As filed with the Securities and Exchange Commission on February 5, 1998
Registration No. 333-40813
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
ANTHRACITE 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 Director Executive Offices)
-----------------
Hugh R. Frater
President
Anthracite 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:
VINCENT J. PISANO, ESQ. GEORGE C. HOWELL III, ESQ.
SKADDEN, ARPS, SLATE RANDOLPH F. TOTTEN, ESQ.
MEAGHER & FLOM LLP HUNTON & WILLIAMS
919 THIRD AVENUE 951 EAST BYRD STREET
NEW YORK, NEW YORK 10022 RICHMOND, VIRGINIA 23219
TELEPHONE: (212) 735-2790 TELEPHONE: (804) 788-8200
FACSIMILE: (212) 735-2000 FACSIMILE: (804) 788-8218
-----------------
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
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TITLE OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) SHARE PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par 330,000 shares $20.00 $6,600,000 $ (3)
value
$0.01 per share
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</TABLE>
(1) Includes [ ] shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any (the "Underwriting).
(2) Estimated based on a bona fide estimate of the maximum offering
price of $20.00 solely for the purpose of calculating the
registration fee pursuant to Rule 457(a) of the Securities Act of
1933.
(3) A fee of $2,000.00 was paid on November 21, 1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
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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.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY __, 1998
PROSPECTUS
__________ SHARES
ANTHRACITE CAPITAL, INC.
COMMON STOCK
Anthracite Capital, Inc. (the "Company") is a Maryland corporation
organized in November 1997 that will 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, future offerings of
equity securities 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
operations will be managed by BlackRock Financial Management Inc. (the
"Manager"), a subsidiary of PNC Bank Corp ("PNC"), in which the Company
has no ownership interest.
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 all of the equity ownership of the Company,
except that PNC has agreed to purchase directly from the Company, at a
price equal to the initial public offering price less the Underwriters'
discount, a number of shares of Common Stock such that following
completion of the Offering and the Underwriters' exercise of the
over-allotment option, if any, PNC will own 4.9% of the shares of Common
Stock outstanding.
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 will be made to list the
Common Stock on the NASDAQ National Market under the symbol "[ ]MC."
Defined terms used herein are set forth in the Glossary commencing on
page __.
--------------
SEE "RISK FACTORS" COMMENCING ON PAGE __ FOR A DISCUSSION OF
MATERIAL RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY, INCLUDING:
o The Company and the Manager have common officers and directors,
which may present conflicts of interest in the Company's dealings
with the Manager and its Affiliates, including the Company's
purchase of assets from the Manager's Affiliates and the Manager's
allocation of investment opportunities to the Company;
o The Company was organized in November 1997 and has no operating
history, no material assets, no identified investments and no
established financing sources; the Company will face substantial
competition in acquiring suitable investments, which could increase
their cost; delays in investing the proceeds of the offering would
result in reduced income to the Company;
o The Company is totally reliant on the Manager, the Manager has
never managed a REIT and there can be no assurance that the past
experience of the Manager will be sufficient to successfully manage
the business of the Company;
o The yield on the Company's investments, and the value of the Company's
Common Stock, will be sensitive to changes in prevailing interest
rates and changes in prepayment rates, which may result in a
mismatch between the Company's borrowing rates and asset yields and
consequently reduce or eliminate net income from the Company's
investments;
o The Company's operations are expected to be highly leveraged and
there are no limitations on borrowings, 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 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 Director and non-payment of
interest;
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 taxed as a regular corporation if it fails to
qualify or maintain its qualification as a REIT, which would reduce
earnings and cash available for distribution to stockholders;
o The Company's investment and operating policies and strategies may be
changed at any time without the consent of stockholders;
o The Management Agreement provides for incentive fees payable to the
Manager based on certain performance criteria, which could result
in the Manager recommending riskier or more speculative investments;
and
o Stockholders will be subject to significant potential dilution from
future equity offerings, including offerings of preferred stock.
o The Company's activities, structure and operations may be adversely
affected by changes in the tax laws applicable to REITs;
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY
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<S> <C> <C> <C>
PER SHARE $ $ $
TOTAL (3) $ $ $
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</TABLE>
(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 A 30-DAY OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
[ ] ADDITIONAL SHARES OF COMMON STOCK AT THE SAME TERMS
AND CONDITIONS AS SET FORTH ABOVE. IF SUCH OPTION IS EXERCISED IN FULL,
THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNT AND PROCEEDS TO THE
COMPANY WILL BE $_______, $_______, AND $______, RESPECTIVELY. SEE
"UNDERWRITING."
-----------------
THE SHARES OF COMMON STOCK ARE BEING OFFERED BY THE SEVERAL UNDERWRITERS,
SUBJECT TO PRIOR SALE, WHEN, AS AND IF ISSUED TO AND ACCEPTED BY THE
UNDERWRITERS AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY COUNSEL
FOR THE UNDERWRITERS AND CERTAIN OTHER CONDITIONS. THE UNDERWRITERS
RESERVE THE RIGHT TO WITHDRAW, CANCEL OR MODIFY SUCH OFFER AND TO REJECT
ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE SHARES OF
COMMON STOCK WILL BE MADE IN NEW YORK, NEW YORK ON OR ABOUT _______,
1998.
----------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
----------------
The date of this Prospectus is _________, 1998.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF
THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE
THE MARKET PRICE, 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."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING
GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
----------------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS,"
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.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY...........................................................1
THE COMPANY..................................................................1
GENERAL...................................................................1
INVESTMENT STRATEGY.......................................................1
RELATIONSHIP WITH PNC.....................................................2
SUMMARY RISK FACTORS.........................................................3
CREDIT RISK MANAGEMENT.......................................................4
THE MANAGER..................................................................4
GENERAL...................................................................4
THE MANAGEMENT AGREEMENT..................................................5
MANAGEMENT COMPENSATION...................................................5
CONFLICTS OF INTEREST OF THE MANAGER.........................................6
TAX STATUS OF THE COMPANY....................................................7
CERTAIN BENEFITS TO EXISTING STOCKHOLDER, DIRECTORS AND OFFICERS.............7
INDUSTRY TRENDS..............................................................7
DIVIDEND POLICY AND DISTRIBUTIONS............................................8
THE OFFERING.................................................................8
RISK FACTORS.................................................................9
GENERAL......................................................................9
CONFLICTS OF INTEREST OF THE MANAGER MAY RESULT IN DECISIONS
THAT DO NOT FULLY REFLECT STOCKHOLDERS' BEST INTERESTS....................9
NO OPERATING HISTORY; NO IDENTIFIED ASSETS; NO ESTABLISHED FINANCING........10
DEPENDENCE ON THE MANAGER; TERMINATION OF MANAGEMENT AGREEMENT..............10
INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS,
NET INCOME AND COMMON STOCK..............................................11
General ................................................................11
Interest Rate Mismatch Could Occur Between Asset Yields and Borrowing
Rates Resulting in Decreased Yield....................................11
Inverted Yield Curve Adversely Affects Income............................11
Prepayment Rates Can Increase, Thus Adversely Affecting Yields...........11
Ownership of Non-Investment Grade Mortgage Assets Subject To Increased
Risk of Loss...........................................................12
RISK OF LOSS ON MORTGAGE LOANS...........................................12
Multifamily and Commercial Loans Involve a Greater Risk of Loss than
Single Family Loans...................................................13
Volatility of Values of Mortgaged Properties May Affect Adversely the
Company's Mortgage Loans...............................................13
Construction, Bridge and Mezzanine Loans Involve Greater Risks of
Loss than Loans Secured by Income Producing Properties................13
Distressed Mortgage Loans May Have Greater Default Risks than
Performing Loans......................................................13
Risks Related to Investments in Real Property............................13
SIGNIFICANT LEVERAGE INCREASES EXPOSURE TO LOSS..........................14
HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES.....14
TAX, LEGAL AND OTHER RISKS..................................................15
Failure to Maintain REIT Status would have Adverse Tax Consequences......15
Risk of Changes in the Tax Law Applicable to REITs.......................16
Risk the Potential Future Offerings Could Dilute the Interest of
Holders of Common Stock...............................................16
Future Revisions in Policies and Strategies Without Stockholder Consent
Create Uncertainty for Investors......................................16
Significant Competition May Adversely Affect the Company's Ability to
Acquire Assets........................................................16
Failure to Maintain Exclusion from the Investment Company Act Would
Restrict the Company's Operating Flexibility..........................17
Failure to Develop a Public Market May Result in a Decrease in Market
Price.................................................................17
Temporary Investment in Short-term Investments Will Reduce the Earnings
of the Company........................................................17
Risk of Adverse Tax Treatment of Excess Inclusion Income.................17
Restrictions on Ownership of the Common Stock............................18
Possible Environmental Liabilities....................................19
Investments May Be Illiquid and Their Value May Decrease.................19
Plans Should Consider ERISA Risks of Investing in Common Stock...........19
Year 2000 Compliance.....................................................19
USE OF PROCEEDS.............................................................20
DIVIDEND AND DISTRIBUTION POLICY............................................20
CAPITALIZATION..............................................................21
THE COMPANY.................................................................22
GENERAL..................................................................22
INVESTMENT STRATEGY......................................................23
OPERATING POLICIES AND STRATEGIES........................................23
OPERATING POLICIES....................................................23
CAPITAL AND LEVERAGE POLICIES.........................................24
LIABILITIES...........................................................24
RELATIONSHIP WITH PNC.................................................25
SECURITIZATION........................................................27
CREDIT RISK MANAGEMENT................................................27
ASSET/LIABILITY MANAGEMENT...............................................28
HEDGING ACTIVITIES....................................................28
OTHER POLICIES........................................................29
FUTURE REVISIONS IN POLICIES AND STRATEGIES...........................29
MORTGAGE LOANS........................................................29
DISTRESSED MORTGAGE LOANS.............................................30
CONSTRUCTION FINANCING, BRIDGE FINANCING AND LOANS SUBJECT
TO PRIOR LIENS.....................................................30
COMMITMENTS TO MORTGAGE LOAN SELLERS..................................30
BRIDGE LOANS..........................................................32
MORTGAGE-BACKED SECURITIES............................................32
COMMERCIAL MORTGAGE-BACKED SECURITIES.................................34
FHA AND GNMA PROJECT LOANS............................................35
PASS-THROUGH CERTIFICATES.............................................35
PRIVATELY ISSUED PASS-THROUGH CERTIFICATES............................35
MORTGAGE DERIVATIVES..................................................37
MULTIFAMILY AND COMMERCIAL REAL PROPERTIES............................37
FOREIGN REAL PROPERTIES...............................................39
REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS.....................39
NET LEASED REAL ESTATE................................................40
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN
REAL ESTATE ACTIVITIES................................................40
INVESTMENTS IN OTHER SECURITIES..........................................40
EMPLOYEES................................................................40
FACILITIES...............................................................40
LEGAL PROCEEDINGS........................................................40
MANAGEMENT OF THE COMPANY...................................................41
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..........................41
EXECUTIVE COMPENSATION...................................................46
STOCK OPTIONS............................................................46
STOCK OPTIONS OUTSTANDING................................................47
THE MANAGER.................................................................47
THE MANAGEMENT AGREEMENT.................................................48
MANAGEMENT COMPENSATION..................................................50
EXPENSES.................................................................51
LIMITS OF RESPONSIBILITY.................................................53
FEDERAL INCOME TAX CONSEQUENCES.............................................53
TAXATION OF THE COMPANY..................................................54
REQUIREMENTS FOR QUALIFICATION...........................................55
INCOME TESTS..........................................................56
ASSET TESTS...........................................................59
DISTRIBUTION REQUIREMENTS.............................................59
RECORDKEEPING REQUIREMENTS............................................61
FAILURE TO QUALIFY.......................................................61
TAXATION OF TAXABLE U.S. STOCKHOLDERS....................................61
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK..........63
CAPITAL GAINS AND LOSSES.................................................63
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING................63
TAXATION OF TAX-EXEMPT STOCKHOLDERS......................................63
TAXATION OF NON-U.S. STOCKHOLDERS........................................64
STATE AND LOCAL TAXES....................................................66
ERISA CONSIDERATIONS........................................................66
DESCRIPTION OF CAPITAL STOCK................................................66
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER........................67
DIVIDEND REINVESTMENT PLAN...............................................69
MATERIAL PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS....................69
REMOVAL OF DIRECTORS.....................................................69
STAGGERED BOARD..........................................................69
BUSINESS COMBINATIONS....................................................69
CONTROL SHARE ACQUISITIONS...............................................70
AMENDMENT TO THE ARTICLES OF INCORPORATION...............................70
DISSOLUTION OF THE COMPANY...............................................71
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS..................71
POSSIBLE ANTI-TAKEOVER EFFECT OF MATERIAL PROVISIONS OF MARYLAND
LAW AND OF THE ARTICLES OF INCORPORATION AND BYLAWS...................71
TRANSFER AGENT AND REGISTRAR.............................................71
REPORTS TO STOCKHOLDERS..................................................71
LEGAL MATTERS...............................................................73
EXPERTS.....................................................................73
ADDITIONAL INFORMATION......................................................73
GLOSSARY....................................................................75
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. Capitalized and other terms used herein
shall have the meanings assigned to them in the Glossary, which starts at
page 85. 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
GENERAL
Anthracite Capital, Inc. (the "Company"), a Maryland corporation,
was formed in 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
Consequences--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, which shall
initially consist of six members, four of whom will be unaffiliated with
the Manager and its affiliates. The Manager, a Delaware corporation, is a
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.
INVESTMENT STRATEGY
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.
Except as set forth below, the Company has not yet established specific
investment guidelines or standards, but its investments will be made
based on prevailing market conditions and an assessment of relative risks
and returns available at the time. An investor in the Common Stock
offered hereby is therefore subject to the risk that the Company's
investment strategy will differ from that which would be selected by such
investor at any given time.
Initially, one of the Company's primary investment focuses will be
the acquisition of non-investment grade CMBS. These CMBS offer the
potential of a higher yield than relatively more senior classes of CMBS,
but carry greater credit and prepayment risk. The Company believes that a
prudently managed portfolio of non-investment grade CMBS can produce
attractive returns in a variety of interest rate environments but no
assurance can be given that such returns can be achieved.
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,
Director 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.
The Company will finance its assets with the net proceeds of this
offering (the "Offering"), future offerings of equity securities 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's governing
documents do not explicitly limit the amount of leverage that the Company
may employ. Instead, the amount of leverage to be employed will be left
to the discretion of the manager, subject to periodic review by the
Company's Board of Directors. The Company will leverage its assets
primarily with reverse repurchase agreements, dollar rolls,
securitizations of its Mortgage Loans and secured and unsecured loans,
including the issuance of commercial paper. The Company also expects to
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.
RELATIONSHIP WITH PNC
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 consideration for such
purchases could, in some cases, consist of shares of stock of the
Company. The Company believes that pools of PNC Bank's Mortgage Loans
will be appropriate investments for the Company given the Company's
investment strategy.
On January 28, 1998, PNC announced an agreement to acquire the
assets of Midland Loan Services, L.P. ("Midland"), headquartered in
Kansas City, Missouri. Midland specializes in commercial loan servicing
and loan origination. At December 31, 1997, Midland was the largest
servicer of CMBS in the United States, with a servicing portfolio of
approximately $24 billion. The Company anticipates that Midland will
service commercial loans for which the Company acquires servicing rights.
SUMMARY RISK FACTORS
o Each prospective purchaser of the Common Stock offered hereby
should review "Risk Factors" beginning on page 15 for a discussion
of material risks that should be considered before investing in the
Common Stock, including the following:
o The Company and the Manager have common officers and common
directors, which may present conflicts of interest in the Company's
dealings with the Manager and its Affiliates, including the
Company's purchase of assets originated by such Affiliates.
o The Company was organized in November 1997 and has no operating
history, no material assets, no identified investments and no
established financing sources. The Company has not yet purchased or
entered into any commitments to purchase any investment assets and
the Company will face substantial competition in acquiring suitable
investments, which could increase their costs. Stockholders may not
have the opportunity to evaluate the manner in which the proceeds
of the Offering are to be invested and the economic merit of
particular assets to be acquired. The Manager will exercise
significant discretion in investing and allocating the proceeds of
the Offering. Assets to be purchased by the Company from PNC and
Affiliates may in some cases not have a readily determined fair
market value and no independent valuations will be sought.
o The Company is totally reliant on the Manager and the Manager has
never managed 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.
o The yield on the investments in mortgage loans and mortgage
backed securities, particularly IO's and PO's, and thus the value
of the Company's Common Stock, will be sensitive to changes in
prevailing interest rates and changes in prepayment rates which may
result in a mismatch between the Company's borrowing rates and
asset yields and consequently reduce or eliminate net income from
the Company's investments.
o The Company's operations are expected to be highly leveraged and
there are no limitations on borrowings, which is likely to increase
the volatility of the Company's income and net asset value and
could result in operating or capital losses. The Company intends to
leverage its investments in an amount to be determined by the
Manager and, ultimately, the Board of Directors. If borrowing costs
increase, or if the cash flow generated by the Company's assets
decrease, the Company's use of leverage will increase the
likelihood that the Company will experience reduced or negative
cash flow and reduced liquidity.
o The Company intends to acquire significant amounts of Mortgage
Loans and non-investment grade mortgage-backed securities,
including IOs, which are subject to greater risk of loss of
Director and non-payment of interest than investments in Mortgage
Loans or senior investment grade securities.
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 taxed as a regular corporation if it fails to
maintain its qualification as a REIT, which would reduce earnings
and cash available for distribution to stockholders.
o The Company's activities, structure and operations may be
adversely affected by changes in the tax
laws applicable to REITs.
o The Management Agreement provides for incentive fees payable to
the Manager based on certain performance criteria, which could result
in the Manager recommending riskier or more speculative
investments. Termination of the Management Agreement by the Manager
could adversely affect the Company if the Company were unable to
find a suitable replacement.
o Stockholders will be subject to significant potential dilution
from future equity offerings, including offerings of preferred stock,
which may have an adverse effect on the market price of the Common
Stock.
o Failure to maintain an exception from the Investment Company
Act of 1940, as amended (the "Investment Company Act"), would adversely
affect results of operations.
o The Company's investment and operating policies and strategies
may be changed at any time without the consent of stockholders.
CREDIT RISK MANAGEMENT
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
GENERAL
The Manager is a subsidiary of PNC. Established in 1988, the
Manager is a registered investment adviser under the Investment Advisers
Act of 1940 and is one of the largest fixed income investment management
firms in the United States. 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 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. As a
result, many of the assets in which the Company may invest also
constitute suitable investments for other accounts managed by the
Manager. In allocating investment opportunities, the Manager will use
criteria it deems to be fair in the circumstances and considering the
investment objectives of each account. None of the existing accounts of
the Manager has investment objectives which are identical to those of the
Company.
ORGANIZATION AND RELATIONSHIPS
The relationship among the Company, its affiliates and the Manager
is depicted in the organization chart below.
[GRAPHIC OMITTED]
THE MANAGEMENT AGREEMENT
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 may be obligated to pay the Manager
a substantial termination fee which may adversely affect the Company's
ability to terminate the Manager without cause. The termination fee will
be equal to the Fair Market Value of the Management Agreement as
determined by an independent appraisal.
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 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. At all times, the Manager
will be subject to the direction and oversight of the Company's Board of
Directors.
MANAGEMENT COMPENSATION
The Manager will receive a quarterly base management fee calculated
as a percentage of the Average Invested Assets of the Company for each
calendar quarter which shall be calculated as follows:
ANNUAL BASE MANAGEMENT FEE AS A PERCENTAGE OF
AVERAGE INVESTED ASSETS AVERAGE INVESTED ASSETS
- ----------------------------------------------------------------------------
$0 to $1 billion 1.00 %
$1 billion to $1.25 billion $10 million plus 0.75% of amounts in
excess of $1 billion
$1.25 billion or more $11.875 million plus 0.50% of amounts in excess
of $1.25 billion
Reimbursement of out-of-pocket expenses of the Manager paid to
third parties.
The term "Average Invested Assets" for any period means the average
of the aggregate book value of the assets of the Company, including the
assets of all of its direct and indirect subsidiaries, before reserves
for depreciation or bad debts or other similar noncash reserves, computed
by taking the daily average of such values during such period. The
Manager will not receive any management fee for the period prior to the
sale of the shares of Common Stock offered hereby. The base management
fee is intended to compensate the Manager, among other things, for its
costs in providing management services to the Company.
The Manager will be entitled to receive incentive compensation for
each fiscal quarter in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) Funds From Operations of the Company
(before the incentive fee) per share of Common Stock (based on the
weighted average number of shares outstanding) plus (b) gains (or minus
loses) from debt restructuring and sales of property per share of Common
Stock (based on the weighted average number of shares outstanding),
exceed (2) an amount equal to (a) the weighted average of the price per
share of the initial offering and the prices per share of any secondary
offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate plus two percent per annum (expressed as a quarterly percentage)
multiplied by (B) the weighted average number of shares of Common Stock
outstanding during such quarter. Notwithstanding the foregoing, accrual
and payment of any portion of the incentive compensation that is
attributable to net capital gains of the Company will be delayed to the
extent, if any, required by the Investment Advisers Act of 1940 as in
effect at that time. "Funds From Operations" as defined by the National
Association of Real Estate Investment Trusts ("NAREIT") means net income
(computed in accordance with generally accepted accounting principles
("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. See "The Manager -- Management Compensation" for
a more detailed explanation of the management compensation arrangements.
CONFLICTS OF INTEREST OF THE MANAGER
The Company is subject to conflicts of interest involving the
Manager and its Affiliates because, among other reasons, (i) the Manager
and its Affiliates are permitted to purchase mortgage assets for their
own account and to advise accounts of other clients, and many investments
appropriate for the Company also will be appropriate for these accounts
and (ii) the incentive fee, which is based on income of the Company, may
create an incentive for the Manager to recommend investments with greater
income potential, which generally are riskier or more speculative, than
would be the case if its fee did not include a "performance" component.
The Company is also subject to conflicts of interest because of the
expected purchase of substantial assets from PNC and its Affiliates. Many
of such assets do not have a readily determinable fair market value and
no independent valuations will be sought. Nevertheless, the Company
intends to adopt operating policies to minimize the effect of such
conflicts. These policies will require that any acquisition of assets
from PNC or its Affiliates be made for fair market value, and that each
such acquisition be approved by the Unaffiliated Directors on a quarterly
basis, except that any purchase of securities must be approved in
advance. In addition, the Board of Directors intends to approve certain
operating and investing guidelines which may be amended from time to
time. The Unaffiliated Directors are likely to rely substantially on
information and analysis provided by the Manager.
Pursuant to the Management Agreement, the Manager will not assume
any responsibility other than to render the services called for
thereunder and will not be responsible for any action of the Board of
Directors in following or declining to follow its advice or
recommendations. The Manager and its directors and officers will not be
liable to the Company, any subsidiary of the Company, the Unaffiliated
Directors, the Company's stockholders or any subsidiary's stockholders
for acts performed in accordance with and pursuant to the Management
Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under
the Management Agreement. The Company has agreed to indemnify the Manager
and its directors and officers with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from acts of
the Manager not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT
under the REIT Provisions of the Code commencing with its taxable year
ending December 31, 1998. Provided the Company qualifies as a REIT, the
Company generally will not be subject to federal corporate income tax on
taxable income that is distributed to its stockholders. REITs are subject
to a number of organizational and operational requirements, including a
requirement that they currently distribute at least 95% of their annual
Taxable Income. Although the Company does not intend to request a ruling
from the Internal Revenue Service (the "IRS") as to its REIT status, the
Company will receive an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP that the Company qualifies as a REIT, which opinion is based on
certain assumptions and representations about the Company's ongoing
businesses and investment activities and other matters. No assurance can
be given that the Company will be able to comply with such assumptions
and representations in the future. Furthermore, such opinion is not
binding on the IRS or any court. Failure to qualify as a REIT would
render the Company subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular
corporate rates and distributions to its stockholders would not be
deductible. Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain federal, state, local and foreign taxes
on its income and property. In connection with the Company's election to
be taxed as a REIT, the Company's Articles of Incorporation impose
restrictions on the transfer and ownership of its stock. See "RISK
FACTORS- Failure to Maintain REIT Status would have Adverse Tax
Consequences," "Federal Income Tax Consequences- Taxation of the Company"
and "DESCRIPTION OF CAPITAL STOCK Repurchase of Shares and Restrictions
on Transfer."
CERTAIN BENEFITS TO EXISTING STOCKHOLDER, DIRECTORS AND OFFICERS
The Company will grant to the Manager options to purchase an
aggregate of ________ shares of Common Stock (which the Manager will
allocate to its directors, officers and employees) at an exercise price
equal to the initial public offering price. See "The Manager - Stock
Options and Other Awards" and "Management of the Company Stock Options
Plan."
PNC has agreed that following the Offering, it will purchase from
the Company, at a price equal to the initial public offering price less
the Underwriters" Discount, a number of shares of Common Stock of the
Company such that the shares owned by it will constitute 4.9% of the
shares of the Company's Common Stock then outstanding.
The Company will enter into the Management Agreement with the
Manager pursuant to which the Manager will be entitled to receive an
annual base management fee, a quarterly incentive fee and a termination
fee in the event of termination without cause or nonrenewal. Mr. Fink,
the Chairman of the Board and Chief Executive Officer of the Manager, is
also the Chairman of the Board of the Company. Hugh R. Frater, a Managing
Director of the Manager is also President and Chief Executive Officer of
the Company. Richard Shea, a Director of the Manager is the Chief
Operating Officer of the Company. Mark S. Warner, a Director of the
Manager is a Vice President of the Company. Susan L. Wagner, a Managing
Director of the Manager is Secretary of the Company.] 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 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 institutions
with similar investments but that are subject to federal income tax on
their earnings. In addition, recent changes to federal tax laws provide
REITs with greater flexibility to manage and hedge their floating rate
liabilities. See "Federal Income Tax Consequences -- Taxation of the
Company."
The U.S. residential and commercial mortgage markets have
experienced considerable growth over the past 15 years with total U.S.
residential mortgage debt outstanding growing from approximately $965
billion in 1980 to approximately $3.9 trillion in 1996, according to the
Mortgage Market Statistical Annual for 1997, and total U.S. commercial
mortgage debt outstanding growing from approximately $955 billion in 1993
to approximately $1.06 trillion in 1996, according to The Federal
Reserve. In addition, according to the same sources, the total U.S.
residential mortgage debt securitized into MBS has grown from
approximately $110 billion in 1980 to approximately $1.9 trillion in
1996, and total U.S. commercial MBS outstanding has grown from
approximately $34.2 billion in 1993 to approximately $97.2 billion in
1996.
Foreign mortgage loan and securitization markets have also grown
rapidly in recent years. For example, in Europe, commercial and
residential Mortgage Loans outstanding have grown by over $200 billion
since 1993 to reach $1.6 trillion in 1996. This global growth of the
supply and demand for mortgage capital is expected to continue and the
REIT investment structure is expected to be the most efficient vehicle
for financing such growth.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, the Company intends to
make annual distributions to its stockholders of at least 95% of the
Company's Taxable Income (which does not necessarily equal net income as
calculated in accordance with GAAP), determined without regard to the
deduction for dividends paid and by excluding any net capital gains. The
foregoing dividend policy is subject to revision at the discretion of the
Company's Board of Directors. All distributions in excess of those
required for the Company to maintain REIT status will be made by the
Company at the discretion of the Board of Directors and will depend on
the taxable earnings of the Company, its financial condition and such
other factors as the Board of Directors deems relevant.
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
consistent with its
intention to qualify as a
REIT 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 NASDAQ National Market Symbol....... "[ ]MC"
- ---------------
(1) Assumes that the Underwriters' option to purchase up to an additional
_________ shares to cover over-allotments is not exercised. See
"Underwriting."
(2) Excludes _________ shares of Common Stock reserved for issuance
under the Company's 1998 Stock Option Plan. Options to acquire
_____ shares of Common Stock will be 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.
CONFLICTS OF INTEREST OF THE MANAGER MAY RESULT IN DECISIONS THAT
DO NOT FULLY REFLECT STOCKHOLDERS' BEST INTERESTS. The Company is subject
to conflicts of interest involving the Manager. The executive officers
and certain of the directors of the Company will be directors, officers
and employees of the Manager. A majority of the Board of Directors will
consist of Unaffiliated Directors, but the initial Unaffiliated Directors
will be selected by the Manager.
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
currently provide investment services to more than 200 accounts with
assets of more than $50 billion for which assets suitable for the Company
could also be appropriate. The Manager also intends to provide services
to other REITs not affiliated with the Company.
The Company has not yet purchased or entered into any commitments
to purchase any assets. The Manager will exercise significant discretion
in investing and allocating the proceeds of the Offering. Guidelines for
investment have not yet been adopted by the Board of Directors and, when
adopted, could be changed at any time. In addition, while substantial
leverage is critical to the Company's business plan, 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.
Certain of such purchases could involve the issuance of equity securities
of the Company. 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 review by 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.
NO OPERATING HISTORY; NO IDENTIFIED ASSETS; NO ESTABLISHED
FINANCING. The Company was organized in November 1997 and, therefore, has
no operating history and will commence operations only if the shares of
Common Stock offered hereby are sold. The results of the Company's
operations will depend on many factors, including the availability of
opportunities for the acquisition of assets, the level of volatility of
interest rates, conditions in the financial markets and economic
conditions. The Company will face substantial competition in acquiring
suitable investments, which could increase their costs. Moreover, delays
in investing the proceeds of the offering would result in reduced income
to the Company. Stockholders will not have the opportunity to evaluate
the manner in which the proceeds are to be invested and the economic
merit of particular assets to be acquired. The Company has not
established any lines of credit or collateralized financing and, if such
financing is available, there is no assurance that it will be available
on favorable terms. Furthermore, no assurance can be given that the
Company will be able to successfully operate its business as described in
this Prospectus.
DEPENDENCE ON THE MANAGER; TERMINATION OF MANAGEMENT AGREEMENT. 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,
primarily those named under "Management" elsewhere herein. 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 the efforts of senior management personnel. While the
Company believes that the Manager could find replacements for its key
executives, the loss of their services could have an adverse effect on
the operations of the Manager and the Company.
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.
The Company and the Manager may terminate the Management Agreement
at any time upon 60 days' written notice to the other party. The Company
will be obligated to pay the Manager a substantial termination fee in the
event the Company terminates the Management Agreement, except in the case
of a termination for cause. Payment of this termination fee could have an
adverse effect on the Company's financial condition, cash flows and
results of operations and would reduce the amount of funds available for
distribution to Stockholders. In addition, the Company is subject to the
risk that the Manager will terminate the Management Agreement and that no
suitable replacement will be found to manage the Company. The company
would be materially and adversely affected if it were unable to engage an
appropriate replacement for the Manager.
INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS, NET INCOME
AND COMMON STOCK.
General. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors
beyond the control of the Company. Interest rate fluctuations can
adversely affect the income and value of the Company's Common Stock in
many ways and present a variety of risks, including the risk of a
mismatch between asset yields and borrowing rates, variances in the yield
curve and changing prepayment rates.
Interest Rate Mismatch Could Occur Between Asset Yields and
Borrowing Rates Resulting in Decreased Yield. 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.
Inverted Yield Curve Adversely Affects Income. 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 Director are reinvested, the spread between the yields of the
new assets and available borrowing rates may decline and also may intend
to decrease the net income and market value of the Company's net assets.
It is also possible that short-term interest rates may adjust relative to
long-term interest rates such that the level of short-term rates exceeds
the level of long-term rates (a yield curve inversion). In this case,
borrowing costs may exceed the interest income and operating losses could
be incurred.
Prepayment Rates Can Increase, Thus Adversely Affecting Yields. 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 case 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 Director, 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 over collateralization 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.
Ownership of Non-Investment Grade Mortgage Assets Subject To
Increased Risk of Loss. 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
Director. Such classes are subject to special risks, including a
substantially greater risk of loss of Director 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 Director to the extent of any deficiency between the value of the
mortgage collateral and the Director 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 Director payments. In addition, the value of multifamily and
commercial real estate can be affected significantly by the supply and
demand in the market for that type of property.
Volatility of Values of Mortgaged Properties May Affect Adversely
the Company's Mortgage Loans. Commercial and multifamily property values
and net operating income derived therefrom are subject to volatility and
may be affected adversely by a number of factors, including, but not
limited to, national, regional and local economic conditions (which may
be adversely affected by plant closings, industry slowdowns and other
factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or
continued weakness in specific industry segments; perceptions by
prospective tenants, retailers and shoppers of the safety, convenience,
services and attractiveness of the property; the willingness and ability
of the property's owner to provide capable management and adequate
maintenance; construction quality, age and design; demographic factors;
retroactive changes to building or similar codes; and increases in
operating expenses (such as energy costs).
Construction, Bridge and Mezzanine Loans Involve Greater Risks of
Loss than Loans Secured by Income Producing Properties. The Company may
acquire Construction Loans, Bridge Loans and Mezzanine Loans. These types
of Mortgage Loans are considered to involve a higher degree of risk than
long-term senior mortgage lending secured by income-producing real
property. This is because of a variety of factors, including, in the case
of Construction Loans, dependency on successful completion and operation
of the project for repayment, difficulties in estimating construction or
rehabilitation costs and loan terms that often require little or no
amortization, providing instead for additional advances to be made and
for a balloon payment at a stated maturity date. In the case of Mezzanine
Loans, the factors would include, among other things, that a foreclosure
by the holder of the senior loan could result in a Mezzanine Loan
becoming unsecured. Accordingly, the Company may not recover some or all
of its investment in such Mezzanine Loan. In addition, Construction
Loans, Bridge Loans and Mezzanine Loans may have higher loan to value
ratios than conventional Mortgage Loans because of shared appreciation
provisions.
Distressed Mortgage Loans May Have Greater Default Risks than
Performing Loans. The Company may acquire Nonperfoming and Subperforming
Mortgage Loans, as well as Mortgage Loans that have had a history of
delinquencies. These Mortgage Loans presently may be in default or may
have a greater than normal risk of future defaults and delinquencies, as
compared to newly originated, high quality loans. Returns on an
investment of this type depend on the borrower's ability to make required
payments or, in the event of default, the ability of the loan's servicer
to foreclose and liquidate the mortgaged property underlying the Mortgage
Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully or in a timely fashion.
Risks Related to Investments in Real Property. Distressed Real
Properties may have significant amounts of unleased space and thus may
not generate revenues sufficient to pay operating expenses and meet debt
service obligations. The value of the Company's investments in real
property and the Company's income and ability to make distributions to
its stockholders will be dependent upon the ability of the Manager to
hire and supervise capable property managers to operate the real property
in a manner that maintains or increases revenues in excess of operating
expenses and debt service. Revenues from real property may be affected
adversely by changes in national or local economic conditions,
competition from other properties offering the same or similar
attributes, changes in interest rates and in the availability, cost and
terms of mortgage funds, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for
capital improvements (particularly in older structures), changes in real
estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God,
including earthquakes, hurricanes and other natural disasters (which may
result in uninsured or underinsured losses), acts of war, adverse changes
in zoning laws, and other factors which will be beyond the control of the
Company.
Although the Company's insurance will not cover all losses, the
Company intends to maintain comprehensive casualty insurance on its real
property, including liability and fire and extended coverage, in amounts
sufficient to permit replacement in the event of a total loss, subject to
applicable deductibles.
All real property owned by the Company will be subject to real
property taxes and, in some instances, personal property taxes. Such real
and personal 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.
SIGNIFICANT LEVERAGE INCREASES EXPOSURE TO LOSS. 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 against, decreases in the
market value of the Company's assets, increases in interest rates,
changes in the availability of financing in the market, conditions then
applicable in the lending market and other factors. This may cause the
Company to experience losses or less profits than would otherwise be the
case.
A substantial portion of the Company's borrowings are expected to
be in the form of collateralized borrowings. If the value of the assets
pledged to secure such borrowings were to decline, the Company would be
required to 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.
HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO
LOSSES. 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 incurrence of
such costs will limit the amount of cash available for distributions to
stockholders. The Company intends generally to hedge as much of the
interest rate risk as the Manager determines is in the best interests of
the stockholders of the Company given the cost of such hedging
transactions and the need to maintain the Company's status as a REIT.
The Company has not established specific policies as to the extent
of the hedging transactions in which it will engage; however, the
Unaffiliated Directors will be responsible for reviewing at their regular
meetings the extent and effect of hedging activities. The amount of
income the Company may earn form its hedging instruments is subject to
certain limitations under the REIT Provisions of the Code. See "Federal
Income Tax Consequences -- Requirements for Qualification -- Income
Test." These limitations may result in the Manager electing to have the
Company bear a level of interest rate risk that could otherwise be hedged
when the Manager believes, based on all relevant facts, that bearing such
risk is advisable to maintain the Company's status as a REIT.
Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S.
or foreign governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial responsibility or
segregation of customer funds and positions. The business failure of a
counterparty with which the Company has entered into a hedging
transaction will most likely result in a default. 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.
TAX, LEGAL AND OTHER RISKS
Failure to Maintain REIT Status would have Adverse Tax
Consequences. In order to maintain its qualification as a REIT for
federal income tax purposes, the Company must continually satisfy certain
tests with respect to the sources of its income, the nature of its
assets, the amount of its distributions to stockholders and the ownership
of its stock. If the Company fails to qualify as a REIT in any tax year,
it would be taxed as a regular domestic corporation. In such a case, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to the Company's stockholders would not be
deductible by the Company in computing its taxable income. Any such
corporate tax liability could be substantial and would reduce the amount
of cash available for distribution to the Company's stockholders, which
in turn could have an adverse impact on the value of, and trading prices
for, the Common Stock. In addition, the unremedied failure of the Company
to be treated as a REIT for any one year would disqualify the Company
from being treated as a REIT for the four subsequent years.
The REIT provisions of the Code may limit the ability of the
Company to hedge its assets and the related Company borrowings. Under the
REIT provisions, the Company must limit its income in each year from
"Qualified Hedges" (together with any other income generated from other
than qualifying real estate assets) to less than 25% of the Company's
gross income. As a result, the Company may have to limit its use of
certain hedging techniques that might otherwise be advantageous. Any
limitation on the Company's use of hedging techniques may result in
greater interest rate risk. If the Company were to receive income from
Qualified Hedges in excess of the 25% limitation, it could incur payment
of a penalty tax equal to the amount of income in excess of those
limitations, or in the case of a willful violation, loss of REIT status
for federal tax purposes.
The Company must also ensure that at the end of each calendar
quarter at least 75% of the value of its assets consists of cash, cash
items, government securities and qualifying real estate assets, and of
the investments in securities not included in the foregoing, the Company
does not hold more than 10% of the outstanding voting securities of any
one issuer and no more than 5% by value of the Company's assets consists
of the securities of any one issuer. Failure to comply with any of the
foregoing tests would require the Company to dispose of a portion of its
assets within 30 days after the end of the calendar quarter or face loss
of REIT status and adverse tax consequences.
The Company must generally distribute at least 95% of its Taxable
Income each year. The Company's operations may from time to time generate
Taxable Income in excess of cash flows. For example, subordinated MBS
often are issued with OID, which generally is equal to the difference
between an obligation's issue price and its redemption price. Mezzanine
Loans also may be deemed to have OID for federal income tax purposes. OID
generally will be accrued using a constant yield methodology that does
not allow credit losses to be reflected until they are actually incurred.
The Company will be required to recognize as income each year the portion
of the OID that accrues during that year, which will increase the amount
that the Company must distribute for that year in order to avoid a
corporate-level income tax, notwithstanding the fact that there may be no
corresponding contemporaneous receipt of cash by the Company. The Company
also may be required to accrue interest income from Distressed Mortgage
Loans even though the borrowers fail to pay the full amounts due, and may
recognize Excess Inclusion or other "phantom" taxable income from REMIC
Residual Interests and Non-REMIC Residual Interests. See"Federal Income
Tax Consequences." In addition, the Company may recognize taxable market
discount income upon the receipt of proceeds from the disposition of, or
Director payments on, Mortgage Loans and MBS that are "market discount
bonds" (i.e., obligations with an adjusted issue price that is greater
than the Company's tax basis in such obligations), although such proceeds
often will be used to make non-deductible Director payments on related
borrowings. 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 Treasury Regulations section
1.1001-3(e)) to a Mortgage Loan, to the extent that the fair market value
of the underlying property or the Director amount of the modified loan,
as applicable, exceeds the Company's basis in the original loan.
Consequently, the Company's investments could have the effect of
requiring the Company to incur borrowings or to liquidate a portion of
its portfolio at rates or times that the Company regards as unfavorable
in order to distribute all of its taxable income and thereby avoid
corporate-level income tax and maintain its qualification as a REIT.
Risk of Changes in the Tax Law Applicable to REITs. The rules
dealing with federal income taxation are constantly under review by the
IRS, the Treasury Department and Congress. New federal tax legislation or
other provisions may be enacted into law or new interpretations, rulings
or Treasury Regulations could be adopted, all of which could adversely
affect the taxation of the Company or its stockholders. No prediction can
be made as to the likelihood of passage of any new tax legislation or
other provisions either directly or indirectly affecting the Company or
its stockholders. Consequently, the tax treatment described herein may be
modified prospectively or retroactively by legislative action.
Risk the Potential Future Offerings Could Dilute the Interest of
Holders of Common Stock. The Company expects in the future to 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.
Future Revisions in Policies and Strategies Without Stockholder
Consent Create Uncertainty for Investors. 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.
Significant Competition May Adversely Affect the Company's Ability
to Acquire Assets. 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 numerous 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 anticipated
competitors are significantly larger than the Company, have access to
greater capital and other resources and may have other advantages over
the Company. 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.
Failure to Maintain Exclusion from the Investment Company Act Would
Restrict the Company's Operating Flexibility. 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 and an additional 25% of its assets
in real estate related assets. 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.
Failure to Develop a Public Market May Result in a Decrease in
Market Price. 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 will apply to have the Common
Stock listed on the NASDAQ Notional Market under the symbol "[ ]MC."
In the event that a public market for the Common Stock exists, it
is likely that the market price of the shares of the Common Stock will be
strongly influenced by any variation between the gross yield on the
Company's assets (net of credit losses) and prevailing market interest
rates, with any narrowing of the spread between yield and cost adversely
affecting the price of the Common Stock. In addition, since any positive
spread between the yield on its assets and the cost of its borrowings
will not necessarily be larger in high interest rate environments than in
low interest rate environments, the Net Income of the Company and,
therefore, the dividend yield on its Common Stock, may be less attractive
compared with alternative investments, which could negatively affect the
price of the Common Stock.
Temporary Investment in Short-term Investments Will Reduce the
Earnings of the Company. 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.
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 acquire residual interests in one or
more REMIC securitizations. Although there is no Excess Inclusion
currently generated by a non-REMIC securitization, this result may change
if Treasury Regulations are issued regarding the application of the
taxable mortgage pool rules of the Code to REITs. The Company intends to
arrange its securitizations in a manner to avoid generating significant
amounts of Excess Inclusion income.
Restrictions on Ownership of the Common Stock. In order for the
Company to meet the requirements for qualification as a REIT at all
times, the Articles of Incorporation prohibit any person from acquiring
or holding, directly or indirectly, shares of capital stock in excess of
9.8% (in value or in number of shares, whichever is more restrictive) of
the aggregate of the outstanding shares of any class of capital stock of
the Company (other than the Manager and its Affiliates, with respect to
whom such percentages are __% in the aggregate) ("Excess Shares"). The
Articles of Incorporation further prohibit (i) any person from
beneficially or constructively owning shares of capital stock that would
result in the Company being "closely held" under Section 856(h) of the
Code or would otherwise cause the Company to fail to qualify as a REIT,
and (ii) any person from transferring shares of capital stock if such
transfer would result in shares of capital stock being owned by fewer
than 100 persons. If any transfer of shares of capital stock occurs
which, if effective, would result in a violation at one or more ownership
limitations, then that number of shares of capital stock, the beneficial
or constructive ownership of which otherwise would cause such person to
violate such limitations (rounded to the nearest whole shares) shall be
automatically transferred to a Trustee of a Trust for the exclusive
benefit of one or more Charitable Beneficiaries, and the Intended
Transferee may not acquire any rights in such shares; provided, however,
that if any transfer occurs which, if effective, would result in shares
of capital stock being owned by fewer than 100 persons, then the transfer
shall be null and void and the Intended Transferee shall acquire no
rights to the stock. Subject to certain limitations, the Company's Board
of Directors may increase or decrease the ownership limitations or waive
the limitations for certain investors. See "Description of Capital Stock
- -- Repurchase of Shares and Restrictions on Transfer."
Every owner of more than 5% (or such lower percentage as required
by the Code or the Regulations promulgated thereunder) of the outstanding
shares of any class or series of the Company's capital stock, within 30
days after the end of each taxable year, is required to give written
notice to the Company stating the name and address of such owner, the
number of shares of each class and series of stock beneficially owned and
a description of the manner in which such shares are held. Each such
owner shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with
the ownership limitations.
The authorized capital stock of the Company includes preferred
stock issuable in one or more series. The issuance of preferred stock
could have the effect of making an attempt to gain control of the Company
more difficult by means of a merger, tender offer, proxy contest or
otherwise. The preferred stock, if issued, would have a preference on
dividend payments that could affect the ability of the Company to make
dividend distributions to the common stockholders.
The provisions of the Company's Articles of Incorporation or
relevant Maryland law may inhibit market activity and the resulting
opportunity for the holders of the Common Stock to receive a premium for
their Common Stock that might otherwise exist in the absence of such
provisions. Such provisions also may make the Company an unsuitable
investment vehicle for any person seeking to obtain ownership of more
than 9.8% of the outstanding shares of the Company's Common Stock.
Material 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.
Possible Environmental Liabilities. The Company may become subject
to environmental risks when it acquires interests in properties with
material environmental problems. Such environmental risks include the
risk that operating costs and values of these assets may be adversely
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. Such laws often impose liability
regardless of whether the owner or operator knows of, or was responsible
for, the presence of such hazardous or toxic substances. The costs of
investigation, remediation or removal of hazardous substances could
exceed the value of the property. 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.
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.
Plans Should Consider ERISA Risks of Investing in Common Stock.
Fiduciaries of employee benefit plans subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), should
consider the ERISA fiduciary investment standards before authorizing an
unvestment by a plan in the Common Stock. In addition, fiduciaries of
employee benefit plans or other retirement arrangements (such as an
individual retirement account ("IRA") or certain H.R. 10 Plans or Keogh
plans) which are subject to Title I o ERISA, and/or Section 4975 of the
Code, as well as any entity, including an insurance company general
account, whose underlying assets include plan assets by reason of a plan
or account investing in such entity, should consult with their legal
counsel to determine whether an investment in the Common Stock will cause
the assets of the Company to be considered plan assets pursuant to the
plan asset regulations set forth at 29 C.F.R. Section 2510.3-101, thereby
subjecting the Plan to the prohibited transaction rules and the Company's
assets to the fiduciary investment standards of ERISA, or cause the
excise tax provisions of Section 4975 of the Code, to apply to the
Company's assets, unless some exception or exemption granted by the
Department of Labor applies to the acquisition, holding or transfer of
the Common Stock. See "Erisa Considerations."
Year 2000 Compliance. As the year 2000 approaches, an issue has
emerged regarding how existing application software programs and
operating systems can accommodate this date value. Failure to adequately
address this issue could have potentially serious repercussions. The
Manager is in the process of working with the Company's service providers
to prepare for the year 2000. Based on information currently available,
the Company does not expect that it will incur significant operating
expenses or be required to incur material costs to be year 2000
compliant.
USE OF PROCEEDS
The net proceeds from the Offering will be used by the Company to
purchase its initial portfolio of assets. The following table sets forth
information concerning the projected use of proceeds:
Estimated Application of Proceeds of This Offering
DOLLAR
AMOUNT PERCENT
--------- ---------
Gross Offering Proceed(1) $ 100%
Underwriting Commissions
Offering Costs(2)
Registration Fees
======== ========
Net Proceeds Available for Investments(3) $ %
- ---------------------------
(1) Assumes that all ____ shares offered to the public are sold and that
the Underwriter's overallotment option is exercised in full.
(2) Includes legal, accounting, printing and other expenses of this
Offering.
(3) Does not give effect to the fees payable to the Manager as such fees
fluctuate, based on Average Invested Assets
and returns. See "Management Compensation."
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
long term 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 maintain its qualification 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 and not including 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 Consequences -- 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
and to PNC at an assumed per share price at the mid-point of the offering
range set forth on the cover page of this Prospectus, is as follows:
As
Adjusted(1)(2)
------------- --------------
Preferred Stock, par value $.001
Authorized - 100,000,000 shares
None outstanding
Common Stock, par value $.001 $ $
Authorized -- 400,000,000 shares
Outstanding - [ ] shares
(as adjusted _______ shares)
Additional Paid-in Capital $------------ --------------
Total $============ $=============
(1) Before deducting offering expenses estimated to be $_______,
payable by the Company, and assuming no exercise of the
Underwriters' overallotment option to purchase up to an additional
_______ shares of Common Stock.
(2) Does not include _______ shares of Common Stock reserved for issuance
upon exercise of options granted
under the Company's 1998 Stock Option Plan. See "Management of the
Company -- Stock Options."
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, may in the future, enter into a number of relationships
other than those governed by the Management Agreement and other than the
right of first offer, 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.
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.
From time to time, mortgage lenders offer for sale large pools of
mortgage loans and REO properties pursuant to a competitive bidding
process. In such a case, the Manager may choose an unaffiliated entity
with which to submit a joint bid for the pool, as long as the Manager
takes title only to the mortgage loans and not the real estate.
Many investments appropriate for the Company also will be
appropriate for accounts of other clients the Manager advises. The
Manager will act in a manner which it considers fair and equitable in
allocating investment opportunities among the Company and the other
accounts it manages. Situations may arise in which the investment
activities of the Manager or the other accounts may disadvantage the
Company, such as the inability of the market to fully absorb orders for
the purchase or sale of particular securities placed by the Manager for
the Company and its other accounts at prices and in quantities which
would be obtained if the orders were being placed only for the Company.
The Manager may aggregate orders of the Company with orders for its other
accounts. Such aggregation of orders may not always be to the benefit of
the Company with regard to the price or quantity executed.
THE COMPANY
GENERAL
The Company was recently organized to invest in a diversified
portfolio consisting of multifamily, commercial and residential Mortgage
Loans, mortgage backed securities and other real estate related assets.
The Company expects to use its equity and borrowed funds to seek to
generate net income for distribution to stockholders based primarily on
the spread between the yield on its assets (net of credit losses) and the
cost of its borrowings and hedging activities. The Company will elect to
be taxed as a REIT under the Code. The Company generally will not be
subject to federal income tax to the extent that it distributes its
income to its stockholders and maintains its qualification as a REIT. See
"Federal Income Tax Consequences." 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, fixed and
adjustable rate Privately-Issued Certificates and Agency Certificates,
CMOs and REMIC interests, and Mortgage Derivatives, including IOs; (iii)
multifamily and commercial real properties; (iv) Non-U.S. Mortgage Loans,
Non-U.S. MBS and real properties; and (v) 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, future equity offerings and borrowings and expects that it will
maintain a debt-to-equity ratio of up to 6:1, although the actual ratio
may be higher or lower than this range from time to time. The Company
will leverage primarily with reverse repurchase agreements, dollar rolls,
securitizations of its Mortgage Loans, secured and unsecured borrowings,
commercial paper and issuance of Preferred Stock.
The Company's policy is to acquire those mortgage assets which it
believes are likely to generate the highest returns on capital invested,
after considering the amount and nature of anticipated cash flows from
the asset, the Company's ability to pledge the asset to secure
collateralized borrowings, the capital requirements resulting from the
purchase and financing of the asset, the potential for appreciation and
the costs of financing, hedging and managing the asset. Prior to
acquisition, potential returns on capital employed will be assessed over
the expected life of the asset and in a variety of interest rate, yield
spread, financing cost, credit loss and prepayment scenarios. In managing
the Company's portfolio, the Manager also will consider balance sheet
management and risk diversification issues.
Although the Company intends to invest primarily in Mortgage Loans
and CMBS, the Company's business decisions will depend on changing market
factors. Thus the company cannot anticipate with any certainty the
percentage of its assets that will be invested in each category of real
estate related assets. The Company has a great deal of discretion as to
the manner in which it may invest, leverage and hedge its assets. The
Company may change any of its policies without stockholder approval.
There can be no assurance that the Company will be successful in its
investment strategy.
As a requirement for maintaining the Company's REIT status, the
Company generally intends to distribute to stockholders aggregate
dividends equaling at least 95% of its Taxable Income each year. See
"Federal Income Tax Consequences"
OPERATING POLICIES AND STRATEGIES
OPERATING POLICIES. The Board of Directors (including a majority of
the Unaffiliated Directors) must approve operating policies for the
Company. Except as specifically prohibited by the Company's Articles of
Incorporation or Bylaws, the Board of Directors may, in its discretion,
revise such Policies from time to time in response to changes in market
conditions or opportunities without stockholder approval.
The Company will also adopt compliance guidelines, including
restrictions on acquiring, holding and selling assets, to ensure that the
Company continues to qualify as a REIT and is excluded from regulation as
an investment company. Before acquiring any asset, the Manager will
determine whether such asset would constitute a Qualified REIT Real
Estate Asset under the REIT Provisions of the Code. Substantially all of
the assets that the Company intends to acquire are expected to be
Qualified REIT Real Estate Assets. The Company will regularly monitor
purchases of mortgage assets and the income generated from such assets,
including income from its hedging activities, in an effort to ensure that
at all times the Company maintains its qualification as a REIT and its
exclusion under the Investment Company Act.
The Unaffiliated Directors will review all transactions of the
Company on a quarterly basis to ensure compliance with the operating
policies and to ratify all transactions with PNC and its Affiliates,
except that the purchase of securities from PNC and its Affiliates will
require prior approval. The Unaffiliated Directors are likely to rely
substantially on information and analysis provided by the Manager to
evaluate the Company's Operating Policies, Compliance therewith and other
matters relating to the Company's investments.
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-Significant Leverage Increases Risk of
Loss." The Company expects to incur debt such that it will maintain a
debt-to-equity ratio of up to 6:1, 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 Articles of
Incorporation 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-Interest Rate Fluctuations
May Adversely Affect Value of Mortgage Assets, Net Income and Common
Stock."
LIABILITIES. Mortgage assets, other than securitized Mortgage
Loans, will be financed primarily at short-term borrowing rates through
reverse repurchase agreements, dollar roll agreements, loan agreements,
lines of credit, commercial paper borrowings and other credit facilities
with institutional lenders. The Company may also borrow long term and
issue preferred Stock.
Reverse repurchase agreements are structured as sale and repurchase
obligations and have the economic effect of allowing a borrower to pledge
purchased mortgage assets as collateral securing short-term loans to
finance the purchase of such mortgage assets. Typically, the lender in a
reverse repurchase arrangement makes a loan in an amount equal to a
percentage of the market value of the pledged collateral. At maturity,
the borrower is required to repay the loan and the pledged collateral is
released. Pledged mortgage assets continue to pay Director 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 Director
and interest payments on the mortgage assets, but is compensated by the
interest earned on the cash proceeds of the initial sale of the mortgage
assets and the spread on the forward repurchase price. Because the dollar
roll provides a borrower with funds for the roll period, its value may be
expressed as an "implied financing rate." Dollar rolls are a favorable
means of financing when the forward repurchase price is low compared to
the initial sale price, making the implied financing rate lower than
alternative short-term borrowing rates. The Company's ability to enter
into dollar roll agreements may be limited in order to maintain the
Company's status as a REIT or to avoid the imposition of tax on the
Company.
The Company expects that reverse repurchase agreements and, to the
extent consistent with the REIT Provisions of the Code, dollar roll
agreements will be, together with Mortgage Loan securitizations, the
Director means of leveraging its mortgage assets. However, the Company
may also utilize warehouse lines of credit or issue secured or unsecured
notes of any maturity if it appears advantageous to do so. The Company
expects to issue shares of preferred stock, including in connection with
the acquisition of assets. The Company intends to enter into reverse
repurchase agreements with financially sound institutions, including
broker/dealers, commercial banks and other lenders, which meet credit
standards 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 pledged
collateral declines. This may require the Company to sell mortgage assets
to provide such additional collateral or to reduce its borrowings. The
Company intends to maintain an equity cushion sufficient to provide
liquidity in the event of interest rate movements and other market
conditions affecting the market value of the pledged mortgage assets.
However, there can be no assurance that the Company will be able to
safeguard against being required to sell mortgage assets in the event of
a change in market conditions.
RELATIONSHIP WITH PNC. PNC Bank will enter into an agreement
granting to the Company, for as long as the Management Agreement 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 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
consideration for such purchases could, in some circumstances, consist of
equity securities of the Company. While the loans described below are of the
typical performing mortgage loans the company expects to purchase from PNC
Bank, such loans are only a class of loans originated by PNC Bank.
Multifamily and commercial Mortgage Loans originated by PNC Bank
typically are evidenced by a promissory note and secured by a mortgage,
deed of trust or other similar security instrument that creates a first
mortgage lien on a fee simple and/or leasehold interest in real property.
The Mortgage Loans originated to date have been secured by properties
concentrated in the Middle Atlantic States, increasing the risk of
exposure to a downturn in local economic conditions, but the acquisition
of Midland is expected by PNC Bank to lessen that geographic
concentration in the future. PNC Bank's Mortgage Loans generally
constitute nonrecourse obligations of the related borrower and, upon any
such borrower's default in the payment of any amount due, the holder may
look only to the related mortgaged property for satisfaction of the
borrower's obligation.
PNC Bank generally requires that mortgaged properties be subject to
a "Phase I" environmental assessment or an update of a previously
conducted assessment conducted in accordance with industry-wide
standards. In addition, PNC Bank examines whether the use and operation
of the mortgaged properties were in compliance in all material respects
with all applicable zoning, land-use, environmental, building, fire and
health ordinances, rules, regulations and orders applicable to such
properties. In almost all cases, the Mortgage Loans require that each
mortgaged property be insured by a hazard insurance policy in a specified
amount.
The Company expects that the Mortgage Loans purchased from PNC Bank
will have (i) terms to stated maturity ranging from 48 to 180 months,
(ii) amortization terms ranging from 180 months to 360 months, (iii)
loan-to-value ratios at origination ranging from 35% to 85% and (iv) debt
service coverage ratios at origination ranging from 1.15 to 3.0.
While the description set forth above is that of typical performing
mortgage loans the Company expects to purchase from PNC Bank, it is not
limited to the purchase of loans having those characteristics and may
purchase Mortgage Loans having other characteristics.
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 arm's length
transactions, the Manager would be expected to recommend that the Company
decline to acquire that asset at the quoted price and terms,
notwithstanding the relationship among the Company, PNC Bank and its
Affiliates.
The Manager will determine fair transfer prices for the Company's
acquisitions of assets from PNC Bank and its Affiliates based on
guidelines approved by the Unaffiliated Directors. The Unaffiliated
Directors will review those transactions on a quarterly basis to insure
compliance with the guidelines, except that the purchase of securities
from PNC Bank and its affiliates must be approved in advance.
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, including Midland, 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 anticipated that Midland will act as servicer for those
mortgage loans for which the Company acquires servicing rights. Midland
will receive compensation at market rates.
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 in
non-REMIC transactions. 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. To the extent consistent with the REIT
Provisions of the Code, such entity 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
Director 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"). In order to assist the Company in maintaining its
exclusion from investment company regulation, the Company expects that it
will acquire or 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, including
Midland, 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 "Federal Income Tax Consequences--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 transactions 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 transactions for speculative purposes.
The Company will focus its hedging activities on providing 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.
The Company has not established specific policies as to the extent
of the hedging transactions in which it will engage; however, the
Unaffiliated Directors will be responsible for reviewing at their regular
meetings the extent and effect of hedging activities.
OTHER POLICIES. The Company intends to invest and operate in a
manner consistent with the requirements of the Code for qualification as
a REIT for federal income tax purposes (see "Federal Income Tax
Consequences Taxation of the Company"), unless, due to changes in the tax
laws, changes in economic conditions or other fundamental changes in the
Company's business environment, the Board of Directors, with the consent
of the holders of a majority of the shares of Common Stock outstanding
and entitled to vote on the question, determines that it is no longer in
the best interest of the Company to qualify as a REIT.
The Company intends to operate in a manner that will not subject it
to regulation under the Investment Company Act.
The Company has the authority to offer shares of its capital stock
and to repurchase or otherwise reacquire such shares or any other of its
securities. Under certain circumstances the Company may purchase shares
of its Common Stock in the open market or otherwise. The Board of
Directors has no present intention to cause the Company to repurchase any
of its shares and any such action would be taken only in conformity with
applicable federal and state laws and the requirements for qualification
as a REIT for federal income tax purposes.
Except in connection with its formation, the Company has not, to
date, issued shares of Common Stock or other securities. The Company has
not made loans to officers and directors and does not intend to do so.
The Company does not intend to engage in trading, underwriting or agency
distribution or sale of securities of other issuers.
The Company has no present intention to invest in the securities of
other issuers for the purpose of exercising control. The decision to do
so is vested solely in the Board of Directors and may be changed without
a vote of the shareholders.
FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of
Directors (including the Unaffiliated Directors) will approve 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 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 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 Director 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 Director to the extent of any deficiency between the value of the
collateral underlying the Mortgage Loan and the Director 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 Director 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 Director 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
Director repayment terms due to the need for refinancing and minimal
Director 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.
Director 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 Director of and interest on the underlying Mortgage Loans may
be allocated among the several classes of a MBS in many ways, and the
credit quality of a particular class results primarily from the order and
timing of the receipt of cash flow generated from the underlying Mortgage
Loans. Subordinated interests in MBS carry significant credit risks.
Typically, in a "senior-subordinated" structure, the subordinated
interest provide credit protection to the senior classes by absorbing
losses form loan defaults or foreclosures before such losses are
allocated to senior classes. As long as the more senior classes of
securities are outstanding, all prepayments on the Mortgage Loans
generally are paid to those senior classes, at least until the end of a
lock-out period, which typically is five years or more. In some
instances, particularly with respect to subordinated interests in
commercial mortgage securitizations, the holders of subordinated
interests are not entitled to receive scheduled payments of Director
until the more senior classes are paid in full or until the end of a
lock-out period. Because of this structuring of the cash flows from the
underlying Mortgage Loans, subordinated interests in a typical
securitization are subject to a substantially greater risk of non-payment
than are the more senior classes. Accordingly, the subordinated interests
are assigned lower credit ratings, or no ratings at all.
As a result of the typical "senior-subordinated" structure, the
subordinated classes of MBS will be extremely sensitive to losses on the
underlying Mortgage Loans. For example, if the Company owns a $20 million
first loss subordinated class of MBS consisting of $100 million of
underlying Mortgage Loans, a 7% loss on the underlying Mortgage Loans
generally will result in a 70% loss of the stated Director 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 Director amount of the Mortgage Loan
unrecovered after applying any recovery to the expenses of foreclosure
and accrued interest) on the underlying Mortgage Loans.
Losses on the mortgage collateral underlying the Company's MBS will
depend upon a number of factors, many of which will be beyond the control
of the Company or the applicable servicer. Among other things, the
default frequency on the mortgage collateral will reflect broad
conditions in the economy generally and real property particularly,
economic conditions in the economy generally and real property
particularly, economic conditions in the local area in which the
underlying mortgaged property is located, the loan-to-value ratio of the
Mortgage Loan, the purpose of the loan, and the debt service coverage
ratio (with respect to commercial and multifamily Mortgage Loans). The
loss severity on the mortgage collateral will depend upon many of the
same factors described above, and will also be influenced by certain
legal aspects of Mortgage Loans that underlie the MBS acquired by the
Company, including the servicer's ability to foreclose on the defaulted
Mortgage Loan and sell the underlying mortgaged property. Various legal
issues affect the ability to foreclose on a Mortgage Loan or sell the
mortgaged property. These legal issues may extend the time of foreclosure
proceedings or may require the expenditure of additional sums to sell the
underlying Mortgaged Property, in either case increasing the amount of
loss with respect to the Mortgage Loans.
In considering whether to acquire an MBS, the Company's policy is
to determine, in consultation with the Manager, the scope of review to be
performed before the Company acquires that MBS, which will be designed to
provide to the Company such information regarding that MBS as the Company
and Manager determine to be relevant and material to the Company's
decision regarding the acquisition of that MBS. The Company's policy
generally is to request that the Manager perform due diligence
substantially similar to that described above in connection with the
acquisition of performing Mortgage Loans. The due diligence may include
an analysis of (i) the underlying collateral pool, (ii) the prepayment
and default history of the originator's prior loans, (iii) cash flow
analyses under various prepayment and interest rate scenarios (including
sensitivity analyses) and (iv) an analysis of various default scenarios.
The Company also may request that the Manager determine and advise the
Company as to the price at which the Manager would recommend acquisition
of the MBS by the Company, and the Manager's reasons for such advice.
However, which of these characteristics (if any) are important and how
important each characteristic may be to the evaluation of a particular
MBS depends on the individual circumstances. Because there are so many
characteristics to consider, each MBS must be analyzed individually,
taking into consideration both objective data as well as subjective
analysis.
Many of the MBS to be acquired by the Company will not have been
registered under the Securities Act, but instead initially will have been
sold in private placements. These MBS will be subject to restrictions on
resale and, accordingly, will have substantially more limited
marketability and liquidity.
CMO Residuals are derivative mortgage securities issued by agencies
of the U.S. Government or by private originators of, or investors in,
Mortgage Loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Many special purpose trusts or corporations that issue
multi-class MBS elect to be treated, for federal income tax purposes, as
REMICs. The Company may acquire not only MBS that are treated as regular
interests in REMICs, but also those that are designated as REMIC Residual
Interests or as Non-REMIC Residual Interests. The cash flow generated by
the Mortgage Loans underlying a series of CMOs is first applied to the
required payments of Director and interest on the CMOs and second to pay
the related administrative expenses of the issuer. The Residual Interest
generally receives excess cash flows, if any, after making the foregoing
payments. The amount of Residual Interest 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 Loans. Regular Interests in a REMIC are
treated as debt for tax purposes. Unlike regular interests, REMIC
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 generated by a REMIC.
REMIC Residual Interests that are required to report taxable income or
loss but receive no cash flow from the Mortgage Loans are called
"Non-Economic Residuals."
Any purchases and sales of REMIC Residual Interests 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 Consequences - Taxation of Taxable
U.S. Stockholders."
Any REMIC securitizations carried out by the Company will generally
create a REMIC 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 Director 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 amount the Company must distribute to its stockholders in
order to avoid corporate income tax on its retained income 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 distribute all of
its taxable income and thereby avoid corporate income tax in 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
Director 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 arm's 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
Director 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 Director balance of the underlying project
loans. Additional GNMA credit enhancement may cover 100% of the Director
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 Director 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 Director 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 Director amount of any such Mortgage Loan foreclosed or
otherwise finally liquidated, whether or not the Director 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 Director 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 Director on the holder's pro rata share of the unpaid
Director balance of the related Mortgage Loans, but does not guarantee
the timely payment of scheduled Director 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 Director 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. Director 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 Director 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. In general, the Company intends to only acquire CMOs
or multi-class Pass-Through certificates that represent beneficial
ownership in grantor trusts holding Mortgage Loans, or regular interests
and residual interests in 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, Director only, or interest and Director 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 Director only or a
disproportional amount of Director, 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 Director amount than Inverse
IOs.
Other IOs in which the Company may invest, such as Sub IOs, have
the characteristics of a Subordinated Interest. A Sub IO is entitled to
no payments of Director; moreover, interest on a Sub IO often is withheld
in a reserve fund or spread account to fund required payments of Director
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 effective hedging devices 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 area of the real properties within
the portfolio to obtain information regarding rental rates and sales
prices of comparable real property. The Company's policy is to determine,
in consultation with the Manager, whether to obtain a Phase I
environmental assessment (or, if available to the Company or the Manager,
to request that the Manager review a previously obtained Phase I
environmental assessment) for each real property, certain real
properties, or none of the real properties within the portfolio prior to
its acquisition by the Company. The policy of the Company is to use the
information contained in such comparables and environmental assessments
to supplement the due diligence that is to be performed by the Manager
with respect to that portfolio.
The Company's policy generally is to request that the Manager
include within its due diligence review and analysis of those real
properties contemplated to be acquired by the Company a review of market
studies for each geographic market designated by the Company in which the
real properties within a portfolio are concentrated. The Company may
request that such studies include area economic data, employment trends,
absorption rates and market rental rates. The Company's policy is that
such due diligence analyses generally also include (i) site inspections
of the most significant properties in a portfolio of real properties
(and, if the Company determines that such a review will be
cost-effective, a random sampling of the less significant properties),
and (ii) a review of all property files and documentation that are made
available to the Company or the Manager. The Company generally will
require that such reviews include, to the extent possible, examinations
of available legal documents, litigation files, correspondence, title
reports, operating statements, appraisals and engineering and
environmental reports.
The Company's policy is that the process of determining the fair
market value of a real property is to utilize those procedures that the
Company and the Manager deem relevant for the specific real property
being evaluated, which procedures need not be the same for each real
property being evaluated. Sources of information that may be examined in
determining the fair market value of a real property may include one or
more of the following: (a) current and historical operating statements;
(b) existing or new appraisals; (c) sales comparables; (d) industry
statistics and reports regarding operating expenses, such as those
compiled by the Institute of Real Estate Management and the Building
Owners and Managers Association; (e) existing leases and market rates for
comparable leases; (f) deferred maintenance observed during site
inspections or described in structural and engineering reports; and (g)
correspondence and other documents and memoranda found in the files of
the seller of that Real Property or other relevant parties.
The Manager is expected to develop projections of net operating
income and cash flows taking into account lease rollovers, tenant
improvement costs and leasing commissions. The Manager will compare its
estimates of revenue and expenses to historical operating statements and
estimates provided in appraisals and general industry and regional
statistics. Market capitalization rates and discount rates are then
applied to the cash flow projections to estimate values. These values are
then compared to available appraisals and market sale comparables to
determine recommended bid prices for each asset. The amount offered by
the Company generally will take into account projected holding periods,
capital costs and projected profit expectations, and will be the price
that the Manager estimates is sufficient to generate an acceptable
risk-adjusted return on the Company's investment.
After the Company acquires Distressed Real Property, the Company's
goal will be to improve management of that real property so as to
increase its cash flow. If cash flows can be increased and the net
operating income stabilized, the Company may seek an opportunity to sell
the real property. The length of time the Company will hold Distressed
Real Properties may vary considerably from asset to asset, and will be
based on the Manager's analysis and conclusions as to the best time to
sell some or all of them.
If the Company is offered the opportunity to acquire real property
that is likely to be held for fewer than four years, the Company intends
to establish a taxable corporation in which the Company will hold a 95%
non-voting ownership interest to make the acquisition. Such a corporation
will not be eligible for taxation as a Qualified REIT Subsidiary, and any
profits that it earns on its activities will be subject to federal
corporate income tax before they are distributable to the Company. If the
Company acquires real property with the intent to hold it for more than
four years, but an opportunity arises to sell the property sooner, the
Company will consider certain strategies, such as a like-kind exchange,
to reduce any negative tax consequences relating to the sale.
FOREIGN REAL PROPERTIES. In addition to acquiring Distressed Real
Properties, the Company may acquire or originate Mortgage Loans secured
by real property located outside the United States or acquire such real
property, but the Company does not intend to invest more than 20% of its
portfolio in foreign real property and Mortgage Loans secured by foreign
real property. The Company has no limitations on the geographic scope of
its investments in foreign real properties and such investments may be
made in a single foreign country or among several foreign countries as
the Board of Directors may deem appropriate. 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.
There can be no assurance that acquiring or holding properties in the
name of a special purpose entity would insulate the Company from any
environmental liabilities associated with such properties. 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.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES INVESTMENTS IN OTHER SECURITIES
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 following tables set forth certain information about the directors
and executive officers of the Company.
Name Age Position
INSIDE DIRECTORS
Laurence D. Fink 45 Chairman of the Board of Directors
Hugh R. Frater 42 President and Chief Executive
Officer and Director
UNAFFILIATED DIRECTORS
Donald G. Drapkin __ Director
Jeffrey C. Keil Director
Kendrick R. Wilson, III __ Director
EXECUTIVE OFFICERS WHO ARE
NOT DIRECTORS
Richard M. Shea 38 Chief Operating Officer
Edwin O. Bergman Vice President
Chris A. Milner Vice President
Andrew Siwulec Vice President
Mark Warner 36 Vice President
Susan Wagner 36 Secretary
The Company does not expect to employ full-time personnel, except
that the officers listed above are expected to devote substantially all
of their time to the affairs of the Company.
Directors and Executive Officers
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 Manager's 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. During his tenure at
The First Boston Corporation, 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, The First Boston
Corporation developed the first collateralized mortgage obligation (CMO),
the first asset-backed security (ABS) and the first securities credit
enhanced through a senior/subordinate structure.
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 B.A. degree in political science from
the University of California at Los Angeles in 1974 and an M.B.A. 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.
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 Brothers in 1985 as a generalist in
the Mortgage and Savings Institutions Group. 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.
DONALD G. DRAPKIN, Director, has been Vice Chairman and Director of
McAndrews & Forbes Holdings Inc. and various of its affiliates since
March 1987. Prior to joining MacAndrews and Forbes, Mr. Drapkin was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom for more
than five years. Mr. Drapkin also is a Director of the following
corporations which file reports pursuant to the Exchange Act: Algos
Pharmaceutical Corporation, The Cosmetic Center, Inc., The Coleman
Company, Inc., Coleman Holdings Inc., Coleman Worldwide Inc., Playboy
Enterprises, Inc., Cardio Technologies, Inc., Genta, Inc., Welder
Nutrition International Inc., and VIMRx Pharmaceuticals Inc. (On December
27, 1996, Marvel Holdings, Marvel Parent, Marvel Entertainment Group,
Inc., of which Mr. Drapkin is a Director, and several of their respective
subsidiaries, and Marvel III Holdings Inc., of which Mr. Drapkin is a
Director, filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code.).
KENDRICK R. WILSON, III, Director, is a General Partner at Lazard
Freres & Co., formerly, President, Ranieri Wilson & Co.
JEFFREY C. KEIL, Director, has been Chairman of the Executive
Committee of International Real Returns, LLC, investment advisor to an
investment company organized by Lazard Freres & Co., since January 1998.
From 1996 to January 1998, Mr. Keil was a General Partner of Keil
Investment Partners, a private fund which invested in the financial
sector in Israel. From 1983 to 1996, Mr. Keil was President, Director and
Chairman of the Finance Committee of Republic New York Corporation and
Vice Chairman and a Member of the Executive Committee of Republic
National Bank of New York. Mr. Keil earned a B.S. degree in economics
from the University of Pennsylvania in 1965, pursued graduate studies in
mathematical statistics, operations research and international economics
from the London School of Economics, and earned an M.B.A. degree with a
concentration in Finance from Harvard Graduate School of Business
Administration in 1968.
RICHARD SHEA, ESQ., Chief Operating Officer, is a Director of the
Manager and a member of the Risk Management and Analytics Group. Mr. Shea
is responsible for the overall management of BlackRock's eight taxable
term trusts with total assets of approximately $5.3 billion as of
December 31, 1997. The term trusts are fixed income closed-end mutual
funds that terminate on a specific date with a specific targeted net
asset value at termination. Mr. Shea is also responsible for tax and
regulatory issues for all of BlackRock's funds and partnerships. Mr. Shea
has established tax analytics, including a proactive CMO tax model, and
procedures to optimize fund performance within the framework of relevant
tax laws. He currently uses these systems to trade REMIC residuals and to
support trading of other MBS derivatives. He also works with clients that
have special tax situations and assists in designing investment
strategies that take these special needs into account.
Prior to joining BlackRock in 1993, Mr. Shea was an Associate Vice
President and tax counsel at Prudential Securities, Inc. Mr Shea joined
Prudential in 1988 and was responsible for corporate tax planning,
tax-oriented investment strategies and tax issues of CMOs and original
issue discount obligations. Mr. Shea previously worked as a Senior Tax
Specialist at Laventhol and Horwath for over four years where he
structured real estate limited partnership investments for the private
placement market.
Mr. Shea earned a B.S. degree, in accounting from the State
University of New York at Plattsburgh in 1981 and a J.D. degree from New
York Law School in 1984.
EDWIN O. BERGMAN, Vice President -- Risk Management, is also a Vice
President in BlackRock's Risk Management and Analytics group. Since
joining BlackRock in October 1996 Mr. Bergman has performed a variety of
functions throughout the Risk Management area. Mr. Bergman serves as a
team leader within the firm's Risk Management advisory practice. Mr.
Bergman has also developed capabilities which allow enhanced prepayment
and loss analysis of commercial mortgage backed securities, provide
analysis and pricing of money market securities and enhance the
stratification and pricing of the firm's mortgage holdings.
Prior to working at BlackRock, Mr. Bergman worked as an associate
in Booz, Allen & Hamilton's Financial Services and Technology Practice
where he developed credit pricing, pipeline hedging and information
management strategies for several large mortgage finance institutions in
the United States and Australia. Prior to working at Booz, Allen &
Hamilton's, Mr. Bergman was a Vice President in Goldman, Sachs & Co.'s
Mortgage Research area from December 1992 to February 1995 where he
developed models supporting the structuring and analysis of commercial
and residential mortgage-backed securities and a variety of other
asset-backed securities. Prior to working at Goldman Sachs & Co., Mr.
Bergman was a Senior Associate at Morgan Stanley from July 1987 to
December 1992 where he led teams exploring applications of emerging
technology and developing applications supporting Fixed Income
Compliance, Commodities Trading and Brokerage Accounting.
Mr. Bergman received a B.A. in Economics and the Natural Sciences
for the Johns Hopkins University in May of 1987 with departmental honors
in Economics.
CHRIS A. MILNER, Vice President - Originations, is also a Vice
President and Manager of PNC Real Estate Capital Markets, where he is
responsible for managing PNC's Commercial Mortgage-Backed Securities
Program. Areas under Mr. Milner's direction include CMBS loan
origination, underwriting and closing as well as securitization.
Prior to co-founding PNC's CMBS Program in 1995, Mr. Milner was a
Vice President in PNC's real estate asset management subsidiary. In this
capacity, Mr. Milner was responsible for the restructure or sale of $250
million in small balance real estate loans and the coordination of PNC's
special servicer ratings and loan sales.
Mr. Milner joined PNC in 1990 upon completion of his graduate work
(M.B.A.-Finance) at Indiana University. While attending graduate school,
Mr. Milner worked at Melvin Simon & Associates - the predecessor to the
Simon/DeBartolo REIT - performing cashflow/refinance analyses on regional
mall properties. Mr. Milner earned a liberal arts B.A. degree form DePaul
University in 1988.
ANDREW SIWULEC, Vice President -- Loan Underwriting, is Senior Vice
President and Co-Manager of Institutional Real Estate for PNC Bank, N.A.
Institutional Real Estate encompasses public real estate companies, real
estate investment funds, and large private owners/developers throughout
the U.S. His responsibilities include business strategy and the
management of PNC's New York, New Jersey, Philadelphia, and Washington,
D.C. offices. He is a member of the Real Estate Executive Committee which
serves as the management committee for all commercial real estate
activities at PNC.
Prior to joining PNC in 1996, Mr. Siwulec served as Senior Vice
President for commercial real estate workouts at Midlantic Bank where he
started in November 1991. During that period, he managed six teams of
professionals that worked out problem credits and sold performing and
non-performing real estate assets through eight portfolio sales. Mr.
Siwulec previously worked for a Washington, D.C. commercial mortgage
banking firm where he worked on developing a conduit for commercial
mortgages and managed non-performing assets for the firm and under
contract with GNMA. Mr. Siwulec began his real estate finance career at
Continental Illinois National Bank where he most recently managed
commercial construction lending nationwide.
Mr. Siwulec earned his A.B. in 1970 from The Johns Hopkins
University in Liberal Arts and his M.B.A. from The University of
Pennsylvania, Wharton School of Business in 1976 in finance.
MARK S. WARNER, CFA, Vice President, is a Director 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 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 non-residential portfolio. 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 B.A.
degree in political science from Columbia University in 1983 and an
M.B.A. 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.
Ms. Wagner earned a B.A. degree, magna cum laude, in economics and
English from Wellesley College in
1982 and an M.B.A. 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 $20,000, a fee of $1,000 for each meeting of the Board of
Directors attended by each unaffiliated director and reimbursement of
costs and expenses of all directors for attending such meetings.
Affiliated directors will not be separately compensated by the Company
other than through the Company's Stock 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 Director 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 capacities as employees of the Manager, or its
Affiliates, they will devote their time to the affairs of the Manager as
is required 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 six members consisting of two directors affiliated
with the Manager and four 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 Articles of Incorporation of the Company also provides for
three classes of directors with staggered terms to provide for the
election of one class each year. Two of the classes of directors will
contain one affiliated director and one Unaffiliated Director and one
class will contain two Unaffiliated Directors. After the initial
staggering period (the first three years), all directors will serve for a
term of three years.
The Articles of Incorporation 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 Articles of Incorporation of the Company provide that the
personal liability of any director or officer of the Company to the
Company or its stockholders for money damages is limited to the fullest
extent allowed by the statutory or decisional law of the State of
Maryland as amended or interpreted. Maryland law authorizes the
limitation of liability of directors and officers to corporations and
their stockholders for money damages except (i) to the extent that it is
proved that the person actually received an improper benefit in money,
property, or services for the amount of the benefit or profit in money,
property or services actually received, or (ii) to the extent that a
judgment or other final adjudication adverse to the person is entered in
a proceeding based on a finding that the person's action, or failure to
act, was the result of active and deliberate dishonesty and was material
to the cause of action adjudicated. Maryland law does not affect the
potential liability of directors and officers to third parties, such as
creditors of the Company.
EXECUTIVE COMPENSATION
The Company has not paid, but may in the future pay, annual
compensation to the Company's executive officers for their services as
executive officers. The Company may from time to time, in the discretion
of the Board of Directors, grant options to purchase shares of the
Company's Common Stock to the Manager, executive officers and directors
pursuant to the Company's 1998 Stock Option Plan. See "--Stock Options"
below.
STOCK OPTIONS
The Company has adopted a Stock option plan (the "1998 Stock Option
Plan") that provides for the grant of both qualified incentive Stock
options ("ISOs") that meet the requirements of Section 422 of the Code,
and non-qualified Stock options, Stock appreciation rights and dividend
equivalent rights. ISOs may be granted to the officers and key employees
of the Company, if any. Nonqualified Stock options may be granted to the
Manager, directors, officers, any key employees of the Company and to the
directors, officers and key employees of the Manager. The exercise price
for any qualified option granted under the 1998 Stock Option Plan may not
be less than 100% of the fair market value of the shares of Common Stock
at the time the option is granted. The purpose of the 1998 Stock Option
Plan is to provide a means of performance-based compensation to the
Manager in order to attract and retain qualified personnel and to provide
an incentive to others whose job performance affects the Company. The
1998 Stock Option Plan will become effective upon the closing of the
Offering.
Subject to anti-dilution provisions for Stock splits, Stock
dividends and similar events, the 1998 Stock Option Plan authorizes the
grant of options to purchase an aggregate of up to 10% of the outstanding
shares of the Company's Common Stock, but not more than__________ shares
of Common Stock. If an option granted under the 1998 Stock Option Plan
expires or terminates, the shares subject to any unexercised portion of
that option will again become available for the issuance of further
options under the 1998 Stock Option Plan. Excluding the initial Stock
option grants discussed in the succeeding Section, option grants shall be
limited annually to the purchase of the lesser of __% of the outstanding
shares of Common Stock or ________ shares. Unless previously terminated
by the Board of Directors, the 1998 Stock Option Plan will terminate ten
years from its effective date, and no options may be granted under the
1998 Stock Option Plan thereafter.
The 1998 Stock Option Plan will be administered by a committee of
the Board of Directors comprised entirely of Unaffiliated Directors (the
"Compensation Committee") options granted under the 1998 Stock Option
Plan will become exercisable in accordance with the terms of the grant
made by the Compensation Committee. The Compensation Committee has
discretionary authority to determine at the time an option is granted
whether it is intended to be an ISO or a non-qualified option, and when
and in what increments shares of Common Stock covered by the option may
be purchased.
Under current law, ISOs may not be granted to any director of the
Company who is not also a full-time employee or to directors, officers
and other employees of entities unrelated to the Company. In addition, no
options may be granted under the 1998 Stock Option Plan to any person
who, assuming exercise of all options held by such person, would own or
be deemed to own more than 9.8% of the outstanding shares of Common Stock
of the Company.
Each option must terminate no more than ten years from the date it
is granted. Options may be granted on terms providing that they will be
exercisable in whole or in part at any time or times during their
respective terms, or only in specified percentages at stated time periods
or intervals during the term of the option.
The exercise price of any option granted under the 1998 Stock
Option Plan is payable in full (i) by cash, (ii) by surrender of shares
of the Company's Common Stock having a market value equal to the
aggregate exercise price of all shares to be purchased, (iii) by
cancellation of indebtedness owed by the Company to the optionholder,
(iv) by any combination of the foregoing, or (v) by a full recourse
promissory note executed by the optionholder. The terms of the promissory
note may be changed from time to time by the Company's Board of Directors
to comply with applicable regulations or other relevant pronouncements of
the Service or the Commission.
The Company's Board of Directors may, without affecting any
outstanding options, from time to time revise or amend the 1998 Stock
Option Plan, and may suspend or discontinue it at any time. However, no
such revision or amendment may increase the number of shares of Common
Stock subject to the 1998 Stock Option Plan (with the exception of
adjustments resulting from changes in capitalization), change the class
of participants eligible to receive options granted under the 1998 Stock
Option Plan or modify the period within which or the terms upon which the
options may be exercised without stockholder approval.
STOCK OPTIONS OUTSTANDING
The following table sets forth the Stock options to be granted
under the 1998 Stock Option Plan effective on
the closing of the Offering.
<TABLE>
<CAPTION>
STOCK OPTION GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRAMTS FOR OPTION TERM
-------------------- -------------------
OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE(2) EXPIRATION
NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE 5%($) 10%(S)
- --------------- --------- ---------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$
</TABLE>
(1) The options granted are exercisable starting one year after the
date of grant.
(2) The exercise price and tax withholding obligations incurred upon
exercise of the options may be paid by the option holder by
delivering already owned shares of Company Common Stock, including
those which are issuable upon exercise of the options.
THE MANAGER
The Manager is a 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 for an initial term expiring on the second anniversary of the
closing of the Offering although the Manager shall have the option at any
time to terminate the Agreement upon giving the Company 120 days written
notice and by the approval by the vote of a majority of the Directors of
the Company in office at the time of a successor investment manager.
Thereafter, successive extensions, each for a period not to exceed one
year, may be made by agreement between the Company and the Manager. 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:
o 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;
o 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;
o 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;
o counseling the Company in connection with policy decisions made
by the Board of Directors;
o 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;
o supervising compliance with the REIT Provisions of the Code and
maintenance of an exclusion from regulation as an investment company;
o 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;
o arranging for the issuance of MBS from pools of Mortgage Loans
owned by the Company;
o 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;
o 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;
o 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;
o contracting, as necessary, with third parties for master and
special servicing of assets acquired by
the Company;
o 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;
o causing the Company to qualify to do business in all applicable
jurisdictions;
o 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;
o 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;
o assisting the Company in making required tax filings and
reports and maintaining its status as a REIT, including soliciting
stockholders for required information to the extent provided in the
REIT Provisions of the Code;
o 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
o 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 determined by independent appraisal (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 U.S. Treasury Rate. The Company has the right upon 60 days'
notice to terminate the Management Agreement without the payment of any
termination fee if such termination is "for cause" which shall include
among other things, a material breach by the Manager of any provision
contained in the Management Agreement that remains uncured at the end of
the applicable cure period (including the failure of the Manager to
follow the Company's Operating Policies), the bankruptcy of the Manager,
the admission in writing by the Manager of its inability to pay its debts
when they become due or the sequestration or attachment of a substantial
part of the Manager's properties that continues for 30 days. The
Management Agreement will contain a dispute resolution mechanism to
address potential conflicts that may arise under the termination
provisions of the Management Agreement. Upon termination by the Company
of the Management Agreement an independent appraiser will be selected
subject to the approval of a majority of Unaffiliated Directors. The
payment of such a fee would adversely affect the results of the Company's
operations.
The Management Agreement may not be assigned (within the meaning of
the Investment Advisers Act of 1940 and the rules thereunder) by either
party without the consent of the other party.
MANAGEMENT COMPENSATION
The Manager will receive a quarterly base management fee calculated
as a percentage of the Average Invested Assets of the Company for each
calendar quarter as set forth below:
ANNUAL BASE MANAGEMENT FEE AS A PERCENTAGE OF
AVERAGE INVESTED ASSETS AVERAGE INVESTED ASSETS
- ----------------------------------------------------------------------------
$0 to $1 billion 1.00 %
$1 billion to $1.25 billion $10 million plus 0.75% of amounts in excess of
$1 billion
$1.25 billion or more $11.875 million plus 0.50% of amounts in excess
of $1.25 billion
Reimbursement of out-of-pocket expenses of the Manager paid to
third parties.
The term "Average Invested Assets" for any period means the average
of the aggregate book value of the assets of the Company, including the
assets of all of its direct and indirect subsidiaries, before reserves
for depreciation or bad debts or other similar noncash reserves, computed
by taking the daily average of such values during such period. The
Manager will not receive any management fee for the period prior to the
sale of the shares of Common Stock offered hereby. The base management
fee is intended to compensate the Manager, among other things, for its
costs in providing management services to the Company.
The Manager will be entitled to receive incentive compensation for
each fiscal quarter in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) Funds from Operations of the Company
(before the incentive fee) per share of Common Stock (based on the
weighted average number of shares outstanding) plus (b) gains (or minus
loses) from debt restructuring and sales of property per share of Common
Stock (based on the weighted average number of shares outstanding),
exceed (2) an amount equal to (a) the weighted average of the price per
share of the initial offering and the prices per share of any secondary
offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate plus two percent per annum (expressed as a quarterly percentage)
multiplied by (B) the weighted average number of shares of Common Stock
outstanding during such quarter. Notwithstanding the foregoing, no
payment of any portion of the incentive compensation that is attributable
to net capital gains of the Company prior to the end of the first full
fiscal quarter of the Company's operations following any minimum
calculation period longer than a quarter required by Rule 205-3 of the
Investment Advisers Act of 1940 at the time of such calculation, will
accrue or be payable until completion of such fiscal quarter, at which
time the cumulative net capital gains of the Company through the end of
such quarter will be computed and incentive compensation will be paid on
such net gains at the rate provided above and after which time the net
capital gains includible above for each quarter will be the excess of
such net capital gains for such minimum calculation period through the
end of such quarter (the "Total Period") over the net capital gains (if
any) for the portion of the Total Period other than such quarter. For any
period less than a quarter during which this Agreement is in effect, the
incentive fee will be prorated according to the proportion which such
period bears to a full quarter of 90, 91 or 92 days, as the case may be.
"Funds From Operations" as defined by NAREIT means net income (computed
in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization
on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. Funds from Operations does not represent
cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income as an indication
of the Company's performance or to cash flows as a measure of liquidity
or ability to make distributions. As used in calculating the Manager's
compensation, the term "Ten Year U.S. Treasury Rate" means the arithmetic
average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board
during a quarter, or, if such rate is not published by the Federal
Reserve Board, any Federal Reserve Bank or agency or department of the
federal government selected by the Company. If the Company determines in
good faith that the Ten Year U.S. Treasury Rate cannot be calculated as
provided above, then the rate will be the arithmetic average of the per
annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable
U.S. Treasury fixed interest rate security with a final maturity date not
less than eight nor more than twelve years from the date of the closing
asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by the Company.
The ability of the Company to generate Funds From Operations in
excess of the Ten Year U.S. Treasury Rate, and of the Manager to earn the
incentive compensation described in the preceding paragraph, is dependent
upon the level of credit losses, the level and volatility of interest
rates, the Company's ability to react to changes in interest rates and to
utilize successfully the operating strategies described herein, and other
factors, many of which are not within the Company's control.
The Manager is expected to use the proceeds from its base
management fee and incentive compensation in part to pay compensation to
its officers and employees who, notwithstanding that certain of them also
are officers of the Company, will receive no cash compensation directly
from the Company.
The Company expects to rely primarily on the facilities, personnel
and resources of the Manager to conduct its operations. The Manager will
be reimbursed for (or charge the Company directly for) the Manager's
costs and expenses in employing third-parties to perform due diligence
tasks on assets purchased or considered for purchase by the Company.
Further, the Manager will be reimbursed for any expenses incurred in
contracting with third parties for the master or special servicing of
assets acquired by the Company. Such arrangements may also be made using
an income sharing arrangement such as a joint venture. Expense
reimbursement will be made quarterly.
The management fees are payable in arrears. The Manager's base and
incentive fees and reimbursable costs and expenses will be calculated by
the Manager within 45 days after the end of each quarter, and such
calculation will be promptly delivered to the Company. The Company is
obligated to pay such fees, costs and expenses within 60 days after the
end of each fiscal quarter. If requested by the Manger, the Company will
make advance payments of the base management fee as often as semi-monthly
at the rate of 75% of such fee estimated by the Manager.
The Company has adopted a 1998 Stock Option Plan. The Manager and
the directors, officers and any employees of the Company and the Manager
may be granted options under the Company's 1998 Stock Option Plan. See
"Management of the Company -- Stock Options."
EXPENSES
The Company will be required to pay all offering expenses
(including accounting, legal, printing, clerical, personnel, filing and
other expenses) incurred by the Company, the Manager or its Affiliates on
behalf of the Company in connection with the Offering, estimated at $ .
This payment will not be subject to the limitation on expenses to be
borne by the Company as described in the paragraph below.
Subject to the limitations set forth below, the Company will also
pay all operating expenses except those specifically required to be borne
by the Manager under the Management Agreement. The operating expenses
required to be borne by the Manager include costs and expenses of its
officers and employees and any overhead incurred in connection with its
duties under the Management Agreement, the cost of office space and
equipment required for the Company's day-to-day operations and the costs
of any salaries or directors fees of any officers or directors of the
Company who are affiliated persons of the Manager except that the Board
of Directors of the Company may approve reimbursement to the Manager of
the Company's pro rata portion of the salaries, bonuses, health
insurance, retirement benefits and similar employment costs for the time
spent on Company operations and administration other than for the
provision of investment advisory services. The expenses that will be paid
by the Company will include (but not necessarily be limited to) issuance
and transaction costs incident to the acquisition, disposition and
financing of 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.
The Company is subject to conflicts of interest involving the
Manager and its Affiliates because, among other reasons, (i) the Manager
and its Affiliates are permitted to purchase mortgage assets for their
own account and to advise accounts of other clients, and many investments
appropriate for the Company also will be appropriate for these accounts
and (ii) the incentive fee, which is based on income of the Company, may
create an incentive for the Manager to recommend investments with greater
income potential, which generally are riskier or more speculative, than
would be the case if its fee did not include a "performance" component.
The Company is also subject to conflicts of interest because of the
expected purchase of substantial assets from PNC and its Affiliates. Many
of such assets do not have a readily determinable fair market value and
no independent valuations will be sought. Nevertheless, the Company
intends to adopt operating policies to minimize the effect of such
conflicts. These policies will require that any acquisition of assets
from PNC or its Affiliates be made for fair market value and that such
acquisition be approved by a majority of the Unaffiliated Directors. In
addition, the Board of Directors intends to approve certain operating and
investing guidelines which may be amended from time to time in response
to market conditions, but only with the approval of a majority of the
Unaffiliated Directors. The Unaffiliated Directors are likely to rely
substantially on information and analysis provided by the Manager.
Pursuant to the Management Agreement, the Manager will not assume
any responsibility other than to render the services called for
thereunder and will not be responsible for any action of the Board of
Directors in following or declining to follow its advice or
recommendations. The Manager and its directors and officers will not be
liable to the Company, any subsidiary of the Company, the Unaffiliated
Directors, the Company's stockholders or any subsidiary's stockholders
for acts performed in accordance with and pursuant to the Management
Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under
the Management Agreement. The Company has agreed to indemnify the Manager
and its directors and officers with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from acts of
the Manager not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.
From time to time, mortgage lenders offer for sale large pools of
mortgage loans and REO Properties pursuant to a competitive bidding
process. In such a case, the Manager may choose an unaffiliated entity
with which to submit a joint bid for the pool, as long as the Manager
takes title only to the mortgage loans and not the real estate. Fees."
The Company has agreed that if it terminates the Management
Agreement without cause or the Board of Directors fails to approve a
continuation of the Management Agreement, or the Company engages another
person to manage a portion of its assets or to manage assets internally
with personnel other than those previously employed by the Manager, the
Manager will be entitled to receive a termination fee in an amount equal
to the fair market value of the Management Agreement (without giving
effect to any termination and assuming it is renewed in accordance with
its terms), to be determined in accordance with the provisions of the
Management Agreement.
The Manager and its employees and the Unaffiliated Directors may
also receive Stock options pursuant to the Company's 1998 Stock Option
Plan. See "Management of the Company -- Stock Options."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume
any responsibility other than to 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. Although certain officers and
directors of the Manager are also officers and directors of the Company,
and therefore have fiduciary duties to the Company and its stockholders
in that capacity, the Manager has no fiduciary duties to the Company or
its stockholders.
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."
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax
consequences that may be relevant to the Company and 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
consequences 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 (except as discussed below), financial institutions or
broker-dealers and, except as discussed below, foreign corporations and
persons who are not citizens or residents of the United States) subject
to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Skadden, Arps,
Slate, Meagher & Flom LLP are based on current provisions of the Code,
existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Internal Revenue Service (the
"IRS"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any statements
in this Prospectus with respect to the transactions entered into or
contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE,
OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO
BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION,
AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company plans to make an election to be taxed as a REIT under
the Code, commencing with its taxable year ending on December 31, 1998.
The sections of the Code relating to qualification and operation as
a REIT are highly technical and complex. The following discussion sets
forth the material aspects of the Code sections that govern the federal
income tax treatment of a REIT and its stockholders. The discussion is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change prospectively
or retroactively.
Skadden, Arps, Slate, Meagher & Flom LLP ("Counsel") has acted as
counsel to the Company in connection with the Offering and the Company's
election to be taxed as a REIT. In the opinion of Counsel, assuming that
the elections and other procedural steps described in this discussion of
"Federal Income Tax Consequences" are completed by the Company in a
timely fashion, commencing with the Company's taxable year ending
December 31, 1998, 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 in this Prospectus.
Moreover, the Company's qualification and taxation as a REIT depends upon
its ability to meet, through actual annual operating results, asset
ownership, distribution levels, and diversity of Stock ownership, and 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 gross income attributable to the greater of the
amount by which the Company fails the 75% or 95% gross income test,
multiplied by a fraction intended to reflect the REIT's profitability.
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. To the extent that the Company
elects to retain and pay income tax on its net capital gain, such
retained amounts will be treated as having been distributed for purposes
of the 4% excise tax. 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 TESTS. 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 Director 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, and Mortgage Loans 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.
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 interest 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 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. To the extent consistent with the REIT
Provisions of the Code, such entity would elect to be taxed as a Real
Estate Mortgage Investment Conduit ("REMIC") or a Financial Asset
Securitization Investment Trust ("FASIT").
The rent received by the Company from the tenants of its real
property ("Rent") will qualify as "rents from real property" in
satisfying the gross income tests for a REIT described above only if
several conditions are met. First, the amount of Rent must not be based,
in whole or in part, on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides
that the Rent received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the Company, or a
direct or indirect owner of 10% or more of the Company, owns 10% or more
of the ownership interests in such tenant, taking into account both
direct and constructive ownership (a "Related Party Tenant"). Third, if
Rent attributable to personal property, leased in connection with a lease
of Real Property, is greater than 15% of the total Rent received under
the lease, then the portion of Rent attributable to such personal
property will not qualify as "rents from real property." Finally, for the
Rent to qualify as "rents from real property," the Company generally must
not operate or manage the Real Property or furnish or render services to
the tenants of such Real Property, other than through an "independent
contractor" who is adequately compensated and from whom the Company
derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by the Company are
"usually or customarily rendered" in connection with the rental or space
for occupancy only and are not otherwise considered "rendered to the
occupant." In addition, the Company may render a "de minimis" amount of
impermissible services without violating the independent contractor
requirement.
The Company has represented that it will not charge Rent for any
portion of any real property that is based, in whole or in part, on the
income or profits of any person (except by reason of being based on a
fixed percentage or percentages of receipts or sales, as described above)
to the extent that the receipt of such Rent would jeopardize the
Company's status as a REIT. In addition, the Company has represented
that, to the extent that it receives Rent from a Related Party Tenant,
such Rent will not cause the Company to fail to satisfy either the 75% or
95% gross income test. The Company also has represented that it will not
allow the Rent attributable to personal property leased in connection
with any lease of real property to exceed 15% of the total Rent received
under the lease, if the receipt of such Rent would cause the Company to
fail to satisfy either the 75% or 95% gross income test. Furthermore, as
a result of restrictions on the ownership of Stock in the Company, no
person may own, directly or indirectly, more than 9.8% of the outstanding
Stock of the Company so that no tenant of the Company should be a Related
Party Tenant. Finally, the Company has represented that it will not
operate or manage its real property or furnish or render noncustomary
services to the tenants of its real property other than through an
"independent contractor," to the extent that such operation or the
provision of such services would jeopardize the Company's status as a
REIT.
REITS generally are subject to tax at the maximum corporate rate on
any income from foreclosure property (other than income that would be
qualifying income for purpose of the 75% gross income test), less
expenses directly connected with the production of such income.
"Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to such
real property (i) that is acquired by a REIT as the result of such REIT
having bid in such property at foreclosure, or having otherwise reduced
such property to ownership or possession by agreement or process of law,
after there was a default (or default was imminent) on a lease of such
property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a
time when default was not imminent or anticipated, and (iii) for which
such REIT makes a proper election to treat such property as foreclosure
property. The Company does not anticipate that it will receive any income
from foreclosure property that is not qualifying income for purposes of
the 75% gross income test, but, if the Company does receive any such
income, the Company will make an election to treat the related property
as foreclosure property. If property is not eligible for the election to
be treated as foreclosure property because the related loan was acquired
by the REIT at a time when default was imminent or anticipated, income
received with respect to such Ineligible Property may not be qualifying
income for purposes of the 75% or 95% gross income test.
The Company will generally be subject to a 100% tax on net income
derived from a prohibited transaction. The term "prohibited transaction"
generally includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. In general, the assets owned by
the Company should not be considered held for sale to customers and any
such sale should 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. 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." In addition, it should be noted that a REMIC or
FASIT securitization by the Company of its whole loans could be
considered a "prohibited transaction."
It is possible that, from time to time, the Company will enter into
hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including an interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or similar financial instrument
(collectively, a "Qualified Hedge"). To the extent that the Company
enters into a Qualified Hedge to reduce the interest rate risk on
indebtedness incurred or to be incurred to acquire or carry Real Estate
Assets, any periodic income or gain from the disposition of such
Qualified Hedge should be qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test.
The Company may receive income not described above that is not
qualifying income for purposes of the 75% and 95% gross income tests. The
Company will monitor the amount of nonqualifying income produced by its
assets and has represented that it will manage its portfolio in order to
comply at all times with the gross income tests.
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 Consequences--Taxation of the
Company," even if such relief provisions apply, a 100% tax would be
imposed on the gross income attributable to the greater of the amount by
which the Company fails the 75% or 95% gross income test, multiplied by a
fraction intended to reflect the Company's profitability.
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 (at 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
Director 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 Director 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 MBS, Distressed Real Property 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 Director 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 should 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.
Income realized by the Company from a REMIC securitization could,
however, be subject to a 100% tax as a "prohibited transaction."
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 its earnings, is required to distribute with respect
to each taxable year dividends (other than capital gain dividends and
retained capital gains) to its stockholders in an aggregate amount at
least equal to (i) the sum of (A) 95% of its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company
timely files its federal income tax return for such year and if paid on
or before the first regular dividend payment date after such declaration.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. Furthermore, if
the Company should fail to distribute during each calendar year (or, in
the case of distributions with declaration and record dates falling in
the last three months of the calendar year, by the end of the January
immediately following such year) at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year and (iii) any undistributed taxable income from
prior periods, the Company would be subject to a 4% nondeductible excise
tax on the excess of such required distribution over the amounts actually
distributed. However, the Company may elect to retain, rather than
distribute, all or a portion of its net long-term capital gains and pay
the tax on such undistributed gains, in which case the Company's
stockholders would include their proportionate share of such
undistributed long-term capital gains in income and receive a credit for
their share of the tax paid by the Company. For purposes of the 4% excise
tax described above, any such retained amounts would be treated as having
been 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.
Mezzanine Loans may also be deemed to have OID for Federal income tax
purposes. OID generally will be accrued using a methodology that does not
allow credit losses to be reflected until they are actually incurred. The
Company may also be required to accrue interest income from Distressed
Mortgage Loans even though the borrowers fail to pay the full amounts
due. In addition, the Company may recognize taxable market discount
income upon the receipt of proceeds from the disposition of, or Director
payments on, MBS and Distressed Mortgage Loans that are "market discount
bonds" (i.e., obligations with an adjusted issue price 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 Director
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. Furthermore, the Company would have income
without the receipt of cash to the extent of the market discount
attributable to debt securities held by a REMIC in which the Company
holds a residual interest. 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 Director 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 because Excess Inclusion and OID are not
taken into account in calculating the Company's REIT taxable income for
purposes of the distribution requirement, 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.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirements for a year by paying
"deficiency dividends" to it stockholders in a later year, which may be
included in the Company's deduction for dividends paid for the earlier
year. Although the Company may be able to avoid being taxed on amounts
distributed as deficiency dividends, it will be required to pay to the
IRS interest based upon the amount of any deduction taken for deficiency
dividends.
RECORDKEEPING REQUIREMENTS. Under the Treasury Regulations, the
Company must maintain certain records and request on an annual basis
certain information from its stockholders designed to disclose the actual
ownership of its outstanding Stock. The Company intends to comply with
such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any
taxable year, and certain relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Distributions to the
Company's stockholders in any year in which the Company fails to qualify
as a REIT will not be deductible by the Company nor will they be required
to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to stockholders will
be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions,
the Company also will be disqualified from taxation as a REIT for the
four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to
the Company's taxable U.S. stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends or
retained capital gains) will be taken into account by such U.S.
stockholders as ordinary income and will not be eligible for the
dividends received deduction generally available to corporations. As used
herein, the term "U.S. stockholder" means a holder of Common Stock that
for U.S. federal income tax purposes is (i) a citizen or resident of the
U.S., (ii) a corporation, partnership, or other entity created or
organized in or under the laws of the U.S. or of any political
subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income
tax purposes regardless of its connection with the conduct of a trade or
business within the United States, or (iv) any trust with respect to
which (a) a U.S. court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. fiduciaries have
the authority to control all substantial decisions of the trust.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to
the period for which the stockholder has held his Common Stock. However,
corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of
the stockholder's Common Stock, but rather will reduce the adjusted basis
of such Stock. To the extent that such distributions in excess of current
and accumulated earnings and profits exceed the adjusted basis of a
stockholder's Common Stock, such distributions will be included in income
as long-term capital gain (or short-term capital gain if the Common Stock
had been held for one year or less), assuming the Common Stock is a
capital asset in the hands of the stockholder. In addition, any
distribution declared by the Company in October, November, or December of
any year and payable to a stockholder of record on a specified date in
any such month shall be treated as both paid by the Company and received
by the stockholder on December 31 of such year, provided that the
distribution is actually paid by the Company during January of the
following calendar year.
Stockholders may not include in their individual income tax returns
any net operating losses or capital losses of the Company. Instead, such
losses would be carried over by the Company for potential offset against
its future income (subject to certain limitations). Taxable distributions
from the Company and gain from the disposition of the Common Stock will
not be treated as passive activity income and, therefore, stockholders
generally will not be able to apply any "passive activity losses" (such
as losses from certain types of limited partnerships in which a
stockholder is a limited partner) against such income. Taxable
distributions from the Company generally will be treated as investment
income for purposes of the investment interest limitations. Capital gains
from the disposition of Common Stock (or distributions treated as such),
however, will be treated as investment income only if the stockholder so
elects, in which case such capital gains will be taxed at ordinary income
rates. The Company will notify stockholders after the close of the
Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income or capital gain
dividends.
The Company may elect to retain and pay income tax on its net
long-term capital gains. If the Company makes this election, the
Company's stockholders would include in their income as long-term capital
gain their proportionate share of the long-term capital gain as
designated by the Company. Each stockholder will be deemed to have paid
the stockholder's share of the tax, which could be credited or refunded
to the stockholder. The basis of the stockholder's shares is increased by
the amount of the undistributed long-term capital gains (less the amount
of capital gains tax paid).
The Company's investment in MBS may cause it under certain
circumstances to recognize phantom income and to experience an offsetting
excess of economic income over its taxable income in later years. As a
result, stockholders may from time to time be required to pay federal
income tax on distributions that economically represent a return of
capital, rather than a dividend. Such distributions would be offset in
later years by distributions representing economic income that would be
treated as returns of capital for federal income tax purposes.
Accordingly, if the Company receives phantom income, its stockholders may
be required to pay federal income tax with respect to such income on an
accelerated basis, i.e., before such income is realized by the
stockholders in an economic sense. Taking into account the time value of
money, such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in
the Company that would be less than the after-tax rate of return on an
investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an
effective income tax rate of 30% purchased a bond (other than a
tax-exempt bond) with an annual interest rate of 10% for its face value,
his before-tax return on his investment would be 10%,and his after-tax
return would be 7%. However, if the same investor purchased Stock of the
Company at a time when the before-tax rate of return was 10%, his
after-tax rate of return on his Stock might be somewhat less than 7% as a
result of the Company's phantom income. In general, as the ratio of the
Company's phantom income to its total income increases, the after-tax
rate of return received by a taxable stockholder of the Company will
decrease. The Company will consider the potential effects of phantom
income on its taxable stockholders in managing its investments.
If the Company owns REMIC Residual Interests, it is possible that
stockholders would not be permitted to offset certain portions of the
dividend income they derive from the Company with their current
deductions or net operating loss carryovers or carrybacks. The portion of
a stockholder's dividends that would be subject to this limitation would
equal his allocable share of any Excess Inclusion income derived by the
Company with respect to the REMIC Residual Interests. The Company's
Excess Inclusion income for any calendar quarter will equal the excess of
its income from REMIC Residual Interests over its "daily accruals" with
respect to such REMIC Residual Interests for the calendar quarter. Daily
accruals for a calendar quarter are computed by allocating to each day on
which a REMIC Residual Interest is owned a ratable portion of the product
of (i) the "adjusted issue price" of the REMIC Residual Interest at the
beginning of the quarter and (ii) 120% of the long-term federal interest
rate (adjusted for quarterly compounding) on the date of issuance of the
REMIC Residual Interest. The adjusted issue price of a REMIC Residual
Interest at the beginning of a calendar quarter equals the original issue
price of the REMIC Residual Interest, increased by the amount of daily
accruals for prior quarters and decreased by all prior distributions to
the Company with respect to the REMIC Residual Interest. To the extent
provided in future Treasury Regulations, the Excess Inclusion income with
respect to any REMIC Residual Interests owned by the Company that do not
have significant value will equal the entire amount of the income derived
from such REMIC Residual Interests. Furthermore, to the extent that the
Company (or a Qualified REIT Subsidiary) acquires or originates Mortgage
Loans and uses those loans to collateralize one or more multiple-class
offerings of MBS for which no REMIC election is made ("Non-REMIC
Transactions"), it is possible that, to the extent provided in future
Treasury Regulations, stockholders will not be permitted to offset
certain portions of the dividend income that they derive from the Company
that are attributable to Non-REMIC Transactions with current deductions
or net operating loss carryovers or carrybacks. Although no applicable
Treasury Regulations have yet been issued, no assurance can be provided
that such regulations will not be issued in the future or that, if
issued, such regulations will not prevent the Company's stockholders from
offsetting some portion of their dividend income with deductions or
losses from other sources.
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of
the Common Stock by a stockholder who is not a dealer in securities will
be treated as long-term capital gain or loss if the Common Stock has been
held for more than one year and otherwise as short-term capital gain or
loss. However, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such shares for six months or less (after
applying certain holding period rules) will be treated as a long-term
capital loss to the extent of distributions from the Company required to
be treated by such stockholder as long-term capital gain. All or portion
of any loss realized upon a taxable disposition of the Common Stock may
be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate (which applies to
ordinary income and gain from the sale or exchange of capital assets held
for one year or less) is 39.6%. The maximum regular income tax rate on
capital gains derived by non-corporate taxpayers is 28% for sales and
exchanges of capital assets held for more than one year but not more than
eighteen months, and 20% for sales and exchanges of capital assets held
for more than eighteen months. However, any long-term capital gains from
the sale or exchange of depreciable real property that would be subject
to ordinary income taxation (i.e., "depreciation recapture") if treated
as personal property will be subject to a maximum tax rate of 25% instead
of the 20% maximum rate. For taxable years beginning after December 31,
2000, the maximum regular capital gains rate for assets which are held
more than 5 years is 18%. This rate will generally only apply to assets
for which the holding period begins after December 31, 2000. With respect
to distributions designated by the Company as capital gain dividends and
any retained capital gains that the Company is deemed to distribute, the
Company may designate (subject to certain limits) whether such a
distribution is taxable to its individual stockholders at a federal
income tax rate of 20%, 25% or 28%. Thus, the tax rate differential
between capital gains and ordinary income for non-corporate taxpayers may
be significant. In addition, the characterization of income as capital
gain or ordinary income may affect the deductibility of capital losses.
Capital losses not offset by capital gains my be deducted against a
non-corporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward
indefinitely by non-corporate taxpayers. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate income tax
rates. A corporate taxpayer can deduct capital losses only to the extent
of capital gains, with unused losses being carried back three years and
forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. stockholders and to the IRS 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
IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distribution to any
stockholders who fail to certify their non-foreign status to the Company.
The IRS has issued final Treasury Regulations regarding the back up
withholding rules as applied to non- U.S. stockholders. Those regulators
alter the current system of back up withholding compliance and will be
effective for payments made after December 31, 1998.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts ("Exempt
Organizations"), generally are exempt from federal income taxation.
However, they are subject to taxation on their unrelated business taxable
income ("UBTI"). While many investments in real estate generate UBTI, the
IRS has ruled that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the shares
of the REIT are not otherwise used in an unrelated trade or business of
the exempt employee pension trust. Based on that ruling, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its
acquisition of the Common Stock with debt, a portion of its income from
the Company will constitute UBTI pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs
(7), (9), (17) and (20), respectively, of Code Section 501(c) are subject
to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the
Company's Stock is required to treat a percentage of the dividends from
the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross
income of the Company for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of the
Company's Stock only if (i) the UBTI Percentage is at least 5%, (ii) the
Company qualifies as a REIT be reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interest
in the pension trust, and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's Stock or (B) a group of pension
trusts individually holding more than 10% of the value of the Company's
Stock collectively owns more than 50% of the value of the Company's
Stock. The restrictions on the ownership and transfer of the Company's
Stock 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 gain dividends
or retained capital gains will be treated as dividends of ordinary income
to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions ordinarily will be subject
to a withholding tax equal to 30% of the gross amount of the distribution
unless an applicable tax treaty reduces or eliminates that tax. However,
if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S.
trade or business, the Non-U.S. Stockholder generally will be subject to
federal income tax at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to such distributions (and also may
be subject to the 30% branch profits tax in the case of a Non-U.S.
Stockholder that is a corporation). The Company expects to withhold U.S.
income tax at the rate of 30% on the gross amount of any such
distributions made to a Non- U.S. Stockholder unless (i) a lower treaty
rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder
files an IRS Form 4224 with the Company claiming that the distribution is
effectively connected income.
Any portion of the dividends paid to Non-U.S. Stockholders that is
treated as Excess Inclusion income will not be eligible for exemption
from the 30% withholding tax or a reduced treaty rate. In addition, if
Treasury regulations are issued in the future allocating the Company's
Excess Inclusion income from non-REMIC transactions among its
stockholders, some percentage of the Company's dividends would not be
eligible for exemption from the 30% withholding tax or a reduced treaty
withholding tax rate in the hands of Non-U.S. Stockholders. See
"-Taxation of Taxable U.S. Stockholders."
Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a stockholder to the extent
that such distributions do not exceed the adjusted basis of the
stockholder's Common Stock, but rather will reduce the adjusted basis of
such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's Common Stock, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax
on any gain from the sale or disposition of his Common Stock, as
described below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess
of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as
a dividend. However, amounts so withheld are refundable to the extent it
is subsequently determined that such distribution was, in fact, in excess
of current and accumulated earnings and profits of the Company. The
Company is required to withhold 10% of any distribution in excess of the
Company's current and accumulated earnings and profits. Consequently,
although the Company intends to withhold at a rate of 30% on the entire
amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of
30% will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT,
distributions that are attributable to gain from sales or exchanges by
the Company of a U.S. real property interest (which includes certain
interests in Real Property but does not include Mortgage Loans or MBS)
will be taxed to a Non-U.S. Stockholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real
property interests are taxed to a Non-U.S. Stockholder as if such gain
were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch
profits tax in the hands of a Non- U.S. corporate stockholder not
entitled to treaty relief or exemption. The Company is required to
withhold 35% of any distribution that is designated by the Company as a
U.S. real property capital gains dividend. The amount withheld is
creditable against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his Common
Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of the
Stock was held directly or indirectly by non-U.S. persons. Because the
Common Stock will be publicly traded, no assurance can be given that the
Company will be or remain a "domestically controlled REIT." In addition,
a Non-US Stockholder that owns, actually or constructively, 5% or less of
the Company's Stock throughout a specified "look-back" period will not
recognize taxable gain on the sale of his Stock under FIRPTA if the
shares are traded on an established securities market. Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the Common Stock is effectively connected with the Non-U.S.
Stockholder's U.S. trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders
with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the U.S. for 183 days or
more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Common Stock
were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect
to such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and
the possible application of the 30% branch profits tax in the case of
non-U.S. corporations).
STATE AND LOCAL TAXES
The Company or the Company's stockholders may be subject to state
and local tax in various states and localities, including those states
and localities in which it or they transact business, own property, or
reside. The state and local tax treatment of the Company and its
stockholders in such jurisdictions may differ from the federal income tax
treatment described above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock.
ERISA CONSIDERATIONS
In considering an investment in the Common Stock, a fiduciary of a
profit-sharing, pension Stock bonus plan, or individual retirement
account ("IRA"), including a plan for self-employed individuals and their
employees or any other employee benefit plan subject to prohibited
transaction provisions of the Code or the fiduciary responsibility
provisions of ERISA (an "ERISA Plan") should consider (a) whether the
ownership of Common Stock is in accordance with the documents and
instruments governing such ERISA Plan, (b) whether the ownership of
Common Stock is consistent with the fiduciary's responsibilities and
satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions
in improper delegation of control over, or responsibility for, "plan
assets" and ERISA's imposition of co-fiduciary liability on a fiduciary
who participates in, permits (by action or inaction) the occurrence of,
or fails to remedy a known breach of duty by another fiduciary and (d)
the need to value the assets of the ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c) above,
Counsel is of the opinion that, effective as of the date of the closing
of the Offering and the listing of the shares of Common Stock on the New
York Stock Exchange, and based on certain representations of the Company,
the Common Stock should qualify as a "publicly offered security," and,
therefore, the acquisition of such Common Stock by ERISA Plans should not
cause the Company's assets to be treated as assets of such investing
ERISA Plans for purposes of the fiduciary responsibility provisions of
ERISA or the prohibited transaction provisions of the Code. Fiduciaries
of ERISA Plans and IRAs should consult with and rely upon their own
advisors in evaluating the consequences under the fiduciary provisions of
ERISA and the Code of an investment in Common Stock in light of their own
circumstances.
DESCRIPTION OF CAPITAL STOCK
The authorized capital Stock of the Company consists of 400 million
shares of Common Stock, $.001 par value, and 100 million shares of
preferred stock, $.001 par value, issuable in one or more series. Each
share of Common Stock is entitled to participate equally in dividends
when and as declared by the Board of Directors and in the distribution of
assets of the Company upon liquidation. Each share of Common Stock is
entitled to one vote and will be fully paid and non-assessable by the
Company upon issuance. Shares of the Common Stock of the Company have no
preference, conversion, exchange, preemptive or cumulative voting rights.
The authorized capital Stock of the Company may be increased and altered
from time to time as permitted by Maryland law.
Preferred Stock may be issued from time to time in one or more
classes or series, with such distinctive designations, rights and
preferences as shall be determined by the Company's Board of Directors.
Preferred Stock would be available for possible future financings of, or
acquisitions by, the Company and for general corporate purposes without
any legal requirement that stockholder authorization for issuance be
obtained. The issuance of preferred Stock could have the effect of making
an attempt to gain control of the Company more difficult by means of a
merger, tender offer, proxy contest or otherwise. The preferred Stock, if
issued, would have a preference on dividend payments that could affect
the ability of the Company to make dividend distributions to the common
stockholders.
Meetings of the stockholders of the Company are to be held annually
and special meetings may be called by the Board of Directors, the
Chairman of the Board, the President or a majority of the Unaffiliated
Directors. The Articles of Incorporation reserve to the Company the right
to amend any provision thereof in the manner prescribed by law.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements of qualification as a REIT are that (1)
during the last half of each taxable year (other than the first taxable
year for which a REIT election is made) to which a REIT section is made
not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals (the "5/50 Rule") and
(2) there must be at least 100 stockholders on 335 days of each taxable
year (other than the first taxable year for which a REIT election is
made) of 12 months.
In order that the Company may meet these requirements at all times,
the Articles of Incorporation prohibit any person from acquiring or
holding, directly or indirectly, shares of Common Stock in excess of 9.8%
(in value or in number of shares, whichever is more restrictive) of the
aggregate of the outstanding shares of Common Stock of the Company. For
this purpose, the term "ownership" is defined in accordance with the REIT
Provisions of the Code and the constructive ownership provisions of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code.
Subject to certain limitations, the Company's Board of Directors may
increase or decrease the ownership limitations or waive the limitations
for individual investors to the extent such action does not affect the
Company's qualification as a REIT.
For purposes of the 5/50 Rule, the constructive ownership
provisions applicable under Section 544 of the Code (i) attribute
ownership of securities owned by a corporation, partnership, estate or
trust proportionately to its stockholders, partners or beneficiaries,
(ii) attribute ownership of securities owned by certain family members to
other members of the same family, and (iii) treat securities with respect
to which a person has an option to purchase as actually owned by that
person. These rules will be applied in determining whether a person holds
shares of Common Stock in violation of the ownership limitations set
forth in the Articles of Incorporation. 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 provide 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 with respect to a stockholder's
ownership of Common Stock, to the extent such waiver does not affect the
Company's qualification as a REIT.
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 Director 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 Director consolidated transaction reporting system with
respect to securities listed on the Director 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 Director
other automated quotation system that may then be in use or, if such
shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in such shares selected by the Company's Board of
Directors or, in the event that no trading price is available for such
shares, the fair market value of the shares, as determined in good faith
by the Company's Board of Directors.
Every owner of more than 5%, (or such lower percentage as required
by the Code or the Regulations promulgated thereunder) of the outstanding
shares or any class or series of the Company's Stock, within 30 days
after the end of each taxable year, is required to give written notice to
the Company stating the name and address of such owner, the number of
shares of each class and series of Stock of the Company beneficially
owned and a description of the manner in which such shares are held. Each
such owner shall provide to the Company such additional information as
the Company may request in order to determine the effect, if any, of such
beneficial ownership on the Company's status as a REIT and to ensure
compliance with the ownership limitations.
DIVIDEND REINVESTMENT PLAN
The Company may implement a dividend reinvestment plan whereby
stockholders may automatically reinvest their dividends in the Company's
Common Stock. Details about any such plan would be sent to the Company's
Stockholders following adoption thereof by the Board of Directors.
MATERIAL PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following summary of material 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 removal by the directors, with
or without cause by the affirmation vote of at least two-thirds of the
directors then in office.
STAGGERED BOARD
The Articles of Incorporation and the Bylaws divide the Board of
Directors into three classes of directors, each class constituting
approximately one-third of the total number of directors, which the
classes serving staggered three-year terms. The classification of the
Board of Directors will make it more difficult for stockholders to change
the composition of the Board of Directors because only a minority of the
directors can be elected at once. The classification provisions could
also discourage a third party from accumulating the Company's Stock or
attempting to obtain control of the Company, even though this attempt
might be beneficial to the Company and some, or a majority, of its
stockholders. Accordingly, under certain circumstances stockholders could
be deprived of opportunities to sell their shares of Common Stock at a
higher price than might otherwise be available.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a
merger, consolidation, share exchange or, in certain circumstances, an
asset transfer or issuance or reclassification of equity securities)
between a Maryland corporation and any person who beneficially owns 10%
or more of the voting power of the corporation's shares or an affiliate
of the corporation who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of the
voting power of the then outstanding voting Stock of the corporation (an
"Interested Stockholder") or an affiliate of such an Interested
Stockholder are prohibited for five years after the most recent date on
which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be recommended by the
board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding shares of voting Stock of the corporation and (b) two-thirds
of the votes entitled to be cast by holders of voting Stock of the
corporation other than shares held by the Interested Stockholder with
whom (or with whose affiliate) the business combination is to be
effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. The MGCL
does not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time
that the Interested Stockholder becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to
the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of Stock owned by the acquirer, by
officers or by directors who are employees of the corporation. "Control
Shares" are voting shares of Stock which, if aggregated with all other
such shares of Stock previously acquired by the acquirer or in respect of
which the acquirer is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would entitle the
acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority or (iii) a
majority or more of all voting power. Control shares do not include
shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "Control Share
Acquisition" means the acquisition of Control Shares, subject to certain
exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement as
required by the statute, then, subject to certain conditions and
limitations, the corporation may redeem any or all of the Control Shares
(except those for which voting rights have previously been approved) for
fair value determined, without regard to the absence of voting rights for
the Control Shares, as of the date of the last control share acquisition
by the acquirer or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to
vote, all other stockholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquirer in
the control share acquisition.
The control share acquisition statute does not apply (i) to shares
acquired in a merger, consolidation or share exchange if the corporation
is a party to the transaction, or (ii) to acquisitions approved or
exempted by the Articles of Incorporation or Bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person
of the Company's shares of Common Stock. There can be no assurance that
such provision will not be amended or eliminated at any time in the
future.
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company reserves the right from time to time to make any
amendment to its Articles of Incorporation, now or hereafter authorized
by law, including any amendment which alters the contract rights as
expressly set forth in the Articles of Incorporation, of any shares of
outstanding Stock. The Articles of Incorporation may be amended only by
the affirmative vote of holders of shares entitled to cast not less than
a majority of all the votes entitled to be cast on the matter; provided,
however, that provisions relating to the Company's election to be taxed
as a REIT and to 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 MATERIAL 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 the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters
named below (the "Underwriters") and each of the Underwriters, for whom
Friedman, Billings, Ramsey & Co., Inc. is acting as representative (the
"Representative"), has severally agreed to purchase from the Company, the
number of shares of Common Stock offered hereby set forth below opposite
its name.
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
Friedman, Billings, Ramsey & Co., Inc. ......................
Total..................................................
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock
offered hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common
Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such offering
price less a concession not to exceed $___ per share of Common Stock. The
Underwriters may allow and such dealers may reallow a concession not to
exceed $___ per share of Common Stock to certain other dealers. After the
shares of Common Stock are released for sale to the public, the offering
price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option exercisable
during the 30-day period beginning after the date hereof to purchase, at
the initial public offering price net of any underwriting discounts and
commissions, up to an additional __________ shares of Common Stock for
the sole purpose of covering over-allotments, if any. To the extent that
the Underwriters exercise such options each Underwriter will be
committed, subject to certain conditions, to purchase that number of
additional shares of Common Stock that is proportionate to such
Underwriter's initial commitment.
The Company has agreed to reimburse the Underwriters for up to
$200,000 of their out-of-pocket expenses, including fees and expenses of
counsel to the Underwriters.
The Company has agreed to indemnify the several Underwriters
against certain civil liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in
respect thereof.
Prior to this Offering, there has been no public market for the
Common Stock. The initial public offering price will be determined by
negotiation between the Company and the Representative. Among the factors
considered in making such determination were the history of, and the
prospects for, the industry in which the Company will compete, an
assessment of the skills of the Manager and the Company's prospects for
future earnings, the general conditions of the economy and the securities
market and the prices of offerings by similar issuers. There can,
however, be no assurance that the price at which the shares of Common
Stock will sell in the public market after this Offering will not be
lower than the price at which they are sold by the Underwriters.
The Representative has informed the Company that the Underwriters
do not intend to confirm sales of the Common Stock to any accounts over
which they exercise discretionary authority.
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 or purchase the Common Stock. As an
exception to these rules, the Representative may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common
Stock. Specifically, the Representative may overallot this Offering,
creating a syndicate short position. In addition, the Representative may
bid for and purchase shares of Common Stock in the open market to cover
syndicate short positions or to stabilize the price of the shares.
Finally, the Representative may reclaim selling concessions from
syndicate members if the syndicate repurchases previously distributed
shares of Common Stock in syndicate covering transactions, or otherwise.
Any of these activities may stabilize or maintain the market price of the
Common Stock above independent market levels. 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 the Common Stock. In addition, neither the
Company nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The Company, the Manager, and their respective officers and
directors have agreed not to, directly or indirectly, offer, sell,
contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible or exchangeable for shares of Common Stock for
a period of 180 days from the date of this Prospectus without the prior
written consent of the Representative, except that the Company may,
without such consent, grant options or issue shares of Common Stock
pursuant to the Company's 1998 Stock Option Plan.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Skadden Arps Slate Meagher & Flom LLP, New
York, New York, who will rely on the opinion of Miles & Stockbridge with
respect to matters of Maryland law, and certain legal matters will be
passed upon for the Underwriters by Hunton & Williams, Richmond,
Virginia. In addition, the description of federal income tax consequences
contained in this Prospectus entitled "Federal Income Tax Consequences"
is based upon the opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
The balance sheet of Anthracite Capital, Inc., as of _____________,
1997, included in this Prospectus has been audited by _________________,
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 Director 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 Director consolidated transaction reporting system with
respect to securities listed on the Director 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 Director 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
Director and interest payments received on the collateral are sufficient
to make Director 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 Director amount and at a specified price.
"Common Stock" means the Company's shares of Common Stock, $.01 par
value per share.
"Company" means Anthracite Capital, Inc., a Maryland corporation.
"Compensation Committee" means the committee of the Company's Board
of Directors, comprised entirely of Unaffiliated Directors, that will
administer the 1998 Stock Option Plan.
"Construction Loans" shall mean a loan the proceeds of which are to
be used to finance the costs of construction or rehabilitation of real
property.
"Control Shares" means voting shares of Stock which, if aggregated
with all other shares of Stock previously acquired by the acquirer or in
respect of which the acquirer is able to exercise or direct the exercise
of voting power (except solely by virtue of a revocable proxy), would
entitle the acquirer to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more
but less than one-third, (ii) one-third or more but less than a majority
or (iii) a majority or more of all voting power. Control shares do not
include shares if the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval.
"Control Share Acquisition" means the acquisition of control
shares, subject to certain exceptions.
"Conforming Mortgage Loans" means conventional Mortgage Loans that
either comply with requirements inclusion in credit support programs
sponsored by FHLMC, Fannie Mae or GNMA or are FHA or VA Loans, all of
which are secured by first mortgages or deeds of trust on single-family
(one to four units) residences.
"Counsel" means Skadden Arps Slate Meagher & Flom LLP.
"Counterparty" means a third-party financial institution with which
the Company enters into an agreement.
"Dealer Property" means real property and real estate mortgages
that constitute 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 of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organization" shall mean a Tax Exempt Entity.
"FASIT" means Financial Asset Securitization Investment Trust.
"FNMA" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C., (S)1716 et seq.), formerly known as
the Federal National Mortgage Association.
"FNMA Certificates" means guaranteed mortgage pass-through
certificates issued by Fannie Mae either in certified or book-entry form.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"FHA" means the United States Federal Housing Administration.
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC Certificates" means mortgage participation certificates
issued by FHLMC, either in certificated or book-entry form.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Foreclosure Property" means property acquired at or in lieu of
foreclosure of the mortgage secured by such property or a result of a
default under a lease of such property.
"Funds From Operations" means net income (computed in accordance
with GAAP) excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets and
after adjustments for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"GNMA Certificates" means fully modified pass-through
mortgage-backed certificates guaranteed by GNMA and issued either in
certificated or book-entry form.
"High Quality" means either (i) securities that are rated __ or
above by at least one of the Rating Agencies, (ii) securities that are
unrated but are obligations of the United States or obligations
guaranteed by the United States government or an agency or
instrumentality thereof or (iii) securities that are of equivalent credit
quality as determined by the Manager.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the Department of Housing and Urban Development.
"Ineligible Property" means property not eligible to be treated as
foreclosure property.
"Interested Stockholder" means any person who beneficially owns 10%
or more of the voting power of a corporation's shares or an affiliate of
a corporation who, at any time within the ten-year period prior to the
date in question, was the beneficial owner of 10% or more of the voting
power of the then outstanding voting Stock of the corporation.
"IO" means Mortgage Derivative Securities representing the right to
receive interest only or a disproportionately large amount of interest in
relation to Director payments.
"Intended Transferee" means, with respect to any purported Transfer
or Non-Transfer Event, any Person who, but for any restrictions on the
transfer or ownership of Equity Stock, would own record title to shares
of Equity Stock.
"Inverse IOS" means IOS that bear interest rate at a floating rate
that varies inversely with (and often at a multiple of) changes in a
specific index.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRAs" means Individual Retirement Accounts.
"ISOS" means qualified incentive Stock options granted under the
1998 Stock Option Plan that meet the
requirements of Section 422 of the Code.
"Issuers" means those entities that issue mortgage securities,
including trusts or subsidiaries organized by the Company and Affiliates
of the Manager.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means London-Inter-Bank Offered Rate.
"MGCL" means the Maryland General Corporation Law, as amended from
time to time.
"Management Agreement" means the agreement by and between the
Company and the Manager whereby the Manager agrees to perform certain
services to the Company in exchange for certain compensation.
"Manager" means BlackRock Financial Management Inc., a Delaware
corporation.
"Market Discount Bonds" means obligations with an adjusted issue
price 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 Backed 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, Director only, or
interest and Director 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 Consequences--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 Director and interest
is more than 90 days delinquent.
"Non-REMIC Residual Interests" shall mean the retained interest in
a securitization transaction for which no REMIC or FASIT election is
made.
"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 Director 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 Director only or a disproportionate amount of Director.
"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 Director and interest
payments in the underlying pool of Mortgage Loans and are issued or
guaranteed by the private institution.
"Prohibited Transaction" means a transaction involving a sale of
Dealer Property, other than Foreclosure Property.
"Purchase Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Qualified Hedges" means any interest rate swap or cap agreement,
option, futures contract, forward rate agreement, or similar financial
instrument entered into by the Company to reduce interest rate risk with
respect to any indebtedness incurred or to be incurred by the Company to
acquire or carry Real Estate Assets.
"Qualified REIT Real Estate Assets" means Pass-Through
Certificates, Mortgage Loans, Agency Certificates, real property and
other assets of the type described in Section 856(c)(6)(B) of the Code.
"Qualified REIT Subsidiary" means a corporation whose Stock is
entirely owned by the REIT.
"Qualified Temporary Investment Income" means income attributable
to stock or debt instruments acquired with new capital of the Company
(other than the proceeds of debt obligations with a term of less than
five years) 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 Director
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 Director 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), shares of other REITs and certain temporary investments..
"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 a tenant of the Company in which the
Company, or a direct or indirect owner of 10% or more of the Company,
owns more than 10% of the ownership interests, 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 Consequences--Requirements for Qualification as a REIT--Gross
Income Tests."
"Shared Appreciation Provision" means
"Special Servicing" shall mean servicing of defaulted mortgage
loans, including oversight and management of the resolution of such
mortgage loans by modification, foreclosure, deed in lieu of foreclosure
or otherwise.
"1998 Stock Option Plan" means the Stock option plan adopted by the
Company in 1998.
"Sub IOS" shall mean an IO with characteristics of a Subordinated
Interest.
"Subperforming Mortgage Loans" shall mean multifamily and
commercial mortgage loans for which default is likely or imminent.
"Suppliers of Mortgage Assets" means mortgage bankers, savings and
loan associations, investment banking firms, banks, home builders,
insurance companies and other concerns or lenders involved in mortgage
finance or originating and packaging mortgage loans, and their
Affiliates.
"Tax-Exempt Entity" means a qualified pension, profit-sharing or
other employee retirement benefit plans, Keogh plans, bank commingled
trust funds for such plans, and IRAs, and other similar entities intended
to be exempt from federal income taxation.
"Taxable Income" means for any year the taxable income of the
Company for such year (excluding any net income derived either from
property held primarily for sale to customers or from Foreclosure
Property) subject to certain adjustments provided in the REIT Provisions
of the Code.
"Ten-Year U.S. Treasury Rate" means the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to a constant maturity
of ten years) published by the Federal Reserve Board during a quarter,
or, if such rate is not published by the Federal Reserve Board, any
Federal Reserve Bank or agency or department of the federal government
selected by the Company. If the Company determines in good faith that the
Ten Year U.S. Treasury Rate cannot be calculated as provided above, then
the rate shall be the arithmetic average of the per annum average yields
to maturities, based upon closing asked prices on each business day
during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor
more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York
City by at least three recognized dealers in U.S. government securities
selected by the Company.
"Treasury Regulations" shall mean the income tax regulations
promulgated under the Code.
"Trust" means a trust that is the transferee of that number of
shares of Common Stock the beneficial or constructive ownership of which
otherwise would cause a person to acquire or hold, directly or
indirectly, shares of Common Stock in an amount that violates the
Company's Articles of Incorporation, which trust shall be for the
exclusive benefit of one or more Charitable Beneficiaries.
"Trustee" means a trustee of a Trust for the exclusive benefit of a
Charitable Beneficiary.
"UBTI" means "unrelated trade or business income" as defined in
Section 512 of the Code.
"UBTI Percentage" shall mean the gross income derived by the
Company from UBTI (determined as if the Company was a pension trust)
divided by gross income of the Company for the year in which the
dividends are paid.
"Unaffiliated Directors" shall mean a director who (a) does not own
greater than a de minimis interest in the Manager or any of its
Affiliates, and (b) within the last two years, has not (i) directly or
indirectly been employed by the Manager or any of its Affiliates, (ii)
been an officer or director of the Manager or any of its Affiliates,
(iii) performed services for the Manager or any of its Affiliates, or
(iv) had any material business or professional relationship with the
Manager or any of its Affiliates.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. as
well as others in the future and each of
the underwriters for whom they are acting as representatives.
"United States Stockholder" means an initial purchaser of the
Common Stock that, for United States income tax purposes, is a United
States person (i.e., is not a Foreign Holder).
"VA" means the United States Veterans Administration.
"VA Loans" means Mortgage Loans partially guaranteed by the VA
under the Serviceman's Readjustment Act of 1944, as amended.
ANTHRACITE CAPITAL, INC.
BALANCE SHEET
___________ ___, 1997
ASSETS
Cash ...................................................... $ 1,500
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity
Preferred Stock, par value $0.001 per share; 100,000,000
shares authorized, no shares issued;
Common Stock, par value $0.001 per share;
400,000,000 shares authorized; [1000] shares issued
and outstanding ...................................... $ 1
Additional paid-in-capital.................................. 1,499
---------
Total Stockholder's Equity............................ $ 1,500
=========
See accompanying notes to balance sheet.
ANTHRACITE CAPITAL, INC.
NOTES TO BALANCE SHEET
_________ ___, 1997
NOTE 1 - THE COMPANY
Anthracite Capital, Inc. (the "Company") was incorporated in
Maryland and was initially capitalized through the sale of shares of
Common Stock for $1,500 on _________ ___, 1997. The Company will seek to
acquire primarily mortgage-backed securities and may also invest in other
real estate related assets, including mortgage loans.
The Company has had no operations to date other than matters
relating to the organization and start-up of the Company. Accordingly, no
statement of operations is presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FEDERAL AND STATE INCOME TAXES
The Company will elect to be taxed as a real estate investment
trust under the Internal Revenue Code of 1986, as amended, and generally
will not be subject to federal and state taxes on its income to the
extent it distributes annually 95% of its predistribution taxable income
to stockholders and maintains its qualification as a real estate
investment trust.
INCOME RECOGNITION
Income and expenses are to be recorded on the accrual basis of
accounting.
NOTE 3 - TRANSACTIONS WITH AFFILIATES
The Company intends to enter into a Management Agreement (the
"Management Agreement") with BlackRock Financial Management Inc. (the
"Manager"), a wholly owned subsidiary of PNC Bank Corp, under which the
Manager will manage the Company's day-to-day operations, subject to the
direction and oversight of the Company's Board of Directors. The Company
will pay the Manager annual base management compensation, payable
quarterly, equal to 1% of the Average Net Invested Capital as further
defined in the Management Agreement. The Company will also pay the
Manager, as incentive compensation, an amount equal to 25% of the Funds
from Operation of the Company plus gains (minus losses), before incentive
compensation, in excess of the amount that would produce an annualized
Return on Equity on the invested amount of common Stock equal to 2% over
the Ten-Year U.S. Treasury Rate as further defined in the Management
Agreement.
The Company intends to adopt a Stock option plan that provides for
the grant of qualified Stock options, non-qualified Stock options, Stock
appreciation rights and dividend equivalent rights ("Options") under
which Options may be granted to the Manager, directors, officers and any
key employees of the Company and to the directors, officers and key
employees of the Manager.
NOTE 4 - PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement
for the sale of its common Stock. Contingent upon the consummation of the
public offering, the Company will be liable for organization and offering
expenses in connection with the sale of the shares offered.
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK BY ANYONE IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- ------------------------------------------------------------------------------
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 CAPITAL, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
---------------
, 1997
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID
SEC Registration Fee............................ $
NASDAQ 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
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
None
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 Underwriting 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 Underwriting 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
*5.2 Opinion of Miles & Stockbridge
*8.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*10.1 Management Agreement between the Registrant and BlackRock
Financial Management Inc.
*10.6 1998 Stock Option Incentive Plan
*10.8 1998 outside Directors Stock Option Plan
*23.1 Consent of Accountants
*23.2 Consent of Skadden Arps Slate Meagher & Flom LLP (included
in Exhibits 5.1 and 8.1)
*23.3 Consent of Miles & Stockbridge
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.
The registrant undertakes to file a sticker supplement pursuant to
Rule 424(c) under the Act during the distribution period describing each
property not identified in the prospectus at such time as there arises a
reasonable probability that such property will be acquired and to
consolidate all such stickers into a post-effective amendment filed at
least once every three months, with the information contained in such
amendment provided simultaneously to the existing stockholders. The
post-effective amendment shall include audited financial statements
meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period.
The registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the
financial statements and any additional information required by Rule 3-14
of Regulation S-X, to reflect each commitment (i.e., the signing of a
binding purchase agreement) made after the end of the distribution period
involving the use of 10% or more (on a cumulative basis) of the net
proceeds of the offering and to provide the information contained such
report to stockholders at least once each quarter after the distribution
period of the offering has ended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-11 and
has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of
New York, State of New York, on the 5th day of February, 1998.
ANTHRACITE CAPITAL, INC.
By: /s/Richard Shea
----------------------------
Chief Operating Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signatures appear below, constitutes and appoints each of Laurence Fink,
Hugh Frater and Richard Shea, or any of them, each acting alone, his true
and lawful attorney-in-fact and agent, with full power os substitution
and resubstitution, for such person and in his name, place and stead, in
any and all capacities, in connection with the Registrant's Registration
Statement in the name and on behalf of the Registrant or on behalf of the
undersigned as a director or officer of the Registrant, on Form S.11
under the securities Act of 1933, as amended, including , without
limiting the generally of the foregoing, to sign the Registration
Statement, and any subsequent registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to
be done in connection there with, as fully to all intents and purposes as
they might or could do in person, thereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
/s/ LAURENCE D. FINK Chairman of the Board
- ------------------------
Laurence D. Fink
/s/ HUGH R. FRATER President (Director Executive
- ------------------------ Officer)
Hugh R. Frater
/s/ RICHARD SHEA Chief Operating Officer
- ------------------------ (Director Financial and
Richard Shea Accounting Officer)
EXHIBIT INDEX
*1.1 Form of Purchase Agreement
3.1 Articles of Incorporation of the Registrant is incorporated by
reference to Exhibit 3.1 of the Registration Statement filed with
the Securities and Exchange Commission on November 21, 1997.
*3.2 Bylaws of the Registrant
*5.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*5.2 Opinion of Miles & Stockbridge
*8.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*10.1 Management Agreement between the Registrant and BlackRock Financial
Management Inc.
*10.6 1998 Stock Option Incentive Plan
*10.8 1997 Outside Directors Stock Option Plan
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Skadden Arps Slate Meagher & Flom LLP (included in Exhibits
5.1 and 8.1)
*23.3 Consent of Miles & Stockbridge
24.1 Power of Attorney (included on page II-5) is incorporated by
reference to Exhibit 24.1 of the Registration Statement filed with
the Securities and Exchange Commission on November
21, 1997.
*99.1 Consents to be named as a director pursuant to Rule 438
* To be filed by amendment.
