of the Code. Those relief provisions generally will be available if the
Company's failure to meet such tests is due to reasonable cause and not
due to willful neglect, the Company attaches a schedule of the sources of
its income to its return, and the Company anticipates that any incorrect
information on the schedule will not be due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of such relief provisions.
As discussed above in "Federal Income Tax Considerations--Taxation of the
Company," even if such relief provisions apply, a 100% tax would be
imposed on the net income attributable to the greater of the amount by
which the Company fails the 75% or 95% gross income test.
ASSET TESTS. The Company, at the close of each quarter of each
taxable year, also must satisfy, either directly or through partnerships
in which it has an interest, two tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total assets
must be represented by cash or cash items (including certain
receivables), government securities, "Real Estate Assets," or, in cases
where the Company raises new capital through stock or long-term (as least
five-year) debt offerings, temporary investments in stock or debt
instruments during the one-year period following the Company's receipt of
such capital. The term "Real Estate Assets" includes interests in real
property, interests in mortgages on real property to the extent the
principal balance of a mortgage does not exceed the fair market value of
the associated real property, regular or residual interests in a REMIC
(except that, if less than 95% of the assets of a REMIC consists of "real
estate assets" (determined as if the Company held such assets), the
Company will be treated as holding directly its proportionate share of
the assets of such REMIC), and shares of other REITs. For purposes of the
75% asset test, the term "interest in real property" includes an interest
in mortgage loans or land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of
real property, and an option to acquire real property (or a leasehold of
real property). An "interest in real property" also generally includes an
interest in mortgage loans secured by controlling equity interests in
entities treated as partnerships for federal income tax purposes that own
real property, to the extent that the principal balance of the mortgage
does not exceed the fair market value of the real property that is
allocable to the equity interest. Second, of the investments not included
in the 75% asset class, the value of any one issuer's securities owned by
the Company may not exceed 5% of the value of the Company's total assets,
and the Company may not own more than 10% of any one issuer's outstanding
voting securities (except for its interests in any partnership and any
Qualified REIT Subsidiary).
The Company expects that any Distressed Real Properties, MBS
Interests, Real Estate Related Assets and temporary investments that it
acquires generally will be qualifying assets for purposes of the 75% asset
test, except to the extent that less than 95% of the assets of a REMIC in
which the Company owns an interest consists of "Real Estate Assets" and the
Company's proportionate share of those assets includes assets that are
nonqualifying assets for purposes of the 75% asset test. Mortgage Loans
(including Distressed Mortgage Loans, Construction Loans, Bridge Loans and
Mezzanine Loans) also will be qualifying assets for purposes of the 75%
asset test to the extent that the principal balance of each mortgage loan
does not exceed the value of the associated real property. The Company will
monitor the status of the assets that it acquires for purposes of the
various asset tests and has represented that it will manage its portfolio
in order to comply at all times with such tests.
The Company anticipates that it may securitize all or a
portion of the Mortgage Loans which it acquires, in which event the
Company will likely retain certain of the subordinated and IO classes of
MBS Interests which may be created as a result of such securitization.
The securitization of the Mortgage Loans may be accomplished through one
or more REMICs established by the Company or, if a non-REMIC
securitization is desired, through one or more Qualified REIT
Subsidiaries established by the Company. The securitization of the
Mortgage Loans through either one or more REMICs or one or more Qualified
REIT Subsidiaries will not affect the qualification of the Company as a
REIT or result in the imposition of corporate income tax under the
taxable mortgage pool rules.
If the Company should fail to satisfy the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its
REIT status if (i) it satisfied the asset tests at the close of the
preceding calendar quarter and (ii) the discrepancy between the value of
the Company's assets and the asset test requirements arose from changes
in the market values of its assets and was not wholly or partly caused by
the acquisition of one or more nonqualifying assets. If the condition
described in clause (ii) of the preceding sentence were not satisfied,
the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in
which it arose.
DISTRIBUTION REQUIREMENTS. The Company, in order to avoid
corporate income taxation of the earnings that it distributes, is required
to distribute with respect to each taxable year dividends (other than
capital gain dividends) to its stockholders in an aggregate amount at least
equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain)
and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
federal income tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes
at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the
calendar year, by the end of the January immediately following such year)
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. However, the Company
may elect to retain, rather than distribute all or a portion of its net
long-term capital gains and pay the tax on such undistributed gains, in
which case the Company's stockholders would include their proportionate
share of such undistributed long-term capital gains in income and receive a
credit for their share of the tax paid by the Company. The Company would
avoid the above 4% excise tax to the extent such an election and
distributions of income exceed the requirements described above. The
Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements.
It is possible that, from time to time, the Company may
experience timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of that income
and deduction of such expenses in arriving at its REIT taxable income. For
example, the Company will recognize taxable income in excess of its cash
receipts when, as frequently happens, OID accrues with respect to certain
of its subordinated MBS Interests, including POs and certain IOs. OID
generally will be accrued using a methodology that does not allow credit
losses to be reflected until they are actually incurred. In addition, the
Company may recognize taxable market discount income upon the receipt of
proceeds from the disposition of, or principal payments on, MBS Interests
and Distressed Mortgage Loans that are "market discount bonds" (i.e.,
obligations with a stated redemption price at maturity that is greater than
the Company's tax basis in such obligations), but not have any cash because
such proceeds may be used to make non-deductible principal payments on
related borrowings. Market discount income is treated as ordinary income
and not as capital gain and, thus, is subject to the 95% distribution
requirement. The Company also may recognize Excess Inclusion or other
taxable income in excess of cash flow from REMIC Residual Interests or its
retained interests from non-REMIC securitization transactions. It is also
possible that, from time to time, the Company may recognize net capital
gain attributable to the sale of depreciated property that exceeds its cash
receipts from the sale. In addition, pursuant to certain Treasury
Regulations, the Company may be required to recognize the amount of any
payment to be made pursuant to a shared appreciation provision over the
term of the related loan using the constant yield method. Finally, the
Company may recognize taxable income without receiving a corresponding cash
distribution if it forecloses on or makes a "significant modification" (as
defined in Regulations section 1.1001-3(e)) to a loan, to the extent that
the fair market value of the underlying property or the principal amount of
the modified loan, as applicable, exceeds the Company's basis in the
original loan. Therefore, the Company may have less cash than is necessary
to meet its annual 95% distribution requirement or to avoid corporate
income tax or the excise tax imposed on certain undistributed income. In
such a situation, the Company may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds through the
issuance of Preferred Stock or additional Common Stock, or through the sale
of assets.
As a result of securitization or resecuritization of Mortgage
Loans or other debt instruments, and the subsequent sale of the senior
(or most secure) securities created in the securitization, the Company
may retain subordinated securities or a residual interest in the assets
being securitized on which interest or discount income will be accrued
without the current payment of cash. This situation could arise because
cash payments received on the assets are required to be paid to the
holders of senior securitized interests. In addition, the Company would
have phantom income to the extent of the market discount attributable to
debt securities held by a REMIC in which the Company holds a REMIC
Residual Interest. In such situations, the income related to such
subordinate debt instruments will be subject to the 95% distribution
requirement. In order to satisfy the REIT distribution requirements, the
Company may need to distribute funds obtained through borrowing, the
issuance of additional capital stock or the sale of assets. As a result,
the maintenance of REIT status could affect the manner in which the
Company conducts its business operations.
Under certain circumstances, the Company may be able to
rectify a failure to meet the distribution requirements for a year by
paying "deficiency dividends" to it stockholders in a later year, which
may be included in the Company's deduction for dividends paid for the
earlier year. Although the Company may be able to avoid being taxed on
amounts distributed as deficiency dividends, it will be required to pay
to the IRS interest based upon the amount of any deduction taken for
deficiency dividends.
RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury
Regulations, in order to be able to elect to be taxed as a REIT, the
Company must maintain certain records and request on an annual basis
certain information from its stockholders designed to disclose the actual
ownership of its outstanding stock. The Company intends to comply with such
requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any
taxable year, and certain relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Distributions to the
Company's stockholders in any year in which the Company fails to qualify
as a REIT will not be deductible by the Company nor will they be required
to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to stockholders will
be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions,
the Company also will be disqualified from taxation as a REIT for the
four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made
to the Company's taxable U.S. stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will
be taken into account by such U.S. stockholders as ordinary income and
will not be eligible for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. stockholder"
means a holder of Common Stock that for U.S. federal income tax purposes
is (i) a citizen or resident of the U.S., (ii) a corporation,
partnership, or other entity created or organized in or under the laws of
the U.S. or of any political subdivision thereof, (iii) an estate whose
income from sources without the United States is includible in gross
income for U.S. federal income tax purposes regardless of its connection
with the conduct of a trade or business within the United States, or (iv)
any trust with respect to which (a) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or
more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do
not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the stockholder has held his
Common Stock. However, corporate stockholders may be required to treat up
to 20% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's Common Stock, but rather
will reduce the adjusted basis of such stock. To the extent that such
distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a stockholder's Common Stock, such
distributions will be included in income as long-term capital gain (or
short-term capital gain if the Common Stock had been held for one year or
less), assuming the Common Stock is a capital asset in the hands of the
stockholder. In addition, any distribution declared by the Company in
October, November, or December of any year and payable to a stockholder
of record on a specified date in any such month shall be treated as both
paid by the Company and received by the stockholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company.
Instead, such losses would be carried over by the Company for potential
offset against its future income (subject to certain limitations).
Taxable distributions from the Company and gain from the disposition of
the Common Stock will not be treated as passive activity income and,
therefore, stockholders generally will not be able to apply any "passive
activity losses" (such as losses from certain types of limited
partnerships in which a stockholder is a limited partner) against such
income. Taxable distributions from the Company generally will be treated
as investment income for purposes of the investment interest limitations.
Capital gains from the disposition of Common Stock (or distributions
treated as such), however, will be treated as investment income only if
the stockholder so elects, in which case such capital gains will be taxed
at ordinary income rates. The Company will notify stockholders after the
close of the Company's taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income
or capital gain dividends.
The Company may elect to retain and pay income tax on its net
long-term capital gains. If the Company makes this election, the
Company's stockholders would include in their income as long-term capital
gain their proportionate share of the long-term capital gain as
designated by the Company. Each stockholder will be deemed to have paid
the stockholder's share of the tax, which could be credited or refunded
to the stockholder. The basis of the stockholder's shares is increased by
the amount of the undistributed long-term capital gains (less the amount
of capital gains tax paid).
The Company's investment in MBS Interests and certain types of
MBS may cause it under certain circumstances to recognize phantom income
and to experience an offsetting excess of economic income over its taxable
income in later years. As a result, stockholders may from time to time be
required to pay federal income tax on distributions that economically
represent a return of capital, rather than a dividend. Such distributions
would be offset in later years by distributions representing economic
income that would be treated as returns of capital for federal income tax
purposes. Accordingly, if the Company receives phantom income, its
stockholders may be required to pay federal income tax with respect to such
income on an accelerated basis, i.e., before such income is realized by the
stockholders in an economic sense. Taking into account the time value of
money, such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an
investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an
effective income tax rate of 30% purchased a bond (other than a tax-exempt
bond) with an annual interest rate of 10% for its face value, his
before-tax return on his investment would be 10%,and his after-tax return
would be 7%. However, if the same investor purchased stock of the Company
at a time when the before-tax rate of return was 10%, his after-tax rate of
return on his stock might be somewhat less than 7% as a result of the
Company's phantom income. In general, as the ratio of the Company's phantom
income to its total income increases, the after-tax rate of return received
by a taxable stockholder of the Company will decrease. The Company will
consider the potential effects of phantom income on its taxable
stockholders in managing its investments.
If the Company owns REMIC Residual Interests, it is possible
that stockholders would not be permitted to offset certain portions of
the dividend income they derive from the Company with their current
deductions or net operating loss carryovers or carrybacks. The portion of
a stockholder's dividends that would be subject to this limitation would
equal his allocable share of any Excess Inclusion income derived by the
Company with respect to the REMIC Residual Interests. The Company's
Excess Inclusion income for any calendar quarter will equal the excess of
its income from REMIC Residual Interests over its "daily accruals" with
respect to such REMIC Residual Interests for the calendar quarter. Daily
accruals for a calendar quarter are computed by allocating to each day on
which a REMIC Residual Interest is owned a ratable portion of the product
of (i) the "adjusted issue price" of the REMIC Residual Interest at the
beginning of the quarter and (ii) 120% of the long-term federal interest
rate (adjusted for quarterly compounding) on the date of issuance of the
REMIC Residual Interest. The adjusted issue price of a REMIC Residual
Interest at the beginning of a calendar quarter equals the original issue
price of the REMIC Residual Interest, increased by the amount of daily
accruals for prior quarters and decreased by all prior distributions to
the Company with respect to the REMIC Residual Interest. To the extent
provided in future Treasury Regulations, the Excess Inclusion income with
respect to any REMIC Residual Interests owned by the Company that do not
have significant value will equal the entire amount of the income derived
from such REMIC Residual Interests. Furthermore, to the extent that the
Company (or a Qualified REIT Subsidiary) acquires or originates Mortgage
Loans and uses those loans to collateralize one or more multiple-class
offerings of MBS for which no REMIC election is made ("Non-REMIC
Transactions"), it is possible that, to the extent provided in future
Treasury Regulations, stockholders will not be permitted to offset
certain portions of the dividend income that they derive from the Company
that are attributable to Non-REMIC Transactions with current deductions
or net operating loss carryovers or carrybacks. Although no applicable
Treasury Regulations have yet been issued, no assurance can be provided
that such regulations will not be issued in the future or that, if
issued, such regulations will not prevent the Company's stockholders from
offsetting some portion of their dividend income with deductions or
losses from other sources.
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable
disposition of the Common Stock by a stockholder who is not a dealer in
securities will be treated as long-term capital gain or loss if the
Common Stock has been held for more than one year and otherwise as
short-term capital gain or loss. However, any loss upon a sale or
exchange of Common Stock by a stockholder who has held such shares for
six months or less (after applying certain holding period rules) will be
treated as a long-term capital loss to the extent of distributions from
the Company required to be treated by such stockholder as long-term
capital gain. All or portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other shares of
Common Stock are purchased within 30 days before or after the
disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate (which applies
to ordinary income and gain from the sale or exchange of capital assets
held for one year or less) is 39.6%. The maximum regular income tax rate
on capital gains derived by non-corporate taxpayers is 28% for sales and
exchanges of capital assets held for more than one year but not more than
eighteen months, and 20% for sales and exchanges of capital assets held
for more than eighteen months. However, any long-term capital gains from
the sale or exchange of depreciable real property that would be subject
to ordinary income taxation (i.e., "depreciation recapture") if treated
as personal property will be subject to a maximum tax rate of 25% instead
of the 20% maximum rate. For taxable years beginning after December 31,
2000, the maximum regular capital gains rate for assets which are held
more than 5 years is 18%. This rate will generally only apply to assets
for which the holding period begins after December 31, 2000. Thus, the
tax rate differential between capital gains and ordinary income for
non-corporate taxpayers may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect
the deductibility of capital losses. Capital losses not offset by capital
gains my be deducted against a non-corporate taxpayer's ordinary income
only up to a maximum annual amount of $3,000. Unused capital losses may
be carried forward indefinitely by non-corporate taxpayers. All net
capital gain of a corporate taxpayer is subject to tax at ordinary
corporate income tax rates. A corporate taxpayer can deduct capital
losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. stockholders and to the
Service the amount of distributions paid during each calendar year, and
the amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with
respect to distributions paid unless such holder (i) is a corporation or
comes within certain other exempt categories and, when required,
demonstrates this fact or (ii) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup
withholding rules. A stockholder who does not provide the Company with
his correct taxpayer identification number also may be subject to
penalties imposed by the Service. Any amount paid as backup withholding
will be creditable against the stockholder's income tax liability. In
addition, the Company may be required to withhold a portion of capital
gain distribution to any stockholders who fail to certify their
non-foreign status to the Company.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts ("Exempt
Organizations"), generally are exempt from federal income taxation.
However, they are subject to taxation on their unrelated business taxable
income ("UBTI"). While many investments in real estate generate UBTI, the
IRS has ruled that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the shares
of the REIT are not otherwise used in an unrelated trade or business of
the exempt employee pension trust. Based on that ruling, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its
acquisition of the Common Stock with debt, a portion of its income from
the Company will constitute UBTI pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs
(7), (9), (17) and (20), respectively, of Code section 501(c) are subject
to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the
Company's stock is required to treat a percentage of the dividends from
the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross
income of the Company for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of the
Company's stock only if (i) the UBTI Percentage is at least 5%, (ii) the
Company qualifies as a REIT be reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interest
in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's stock or (B) a group of pension
trusts individually holding more than 10% of the value of the Company's
stock collectively owns more than 50% of the value of the Company's
stock. The Company's ownership limitations should prevent an Exempt
Organization from owning more than 10% of the value of the Company's
stock.
Any dividends received by an Exempt Organization that are
allocable to Excess Inclusion will be treated as UBTI. In addition, the
Company will be subject to tax at the highest marginal corporate rate on
the portion of any Excess Inclusion Income derived by the Company from
REMIC Residual Interests that is allocable to stock of the Company held
by Disqualified Organizations. Any such tax would be deductible by the
Company against its income that is not Excess Inclusion income.
If the Company derives Excess Inclusion income from REMIC
Residual Interests, a tax similar to the tax on the Company described in
the preceding paragraph may be imposed on stockholders who are (i)
pass-through entities (i.e., partnerships, estates, trusts, regulated
investment companies, REITs, common trust funds, and certain types of
cooperatives (including farmers' cooperatives described in section 521 of
the Code)) in which a Disqualified Organization is a record holder of
shares or interests and (ii) nominees who hold Common Stock on behalf of
Disqualified Organizations. Consequently, a brokerage firm that holds
shares of Common Stock in a "street name" account for a Disqualified
Organization may be subject to federal income tax on the Excess Inclusion
income derived from those shares.
The Treasury Department has been authorized to issue
regulations regarding issuances by a REIT of multiple- class
mortgage-backed securities in non-REMIC transactions. If such Treasury
regulations are issued in the future allocating the Company's Excess
Inclusion Income from non-REMIC transactions pro rata among its
stockholders, some percentage of the dividends paid by the Company would
be treated as UBTI in the hands of stockholders that are Exempt
Organizations. See "-Taxation of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of
nonresident alien individuals, foreign corporations, foreign
partnerships, and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex and no attempt will be made herein to provide
more than a summary of such rules. PROSPECTIVE NON-U.S.
STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not
attributable to gain from sales or exchanges by the Company of U.S. real
property interests and are not designated by the Company as capital gains
dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of
the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces or eliminates that tax. However,
if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S.
trade or business, the Non-U.S. Stockholder generally will be subject to
federal income tax at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to such distributions (and also may
be subject to the 30% branch profits tax in the case of a Non-U.S.
Stockholder that is a corporation). The Company expects to withhold U.S.
income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Stockholder unless (i) a lower treaty
rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder
files an IRS Form 4224 with the Company claiming that the distribution is
effectively connected income.
Any portion of the dividends paid to Non-U.S. Stockholders that
is treated as Excess Inclusion income will not be eligible for exemption
from the 30% withholding tax or a reduced treaty rate. In addition, if
Treasury regulations are issued in the future allocating the Company's
Excess Inclusion income from non-REMIC transactions among its stockholders,
some percentage of the Company's dividends would not be eligible for
exemption from the 30% withholding tax or a reduced treaty withholding tax
rate in the hands of Non-U.S. Stockholders. See "-Taxation of Taxable U.S.
Stockholders."
Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a stockholder to the
extent that such distributions do not exceed the adjusted basis of the
stockholder's Common Stock, but rather will reduce the adjusted basis of
such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's Common Stock, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax
on any gain from the sale or disposition of his Common Stock, as
described below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess
of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as
a dividend. However, amounts so withheld are refundable to the extent it
is subsequently determined that such distribution was, in fact, in excess
of current and accumulated earnings and profits of the Company. However,
the Small Business Job Protection Act of 1996 requires the Company to
withhold 10% of any distribution in excess of the Company's current and
accumulated earnings and profits. Consequently, although the Company
intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be
subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT,
distributions that are attributable to gain from sales or exchanges by
the Company of a U.S. real property interest (which includes certain
interests in Real Property but does not include Mortgage Loans or MBS)
will be taxed to a Non-U.S. Stockholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real
property interests are taxed to a Non-U.S. Stockholder as if such gain
were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch
profits tax in the hands of a Non-U.S. corporate stockholder not entitled
to treaty relief or exemption. The Company is required to withhold 35% of
any distribution that is designated by the Company as a U.S. real
property capital gains dividend. The amount withheld is creditable
against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of the
stock was held directly or indirectly by non-U.S. persons. Because the
Common Stock will be publicly traded, no assurance can be given that the
Company will be or remain a "domestically controlled REIT." In addition,
a Non-US Stockholder that owns, actually or constructively, 5% or less of
the Company's stock throughout a specified "look-back" period will not
recognize taxable gain on the sale of his stock under FIRPTA if the
shares are traded on an established securities market. Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the Common Stock is effectively connected with the Non-U.S.
Stockholder's U.S. trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders
with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the U.S. for 183 days or
more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Common Stock
were to be subject to taxation under FIRPTA, the Non- U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect
to such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and
the possible application of the 30% branch profits tax in the case of
non-U.S. corporations).
STATE AND LOCAL TAXES
The Company or the Company's stockholders may be subject to
state and local tax in various states and localities, including those
states and localities in which it or they transact business, own
property, or reside. The state and local tax treatment of the Company and
its stockholders in such jurisdictions may differ from the federal income
tax treatment described above. Consequently, prospective stockholders
should consult their own tax advisors regarding the effect of state and
local tax laws upon an investment in the Common Stock.
ERISA CONSIDERATIONS
In considering an investment in the Common Stock, a fiduciary
of a profit-sharing, pension stock bonus plan, or individual retirement
account ("IRA"), including a plan for self-employed individuals and their
employees or any other employee benefit plan subject to prohibited
transaction provisions of the Code or the fiduciary responsibility
provisions of ERISA (an "ERISA Plan") should consider (a) whether the
ownership of Common Stock is in accordance with the documents and
instruments governing such ERISA Plan, (b) whether the ownership of
Common Stock is consistent with the fiduciary's responsibilities and
satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions
in improper delegation of control over, or responsibility for, "plan
assets" and ERISA's imposition of co-fiduciary liability on a fiduciary
who participates in, permits (by action or inaction) the occurrence of,
or fails to remedy a known breach of duty by another fiduciary and (d)
the need to value the assets of the ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c)
above, 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 New York 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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 400
million shares of Common Stock, $.001 par value, and 100 million shares
of preferred stock, $.001 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.
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 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, would 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 Articles of Incorporation reserve 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 as a REIT are that
(1) during the last half of each taxable year not more than 50% in value
of the outstanding shares may be owned directly or indirectly by five or
fewer individuals (the "5/50 Rule") and (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 Articles of Incorporation prohibits any person from acquiring
or holding, directly or indirectly, shares of Common Stock 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 5/50 Rule 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 Articles of Incorporation,
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 Articles of Incorporation. 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.
The Articles of Incorporation 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 Articles of Incorporation. 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 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 New York Stock Exchange or, if such shares are
not listed or admitted to trading on the New York 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%, (or such lower percentage as
required by the Code or the Regulations promulgated thereunder) of the
outstanding shares of any class 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.
DIVIDEND REINVESTMENT PLAN
The Company has adopted a Dividend Reinvestment Plan (the "DRP")
to provide stockholders with a convenient method to automatically reinvest
their cash dividends in, and, subject to the Board of Director's
determination, make periodic cash subscriptions for, shares of the
Company's Common Stock. The DRP is being administered by (the "Plan
Administrator"). The Plan Administrator keeps records, sends statements of
account to each stockholder who participates in the DRP (the "DRP
Participant"), provides safekeeping for the shares, and performs other
duties related to the DRP. The Plan Administrator also acts as the dividend
disbursing agent, transfer agent and registrar for the Capital Stock of the
Company.
All of the Company's stockholders owning at least 100 shares
or a minimum optional subscription of $250, are eligible to participate
in the DRP. Stockholders whose shares are registered in their own names
may participate directly in the DRP. Stockholders who beneficially own
shares that are registered in a name other than their own (i.e., in the
name of a broker, bank or other nominee) must either make arrangements
with their broker, bank or other nominee to participate in the DRP on
their behalf or become the registered owner of the stock by having such
shares transferred into their names. If shares are owned in the
stockholder's own name, the stockholder may elect to participate in the
DRP by requesting from the Company a Prospectus for the DRP and by
completing and sending an authorization form to the Plan Administrator.
If the stockholder beneficially owns shares registered in the name of a
broker, bank or other nominee, the stockholder must contact such broker,
bank or other nominee and ask them to participate in the DRP on the
stockholder's behalf.
The authorization form provides for the purchase of shares of
the Company's Common Stock through the following investment options: (i)
Full Dividend Reinvestment-the Plan Administrator will apply cash
dividends paid on all the shares of Common Stock registered in the record
owner's name(s) toward the purchase of shares of the Company's Common
Stock; (ii) Partial Dividend Reinvestment-the Plan Administrator will
apply cash dividends paid on only the number of participating shares
specified on the Authorization Form toward the purchase of shares of the
Company's Common Stock; or (iii) optional cash subscriptions. Shares
purchased by the DRP will be automatically enrolled in the DRP so that
the dividends paid on such shares will also be reinvested in additional
shares of the Company's Common Stock.
Stockholders will not be automatically enrolled in the DRP.
Each stockholder desiring to participate in the DRP must complete and
deliver to the Agent an enrollment form, which will be sent to each
eligible stockholder following the effectiveness of the registration of
the shares to be issued under the DRP. Participation in the DRP will
commence with all dividends and distributions payable after receipt of a
DRP Participant's authorization form; provided that the authorization
form must be received by the Plan Administrator at least two business
days prior to the record date for any dividends in order for any
stockholder to be eligible for reinvestment of such dividends. A DRP
Participant may terminate participation in the DRP at any time upon
delivery of a written notice to that effect to the Plan Administrator;
provided that the termination notice must be received by the Plan
Administrator at least two business days prior to the record date for any
dividends in order for the termination to be effective with respect to
such dividends. Upon termination, the Plan Administrator will send to the
DRP Participant certificates evidencing the whole shares in the DRP
Participant's account and a check for any fractional shares based on the
current market price of the Common Stock on the date of termination.
The Company will pay to the Plan Administrator all dividends
payable with respect to shares of Common Stock owned by DRP Participants,
including shares and fractional shares previously acquired under the DRP.
The Plan Administrator will apply such funds towards the purchase of the
Company's Common Stock for the DRP Participant's account either directly
from the Company or on the open market, as instructed by the Company. The
price of the shares purchased by the Plan Administrator directly from the
Company will be the then-current Average Market Price or at a discount
thereto at the discretion of the Company. The "Average Market Price" is
the average of the daily high and low sales prices, computed to seven
decimal places, of the Company's Common Stock on the [ ] during the
pricing period (the ten days on which the [ ] is open and for which
trades in the Company's Common Stock are reported immediately preceding
the relevant investment date). In the case of purchases on the open
market, the price will be the weighted average purchase price of the
Company's Common Stock purchased for the DRP in respect of the related
investment date.
Generally, the Company pays all costs relating to the
administration and maintenance of the DRP. There will be no brokerage
commission on shares purchased directly from the Company. With respect to
purchases on the open market, the Plan Administrator shall pay brokerage
commissions, administration costs and other charges in an amount determined
by the prevailing rates at the time of purchase. Such commissions,
administration costs and charges will be reimbursed by the Company, but in
no event shall the Company pay commissions, administration costs or other
charges which, when combined with any discount, exceed 5% of the fair
market value of the stock at the time of purchase. A DRP Participant pays a
$5.00 fee and brokerage commissions in the event the DRP Participant asks
the Plan Administrator to sell all of the DRP Participant's shares, to a
$15.00 fee and brokerage commissions for each partial sale.
As soon as practical after the purchase of the shares has been
completed, the Plan Administrator will send each DRP Participant a
statement of account confirming the transaction and itemizing the
previous reinvestment activity for the calendar year. DRP Participants
will receive tax information annually for their personal records and to
assist in the preparation of their federal income tax returns. For
federal income tax purposes, DRP Participants will generally be treated
as having received a dividend distribution equal to the fair market value
of the DRP shares that are purchased with the DRP , plus the brokerage
commissions, if any, allocable to the purchase of such shares, and DRP
Participants will have a tax basis Participant's reinvested dividends
generally on the date that the Company credits such shares to the DRP
Participant's account s in the shares equal to such value. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following summary of certain provisions of the Maryland
General Corporation Law, as amended from time to time, and of the
Articles of Incorporation 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 Articles of Incorporation 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."
REMOVAL OF DIRECTORS
The Articles of Incorporation provide that a director may be
removed from office at any time but only, in the case of removal by
shareholders, for cause 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 or, in the case of the directors, with or without
cause by the affirmation vote of at least two-thirds of the directors
then in office.
STAGGERED BOARD
The Charter and the Bylaws divide the Board of Directors into
three classes of directors, each class constituting approximately
one-third of the total number of directors, which the classes serving
staggered three-year terms. The classification of the Board of Directors
will make it more difficult for stockholders to change the composition of
the Board of Directors because only a minority of the directors can be
elected at once. The Company believes, however, that the staggered Board
of Directors will help to ensure continuity and stability of the
Company's management and policies. The classification provisions could
also discourage a third party from accumulating the Company's stock or
attempting to obtain control of the Company, even though this attempt
might be beneficial to the Company and some, or a majority, of its
stockholders. Accordingly, under certain circumstances stockholders could
be deprived of opportunities to sell their shares of Common Stock at a
higher price than might otherwise be available.
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 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 (an "Interested
Stockholder") or an affiliate of such an Interested Stockholder are
prohibited for five years after the most recent date on which the
Interested Stockholder becomes an Interested Stockholder. Thereafter, any
such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80%
of the votes entitled to be cast by holders of outstanding 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. The MGCL does not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to
the time that the Interested Stockholder becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
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
acquirer or in respect of which the acquirer is able to exercise or
direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer 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. 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), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement as
required by the statute, then, subject to certain conditions and
limitations, the corporation may redeem any or all of the control shares
(except those for which voting rights have previously been approved) for
fair value determined, without regard to the absence of voting rights for
the control shares, as of the date of the last control share acquisition
by the acquirer 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
acquirer 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 (i) to
shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or (ii) to acquisitions
approved or exempted by the Articles of Incorporation 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 Common Stock. There can be no assurance
that such provision will not be amended or eliminated at any time in the
future.
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company reserves the right from time to time to make any
amendment to its Articles of Incorporation, now or hereafter authorized
by law, including any amendment which alters the contract rights as
expressly set forth in the Articles of Incorporation, of any shares of
outstanding stock. The Articles of Incorporation 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 a majority
of the directors then in office and by the affirmative vote of holders of
shares entitled to cast not less than seventy-five percent of all the
votes entitled to be cast on the matter unless such dissolution has been
approved by at least two-thirds of the directors then in office, in which
case such dissolution must also be approved by a majority of all the
votes entitled to be case on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders
may be made only (1) pursuant to the Company's notice of the meeting, (2)
by the Board of Directors or, (3) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice procedures
set forth in the Bylaws, and (b) with respect to special meetings of
stockholders, only the business specified in the Company's notice of
meeting may be brought before the meeting of stockholders and nominations
of persons for election to the Board of Directors or (c) provided that
the Board of Directors has determined that directors shall be elected at
such meeting, by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice provisions set forth in the Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
ARTICLES OF INCORPORATION AND BYLAWS
The business combination provisions and, if the applicable
provision in the Bylaws is rescinded, the control share acquisition
provisions of the MGCL, the provisions of the Articles of Incorporation
on staggered board 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 AND REGISTRAR
The Company intends to appoint ______________ [address and
phone] as its transfer agent and registrar for the Common Stock.
REPORTS TO STOCKHOLDERS
The Company will furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports
as it may determine to furnish or as may be required by law.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase
agreement (the "Purchase Agreement"), the Company has agreed to sell to
each of the underwriters named below (the "Underwriters"), and each of the
Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. and others in
the future are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company the number of shares of
Common Stock set forth opposite its name below.
Number of
Underwriter shares
- -----------------------------------------------------------------------
Friedman, Billings, Ramsey & Co., Inc. ................
_________________________________________..............
_________________________________________..............
- -----------------------------------------..............--------------
Total.......................................===============
In the Purchase Agreement, the several Underwriters named
therein have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold
pursuant to the Purchase Agreement if any of such shares of Common Stock
are purchased. Under certain circumstances, the commitments of
non-defaulting Underwriters may be increased as set forth in the Purchase
Agreement.
The Representatives have advised the Company that the
Underwriters propose to offer the shares of Common Stock offered hereby
to the public initially at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ ___ per share of Common Stock, and that the
Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ ___ per share of Common Stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted to the Underwriters an option
exercisable for 30 days after the date hereof to purchase up to an
aggregate of ___________ additional shares of Common Stock to cover
over-allotments, if any, at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment, subject to certain conditions,
to purchase approximately the same percentage thereof which the number of
shares of Common Stock to be purchased by it shown in the foregoing table
is of the number of shares of Common Stock initially purchased by the
Underwriters.
The Company, the Manager and their respective officers and
directors have agreed not to offer, sell, agree or offer to sell, grant
any option to purchase or otherwise dispose of, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock directly or indirectly, for a period of 180
days after the date of this Prospectus without the prior written consent
of Friedman, Billings, Ramsey & Co., Inc. acting on behalf of the
Underwriters, except that the Company may, without such consent, grant
options or issue shares of Common Stock pursuant to the Company's 1998
Stock Option Plan.
The Representatives of the Underwriters have advised the
Company that the Underwriters do not intend to confirm sales to any
account over which they exercise discretionary authority.
Prior to the offering, there has been no public market for the
Common Stock. The initial public offering price of the Common Stock will
be determined by negotiations between the Company and the
Representatives. 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 in general, the demand for similar
securities of companies considered comparable to the Company and other
relevant factors. The initial public offering price set forth on the
cover page of this Prospectus should not, however, be considered an
indication of the actual value of the Common Stock. Such price will be
subject to change as a result of market conditions and other factors.
There can be no assurance that an active trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
Until the distribution of the Common Stock is completed, rules
of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common
Stock in connection with the offering (i.e., if they sell more shares of
Common Stock than are set forth on the cover page of this Prospectus),
the Representatives may reduce that short position by purchasing Common
Stock in the open market. The Representatives may also elect to reduce
any short position through the exercise of all or part of the
over-allotment options described above.
The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the
Representatives purchase shares of Common Stock in the open market to
reduce the Underwriters, short position or to stabilize the price of the
Common Stock, they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part
of the Offering.
In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
The imposition of a penalty bid might also have an effect on the price of
a security to the extent that it were to discourage resales of the
security.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of
Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
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 Company intends to purchase insurance that,
among other things, provides coverage for the Company with respect to the
foregoing indemnification and contribution agreement. See "The Manager -
Expenses."
Certain of the Underwriters have performed, and may continue
to perform, investment banking, broker-dealer and financial advisory
services for the Company and certain of its Affiliates and have received
and will receive customary compensation therefor.
The Underwriters undertake that the minimum distribution,
issuance and aggregate market value requirements for listing on the [New
York Stock Exchange] will be achieved in the Offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will
be passed upon for the Company by Skadden Arps Slate Meagher & Flom LLP,
New York, New York, who will rely on the opinion of __________________ with
respect to matters of Maryland law, and certain legal matters will be
passed upon for the Underwriters by _______________. In addition, the
description of federal income tax consequences contained in this Prospectus
entitled "Federal Income Tax Considerations" is based upon the opinion of
Skadden Arps Slate Meagher & Flom LLP.
EXPERTS
The balance sheet of Anthracite Mortgage Capital Inc. as of
_____________, 1997, included in this Prospectus has been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and is included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus
forms a part and the exhibits thereto are on file at the offices of the
Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and inspected, without
charge, at the offices of the Commission. The Company will be subject to
the informational requirements of the Exchange Act, and in accordance
therewith, will periodically file reports and other information with the
Commission. Such reports and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New
York, New York 10048, and at 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission
at prescribed rates through its Public Reference Section at 450 Fifth
Street, N.W., Washington, D.C. 20549. 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
respect by such reference. 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.
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 each year.
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; provided, however, that the
Company an its subsidiaries will not be treated as an Affiliate of the
Manager and its Affiliates.
"Agency Certificates" means GNMA Certificates, Fannie Mae
Certificates and FHLMC Certificates.
"ARM" means either a (i) a Mortgage Security as to which the
underlying mortgage loans feature adjustments of the underlying interest
rate at predetermined times based on an agreed margin to an establish
index or (ii) 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.
"Articles of Incorporation" shall mean the Articles of
Incorporation of the Company.
"Average Invested Assets" means the average of the aggregate
book value of the assets of the Company, including the assets of all of
its direct and indirect subsidiaries before reserves for depreciation or
bad debts or other similar noncash reserves computed by taking the daily
average of such values during such period.
"Average Net Worth" means for any period the arithmetic
average of the sum of the proceeds from the offerings of its equity
securities by the Company, before deducting any underwriting discounts
and commissions and other expenses and costs relating to the offerings,
plus the Company's retained earnings (without taking into account any
losses incurred in prior periods) computed by taking the average of such
values at the end of each month during such period.
"Bankruptcy Code" means Title 11 of the United States Code, as
amended.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Bridge Loans" means loans secured by real property and used for
temporary financing.
"Business Combinations" shall have the meaning specified in the
MGCL.
"Bylaws" shall mean the Bylaws of the Company.
"Capital and Leverage Policy" means the policy of the Company
that limits its ability to acquire additional Mortgage Assets during
times when the capital base of the Company is less than a required
amount, as described in this Prospectus.
"Charitable Beneficiary" means a charitable beneficiary of a
Trust.
"Closely Held" shall have the meaning specified in the MGCL.
"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 New York Stock Exchange or, if such shares are
not listed or admitted to trading on the New York 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 transaction prices are
not reported, 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.
"CMBS" shall mean commercial or multi-family MBS.
"CMOs" means debt obligations (bonds) that are collateralized
by mortgage loans or mortgage certificates other than Mortgage Derivative
Securities and Subordinated Interests. CMOs are structured so that
principal and interest payments received on the collateral are sufficient
to make principal and interest payments on the bonds. Such bonds may be
issued by United States government agencies or private issuers in one or
more classes with fixed or variable interest rates, maturities and
degrees of subordination that are characteristics designed for the
investment objectives of different bond purchasers.
"CMO Residuals" means derivative mortgage securities issued by
agencies of the U.S. Government or by private originators of, or
investors in, Mortgage Loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Commitments" means commitments issued by the Company that
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,
$.01 par value per share.
"Company" means Anthracite Mortgage Capital Inc., a Maryland
corporation.
"Compensation Committee" means the committee of the Company's
Board of Directors, comprised entirely of unaffiliated directors, that
will administer the 1998 Stock Option Plan.
"Construction Loans" shall mean a loan the proceeds of which
are to be used to finance the costs of construction or rehabilitation of
real property.
"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 acquirer is able to exercise or
direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer 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 if 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.
"Conforming Mortgage Loans" means conventional Mortgage Loans
that either comply with requirements 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.
"Counsel" means Skadden Arps Slate Meagher & Flom LLP.
"Counterparty" means a third-party financial institution with
which the Company enters into an 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.
"Disqualified Organization" means the United States, any state
or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, any other tax-exempt organization (other than a farmer's
cooperative described in Section 521 of the Code) that is exempt from
taxation under UBTI provisions of the Code, or any rural, electrical or
telephone cooperative.
"Distressed Mortgage Loans" shall mean Subperforming Mortgage
Loans and Nonperforming Mortgage Loans.
"Distressed Real Properties" shall mean REO Properties and
other underperforming or otherwise distressed real property.
"Dollar-Roll Agreement" means an agreement to sell a security
for delivery on a specified future date and a simultaneous agreement to
repurchase the same or substantially similar security on a specified
future date.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA Plan" means a pension, profit-sharing, retirement or
other employee benefit plan that is subject to ERISA.
"Excess Inclusion" shall have the meaning specified in Section
860E(c) of the Code.
"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.
"Exempt Organization" shall mean a Tax Exempt Entity.
"FASIT" means Financial Asset Securitization Investment Trust.
"FNMA" means the 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.), formerly known as
the Federal National Mortgage Association.
"FNMA Certificates" means guaranteed mortgage pass-through
certificates issued by Fannie Mae either in certified or book-entry form.
"Federal Reserve Board" means the Board of Governors of the
Federal Reserve System.
"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 the mortgage secured by such property or a result of a
default under a lease of such property.
"Funds From Operations" means net income (computed in
accordance with GAAP) excluding gains or losses from debt restructuring
and sales of property, plus depreciation and amortization on real estate
assets and after adjustments for unconsolidated partnerships and joint
ventures.
"GAAP" means generally accepted accounting principles.
"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 that are rated __
or above by at least one of the Rating Agencies, (ii) securities that are
unrated but are obligations of the United States or obligations
guaranteed by the United States government or an agency or
instrumentality thereof or (iii) securities that are of equivalent credit
quality as determined by the Manager.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the Department of Housing and Urban Development.
"Ineligible Property" means property not eligible to be treated
as foreclosure property.
"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.
"IO" means Mortgage Derivative Securities representing the
right to receive interest only or a disproportionately large amount of
interest in relation to principal payments.
"Intended Transferee" means, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for any restrictions
on the transfer or ownership of Equity Stock, would own record title to
shares of Equity Stock.
"Inverse IOs" means IOs that bear interest rate at a floating
rate that varies inversely with (and often at a multiple of) changes in a
specific index.
"Investment Company Act" means the Investment Company Act of
1940, as amended.
"IRAs" means Individual Retirement Accounts.
"ISOS" means qualified incentive stock options granted under
the 1998 Stock Option Plan that 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.
"MGCL" means the Maryland General Corporation Law, as amended
from time to time.
"Management Agreement" means the agreement by and between the
Company and the Manager whereby the Manager agrees to perform certain
services to the Company in exchange for certain compensation.
"Manager" means BlackRock Financial Management Inc., a Delaware
corporation.
"Market Discount Bonds" means obligations with a stated
redemption price at maturity that is greater than the Company's tax basis
in such obligations.
"Market Price" on any date shall mean, with respect to a class
or series of outstanding shares of the Company's stock, the Closing Price
for such stock on such date.
"Master Servicer" shall mean an entity acceptable to the
Rating Agencies that regularly engage in the business of Mortgage Loans.
"MBS" shall mean mortgage-backed securities (including CMBS and
RMBS).
"Mezzanine Loan" shall mean a loan secured by a lien on Real
Property that is subordinate to a lien on such Real Property securing
another loan.
"Mortgage Back Securities" means debt obligations (bonds) that
are secured by mortgage loans or mortgage certificates.
"Mortgage Derivative Securities" means mortgage securities
that 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 and may include other derivative
instruments.
"Mortgage Loans" means loans secured by real property.
"Mortgage Warehouse Participations" means participations in
lines of credit to mortgage originators that are secured by recently
originated mortgage Loans that are in the process of being either
securitized or sold to permanent investors.
"NAREIT" shall mean the National Association of Real Estate
Investment Trusts, Inc.
"Net Income" means the taxable income of the Company.
"Net Leased Real Estate" means real estate that is net leased
on a long-term basis (ten years or more) to tenants who are customarily
responsible for paying all costs of owning, operating, and maintaining
the leased property during the term of the lease, in addition to the
payment of a monthly net rent to the landlord for the use and occupancy
of the premises.
"1997 Act" means The Taxpayer Relief Act of 1997.
"95% of Income Test" means the income-based test that the
Company must meet to qualify as a REIT described in paragraph 2 of
"Federal Income Tax Considerations--Requirements for Qualification as a
REIT--Gross Income Tests."
"Non-Economic Residual" shall mean CMO Residuals that are
required to report taxable income or loss but receive no cash flow from
the Mortgage Loans.
"Non-Investment Grade" means a credit rating from a Rating
Agency of "BBB" or less.
"Nonperforming Mortgage Loans" shall mean multifamily and
commercial mortgage loans for which the payment of principal and interest
is more than 90 days delinquent.
"Non-REMIC Residual interests" shall mean a class of MBS that
is not designated as the residual interest in one or more REMICS.
"Non-U.S. Stockholders" means nonresident alien individuals,
foreign corporations, foreign partnerships and other foreign stockholders.
"Offering" means the shares of Common Stock offered through
the Underwriters in connection with this Prospectus.
"Offering Price" shall mean the offering price of $ per
Common Share offered hereby.
"OID" shall mean original issue discount.
"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.
"Pass-Through Certificates" means securities (or interests
therein) other than Mortgage Derivative Securities and Subordinate
Interests evidencing undivided ownership interests in a pool of mortgage
loans, the holders of which receive a "pass-through" of the principal and
interest paid in connection with the underlying mortgage loans in
accordance with the holders, respective, undivided interests in the pool.
Pass-Through Certificates include Agency Certificates, as well as other
certificates evidencing interests in loans secured by single-family
properties.
"PNC" means PNC Bank Corp., a Delaware corporation.
"PNC Group" means PNC together with its subsidiaries and
Affiliates.
"PO" means Mortgage Derivative Securities representing the
right to receive principal only or a disproportionate amount of
principal.
"Preferred Stock" shall mean the preferred stock of the Company.
"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.
"Purchase Agreement" shall mean the agreement pursuant to
which the Underwriters will underwrite the Common Stock.
"Qualified Hedges" means any interest rate swap or cap
agreement, option, futures contract, forward rate agreement, or similar
financial instrument entered into by the Company to reduce interest rate
risk with respect to any indebtedness incurred or to be incurred by the
Company to acquire or carry Real Estate Assets.
"Qualified REIT Real Estate Assets" means Pass-Through
Certificates, Mortgage Loans, Agency Certificates, real property 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.
"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 Agency" means, with respect to securities of U.S.
issuers, any nationally recognized statistical rating organization and,
with respect to non-U.S. issuers, any of the foregoing or any equivalent
organization operating in the jurisdiction where the issuer's principal
operations are located either Standard & Poor's and Moody's Investors
Service, Inc.
"Real Estate Asset" shall mean interests in real property,
mortgages on real property to the extent the principal balance of the
mortgage does not exceed the fair market value of the associated real
property, regular or residual interests in a REMIC, (except that, if less
than 95% of the assets of a REMIC consists of "real estate assets"
(determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), and shares of other REITs.
"REIT" means a real estate investment trust as defined under
section 856 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of
the Code.
"Related Party Tenant" means the Company, or a direct or
indirect owner of 10% or more of the Company, owns more than 10% or more
of the ownership interests in a tenant, taking into account both direct
and constructive ownership.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Residual Interests" shall mean a class of MBS that is
designated as the residual interest in one or more REMICS.
"Rent" shall mean the rent received by the Company from
tenants of Real Property owned by the Company.
"REO Property" shall mean real property acquired at
foreclosure (or by deed in lieu of foreclosure).
"Representatives" shall mean each Underwriter that is acting
as a representative for other Underwriters.
"Residual Interests" shall mean REMIC and non-REMIC Residual
Interests collectively.
"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.
"RMBS" shall mean a series of one- to four-family residential MBS.
"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.
"75% of Income Test" means the income-based test that the
Company must meet to qualify as a REIT described in paragraph 1 of
"Federal Income Tax Considerations--Requirements for Qualification as a
REIT--Gross Income Tests."
"Shared Appreciation Provision" means
"Special Servicing" shall mean servicing of defaulted mortgage
loans, including oversight and management of the resolution of such
mortgage loans by modification, foreclosure, deed in lieu of foreclosure
or otherwise.
"1998 Stock Option Plan" means the stock option plan adopted
by the Company in 1998.
"Sub IOs" shall mean an IO with characteristics of a
Subordinated Interest.
"Subperforming Mortgage Loans" shall mean multifamily and
commercial mortgage loans for which default is likely or imminent.
"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.
"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.
"Treasury Regulations" shall mean the income tax regulations
promulgated under the Code.
"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 Articles of Incorporation, which trust shall be for the
exclusive benefit of one or more Charitable Beneficiaries.
"Trustee" means a trustee of a Trust for the exclusive benefit
of a Charitable Beneficiary.
"UBTI" means "unrelated trade or business income" as defined
in section 512 of the Code.
"UBTI Percentage" shall mean the gross income derived by the
Company from UBTI (determined as if the Company was a pension trust)
divided by gross income of the Company for the year in which the
dividends are paid.
"Unaffiliated Directors" shall mean a director who (a) does
not own greater than a de minimis interest in the Manager or any of its
Affiliates, and (b) within the last two years, has not (i) directly or
indirectly been employed by the Manager or any of its Affiliates, (ii)
been an officer or director of the Manager or any of its Affiliates,
(iii) performed services for the Manager or any of its Affiliates, or
(iv) had any material business or professional relationship with the
Manager or any of its Affiliates.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc.
as well as others in the future and each of the underwriters for whom they
are acting as representatives.
"United States Stockholder" 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 Serviceman's Readjustment Act of 1944, as amended.
ANTHRACITE MORTGAGE CAPITAL INC.
BALANCE SHEET
___________ ___, 1997
ASSETS
Cash ....................................... $ 1,500
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity
Preferred Stock, par value $0.001
per share; 100,000,000 shares authorized,
no shares issued; Common Stock, par value
$0.001 per share; 400,000,000 shares
authorized; 1000 shares issued and outstanding.... $ 1
Additional paid-in-capital................................... 1,499
--------
Total Stockholder's Equity....................... $ 1,500
========
See accompanying notes to balance sheet.
ANTHRACITE MORTGAGE CAPITAL INC.
NOTES TO BALANCE SHEET
_________ ___, 1997
NOTE 1 - THE COMPANY
Anthracite Mortgage Capital Inc. (the "Company") was
incorporated in Maryland and was initially capitalized through the sale
of 100 shares of Common Stock for $1,500 on _________ ___, 1997. The
Company will seek to acquire primarily mortgage-backed securities and may
also invest in other real estate related assets, including mortgage
loans.
The Company has had no operations to date other than matters
relating to the organization and start-up of the Company. Accordingly, no
statement of operations is presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FEDERAL AND STATE INCOME TAXES
The Company will elect to be taxed as a real estate investment
trust under the Internal Revenue Code of 1986, as amended, and generally
will not be subject to federal and state taxes on its income to the
extent it distributes annually 95% of its predistribution taxable income
to stockholders and maintains its qualification as a real estate
investment trust.
INCOME RECOGNITION
Income and expenses are to be recorded on the accrual basis of
accounting.
NOTE 3 - TRANSACTIONS WITH AFFILIATES
The Company intends to enter into a Management Agreement (the
"Management Agreement") with BlackRock Financial Management Inc. (the
"Manager"), a wholly owned subsidiary of PNC Bank Corp, under which the
Manager will manage the Company's day-to-day operations, subject to the
direction and oversight of the Company's Board of Directors. The Company
will pay the Manager annual base management compensation, payable
quarterly, equal to 1% of the Average Net Invested Capital as further
defined in the Management Agreement. The Company will also pay the
Manager, as incentive compensation, an amount equal to 25% of the Funds
from Operation of the Company plus gains (minus losses), before incentive
compensation, in excess of the amount that would produce an annualized
Return on Equity on the invested amount of common stock equal to 2% over
the Ten-Year U.S.
Treasury Rate as further defined in the Management Agreement.
The Company intends to adopt a stock option plan that provides
for the grant of qualified stock options, non-qualified stock options,
stock appreciation rights and dividend equivalent rights ("Options")
under which Options may be granted to the Manager, directors, officers
and any key employees of the Company and to the directors, officers and
key employees of the Manager.
NOTE 4 - PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration
Statement for the sale of its common stock. Contingent upon the
consummation of the public offering, the Company will be liable for
organization and offering expenses in connection with the sale of the
shares offered.
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK BY ANYONE IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- -------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY...................................................6
DIVIDEND POLICY AND DISTRIBUTIONS...................................10
RISK FACTORS........................................................14
USE OF PROCEEDS.....................................................23
DIVIDEND AND DISTRIBUTION POLICY....................................23
CAPITALIZATION......................................................24
MANAGEMENT OF THE COMPANY...........................................42
THE MANAGER.........................................................47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......53
FEDERAL INCOME TAX CONSIDERATIONS...................................54
ERISA CONSIDERATIONS................................................67
DESCRIPTION OF CAPITAL STOCK........................................67
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS...............70
UNDERWRITING........................................................73
LEGAL MATTERS.......................................................75
EXPERTS .........................................................75
ADDITIONAL INFORMATION..............................................75
GLOSSARY .........................................................76
UNTIL _________, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS)
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------------------
____________ SHARES
ANTHRACITE MORTGAGE
CAPITAL INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
---------------
, 1997
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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.
AMOUNT TO BE PAID
SEC Registration Fee.................................. $
NYSE listing fee...................................... *
NASD filing fee.......................................
Printing and engraving expenses....................... *
Legal fees and expenses............................... *
Accounting fees and expenses.......................... *
Transfer agent and custodian fees..................... *
Miscellaneous......................................... *
Total................................................. *
* To be provided by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
The securities described in Item 33(a) were issued to BlackRock
Financial Management Inc. in exchange for cash.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Pursuant to the exemption provided by Section 4(2) of the
Securities Act, on September 15, 1997 the Company issued 100 shares of
Common Stock for an aggregate purchase price of $1,500 to BlackRock
Financial Management Inc.
(b) Pursuant to the exemption provided by Rule 701 promulgated
under the Securities Act, on __________, 1997, the Company issued options
to purchase shares of Common Stock with an exercise price of $ per share.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the MGCL, the Company's Articles of
Incorporation obligate the Company to indemnify its present and former
directors and officers and the Manager and its employees, officers,
directors and controlling persons and to pay or reimburse reasonable
expenses for such persons in advance of the final disposition of a pro-
ceeding 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 of the Company implement the provisions relating to
indemnification contained in the Company's Articles of Incorporation. The
MCGL 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 Company's Articles of
Incorporation contain 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 Company
under the Purchase Agreement relating to this Offering. The Company will
maintain for the benefit of its officers and directors, officers' and
directors' insurance.
The Purchase Agreement (Exhibit 1.1) also provides for the
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 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements included in the Prospectus are:
Balance sheet at __________ ___, 1997
Notes to financial statements
All schedules have been omitted because they are not
applicable.
(b) Exhibits
*1.1 Form of Purchase Agreement
3.1 Articles of Incorporation of the Registrant
*3.2 Bylaws of the Registrant
*5.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*8.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*10.1 Management Agreement between the Registrant and
BlackRock Financial Management Inc.
*10.6 1998 Stock Option Incentive Plan
*10.8 1998 outside Directors Stock Option Plan
23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Skadden Arps Slate Meagher & Flom LLP
(included in Exhibits 5.1 and 8.1)
24.1 Power of Attorney (included on page II-5)
*99.1 Consents to be named as a director pursuant to
Rule 438
* To be filed by amendment.
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing of the Offering 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 Registrant for liabilities
arising under the Securities Act may be permitted to directors, officers
and controlling person of the Registrant pursuant to the provisions
referenced in Item 34 of this Registration Statement or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
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 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.
G10 SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-11 and
has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of
New York, State of New York, on the 11th day of December, 1997.
ANTHRACITE MORTGAGE CAPITAL INC.
By: /s/Richard Shae
Chief Operating Officer
PURSUANT TO 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.
/s/ LAURENCE D. FINK Chairman of the Board
Laurence D. Fink
/s/ HUGH R. FRATER President (Principal Executive
Hugh R. Frater Officer)
/s/ RICHARD SHAE Chief Operating Officer
Richard Shae (Principal Financial and
Accounting Officer)
EXHIBIT INDEX
*1.1 Form of Purchase Agreement
3.1 Articles of Incorporation of the Registrant is incorporated by
reference to Exhibit 3.1 of the Registration Statement filed
with the Securities and Exchange Commission on November 21,
1997.
*3.2 Bylaws of the Registrant
*5.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*8.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*10.1 Management Agreement between the Registrant and BlackRock
Financial Management Inc.
*10.6 1998 Stock Option Incentive Plan
*10.8 1997 Outside Directors Stock Option Plan
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Skadden Arps Slate Meagher & Flom LLP (included in
Exhibits 5.1 and 8.1)
24.1 Power of Attorney (included on page II-5) is incorporated by
reference to Exhibit 24.1 of the Registration Statement filed
with the Securities and Exchange Commission on November 21,
1997.
*99.1 Consents to be named as a director pursuant to Rule 438
* To be filed by amendment.
