As filed with the Securities and Exchange Commission on November 21, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
ANTHRACITE MORTGAGE CAPITAL, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
-----------------
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.
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
- --------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED REGISTERED (1) OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SHARE PRICE(2) FEE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $0.01 per share 330,000 shares $20.00 $6,600,000 $2,000.00
- --------------------------------------------------------------------------------------------------------
</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.
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>
1. Forepart of Registration Statement FOREPART OF REGISTRATION STATEMENT, OUTSIDE FRONT
and Outside Front Cover Page of COVER PAGE OF PROSPECTUS
Prospectus........................
2. Inside Front and Outside Back Cover INSIDE FRONT COVER PAGE OF PROSPECTUS; OUTSIDE
Pages of Prospectus............... BACK COVER PAGE OF PROSPECTUS
3. Summary Information, Risk Factors PROSPECTUS SUMMARY; RISK FACTORS
and Ratio of Earnings to
Fixed Charges.....................
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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
of Financial Condition and Results CONDITION AND RESULTS OF OPERATIONS
of Operations.....................
11. General Information as to Registrant.. PROSPECTUS SUMMARY; BUSINESS; THE MANAGER; THE
COMPANY
12. Policy with Respect to Certain BUSINESS; THE MANAGER; DESCRIPTION OF CAPITAL
Activities......................... 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 PROSPECTUS SUMMARY; RISK FACTORS; CERTAIN FEDERAL
Security Holders.................. INCOME TAX CONSIDERATIONS; ERISA CONSIDERATIONS
17. Market Price of and Dividends on the RISK FACTORS; DIVIDEND AND DISTRIBUTION POLICY;
Registrant's Common Equity and PRINCIPAL STOCKHOLDERS
Related Stockholder Matters.......
18. Description of Registrant's OUTSIDE FRONT COVER PAGE OF PROSPECTUS; PROSPECTUS
Securities........................ SUMMARY; DESCRIPTION OF CAPITAL STOCK, CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS; ERISA CONSIDERATIONS
19. Legal Proceedings................... BUSINESS
20. Security Ownership of Certain OUTSIDE FRONT COVER PAGE OF PROSPECTUS; THE
Beneficial Owners and MANAGER; THE COMPANY; PRINCIPAL STOCKHOLDERS
Management........................
21. Directors and Executive Officers.... THE MANAGER; THE COMPANY
22. Executive Compensation.............. THE MANAGER; THE COMPANY
23. Certain Relationships and Related RISK FACTORS; THE MANAGER
Transactions......................
24. Selection, Management and Custody of RISK FACTORS; THE MANAGER
Registrant's Investments..........
25. Policies with Respect to Certain RISK FACTORS; THE MANAGER
Transactions......................
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 LEGAL MATTERS; EXPERTS
Counsel.............................
29. Disclosure of Commission Position on *
Indemnification for Securities
Act Liabilities.....................
30. Quantitative and Qualitative *
Disclosures About Market Risk.......
+++
</TABLE>
- ----------------------
* 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 NOVEMBER __, 1997
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 "SMC."
--------------
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.
- -----------------------------------------------------------------------------
PRICE TO PUBLIC UNDERWRITING PROCEEDS TO
DISCOUNT(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 OVERALLOTMENTS, 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 _______,
1997.
----------------
[UNDERWRITERS]
----------------
The date of this Prospectus is _________, 1997.
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 November ___, 1997, 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 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 shall 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. "Funds
From Operations" as defined by 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.
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 provided 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 1973 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 or losses, 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. The
Company's Board of Directors has not established a minimum dividend
level.
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 market price of the Common Stock
and the ability of the Company to acquire assets;
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
bearing 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................... "SMC"
- ---------------
(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 1997 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 at 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), act 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, the Company's insurance will not cover all
losses.
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 Bylaws 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, 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 would 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 mortgage 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 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 [after taking various timing considerations into
account]. 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. The Company generally intends to
distribute sufficient amounts to avoid excise tax liability unless
retention of income will create additional stockholder value.
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 "SMC."
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. Furthermore, certain types of Tax-Exempt Entities, such
as voluntary employee benefit associations and entities that have
borrowed to acquire their shares of Common Stock, may be required to
treat all or a portion of the dividends they may receive from the Company
as UBTI. See "Federal Income Tax Considerations -- Taxation of Tax-Exempt
Entities."
FUTURE REVISIONS IN POLICIES AND STRATEGIES . 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 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 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 in excess or in
violation of the above transfer or ownership limitations, the beneficial
or constructive ownership of which otherwise would cause such person to
violate such limitations (rounded to the nearest whole shares) shall be
automatically transferred to a Trustee of a Trust for the exclusive
benefit of one or more Charitable Beneficiaries, and the Intended
Transferee 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 individual 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 all classes or
series of the Company's capital stock, within 30 days after the end of
each taxable year, is required to give written notice to the Company
stating the name and address of such owner, the number of shares of each
class and series of stock beneficially owned and a description of the
manner in which such shares are held. Each such owner shall provide to
the Company such additional information as the Company may request in
order to determine the effect, if any, of such 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:
Actual As Adjusted(1)(2)
(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
1997 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 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 further 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 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
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 make 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. See "Certain Federal Income Tax
Considerations."
The Company expects that reverse repurchase agreements and, to
the extent consistent with the REIT Provisions of the Code, dollar roll
agreements will be, together with Mortgage Loan securitizations, the
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 Independent Directors. The Independent
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 invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, particularly in the course of disposing of its assets (iii)
originate loans and (iv) 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 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 those 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 objectives 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 or, if it
has been formed, an operating partnership 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. Income from such sale
will be nonqualifying income for purposes of the 30% gross income test.
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 in excess 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 an 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 1997 Stock Option Plan. See "--Stock Options"
below.
STOCK OPTIONS
The Company has adopted a stock option plan (the "1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 Stock option Plan will terminate ten
years from its effective date, and no options may be granted under the
1997 Stock Option Plan thereafter.
The 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 Stock Option Plan effective on the closing of the Offering.
STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION
FOR OPTION TERM
NAME OPTIONS OPTIONS EXERCISE EXPIRATION
GRANTED(1) GRANTED TO PRICE(2) DATE
EMPLOYEES ($/SHARE) 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 1997 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) 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;
(v) arranging for the issuance of MBS from pools of
Mortgage Loans owned by the Company;
(vi) 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;
(vii) 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;
(viii) 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;
(ix) contracting, as necessary, with third parties for
master and special servicing of assets acquired by the Company;
(x) counseling the Company in connection with policy
decisions made by the Board of Directors;
(xi) 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;
(xii) 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;
(xiii) supervising compliance with the REIT Provisions of
the Code and maintenance of an exclusion from regulation as an
investment company;
(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) providing all actions necessary to enable the
Company to make required tax filings and reports and generally
enable the Company to maintain 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 be assigned by the Manager to an
Affiliate without the consent of the Company. The Management Agreement may
be assigned to a non-Affiliate only with the approval of a majority of the
unaffiliated directors.
MANAGEMENT COMPENSATION
The Manager will receive a 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 shall 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. "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 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.
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 te
end of each fiscal quarter.
The Company has adopted a 1997 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 1997 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 the compensation of the
Company's officers and the cost of office space and equipment required
for the Company's day-to-day operations. The expenses that will be paid
by the Company will include (but not necessarily be limited to) issuance
and transaction costs incident to the acquisition, disposition and
financing of investments, 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 1997 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 undertake 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 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, 1997.
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 three 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 of 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 9.9% 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 ("Ineligible 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 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 interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that
the Company enters into an interest rate swap or cap contract to hedge
any variable rate indebtedness incurred to acquire or carry real estate
assets, any periodic income or gain from the disposition of such contract
should be qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test. To the extent that the Company hedges
with other types of financial instruments or in other situations, it may
not be entirely clear how the income from those transactions will be
treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions
in a manner that does not jeopardize its status as a REIT. Accordingly,
the Company may conduct some or all of its hedging activities through a
corporate subsidiary that is fully subject to federal corporate income
tax.
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. 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 REIT
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
Service 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 the 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. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment
interest limitations. Capital gains from the disposition of Common Stock
(or distributions treated as such), however, will be treated as
investment income only if the 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 shareholders would include in their income as long-term capital
gains their proportionate share of the long-term capital gains as
designated by the Company. Each shareholder will be deemed to have paid
the shareholder's share of the tax, which could be credited or refunded
to the shareholder. The basis of the shareholder'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
A capital asset generally must be held for more than one year in
order for gain or loss derived from its sale or exchange to be treated as
long-term capital gain or loss. The highest marginal individual income
tax rate is 39.6%, and the tax rate on long-term capital gains applicable
to non-corporate taxpayers is 28% for sales and exchanges of assets held
for more than one year but not more than eighteen months, and 20% for
sales and exchanges of assets held for more than eighteen months. Thus,
the tax rate differential between capital gain 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 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.
Recently enacted legislation (The Taxpayer Relief Act of 1997
(the "1997 Act")) reduces the maximum rate on long-term capital gains of
non-corporate taxpayers from 28% to 20% (10% for taxpayers in the 15% tax
bracket). The lower rates generally apply to sales or exchanges of
capital assets occurring after May 6, 1997. However, the reduced
long-term capital gains rates are only available for sales or exchanges
of capital assets held for more than 18 months (or more than 12 months if
the sale or exchange occurred after May 6, 1997 and before July 29,
1997). 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 it were treated as personal
property will be subject to a maximum tax rate of 25% instead of the 20%
maximum rate for gains taken into account after July 28, 1997. Also,
under the legislation, for taxable years beginning after December 31,
2000, the maximum capital gains rates for assets which are held more than
5 years are 18% and 8% (rather than 20% and 10%). These rates will
generally only apply to assets for which the holding period begins after
December 31, 2000.
The capital gains provisions in the 1997 Act authorize the
Service to issue regulations (including regulations requiring reporting)
applying the provisions to any "pass-thru entity" including a REIT and
interests in such an entity. No assurance can be given concerning the
content of any such regulations. Generally, the determination of when
gain is properly taken into account will be made at the entity level.
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
nonforeign status to the Company. The Treasury Department issued final
regulations in October 1997 regarding the backup withholding rules as
applied to Non-U.S. Stockholders. The final regulations would alter the
current system of backup withholding compliance and are proposed to be
effective for distributions made after December 31, 1998. See "-Taxation
of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts ("Exempt
Organizations"), generally are exempt from federal income taxation.
However, they are subject to taxation on their unrelated business taxable
income ("UBTI"). While many investments in real estate generate UBTI, the
Service has issued a published ruling that dividend distributions from a
REIT to an exempt employee pension trust do not constitute UBTI, provided
that the shares of the REIT are not otherwise used in an unrelated trade
or business of the exempt employee pension trust. Based on that ruling,
amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances
its acquisition of the Common Stock with debt, a portion of its income
from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs
(7), (9), (17) and (20), respectively, of 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 non-U.S. corporation). The Company expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any
such distributions made to a Non-U.S. Stockholder unless (i) a lower
treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder
files an IRS Form 4224 with the Company claiming that the distribution is
effectively connected income. The Treasury Department issued final
regulations in October 1997 that would modify the manner in which the
Company complies with the withholding requirements.
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 determined subsequently that such distribution was, in fact, in excess
of current and accumulated earnings and profits of the Company. In August
1996, the U.S. Congress passed the Small Business Job Protection Act of
1996, which 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 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 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. However,
because the Common Stock will be publicly traded, no assurance can be
given that the Company will be or remain a 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 the gain on the sale of
his stock taxable 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.
The preferred stock may be issued from time to time in one or
more classes or series, with such distinctive designations, rights and
preferences as shall be determined by the Company's Board of Directors.
Preferred stock would be available for possible future financings of, or
acquisitions by, the Company and for general corporate purposes without
any legal requirement that further stockholder authorization for issuance
be obtained. The issuance of preferred stock could have the effect of
making an attempt to gain control of the Company more difficult by means
of a merger, tender offer, proxy contest or otherwise. The preferred
stock, if issued, 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 for the tax benefits
accorded by the REIT Provisions of the Code are that (1) during the last
half of each taxable year not more than 50% in value of the outstanding
shares may be owned directly or indirectly by five or fewer individuals
(the "50%/5 stockholder test") and (2) there must be at least 100
stockholders on 335 days of each taxable year of 12 months.
In order that the Company may meet these requirements at all
times, the Articles of Incorporation prohibits any person from acquiring
or holding, directly or indirectly, shares of Common Stock in excess of
[__]% in value of the aggregate of the outstanding shares of Common Stock
or in excess of [__]% (in value or in number of shares, whichever is more
restrictive) of the aggregate of the outstanding shares of Common Stock
of the Company. For this purpose, the term "ownership" is defined in
accordance with the REIT Provisions of the Code and the constructive
ownership provisions of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. Subject to certain limitations, the Company's
Board of Directors may increase or decrease the ownership limitations or
waive the limitations for individual investors.
For purposes of the 50%/5 stockholder test, the constructive
ownership provisions applicable under Section 544 of the Code attribute
ownership of securities owned by a corporation, partnership, estate or
trust proportionately to its stockholders, partners or beneficiaries,
attribute ownership of securities owned by family members and partners to
other members of the same family, treat securities with respect to which
a person has an option to purchase as actually owned by that person, and
set forth application of such attribution provisions (i.e.,
"reattribution"). Thus, for purposes of determining whether a person
holds shares of Common Stock in violation of the ownership limitations
set forth in the 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%, in the case of 2,000 or more
stockholders of record and 1% in the case of more than 200 but fewer than
2,000 stockholders of record, of all classes or series of the Company's
stock, within 30 days after the end of each taxable year, is required to
give written notice to the Company stating the name and address of such
owner, the number of shares of each class and series of stock of the
Company beneficially owned and a description of the manner in which such
shares are held. Each such owner shall provide to the Company such
additional information as the Company may request in order to determine
the effect, if any, of such beneficial ownership on the Company's status
as a REIT and to ensure compliance with the ownership limitations.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S 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
[To Come]
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 acquiror, by
officers or by directors who are employees of the corporation. "Control
shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (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 acquiror or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the
acquiror 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 acquiror 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 ______________ 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.
Underwriter Number of
shares
_________________________.........................
_________________________.........................
_________________________.........................
_________________________.........................
_________________________......................... ________________
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 ________ 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 1997 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, 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 1997 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
acquiror or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power:
(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.
"Independent Director" 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.
"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
1997 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 bona fide interest rate swap or cap
agreements entered into by the Company to hedge variable-rate
indebtedness only that the Company incurred to acquire or carry Qualified
REIT Real Estate Assets and any futures and options, or other investments
(other than Qualified REIT Real Estate Assets) made by the Company to
hedge its Mortgage Assets or borrowings that have been determined by a
favorable opinion of counsel to generate qualified income for purposes of
the 95% source of income test applicable to REITS.
"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 at all times during such corporation's
existence.
"Qualified Temporary Investment Income" means income attributable
to stock or debt instruments acquired with new capital of the Company
received during the one-year period beginning on the day such proceeds
were received.
"Rating 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.
"1997 Stock Option Plan" means the stock option plan adopted by
the Company in 1997.
"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" means 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.
"Underwriters" shall mean and each of the
underwriters for whom 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 ................................................. $ 0
==========
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................... $ 0
Additional paid-in-capital.............................. 0
----------
Total Stockholder's Equity...................... $ 0
==========
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 shares of Common Stock for $ 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
---------------
[UNDERWRITERS]
---------------
, 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 proceeding to the
maximum extent permitted from time to time by Maryland law. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service
in those or other capacities, unless it is established that (a) the act
or omission of the director or officer was material to the matter giving
rise to such proceeding and (i) was committed in bad faith, or (ii) was
the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property
or services, or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. The Bylaws 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 1997 Stock 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)
*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.
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 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 21st day of November, 1997.
ANTHRACITE MORTGAGE CAPITAL INC.
By: /s/ Hugh Frater
----------------------------
President
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.
<TABLE>
<S> <C> <C>
/s/ LAURENCE D. FINK Chairman of the Board November 21, 1997
___________________________
Laurence D. Fink
/s/ HUGH R. FRATER President (Principal November 21, 1997
____________________________ Executive Officer)
Hugh R. Frater
/s/ HENRY GABBAY Chief Financial Officer November 21, 1997
____________________________ (Principal Financial and
Henry Gabbay Accounting Officer)
</TABLE>
EXHIBIT INDEX
3.1 Articles of Incorporation of the Registrant
24.1 Power of Attorney (included on page II-5)
ANTHRACITE MORTGAGE CAPITAL, Inc.
ARTICLES OF INCORPORATION
The undersigned, being a natural person and
acting as an incorporator, does hereby adopt the follow-
ing Articles of Incorporation for the purpose of forming
a business corporation in the State of Maryland, pursuant
to the provisions of the Maryland General Corporation
Law. These Articles of Incorporation, as they may be
amended, supplemented or restated from time to time, are
referred to as the "Charter."
ARTICLE I
INCORPORATOR
The undersigned, ___________________, whose
address is _____________________________________________
_________, being at least 18 years of age, does hereby
form a corporation under the general laws of the State of
Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation")
is:
Anthracite Mortgage Capital, Inc.
ARTICLE III
PURPOSE
The purpose for which the Corporation is formed
is to engage in any lawful act or activity including,
without limitation or obligation, engaging in business as
a real estate investment trust ("REIT") under Sections
856 through 860 of the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code") for which
corporations may be organized under the general laws of
the State of Maryland as now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the
Corporation in the State of Maryland is c/o The
Prentice-Hall Corporation System Maryland, 11 East Chase
Street, Baltimore, Maryland 21202. The name and address
of the resident agent of the Corporation in the State of
Maryland is The Prentice-Hall Corporation System Mary-
land, 11 East Chase Street, Baltimore, Maryland 21202.
The resident agent is a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors.
5.1.1 Number of Directors. The business and
affairs of the Corporation shall be managed under the
direction of the Board of Directors. The number of direc-
tors of the Corporation shall be no less than three and
no more than nine. The number of directors may be in-
creased or decreased pursuant to the Bylaws, but shall
never be less than the minimum number required by the
General Laws of the State of Maryland now or hereafter in
force. The names of the directors who shall serve until
the first annual meeting of stockholders and until their
successors are elected and qualified are Laurence D.
Fink, Ralph Schlosstein and Hugh R. Frater.
The directors shall be divided into three
classes as follows: (1) the term of office of Class I
shall be until the 1998 annual meeting of stockholders
and until their successors shall be elected and have
qualified and thereafter shall be for three years and
until their successors shall be elected and have quali-
fied; (2) the term of office of Class II shall be until
the 1999 annual meeting of stockholders and until their
successors shall be elected and have qualified and there-
after shall be for three years and until their successors
shall be elected and have qualified; and (3) the term of
office of Class III shall be until the 2000 annual meet-
ing of stockholders and until their successors shall be
elected and have qualified and thereafter shall be for
three years and until their successors shall be elected
and have qualified. If the number of directors is
changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of direc-
tors in each class as nearly equal as possible. A direc-
tor elected by stockholders shall hold office until the
annual meeting for the year in which his or her term
expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from
office.
5.1.2 Election by Preferred Stockholders.
Whenever the holders of any one or more series of pre-
ferred stock of the Corporation shall have the right,
voting separately as a class, to elect one or more direc-
tors of the Corporation, the Board of Directors shall
consist of said directors so elected in addition to the
number of directors fixed as provided in paragraph 5.1.1
of this Article V or in the Bylaws. Notwithstanding the
foregoing, and except as otherwise may be required by
law, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right,
voting separately as a class, to elect one or more direc-
tors of the Corporation, the terms of the director or
directors elected by such holders shall expire at the
next succeeding annual meeting of stockholders.
Section 5.2 Independent Board of Directors.
5.2.1 Independent Majority. Notwithstanding
anything herein to the contrary, at all times from and
after the first annual meeting of stockholders (except
during a period not to exceed one hundred twenty (120)
days following the death, resignation, incapacity or
removal from office of a director prior to expiration of
the director's term of office), a majority of the Board
of Directors shall be "Independent Directors." "Indepen-
dent Director" shall mean any director who (a) does not
own greater than a de minimis interest in the "Manager"
(as defined below) or any of its "Affiliates," (as de-
fined below) other than the Corporation and any Person
controlled by the Corporation, and who (b) within the
last two years has not directly or indirectly (i) been an
officer of or employed by the Corporation or the Manager
or any of their Affiliates, (ii) been a director of the
Manager or any of its Affiliates other than the Corpora-
tion and any Person controlled by the Corporation, (iii)
performed more than a de minimis amount of 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 other than as a director
of the Corporation or any Person controlled by the Corpo-
ration.
5.2.2 Manager. The term "Manager" means the
Person engaged by the Corporation pursuant to a Manage-
ment Agreement (as that term is defined in Section 5.12)
to advise the Board of Directors and be responsible for
directing the day-to-day business affairs of the Corpora-
tion, including any Person to which the Person so engaged
subcontracts substantially all such functions.
5.2.3 Affiliate. "Affiliate" of a Person
shall mean any Person directly or indirectly controlling,
controlled by, or under common control with such other
Person.
5.2.4 Indirect Relationship. For the purposes
of this Section 5.2, an indirect relationship shall
include a direct relationship by a director's spouse,
children, parents or, siblings.
5.2.5 Business Relationship. For the purposes
of this Section 5.2, an interest, service or business
relationship automatically is not de minimis or is mate-
rial, as the case may be per se if the interest or gross
revenue involved exceeds 5% of the director's or other
Person's (i) annual gross revenue from all sources in
either of the last two years or (ii) net worth, on a fair
market value basis.
5.2.6 Person. "Person" means and includes any
natural person, corporation, partnership, association,
trust, limited liability company or any other legal
entity.
Section 5.3 Extraordinary Actions. Notwithstanding any
provision of law requiring the authorization of any
action by a greater proportion than a majority of the
total number of shares of all classes of capital stock or
of the total number of shares of any class of capital
stock, such action shall be valid and effective if autho-
rized by an affirmative vote of the holders of a majority
of the total number of shares of all classes outstanding
and entitled to vote thereon, except as otherwise provid-
ed in this Charter.
Section 5.4 Authorization by Board of Stock Issuance.
The Board of Directors may authorize the issuance from
time to time of shares of stock of the Corporation of any
class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock
of any class or series, whether now or hereafter autho-
rized, for such consideration as the Board of Directors
may deem advisable (or without consideration in the case
of a stock split or stock dividend), subject to such
restrictions or limitations, if any, as may be set forth
in this Charter.
Section 5.5 Preemptive Rights. No holder of any stock or
any other securities of the Corporation, whether now or
hereafter authorized, shall have any preemptive right to
subscribe for or purchase any stock or any other securi-
ties of the Corporation other than such, if any, as the
Board of Directors, in its sole discretion, may determine
and at such price or prices and upon such other terms as
the Board of Directors, in its sole discretion, may fix;
and any stock or other securities which the Board of
Directors may determine to offer for subscription may, as
the Board of Directors in its sole discretion shall
determine, be offered to the holders of any class, series
or type of stock or other securities at the time out-
standing to the exclusion of the holders of any or all
other classes, series or types of stock or other securi-
ties at the time outstanding.
Section 5.6 Indemnification.
5.6.1 The Corporation shall indemnify and hold
harmless and, without requiring a determination of the
ultimate entitlement to indemnification, pay reasonable
expenses in advance of the final disposition of any
proceeding to (A) its present and former directors and
officers, whether serving the Corporation or at its
request any other entity, to the full extent required or
permitted by the General Laws of the State of Maryland
now or hereafter in force, including the advance of
expenses under the procedures and to the full extent
permitted by law and (B) other employees and agents to
such extent as shall be authorized by the Board of Direc-
tors or the Corporation's Bylaws and be permitted by law.
The foregoing rights of indemnification shall not be
exclusive of any other rights to which those seeking
indemnification may be entitled. The Board of Directors
may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to
adopt, approve and amend from time to time such bylaws,
resolutions or contracts implementing such provisions or
such further indemnification arrangements as may be
permitted by law.
5.6.2 Any indemnification, or payment of
expenses in advance of the final disposition of any
proceeding, shall be made promptly, and in any event
within 60 days, upon the written request of the director
or officer entitled to seek indemnification (the "Indem-
nified Party"). The right to indemnification and advances
hereunder shall be enforceable by the Indemnified Party
in any court of competent jurisdiction, if (i) the Corpo-
ration denies such request, in whole or in part, or (ii)
no disposition thereof is made within 60 days. The Indem-
nified Party's costs and expenses incurred in connection
with successfully establishing his or her right to indem-
nification, in whole or in part, in any such action shall
also be reimbursed by the Corporation. It shall be a
defense to any action for advance for expenses that (a) a
determination has been made that the facts then known to
those making the determination would preclude indemnifi-
cation or (b) the Corporation has not received both (i)
an undertaking as required by law to repay such advances
in the event it shall ultimately be determined that the
standard of conduct has not been met and (ii) a written
affirmation by the Indemnified Party of such Indemnified
Party's good faith belief that the standard of conduct
necessary for indemnification by the Corporation has been
met.
5.6.3 No amendment of this Charter or repeal
of any of its provisions shall limit or eliminate the
right to indemnification provided hereunder with respect
to acts or omissions occurring prior to such amendment or
repeal.
Section 5.7 Determinations by Board. The determination
as to any of the following matters, made in good faith by
or pursuant to the direction of the Board of Directors
consistent with this Charter and in the absence of actual
receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established
by a court, shall be final and conclusive and shall be
binding upon the Corporation and every holder of shares
of its stock: the amount of the net income of the Corpo-
ration for any period and the amount of assets at any
time legally available for the payment of dividends,
redemption of its stock or the payment of other distribu-
tions on its stock; the amount of paid-in surplus, net
assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess
of profits over losses on sales of assets; the amount,
purpose, time of creation, increase or decrease, alter-
ation or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or
liability for which such reserves or charges shall have
been created shall have been paid or discharged); the
fair value, or any sale, bid or asked price to be applied
in determining the fair value, of any asset owned or held
by the Corporation; any matters relating to the acquisi-
tion, holding and disposition of any assets by the Corpo-
ration; whether and to what extent and at what times and
places and under what conditions and regulations the
books, accounts and documents of the Corporation shall be
open to the inspection of stockholders, except as other-
wise provided by statute and, except as so provided, no
stockholder shall have any right to inspect any book,
account or document of the Corporation unless authorized
to do so by resolution of the Board of Directors.
Section 5.8 REIT Qualification. The Corporation shall
seek to elect and maintain status as a REIT under the
Code. The Board of Directors shall use its reasonable
best efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code,
including, but not limited to, the ownership of its
outstanding stock, the nature of its assets, the sources
of its income, and the amount and timing of distributions
to its stockholders. The Board of Directors shall take
no action to disqualify the Corporation as a REIT or to
otherwise revoke the Corporation's election to be taxed
as a REIT without the affirmative vote of not less than
two-thirds of all of the votes ordinarily entitled to be
cast in the election of directors, voting together as a
single class.
Section 5.9 Removal of Directors. Any director, or the
entire Board of Directors, may be removed from office at
any time by the stockholders, but only for cause and then
only by the affirmative vote of not less than two-thirds
of all of the votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
Any director may be removed from office at any time with
or without cause by the affirmative vote of not less than
two-thirds of the remaining directors.
Section 5.10 Dissolution. The dissolution of the Corpo-
ration shall be approved by the affirmative vote of not
less than two-thirds of all of the votes ordinarily
entitled to be cast in the election of directors, voting
together as a single class; and the affirmative vote of
not less than two-thirds of the votes of any series or
class of stock expressly granted a series or class vote
on the dissolution of the Corporation in the resolution
provided for such series or class.
Section 5.11 Management Agreements. Subject to such
approval of the Independent Directors and other condi-
tions, if any, as may be required by any applicable
statute, rule or regulation, the Board of Directors may
engage a Manager to advise the Board of Directors and be
responsible for directing the day-to-day affairs of the
Corporation under the supervision of the Board of Direc-
tors pursuant to a written agreement (a "Management
Agreement"). The approval of any Management Agreement
and the renewal or termination thereof shall require the
affirmative vote of a majority of the Independent Direc-
tors.
Section 5.12 Amendment of Certain Provisions. Notwith-
standing any other provision of this Charter or the
Bylaws of the Corporation, the provisions of Sections 5.6
(other than 5.6.3) 5.8, 5.9, 5.10, 5.11 and 5.12 shall
not be amended, altered, changed or repealed without the
affirmative vote of not less than two-thirds of all of
the votes ordinarily entitled to be cast in the election
of directors, voting together as a single class.
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The total number of
shares of capital stock of all classes which the Corpora-
tion has authority to issue is five hundred million
(500,000,000) shares of capital stock, of which four
hundred million (400,000,000) shall be shares of common
stock, par value one tenth of one cent ($.001) per share,
amounting in aggregate par value to Four Hundred Thousand
Dollars ($400,000), and one hundred million (100,000,000)
shall be shares of preferred stock, par value one tenth
of one cent ($.001) per share, amounting in aggregate par
value to One Hundred Thousand Dollars ($100,000). The
total par value of all shares of capital stock which the
Corporation has authority to issue is $500,000. The
Board of Directors may classify and reclassify any unis-
sued shares of capital stock, whether now or hereafter
authorized, by setting or changing in any one or more
respects the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of
such shares. The Board of Directors of the Corporation
may from time to time issue shares of Preferred Stock, in
such series and with such preferences, conversion or
other rights, voting powers, restrictions, limitations as
to dividends, qualifications or other provisions as may
be fixed by the Board of Directors.
Section 6.2 Common Stock. Subject to Article VII, the
following is a description of the preferences, conversion
and other rights, voting powers, restrictions, limita-
tions as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the
Corporation:
6.2.1 Voting Rights. Each share of Common
Stock shall have one vote, and shall have no preference,
conversion, exchange, preemptive or cumulative voting
rights. Except as otherwise provided in respect of any
class of stock hereafter classified or reclassified, the
exclusive voting power for all purposes shall be vested
in the holders of the Common Stock. Shares of Common
Stock shall not have cumulative voting rights.
6.2.2 Dividends. Subject to the provisions of
law, any preferences of any class of stock hereafter
classified or reclassified and the provisions of any
marketing obligations or guarantees thereof, incurred by
the Corporation, dividends, including dividends payable
in shares of another class of the Corporation's stock,
may be paid ratably on the Common Stock at such time and
in such amounts as the Board of Directors may deem advis-
able.
6.2.3 Distribution Upon Dissolution. In the
event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the
holders of the Common Stock shall be entitled, together
with the holders of any other class of stock hereafter
classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding
up of the Corporation, to share ratably in the net assets
of the Corporation remaining after payment or provision
for payment of the debts and other liabilities of the
Corporation and the amount to which the holders of any
class of stock hereafter classified or reclassified
having a preference on distributions in the liquidation,
dissolution or winding up of the Corporation shall be
entitled.
Section 6.3 Classification/Reclassification.
6.3.1 Powers of the Board of Directors.
Subject to the provisions of this Charter, the power of
the Board of Directors to classify and reclassify any of
the shares of capital stock shall include, without limi-
tation, authority to classify or reclassify any unissued
shares of such stock into a class or classes of preferred
stock, preference stock, special stock or other stock,
and to divide and classify shares of any class into one
or more series of such class, by determining, fixing, or
altering one or more of the following:
(a) The distinctive designation of such
class or series and the number of shares to constitute
such class or series; provided that, unless otherwise
prohibited by the terms of such or any other class or
series, the number of shares of any class or series may
be decreased by the Board of Directors in connection with
any classification or reclassification of unissued shares
and the number of shares of such class or series may be
increased by the Board of Directors in connection with
any such classification or reclassification, and any
shares of any class or series which have been redeemed,
purchased, otherwise acquired or converted into shares of
Common Stock or any other class or series shall become
part of the authorized capital stock and be subject to
classification and reclassification as provided in this
sub-paragraph.
(b) Whether or not and, if so, the rates,
amounts and times at which, and the conditions under
which, dividends shall be payable on shares of such class
or series, whether any such dividends shall rank senior
or junior to or on a parity with the dividends payable on
any other class or series of stock, and the status of any
such dividends as cumulative, cumulative to a limited
extent or non-cumulative and as participating or
non-participating.
(c) Whether or not shares of such class
or series shall have voting rights, in addition to any
voting rights provided by law and, if so, the terms of
such voting rights.
(d) Whether or not shares of such class
or series shall have conversion or exchange privileges
and, if so, the terms and conditions thereof, including
provision for adjustment of the conversion or exchange
rate in such events or at such times as the Board of
Directors shall determine.
(e) Whether or not shares of such class
or series shall be subject to redemption and, if so, the
terms and conditions of such redemption, including the
date or dates upon or after which they shall be redeem-
able and the amount per share payable in case of redemp-
tion, which amount may vary under different conditions
and at different redemption dates; and whether or not
there shall be any sinking fund or purchase account in
respect thereof, and if so, the terms thereof.
(f) The rights of the holders of shares
of such class or series upon the liquidation, dissolution
or winding up of the affairs of, or upon any distribution
of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary,
may vary at different dates, and whether such rights
shall rank senior or junior to or on a parity with such
rights of any other class or series of stock.
(g) Whether or not there shall be any
limitations applicable, while shares of such class or
series are outstanding, upon the payment of dividends or
making of distributions on, or the acquisition of, or the
use of moneys for purchase or redemption of, any stock of
the Corporation, or upon any other action of the Corpora-
tion, including action under this sub-paragraph, and, if
so, the terms and conditions thereof.
(h) Any other preferences, rights, re-
strictions, including restrictions on transferability,
and qualifications of shares of such class or series, not
inconsistent with law and this Charter.
6.3.2 Ranking. For the purposes hereof and of
any articles supplementary to this Charter providing for
the classification or reclassification of any shares of
capital stock or of any other Charter document of the
Corporation (unless otherwise provided in any such arti-
cles or document), any class or series of stock of the
Corporation shall be deemed to rank:
(a) prior to another class or series
either as to dividends or upon liquidation, if and to the
extent the holders of such class or series shall be
entitled to the receipt of dividends or of amounts dis-
tributable on liquidation, dissolution or winding up, as
the case may be, in preference or priority to holders of
such other class or series;
(b) on a parity with another class or
series either as to dividends or upon liquidation, wheth-
er or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be
different from those of such others, if and to the extent
the holders of such class or series of stock shall be
entitled to receipt of dividends or amounts distributable
upon liquidation, dissolution or winding up, as the case
may be, in proportion to their respective dividend rates
or redemption or liquidation prices, without preference
or priority over the holders of such other class or
series; and
(c) junior to another class or series
either as to dividends or upon liquidation, if and to the
extent the rights of the holders of such class or series
shall be subject or subordinate to the rights of the
holders of such other class or series in respect of the
receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may
be.
Section 6.4 Charter and Bylaws. All persons who shall
acquire stock in the Corporation shall acquire the same
subject to the provisions of this Charter and the Bylaws
of the Corporation.
ARTICLE VII
Section 7.1 Restrictions on Transfer.
7.1.1 Definitions. For purposes of this
Article VII, the following terms shall have the following
meanings:
(a) "Beneficial Ownership" shall mean
ownership of shares of Equity Stock by a Person who would
be treated as an owner of such shares of Equity Stock
either directly or indirectly through the application of
Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns," and "Beneficially Owned" shall have
correlative meanings.
(b) "Beneficiary" shall mean, with re-
spect to any Trust, one or more organizations described
in each of Section 170(b)(1)(A) (other than clauses (vii)
or (viii) thereof) and Section 170(c)(2) of the Code that
are named by the Corporation as the beneficiary or bene-
ficiaries of such Trust, in accordance with the provi-
sions of Section 7.2.1.
(c) "Board of Directors" shall mean the
Board of Directors of the Corporation.
(d) "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 a day, the
average of the closing bid and asked prices, regular way,
for such shares, in either case as reported in the prin-
cipal 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 System,
or, if such system is no longer in use, the principal
other automated quotation system that may then be in use
or, if such shares are not quoted by any such organiza-
tion, 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 Corporation'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 Corporation's
Board of Directors.
(e) "Constructive Ownership" shall mean
ownership of shares of Equity Stock by a Person who would
be treated as an owner of such shares of Equity Stock
either directly or indirectly through the application of
Section 318 of the Code, as modified by Section 856(d)(5)
of the Code. The terms "Constructive Owner," "Construc-
tively Owns," and "Constructively Owned" shall have
correlative meanings.
(f) "Disqualified Person" means (A) the
United States, any State or political subdivision there-
of, any foreign government, any international organiza-
tion, or any agency or instrumentality of any of the
foregoing, (B) any organization (other than a cooperative
described in Section 521 of the Code) which is exempt
from tax unless such organization is subject to the tax
imposed by Section 511 of the Code, and (c) any organiza-
tion described in Section 1381(a)(2)(c) of the Code.
(g) "Equity Stock" shall mean the Common
Stock and the preferred stock of the Corporation, includ-
ing the Common Stock and the preferred stock of the
Corporation that are held as Shares-in-Trust in accor-
dance with the provisions of Section 7.2.
(h) "Excess Shares" shall mean the number
of shares owned (or deemed to be owned by virtue of the
attribution provisions of the Code) or held, directly or
indirectly, in excess of 9.8% of the outstanding shares
of Common Stock or any series of preferred stock by any
stockholder.
(i) "Initial Public Offering" means the
sale of shares of Common Stock pursuant to the
Corporation's first effective registration statement for
such shares of Common Stock filed under the Securities
Act of 1933, as amended.
(j) "Intended Transferee" shall mean,
with respect to any purported Transfer or Non-Transfer
Event, any Person who, but for the provisions of Section
7.1.3, would own record title to shares of Equity Stock.
(k) "Market Price" on any date shall
mean, with respect to a class or series of outstanding
shares of the Corporation's stock, the Closing Price for
such stock on such date.
(l) "Non-Transfer Event" shall mean an
event other than a purported Transfer that would cause
any Person to Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit,
including, but not limited to, the granting of any option
or entering into any agreement for the sale, transfer or
other disposition of shares of Equity Stock or the sale,
transfer, assignment or other disposition of any securi-
ties or rights convertible into or exchangeable for
shares of Equity Stock.
(m) "Person" shall mean an individual,
corporation, partnership, estate, trust, a portion of a
trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of
Section 509(a) of the Code, joint stock company or other
entity and also includes a "group" as that term is used
for purposes of Section 13(d)(3) of the Securities Ex-
change Act of 1934, as amended.
(n) "Restriction Termination Date" shall
mean the first day after the date of the Initial Public
Offering on which (i) the Board of Directors determines
that it is no longer in the best interests of the Corpo-
ration to attempt to, or continue to, qualify as a REIT
and (ii) there is an affirmative vote of not less than
two-thirds of all of the votes ordinarily entitled to be
cast in the election of directors, voting together as a
single class.
(o) "Trading Day" shall mean any day
other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or
obligated by law or executive order to close.
(p) "Transfer" (as a noun) shall mean any
sale, transfer, gift, assignment, devise or other dispo-
sition of shares of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or benefi-
cially and whether by operation of law or otherwise.
"Transfer" (as a verb) shall not have the correlative
meaning.
(q) "Trust" shall mean any separate trust
created pursuant to Section 7.1.3 and administered in
accordance with the terms of Section 7.2 hereof, for the
exclusive benefit of any Beneficiary.
(r) "Trustee" shall mean any Person or
entity unaffiliated with both the Corporation and any
Prohibited Owner, such Trustee to be designated by the
Corporation to act as trustee of any Trust, or any suc-
cessor trustee thereof.
7.1.2 Restriction on Transfers.
(a) Except as provided in Section 7.1.7,
from the date of the Initial Public Offering and prior to
the Restriction Termination Date, (i) no Person may
Beneficially Own or Constructively Own Excess Shares and
(ii) any Transfer that, if effective, would result in any
Person Beneficially Owning or Constructively Owning
Excess Shares shall be void ab initio as to the Transfer
of that number of shares which would otherwise constitute
Beneficial Ownership or Constructive Ownership by such
Person, and the Intended Transferee shall acquire no
rights in such Excess Shares.
(b) Except as provided in Section 7.1.7,
from the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer that, if
effective, would result in shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined
without reference to any rules of attribution) shall be
void ab initio as to the Transfer of that number of
shares which would be otherwise beneficially owned (de-
termined without reference to any rules of attribution)
by the transferee, and the Intended Transferee shall
acquire no rights in such shares of Equity Stock.
(c) From the date of the Initial Public
Offering and prior to the Restriction Termination Date,
any Transfer of shares of Equity Stock that, if effec-
tive, would result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code
shall be void ab initio as to the Transfer of that number
of shares of Equity Stock which would cause the Corpora-
tion to be "closely held" within the meaning of Section
856(h) of the Code, and the Intended Transferee shall
acquire no rights in such shares of Equity Stock.
(d) From the date of the Initial Public
Offering and prior to the Restriction Termination Date,
any Transfer of shares of Equity Stock that, if effec-
tive, would cause the Corporation to Constructively Own
10% or more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Sec-
tion 856(d)(2)(B) of the Code, shall be void ab initio as
to the Transfer of that number of shares of Equity Stock
which would cause the Corporation to Constructively Own
10% or more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Sec-
tion 856(d)(2)(B) of the Code, and the Intended Transfer-
ee shall acquire no rights in such excess shares of
Equity Stock.
(e) From the date of the Initial Public
Offering and prior to the Restriction Termination Date,
any Transfer of Shares of Equity Stock that, if effec-
tive, would result in shares of Equity Stock being bene-
ficially owned by a Disqualified Person shall be void ab
initio as to the Transfer of that number of shares which
would be otherwise beneficially owned by the transferee,
and the Intended Transferee shall acquire no rights in
such shares of Equity Stock.
7.1.3 Transfer to Trust.
(a) If, notwithstanding the other provi-
sions contained in this Section 7.1, at any time after
the Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either
Beneficially Own or Constructively Own Excess Shares,
then, (i) except as otherwise provided in Section 7.1.7,
the Intended Transferee shall acquire no right or inter-
est (or, in the case of a Non-Transfer Event, the Person
holding record title to the shares of Equity Stock Bene-
ficially Owned or Constructively Owned by such Beneficial
Owner or Constructive Owner, shall cease to own any right
or interest) in such number of shares of Equity Stock
which would cause such Intended Transferee to Beneficial-
ly Own or Constructively Own Excess Shares, (ii) such
Excess Shares (rounded up to the nearest whole share)
shall be transferred automatically and by operation of
law to the Trust to be held in accordance with that
Section 7.2, and (iii) the Intended Transferee shall
submit such number of shares of Equity Stock to the
Corporation for registration in the name of the Trustee.
(b) If, notwithstanding the other provi-
sions contained in this Section 7.1, at any time after
the Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result
in the shares of Equity Stock being beneficially owned by
fewer than 100 Persons (determined without reference to
any rules of attribution), (ii) result in the Corporation
being "closely held" within the meaning of Section 856(h)
of the Code, (iii) result in the shares of Equity Stock
being beneficially owned by a Disqualified Person, or
(iv) cause the Corporation to Constructively Own 10% or
more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Sec-
tion 856(d)(2)(B) of the Code, then (x) the Intended
Transferee shall not acquire any right or interest (or,
in the case of a Non-Transfer Event, the Person holding
record title of the shares of Equity Stock with respect
to which such Non-Transfer Event occurred, shall cease to
own any right or interest) in such number of shares of
Equity Stock, the ownership of which by such Intended
Transferee or record holder would (A) result in the
shares of Equity Stock being beneficially owned by fewer
than 100 Persons (determined without reference to any
rules of attribution), (B) result in the Corporation
being "closely held" within the meaning of Section 856(h)
of the Code, (C) result in the shares of Equity Stock
being beneficially owned by a Disqualified Person, or (D)
cause the Corporation to Constructively Own 10% or more
of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Sec-
tion 856(d)(2)(B) of the Code, (y) such number of shares
of Equity Stock (rounded up to the nearest whole share)
shall be designated Shares-in-Trust and, in accordance
with the provisions of Section 7.2, transferred automati-
cally and by operation of law to the Trust to be held in
accordance with that Section 7.2, and (z) the Intended
Transferee shall submit such number of shares of Equity
Stock to the Corporation for registration in the name of
the Trustee.
7.1.4 Remedies For Breach. If the Corpora-
tion, or its designees, shall at any time determine in
good faith that a Transfer has taken place in violation
of Section 7.1.2 or that a Person intends to acquire or
has attempted to acquire Beneficial Ownership or Con-
structive Ownership of any shares of Equity Stock in
violation of Section 7.1.2, the Corporation shall take
such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition,
including, but not limited to, refusing to give effect to
such Transfer on the books of the Corporation or insti-
tuting proceedings to enjoin such Transfer or acquisi-
tion.
7.1.5 Notice of Restricted Transfer. Any
Person who acquires or attempts to acquire shares of
Equity Stock in violation of Section 7.1.2, or any Person
who owned shares of Equity Stock that were transferred to
the Trust pursuant to the provisions of Section 7.1.2,
shall immediately give written notice to the Corporation
of such event and shall provide to the Corporation such
other information as the Corporation may request in order
to determine the effect, if any, of such Transfer or
Non-Transfer Event, as the case may be, on the
Corporation's status as a REIT.
7.1.6 Owners Required To Provide Information.
From the date of the Initial Public Offering and prior to
the Restriction Termination Date:
(a) Every Beneficial Owner or Construc-
tive Owner of more than 5%, or such lower percentages as
required pursuant to regulations under the Code, of the
outstanding shares of all classes of capital stock of the
Corporation shall, within 30 days after January 1 of each
year, provide to the Corporation a written statement or
affidavit stating the name and address of such Beneficial
Owner or Constructive Owner, the number of shares of
Equity Stock Beneficially Owned or Constructively Owned,
and a description of how such shares are held. Each such
Beneficial Owner or Constructive Owner shall provide to
the Corporation such additional information as the Corpo-
ration may request in order to determine the effect, if
any, of such Beneficial Ownership or Constructive Owner-
ship on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
(b) Each Person who is a Beneficial Owner
or Constructive Owner of shares of Equity Stock and each
Person (including the stockholder of record) who is
holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a
written statement or affidavit stating such information
as the Corporation may request in order to determine the
Corporation's status as a REIT and to ensure that no
Person owns Excess Shares.
7.1.7 Exception. The restrictions on the
ownership of Excess Shares shall not apply to the acqui-
sition of shares of Equity Stock by an underwriter that
participates in a public offering of such shares for a
period of 90 days following the purchase by such under-
writer of such shares provided that the restrictions
contained in Section 7.1.2 will not be violated following
the distribution by such underwriter of such shares. In
addition, the Board of Directors, upon receipt of a
ruling from the Internal Revenue Service or an opinion of
counsel in each case to the effect that the restrictions
contained in Section 7.2.2, Section 7.2.3, and/or Section
7.2.4 hereof will not be violated, may exempt a Person
from the restrictions on the ownership of Excess Shares
provided that (i) the Board of Directors obtains such
representations and undertakings from such Person as are
reasonably necessary to ascertain that no individual's
Beneficial Ownership or Constructive Ownership of shares
of Equity Stock will violate the restrictions on the
ownership of Excess Shares and (ii) such Person agrees in
writing that any violation or attempted violation will
result in such transfer to the Trust of shares of Equity
Stock pursuant to Section 7.1.3.
Section 7.2 Shares Transferred to a Trust.
7.2.1 Trust. Any shares of Equity Stock
transferred to a Trust pursuant to Section 7.1.3 hereof
shall be held for the exclusive benefit of one or more
charitable beneficiaries (the "Charitable Beneficiary").
The Corporation shall name a Charitable Beneficiary for
each Trust within twenty days after determining the need
for such Trust hereunder. Any transfer to a Trust pursu-
ant to Section 7.1.3 shall be effective as of the close
of business on the business day prior to the date of the
Transfer or Non-Transfer Event that results in the trans-
fer to the Trust. Shares held in a Trust shall remain
issued and outstanding shares of Equity Stock of the
Corporation and shall be entitled to the same rights and
privileges on identical terms and conditions as are all
other issued and outstanding shares of Equity Stock of
the same class and series.
7.2.2 Dividend Rights. The Trust, as record
holder of shares transferred to the Trust pursuant to
Section 7.1.3, shall be entitled to receive all dividends
and distributions as may be declared by the Board of
Directors on such shares of Equity Stock and shall hold
such dividends or distributions in trust for the exclu-
sive benefit of the Charitable Beneficiary. The Intended
Transferee with respect to the shares held in the Trust
shall repay to the Trust the amount of any dividends or
distributions received by it that (i) are attributable to
such shares of Equity Stock and (ii) which dividends or
distributions were paid to the Intended Transferee prior
to the discovery by the Corporation that such shares have
been transferred to the Trust. The Corporation shall
take all measures that it determines reasonably necessary
to recover the amount of any such dividend or distribu-
tion paid to an Intended Transferee, including, if neces-
sary, withholding any portion of future dividends or
distributions payable on shares of Equity Stock Benefi-
cially Owned or Constructively Owned by the Intended
Transferee; and, as soon as reasonably practicable fol-
lowing the Corporation's receipt or withholding thereof,
shall pay over to the Trust for the benefit of the Chari-
table Beneficiary the dividends so received or withheld,
as the case may be.
7.2.3 Rights Upon Liquidation. In the event
of any voluntary or involuntary liquidation, dissolution
or winding up of, or any distribution of the assets of,
the Corporation, holders of shares in the Trust shall be
entitled to receive, ratably with each other holder of
shares of Equity Stock of the same class or series, that
portion of the assets of the Corporation which is avail-
able for distribution to the holders of such class and
series of shares of Equity Stock. The Trust shall dis-
tribute to the Intended Transferee the amounts received
upon such liquidation, dissolution, or winding up, or
distribution; provided, however, that the Intended Trans-
feree shall not be entitled to receive amounts pursuant
to this Section 7.2.3 in excess of, in the case of a
purported Transfer in which the Intended Transferee gave
value for shares of Equity Stock and which Transfer
resulted in the transfer of the shares to the Trust, the
price per share, if any, such Intended Transferee paid
for the shares of Equity Stock and, in the case of a
Non-Transfer Event or Transfer in which the Intended
Transferee did not give value for such shares (e.g., if
the shares were received through a gift or devise) and
which Non-Transfer Event or Transfer, as the case may be,
resulted in the transfer of shares to the Trust, the
price per share equal to the Market Price on the date of
such Non-Transfer Event or Transfer. Any remaining
amount in such Trust shall be distributed to the Charita-
ble Beneficiary.
7.2.4 Voting Rights. The Trustee shall be
entitled to vote all shares held in the Trust for the
exclusive benefit of the Charitable Beneficiary. Any
vote by an Intended Transferee as a holder of shares of
Equity Stock prior to the discovery by the Corporation
that the shares of Equity Stock are held in the Trust
shall, subject to applicable law, be rescinded and shall
be void ab initio with respect to such shares and the
Intended Transferee shall be deemed to have given, as of
the close of business on the business day prior to the
date of the purported Transfer or Non-Transfer Event that
results in the transfer to the Trust of shares of Equity
Stock under Section 7.1.3, an irrevocable proxy to the
Trustee to vote the shares held in the Trust in the
manner in which the Trustee, in its sole and absolute
discretion, desires.
7.2.5 Compensation to Record Holder of Shares
of Equity Stock that Become Shares-in-Trust. Within 20
days of receiving notice from the Corporation that shares
of Common stock have been transferred to the Trust, the
Trustee shall sell the shares held a person, designated
by the Trustee, whose ownership of the violate the limi-
tations set forth in this Article VII. Upon such sale,
the interest of the Charitable Beneficiary in the shares
sold shall terminate and the Trustee shall distribute the
proceeds of the net 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. The Charitable Beneficiary and
Intended Transferee waive any and all claims that they
may have against the Trustee and the Trust arising out of
the disposition of shares held in the Trust, except for
claims arising out of the gross negligence or willful
misconduct of, or any failure to make payments in accor-
dance with this Section 7.2, by such Trustee or the
Corporation.
7.2.6 Purchase Right in Shares-in-Trust.
Shares of Common Stock transferred to the Trustee shall
be deemed to have been offered for sale to the Corpora-
tion, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case
of a devise or gift, the Market Price at the time of such
devise or gift), and (ii) the Market Price on the date
the Corporation, or its designee, accepts such offer.
The Corporation shall have the right to accept such offer
until the Trustee has sold shares held in the Trust.
Upon such a sale to the Corporation, the interest of the
Charitable Beneficiary in the shares sold shall terminate
and the Trustee shall distribute the net proceeds of the
sale to the Intended Transferee.
Section 7.3 Remedies Not Limited. Nothing contained in
this Article VII shall limit the authority of the Corpo-
ration to take such other action as it deems necessary or
advisable to protect the Corporation and the interests of
its stockholders by preservation of the Corporation's
status as a REIT and to ensure that no Person owns or
holds Excess Shares.
Section 7.4 Ambiguity. In the case of an ambiguity in
the application of any of the provisions of this Article
VII, including any definition contained in Section 7.1.1,
the Board of Directors shall have the power to determine
the application of the provisions of this Article VII
with respect to any situation based on the facts known to
it.
Section 7.5 Legend. From the date of the Initial Public
Offering and prior to the Restriction Termination Date,
each certificate for shares of Equity Stock shall bear
the following legend:
"The shares of Common or Preferred Stock
represented by this certificate are subject to
restrictions on transfer for the purpose of the
Corporation's maintenance of its status as a real
estate investment trust under the Internal Revenue
Code of 1986, as amended (the "Code"). No Person
may (i) Beneficially Own or Constructively Own
shares of Common Stock in excess of 9.8% of the
number of outstanding shares of Common Stock, (ii)
Beneficially Own or Constructively Own shares of any
class or series of Preferred Stock in excess of 9.8%
of the number of outstanding shares of such class or
series of Preferred Stock, (iii) beneficially own
shares of Equity Stock that would result in the
shares of Equity Stock being beneficially owned by
fewer than 100 Persons (determined without reference
to any rules of attribution), (iv) beneficially own
shares of Equity Stock that would result in the
shares of Equity Stock being beneficially owned by
(A) the United States, any State or political subdi-
vision thereof, any foreign government, any interna-
tional organization, or any agency or instrumentali-
ty of any of the foregoing, (B) any organization
(other than a cooperative described in Section 521
of the Code) which is exempt from tax unless such
organization is subject to the tax imposed by Sec-
tion 511 of the Code, or (C) any organization de-
scribed in Section 1381(a)(2)(C) of the Code, (v)
Beneficially Own shares of Equity Stock that would
result in the Corporation being "closely held" under
Section 856(h) of the Code, or (vi) Constructively
Own shares of Equity Stock that would cause the
Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's
real property, within the meaning of Section
856(d)(2)(B) of the Code. Any Person who attempts
to Beneficially Own or Constructively Own shares of
Equity Stock in excess of the above limitations must
immediately notify the Corporation in writing. If
the restrictions above are violated, the shares of
Equity Stock represented hereby will be transferred
automatically and by operation of law to a Trust and
shall be designated Shares-in-Trust. All capital-
ized terms in this legend have the meanings defined
in the Corporation's Charter, as the same may be
further amended from time to time, a copy of which,
including the restrictions on transfer, will be sent
without charge to each stockholder who so requests."
Section 7.6 Severability. If any provision of this
Article VII or any application of any such provision is
determined to be invalid by any federal or state court
having jurisdiction over the issues, the validity of the
remaining provisions shall not be affected and other
applications of such provision shall be affected only to
the extent necessary to comply with the determination of
such court.
Section 7.7 Exchange Transactions. Nothing in this
Article VII shall preclude the settlement of any transac-
tion entered into through the facilities of any national
securities exchange or automated inter-dealer quotation
system. The fact that the settlement of any transaction
is so permitted shall not negate the effect of any other
provision of this Article VII and any transferee in such
a transaction shall be subject to all of the provisions
and limitations set forth in this Article VII.
Section 7.8 Enforcement. The Corporation is authorized
specifically to seek equitable relief, including injunc-
tive relief, to enforce the provisions of this Article
VII.
Section 7.9 Non-Waiver. No delay or failure on the part
of the Corporation or the Board of Directors in exercis-
ing any right hereunder shall operate as a waiver of any
right of the Corporation or the Board of Directors, as
the case may be, except to the extent specifically waived
in writing.
Section 7.10 Headings of Subdivisions. The headings of
the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of
the provision hereof.
Section 7.11 Amendment. Notwithstanding any other
provision of this Charter or the Bylaws of the Corpora-
tion, the provisions of Section 7 shall not be amended,
altered, changed or repealed without the affirmative vote
of not less than two-thirds of all of the votes ordinari-
ly entitled to be cast in the election of directors,
voting together as a single class; provided, however,
that without the approval of stockholders, the Board of
Directors may amend this Charter or By Laws of the Corpo-
ration to make any change necessary or, in the opinion of
the Board of Directors, advisable to comply with changes
in the Code imposing additional or different transfer
restrictions on stockholders of any entity seeking to
qualify as a REIT.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to
time to make any amendments of this Charter which may now
or hereafter be authorized by law, including any amend-
ments changing the terms or contract rights, as expressly
set forth in this Charter, of any of its outstanding
stock by classification, reclassification or otherwise
but no such amendment which changes such terms or con-
tract rights of any of its outstanding stock shall be
valid unless such amendment shall have been authorized by
not less than a majority of the aggregate number of the
votes entitled to be cast thereon or such higher vote as
may be required by this Charter or law.
ARTICLE IX
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted,
no director or officer of the Corporation shall be per-
sonally liable to the Corporation or its stockholders for
money damages. No amendment of this Charter or repeal of
any of its provisions shall limit or eliminate the limi-
tation on liability provided to directors and officers
hereunder with respect to any act or omission occurring
prior to such amendment or repeal.
IN WITNESS WHEREOF, I have signed these Arti-
cles of Incorporation acknowledging the same to be my
act, on November ___, 1997
WITNESS:
_______________________ __________________________
EXHIBIT 24.1
We, the undersigned directors and officers of Anthracite
Mortgage Capital Inc., do hereby constitute and appoint
___________________ and ___________________, or either of them, our true
and lawful attorneys and agents, to do any and all acts and things in our
name and behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may
deem necessary or advisable to enable said corporation to comply with the
Securities Act of 1933, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission, in connection
with this Registration Statement, including specifically, but without
limitation, power and authority to sign for us or any of us in our names
and in the capacities indicated below, any and all amendments (including
post-effective amendment) to this Registration Statement, or any related
registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended; and we do
hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereby.
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.
<TABLE>
<S> <C> <C>
/s/ LAURENCE D. FINK Chairman of the Board November 21, 1997
___________________________
Laurence D. Fink
/s/ HUGH R. FRATER President (Principal November 21, 1997
____________________________ Executive Officer)
Hugh R. Frater
/s/ HENRY GABBAY Chief Financial Officer November 21, 1997
____________________________ (Principal Financial and
Henry Gabbay Accounting Officer)
</TABLE>
