<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998.
REGISTRATION NO. 333-46179
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MARYLAND 6798 13-3974868
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
399 PARK AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE NUMBER (212) 935-8760
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
MICHAEL B. YANNEY
CHAIRMAN OF THE BOARD
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
399 PARK AVENUE
NEW YORK, NEW YORK 10022
(212) 935-8760
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
COPIES TO:
ALAN L. GOSULE, ESQ. AND
JAY L. BERNSTEIN, ESQ.
ROGERS & WELLS LLP
200 PARK AVENUE
NEW YORK, NY 10166
(212) 878-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective and the satisfaction or waiver of all other conditions to the
transactions described in the Consent Solicitation Statement/Prospectus included
herein.
------------------------
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
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(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. / /
------------------------
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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<PAGE>
February 27, 1998
Dear Investor:
We are asking you to consider and vote on a proposal to merge the following
limited partnerships into a new mortgage Real Estate Investment Trust:
/ / America First Participating/Preferred Equity Mortgage Fund;
/ / America First PREP Fund 2; and,
/ / America First PREP Fund 2 Pension Series
You have received this package because you are an investor in one or more of
these limited partnerships.
The merger proposal is described in detail in the accompanying Consent
Solicitation Statement/Prospectus. We realize the amount of information required
by the Securities and Exchange Commission results in a sizable document, but we
urge you to read it carefully.
After you have reviewed the enclosed solicitation materials, we urge you to vote
"FOR" the proposal by completing, signing and dating the enclosed Consent Form
and returning it by March 31, 1998 in the enclosed postage-paid envelope.
In the pages that follow, we have described the risks and benefits of voting
"FOR" the proposed merger. We have also provided a question and answer memo
which we believe will answer many of the questions you might have. If you have
further questions, you can call our Investor Services Department at
1-800-239-8787.
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Michael Yanney Stewart Zimmerman
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Chairman Executive Vice President
America First Companies America First Companies
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<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
------------------
CONSENT SOLICITATION STATEMENT OF
AMERICA FIRST PARTICIPATING/PREFERRED
EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
AND
AMERICA FIRST PREP FUND 2
LIMITED PARTNERSHIP
AND
AMERICA FIRST PREP FUND 2
PENSION SERIES LIMITED PARTNERSHIP
------------------------
THIS CONSENT SOLICITATION STATEMENT ALSO SERVES AS
THE PROSPECTUS OF AMERICA FIRST MORTGAGE INVESTMENTS, INC.
UP TO 8,971,506 SHARES OF COMMON STOCK
------------------------
This Consent Solicitation Statement/Prospectus relates to the proposed
combination (the "Merger") of America First Mortgage Investments, Inc., a newly
formed, externally advised Maryland corporation which expects to qualify as a
real estate investment trust (a "REIT") for federal income tax purposes (the
"Company"), and America First Participating/ Preferred Equity Mortgage Fund
Limited Partnership, a Delaware limited partnership ("Prep Fund 1"), America
First Prep Fund 2 Limited Partnership, a Delaware limited partnership ("Prep
Fund 2"), and America First Prep Fund 2 Pension Series Limited Partnership, a
Delaware limited partnership ("Pension Fund," and together with Prep Fund 1 and
Prep Fund 2, the "Partnerships"). As a result of the Merger, (i) Prep Fund 1 and
Prep Fund 2 will merge with and into the Company, (ii) Pension Fund will merge
with AF Merger, L.P., a Delaware limited partnership, and survive the merger
becoming a subsidiary of the Company, (iii) outstanding Exchangeable Units
representing assigned limited partnership interests in Prep Fund 1 ("Prep Fund 1
Units") will be converted (at the rate of 1.00 share for each Prep Fund 1 Unit)
into an aggregate of 5,775,797 shares of common stock, par value $0.01 per
share, of the Company (the "Common Stock"), (iv) outstanding Beneficial Unit
Certificates representing assigned limited partnership interests in Prep Fund 2
("Prep Fund 2 BUCs") will be converted (at the rate of approximately 1.26 shares
for each Prep Fund 2 BUC) into an aggregate of 2,012,336 shares of Common Stock
and (v) outstanding Beneficial Unit Certificates representing assigned limited
partnership interests in Pension Fund ("Pension BUCs," and together with Prep
Fund 1 Units and Prep Fund 2 BUCs, the "Units") will be converted (at the rate
of approximately 1.31 shares for each Pension BUC) into a maximum of 1,183,373
shares of Common Stock. Holders of Units in Pension Fund have the option of
retaining their Pension BUCs as described herein under "TERMS OF THE
MERGER--Retention Option." The retained Pension BUCs will be substantially
equivalent to the Pension BUCs currently held by holders of Units in Pension
Fund. Pursuant to the terms of the Merger, the Company will also make a one-time
cash payment of $1.06 per share (the "Cash Merger Payment"), which will be paid
in four equal quarterly payments during the first year following the Merger, to
stockholders entitled to receive distributions; provided, however, any
distributions paid to stockholders by the Company out of earnings during this
first year will have the effect of reducing the amount of the Cash Merger
Payment so that the amount paid to stockholders will still be, in the aggregate,
equal to $1.06 per share.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, under the symbol "MFA."
SEE "RISK FACTORS" BEGINNING ON PAGE 31 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED CAREFULLY BEFORE VOTING ON THE MATTERS DESCRIBED HEREIN.
The effects of the Merger may differ as to individual holders of Units in
each of the Partnerships (the "Unitholders") and may be disadvantageous to
certain Unitholders depending on their individual circumstances and investment
objectives. In particular, Unitholders who receive shares of Common Stock in the
Merger should consider the following factors:
- - There is substantial uncertainty as to the price at which the shares of
Common Stock will trade following the Merger.
- - The general partners of the Partnerships (the "General Partners") anticipate
that the Company will fund the Cash Merger Payment, to the extent it is
required to be paid to stockholders during the first year following the
Merger, out of the proceeds from sales of mortgage-backed securities and
mortgage loans, short-term borrowings or existing cash reserves. Because the
size of the Company's investment portfolio will be reduced in connection
with the distribution of the Cash Merger Payment, the General Partners
anticipate that the sale of mortgage-backed securities and mortgage loans or
the use of borrowings or reserves to fund such Cash Merger Payment will
adversely affect the Company's future operations, earnings and the payment
of distributions on the Common Stock.
- - The nature of each Unitholder's investment will change from interests in a
finite-life partnership holding a static and unleveraged portfolio of
fixed-rate mortgage related assets to interests in an infinite-life mortgage
REIT that will employ leverage and invest in a broader variety of mortgage
related assets, consisting primarily of adjustable-rate mortgage-backed
securities and mortgage loans.
- - The General Partners initiated and participated in the structuring of the
Merger and have certain conflicts of interest with respect to its
completion, including that the Company's advisor is an affiliate of the
General Partners.
- - If the Merger is approved by a majority in interest of the Unitholders of a
Partnership, all Unitholders in such Partnership will be bound by the
decision of the majority and, except for those Unitholders in Pension Fund
electing to retain their Pension BUCs, will be required to exchange their
Units for shares of Common Stock.
<PAGE>
- - Unitholders will have no appraisal, dissenters' or similar rights in
connection with the Merger.
- - The Company will employ a strategy of borrowing funds to finance the
acquisition of mortgage related assets and expects to maintain an
equity-to-assets ratio of 8% to 10%. If the returns on such assets fail to
offset the cost of the borrowings, the Company's earnings and distributions
on its Common Stock will be adversely affected.
- - Fluctuations in short-term interest rates may adversely affect the Company's
earnings and the market price of its Common Stock as a result of (i)
mismatches between the repricing of the Company's mortgage related assets
and the repricing of its borrowed funds, (ii) interest rate caps on its
mortgage related assets and (iii) different interest rate indices between
the Company's mortgage related assets and its borrowed funds.
- - An increase in the prepayment rate on mortgage related assets which have been
purchased at a premium could adversely affect the Company's earnings and
distributions on its Common Stock.
- - Hedging strategies involve certain risks and may not be successful in
reducing all of the Company's exposure to fluctuations in interest rates.
- - Failure to remain exempt from registration under the Investment Company Act
of 1940, as amended, would severely limit the Company's ability to implement
its leveraging strategy.
- - If the Company fails to qualify as a REIT for federal income tax purposes,
the Company will be taxed as a regular corporation which would adversely
affect the ability of the Company to make distributions on its Common Stock.
--------------------------
This Consent Solicitation Statement/Prospectus is being furnished to
Unitholders in connection with the solicitation of consents by the General
Partners. Approval by a majority in interest of the Unitholders of each
Partnership is required for such Partnership to approve the Merger. The Merger
will not be consummated unless both Prep Fund 1 and Prep Fund 2 participate in
the Merger. The participation of Pension Fund is not a condition to the closing
of the Merger. The established record date for voting of Units is February 25,
1998. The deadline for returning the enclosed form of consent (the "Consent
Form") is March 31, 1998 (the "Response Date"). UNITHOLDERS ARE REQUESTED TO
COMPLETE, DATE AND SIGN THE CONSENT FORM AND RETURN IT IN THE POSTAGE-PREPAID
ENVELOPE PROVIDED.
This Consent Solicitation Statement/Prospectus and the Consent Form are
first being sent to Unitholders on or about February 27, 1998.
--------------------------
The Company will file a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission covering the
8,971,506 shares of Common Stock to be issued to Unitholders in connection with
the Merger. This Consent Solicitation Statement/Prospectus also constitutes the
prospectus of the Company filed as part of the Registration Statement with
respect to the shares of Common Stock to be issued in connection with the
Merger.
THE GENERAL PARTNERS RECOMMEND VOTING FOR THE MERGER. EACH UNITHOLDER MUST
MAKE ITS DETERMINATION BASED UPON SUCH UNITHOLDER'S PERSONAL SITUATION, AND SUCH
DECISION SHOULD BE BASED UPON A CAREFUL EXAMINATION OF THE UNITHOLDER'S PERSONAL
FINANCES, INVESTMENT OBJECTIVES, TAX SITUATION AND EXPECTATIONS AS TO THE
COMPANY'S FUTURE GROWTH.
------------------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE 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 FAIRNESS OR MERITS OF THIS TRANSACTION OR
THE ACCURACY OR ADEQUACY OF THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PARTNERSHIPS, THE GENERAL PARTNERS OR THE COMPANY. THIS CONSENT
SOLICITATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS NOR ANY SALES MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE PARTNERSHIPS OR THE COMPANY SINCE THE DATE
HEREOF; HOWEVER, IN THE EVENT OF ANY MATERIAL CHANGE DURING THE PERIOD WHEN THIS
CONSENT SOLICITATION STATEMENT/PROSPECTUS MUST BE DELIVERED, THE CONSENT
SOLICITATION STATEMENT/PROSPECTUS WILL BE SUPPLEMENTED ACCORDINGLY.
UNTIL 90 DAYS AFTER THE DATE OF THE CONSENT SOLICITATION
STATEMENT/PROSPECTUS, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
CONSENT SOLICITATION STATEMENT/ PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A CONSENT SOLICITATION STATEMENT/PROSPECTUS
WHEN ACTING AS SOLICITING DEALERS.
--------------------------
The date of this Consent Solicitation Statement/Prospectus is , 1998.
ii
<PAGE>
AVAILABLE INFORMATION
Prep Fund 1, Prep Fund 2 and Pension Fund are each subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith file reports, proxy and
information statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission at 7 World Trade
Center, New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a site on the Internet at http://www.sec.gov
that contains reports, proxy and other information statements and other
information regarding registrants (including the Partnerships and the Company)
that file electronically with the Commission. This Proxy Statement is also
included at the Commission's Web Site. The reports, proxy and information
statements and other information concerning Prep Fund 1 and Prep Fund 2 can also
be inspected at the offices of the NASDAQ Stock Market, 1725 K Street, N.W.,
Washington, D.C. 20006 and the American Stock Exchange, 86 Trinity Place, New
York, New York 10006, respectively.
The Company has filed with the Commission the Registration Statement of
which this Consent Solicitation Statement/Prospectus forms a part (including all
amendments, exhibits, annexes and schedules thereto), pursuant to the Securities
Act and the rules and regulations promulgated thereunder, covering the shares of
Common Stock to be issued in connection with the Merger. This Consent
Solicitation Statement/Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Consent Solicitation Statement/Prospectus as to the contents
of any contract, agreement or other document are not necessarily complete, and
in each instance, reference is made to the copy of such contract, agreement or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The information in
this Consent Solicitation Statement/Prospectus concerning the Company, Prep Fund
1, Prep Fund 2 and Pension Fund has been furnished by the Company, Prep Fund 1,
Prep Fund 2 and Pension Fund, respectively. For further information with respect
to the Company, the Partnerships and the Common Stock offered hereby reference
is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Prep Fund 1 (File No.
0-15854), Prep Fund 2 (File No. 1-10022) and Pension Fund (File No. 0-17582)
pursuant to the Exchange Act are incorporated herein by reference:
(i) Prep Fund 1's Annual Report on Form 10-K for the year ended December 31,
1996;
(ii) Prep Fund 1's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
(iii) Prep Fund 1's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997;
(iv) Prep Fund 1's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, as amended by Quarterly Report on Form 10-Q/A No. 1
filed on November 24, 1997, Quarterly Report on Form 10-Q/A No. 2 filed
on December 16, 1997 and Quarterly Report on Form 10-Q/ A No. 3 filed
on January 9, 1998;
(v) Prep Fund 2's Annual Report on Form 10-K for the year ended December 31,
1996;
(vi) Prep Fund 2's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
(vii) Prep Fund 2's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997;
iii
<PAGE>
(viii) Prep Fund 2's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997;
(ix) Prep Fund 2's Current Report on Form 8-K filed February 13, 1997;
(x) Pension Fund's Annual Report on Form 10-K for the year ended December
31, 1996, as amended by Annual Report on Form 10-K/A No. 1 filed on
October 29, 1997;
(xi) Pension Fund's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(xii) Pension Fund's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997;
(xiii) Pension Fund's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997; and
(xiv) Pension Fund's Current Report on Form 8-K filed February 13, 1997.
Each document subsequently filed by the Partnerships pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act shall be deemed to be incorporated
by reference herein and to be a part hereof from the date of filing of such
reports and documents. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Consent Solicitation Statement/Prospectus to the extent that a statement
contained in this Consent Solicitation Statement/ Prospectus modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part of this Consent Solicitation
Statement/Prospectus except as so modified or superseded.
This Consent Solicitation Statement/Prospectus is accompanied by a copy of
(i) the Annual Report on Form 10-K for the year ended December 31, 1996 for each
of Prep Fund 1 and Prep Fund 2, (ii) the Annual Report on Form 10-K/A No. 1 for
the year ended December 31, 1996 for Pension Fund, (iii) the Quarterly Report on
Form 10-Q/A No. 3 for the quarter ended September 30, 1997 for Prep Fund 1 and
(iv) the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
for each of Prep Fund 2 and Pension Fund. The Partnerships hereby will provide,
without charge, to any person, including any beneficial owner, to whom this
Consent Solicitation Statement/Prospectus has been delivered, on the written or
oral request of any such person and by first class mail or other equally prompt
means within one day of receipt of such request, any or all of the documents
referred to above which have been or may be incorporated in this Consent
Solicitation Statement/Prospectus (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference). Requests for such
copies should be: (i) in the case of documents relating to Prep Fund 1, directed
to America First Participating/Preferred Equity Mortgage Fund Limited
Partnership, 1004 Farnam Street, Omaha, Nebraska 68102, at telephone number
(800) 239-8787, Attention: Maurice E. Cox, Jr.; (ii) in the case of documents
relating to Prep Fund 2, directed to America First Prep Fund 2 Limited
Partnership, 1004 Farnam Street, Omaha, Nebraska 68102, at telephone number
(800) 239-8787, Attention: Maurice E. Cox, Jr.; or (iii) in the case of
documents relating to Pension Fund, directed to America First Prep Fund 2
Pension Series Limited Partnership, 1004 Farnam Street, Omaha, Nebraska 68102,
at telephone number (800) 239-8787, Attention: Maurice E. Cox, Jr. In order to
ensure timely delivery of the documents, any requests should be made no later
than five business days prior to the Response Date.
PREP FUND 1, PREP FUND 2 AND PENSION FUND WILL PROVIDE, WITHOUT CHARGE, TO
EACH PERSON WHO RECEIVES THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS, UPON
THE WRITTEN OR ORAL REQUEST OF SUCH PERSON AND BY FIRST CLASS MAIL OR OTHER
EQUALLY PROMPT MEANS WITHIN ONE DAY OF RECEIPT OF SUCH REQUEST, A COPY OF SUCH
DOCUMENTS DELIVERED HEREWITH OR INCORPORATED HEREIN BY REFERENCE (NOT INCLUDING
EXHIBITS TO SUCH INFORMATION UNLESS THE EXHIBITS THEMSELVES ARE SPECIFICALLY
INCORPORATED BY REFERENCE). REQUESTS FOR DOCUMENTS SHOULD BE MADE AS SPECIFIED
ABOVE.
iv
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TABLE OF CONTENTS
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AVAILABLE INFORMATION.................................................................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................................................... iii
SUMMARY.................................................................................................. 1
Introduction........................................................................................... 1
Summary Risk Factors................................................................................... 2
Overview of the Merger................................................................................. 5
Retention Option....................................................................................... 5
Organizational Charts.................................................................................. 6
Parties to the Merger.................................................................................. 8
The Company............................................................................................ 8
Background of the Merger............................................................................... 9
Fairness Opinion....................................................................................... 10
Bringdown Fairness Opinion............................................................................. 11
Financial Advisor...................................................................................... 11
Recommendations of the General Partners and the Special Committee; Fairness Determination.............. 11
Assessment of Alternatives to the Merger............................................................... 14
Benefits to Insiders................................................................................... 15
The Merger Agreement................................................................................... 16
Comparison of Units and Common Stock................................................................... 17
Dividend Reinvestment Plan............................................................................. 23
Federal Income Tax Considerations...................................................................... 24
The Consent Solicitation............................................................................... 25
Dissenters' Rights of Appraisal........................................................................ 25
Fees and Expenses...................................................................................... 25
Consequences If the Merger Is Not Approved............................................................. 25
Accounting Treatment................................................................................... 26
Delivery of the Certificates for Units................................................................. 26
Comparative Market Data................................................................................ 26
Historical and Pro Forma Per Unit and Per Share Information............................................ 27
Summary Historical Financial Information............................................................... 28
RISK FACTORS............................................................................................. 31
Risks Associated with the Merger....................................................................... 31
Uncertain Market Price of Common Stock After the Merger................................................ 31
Cash Merger Payment to Be Funded Partly from the Sale of Assets or
Borrowings........................................................................................... 31
Possible Lower Distributions........................................................................... 31
Fundamental Change in Nature of Investments............................................................ 32
Lack of Operating History.............................................................................. 32
Lack of Management Experience in Managing a Mortgage REIT.............................................. 32
Change in Investment Policies.......................................................................... 33
Implementation of a Growth-Oriented Business Plan...................................................... 33
Potential Conflicts of Interest of General Partners.................................................... 33
Federal Income Tax Consequences........................................................................ 34
A Majority in Interest Will Bind All Unitholders in Each Partnership................................... 34
No Dissenters' Rights.................................................................................. 34
Merger Expenses........................................................................................ 34
</TABLE>
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Allocation of Common Stock Among the Partnerships...................................................... 34
Limitations on Changes in Control Contained in the Charter and Bylaws.................................. 35
Limitations on Changes in Control Pursuant to Maryland Law............................................. 35
Dependence on Key Personnel............................................................................ 36
No Assurance Benefits of Merger Will Be Realized....................................................... 36
Change in the Payment Schedule of Distributions........................................................ 36
Risks Associated with the Company's Business............................................................. 36
Leveraging Strategy.................................................................................... 36
No Limitation on Debt.................................................................................. 37
Fluctuations in Short-Term Interest Rates.............................................................. 37
Decline in Market Value of Mortgage Securities......................................................... 38
Loss on Certain Mortgage Loans and Securitization...................................................... 38
Loss on Certain Mortgage Securities.................................................................... 38
Prepayment of Adjustable-Rate Mortgage Securities and Mortgage Loans................................... 38
Hedging Strategies May Not Eliminate Interest Rate Risk................................................ 39
Ability to Change Policies Without Stockholder Approval................................................ 40
Competition............................................................................................ 41
Registration under the Investment Company Act.......................................................... 41
Risks Associated with a Corporation Qualifying as a REIT................................................. 42
Taxation as a Corporation.............................................................................. 42
REIT Minimum Distribution Requirements; Possible Incurrence of Additional Debt......................... 42
Failure of Pension Fund to Be Classified as a Partnership for Federal Income Tax Purposes.............. 42
ERISA Requirements..................................................................................... 43
THE PARTNERSHIPS......................................................................................... 44
Prep Fund 1............................................................................................ 44
Prep Fund 2............................................................................................ 44
Pension Fund........................................................................................... 45
THE COMPANY.............................................................................................. 46
General................................................................................................ 46
Investment Strategies.................................................................................. 46
Financing Strategies................................................................................... 47
Risk Management Strategies............................................................................. 49
Securitization of Mortgage Loans....................................................................... 50
Operating Restrictions................................................................................. 50
Portfolio of Mortgage Securities and Mortgage Loans.................................................... 51
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities............................. 54
Distribution Policy.................................................................................... 55
MANAGEMENT OF THE COMPANY................................................................................ 56
Directors and Executive Officers of the Company........................................................ 56
Executive Compensation................................................................................. 58
Employment Agreements.................................................................................. 58
Stock Option Plan...................................................................................... 59
Committees of the Board of Directors................................................................... 60
Vacancies on the Board of Directors.................................................................... 60
Compensation of Directors.............................................................................. 61
The Advisor............................................................................................ 61
Legal Proceedings...................................................................................... 64
Conflicts of Interest.................................................................................. 64
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vi
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THE PROPOSED MERGER...................................................................................... 66
Background of the Merger............................................................................... 66
Fairness Opinion....................................................................................... 71
Financial Advisor...................................................................................... 79
Recommendations of the General Partners and the Special Committee; Fairness Determination.............. 81
Assessment of Alternatives to the Merger............................................................... 89
TERMS OF THE MERGER...................................................................................... 91
General................................................................................................ 91
Effects of the Merger.................................................................................. 91
Effective Date of the Merger........................................................................... 91
Allocation of Common Stock............................................................................. 91
Cash Merger Payment.................................................................................... 93
The Merger Agreement................................................................................... 94
Consequences If Merger Not Completed................................................................... 97
Accounting Treatment................................................................................... 97
Fees and Expenses...................................................................................... 97
Delivery of the Certificates for Units................................................................. 98
Dissenters' Right of Appraisal......................................................................... 99
Retention Option....................................................................................... 99
THE CONSENT SOLICITATION................................................................................. 102
Introduction........................................................................................... 102
Response Date.......................................................................................... 102
Record Date and Vote Required.......................................................................... 102
Consent Procedures..................................................................................... 102
Exercise of the Retention Option....................................................................... 103
Effect of Consent...................................................................................... 103
Solicitation Expenses.................................................................................. 104
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY.............................................................. 104
General................................................................................................ 104
Common Stock........................................................................................... 104
Additional Classes of Stock............................................................................ 105
Restrictions on Transfer............................................................................... 105
DIVIDEND REINVESTMENT PLAN............................................................................... 106
CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER AND BYLAWS............................................ 108
Board of Directors..................................................................................... 108
Business Combinations.................................................................................. 108
Control Share Acquisitions............................................................................. 109
Amendment to Charter................................................................................... 110
Advance Notice of Director Nominations and New Business................................................ 110
FEDERAL SECURITIES LAW CONSEQUENCES...................................................................... 111
COMPARATIVE RIGHTS AND OBLIGATIONS OF UNITHOLDERS AND STOCKHOLDERS....................................... 112
Form of Organization................................................................................... 112
Duration of Existence.................................................................................. 112
Business............................................................................................... 112
Investment and Financing Objectives and Policies....................................................... 113
</TABLE>
vii
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<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Nature of Investment................................................................................... 114
Borrowing Policies..................................................................................... 114
Expected Distributions and Payments.................................................................... 114
Management............................................................................................. 115
Fees and Expenses...................................................................................... 116
Potential Dilution..................................................................................... 117
Potential Dilution of Payment Rights................................................................... 117
Potential Redemption or Repurchase..................................................................... 118
Liquidity and Transferability.......................................................................... 118
Anti-Takeover Provisions............................................................................... 118
Taxation of Taxable Investors.......................................................................... 119
Voting Rights.......................................................................................... 119
Meetings............................................................................................... 120
Right to Inspect Books and Records..................................................................... 120
Reports................................................................................................ 121
Liabilities............................................................................................ 121
FIDUCIARY RESPONSIBILITIES AND INDEMNIFICATION OF OFFICERS AND DIRECTORS................................. 122
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY............................ 123
FEDERAL INCOME TAX CONSIDERATIONS........................................................................ 123
General................................................................................................ 123
Opinions of Counsel.................................................................................... 124
Certain Tax Differences between the Ownership of Units and Common Stock................................ 124
Tax Treatment of the Merger for Partnerships and Unitholders........................................... 125
Tax Consequences to Company............................................................................ 127
Treatment of the Company as a REIT..................................................................... 128
Taxation of the Company as a REIT...................................................................... 128
Requirements for Qualification as a REIT............................................................... 129
Tax Aspects of the Company's Investments in Partnerships............................................... 134
Taxation of the Company's Stockholders................................................................. 134
Certain Tax Considerations for Non-U.S. Holders of Common Stock........................................ 137
Other Tax Considerations............................................................................... 139
Recent Legislation..................................................................................... 139
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GIVING EFFECT TO
THE MERGER............................................................................................. 140
EXPERTS.................................................................................................. 142
LEGAL MATTERS............................................................................................ 142
GLOSSARY................................................................................................. 143
INDEX TO FINANCIAL STATEMENTS............................................................................ F-1
PRO FORMA FINANCIAL INFORMATION.......................................................................... F-5
APPENDIX A............................................................................................... A-1
APPENDIX B-1............................................................................................. B-1-1
APPENDIX B-2............................................................................................. B-2-1
APPENDIX C............................................................................................... C-1
</TABLE>
viii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARIZES CERTAIN INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE ELSEWHERE IN THIS CONSENT SOLICITATION STATEMENT/PROSPECTUS. THIS
SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MORE DETAILED INFORMATION APPEARING OR INCORPORATED BY
REFERENCE ELSEWHERE HEREIN. AS USED HEREIN, "PREP FUND 1" REFERS TO AMERICA
FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP, "PREP
FUND 2" REFERS TO AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP, "PENSION FUND"
REFERS TO AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP, THE
"PARTNERSHIPS" REFERS TO ALL THREE OF SUCH PARTNERSHIPS, THE "COMPANY" REFERS TO
AMERICA FIRST MORTGAGE INVESTMENTS, INC., A NEWLY ORGANIZED, EXTERNALLY ADVISED
MARYLAND CORPORATION, THE "ADVISOR" REFERS TO AMERICA FIRST MORTGAGE ADVISORY
CORPORATION, A NEWLY ORGANIZED MARYLAND CORPORATION OWNED BY AMERICA FIRST
COMPANIES L.L.C., THE ENTITY THAT CONTROLS THE GENERAL PARTNERS OF THE
PARTNERSHIPS ("AMERICA FIRST"), "PREP FUND 1 UNITS" REFERS TO THE EXCHANGEABLE
UNITS REPRESENTING ASSIGNED LIMITED PARTNERSHIP INTERESTS IN PREP FUND 1, "PREP
FUND 2 BUCS" REFERS TO THE BENEFICIAL UNIT CERTIFICATES REPRESENTING ASSIGNED
LIMITED PARTNERSHIP INTERESTS IN PREP FUND 2, "PENSION BUCS" REFERS TO THE
BENEFICIAL UNIT CERTIFICATES REPRESENTING ASSIGNED LIMITED PARTNERSHIP INTERESTS
IN PENSION FUND, "UNITS" REFERS TO ALL THREE OF SUCH SECURITIES, "UNITHOLDERS"
REFERS TO THE HOLDERS OF THE UNITS AND "COMMON STOCK" REFERS TO THE COMMON
STOCK, PAR VALUE $0.01 PER SHARE, OF THE COMPANY. SEE "GLOSSARY" FOR THE
DEFINITIONS OF CERTAIN OTHER CAPITALIZED TERMS USED IN THIS CONSENT SOLICITATION
STATEMENT/PROSPECTUS.
INTRODUCTION
This Consent Solicitation Statement/Prospectus relates to the proposed
combination (the "Merger") of Prep Fund 1, Prep Fund 2 and Pension Fund with and
into the Company, a growth oriented, externally advised real estate investment
trust ("REIT") that will own and actively manage a portfolio of mortgage-backed
securities ("Mortgage Securities") and mortgage loans ("Mortgage Loans"). As a
result of the Merger, Unitholders will exchange their Units in the Partnerships
for shares of Common Stock in the Company on a basis that is expected to be
tax-free for federal income tax purposes. The terms of the Merger also provide
that the Company will make a one-time cash payment of $1.06 per share (the "Cash
Merger Payment"), which will be paid in four equal quarterly payments during the
first year following the Merger, to stockholders entitled to receive
distributions; provided, however, any distributions paid to stockholders by the
Company out of earnings during this first year will have the effect of reducing
the amount of the Cash Merger Payment so that the amount paid to stockholders
will still be, in the aggregate, equal to $1.06 per share. The Merger is being
proposed in accordance with an agreement and plan of merger (the "Merger
Agreement"), dated as of July 29, 1997, among the Company, AF Merger, L.P., a
Delaware limited partnership subsidiary of the Company ("Partnership Merger
Sub"), and the Partnerships. A copy of the Merger Agreement is attached to this
Consent Solicitation Statement/Prospectus as Appendix A. The Common Stock has
been approved for listing on the New York Stock Exchange (the "NYSE"), subject
to official notice of issuance, under the symbol "MFA." The general partners of
the Partnerships (the "General Partners") are proposing the Merger in order to
increase the earnings of, and to enhance the value of the investments held by
Unitholders in, the Partnerships.
The Merger is intended to take advantage of the growing acceptance in the
U.S. equity markets of residential mortgage REITs. Since 1994, the residential
mortgage REIT sector has experienced dramatic growth, from a market
capitalization of approximately $750 million in 1994 to approximately $4.5
billion in September 1997. These REITs own portfolios of Mortgage Securities and
Mortgage Loans that are similar in terms of investment type and credit quality
to those currently held by the Partnerships. However, instead of holding static
and unleveraged portfolios of fixed-rate Mortgage Securities and Mortgage Loans
like the Partnerships, mortgage REITs employ leverage, invest primarily in
adjustable-rate Mortgage Securities and Mortgage Loans and vary their
investments over time. As a group, they are more highly valued (as a multiple of
their earnings and book value) in the public markets than are the Partnerships.
The General Partners believe that the Partnerships, being long-term investors in
the type of assets that are commonly held by mortgage REITs, are especially well
positioned to make the transformation from long-term passive investors in
Mortgage Securities and Mortgage Loans into a growth-oriented mortgage REIT.
Upon completion of the Merger, the Company, which does not currently own any
adjustable-rate Mortgage Securities or Mortgage Loans, intends to realign its
portfolio by disposing of a substantial portion of its fixed-rate assets and
acquiring adjustable-rate Mortgage Securities and Mortgage Loans. Upon
completion of this realignment, the Company's investment policies will require
that at least 70% of
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the Company's investment portfolio consists of Mortgage Securities and Mortgage
Loans that will be similar in terms of investment type and credit quality to
those currently held by the Partnerships. This portion of the Company's
investment portfolio will consist of Mortgage Securities that are either (i)
issued or guaranteed by an agency of the U.S. government such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National Mortgage
Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation
("Freddie Mac"), (ii) rated in one of the two highest rating categories by
either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"), or (iii) considered to be of equivalent credit quality as
determined by the Advisor and approved by an investment acquisition committee
(the "Acquisition Committee") comprised of certain of the Company's executive
officers and members of its board of directors (the "Board of Directors"). In
connection with the Company's acquisition of Mortgage Securities and Mortgage
Loans for this portion of its investment portfolio, it is expected that the
Company will invest primarily in adjustable-rate Mortgage Securities and
Mortgage Loans. The remainder of the Company's investment portfolio (referred to
herein as "Other Investment" assets) may consist of pass-through certificates,
multi-class pass-throughs or collateralized mortgage obligations backed by
Mortgage Loans on single-family, multifamily, commercial or other real
estate-related properties or whole Mortgage Loans on single-family, multifamily
or other income producing properties, most of which are expected to be rated at
least investment grade at the time of purchase by either S&P or Moody's (e.g.,
securities having a rating of BBB, Baa or better) or considered to be of
equivalent credit quality as determined by the Advisor and approved by the
Acquisition Committee. In addition, the Company may also invest directly in such
single-family, multifamily, commercial or other related properties which may
collateralize its Mortgage Securities. While the Other Investment assets
portfolio will contain a greater level of credit and liquidity risk, it also is
expected to yield more than the other Mortgage Securities in the Company's
portfolio. The Board of Directors will have the ability to change the Company's
investment policies at any time without stockholder approval.
The General Partners have determined that the Merger is fair to, and in the
best interests of, Unitholders. Although the Merger was not negotiated at arm's
length, the General Partners arranged for the organization of an independent
committee (the "Special Committee") consisting of a majority of the non-employee
managers of the Board of Managers of America First (the "Board of Managers") to
represent the interests of Unitholders in the negotiation of the terms of the
Merger. The Special Committee has also determined that the Merger is fair to,
and in the best interests of, Unitholders. The Special Committee retained CIBC
Oppenheimer Corp. ("Oppenheimer") to render its opinion, dated as of July 28,
1997 (the "Fairness Opinion"), as to the fairness, from a financial point of
view, of the Merger, assuming all of the Partnerships participate or,
alternatively, that only Prep Fund 1 and Prep Fund 2 participate. See "THE
PROPOSED MERGER--Fairness Opinion." Accordingly, the General Partners have
approved the Merger and the Merger Agreement and the General Partners and the
Special Committee are recommending the approval of the Merger and the adoption
of the Merger Agreement by Unitholders. The basis of the recommendations of the
General Partners and the Special Committee is set forth herein under "THE
PROPOSED MERGER--Recommendations of the General Partners and the Special
Committee; Fairness Determination." In considering the fairness of the Merger,
the General Partners and the Special Committee analyzed both the participation
of all of the Partnerships in the Merger and the participation of only Prep Fund
1 and Prep Fund 2 in the Merger. The General Partners also arranged for the
Partnerships to retain PaineWebber Incorporated ("PaineWebber"), which has
substantial experience in the mortgage REIT sector, to render financial advice
with respect to the development and implementation of an operating structure and
a business strategy for the Company. See "THE PROPOSED MERGER--Financial
Advisor." In considering the recommendations of the General Partners and the
Special Committee, Unitholders are urged to consider carefully the basis of
their recommendations and the substantial conflicts of interest of the General
Partners and risk factors present in the Merger and in the business of the
Company following the Merger as described herein under "RISK FACTORS" and
"MANAGEMENT OF THE COMPANY--Conflicts of Interest."
SUMMARY RISK FACTORS
RISKS ASSOCIATED WITH THE MERGER.
Uncertain Market Price of Common Stock after the Merger. Prior to the
Merger, there will be no market for the Common Stock and there is substantial
uncertainty as to the price at which the shares of
2
<PAGE>
Common Stock will trade following the consummation of the Merger. The
possibility exists that the trading price of the shares may be lower than the
proportionate Net Asset Value (as herein defined) estimated for each Unit. See
"TERMS OF THE MERGER--Allocation of Common Stock."
Cash Merger Payment to Be Funded Partly from the Sale of Assets or
Borrowings. The Merger Agreement provides that the Company will make the Cash
Merger Payment, which will be paid in four equal quarterly payments of $.2650
per share of Common Stock during the first year following the Merger, to
stockholders entitled to receive distributions. During the first year following
the Merger, any distributions paid to stockholders by the Company out of
earnings will have the effect of reducing the amount of the Cash Merger Payment
so that the amount paid to stockholders during this first year will still be, in
the aggregate, equal to $1.06 per share. The General Partners anticipate that
the Company will fund the Cash Merger Payment, to the extent it is required to
be paid to stockholders during the first year following the Merger, out of the
proceeds from sales of Mortgage Securities and Mortgage Loans, short-term
borrowings or existing cash reserves. Because the size of the Company's
investment portfolio will be reduced in connection with the distribution of the
Cash Merger Payment, the General Partners anticipate that the sale of Mortgage
Securities and Mortgage Loans and the use of borrowings or reserves to fund such
Cash Merger Payment will adversely affect the Company's future operations,
earnings and the payment of distributions on the Common Stock. See "TERMS OF THE
MERGER--Cash Merger Payment."
Possible Lower Distributions. While the Partnerships currently pay
distributions to Unitholders out of their earnings and as a return of invested
capital, the Company's policy will be generally to refrain from paying return of
capital distributions to stockholders (except for the Cash Merger Payment), but
instead to pay as distributions substantially all of the Company's taxable
income. Primarily as a result of this factor, it is expected that the quarterly
distributions payable by the Company on the shares of Common Stock issued in
respect of each Unit in the Merger will be lower on a quarterly basis over the
first year following the Merger than the total distributions (which include
amounts paid out of both net income and as a return of capital) made by the
Partnerships for the three months ended September 30, 1997. See "THE
COMPANY--Distribution Policy."
Fundamental Change in Nature of Investments. The nature of each
Unitholder's investment will change from an interest in a finite-life limited
partnership holding a static and unleveraged portfolio of fixed-rate Mortgage
Securities, Mortgage Loans, preferred real estate participations ("PREPs")
representing limited partnership interests in partnerships that own the
multifamily properties collateralizing such Mortgage Securities and certain
other investments that will be liquidated over time to shares of Common Stock in
an ongoing, infinite-life mortgage REIT that will employ leverage and reinvest
the proceeds of asset sales and mortgage repayments primarily in adjustable-rate
Mortgage Securities and Mortgage Loans. In comparison to the Partnerships, the
Company will have a more diverse investment strategy with greater opportunity
for growth. Such growth potential, however, is accompanied by greater risks,
such as those associated with the Company's leveraging and hedging strategies,
than those posed by continued investment in the Partnerships.
Potential Conflicts of Interest of General Partners. The General Partners
initiated and participated in the structuring of the Merger and have substantial
conflicts of interest with respect to its completion due to interests and
affiliations different from those of Unitholders. Such interests and
affiliations include that (i) the Advisor will be an affiliate of the General
Partners and therefore the owners of the General Partners will benefit from the
completion of the Merger by indirectly receiving fees pursuant to the Advisory
Agreement (as hereinafter defined) and (ii) the General Partners determined the
method of allocation of the Common Stock between themselves and Unitholders. See
"MANAGEMENT OF THE COMPANY--Conflicts of Interest--General Partners."
A Majority in Interest Will Bind All Unitholders in Each Partnership. Under
the Merger Agreement and the requirements of the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act"), a Partnership will participate in
the Merger if a majority in interest of its Unitholders consent to the Merger.
If the Merger is approved by such majority, all Unitholders in such Partnership
will be bound by the decision of the majority and, except for those Unitholders
in Pension Fund electing to remain as
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<PAGE>
Unitholders in Pension Fund (the "Retention Option"), will be required to
exchange their Units for shares of Common Stock even if they do not desire to do
so.
No Dissenters' Rights. Unitholders will have no appraisal, dissenters' or
similar rights in connection with the Merger. Therefore, Unitholders will not be
entitled to receive any cash payment in exchange for the fair value of their
respective Units if they do not vote in favor of the Merger and the Merger is
approved and consummated.
RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS.
Leveraging Strategy. The Company will employ a strategy of borrowing funds
to finance the acquisition of Mortgage Securities and Mortgage Loans and expects
to maintain an equity-to-assets ratio of 8% to 10%. If the returns on such
assets fail to offset the cost of the borrowings, the Company's earnings and
distributions on its Common Stock will be adversely affected.
Fluctuations in Short-Term Interest Rates. Fluctuations in short-term
interest rates may adversely affect the Company's earnings and the market price
of its Common Stock as a result of (i) mismatches between the repricing of the
Company's adjustable-rate Mortgage Securities and Mortgage Loans and the
repricing of its borrowed funds, (ii) interest rate caps on its adjustable-rate
Mortgage Securities and Mortgage Loans and (iii) different interest rate indices
between the Company's adjustable-rate Mortgage Securities and Mortgage Loans and
its borrowed funds.
Prepayment of Investments. To the extent that there is an unexpected
increase in prepayment rates resulting in a shortening of the expected life of
the Mortgage Securities and Mortgage Loans, the Company's earnings and the
payment of distributions could be adversely affected primarily due to the
increase in amortization of any remaining premium on Mortgage Securities and
Mortgage Loans.
Hedging Strategies May Not Eliminate Interest Rate Risk. The Company
intends to enter into hedging strategies which involve certain risks and may not
be successful in reducing all of the Company's exposure to fluctuations in
interest rates.
Ability to Change Policies Without Stockholder Approval. The Board of
Directors will have the ability to change the Company's policies with respect to
acquisitions, growth, operations, indebtedness, capitalization and distributions
at any time without stockholder approval. Accordingly, stockholders will have no
control over the Company's policies, except through their ability to elect new
members to the Board of Directors.
Registration under the Investment Company Act. Failure to remain exempt
from registration under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), would severely limit the Company's ability to
implement its leveraging strategy.
RISKS ASSOCIATED WITH THE COMPANY QUALIFYING AS A REIT.
Taxation as a Corporation. If the Company fails to qualify as a REIT for
federal income tax purposes, the Company will be taxed as a regular corporation
which would adversely affect the ability of the Company to make distributions on
its Common Stock.
REIT Minimum Distribution Requirements; Possible Incurrence of Additional
Debt. In order to qualify as a REIT, the Company generally will be required
each year to distribute to stockholders at least 95% of its net taxable income
(excluding any net capital gain). The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company to
distribute amounts that otherwise would be spent on future investments or
repayment of debt, which would require the Company to borrow funds or to sell
assets to fund the costs of such items thereby adversely affecting the Company's
earnings, cash available for distributions and dividend yield.
4
<PAGE>
OVERVIEW OF THE MERGER
In order for each Partnership to participate in the Merger, Unitholders
representing a majority of the outstanding Units in such Partnership must vote
to approve the Merger and the other conditions to such Partnership's
participation in the Merger as specified in the Merger Agreement must be
satisfied. The Merger will not be consummated unless both Prep Fund 1 and Prep
Fund 2 participate in the Merger. The participation of Pension Fund is not a
condition to the closing of the Merger. As a result of the Merger, (i)
outstanding Prep Fund 1 Units will be converted (at the rate of 1.00 share per
Unit) into an aggregate of 5,775,797 shares of Common Stock, (ii) outstanding
Prep Fund 2 BUCs will be converted (at the rate of approximately 1.26 shares per
Unit) into an aggregate of 2,012,336 shares of Common Stock and (iii)
outstanding Pension BUCs will be converted (at the rate of approximately 1.31
shares per Unit) into an aggregate maximum of 1,183,373 shares of Common Stock.
If Pension Fund participates in the Merger, Unitholders in Pension Fund will be
given the option, in lieu of receiving shares of Common Stock in the Company, to
elect the Retention Option and remain as Unitholders in Pension Fund. See "TERMS
OF THE MERGER--Retention Option." The 8,971,506 shares of Common Stock to be
issued to Unitholders in the Merger have been allocated among the Partnerships
in proportion to their relative Net Asset Values. See "TERMS OF THE
MERGER--Allocation of Common Stock." The Merger Agreement also provides that the
Company will make the Cash Merger Payment, which will be paid in four equal
quarterly payments of $.2650 per share of Common Stock during the first year
following the Merger, to stockholders entitled to receive distributions;
provided, however, any distributions paid to stockholders by the Company out of
earnings during this first year will have the effect of reducing the amount of
the Cash Merger Payment so that the amount paid to stockholders will still be,
in the aggregate, equal to $1.06 per share. See "TERMS OF THE MERGER--Cash
Merger Payment." In connection with the organization of the Company, the General
Partners were issued 90,621 shares of Common Stock. As consideration for the
90,621 shares, the General Partners paid the Company an aggregate of $1,000 as
well as surrendered their rights to receive 1% of distributions made by the
Partnerships out of operating cash flow. The General Partners will not be issued
any additional shares of Common Stock or other consideration in the Merger.
RETENTION OPTION
The Unitholders in Pension Fund have the opportunity to elect the Retention
Option and continue their current investment by remaining as Unitholders in
Pension Fund through the retention of the same security that was originally
issued to, or subsequently acquired by, such Unitholder. In providing for the
Retention Option, the General Partners wanted to be responsive to those
Unitholders in Pension Fund who might not want to modify their current
investment in Pension Fund. To the extent that Unitholders in Pension Fund elect
the Retention Option, the aggregate number of shares of Common Stock otherwise
issuable to the Unitholders in Pension Fund in the Merger will be accordingly
reduced. In order to elect the Retention Option, Unitholders in Pension Fund
must properly complete, sign and return the enclosed form for the election of
the Retention Option (the "Retention Option Form") in accordance with the
procedures set forth herein under "THE CONSENT SOLICITATION--Exercise of the
Retention Option." If a Unitholder in Pension Fund fails to properly complete,
sign and return a Retention Option Form and Pension Fund participates in the
Merger, such Unitholder will receive shares of Common Stock in connection with
the Merger. For a complete discussion regarding the Retention Option and the
rights, benefits and risks associated with the retention of Pension BUCs, see
"TERMS OF THE MERGER-- Retention Option."
5
<PAGE>
[Charts Showing
Current Organizational Structure of
Prep Fund 1 and Prep Fund 2]
6
<PAGE>
[Chart Showing
Current Organizational Structure of
Pension Fund]
[Chart Showing Expected
Organizational Structure of
the Company]
7
<PAGE>
PARTIES TO THE MERGER
PREP FUND 1. Prep Fund 1, a Delaware limited partnership, was formed on
November 20, 1986. The general partner of Prep Fund 1 is America First Capital
Associates Limited Partnership Three, a Delaware limited partnership. As of the
Record Date, Prep Fund 1 had outstanding 5,775,797 Prep Fund 1 Units. Prep Fund
1 Units are included for quotation on the NASDAQ Stock Market ("NASDAQ") under
the trading symbol "AFPFZ." As of September 30, 1997, Prep Fund 1 held a
portfolio of fixed-rate Mortgage Securities, five PREPs, all of the equity
interest in one limited partnership owning a multifamily property (the "Equity
Interest") and one participating first Mortgage Loan on a multifamily property
(a "Participating Loan") financed in part by America First Apartment Investors,
L.P., an affiliated equity fund.
PREP FUND 2. Prep Fund 2, a Delaware limited partnership, was formed on May
28, 1987. The general partner of Prep Fund 2 is America First Capital Associates
Limited Partnership Six, a Delaware limited partnership. As of the Record Date,
Prep Fund 2 had outstanding 1,593,604 Prep Fund 2 BUCs. Prep Fund 2 BUCs are
listed on the American Stock Exchange ("AMEX") under the trading symbol "PF." As
of September 30, 1997, Prep Fund 2 held a portfolio of fixed-rate Mortgage
Securities and three PREPs.
PENSION FUND. Pension Fund, a Delaware limited partnership, was formed on
February 2, 1988. The general partner of Pension Fund is America First Capital
Associates Limited Partnership Six. Pension Fund, which is not publicly traded,
was organized to provide an investment vehicle to certain tax-exempt investors,
including individual retirement accounts ("IRAs"), Keogh plans, pension and
profit sharing plans and other qualified retirement plans (collectively,
"Tax-Exempt Investors"), which would invest in the same types of investments as
Prep Fund 2 without causing such investors to realize unrelated business taxable
income ("UBTI") under the Internal Revenue Code of 1986, as amended (the
"Code"). As of the Record Date, Pension Fund had outstanding 905,974 Pension
BUCs. Pension BUCs are subject to various transfer restrictions which were
imposed to prevent Pension Fund from being treated as a publicly traded
partnership for federal income tax purposes and, accordingly, are not listed or
regularly traded, except in the informal secondary market. As of September 30,
1997, Pension Fund held a portfolio of fixed-rate Mortgage Securities and three
PREPs.
THE COMPANY
GENERAL. The Company will be a newly organized, externally advised Maryland
corporation which expects to elect and qualify to be taxed as a REIT for federal
tax purposes under the Code. Upon consummation of the Merger, the Company will
become the direct and indirect owner of the Mortgage Securities, Mortgage Loans,
PREPs and other assets, subject to liabilities, held by the Partnerships.
Following the Merger, the Company intends to replace a substantial portion of
the Partnerships' current portfolio with a portfolio consisting primarily of
adjustable-rate Mortgage Securities, Mortgage Loans and other related assets,
subject to the parameters and guidelines set forth below.
INVESTMENT STRATEGIES. The Company's investment strategy will be to acquire
Mortgage Securities and Mortgage Loans in the secondary market from savings and
loan institutions, commercial banks, investment banks, mortgage originators,
mortgage conduits and other mortgage banking institutions who specialize in the
origination, disposition and servicing of Mortgage Securities or Mortgage Loans.
The Company will seek to generate income for distribution to its stockholders
primarily from the difference between the interest income on its adjustable-rate
Mortgage Securities and Mortgage Loans and the financing costs associated with
carrying such Mortgage Securities and Mortgage Loans. See "THE
COMPANY--Investment Strategies."
FINANCING STRATEGIES. The Company's strategy is to increase its assets by
borrowing against its portfolio of Mortgage Securities and Mortgage Loans and
reinvesting the proceeds of the borrowings in additional Mortgage Securities and
Mortgage Loans. The Company expects to maintain an equity-to-assets ratio (I.E.,
total equity of the Company as a percentage of its total assets) of
approximately 8% to 10%. The Company's Mortgage Securities will be financed
primarily at short-term borrowing rates utilizing reverse repurchase agreements,
borrowings under lines of credit and other secured or unsecured financings which
8
<PAGE>
the Company may establish with approved institutional lenders. See "THE
COMPANY--Financing Strategies."
RISK MANAGEMENT STRATEGIES. Changes in market interest rates could cause
the interest paid on the Company's variable rate investments to drop below the
costs paid on its borrowings. To the extent necessary, the Company will enter
into hedging transactions to reduce the impact of certain adverse changes in
interest rates on its net interest income. See "THE COMPANY--Risk Management
Strategies."
SECURITIZATION OF MORTGAGE LOANS. The Company may supplement its portfolio
of Mortgage Securities with individual Mortgage Loans acquired for its
investment portfolio for future securitization. It is expected that, to be
eligible for securitization, Mortgage Loans will generally be underwritten to
"A" quality standards and will be combined together to create Mortgage
Securities that will be more highly rated than the individual Mortgage Loans.
See "THE COMPANY--Securitization of Mortgage Loans."
DISTRIBUTION POLICY. Following the Merger, the Company intends to
distribute substantially all of its taxable income (which generally does not
equal net income as calculated in accordance with GAAP) to stockholders as
distributions. The Company intends to declare distributions on its Common Stock
quarterly. The distribution policy is subject to revision by, and all
distributions by the Company will be made at the discretion of, the Board of
Directors. The amount of such distributions will be affected by a number of
factors, including the Company's actual cash available for distribution, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant.
MANAGEMENT OF THE COMPANY. The Company will have a seven-member Board of
Directors, a majority of which will consist of persons who are neither executive
officers of the Company nor executive officers or directors of the Advisor (the
"Independent Directors"). The Company will contract with the Advisor to manage
the Mortgage Securities and Mortgage Loans held by the Company and to provide
other services to the Company pursuant to an Advisory Agreement (the "Advisory
Agreement") between the Company and the Advisor. See "MANAGEMENT OF THE
COMPANY--The Advisor."
BACKGROUND OF THE MERGER
Units in the Partnerships were offered to the public in three separate
offerings from 1986 through 1988. The Partnerships were formed to invest their
original capital on an unleveraged basis principally in Mortgage Securities,
PREPs and, to a lesser extent, in participating Mortgage Loans collateralized by
multifamily properties and then to liquidate their investments and distribute
the proceeds from such liquidation to Unitholders generally within 12 years of
purchase (I.E., by 1999 for Prep Fund 1 and by 2000 for Prep Fund 2 and Pension
Fund), subject to the right of the General Partners to extend the date of
liquidation to December 31, 2036 in the case of Prep Fund 1 and December 31,
2017 in the case of Prep Fund 2 and Pension Fund.
The primary objectives of the Partnerships were to provide investors with
(i) safety and preservation of capital, (ii) regular cash distributions and
(iii) a potential for capital appreciation from enhanced yield from investments
in PREPs and other equity-related real estate investments. While the
Partnerships have been able to provide Unitholders with regular cash
distributions, they have been less successful in preserving the Unitholders'
capital or providing enhanced yield or appreciation in the value of Units. At
March 31, 1997, Units in Prep Fund 1, Prep Fund 2 and Pension Fund had a Net
Asset Value of $9.21, $11.63 and $12.03, respectively, compared to an initial
offering price for each Unit of $20.00. A part of this decline is attributable
to the existing self-liquidating nature of the Partnerships which have made
return of capital distributions to Unitholders out of principal repayments
received by the Partnerships from their Mortgage Loans and from the mortgages
underlying the Partnerships' Mortgage Securities. Through March 31, 1997, Prep
Fund 1, Prep Fund 2 and Pension Fund have made return of capital distributions
to Unitholders aggregating $10.24, $7.63 and $6.92, respectively, per Unit. The
General Partners also attribute the decline in the value of the Units to the
payment of fees and expenses incurred in connection
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<PAGE>
with the organization of the Partnerships and a decrease in the value of PREPs
and other equity-related real estate investments owned by the Partnerships.
The General Partners believe that the structure of the Partnerships, as
finite-life, fixed portfolio investment vehicles, has limited the flexibility of
the Partnerships to react to market conditions and changes in interest rates and
to implement new strategies to benefit Unitholders and the Partnerships. The
General Partners have concluded that Unitholders are unlikely to achieve the
full benefits from their investments in the Partnerships if the Partnerships
continue to operate in accordance with their respective Agreements of Limited
Partnership of the Partnerships (collectively, the "Partnership Agreements") and
existing business plans or if they commence an orderly liquidation of their
investment portfolios.
In the spring of 1996, the General Partners began considering different
approaches for the Partnerships in an effort to enhance the value of the
investments held by Unitholders. In the course of performing such analysis, the
General Partners observed that mortgage REITs, which hold investments that are
similar in terms of investment type and credit quality to those held by the
Partnerships, are more highly valued (as a multiple of their earnings and book
value) by the public equity markets than are the Partnerships. These
circumstances led the General Partners to begin an assessment of the feasibility
of converting the Partnerships to a mortgage REIT structure. The General
Partners considered the Partnerships to be especially well positioned for such a
conversion due to the investment similarities between the Partnerships and the
typical mortgage REIT.
In December 1996, members of management of the General Partners approached
PaineWebber to discuss the feasibility of converting the Partnerships to the
mortgage REIT structure. Members of management of the General Partners sought
the advice of PaineWebber due to PaineWebber's substantial experience in the
mortgage REIT sector. In March 1997, the General Partners caused the
Partnerships to engage PaineWebber as their financial advisor.
The General Partners, acting through the Board of Managers of America First,
met on five occasions since December of 1996 to discuss the proposed Merger. At
the meeting on June 17, 1997, the Board of Managers voted to appoint the Special
Committee, consisting of Martin A. Massengale (chair), George Kubat and W. S.
Carter, to represent the interests of Unitholders in the Merger.
Since the organization of the Special Committee, it met on six occasions for
the purpose of considering the proposed Merger and related transactions. As part
of its analysis of the Merger, the Special Committee engaged Christy & Viener to
act as its counsel and also engaged Oppenheimer to render a fairness opinion
with regard to the Merger. On July 28, 1997, the Special Committee received the
Fairness Opinion from Oppenheimer and reported its determinations regarding the
Merger to the Board of Managers. The Special Committee then determined that the
Merger is fair to, and in the best interest of, Unitholders and recommended that
Unitholders vote to approve the Merger. The General Partners, acting through the
Board of Managers, also determined the Merger is fair to, and in the best
interests of, Unitholders and voted to approve the Merger and the Merger
Agreement and voted to recommend that Unitholders approve the Merger.
On July 29, 1997, the Partnerships and the Company signed the Merger
Agreement and issued a press release announcing the proposed transaction. See
"THE PROPOSED MERGER--Background of the Merger."
FAIRNESS OPINION
The Special Committee retained Oppenheimer to render its Fairness Opinion,
dated as of July 28, 1997, as to the fairness, from a financial point of view,
of the Merger, including the allocation of Common Stock among the Partnerships
assuming, in each case, that all of the Partnerships participate in the Merger
and no Unitholders in Pension Fund elect the Retention Option ("Maximum
Participation") and that Pension Fund does not participate in the Merger. The
full text of the Fairness Opinion, which contains a description of the
assumptions and qualifications made, matters considered and limitations imposed
on the review and analysis, is set forth in Appendix B-1 and should be read in
its entirety.
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<PAGE>
Based on the analysis described herein under "THE PROPOSED MERGER--Fairness
Opinion," and subject to the assumptions, limitations and qualifications noted
herein and in its Fairness Opinion, Oppenheimer concluded that the Merger,
including the allocation of shares of Common Stock among the Partnerships, is
fair from a financial point of view to the Unitholders assuming either Maximum
Participation or, alternatively, that Pension Fund does not participate in the
Merger.
BRINGDOWN FAIRNESS OPINION
Oppenheimer subsequently delivered its written confirmatory opinion, dated
as of February 10, 1998, that the Merger continues to be fair from a financial
point of view to the Unitholders assuming either Maximum Participation or,
alternatively, that Pension Fund does not participate in the Merger. The full
text of the confirmatory opinion, which contains a description of the
assumptions and qualifications made, matters considered and limitations imposed
on the review and analysis, is set forth in Appendix B-2 and should be read in
its entirety. See "THE PROPOSED MERGER--Fairness Opinion--Bringdown Fairness
Opinion."
FINANCIAL ADVISOR
PaineWebber has been engaged by the Partnerships to serve as their financial
advisor. PaineWebber rendered financial advice to the Partnerships with respect
to the development and implementation of an operating structure and a business
strategy for the Company, including reviewing the asset types to be purchased,
the liability structures to be used to finance the assets and the Company's
desired leverage ratio. PaineWebber also assisted the Partnerships in developing
the Company's business plan and investment strategy and guidelines and in
determining the contract terms and other arrangements between the Company and
the Advisor. In addition, PaineWebber assisted the Partnerships and their
General Partners in developing financial forecasts for the Company which are
described herein under "THE PROPOSED MERGER--Recommendations of the General
Partners and the Special Committee; Fairness Determination." PaineWebber did
not, in connection with its engagement by the Partnerships, render a fairness
opinion to the General Partners or the Partnerships. See "THE PROPOSED
MERGER--Financial Advisor."
RECOMMENDATIONS OF THE GENERAL PARTNERS AND THE SPECIAL COMMITTEE; FAIRNESS
DETERMINATION
The General Partners, together with the Special Committee, have determined
that the Merger is fair to, and in the best interests of, the Unitholders.
Accordingly, the General Partners have approved the Merger and the Merger
Agreement and the General Partners and the Special Committee have recommended
that the Unitholders vote FOR the approval of the Merger and the adoption of the
Merger Agreement. In reaching this determination, the General Partners and the
Special Committee considered a number of factors, as well as consulted with
PaineWebber, legal counsel and, in the case of the General Partners, the
Partnerships' accountants, and received the Fairness Opinion from Oppenheimer.
See "THE PROPOSED MERGER--Recommendations of the General Partners and the
Special Committee; Fairness Determination."
In assessing the Merger, the General Partners and the Special Committee
considered a comparative valuation analysis prepared by management of the
General Partners. This analysis, which supported their determination that the
Merger is fair to and in the best interest of Unitholders, compared estimated
values of the Units assuming they are converted into shares of Common Stock in
the Merger to estimated values of the Units (i) assuming the Partnerships
continue to operate in accordance with their existing Partnership Agreements and
business plans, (ii) assuming the Partnerships commenced an orderly liquidation
of their investment portfolios on June 30, 1997 or (iii) based on recent trading
or secondary market prices. In this analysis, the estimated ranges of values of
the Units assuming they are converted into shares of Common Stock in the Merger
were determined by applying the forecasted net income per share of the Company
for the second year of its operations, which was developed by management of the
General Partners with the assistance of PaineWebber, to the net income multiples
developed by PaineWebber for certain Comparative Companies (as hereinafter
defined) in the residential mortgage REIT industry. The second year of
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<PAGE>
operations was used in this analysis because the Company is expected to have
completed the portfolio realignment anticipated by its business plan before the
beginning of such second year. See "THE PROPOSED MERGER--Recommendations of the
General Partners and the Special Committee; Fairness Determination." The
estimated ranges of values of the Units included in the analysis described in
(i) and (ii) above were the same ranges of values used by Oppenheimer in
connection with the analysis underlying its Fairness Opinion. The General
Partners and the Special Committee have reviewed Oppenheimer's methodology in
developing such estimated ranges of values and believe that such methodology is
reasonable. See "THE PROPOSED MERGER--Fairness Opinion." The recent trading
prices included in this analysis (i) for Prep Fund 1 Units and Prep Fund 2 BUCs
were based on the average of the last reported sales prices of such Units on the
NASDAQ and the AMEX, respectively, for the 45 consecutive trading days preceding
the date prior to the public announcement of the Merger and (ii) for Pension
BUCs were based on the average trading prices of such Units in the secondary
markets from January 1, 1997 through the date prior to the public announcement
of the Merger.
The following table summarizes the results of the comparative valuation
analysis and also presents the included values as a percentage of the historical
book value of the Partnerships:
COMPARATIVE VALUATION ANALYSIS(1)
<TABLE>
<CAPTION>
ESTIMATED VALUE OF
UNITS ASSUMING
CONVERSION TO SHARES
OF COMMON STOCK ESTIMATED ESTIMATED
IN THE NEW CONTINUATION LIQUIDATION VALUE(4)
COMPANY(2) VALUE(3)
-------------------- -------------------- -------------------- RECENT
HIGH LOW HIGH LOW HIGH LOW TRADING
PARTNERSHIP VALUE VALUE VALUE VALUE VALUE VALUE PRICES(5)
- ------------------------------------ --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ESTIMATED VALUATION:
Prep Fund 1......................... $ 11.88 $ 10.48 $ 8.80 $ 8.63 $ 9.08 $ 8.83 $ 8.63
Prep Fund 2......................... $ 14.97 $ 13.20 $ 11.01 $ 10.71 $ 11.13 $ 11.06 $ 12.19
Pension Fund........................ $ 15.56 $ 13.72 $ 11.37 $ 11.16 $ 11.79 $ 11.75 $ 9.49
ESTIMATED VALUATION AS A PERCENTAGE OF HISTORICAL BOOK VALUE OF THE PARTNERSHIPS(6):
Prep Fund 1......................... 141% 124% 105% 102% 108% 105% 102%
Prep Fund 2......................... 140% 124% 103% 100% 104% 104% 114%
Pension Fund........................ 136% 120% 99% 97% 103% 103% 83%
</TABLE>
- ------------------------
(1) Based on information available as of June 30, 1997, except with respect to
the recent trading prices of the Units.
(2) See "THE PROPOSED MERGER--Recommendations of the General Partners and the
Special Committee; Fairness Determination."
(3) See "THE PROPOSED MERGER--Fairness Opinion--Summary of Analysis and
Methodology."
(4) Represents the amount that would have been distributed with respect to each
Unit if the Partnerships had sold their Mortgage Securities, Mortgage Loans
and other assets on June 30, 1997, subject to certain assumptions. See "THE
PROPOSED MERGER--Fairness Opinion--Summary of Analysis and Methodology."
(5) For Prep Fund 1 Units and Prep Fund 2 BUCs, the average of the last reported
sales prices of such Units on the NASDAQ and the AMEX, respectively, for the
45 consecutive trading days preceding the date prior to the public
announcement of the Merger. For Pension BUCs, the average trading prices of
such Units in the secondary markets from January 1, 1997 through June 30,
1997.
(6) Mortgage REITs are typically valued in the public markets on the basis of
either a trading price to book value or a trading price to earnings. The
historical book value of the Units was used in the comparative valuation
analysis, as opposed to earnings of the Partnerships, because historical
book value is a measure which is applicable to all three scenarios contained
in the comparative valuation analysis. The historic book value per Unit as
of March 31, 1997 for Prep Fund 1 was $8.42, Prep Fund 2 was $10.67 and
Pension Fund was $11.45.
In reaching their determination that the Merger is fair to and in the best
interests of the Unitholders, the General Partners and the Special Committee
viewed as favorable the comparative valuation analysis prepared by management of
the General Partners. In this analysis, the estimated range of values of the
Units assuming they are converted to shares of Common Stock in the Merger is
above the estimated range of values of the Units assuming the Partnerships
continue to operate in accordance with their existing Partnership Agreements and
business plans or assuming the Partnerships were to have commenced an orderly
liquidation of their investment portfolios on June 30, 1997 and above the recent
trading or
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<PAGE>
secondary market prices of the Units that were used in the analysis. See "THE
PROPOSED MERGER--Recommendations of the General Partners and the Special
Committee; Fairness Determination."
In assessing the comparative valuation analysis, the General Partners and
the Special Committee recognized that the valuation estimates used in the
analysis are subject to significant uncertainties, variables and assumptions, as
well as varying market conditions, and no assurance can be given that the
estimated values indicated could ever be realized. The General Partners and the
Special Committee also recognize that there is substantial uncertainty as to the
prices at which the shares of Common Stock will trade following the Merger and
it is possible that the shares will trade below the other values in this
analysis. See "RISK FACTORS--Risks Associated with the Merger--Uncertain Market
Price of Common Stock After the Merger." The comparative valuation analysis was
based on information available as of June 30, 1997 (except for the recent
trading prices of the Units). It is not anticipated that management of the
General Partners will update the comparative valuation analysis or any of the
information contained therein. In addition, the General Partner and the Special
Committee do not consider the recent trading prices of the Pension BUCs to be
representative of the market value of such Units because secondary market
activity for such Units has been limited and sporadic and the extent of such
activity has varied from time from time.
In spite of these uncertainties, the General Partners and the Special
Committee believe that the comparative valuation analysis, when considered
together with the anticipated effect of the Merger and with all the other
differences between continued ownership of Units as compared with the receipt of
shares of Common Stock, supports their recommendation relating to the Merger.
In addition to the comparative valuation analysis, the General Partners and
the Special Committee also considered the Fairness Opinion and several other
factors as favorable to their determination. In particular, the General Partners
and the Special Committee determined that the Merger provides (i) opportunities
for growth once the Partnerships are combined within the Company; (ii)
opportunities to increase earnings to Unitholders; (iii) enhanced access to
capital and greater operating flexibilities; (iv) greater diversification of
investment risk; (v) enhanced liquidity for Unitholders; (vi) opportunities to
achieve a more efficient operating structure; (vii) opportunities for
Unitholders to exchange their Units for shares of Common Stock on a basis that
is expected to be tax-free for federal income tax purposes; and (viii)
simplified tax reporting.
In assessing the Merger, the General Partners and the Special Committee also
noted that the Partnerships currently pay distributions to Unitholders out of
their earnings and as a return of invested capital. For the three months ended
September 30, 1997, Prep Fund 1, Prep Fund 2 and Pension Fund paid distributions
per Unit totalling $0.2649, $0.3267 and $.3233, respectively, while generating
net income over this period of $0.12, $0.05 and $0.07, respectively. As a
result, the quantity of the income producing assets held by the Partnerships has
been declining each quarter which will eventually erode the ability of the
Partnerships to maintain distributions at current levels. Following the Merger,
the Company's policy will be generally to refrain from paying return of capital
distributions to stockholders (except for the Cash Merger Payment), but instead
to pay as distributions substantially all of the Company's taxable income.
Primarily as a result of this factor, it is expected that the quarterly
distributions payable by the Company on the shares of Common Stock issued in
respect of each Unit in the Merger will be lower on a quarterly basis over the
first year following the Merger than the total distributions (which include
amounts paid out of both net income and as a return of capital) made by the
Partnerships for the three months ended September 30, 1997. See "THE
COMPANY--Distribution Policy." The Merger Agreement, however, provides that the
Company will make the Cash Merger Payment, which will be paid in four equal
quarterly payments of $.2650 per share of Common Stock during the first year
following the Merger, to stockholders entitled to receive distributions. During
the first year following the Merger, any distributions paid to stockholders by
the Company out of earnings will have the effect of reducing the amount of the
Cash Merger Payment so that the amount paid to stockholders during this first
year will still be, in the aggregate, equal to $1.06 per share. The General
Partners anticipate that the Company will fund the Cash Merger
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<PAGE>
Payment, to the extent it is required to be paid to stockholders during the
first year following the Merger, out of the proceeds from sales of Mortgage
Securities and Mortgage Loans, short-term borrowings or existing cash reserves.
See "TERMS OF THE MERGER--Cash Merger Payment." At an exchange ratio for each
Unit in Prep Fund 1, Prep Fund 2 and Pension Fund of 1.0x, 1.26x and 1.31x,
respectively, into shares of Common Stock, the minimum quarterly payment to be
made in respect of each Unit in Prep Fund 1, Prep Fund 2 and Pension Fund
exchanged in the Merger will equal $.2650, $.3346 and $.3461, respectively.
Following the completion of the initial one-year distribution period, the
Company intends to pay quarterly distributions as determined by the Board of
Directors.
The General Partners and the Special Committee also considered (i) that the
effects of the Merger may differ with each Unitholder and may be disadvantageous
to certain Unitholders, depending on their individual circumstances and
investment objectives, and (ii) certain negative factors relating to the Merger,
including (a) there is substantial uncertainty as to the prices at which the
shares of Common Stock will trade and the possibility exists that the trading
price of the shares may be lower than the proportionate Net Asset Value
estimated for each Unit; (b) there is no assurance that, after the Company's
first year of operations, the Company will be able to generate sufficient net
income to fund the payment of distributions at the aggregate amount paid during
such first year or higher; (c) the Company will be a newly formed corporation,
with no operating history as a publicly traded REIT; (d) potential conflicts
facing the Company following the Merger, including, among other things, the fees
payable to the Advisor under the Advisory Agreement; (e) the Partnerships or the
Company will pay all expenses of the Merger, including solicitation expenses,
whether or not the Merger is consummated; (f) the payment of such expenses will
reduce the net worth of the Company following the Merger; and (g) there can be
no assurance the Company will be able to achieve the benefits of the proposed
Merger and successfully implement its business plan as described herein. The
General Partners and the Special Committee did not believe that the negative
factors were sufficient, either individually or collectively, to outweigh the
advantages of the Merger. See "RISK FACTORS" and "MANAGEMENT OF THE
COMPANY--Conflicts of Interest."
ASSESSMENT OF ALTERNATIVES TO THE MERGER
In connection with their assessment of the comparative financial analysis,
the General Partners also considered the following additional factors with
regard to the analyzed alternatives:
CONTINUATION OF THE PARTNERSHIPS. In assessing the Merger, the General
Partners and the Special Committee considered the advantages and disadvantages
of keeping the Partnerships intact and continuing to operate them in accordance
with their respective Partnership Agreements and existing business plans.
Continuing to operate the Partnerships as in the past has a number of benefits,
including (i) the Partnerships would remain separate entities, with their
original investment objectives, consistent with their respective Partnership
Agreements; (ii) there would be no change in the nature of the Unitholders'
investments; (iii) the Unitholders' investment in the Partnerships would not be
exposed to the additional risks associated with the implementation and operation
of the Company's new business plan compared to the Partnerships'; (iv) the
Partnerships would liquidate their holdings and distribute the proceeds from
such liquidation in accordance with their respective business plans; (v) the
Unitholders would continue to defer certain income taxes on Partnership
distributions; and (vi) the Partnerships would not incur any expenses in
connection with the Merger. In addition, continuing the Partnerships without
change avoids the risks inherent in the Merger, including, among others, the
implementation of the Company's new business plan and investment strategy, the
uncertain market value of the Common Stock, the change in distribution policies,
the fundamental change in the nature of investment held by Unitholders who
receive Common Stock and the potential conflicts of interests of the General
Partners. See "RISK FACTORS--Risks Associated with the Merger." In an effort to
maximize the value of the Unitholders' investments in the Partnerships and to
enhance the capital raising and investment flexibility of the Partnerships, the
General Partners ultimately decided to take advantage of the growing acceptance
of mortgage REITs in the U.S. equity markets and proceed forward with the
Merger. The General Partners concluded that maintaining the Partnerships as
separate entities may have the following potentially
14
<PAGE>
negative results when compared with the benefits that the General Partners
perceive may be derived from the Merger: (i) limitations on growth and capital
raising; (ii) limitations on new investments; (iii) with respect to the Pension
BUCs, lower liquidity of investment on a current basis due to the illiquid
nature of the market for Pension BUCs; (iv) less flexibility and control in
actively managing the portfolio; and (v) duplicative general and administrative
expenses.
LIQUIDATION OF THE PARTNERSHIPS. Although the investment objectives and
policies of the Partnerships do not contemplate the commencement of the
liquidation of the portfolios of Mortgage Securities, Mortgage Loans, PREPs and
other investments until 1999 in the case of Prep Fund 1 and 2000 in the case of
Prep Fund 2 and Pension Fund, the General Partners and the Special Committee
assessed the possibility of commencing the orderly liquidation of the
Partnerships and distributing the net proceeds from such liquidation to
partners. The General Partners and Special Committee have determined that to
attempt to liquidate the Partnerships' investments at the current time would
likely result in Unitholders not achieving the full benefits from their
investment in the Partnerships, especially capital appreciation in their Units,
based on the historical amount of return on capital distributions received by
Unitholders plus the amount that would be received by Unitholders if the
Partnerships' investments were liquidated as compared to the amount originally
invested by such Unitholders in the Partnerships. In addition, even though the
Company's business plan contemplates the realignment of its portfolio through
the sale of a substantial portion of its fixed-rate assets and the acquisition
of adjustable-rate Mortgage Securities and Mortgage Loans, the General Partners
and the Special Committee have concluded that, based on the comparative
valuation analysis prepared by management of the General Partners, liquidation
at the current time would be premature and would not provide the Unitholders
with their best option to realize the optimum return on their investments in the
Partnerships. As the comparative valuation analysis indicates, the estimated
ranges of values of the Units assuming they are converted to shares of Common
Stock in the Merger are substantially above the estimated ranges of values of
the Units assuming the Partnerships were to have commenced an orderly
liquidation of their investment portfolios on June 30, 1997. See "THE PROPOSED
MERGER--Assessment of Alternatives to the Merger."
BENEFITS TO INSIDERS
The General Partners are expected to receive certain benefits as a result of
the Merger. First, the General Partners were issued and will retain 90,621
shares of Common Stock representing 1% of the shares of Common Stock outstanding
following the Merger (assuming Maximum Participation). Upon completion of the
Merger (assuming Maximum Participation), the 90,621 shares of Common Stock
issued to the General Partners will have an estimated value, based on the
high-end of the range of values of Units assuming conversion to shares of Common
Stock in the Merger that was used by the General Partners in the comparative
valuation analysis described above, of approximately $1.07 million. See
"MANAGEMENT OF THE COMPANY--Conflicts of Interest--General Partners" and "TERMS
OF THE MERGER--Allocation of Common Stock." In exchange for these shares of
Common Stock, the General Partners will be effectively contributing their
general partner interests in the Partnerships which, as of March 31, 1997, had a
Net Asset Value of approximately $825,000. In addition, the Advisor, a
subsidiary of America First, the entity that owns the General Partners, will
serve as the advisor to the Company and will be entitled to receive management
fees from the Company pursuant to the Advisory Agreement. See "MANAGEMENT OF THE
COMPANY--The Advisor" and "--Conflicts of Interest-- The Advisor." Further,
certain members, managers and officers of America First, including Michael B.
Yanney, Stewart Zimmerman, Gary Thompson, and George H. Krauss, will also serve
as directors and officers of the Company and the Advisor. As officers of the
Company and the Advisor, these persons will be entitled to receive compensation
from the Company or the Advisor and may enter into employment agreements with
the Company or the Advisor. Furthermore, such persons may be entitled to receive
stock options under the Company's 1997 Stock Option Plan (the "Stock Option
Plan"). The benefits that may be realized by such persons are likely to exceed
the benefits that they would expect to derive from the Partnerships if the
Merger does not occur.
15
<PAGE>
THE MERGER AGREEMENT
GENERAL. The Merger Agreement, which is dated as of July 29, 1997, provides
that, subject to the satisfaction or waiver of certain conditions, Prep Fund 1
and Prep Fund 2 will merge with and into the Company and Pension Fund will merge
with Partnership Merger Sub. The Company and Pension Fund, if it participates,
will be the surviving entities. See "TERMS OF THE MERGER--Effects of the
Merger." The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and the Articles of
Merger with the Department of Assessments and Taxation of the State of Maryland
(the "Effective Date").
In addition to customary mutual covenants, each of the Partnerships is
subject to covenants applicable prior to the Effective Date requiring them to
operate their respective businesses in the ordinary course and imposing certain
other specific restrictions on such operations. See "TERMS OF THE MERGER--The
Merger Agreement." Furthermore, the Merger may be terminated prior to the
Effective Date, before receipt of approval of Unitholders, as follows: (i) by
mutual written consent of the Partnerships; (ii) by any of the Partnerships upon
a breach in any material respect of any representation or warranty on the part
of another Partnership or the breach in any material respect of any covenant or
agreement of another Partnership set forth in the Merger Agreement; (iii) by any
of the Partnerships if the Merger shall not have been consummated before June
30, 1998; (iv) by any of the Partnerships if the approval of a majority of
holders of either Prep Fund 1 Units or Prep Fund 2 BUCs is not obtained; and (v)
by any of the Partnerships if prior to the approval of the Unitholders of such
Partnership the General Partner of such Partnership or the Special Committee
shall have withdrawn or modified its recommendation of the Merger or the Merger
Agreement.
CONDITIONS TO THE MERGER. Each Partnership's participation in the Merger is
subject to the affirmative vote of Unitholders representing a majority of the
outstanding Units in such Partnership. Pursuant to the Merger Agreement, the
Merger is also subject to the satisfaction of certain conditions, including the
participation in the Merger of Prep Fund 1 and Prep Fund 2 and the absence of
any event or any matter brought to the attention of the General Partners that,
in the sole judgment of the General Partners, materially affects, whether
adversely or otherwise, the Partnerships, the Company or the Merger. The General
Partners (with the concurrence of the Special Committee) acting on behalf of the
Partnerships and the Company may, by an appropriate instrument executed at any
time prior to the Effective Date, whether before or after the approvals of the
Unitholders are obtained, amend, modify or waive compliance with any of the
provisions of the Merger Agreement; provided that after the receipt of such
approvals, no amendment, modification or waiver may be made which alters the
amount or changes the form of the consideration to be delivered to the
Unitholders in the Merger or that in any way, in the reasonable judgment of the
General Partners, adversely affects such Unitholders unless a majority in
interest of the adversely affected Unitholders consents to such amendment,
modification or waiver. See "TERMS OF THE MERGER--The Merger Agreement--Waiver;
Extension."
ALLOCATION OF COMMON STOCK. For purposes of allocating the shares of Common
Stock to be issued in the Merger among the Partnerships, the General Partners
valued each Partnership as of March 31, 1997 based on each Partnership's Net
Asset Value. See "TERMS OF THE MERGER--Allocation of Common Stock." The Net
Asset Value for Prep Fund 1 is $9.21, for Prep Fund 2 is $11.63 and for Pension
Fund is $12.03. The 8,971,506 shares of Common Stock to be issued to Unitholders
in the Merger have been allocated among the Partnerships in proportion to their
relative Net Asset Values. In connection with the organization of the Company,
the General Partners were issued 90,621 shares of Common Stock and will not be
issued any additional shares as a result of the Merger.
CASH MERGER PAYMENT. The Merger Agreement provides that the Company will
make the Cash Merger Payment, which will be paid in four equal quarterly
payments of $.2650 per share of Common Stock during the first year following the
Merger, to stockholders entitled to receive distributions. During the first year
following the Merger, any distributions paid to stockholders by the Company out
of earnings will have the
16
<PAGE>
effect of reducing the amount of the Cash Merger Payment so that the amount paid
to stockholders during this first year will still be, in the aggregate, equal to
$1.06 per share. The General Partners anticipate that the Company will fund the
Cash Merger Payment, to the extent it is required to be paid to stockholders
during the first year following the Merger, out of the proceeds from sales of
Mortgage Securities and Mortgage Loans, short-term borrowings or existing cash
reserves. Because the size of the Company's investment portfolio will be reduced
in connection with the distribution of the Cash Merger Payment, the General
Partners anticipate that the sale of Mortgage Securities and Mortgage Loans and
the use of borrowings or reserves to fund such Cash Merger Payment will
adversely affect the Company's future operations, earnings and the payment of
distributions on the Common Stock. Further, there is no assurance that, after
the first year following the Merger, the Company will be able to generate
sufficient net income to fund the payment of distributions to stockholders at a
rate that will equal the Cash Merger Payment. See "TERMS OF THE MERGER--Cash
Merger Payment."
COMPARISON OF UNITS AND COMMON STOCK
The following is a comparison of certain specific attributes associated with
the ownership of Units and the ownership of Common Stock. Prior to the Merger,
the rights and obligations of the Unitholders will be governed by their
respective Partnership Agreements. Upon consummation of the Merger, Unitholders
(except for those Unitholders in Pension Fund electing the Retention Option)
will become stockholders of the Company. The descriptions set forth below are
qualified in their entirety by reference to the Articles of Incorporation of the
Company (the "Charter"), the Bylaws of the Company ("Bylaws"), each
Partnership's Partnership Agreement, the Maryland General Corporation Law
("MGCL") and the Delaware Act. The descriptions are summaries and do not purport
to be complete discussions of these matters. Unitholders are encouraged to
review carefully the more detailed comparison regarding the Units and the Common
Stock discussed under "COMPARATIVE RIGHTS AND OBLIGATIONS OF UNITHOLDERS AND
STOCKHOLDERS" in this Consent Solicitation Statement/Prospectus.
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Form of Organization - Limited partnerships formed under - Maryland corporation which will
the Delaware Act. elect to be taxed as a REIT.
Duration of Existence - 12-year anticipated holding period - Perpetual.
for investments, subject to the - Reinvest proceeds from sale and
right of the General Partners to refinancing of, and payments on,
extend the date of liquidation Mortgage Securities and Mortgage
until December 31, 2036 in the Loans.
case of Prep Fund 1 and December
31, 2017 in the case of Prep Fund
2 and Pension Fund.
- Distribute proceeds from sale and
refinancing of, and payments on,
Mortgage Securities and Mortgage
Loans to Unitholders.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Business - Invest in a static and unleveraged - Invest in a growing and more
portfolio of fixed-rate Mortgage diverse portfolio consisting
Securities, Mortgage Loans, PREPs primarily of adjustable-rate
and other related assets. Mortgage Securities, Mortgage
Loans and other related assets
which will be subject to
additional risks not associated
with the Partnerships' portfolios.
- Leverage equity capital and
generate income on the difference
between yield on investments and
cost of borrowings.
- Create, through securitization,
Mortgage Securities.
- Reduce interest rate risk through
hedging techniques.
Investment and Financing Objectives - Provide investors with safety and - Invest primarily in adjustable-
and Policies preservation of capital, regular rate Mortgage Securities and
cash distributions and a potential Mortgage Loans.
for enhanced yield from - Take advantage of investment and
investments in PREPs. financing opportunities as they
arise.
- Build on investment methods of the
Partnerships in a manner to
encourage growth in the Company,
increase earnings and enhance
value of Unitholders' investments.
Nature of Investment - Units constitute equity interests - Shares of Common Stock constitute
entitling each Unitholder to his equity interests entitling each
or her pro rata share of cash stockholder to its pro rata share
distributions. of distributions made with respect
to the Common Stock.
- Greater opportunity for capital
appreciation.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Borrowing Policies - Prep Fund 1 may not borrow money - Mortgage Securities and Mortgage
for any purpose. Loans financed primarily at
- Prep Fund 2 and Pension Fund may short-term borrowing rates through
not borrow money for acquisition utilization of reverse repurchase
of assets, but are permitted to agreements, borrowings under lines
borrow funds for working capital. of credit and other secured and
unsecured financings.
- Maintain equity-to-assets ratio of
8% to 10%.
Management - Prep Fund 1 is managed by America - A seven-member Board of Directors
First Capital Associates Limited elected by the stockholders.
Partnership Three, its general - The Advisor will manage day- to-day
partner. activities of the Company and
- Prep Fund 2 and Pension Fund are provide other services.
each managed by America First
Capital Associates Limited
Partnership Six, their general
partner.
- The General Partners are not
regularly elected by Unitholders.
Fees and Expenses - Each Partnership pays to its - The Company will pay all of its
respective General Partner or its expenses and shall reimburse the
affiliates administrative fees, Advisor for expenses incurred on
mortgage custodial and transfer its behalf; provided, however, the
agent fees, and property Advisor will pay the compensation
management fees. of the Company's officers and
- The General Partners are other personnel.
reimbursed for costs and expenses - Under the Advisory Agreement, the
incurred in connection with the Advisor is entitled to receive a
operation of the Partnerships. base management fee based on the
size of the Company's portfolio
and incentive compensation based
on the Return on Equity (as
defined herein) of the Company.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Potential Dilution - Not authorized to issue additional - The Board of Directors is
equity securities. authorized to issue shares of
capital stock of any class or
securities convertible into shares
of capital stock of any class or
classes.
- The Board of Directors may
classify or reclassify any
unissued shares of capital stock.
- No potential dilution of - Potential for dilution of the
distributions. relative voting power of each
share of Common Stock in
connection with the issuance of
additional shares of capital
stock.
- Potential for dilution of the
interests of the stockholders in
the distributions of the Company.
Potential Redemption or Repurchase - General Partners may set aside - Board of Directors may authorize
funds to repurchase Units in the repurchase of shares to
open-market transactions. further the Company's business
objectives.
Liquidity and Transferability - Prep Fund 1 Units are included for - The Common Stock has been approved
quotation on the NASDAQ. for listing on the NYSE.
- Prep Fund 2 BUCs are listed on the - Ownership Limit to preserve REIT
AMEX. status.
- Pension BUCs are not listed or
regularly traded, except in the
informal secondary market.
- The General Partners are permitted
to defer or suspend trading of the
Units in the event 45% of the
Units are traded in any 12-month
period.
Anti-Takeover Provisions - The General Partners are not - The Ownership Limit, the Board of
regularly elected by, and can only Directors' power to issue
be removed upon the vote of a additional stock, staggered Board
majority in interest of, of Directors and certain
Unitholders. provisions of the MGCL, the
- Units are generally freely Charter and the Bylaws may have
transferable, except for certain the effect of delaying, deferring
restrictions contained in the or preventing a takeover.
Partnership Agreements.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Taxation of Partnerships/ Company - The Partnerships are not subject - As a REIT, the Company will be
to federal income tax. able to deduct distributions to
- Partners are allocated their stockholders, generally
proportionate share of income, eliminating double taxation.
gain, loss, deduction and credit - The Company will be subject to
of the partnership. federal income tax at regular
corporate rates on any
undistributed income, including
capital gains, and in certain
other circumstances.
Taxation ofUnitholders/ Stockholders - Unitholders receive complex - Stockholders mailed 1099-DIV in
Schedule K-1 forms in March or January.
April. - Distributions received by
- Unitholders must report their stockholders generally constitute
allocable share of partnership portfolio income, which cannot be
income. Generally, interest offset by passive losses.
income, as well as market discount - Distributions by the Company will
and original issue discount generally be taxable to
income, if any, of the stockholders to the extent of the
Partnerships are portfolio income Company's accumulated earnings and
and income or loss arising from profits.
equity investments (such as PREPs)
are passive income. Passive income
allocated to a Unitholder from the
Partnerships may be offset by
passive losses of such Unitholder.
- Unitholders are taxed whether or
not cash distributions are made.
Voting Rights - Decisions relating to the - Stockholders are entitled to vote
operation and management of the on all material transactions and
Partnerships are made by the actions, including the election of
General Partners. directors, amendments to the
- Majority in interest of the Charter, the determination to
Unitholders may amend the dissolve the Company, the
Partnership Agreements, approve or determination to merge the Company
disapprove the sale of 75% or more into another entity and the
of the assets, dissolve the determination to sell all or
Partnerships and remove and substantially all of the Company's
replace the General Partners. assets.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Meetings - No regular meetings, provided that - Annual meetings for the election
meetings may be called by the of directors among other actions.
General Partners, and meetings are - Special meetings will be called
required to be called upon written upon the written request of the
request of Unitholders holding holders of 50% of the outstanding
more than 10% of the outstanding shares.
Units.
Right to Inspect Books and Records - Books and records must be - Bylaws, minutes of stockholders'
available for Unitholder meetings and certain other books
inspection. and records must be available for
- Right to obtain current list of stockholder inspection.
names and addresses of partners - Upon written request and for a
and Unitholders. proper corporate purpose,
stockholders shall have right to
obtain statement showing all stock
and securities issued by the
Company during a specified period
of not more than the preceding 12
months.
- Upon written request, stockholders
owning more than 5% of the
outstanding capital stock for at
least six months shall have the
right to inspect the Company's
books, records and stock ledger.
Reports - Partnerships furnish Unitholders - Company will mail stockholders
with tax return information on distribution information on Form
complex Schedule K-1 forms in 1099-DIV in January.
March or April. - Within 120 days after the close of
- Within 120 days after the end of each fiscal year, the Company will
each fiscal year, Partnerships furnish each stockholder with
furnish Unitholders with reports reports containing audited
including audited financial financial statements for such
statements for such fiscal year. fiscal year.
- The Company will furnish
stockholders with unaudited
quarterly reports.
Liabilities - Under the Delaware Act, limited - Under the MGCL, stockholders are
partners are not liable for not subject to any personal
obligations of the Partnership liability for the acts or
unless deemed to be participating obligations of the Company.
in the control of the business of
such partnership.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC LIMITED PARTNERSHIPS (UNITS) COMPANY (COMMON STOCK)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Stock Option Plans - No plans pursuant to which General - The Company will adopt the Stock
Partners or their affiliates may Option Plan pursuant to which the
be granted securities or options Advisor and the Directors,
on securities in the Partnerships. officers and employees of the
Company may be granted options to
purchase Common Stock.
</TABLE>
DIVIDEND REINVESTMENT PLAN
Upon consummation of the Merger, the Company intends to institute a Dividend
Reinvestment Plan whereby stockholders may automatically reinvest cash
distributions from the Company in additional shares of Common Stock. Service
Data Corporation (the "DRP Agent") will act as independent agent for those
stockholders who wish to participate in the Dividend Reinvestment Plan. All
distributions paid in respect of shares of Common Stock owned by participants in
the Dividend Reinvestment Plan will be paid directly to the DRP Agent. The DRP
Agent may use the distributions of participants to purchase additional shares of
Common Stock for such participants either (i) in the open market or (ii) from
the Company, if the Board of Directors, in its discretion, determines to
register additional shares of Common Stock for issuance to participants in the
Dividend Reinvestment Plan. Any shares purchased from the Company will be
purchased at a 3% discount from the prevailing market price of such shares as
reported on the NYSE at the time of purchase. Unitholders may elect to
participate in the Dividend Reinvestment Plan by indicating such election in the
space provided for such purpose on the Consent Form and returning the Consent
Form to the Company prior to the Response Date. See "DIVIDEND REINVESTMENT
PLAN."
23
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The Merger should be treated as a transfer of assets by Prep Fund 1 and Prep
Fund 2 and a transfer of Units by Pension Fund Unitholders which do not elect
the Retention Option for Common Stock qualifying for treatment under Section 351
of the Code, followed by a tax-free distribution of such Common Stock by Prep
Fund 1 and Prep Fund 2 to their Unitholders. The Partnerships, and therefore the
Unitholders participating in the Merger, are not expected to recognize gain or
loss for federal income tax purposes, except to the extent that a Partnership or
Pension Fund Unitholder receives cash proceeds in lieu of fractional shares of
the Company. In the event the Merger did not qualify as a tax-free transaction,
the transfers should result in the realization of gain or loss by Prep Fund 1
and Prep Fund 2, and, therefore, the realization of gain or loss by the
Unitholders of Prep Fund 1 and Prep Fund 2 as well as the realization of gain or
loss by Pension Fund Unitholders who do not elect the Retention Option. In such
case, under certain circumstances, losses, if any, realized by certain
Unitholders with respect to the Merger could be disallowed. Rogers & Wells LLP,
counsel to the Company, has rendered its opinion, subject to various assumptions
and conditioned upon certain representations as to factual matters, that the
Merger will be treated as a transfer of assets by Prep Fund 1 and Prep Fund 2
and a transfer of Units by Pension Fund Unitholders which do not elect the
Retention Option for Common Stock qualifying under Section 351, followed by a
tax-free distribution of such Common Stock by Prep Fund 1 and Prep Fund 2 to
their Unitholders. See "FEDERAL INCOME TAX CONSIDERATIONS."
The Partnerships are organized as limited partnerships which are not subject
to federal income taxation at the entity level, but instead function as
conduits, with the tax results of their operations required to be reflected in
the returns of Unitholders. The Company intends to qualify for treatment as a
REIT for federal income tax purposes. Accordingly, as a result of the Merger,
Unitholders will cease being partners in a Partnership and will, except in the
case of Unitholders of Pension Fund who elect the Retention Option, become
stockholders of a REIT. This change in status will affect the character and
amount of income and loss reportable by Unitholders. A REIT, generally, is not
subject to federal income tax on that portion of its taxable income or net
capital gain that is distributed to its stockholders. A REIT is, however,
subject to tax at normal corporate rates on any undistributed REIT taxable
income, including net capital gains. To qualify as a REIT, the Company must
satisfy a number of income, asset, distribution and share ownership requirements
imposed by the Code. There can be no assurance that the Company will be able to
qualify, or continue to qualify, as a REIT. Failure to qualify as a REIT will
result in significant additional federal income tax on the Company and
substantially reduced distributions to stockholders. In the opinion of Rogers &
Wells LLP, commencing with its taxable year ending December 31, 1998, the
Company will be organized in conformity with the requirements for qualification
and taxation as a REIT under the Code and its proposed method of operation will
permit it to so qualify. Such legal opinion is based on various assumptions and
factual representations regarding the Company's activities and its ability to
meet the numerous requirements for qualification as a REIT. No assurance can be
given that the Company's actual operating results will enable it to satisfy
these requirements. Unitholders should be aware that a tax opinion is not
binding on the Internal Revenue Service ("IRS") or any court.
Company distributions received by stockholders should not be treated as UBTI
to certain tax-exempt stockholders, provided such tax-exempt stockholders do not
hold such shares as "debt-financed property" within the meaning of the Code and
such shares are not otherwise used in a trade or business. Distributions to
stockholders subject to federal income tax should be treated as portfolio income
and, therefore, cannot be offset by passive losses from a stockholder's other
activities.
24
<PAGE>
THE CONSENT SOLICITATION
Each Unit entitles the holder thereof to one vote. Only holders of Units on
February 25, 1998 (the "Record Date"), are entitled to vote on the Merger. The
enclosed form of consent ("Consent Form") must be received by Kissel-Blake Inc.,
which has been appointed by the General Partners to act as exchange agent in
connection with the Merger (the "Exchange Agent"), by 5:00 PM, local time, on
March 31, 1998 (the "Response Date"), to be counted in the vote on the Merger.
The General Partners may, however, extend the solicitation period one or more
times for any reason, including where a number of votes sufficient to consummate
the Merger has not been received by such date.
The Merger will require the approval of 2,887,899 of the 5,775,797 Prep Fund
1 Units outstanding on the Record Date and 796,802 of the 1,593,604 outstanding
Prep Fund 2 BUCs outstanding on the Record Date. In order for Pension Fund to
participate in the Merger, the approval of 452,987 of 905,974 Pension BUCs
outstanding on the Record Date will be required.
Consents to the Merger are being solicited from Unitholders by the General
Partners. A consent by a Unitholder to the Merger with respect to a Partnership
in which such Unitholder holds Units will constitute such Unitholder's consent
to the following: (i) the entering into and execution of the Merger Agreement by
the General Partner on behalf of such Partnership; (ii) the merger of such
Partnership with the Company or, in the case of Pension Fund, the merger with
and into the Partnership Merger Sub in accordance with the terms of the Merger
Agreement; and (iii) the taking of any action by the General Partner of such
Partnership, necessary or advisable in the opinion of the General Partner, to
consummate the Merger, including all transactions set forth in this Consent
Solicitation Statement/Prospectus.
A Consent Form which is properly completed, dated, signed and returned will
be deemed to constitute a consent to the Merger unless the Consent Form is
marked to the contrary. Each Unitholder must either consent to, deny consent to
or abstain from consenting to the Merger with respect to all of such
Unitholder's Units in a particular Partnership. The failure to return a Consent
Form has the effect of, and is the equivalent to, abstaining from consenting to
the Merger. An abstention and broker non-votes (if any) will have the same
effect as denying consent to the Merger. See "THE CONSENT SOLICITATION."
DISSENTERS' RIGHTS OF APPRAISAL
Under the Delaware Act, Unitholders who do not vote in favor of the Merger
will have no appraisal, dissenter's or similar rights in connection with the
Merger if it is approved by a majority in interest of the Unitholders in their
respective Partnerships; I.E., they may not demand the fair value of their stock
and are bound by the terms of the Merger.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger will be paid
by the Partnerships (pro rata in accordance with their aggregate Net Asset
Values) whether or not the Merger is consummated. If, however, the Merger is
consummated, the Company will be allocated the entire amount of these costs. See
"TERMS OF THE MERGER--Fees and Expenses."
CONSEQUENCES IF THE MERGER IS NOT APPROVED
If the Merger is not consummated for any reason, the Partnerships presently
intend to continue to operate as ongoing businesses in their current forms.
There will be no change in their investment objectives, policies or
restrictions. No other transaction is currently being considered by the General
Partners with respect to the Partnerships as an alternative to the Merger,
although the Partnerships may from time to time explore other alternatives.
25
<PAGE>
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting in
accordance with GAAP. Assuming Maximum Participation, Prep Fund 1 will be deemed
to be the acquirer of the other Partnerships under the purchase method because
its Unitholders will be allocated the largest number of shares of Common Stock
in the Merger. Accordingly, the Merger will result, for financial accounting
purposes, in the effective purchase by Prep Fund 1 of all the Units of Prep Fund
2 and Pension Fund. As the surviving entity for financial accounting purposes,
the assets and liabilities of Prep Fund 1 will be recorded by the Company at
their historical cost and the assets and liabilities of Prep Fund 2 and Pension
Fund will be adjusted to fair value.
DELIVERY OF THE CERTIFICATES FOR UNITS
Promptly after the Effective Date of the Merger, the Company will cause to
be mailed to all Unitholders of record who will receive shares of Common Stock
in the Merger a letter of transmittal containing instructions with respect to
the surrender of certificates for Units in exchange for certificates
representing Common Stock. Upon such surrender to the Company, together with a
properly completed letter of transmittal, there will be issued and mailed to
former Unitholders a certificate representing the number of shares of Common
Stock to which such holder is entitled. From and after the Effective Date of the
Merger, each certificate for Units will evidence only the right to receive
shares of Common Stock. See "TERMS OF THE MERGER--Delivery of the Certificates
for Units." UNITHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED
CONSENT FORM. THEY SHOULD RETAIN SUCH CERTIFICATES UNTIL THEIR RECEIPT OF THE
LETTER OF TRANSMITTAL AFTER THE EFFECTIVE DATE OF THE MERGER.
COMPARATIVE MARKET DATA
Prep Fund 1 Units are included for quotation on the NASDAQ under the symbol
"AFPFZ" and Prep Fund 2 BUCs are listed on the AMEX under the symbol "PF." The
following table sets forth the closing price per Unit for each of Prep Fund 1
and Prep Fund 2 and the equivalent price per share of Common Stock on July 25,
1997, the last trading day prior to the public announcement of the Merger
Agreement. Pension BUCs are not listed on any national securities exchange or
quoted in the automated quotation system of any registered securities
association or other over-the-counter market, and there is no established public
trading market for such Units. Secondary market activity for Pension BUCs has
been limited and sporadic, and the extent of such activity has varied from time
to time. Therefore, the following table does not include a market price of
Pension BUCs.
COMPARATIVE MARKET RATES
<TABLE>
<CAPTION>
EQUIVALENT
CLOSING PRICE PRICE
ON PER SHARE OF
JULY 25, 1997 COMMON STOCK(1)
--------------- ---------------
<S> <C> <C>
Prep Fund 1 Unit........................................... $ 9.125 $ 9.125
Prep Fund 2 BUC............................................ $ 12.625 $ 10.000
</TABLE>
- ------------------------
(1) Equivalent price per share of Common Stock is calculated by dividing the
closing price of Prep Fund 1 Units by 1.00x and the closing price of Prep
Fund 2 BUCs by 1.262758x.
THE MARKET PRICES OF PREP FUND 1 UNITS AND PREP FUND 2 BUCS ARE SUBJECT TO
FLUCTUATION AND MAY BE INFLUENCED BY PURCHASES MADE BY THE GENERAL PARTNERS OR
THEIR AFFILIATES. UNITHOLDERS OF PREP FUND 1 AND PREP FUND 2 ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR PREP FUND 1 UNITS AND PREP FUND 2 BUCS.
26
<PAGE>
HISTORICAL AND PRO FORMA PER UNIT AND PER SHARE INFORMATION
The following table sets forth certain historical, pro forma and pro forma
equivalent information giving effect to the Merger as of and for the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
ASSUMING PENSION FUND ASSUMING
DOES NOT PARTICIPATE MAXIMUM PARTICIPATION
----------------------- -----------------------
PRO PRO FORMA PRO PRO FORMA
HISTORICAL FORMA EQUIVALENT(1) FORMA EQUIVALENT(1)
---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Net Income per:
Prep Fund 1 Unit......................... $ .38 (2) $ .35 $ .34
Prep Fund 2 BUC.......................... $ .35 (2) $ .44 $ .43
Pension BUC.............................. $ .40 (2) N/A $ .44
Share of Common Stock.................... $ .35(3) $ .34 (3)
Distributions per:
Prep Fund 1 Unit(4)...................... $ .7947(2) $ .7886 $ .7838
Prep Fund 2 BUC(4)....................... $ .9931(2) $ .9958 $ .9897
Pension BUC(4)........................... $ .9821(2) N/A $ 1.0238
Share of Common Stock.................... $ .7886 $ .7838
Book Value per:
Prep Fund 1 Unit......................... $ 8.22 $ 8.38 $ 8.43
Prep Fund 2 BUC.......................... $ 10.29 $ 10.58 $ 10.65
Pension BUC.............................. $ 11.09 N/A $ 11.01
Share of Common Stock.................... $ 8.38 $ 8.43
</TABLE>
- ------------------------
(1) The pro forma equivalent per Unit amounts are calculated by multiplying pro
forma net income per share of Common Stock, pro forma distributions per
share of Common Stock and pro forma book value per share of Common Stock by
1.00x for each Prep Fund 1 Unit, 1.262758x for each Prep Fund 2 BUC, and
1.306189x for each Pension Fund BUC so that the pro forma per share amounts
are equated to the respective values per Unit.
(2) See "--Summary Historical Financial Information."
(3) See "PRO FORMA FINANCIAL INFORMATION."
(4) Historical distributions represent distributions paid or accrued.
27
<PAGE>
The following table sets forth certain historical, pro forma and pro forma
equivalent information giving effect to the Merger for the year ended December
31, 1996:
<TABLE>
<CAPTION>
ASSUMING PENSION FUND ASSUMING
DOES NOT PARTICIPATE MAXIMUM PARTICIPATION
----------------------- -----------------------
PRO PRO FORMA PRO PRO FORMA
HISTORICAL FORMA EQUIVALENT(1) FORMA EQUIVALENT(1)
----------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Net Income per:
Prep Fund 1 Unit.......................... $ .52 $ .56 $ .58
Prep Fund 2 BUC........................... $ .99 $ .71 $ .73
Pension BUC............................... $ .90 N/A $ .76
Share of Common Stock..................... $ .56 (3) $ .58 (3)
Distributions per:
Prep Fund 1 Unit(4)....................... $ 1.0596 $ 1.0623 $ 1.0602
Prep Fund 2 BUC(4)........................ $ 1.3850 $ 1.3414 $ 1.3388
Pension BUC(4)............................ $ 1.3668 N/A $ 1.3848
Share of Common Stock..................... $ 1.0623 $ 1.0602
</TABLE>
- ------------------------
(1) See "--Summary Historical Financial Information."
(2) The pro forma equivalent per Unit amounts are calculated by multiplying pro
forma net income per share of Common Stock, pro forma distributions per
share of Common Stock and pro forma book value per share of Common Stock by
1.00x for each Prep Fund 1 Unit, 1.262758x for each Prep Fund 2 BUC, and
1.306189x for each Pension Fund BUC so that the pro forma per share amounts
are equated to the respective values per Unit.
(3) See "PRO FORMA FINANCIAL INFORMATION."
(4) Historical distributions represent distributions paid or accrued.
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following tables set forth summary financial information on a historical
basis for each of Prep Fund 1, Prep Fund 2 and Pension Fund as of the dates and
for the periods presented. The summary historical financial information data of
each of the Partnerships for each of the five years in the period ended December
31, 1996 has been derived from their respective audited financial statements.
The financial statements as of December 31, 1995 and 1996 and for each of the
three years in the period ended December 31, 1996 have been audited by Coopers &
Lybrand L.L.P. and are incorporated by reference in this Consent Solicitation
Statement/Prospectus. The summary historical financial information for the nine-
month period ending September 30, 1997 and 1996 is derived from the unaudited
financial statements. The unaudited financial statements include all adjustments
which the General Partners consider necessary for a fair presentation of the
financial condition and results of operations for these periods. The tables
should be read in conjunction with the financial statements and notes thereto of
the Partnerships included in their respective annual reports on Form 10-K for
the year ended December 31, 1996 and quarterly reports on Form 10-Q for the
quarter ended September 30, 1997 which accompany this Consent Solicitation
Statement/Prospectus.
28
<PAGE>
PREP FUND 1
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Mortgage-backed securities
income.......................... $2,024,656 $2,298,465 $3,011,347 $3,398,068 $3,488,646 $4,035,182 $4,464,692
Equity in earnings of property
partnerships.................... 377,458 206,224 264,179 148,589 203,318 285,208 246,982
Rental income..................... 1,897,467 1,788,012 2,465,655 2,334,465 2,268,649 2,189,546 2,166,104
Interest income on participating
loans........................... 177,639 184,481 240,432 251,157 264,904 268,633 266,216
Interest income on temporary cash
investments and U.S. government
securities...................... 419,125 324,938 442,931 408,645 374,521 284,652 243,394
General and administrative
expenses........................ (813,779) (679,835) (895,961) (834,594) (647,772) (785,128) (760,903)
Real estate operating expenses.... (1,104,990) (913,699) (1,320,270) (1,155,052) (1,044,385) (1,116,833) (973,726)
Depreciation...................... (226,882) (243,027) (302,510) (337,598) (502,358) (463,046) (569,476)
Interest expense.................. (565,595) (631,286) (842,875) (841,815) (721,906) (609,667) (622,902)
----------- ----------- ---------- --------- ---------- ---------- ----------
Net income........................ $2,185,099 $2,334,273 $3,062,928 $3,371,865 $3,683,617 $4,088,547 $4,460,381
----------- ----------- ---------- --------- ---------- ---------- ----------
----------- ----------- ---------- --------- ---------- ---------- ----------
BALANCE SHEET DATA:
Investment in U.S. government
securities...................... -- -- -- $5,025,000 -- -- --
Investment in mortgage-backed
securities...................... 3$4,653,964 3$8,161,286 $37,322,028 43,103,240 $45,810,512 $46,851,694 $50,413,119
Investment in and advances to
PREPs, net of valuation
allowance....................... 1,503,551 312,163 324,607 325,517 449,510 469,176 462,766
Investment in real estate......... 4,021,034 6,436,955 6,381,300 6,668,864 6,970,972 7,473,330 7,936,376
Investment in participating loans,
net of valuation allowance...... 860,000 2,960,000 2,960,000 2,960,000 2,960,000 2,960,000 2,960,000
Total assets...................... 55,012,077 60,646,956 60,144,705 64,566,103 67,833,181 69,994,829 72,067,829
Mortgage notes payable............ 6,800,000 9,614,760 9,590,833 9,614,760 9,614,760 9,614,760 9,614,760
PER UNIT DATA:
Net income per Prep Fund 1 Unit... $ .38 $ .40 $ .52 $ .57 $ .62 $ .68 $ .75
Net income per Fund
Certificate(1).................. -- 996.91 1,201.57 1,426.95 1,537.88 1,699.55 1,872.22
Cash distributions paid or accrued
per Prep Fund 1 Unit............ .7947 .7947 1.0596 1.0596 1.0596 1.0596 1.0596
Cash distributions paid or accrued
per Fund Certificate(1)......... -- 1,986.75 2,428.25 2,649.00 2,649.00 2,649.00 2,649.00
</TABLE>
- ------------------------
(1) In connection with the initial public offering of Prep Fund 1, America First
Participating/Preferred Equity Mortgage Fund, a Nebraska general partnership
through which Prep Fund 1 holds all of its assets and which acts as a
pass-through entity with respect to such assets, sold 100 Exchangeable
Pass-through Certificates representing assigned general partner interests
therein ("Fund Certificates"). During 1996, all 100 of the Fund Certificates
were exchanged in accordance with their terms for 250,000 Prep Fund 1 Units
at the rate of 2,500 Prep Fund 1 Units per Fund Certificate.
29
<PAGE>
PREP FUND 2
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Mortgage-backed securities
income.......................... $ 765,119 $ 934,597 $1,231,344 $1,346,474 $1,043,641 $1,092,142 $1,098,831
Equity in earnings of property
partnerships.................... 138,815 47,000 53,802 127,736 169,397 101,473 344,320
Interest income on temporary cash
investments..................... 94,255 17,816 24,302 29,476 68,326 165,010 114,254
Gain on sale of mortgage-backed
securities...................... -- 3,157 3,157 3,023 -- -- --
Gain on sale of PREP.............. -- -- 598,867 -- -- -- --
General and administrative
expenses........................ (429,334) (241,795) (313,422) (287,838) (270,366) (300,018) (307,923)
Provision for losses on investment
in PREPs........................ -- -- -- -- -- -- (200,000)
----------- ----------- ---------- --------- ---------- ---------- ----------
Net income........................ $ 568,855 $ 760,775 $1,598,050 $1,218,871 $1,010,998 $1,058,607 $1,049,482
BALANCE SHEET DATA:
Investment in mortgage-backed
securities...................... 1$4,200,926 1$6,601,324 $16,466,489 $17,895,507 $19,741,212 $19,918,972 $20,307,027
Investment in and advances to
PREPs, net of valuation
allowance....................... -- -- -- -- 37,384 229,810 638,805
Total assets...................... 16,644,027 17,193,654 17,557,582 18,633,427 20,853,645 22,233,478 23,868,232
PER UNIT DATA:
Net income per Prep Fund 2 BUC.... $ 0.35 $ 0.47 $ 0.99 $ 0.73 $ 0.59 $ 0.61 $ 0.61
Total cash distributions paid or
accrued per Prep Fund 2 BUC..... .9931 1.0453 1.3850 1.4546 1.5231 1.5903 1.6376
</TABLE>
PENSION FUND
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Mortgage-backed securities
income.......................... $ 424,589 $ 501,796 $ 660,229 $ 723,177 $ 557,576 $ 655,722 $ 680,483
Equity in earnings of property
partnerships.................... 59,852 17,808 20,381 62,475 76,322 42,445 146,056
Interest income on temporary cash
investments..................... 103,058 69,793 94,739 84,722 78,415 94,691 73,249
Gain on sale of PREP.............. -- -- 226,587 -- -- -- --
General and administrative
expenses........................ (218,942) (137,083) (172,499) (171,190) (148,214) (178,832) (173,555)
Provision for losses on investment
in PREPs........................ -- -- -- -- -- -- (150,000)
----------- ----------- ---------- --------- ---------- ---------- ----------
Net income........................ $ 368,557 $ 452,314 $ 829,437 $ 699,184 $ 564,099 $ 614,026 $ 576,233
----------- ----------- ---------- --------- ---------- ---------- ----------
----------- ----------- ---------- --------- ---------- ---------- ----------
BALANCE SHEET DATA:
Investment in mortgage-backed
securities...................... $7,534,693 $8,631,160 $8,506,853 $9,361,640 $10,202,877 $10,251,266 $11,061,151
Investment in PREPs net of
valuation allowance............. -- -- -- -- -- 99,499 292,524
Total assets...................... 10,194,329 10,591,972 10,690,796 11,288,968 11,879,769 12,577,331 13,363,547
PER UNIT DATA:
Net income per Pension Fund BUC... $ 0.40 $ 0.49 $ 0.90 $ 0.76 $ 0.61 $ 0.66 $ 0.62
Total cash distributions paid or
accrued per Pension Fund BUC.... .9821 1.0312 1.3668 1.4318 1.4898 1.5439 1.6117
</TABLE>
30
<PAGE>
RISK FACTORS
In addition to the other information contained in this Consent Solicitation
Statement/Prospectus, Unitholders should carefully consider the following
factors in evaluating the Merger, the Company and its business before completing
the accompanying Consent Form.
RISKS ASSOCIATED WITH THE MERGER
UNCERTAIN MARKET PRICE OF COMMON STOCK AFTER THE MERGER. Prior to the
Merger, there will be no public market for the Common Stock and there can be no
assurance that an active trading market will develop or be sustained. There is
substantial uncertainty as to the prices at which the shares of Common Stock
will trade and the possibility exists that the trading price of the shares may
be lower than the proportionate Net Asset Value estimated for each Unit.
Following the Merger, the market value of the Common Stock could be
substantially affected by numerous factors, including: governmental regulatory
action; changes in tax laws; the Company's earnings; the market's perception of
the Company and its ability to generate distributions; the size of the Company
in terms of assets and market capitalization; the degree to which management's
interests are perceived to be aligned with the interests of stockholders; the
degree to which leverage is used in the Company's capital structure; the
historical performance of the Partnerships; external factors such as market
interest rates and conditions of the mortgage investment and stock markets; and
technical factors relating to the supply and demand for shares of Common Stock.
Historically, the trading prices of the common stock issued by REITs,
particularly REITs with a large proportion of their assets held as mortgage
investments, have been affected by changes in broader market interest rates,
with increases in rates resulting in decreases in trading prices, and decreases
in rates resulting in increases in such trading prices. An increase in market
interest rates may lead prospective purchasers of the Common Stock to demand a
higher annual distribution rate which may adversely affect the market price of
the Common Stock. Also, certain features of the Charter, Bylaws and certain
provisions of the MGCL may have the effect of discouraging third parties from
making tender offers for the shares of Common Stock or from seeking to replace
incumbent management of the Company which may affect the trading price of such
shares. See "-- Limitations on Changes in Control Contained in the Charter and
Bylaws," and "DESCRIPTION OF CAPITAL STOCK OF THE COMPANY -- Restrictions on
Transfer" and "CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER AND BYLAWS."
CASH MERGER PAYMENT TO BE FUNDED PARTLY FROM THE SALE OF ASSETS OR
BORROWINGS. The Merger Agreement provides that the Company will make the Cash
Merger Payment, which will be paid in four equal quarterly payments of $.2650
per share of Common Stock during the first year following the Merger, to
stockholders entitled to receive distributions. During the first year following
the Merger, any distributions paid to stockholders by the Company out of
earnings will have the effect of reducing the amount of the Cash Merger Payment
so that the amount paid to stockholders during this first year will still be, in
the aggregate, equal to $1.06 per share. The General Partners anticipate that
the Company will fund the Cash Merger Payment, to the extent it is required to
be paid to stockholders during the first year following the Merger, out of the
proceeds from sales of Mortgage Securities and Mortgage Loans, short-term
borrowings or existing cash reserves. Because the size of the Company's
investment portfolio will be reduced in connection with the distribution of the
Cash Merger Payment, the General Partners anticipate that the sale of Mortgage
Securities and Mortgage Loans and the use of borrowings or reserves to fund such
Cash Merger Payment will adversely affect the Company's future operations,
earnings and the payment of distributions on the Common Stock. See "TERMS OF THE
MERGER -- Cash Merger Payment."
POSSIBLE LOWER DISTRIBUTIONS. The Partnerships currently pay distributions
to Unitholders out of their earnings and as a return of invested capital. For
the three months ended September 30, 1997, Prep Fund 1, Prep Fund 2 and Pension
Fund paid distributions per Unit totalling $0.2649, $.3267 and $.3233,
respectively, while generating net income over this period of $0.12, $0.05 and
$0.07, respectively. Following the Merger, the Company's policy will be
generally to refrain from paying return of capital distributions to stockholders
(except for the Cash Merger Payment), but instead to pay as distributions
substantially all of
31
<PAGE>
the Company's taxable income. Primarily as a result of this factor, it is
expected that the quarterly distributions payable by the Company on the shares
of Common Stock issued in respect of each Unit in the Merger will be lower on a
quarterly basis over the first year following the Merger than the total
distributions (which include amounts paid out of both net income and as a return
of capital) made by the Partnerships for the three months ended September 30,
1997. See "THE COMPANY -- Distribution Policy."
FUNDAMENTAL CHANGE IN NATURE OF INVESTMENTS. Unitholders who become holders
of Common Stock will have fundamentally changed the nature of their investments
and their rights will be different from their current rights as Unitholders in
their respective Partnerships. The Partnerships were formed with certain
characteristics, including (i) a finite life, (ii) a strategy of investment in a
portfolio of fixed-rate Mortgage Securities, Mortgage Loans collateralized by
multifamily properties, PREPs and other related assets, (iii) no use of
leverage, (iv) portfolio liquidation over time, which would result in the
realization of the market value of the investments, less certain expenses of
liquidation, if any, and (v) little potential for growth. By contrast, the
Company will have (i) an infinite life, (ii) a growing and diverse portfolio
consisting primarily of Mortgage Securities and Mortgage Loans, (iii) enhanced
financial flexibility, (iv) leverage, (v) no specific intention to liquidate or
to sell its assets at a given point in time, but instead to invest the proceeds
of asset sales and mortgage payments in adjustable-rate Mortgage Securities and
Mortgage Loans, and (vi) an aggressive, value-added, growth-oriented business
plan. The holders of the Common Stock will thus be investors in an entity which
has a more diverse investment strategy with greater opportunity in the General
Partners' view, for growth as compared to the Partnerships. This increased
growth potential is accompanied by greater risks, such as those associated with
the Company's ownership of Mortgage Securities and Mortgage Loans which are not
credit enhanced or guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae or FHA,
fluctuations in short-term interest rates, the Company's leveraging and hedging
strategies and reinvestment of proceeds from the sale of the Company's
investments, than those posed by an investment in the Partnerships.
Each of the Partnerships was formed with the intention to commence
liquidation of its investment portfolio and distribute the proceeds to
Unitholders generally within 12 years of purchase (i.e., by 1999 for Prep Fund 1
and by 2000 for Prep Fund 2 and Pension Fund). If the Merger is completed,
Unitholders who receive Common Stock will not receive any liquidation proceeds
upon sales of investments currently owned by the Partnerships, but may liquidate
their investment in the Company by selling their Common Stock on the NYSE or in
private transactions. In this regard, the market value of the Common Stock may
or may not reflect the full fair market value of the Company's investments and,
consequently, stockholders may or may not realize the full fair market value of
such investments by selling their Common Stock at prices obtained on the NYSE.
LACK OF OPERATING HISTORY. The Company will be a newly formed corporation,
with no operating history as a publicly traded REIT. Although at least 70% of
the Company's investments will be similar in terms of investment quality and
credit type to those of the Partnerships, the Company's business and investment
objectives will differ from those of the Partnerships.
LACK OF MANAGEMENT EXPERIENCE IN MANAGING A MORTGAGE REIT. The day-to-day
operations of the Company will be administered by the Advisor, subject to the
supervision of the Board of Directors. Accordingly, the Company will be totally
reliant on the services and activities of the Advisor and the Advisor's
executive officers, directors and employees for its success. Although the
Company's directors and executive officers of the Advisor have experience in
substantial aspects of the Company's business, none of such persons has managed
a mortgage REIT, and there can be no assurance that the past experience of the
such individuals will be applicable to the implementation and administration of
the Company's business, operations or strategies. See "MANAGEMENT OF THE COMPANY
- -- Directors and Executive Officers of the Company."
32
<PAGE>
CHANGE IN INVESTMENT POLICIES. The Partnerships were organized to invest in
a static and unleveraged portfolio of fixed-rate Mortgage Securities guaranteed
by government agencies, Mortgage Loans, PREPs and other related assets for a
limited time. The Partnership Agreements imposed certain restrictions on the
type and structure of investments which the Partnerships could acquire and do
not permit the Partnerships to make additional investments. In comparison, the
Company will invest in a growing and diversified portfolio consisting primarily
of Mortgage Securities and Mortgage Loans that may include pass-through
certificates, multi-class pass-throughs or collateralized mortgage obligations
backed by Mortgage Loans on single-family, multifamily, commercial or other
real-estate related properties. The Company may also securitize Mortgage Loans
and will leverage its portfolio in order to increase its size. In addition,
although the Company will initially invest its assets in accordance with the
policy described under "THE COMPANY -- Investment Strategies," the
organizational documents of the Company will not contain the restrictions on
investments imposed by the Partnership Agreements and the Board of Directors may
change the investment policies of the Company without stockholder approval.
Accordingly, the Company's investment portfolio may be subject to risks not
currently present in the portfolios of the Partnerships, including increased
credit and liquidity risks relating to the Company's Other Investment Mortgage
Securities and Mortgage Loans and the risks associated with securitization of
Mortgage Loans as described under "-- Risks Associated with the Company's
Business -- Loss on Certain Adjustable-Rate Mortgage Loans," that could
adversely affect the Company's earnings and resulting dividend yield.
IMPLEMENTATION OF A GROWTH-ORIENTED BUSINESS PLAN. The Partnerships have
little potential for growth since the Partnership Agreements limit the use of
leverage, the raising of additional capital and the reinvestment of proceeds
from the sales of Mortgage Securities and Mortgage Loans. The Company will
employ an aggressive, value-added, growth-oriented business plan including the
use of leverage, the raising of additional capital through the issuance of
additional equity securities and the reinvestment of repayments of principal and
proceeds from sales of Mortgage Securities and Mortgage Loans. The increased
potential for growth by the Company as compared to the Partnerships is
accompanied by certain risks including the potential for dilution of the
interest of stockholders in the Company and its distributions and the
magnification of losses sustained in certain economic environments described
more fully under "-- Risks Associated with the Company's Business."
POTENTIAL CONFLICTS OF INTEREST OF GENERAL PARTNERS. The General Partners
initiated and participated in the structuring of the Merger and have substantial
conflicts of interest with respect to its completion due to interests and
affiliations different from those of Unitholders. First, the Company will be
managed by the Advisor, an affiliate of the General Partners, pursuant to the
Advisory Agreement, which may not be terminated, except for cause, until the
fifth anniversary of the closing of the Merger. Following the Merger, the
Advisor will earn fees under the Advisory Agreement based on the amount of
Stockholders' Equity and earnings of the Company. Second, the General Partners
were issued 90,621 shares of Common Stock in connection with the organization of
the Company. As consideration for the 90,621 shares, the General Partners paid
the Company an aggregate of $1,000 as well as surrendered their rights under the
Partnership Agreements to receive any additional shares in the Merger. The
General Partners determined the basis for the allocation of the Common Stock
among themselves and the Unitholders used in the Merger, which resulted in the
retention of 1% (assuming Maximum Participation) of the shares of Common Stock
outstanding immediately following the Merger by the General Partners. If the
provisions relating to the distribution of liquidating distributions contained
in Partnership Agreement for each Partnership had been selected as the basis for
the allocation of the merger consideration between the General Partner and
Unitholders in each Partnership, the General Partners would have been entitled
to receive in the aggregate fewer than 1% of the shares of Common Stock (an
estimated 55,000 shares as opposed to the 90,621 shares contemplated by the
Merger Agreement). Upon completion of the Merger (assuming Maximum
Participation), the 90,621 shares of Common Stock issued to the General Partners
will have an estimated value based on the high-end of the range of values of
Units assuming conversion to shares of Common Stock in the Merger that was used
by the General Partners in the comparative valuation analysis described herein,
of approximately $1.07 million. As indicated herein under "THE PROPOSED
33
<PAGE>
MERGER-- Recommendations of the General Partners and the Special Committee;
Fairness Determination," mortgage REITs generally are valued at more than one
times their book value in the public markets and, as a result, the shares of
Common Stock issued to the General Partners may have a trading value that is
higher than their pro forma book value. Third, following the Merger, the General
Partners may be indemnified for acts or omissions occurring before the Merger
for which the General Partners and certain of their affiliates would not have
been indemnified before the Merger. Until the Merger is consummated, each
General Partner will continue to be accountable to its Partnership and
Unitholders as a fiduciary. These conflicts of interest may cause the General
Partners to take actions that are adverse to the interests of Unitholders and
future stockholders of the Company. For additional information concerning the
potential conflicts of interest between the General Partners and the Unitholders
in the Merger, see "MANAGEMENT OF THE COMPANY -- Conflicts of Interest."
FEDERAL INCOME TAX CONSEQUENCES. The General Partners expect the Merger to
be treated as a transfer of assets by Prep Fund 1 and Prep Fund 2 and a transfer
of Units by Pension Fund Unitholders which do not elect the Retention Option for
Common Stock qualifying for treatment under Section 351 of the Code, followed by
a tax-free distribution of such Common Stock by Prep Fund 1 and Prep Fund 2 to
their Unitholders. The Partnerships, and therefore the Unitholders participating
in the Merger, are not expected to recognize gain or loss for federal income tax
purposes, except to the extent that a Partnership or a Pension Fund Unitholder
receives cash proceeds in lieu of fractional shares of the Company. Unitholders
should be aware that the Partnerships have not requested an advance ruling from
the IRS with respect to the tax consequences of the Merger. Accordingly, there
can be no assurance that the IRS will agree that the Merger will qualify for
treatment under Section 351. In the event the Merger did not qualify as a
tax-free transaction, the transfers should result in the realization of gain or
loss by Prep Fund 1 and Prep Fund 2, and, therefore, the realization of gain or
loss by the Unitholders of Prep Fund 1 and Prep Fund 2 as well as the
realization of gain or loss by the Unitholders of Pension Fund which do not
elect the Retention Option. In such case, under certain circumstances, losses,
if any, realized by certain Unitholders with respect to the Merger could be
disallowed. See "FEDERAL INCOME TAX CONSIDERATIONS."
A MAJORITY IN INTEREST WILL BIND ALL UNITHOLDERS IN EACH PARTNERSHIP. Under
the Merger Agreement and the requirements of the Delaware Act, a Partnership
will participate in the Merger if a majority in interest of its Unitholders
consent to the Merger. If the Merger is approved by such majority, all
Unitholders in such Partnership will be bound by the decision of the majority
and, except for those Unitholders in Pension Fund electing the Retention Option,
will be required to exchange their Units for shares of Common Stock even if they
do not desire to do so. Following the Merger, stockholders of the Company will
have different rights and obligations which could be less beneficial than those
currently held by Unitholders. See "COMPARATIVE RIGHTS AND OBLIGATIONS OF
UNITHOLDERS AND STOCKHOLDERS."
NO DISSENTERS' RIGHTS. Under the Delaware Act, Unitholders will have no
appraisal, dissenters' or similar rights in connection with the Merger.
Therefore, Unitholders will not be entitled to receive any cash payment in
exchange for the fair value of their respective Units if they do not vote in
favor of the Merger and the Merger is approved and consummated. However, holders
of Pension BUCs (which are not publicly traded) may elect to retain their
Pension BUCs and their investment in Pension Fund.
MERGER EXPENSES. The Partnerships or the Company will pay all expenses of
the Merger, including solicitation expenses, which are estimated to be
$1,660,000, whether or not the Merger is consummated. The payment of such
expenses will reduce the net worth of the Company following the Merger. Funds
used to pay such expenses would otherwise be available for distribution to
Unitholders or investment in Mortgage Securities or Mortgage Loans by the
Company.
ALLOCATION OF COMMON STOCK AMONG THE PARTNERSHIPS. The General Partners
allocated the Common Stock among the Partnerships in proportion to the
Partnerships' relative Net Asset Values. The General Partners calculated the Net
Asset Value of the Partnerships as of March 31, 1997 in accordance with the
description set forth herein under "TERMS OF THE MERGER -- Allocation of Common
Stock." The
34
<PAGE>
General Partners and the Special Committee believe the allocation of shares in
this manner is fair to the Unitholders in each of the Partnerships. See "THE
PROPOSED MERGER -- Recommendations of the General Partners and the Special
Committee; Fairness Determination." Furthermore, Oppenheimer concluded in its
Fairness Opinion that the allocation of shares of Common Stock among the
Partnerships is fair, from a financial point of view, to the Unitholders. See
"THE PROPOSED MERGER -- Fairness Opinion." However, the terms of the Merger were
not negotiated at arm's length and there can be no assurances that the Net Asset
Values actually represent the full relative fair market values of the
Partnerships. In determining Net Asset Values, the General Partners could have
used different methods or assumptions which may have yielded different results
and affected the allocation of shares. Further, Net Asset Values were determined
as of March 31, 1997 and no effect will be given to any change affecting the
relative values of the Partnerships after such date. The General Partners are
not, however, aware of any factors or events occurring since such date that
would materially affect the Net Asset Values of the Partnerships.
LIMITATIONS ON CHANGES IN CONTROL CONTAINED IN THE CHARTER AND BYLAWS. As
provided in the Company's Charter, the Ownership Limit will, subject to certain
exceptions, prohibit ownership of more than 9.8% of the value of the outstanding
shares of capital stock of the Company by any single stockholder or "group"
within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). See "DESCRIPTION OF CAPITAL STOCK OF THE
COMPANY." Also, the Board of Directors will consist of seven members who will be
classified into three classes with each class serving a three-year term and with
each class elected in different years. Furthermore, a member of the Board of
Directors may not be removed except for cause upon the vote of 80% of the shares
entitled to vote to elect members of the Board of Directors. In addition, the
Charter will authorize the Board of Directors to classify and reclassify any
authorized but unissued shares of capital stock into one or more new classes or
series of capital stock, including classes or series of preferred stock, and to
determine the preferences, rights and other terms of such classes or series. The
additional classes or series of securities, as well as the Common Stock, will be
available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. These and other Charter and Bylaw provisions could impede a
merger, tender offer or other transaction that some or a majority of the
Company's stockholders might believe to be in their best interest or in which
the stockholders might receive a premium for their shares over the then current
market price of such shares.
LIMITATIONS ON CHANGES IN CONTROL PURSUANT TO MARYLAND LAW. 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 outstanding
voting stock of such corporation (an "Interested Stockholder") or who is an
affiliate or associate of such corporation who, at any time within the two-year
period prior to the date in question, was an Interested Stockholder or an
affiliate or an associate thereof are prohibited for five years after the date
on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(i) 80% of the votes entitled to be cast by holders of outstanding voting stock
of such corporation and (ii) two-thirds of the votes entitled to be cast by
holders of voting stock of such corporation other than shares held by the
Interested Shareholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, holders of the
corporation's common stock 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 Shareholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of directors of a corporation prior to the
time that the Interested Shareholder becomes an Interested Shareholder.
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Under the MGCL, "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 or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by such
a person, 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 of all voting power. "Control shares" do not include shares of
stock the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval. A "control share acquisition" means,
subject to certain exceptions, the acquisition of, ownership of, or the power to
direct the exercise of voting power with respect to, "control shares." These
provisions of Maryland law do not apply, however, to "control share
acquisitions" that are approved or exempted by the charter or bylaws of a
corporation and adopted at any time before the acquisition of shares.
These Sections of the MGCL could impede a merger, tender offer or other
transaction that some or a majority of the Company's stockholders might believe
to be in their best interest or in which the stockholders might receive a
premium for their shares over the then current market price of such shares.
DEPENDENCE ON KEY PERSONNEL. The Company will be dependent on the efforts
of its executive officers and the executive officers of the Advisor,
particularly Stewart Zimmerman, William Gorin and Ronald Freydberg. The loss of
their services could have a material adverse effect on the operations of the
Company and therefore on the earnings of the Company. In connection with the
Merger, the Advisor will assume employment agreements with each of Messrs.
Zimmerman, Gorin and Freydberg from America First.
NO ASSURANCE BENEFITS OF MERGER WILL BE REALIZED. Considerable time and
resources will be required to be devoted by the Advisor in order to implement
the business plan of the Company and to achieve the anticipated benefits of the
Merger. The success of the Company will depend on numerous factors, including
the interest rates on the Company's adjustable-rate Mortgage Securities and
Mortgage Loans, the cost of the Company's borrowing, the cost and effectiveness
of the Company's risk management strategies, reserve requirements and the
operating expenses of the Company. There can be no assurance the Company will be
able to achieve the benefits of the proposed Merger and successfully implement
its business plan.
CHANGE IN THE PAYMENT SCHEDULE OF DISTRIBUTIONS. The Partnerships currently
pay distributions to Unitholders on a monthly basis. Following the Merger, the
Company intends to pay quarterly distributions to its stockholders as a result,
Unitholders will have to adjust to less frequent payments of distributions.
RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS
LEVERAGING STRATEGY. The Company will employ a strategy to increase the
size of its investment portfolio by borrowing against its Mortgage Securities
and Mortgage Loans. By leveraging its portfolio in this manner, it is expected
that the Company will maintain an equity-to-assets ratio of 8% to 10%.
Substantially all of the Company's Mortgage Securities and Mortgage Loans now
and in the future can be expected to be pledged to secure reverse repurchase
agreements, bank borrowings or other credit arrangements used to finance the
acquisition of additional Mortgage Securities and Mortgage Loans. Therefore,
such Mortgage Securities and Mortgage Loans may not be available to the
stockholders in the event of the liquidation of the Company, except to the
extent that the market value thereof exceeds the amounts due to creditors. In
addition, in the event of the bankruptcy of a party with whom the Company has a
reverse repurchase agreement, the Company might experience difficulty recovering
its pledged assets. See "THE COMPANY -- Financing Strategies."
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The incurrence of leverage will expose the Company to the following risks:
(i) the Company could lose its interests in assets given as collateral for
secured borrowings if the required principal and interest payments are not made
when due; (ii) the Company's obligation to make principal payments, which are
not treated as deductions for federal income tax purposes, does not relieve it
from the obligation of distributing at least 95% of its REIT taxable income to
stockholders; (iii) the Company's cash flow from operations may not be
sufficient to retire these obligations as they mature, making it necessary for
the Company to either refinance these obligations prior to maturity or to raise
additional debt and/or equity or sell its assets, possibly at losses under
adverse market conditions, or to retire the obligations, which could have an
adverse effect on the amount of funds available for distribution or to
stockholders; (iv) the Company may not be able to refinance borrowings on
attractive terms; and (v) debt incurred by the Company will primarily be at
interest rates that adjust based on prevailing market interest rates, an
increase in which may adversely affect the Company's earnings and could reduce
the amount of funds available for distribution to stockholders.
NO LIMITATION ON DEBT. The Company expects to maintain an equity-to-assets
ratio, measured on a historical basis, of 8% to 10%. If the equity-to-assets
ratio falls below 8%, then, subject to the source of income limitations
applicable to the Company as a REIT, the Company will take action to increase
the ratio to 8% or greater through normal portfolio amortization, sale of assets
or other steps as necessary. However, the Company will have no policy regarding,
and the Company's organizational documents will not contain any limitation on,
the amount of indebtedness the Company may incur. Therefore, the Board of
Directors could cause the Company to incur additional debt and would do so, for
example, if it were necessary for the Company to continue to qualify as a REIT.
An increase in the indebtedness of the Company would require additional cash for
debt service which could result in less cash available for distribution to
stockholders and could increase the risk of default on the Company's
indebtedness.
FLUCTUATIONS IN SHORT-TERM INTEREST RATES. The results of the Company's
operations will depend on, among other things, the level of net interest income
generated by the difference between the return on the Company's adjustable-rate
Mortgage Securities and Mortgage Loans and the costs of the Company's
adjustable-rate borrowings. The Company's earnings will vary as a result of
changes in short-term interest rates, borrowing costs and prepayment rates. Such
changes are affected by various factors, many of which are beyond the control of
the Company. Although the Company will only acquire adjustable-rate Mortgage
Securities and Mortgage Loans with borrowed funds that have interest rates based
on indexes and repricing terms similar to the interest rate indexes and
repricing terms of such investments, the interest rate indexes and repricing
terms will not be identical. It is expected that a majority of the Company's
portfolio of Mortgage Securities and Mortgage Loans will be indexed to (i) the
six-month London Inter-Bank Offered Rate ("LIBOR") and repriced semi-annually,
(ii) the one-year Constant Maturity Treasury Rate and repriced annually, (iii)
the six-month Certificate of Deposit Rate and repriced semi-annually, or (iv)
the 11th District Cost of Funds Index and generally repriced monthly. During
periods of rising short-term interest rates, particularly during periods when
short-term interest rates increase by more than 1% per six-month period or 2%
per annum, the Company's earnings and the payment of distributions could be
adversely affected by maturity mismatches and interest rate caps. "Maturity
mismatches" refers to situations in which interest rates on the Company's
Mortgage Securities and Mortgage Loans may adjust on average less frequently
than interest rates on its borrowings. Consequently, should short-term interest
rates rise, the cost of the Company's borrowings could increase at a quicker
pace than the return on its adjustable-rate Mortgage Securities and Mortgage
Loans. "Interest rate caps" refers to contractual limitations on increases in
interest rates on the Company's Mortgage Securities and Mortgage Loans during a
given period ("periodic caps") or over the life of the asset ("lifetime caps").
The Company's borrowings are not expected to be subject to interest rate caps.
Therefore, an increase in short-term interest rates could cause a greater
increase in the rate paid by the Company on its borrowings than the rate paid to
the Company on its adjustable-rate Mortgage Securities and Mortgage Loans,
thereby adversely affecting the Company's earnings and resulting dividend yield.
The General Partners expect that the Company's Mortgage Securities and Mortgage
Loans will be subject to periodic caps limiting increases
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to 1% per six-month period and 2% per annum and lifetime caps limiting increases
to 6% over the life of the Mortgage Security or Mortgage Loan. In addition, if
any of the Company's Mortgage Securities and Mortgage Loans are financed with
borrowings that bear interest based on an index different from that used for the
related Mortgage Securities and Mortgage Loans, so-called "basis" interest rate
risk will arise. In that event, if the index used for the Mortgage Securities
and Mortgage Loans is a "lagging" index that reflects market interest rate
changes on a delayed basis, and the rate on the related borrowings reflects
market rate changes more rapidly, the Company's net interest income will be
adversely affected in periods of increasing market interest rates.
DECLINE IN MARKET VALUE OF MORTGAGE SECURITIES. The Company's leveraging
strategy will be designed to increase the size of its portfolio of Mortgage
Securities and Mortgage Loans by borrowing against its existing Mortgage
Securities and Mortgage Loans. Since the borrowings incurred by the Company are
primarily collateralized borrowings based on the current market value of the
Company's Mortgage Securities and Mortgage Loans, a decline in the market value
of such Mortgage Securities and Mortgage Loans due to rising interest rates, a
rating downgrade by Moody's or S&P or other factors could limit the Company's
ability to borrow or require the Company to sell assets, possibly at losses
under adverse market conditions, in order to maintain liquidity and comply with
its investment policies.
LOSS ON CERTAIN MORTGAGE LOANS AND SECURITIZATION. The Company bears the
risk of loss on any Mortgage Loans it purchases in the secondary market or
otherwise acquires. In the future, the Company may acquire Mortgage Loans which
are not credit enhanced or which are not guaranteed by Fannie Mae, Freddie Mac,
Ginnie Mae, the Federal Housing Administration ("FHA") or private insurers for
securitization. Accordingly, during the time it accumulates such Mortgage Loans
for securitization, the Company will be subject to risks of borrower default,
bankruptcy and special hazard losses (such as those occurring from earthquakes).
In addition, it may not be possible or economically feasible for the Company to
complete the securitization of all Mortgage Loans which it acquires. In the
event of a default on any such loans held by the Company, the Company would bear
the loss of principal between the value of the mortgaged property and the
outstanding indebtedness, as well as the loss of interest. Furthermore, the
Company expects to retain interests in the Mortgage Loans that are securitized
and therefore will retain a limited amount of risk of future credit loss and
interest rate or prepayment risk. Such retained interests are expected to be
subordinated to the classes of securities issued to investors in such
securitizations with respect to losses of principal and interest on the
underlying Mortgage Loans. Accordingly, any such losses incurred on the
underlying Mortgage Loans will be applied first to reduce the remaining amount
of the Company's retained interest, until reduced to zero. Thereafter, any
further losses would be borne by the investors or, if used, private insurers in
such securitizations rather than the Company. See "THE COMPANY -- Securitization
of Mortgage Loans."
It is expected that when the Company acquires Mortgage Loans, the seller
will represent and warrant to the Company that there has been no fraud or
misrepresentation during the origination of the Mortgage Loans and will agree to
repurchase any loan with respect to which there is 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.
LOSS ON CERTAIN MORTGAGE SECURITIES. The Company may include in its
portfolio privately issued Mortgage Securities backed by pools of Mortgage
Loans, which are typically not guaranteed by the U.S. Government or any agency
of the U.S. Government. Although such Mortgage Securities generally are
structured with one or more types of credit enhancement and are investment grade
or of equivalent credit quality, any losses due to borrower defaults on any of
the underlying Mortgage Loans, bankruptcies, fraud or special hazard losses, in
excess of certain insurance limits, would be the responsibility of the Company.
PREPAYMENT OF ADJUSTABLE-RATE MORTGAGE SECURITIES AND MORTGAGE
LOANS. Mortgage prepayment rates vary and may cause the yield on the Company's
Mortgage Securities and Mortgage Loans to change, which
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would affect the Company's earnings. Mortgage prepayments generally increase
after a sharp decline in long-term interest rates when current fixed mortgage
interest rates fall relative to the interest rates on adjustable-rate Mortgage
Loans. Prepayments would increase the proportion of the Company's assets not
invested in Mortgage Securities or Mortgage Loans. During such periods of rising
prepayments of Mortgage Securities and Mortgage Loans, the Company will need to
increase its purchases of Mortgage Securities and Mortgage Loans in order to
maintain the current level of such assets in its portfolio. However, during
periods when interest rates are falling or rates on fixed-rate mortgages are
comparable to or are below fully margined adjustable-rate mortgages, the
origination of adjustable-rate mortgages also tends to decline, making it more
difficult for the Company to find attractive reinvestment opportunities. If the
Company is not successful in acquiring adjustable-rate Mortgage Securities and
Mortgage Loans for its portfolio on suitable terms, or has to invest the
proceeds from prepayments in lower yielding Mortgage Securities and Mortgage
Loans, there could be an adverse effect on the Company's earnings and the
payment of distributions on the Common Stock.
Furthermore, because the Company's business plan targets adjustable-rate
Mortgage Securities and Mortgage Loans which are currently priced at a premium
in comparison to other mortgage related assets, a significant amount of the
Company's portfolio of adjustable-rate Mortgage Securities and Mortgage Loans
may be purchased at a price greater than par. The Company will amortize the
premium paid for such adjustable-rate Mortgage Securities and Mortgage Loans
over the expected remaining life of such assets, using the level yield method of
accounting. When a Mortgage Security or Mortgage Loan is prepaid, any
unamortized premium will be written off at the time of prepayment. To the extent
that there is an increase in prepayment rates resulting in a shortening of the
expected life of the adjustable-rate Mortgage Securities and Mortgage Loans, the
Company's earnings and the payment of distributions could be adversely affected.
HEDGING STRATEGIES MAY NOT ELIMINATE INTEREST RATE RISK. The Company
intends to enter into hedging transactions, which may include the purchase of
mortgage derivative securities, to attempt to alleviate the negative impact of
significant unexpected changes in interest and prepayment rates. The Company
will enter into interest rate cap agreements to reduce the risk associated with
borrowing rate increases exceeding the lifetime interest rate caps on the
Company's adjustable-rate Mortgage Securities and Mortgage Loans. The Company
may also engage in limited amounts of buying and selling other mortgage
derivative securities or other derivative products, including, but not limited
to, entering into interest rate swap agreements, buying and selling financial
futures contracts and options on financial futures contracts and trading forward
contracts.
Developing an effective hedging strategy is complex and no strategy can
completely insulate the Company from risks associated with interest rate changes
and prepayments. In addition, hedging typically involves costs, including
transaction costs, which increase dramatically as the period covered by the
hedge increases and which also increase 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.
Federal tax laws applicable to REITs may substantially limit the Company's
ability to engage in hedging transactions. Such federal tax laws may prevent the
Company from effectively implementing hedging strategies that the Company
determines, absent such restrictions, would best insulate the Company from the
risks associated with changing interest rates and prepayments. In this regard,
the amount of income the Company may earn from its interest rate caps and other
hedging instruments may be subject to substantial limitations under the REIT
provisions of the Code. In particular, income generated by such instruments is
non-qualifying income for purposes of the 75% gross income test. Such
restrictions may result in management electing to have the Company bear a level
of interest rate risk that might otherwise be hedged. See "FEDERAL INCOME TAX
CONSIDERATIONS -- General," and "-- Requirements for Qualification as a REIT."
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If the Company purchases interest rate caps or other interest rate
agreements to hedge against lifetime and periodic rate or payment caps, and the
provider of interest rate agreements becomes financially unsound or insolvent,
the Company may be forced to unwind its interest rate agreements with such
provider and may take a loss on such interest rate agreements. Further, the
Company could suffer losses that the hedging transaction was intended to protect
against. Such losses could have a material adverse effect on the Company's
earnings. Although the Company intends to purchase interest rate agreements only
from financially sound institutions and to monitor the financial strength of
such institutions on a periodic basis, no assurance can be given that the
Company can avoid such counterparty credit risks.
The Company will accept legal risk in entering into interest rate swap and
cap agreements. Although the Company will take precautions to assure the
legality of each interest rate swap and cap agreement, no assurance can be given
as to the enforceability of these agreements. An agreement that is not
enforceable may subject the Company to unexpected interest rate risk and have a
material adverse effect on earnings.
The Company also will accept basis risk in entering into interest rate swap
and cap agreements. Basis risk occurs as the performance of hedged financing
sources varies from expectations and differs from the performance of the hedging
instrument. For instance, the Company hedges its borrowing to mitigate interest
rate risk of Mortgage Securities and Mortgage Loans that are fixed or reprice at
different times or based on different indices. Although the hedging items may
reduce interest rate risk, borrowers may prepay at speeds which vary from
initial expectations. Absent proper monitoring, the Company could have a hedging
instrument in place without an underlying financing source, the consequence of
which may be a material adverse effect on earnings.
The Company will not be regulated in regard to its hedging activities.
However, in order to maintain its exemption from the registration requirements
of the Commodities Exchange Act, the Company is limited with respect to
investments in futures contracts, options on futures contracts and options on
commodities. The Company intends to conduct its hedging activities in such a
manner that the Company will not be regulated in regard to its hedging
activities and will maintain its exemption from the registration requirements of
the Commodities Exchange Act. However, if the Company became regulated in regard
to its hedging activities or subject to the registration requirements of the
Commodities Exchange Act, its earnings could be materially adversely affected.
Hedging devices and mortgage instruments are complex and can produce
volatile results. Accordingly, there can be no assurance that the Company's
hedging strategy will have the desired beneficial impact on the Company's
earnings, financial condition and the resulting dividend yield of the Common
Stock. Instead, such hedging strategies may have an adverse effect on the
Company's earnings and resulting dividend yield. See "THE COMPANY -- Risk
Management Strategies."
ABILITY TO CHANGE POLICIES WITHOUT STOCKHOLDER APPROVAL. The Company's
operating and financial policies, including its policies with respect to
acquisitions, growth, operations, indebtedness, capitalization and
distributions, will be determined by the Board of Directors. Although it has no
present intention to amend or revise these or other policies as described
herein, the Board of Directors may do so, from time to time, without stockholder
approval. Accordingly, stockholders will have little direct control over changes
in the Company's policies. Changes in the Company's policies could adversely
affect the Company's financial condition and earnings. In particular, the
descriptions in this Consent Solicitation Statement/Prospectus of the major
policies and the various types of investments to be made by the Company reflect
only the current plans of the prospective members of the Board of Directors. The
Board of Directors may change the investment policies of the Company without a
vote of the stockholders. If the Company changes its investment policies, the
risks and potential rewards of an investment in the Company may also change. In
addition, the methods of implementing the Company's investment policies may vary
as new investment techniques are developed. Accordingly, stockholders will have
no control over the Company's policies,
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except through their ability to elect new members to the Board of Directors. See
"THE COMPANY -- Investment Strategies."
COMPETITION. In purchasing and pooling Mortgage Securities and Mortgage
Loans and in purchasing other mortgage-related assets, the Company competes with
savings and loan associations, banks, other mortgage REITs, mortgage and
investment bankers, conduits, insurance companies, mutual funds, Fannie Mae,
Ginnie Mae, Freddie Mac and other lenders, many of whom have greater financial
resources than the Company. In addition, there are several mortgage REITs
similar to the Company and others may be organized in the future. The existence
of the competitive entities, as well as the possibility of additional entities
forming in the future, may increase the competition for the acquisition of
eligible Mortgage Securities and Mortgage Loans resulting in higher prices and
lower yields to the Company on such Mortgage Securities and Mortgage Loans and
thereby reducing the Company's earnings. Additionally, in issuing Mortgage
Securities, the Company will face competition from other issuers of these
securities and the securities themselves will compete with other investment
opportunities available to prospective purchasers.
The Mortgage Loans that underlie Mortgage Securities that the Company may
otherwise acquire will generally be adjustable-rate loans secured by liens on
single-family residential properties originated by or purchased from various
mortgage suppliers throughout the United States, such as savings and loan
associations, banks, mortgage bankers, home builders, insurance companies and
other mortgage lenders. The Company is not expected to establish any limits upon
the geographic concentration of such Mortgage Loans or the credit quality of
mortgage suppliers. However, concentration in any one area will increase
exposure of the Company's portfolio to the economic and natural hazard risks
associated with that area. The availability of Mortgage Loans meeting the
Company's criteria is dependent upon, among other things, the size of, and level
of activity in, the residential real estate lending market. The size and level
of activity in the residential real estate lending market depend on various
factors, including the level of interest rates, regional and national economic
conditions and inflation and deflation in residential property values. To the
extent the Company is unable to acquire a sufficient number of Mortgage Loans
meeting its criteria, the Company's results of operations will be adversely
affected.
REGISTRATION UNDER THE INVESTMENT COMPANY ACT. The Company at all times
intends to conduct its business so as not to become regulated as an investment
company under the Investment Company Act. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretation by the staff of the
Securities and Exchange Commission (the "Commission"), in order to qualify for
this exemption, the Company, among other things, must maintain at least 55% of
its assets directly in Qualifying Interests. The assets that the Company may
acquire, therefore, may be limited by the provisions of the Investment Company
Act. In connection with any acquisition of a class of Mortgage Security junior
to other classes of Mortgage Securities in the right to receive payment from the
underlying Mortgage Loans, the Company intends, where appropriate to obtain
foreclosure rights with respect to the underlying Mortgage Loans, although there
can be no assurance that it will be able to do so on acceptable terms. As a
result of obtaining such rights, the Company believes that the related
subordinated interest in such class of Mortgage Security will constitute
Qualifying Interests for the purpose of the Investment Company Act. The Company
does not intend, however, to seek an exemptive order, no-action letter or other
form of interpretive guidance from the Commission on these positions. If the
Commission were to take a different position with respect to whether any such
subordinated interest constitutes a Qualifying Interest, the Company could,
among other things, be required either (i) to change the manner in which it
conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company. In addition, if the
Company fails to qualify for exemption from registration as an investment
company, its use of leverage would be substantially reduced, and it would be
unable to conduct its business as described herein. Such a failure to qualify
could have a material adverse effect on the Company's earnings and distributions
to stockholders.
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RISKS ASSOCIATED WITH A CORPORATION QUALIFYING AS A REIT
TAXATION AS A CORPORATION. The General Partners intend for the Company to
elect and to operate so as to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1998. Although the General
Partners believe that the Company will be organized and operate in such a
manner, no assurance can be given that the Company will be organized or will be
able to operate in a manner so as to so qualify or remain so qualified.
Qualification of the Company as a REIT involves the satisfaction of numerous
requirements established under highly technical and complex Code provisions of
which there are only limited judicial and administrative interpretations, and
involve the determination of various factual matters and circumstances not
entirely within the Company's control. In addition, no assurance can be given
that legislation, regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. The Company,
however, is not aware of any proposal to amend the tax laws that would
significantly and adversely affect the Company's ability to qualify as a REIT.
If the Company fails to qualify as a REIT for any taxable year, it would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. Unless entitled to relief
under certain Code provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, cash available for distribution would be
reduced due to the additional tax liability for each of the years involved.
Although the Company intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Board of Directors to revoke the REIT election. See
"FEDERAL INCOME TAX CONSIDERATIONS."
REIT MINIMUM DISTRIBUTION REQUIREMENTS; POSSIBLE INCURRENCE OF ADDITIONAL
DEBT. In order to qualify as a REIT, the Company generally will be required
each year to distribute to stockholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain
net income for that year, and (iii) 100% of its undistributed taxable income
from prior years. See "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for
Qualification as a REIT."
The Company intends to make distributions to stockholders to comply with the
95% distribution requirement and to avoid the nondeductible excise tax.
Differences in timing between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company could
require the Company to borrow funds on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of the Company's net taxable
income could cause the Company to distribute amounts that otherwise would be
spent on future acquisitions, unanticipated capital expenditures or repayment of
debt, which would require the Company to borrow funds or to sell assets to fund
the costs of such items and thereby adversely affect the Company's earnings,
cash available for distribution and dividend yield. See "FEDERAL INCOME TAX
CONSIDERATIONS."
FAILURE OF PENSION FUND TO BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL INCOME
TAX PURPOSES. The General Partners believe that Pension Fund and America First
Participating/Preferred Equity Mortgage Fund have been organized and operated as
partnerships and will continue to qualify to be classified as partnerships for
federal income tax purposes. If Pension Fund continues to have two or more
partners after the Merger and fails to qualify as a partnership for federal
income tax purposes or if America First Participating/ Preferred Equity Mortgage
Fund fails to qualify as a partnership for federal income tax purposes, it would
be taxable as a corporation and, in such event, the Company likely would cease
to qualify as a REIT. Furthermore, the imposition of a corporate income tax on
Pension Fund or America First Participating/ Preferred Equity Mortgage Fund
would substantially reduce the amount of cash available for distribution
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to the Company and therefore its stockholders and to the holders of Pension
BUCs. See "FEDERAL INCOME TAX CONSIDERATIONS -- Tax Aspects of the Company's
Investments in Partnerships."
ERISA REQUIREMENTS. The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit certain transactions
that involve (i) certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts (each, an "ERISA Plan") and
(ii) the assets of an ERISA Plan. A "party in interest" or "disqualified person"
with respect to an ERISA Plan will be subject to (a) an initial 5% excise tax on
the amount involved in any prohibited transaction involving the assets of the
ERISA Plan and (b) an excise tax equal to 100% of the amount involved if any
prohibited transaction is not corrected. Consequently, the fiduciary of an ERISA
Plan contemplating an investment in the Common Stock should consider whether the
Company, any other person associated with the issuance of the Common Stock, or
any affiliate of the foregoing is or might become a "party in interest" or
"disqualified person" with respect to the ERISA Plan. In such a case, the
acquisition or holding of Common Stock by or on behalf of the ERISA Plan could
be considered to give rise to a prohibited transaction under ERISA and the Code.
Regulations of the Department of Labor that define "plan assets" (the "ERISA
Plan Asset Regulations") provide that in some situations, when an ERISA Plan
acquires an equity interest in an entity, the ERISA Plan's assets include both
the equity interest and an undivided interest in each of the underlying assets
of the entity, unless one or more exceptions specified in the ERISA Plan Asset
Regulations are satisfied. In such a case, certain transactions that the Company
might enter into in the ordinary course of its business and operations might
constitute "prohibited transactions" under ERISA and the Code. The assets of the
Company should not be deemed to be "plan assets" of any ERISA Plan that invests
in the Common Stock.
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THE PARTNERSHIPS
PREP FUND 1
ORGANIZATION. Prep Fund 1, a Delaware limited partnership, was formed on
November 20, 1986. The general partner of Prep Fund 1 is America First Capital
Associates Limited Partnership Three. Unitholders in Prep Fund 1 own Prep Fund 1
Units representing limited partnership interests in Prep Fund 1 assigned by
America First Fiduciary Corporation Number Six, a Nebraska corporation and the
sole limited partner of Prep Fund 1. As of the Record Date, Prep Fund 1 had
outstanding 5,775,797 Prep Fund 1 Units which were held of record by
approximately 4,449 Unitholders. Prep Fund 1 Units are included for quotation on
NASDAQ under the trading symbol "AFPFZ." Prep Fund 1 holds all of its Mortgage
Securities, Mortgage Loans and other assets through America First
Participating/Preferred Equity Mortgage Fund, a Nebraska partnership, which acts
as a pass-through entity with respect to such assets.
INVESTMENT PORTFOLIO. Prep Fund 1 was formed to invest principally in first
mortgages on multifamily properties insured by the FHA and fixed-rate Mortgage
Securities collateralized by first Mortgage Loans on multifamily properties or
pools of single-family mortgages which are guaranteed as to timely payment by
Ginnie Mae, Fannie Mae or Freddie Mac and, to a lesser extent, in PREPs in the
partnerships that own the multifamily properties collateralizing such Mortgage
Securities and participating Mortgage Loans collateralized by multifamily
properties. The PREPs and the Participating Loans are intended to provide Prep
Fund 1 with a base return plus a participation in the net cash flow and net
capital appreciation of the underlying real estate properties. Therefore, the
return to Prep Fund 1 depends, in part, on the economic performance of the real
estate financed by the PREPs and the Participating Loans. Prep Fund 1 was formed
to invest its original capital on an unleveraged basis and then to liquidate its
investments and distribute the proceeds from such liquidation to Unitholders
generally within 12 years of purchase (I.E., by 1999), subject to the right of
the General Partners to extend the date of liquidation to December 31, 2036.
As of September 30, 1997, Prep Fund 1 indirectly held through its ownership
interest in America First Participating/Preferred Equity Mortgage Fund (i) four
fixed-rate Mortgage Securities collateralized by first Mortgage Loans on
multifamily properties which are guaranteed as to the timely payment of
principal and interest by Ginnie Mae; (ii) fixed-rate Mortgage Securities
collateralized by pools of single-family mortgages which are guaranteed as to
the timely payment of principal and interest by Ginnie Mae or Fannie Mae; (iii)
five PREPs; (iv) the Equity Interest and (v) one Participating Loan financed in
part by America First Apartment Investors, L.P., an affiliated equity fund. The
Mortgage Securities provide Prep Fund 1 with guaranteed monthly payments of
principal and interest.
PREP FUND 2
ORGANIZATION. Prep Fund 2, a Delaware limited partnership, was formed on
May 28, 1987. The general partner of Prep Fund 2 is America First Capital
Associates Limited Partnership Six. Unitholders in Prep Fund 2 hold Prep Fund 2
BUCs representing limited partnership interests in Prep Fund 2 assigned by
America First Fiduciary Corporation Number Fourteen, a Nebraska corporation and
the sole limited partner of Prep Fund 2. As of the Record Date, Prep Fund 2 had
outstanding 1,593,604 Prep Fund 2 BUCs which were held of record by
approximately 1,702 Unitholders. Prep Fund 2 BUCs are listed on the AMEX under
the trading symbol "PF."
INVESTMENT PORTFOLIO. Prep Fund 2 was formed to invest principally in first
mortgages on multifamily properties insured by FHA and fixed-rate Mortgage
Securities collateralized by first Mortgage Loans on multifamily properties or
pools of single-family mortgages which are guaranteed as to timely payment by
Ginnie Mae and, to a lesser extent, in PREPs in the limited partnerships which
own multifamily properties collateralizing such Mortgage Securities. Prep Fund 2
was formed to invest its original capital on an unleveraged basis and then to
liquidate its investments and distribute the proceeds from such liquidation to
Unitholders generally within 12 years of purchase (I.E., by 2000), subject to
the right of the General Partner to extend the date of liquidation to December
31, 2017.
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As of September 30, 1997, Prep Fund 2 held (i) two fixed-rate Mortgage
Securities collateralized by first Mortgage Loans on multifamily properties
which are guaranteed as to the timely payment of principal and interest by
Ginnie Mae, (ii) fixed-rate Mortgage Securities collateralized by pools of
Mortgage Loans on single-family housing properties which are guaranteed as to
the timely payment of principal and interest by Ginnie Mae or Fannie Mae and
(iii) three PREPs. The Mortgage Securities provide Prep Fund 2 with guaranteed
monthly payments of principal and interest.
PENSION FUND
ORGANIZATION. Pension Fund, a Delaware limited partnership, was formed on
February 2, 1988. The general partner of Pension Fund is America First Capital
Associates Limited Partnership Six. Unitholders in Pension Fund hold Pension
BUCs representing limited partnership interests in Pension Fund assigned by
America First Fiduciary Corporation Number Sixteen, a Nebraska corporation and
the sole limited partner of Pension Fund. Pension Fund, which is not publicly
traded, was organized to provide an investment vehicle to certain Tax-Exempt
Investors which would invest in the same types of investments as Prep Fund 2
without causing such investors to realize UBTI. As of the Record Date, Pension
Fund had outstanding 905,974 Pension BUCs which were held of record by
approximately 799 Unitholders. Pension BUCs are subject to various transfer
restrictions which were imposed to prevent Pension Fund from being treated as a
publicly traded partnership for federal income tax purposes and, accordingly,
are not listed or regularly traded, except in the informal secondary market.
INVESTMENT PORTFOLIO. Pension Fund was formed to invest principally in
first mortgages on multifamily properties insured by FHA and fixed-rate Mortgage
Securities collateralized by first Mortgage Loans on multifamily properties or
pools of single-family mortgages which are guaranteed as to timely payment by
Ginnie Mae and, to a lesser extent, in PREPs in the limited partnerships which
own multifamily properties collateralizing such Mortgage Securities. Pension
Fund was formed to invest its original capital on an unleveraged basis and then
to liquidate its investments and distribute the proceeds from such liquidation
to Unitholders generally within 12 years of purchase (I.E., by 2000), subject to
the right of the General Partner to extend the date of liquidation to December
31, 2017.
As of September 30, 1997, Pension Fund held (i) two fixed-rate Mortgage
Securities collateralized by first Mortgage Loans on multifamily properties
which are guaranteed as to the timely payment of principal and interest by
Ginnie Mae; (ii) fixed-rate Mortgage Securities collateralized by pools of
single-family mortgages which are guaranteed as to the timely payment of
principal and interest by Ginnie Mae or Fannie Mae; and (iii) three PREPs. The
Mortgage Securities provide Pension Fund with guaranteed monthly payments of
principal and interest.
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THE COMPANY
GENERAL
The Company will be a newly organized, externally advised Maryland
corporation which expects to elect and qualify to be taxed as a REIT for federal
tax purposes under the Code. Upon consummation of the Merger, the Company will
become the direct and indirect owner of the Mortgage Securities, Mortgage Loans,
PREPs and other assets, subject to liabilities, held by the Partnerships.
Following the Merger, the Company intends to replace a substantial portion of
the Partnerships' current portfolio with a portfolio consisting primarily of
adjustable-rate Mortgage Securities, Mortgage Loans and other related assets,
subject to the parameters and guidelines set forth below.
INVESTMENT STRATEGIES
The Company's investment strategy will generally be to acquire Mortgage
Securities and Mortgage Loans in the secondary market from savings and loan
institutions, commercial banks, investment banks, mortgage originators, mortgage
conduits and other mortgage banking institutions who specialize in the
origination, disposition and servicing of Mortgage Securities or Mortgage Loans.
Increasingly, mortgage lending is being conducted by savings and loan
institutions, commercial banks, investment banks, mortgage originators, mortgage
conduits and other mortgage banking institutions who specialize in the
origination, disposition and servicing of Mortgage Securities or Mortgage Loans
who specialize in the origination and servicing of Mortgage Loans and then sell
these loans to other mortgage investment entities such as the Company. The
Company will purchase Mortgage Securities and Mortgage Loans either directly
from such mortgage banking institutions or from broker-dealers or other mortgage
suppliers that regularly make markets in these securities. Any changes in this
policy would be subject to approval by the Board of Directors, including a
majority of the Independent Directors.
Upon completion of the realignment of the Company's investment portfolio
following the Merger, the Company's investment policies will require that at
least 70% of the Company's investment portfolio consists of Mortgage Securities
and Mortgage Loans that will be similar in terms of investment type and credit
quality to those currently held by the Partnerships. This portion of the
Company's investment portfolio will consist of Mortgage Securities that are
either (i) issued or guaranteed by an agency of the U.S. government, such as
Ginnie Mae, Fannie Mae, or Freddie Mac, (ii) rated in one of the two highest
rating categories by either S&P or Moody's, or (iii) considered to be of
equivalent credit quality as determined by the Advisor and approved by the
Acquisition Committee. In making its determination as to the equivalency of
credit quality with respect to any Mortgage Security, the Advisor will employ
the same investment criteria that it understands are used by the rating agencies
when rating a Mortgage Security. In connection with the Company's acquisition of
Mortgage Securities and Mortgage Loans for this portion of its investment
portfolio, it is expected that the Company will invest primarily in
adjustable-rate Mortgage Securities and Mortgage Loans. The remainder of the
Company's investment portfolio may consist of pass-through certificates,
multi-class pass-throughs or collateralized mortgage obligations backed by
Mortgage Loans on single-family, multifamily, commercial or other real
estate-related properties, or whole Mortgage Loans on single-family, multifamily
or other income producing properties most of which are expected to be rated at
least investment grade at the time of purchase by either S&P or Moody's (E.G.,
securities having a rating of BBB, Baa or better) or considered to be of
equivalent credit quality as determined by the Advisor and approved by the
Acquisition Committee. In addition, the Company may also invest directly in such
single-family, multifamily, commercial or other related properties which may
collateralize its Mortgage Securities.
While Other Investment assets will have a greater degree of credit risk
(I.E., higher rate of default than that of higher rated assets ) and liquidity
risk (I.E., lower trading volume than generally that of higher rated assets),
the Company believes that, on balance, there are several attractive benefits to
be derived from an investment in such assets. First, the Company believes that
the Other Investment assets it acquires will
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have higher total returns than other available investment opportunities. Second,
the Company seeks to benefit from potential future credit rating upgrades on its
Other Investment assets as senior classes of these securities pay off or as a
result of the appreciation of underlying real estate values. As the Other
Investment Mortgage Loans prepay, the underlying credit enhancement obtained
with respect to the more junior classes of such investments may increase as a
percentage of the remaining balance. As the credit enhancement grows, the more
junior classes of Other Investment Mortgage Loans may become eligible for a
credit upgrade by the credit rating agencies. Further, appreciating real estate
values typically help minimize losses on Other Investment Mortgage Securities so
that over time the delinquency and loss experience can be better than had been
assumed initially by the credit rating agencies.
It is expected that a substantial majority of the Company's portfolio of
Mortgage Securities and Mortgage Loans will be indexed either to the six-month
LIBOR and repriced semi-annually, or the one-year Constant Maturity Treasury
Rate and repriced annually. LIBOR based mortgage assets are generally subject to
periodic caps that limit the amount that the applicable mortgage interest rate
can adjust to no more than 1% per semi-annual period. The Company's Mortgage
Securities and Mortgage Loans which will be indexed to the one-year Constant
Maturity Treasury Rate will have annual adjustment features and will be subject
to a 2% annual periodic cap. The remainder of the portfolio may include
investments indexed to the one-month LIBOR, the six-month Certificate of Deposit
Rate, the six-month Constant Maturity Treasury Rate, or the 11th District Cost
of Funds Index. The Company's Mortgage Securities and Mortgage Loans indexed to
(i) the six-month Certificate of Deposit Rate will adjust semi-annually and will
be subject to a 1% periodic cap, and (ii) the 11th District Cost of Funds Index
will generally adjust monthly and will have no periodic caps. All of the
Company's Mortgage Securities and Mortgage Loans will have a lifetime cap which
the Advisor intends to hedge.
The Company will not invest in real estate mortgage investment conduit
("REMIC") residuals or other collateralized mortgage obligation residuals and
therefore will not create excess inclusion income which would constitute
unrelated business taxable income for tax-exempt investors. Therefore, the
Common Stock is expected to be eligible for purchase by tax-exempt investors.
FINANCING STRATEGIES
The Company's strategy is to increase the size of its investment portfolio
by borrowing against its Mortgage Securities and Mortgage Loans and reinvesting
the proceeds of the borrowings in additional Mortgage Securities and Mortgage
Loans. The Company's strategy is to maintain an equity-to-assets ratio (i.e.,
total equity of the Company as a percentage of its total assets) of 8% to 10%.
The General Partners believe that this level of borrowing is sufficient to allow
the Company to continue to operate in interest rate environments in which the
Company's borrowing rates might exceed its portfolio yield. Such interest rate
environments could occur when the interest rate adjustments on the
adjustable-rate Mortgage Securities and Mortgage Loans lag behind the interest
rate increases in the Company's variable rate borrowing or when the interest
rate of the Company's variable rate borrowings are mismatched with the interest
rate indices of the Company's adjustable-rate Mortgage Securities and Mortgage
Loans. During such interest rate environments, the costs associated with the
Company's borrowings will increase at a quicker pace than the return on its
adjustable-rate Mortgage Securities and Mortgage Loans which could adversely
affect the Company's earnings and the payment of distributions. The Company also
believes that this level of borrowing is adequate to protect the Company from
having to sell assets during periods when the value of its adjustable-rate
Mortgage Securities and Mortgage Loans are declining. If the ratio of the
Company's equity-to-total assets, measured on a historical cost basis, falls
below 8%, then, subject to the source of income limitations applicable to the
Company as a REIT, the Company will take action to increase its equity-to-assets
ratio to 8% of total assets or greater when measured on a historical cost basis
through normal portfolio amortization, sale of assets or other steps as
necessary.
The Company anticipates that its adjustable-rate Mortgage Securities and
Mortgage Loans will be financed primarily at short-term borrowing rates through
the utilization of reverse repurchase agreements,
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borrowings under lines of credit and other secured or unsecured financings which
the Company may establish with approved institutional lenders. The Company
expects that reverse repurchase agreements will be the primary source of
financing utilized to finance its portfolio of adjustable-rate Mortgage
Securities and Mortgage Loans. Generally, upon repayment of each reverse
repurchase agreement, the Mortgage Securities and Mortgage Loans used to
collateralize the financing will immediately be pledged to secure new reverse
repurchase agreements.
A reverse repurchase agreement, although structured as a sale and repurchase
obligation, operates as a financing under which the Company effectively pledges
its Mortgage Securities and Mortgage Loans as a collateral to secure a
short-term loan which is equal in value to a specified percentage of the market
value of such pledged collateral. Reverse repurchase agreements take the form of
a sale of the pledged collateral to a lender at an agreed upon price in return
for such lender's simultaneous agreement to resell the same securities back to
the borrower at a future date (the maturity of the borrowing) at a higher price.
The price difference is the cost of borrowing under these agreements. Under a
reverse repurchase agreement, the Company generally will retain beneficial
ownership of the pledged collateral, including the right to distributions and
the right to vote. At the maturity of a reverse repurchase agreement, the
Company will be required to repay the loan and concurrently will receive back
its pledged collateral from the lender. If the Company were unable to repay the
loan at maturity, the lender could liquidate the pledged collateral to cover
such loan.
The Company expects that all of its reverse repurchase agreements will
require it to pledge cash or additional Mortgage Securities or Mortgage Loans to
the lender in the event the market value of any existing pledged collateral
declines. To the extent that any reserves are insufficient to cover such
deficiencies in the pledged collateral, which may occur in periods of rapidly
rising interest rates, the Company may be required to sell assets to reduce the
amount of the borrowing.
The majority of the Company's Mortgage Securities and Mortgage Loans will
generate income based on short-term interest rates, adjusting annually and
semi-annually. A portion of the remaining Company's mortgage assets will also
adjust based on short-term interest rates on an annual or semi-annual basis but
only after an initial fixed rate period of three or five years. Substantially
all of the Company's borrowings will bear interest at fixed rates with
maturities of one to six months. While increases in short-term interest rates
will generally increase the yields on the Company's adjustable-rate Mortgage
Securities and Mortgage Loans, rising short-term rates will also increase the
costs of borrowings by the Company. To the extent such costs rise more rapidly
than the yields, the Company's net interest income may be reduced or a net loss
may result.
Generally, the Company will attempt to structure its acquisitions so that
the Mortgage Securities and Mortgage Loans purchased will have interest rate
adjustment indices and adjustment periods that, on an aggregate basis,
correspond to adjustment periods of its borrowings. As a result, the Company
will attempt to reduce its exposure to changes in short-term interest rates.
In the event of the insolvency or bankruptcy of a lender during the term of
a reverse repurchase agreement, provisions of the federal Bankruptcy Code, if
applicable, may permit the lender to consider the agreement to resell the
pledged collateral to be an executory contract that, at the lender's option, may
be either assumed or rejected by the lender. If a bankrupt lender rejects its
obligation to resell any pledged collateral to the Company, the Company's claim
against the lender for the damages resulting therefrom may be treated as one of
many unsecured claims against the lender's assets. These claims would be subject
to significant delay and, if and when payments are received, they may be
substantially less than the value of the pledged collateral or the damage
actually suffered by the Company. In addition, if the lender is a broker or
dealer subject to the Securities Investor Protection Act of 1970, the Company's
ability to exercise its rights to recover its pledged collateral under a reverse
repurchase agreement or to be compensated for any damages resulting from the
lender's insolvency may be further limited by such statute. If the lender is an
insured depository institution subject to the Federal Deposit Insurance Act, the
Company's ability to
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exercise its rights to recover its pledged collateral under a reverse repurchase
agreement or to be compensated for damages resulting from the lender's
insolvency may be limited by such statute rather than the Bankruptcy Code.
To reduce its exposure to this risk, the Company (i) will enter into
collateralized borrowings only with financially sound institutions approved by
the Board of Directors, (ii) will monitor the financial condition of such
institutions on a regular basis, (iii) will enter into reverse repurchase
agreements with several different lenders, and (iv) will monitor the percentage
of collateralized borrowings that are the subject of reverse repurchase
agreements with a single lender. Notwithstanding these measures, no assurance
can be given that the Company will be able to avoid such third-party risks.
RISK MANAGEMENT STRATEGIES
To the extent consistent with its election to qualify as a REIT, the Company
will implement certain processes and will follow a hedging program intended to
protect the Company against significant unexpected changes in prepayment rates
and interest rates. The Company will seek to reduce the effects on earnings
caused by higher than anticipated prepayment rates by purchasing Mortgage
Securities and Mortgage Loans which are fully indexed and have previously
experienced periods of rising or falling interest rates. The Company will seek
to manage its Mortgage Security and Mortgage Loan portfolio to offset the
potential adverse effects from (i) lifetime and periodic interest rate caps on
its Mortgage Securities and Mortgage Loans, (ii) the difference between interest
rate indices applicable to its Mortgage Securities and Mortgage Loans and
related borrowings, and (iii) the difference between interest rate adjustment
periods applicable to its Mortgage Securities and Mortgage Loans and related
borrowings (i.e., maturity mismatches). As part of its hedging strategy, the
Company will also monitor on an ongoing basis the prepayment risks associated
with its Mortgage Securities and Mortgage Loans that arise in fluctuating
interest rate environments.
In connection with its hedging strategy, the Company will attempt to
structure its commitments to purchase Mortgage Loans which have interest rate
adjustment indices and adjustment periods that, on an aggregate basis,
correspond to the interest rate adjustment indices and interest rate adjustment
periods of the applicable financing source. The Company also will undertake to
structure its borrowing agreements to include a range of different maturities
(although substantially all will have maturities of less than one year). As a
result, it is expected that the Company will (i) be able to adjust the average
maturity of its Mortgage Loans on an ongoing basis by changing the mix of
maturities as such borrowings come due and are renewed and (ii) minimize any
differences between interest rate adjustment periods of its Mortgage Loans and
related borrowings that may occur due to prepayments of such borrowings or other
factors.
As part of its hedging strategy, the Company will purchase interest rate cap
agreements in an effort to limit or partially offset fluctuations and adverse
changes in interest rates which may result in causing the Company's cost of
borrowing to exceed the lifetime maximum interest rate on its adjustable-rate
Mortgage Securities and Mortgage Loans. These agreements will have the effect of
offsetting a portion of the Company's borrowing costs if prevailing interest
rates exceed the rate specified in the cap agreement. An interest rate cap
agreement is a contractual agreement whereby the Company pays a fee, which may
at times be financed, typically, to either a bank or investment banking firm, in
exchange for the right to receive payments equal to the difference between a
contractually specified cap rate level and a periodically determined future
interest rate times a contractually specified principal, or notional, amount.
Using this strategy, the Company intends generally to hedge as much of the
interest rate risk arising from the lifetime maximum interest rates on its
adjustable-rate Mortgage Securities and Mortgage Loans and from periodic rate
and/or payment caps as is determined to be in its best interest, taking into
consideration the cost of such hedging transactions and the need to maintain its
status as a REIT.
The interest rate risk associated with the Company's ownership of Mortgage
Loans may also be hedged through the purchase of mortgage derivative securities
or other derivative products. To a lesser
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extent, the Company may also enter into interest rate swap agreements, buy and
sell financial futures contracts and options on financial futures contracts and
trade forward contracts as a hedge against future interest rate changes;
provided, however, the Company will not invest in these instruments unless the
Company and the Advisor are exempt from the registration requirements of the
Commodity Exchange Act or otherwise comply with the provisions of such act.
Hedging transactions described above generally are designed to protect the
Company's net interest income during periods when the Company's borrowing costs
exceed the maximum lifetime interest rates on its adjustable-rate Mortgage
Securities. The Company does not intend to hedge for speculative purposes.
Further, no hedging strategy can completely insulate the Company from risk, and
certain of the federal income tax requirements that the Company must satisfy to
qualify as a REIT may limit the Company's ability to hedge. The Company will
carefully monitor and manage the risks associated with derivatives. The Company
will monitor carefully, and may have to limit, its purchases of mortgage
derivative securities to assure that it does not realize excessive hedging
income, or hold hedging assets having excess value in relation to total assets,
which would result in the Company's disqualification as a REIT or, in the case
of excess hedging income, the payment of a penalty tax for failure to satisfy
certain REIT income tests under the Code, provided such failure was for
reasonable cause. See "FEDERAL INCOME TAX CONSIDERATIONS--Requirements for
Qualification as a REIT." In addition, the Company intends to purchase interest
rate cap agreements only from high quality financial institutions approved by
the Board of Directors.
SECURITIZATION OF MORTGAGE LOANS
The Company may supplement its portfolio of Mortgage Securities with
individual Mortgage Loans acquired for its investment portfolio for future
securitization. It is expected that, to be eligible for securitization, Mortgage
Loans will generally be underwritten to "A" quality standards and will be
combined together to create Mortgage Securities that will be more highly rated
than the individual Mortgage Loans. The Company intends to purchase Mortgage
Loans for securitization when it believes that it can earn a higher yield on
Mortgage Securities created through securitization than on comparable Mortgage
Securities purchased in the market or in order to facilitate its compliance with
its exemption from the Investment Company Act. See "--Operating Restrictions"
below. Following the securitization process, the Company intends to hold the
newly created Mortgage Securities in its investment portfolio and may retain a
limited amount of the risk of future credit loss as part of its securitization
program. In order to facilitate its securitization efforts, the Company, in
certain instances, may pledge collateral and assume the credit risk for the
original principal balance of the securitized Mortgage Loans.
OPERATING RESTRICTIONS
The Board of Directors has established the Company's operating and
investment policies and financing strategies and any revision in such policies
and strategies will require the approval of the Board of Directors, including a
majority of the Independent Directors. Except as otherwise restricted, the Board
of Directors has the power to modify or alter the Company's policies and
strategies without the consent of stockholders. Developments in the market which
affect the Company's policies and strategies or which change the Company's
assessment of the market may cause the Board of Directors (including a majority
of the Independent Directors) to revise such policies and strategies.
In the event the rating of a Mortgage Security or Mortgage Loan held by the
Company is reduced by a credit rating agency to below investment grade after its
acquisition, the asset may be retained in the Company's investment portfolio
only if the Advisor recommends that it be retained and the recommendation is
approved by the Board of Directors (including a majority of the Independent
Directors).
The Company will elect to qualify as a REIT for tax purposes. The Company
will adopt certain compliance guidelines which will include restrictions on the
acquisition, holding and sale of assets. Prior to
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the acquisition of any asset, the Company will determine whether such asset will
constitute a Qualified REIT Asset. Substantially all the assets that the Company
will acquire for investment are expected to be Qualified REIT Assets. This
policy will limit the investment strategies that the Company may employ.
The Company will closely monitor its purchases of Mortgage Securities,
Mortgage Loans, the income from such assets, and the income from its hedging
strategies, so as to ensure at all times that it maintains its qualification as
a REIT. The Company will develop certain accounting systems and testing
procedures with the help of qualified accountants and tax experts to facilitate
its ongoing compliance with the REIT provisions of the Code. See "FEDERAL INCOME
TAX CONSIDERATIONS--Requirements for Qualification as a REIT."
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. The
Investment Company Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interest in real estate." Under current interpretation of the staff of the
Commission, in order to qualify for this exemption, the Company must maintain at
least 55% of its assets directly in Qualifying Interests. In addition, unless
certain Mortgage Securities represent an undivided interest in the entire pool
backing such Mortgage Securities (I.E., "whole pool" Mortgage Securities), such
Mortgage Securities may be treated as securities separate from the underlying
Mortgage Loans and, thus, may not be considered Qualifying Interests for
purposes of the 55% requirement. The Company will closely monitor its compliance
with this requirement and intends to maintain its exempt status. See
"--Portfolio of Mortgage Securities and Mortgage Loans--Mortgage Securities."
PORTFOLIO OF MORTGAGE SECURITIES AND MORTGAGE LOANS
In accordance with the Company's operating and investing policies, the
General Partners anticipate that the Company will invest its assets in the types
of Mortgage Securities and Mortgage Loans described below. The Company, at this
time, does not plan to invest in residuals of mortgage securitizations from
collateralized mortgage obligations and pass-through securities. Its Mortgage
Securities will, on most occasions, be collateralized by whole pools. The
Company may in the future purchase Mortgage Loans in the secondary markets and
later use collateralized mortgage obligations and/or REMIC structures as a means
of financing, while maintaining ownership in the Mortgage Securities. Risks
associated with these types of assets are related to moves in short-term
interest rates and the effects that those moves will have on the Company's cost
of borrowings and the assets prepayment rates.
MORTGAGE SECURITIES. The Company's investments in Mortgage Securities will
be concentrated in Mortgage Securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac and privately issued Mortgage Securities representing
interests in Mortgage Loans that are secured primarily by first liens on
single-family residential properties, although the Company may also acquire
Mortgage Securities secured by liens on other types of real estate-related
properties. It is expected that the Company will invest primarily in
adjustable-rate Mortgage Securities and Mortgage Loans. The adjustable-rate
Mortgage Securities acquired by the Company will generally be subject to
periodic interest rate adjustments, as well as periodic and lifetime interest
rate caps which limit the amount an adjustable-rate mortgage interest rate can
change during any given period.
The following is a discussion of each type of Mortgage Security that may be
held by the Company:
GINNIE MAE. The Government National Mortgage Association is an entity
within the United States Department of Housing and Urban Development. Ginnie Mae
operates several mortgage support programs through the purchase of whole
Mortgage Loans or by guaranteeing securities backed by whole Mortgage Loans
insured or coinsured by FHA on single-family or multifamily residential projects
meeting specified eligibility criteria.
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Each Ginnie Mae adjustable-rate mortgage-backed security issued to date has
been issued in the form of a pass-through certificate representing a fractional
undivided interest in a pool of adjustable-rate mortgages purchased by Ginnie
Mae, the terms of which provide for timely monthly payments by the issuers to
the registered holders of the certificates. The original term and maturity of
the Mortgage Loans generally do not exceed 40 years. Ginnie Mae adjustable-rate
Mortgage Securities bear interest at an annual rate which is 0.25% less than the
interest rate on the underlying mortgage loan, the difference representing the
guarantee fee and servicing fee.
Ginnie Mae guarantees to each holder of each Ginnie Mae adjustable-rate
mortgage-backed security the full and timely payment of all principal and
interest. Ginnie Mae's guarantee is backed by the full faith and credit of the
United States. If the issuer fails to make timely monthly payments, Ginnie Mae
is required to do so within a short period of time after default. In the event
of a default by a mortgagor under an FHA insured Mortgage Loan that is
guaranteed by Ginnie Mae, Ginnie Mae may assign the underlying defaulted
mortgage to FHA. In such event, Ginnie Mae is required to prepay the remaining
principal on the certificate upon receipt of insurance proceeds from FHA.
FANNIE MAE. The Federal National Mortgage Association is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act. Fannie Mae provides funds to
the mortgage market primarily by purchasing home Mortgage Loans from mortgage
loan originators, thereby replenishing their funds for additional lending.
Fannie Mae established its first adjustable-rate mortgage programs in 1982 and
currently has several adjustable-rate mortgage programs under which
adjustable-rate Mortgage Securities may be issued, including programs for the
issuance of securities through REMICs under the Code.
Each Fannie Mae adjustable-rate mortgage-backed security issued to date has
been issued in the form of a pass-through certificate representing a fractional
undivided interest in a pool of adjustable-rate mortgages formed by Fannie Mae.
The adjustable-rate mortgages included in each pool are fully amortizing,
conventional Mortgage Loans secured by a first lien on either single-family
housing properties or multifamily properties. The original terms to maturity of
the Mortgage Loans generally do not exceed 40 years. Fannie Mae has issued
several different series of adjustable-rate Mortgage Securities. Each series
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 Fannie Mae's guarantee fee.
Fannie Mae guarantees to each holder of a Fannie Mae mortgage-backed
security the full and timely payment of all scheduled principal and interest on
the Mortgage Loans in any pool foreclosed or otherwise finally liquidated,
whether or not the principal amount is actually received. The obligations of
Fannie Mae under its guarantees are solely those of Fannie Mae and are not
backed by the full faith and credit of the U.S. Government. If Fannie Mae were
unable to satisfy such obligations, distributions to holders of Fannie Mae
adjustable-rate Mortgage Securities would consist solely of payments and other
recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of Fannie Mae adjustable-rate Mortgage Securities would
be affected by delinquent payments and defaults on such Mortgage Loans.
FREDDIE MAC. The Federal Home Loan Mortgage Corporation is a
stockholder-owned, government-sponsored enterprise created pursuant to an Act of
Congress on July 24, 1970. The principal activity of Freddie Mac consists of the
purchase of first lien, conventional residential mortgages, including both whole
loans and participation interests in such mortgages and the resale of the loans
and participations in the form of guaranteed Mortgage Securities.
Each Freddie Mac adjustable-rate mortgage-backed security issued to date has
been issued in the form of a pass-through certificate representing an undivided
interest in a pool of adjustable-rate mortgages purchased by Freddie Mac. The
adjustable-rate mortgages 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 single-family housing properties or multifamily
properties. The interest rates paid on Freddie Mac
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adjustable-rate Mortgage Securities adjust periodically on the first day of the
month following the month in which the interest rates on the underlying Mortgage
Loans adjust.
Freddie Mac guarantees to each holder of its adjustable-rate Mortgage
Securities the timely payment of interest at the applicable pass-through rate
and ultimate collection of all principal on the holder's pro rata share of the
unpaid principal balance of the related adjustable-rate mortgage, but does not
guarantee the timely payment of scheduled principal of the underlying Mortgage
Loans. The obligations of Freddie Mac under its guarantees are solely those of
Freddie Mac and are not backed by the full faith and credit of the U.S.
Government. If Freddie Mac were unable to satisfy such obligations,
distributions to holders of Freddie Mac adjustable-rate mortgage certificates
would consist solely of payments and other recoveries on the underlying Mortgage
Loans and, accordingly, monthly distributions to holders of Freddie Mac
adjustable-rate mortgage certificates would be affected by delinquent payments
and defaults on such Mortgage Loans.
PRIVATELY ISSUED ADJUSTABLE-RATE MORTGAGE SECURITIES. Privately issued
adjustable-rate Mortgage Securities are structured in a manner that is similar
to the Mortgage Securities issued or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac discussed above but are issued by originators of, and investors in,
Mortgage Loans, including savings and loan institutions, commercial banks,
investment banks, mortgage originators, mortgage conduits and other mortgage
banking institutions who specialize in the origination, disposition and
servicing of Mortgage Securities or Mortgage Loans. Privately issued
adjustable-rate Mortgage Securities are usually backed by a pool of
non-conforming conventional adjustable-rate Mortgage Loans and are generally
structured with one or more types of credit enhancement, including pool
insurance, guarantees, or subordination. Accordingly, the privately issued
adjustable-rate Mortgage Securities typically are not guaranteed by an entity
having the credit status of Ginnie Mae, Fannie Mae or Freddie Mac and, as a
result, any losses on such Mortgage Securities due to borrower defaults on any
of the underlying Mortgage Loans, bankruptcies, fraud or special hazard losses,
in excess of certain insurance limits, would be the responsibility of the
Company.
Privately issued adjustable-rate Mortgage Securities, credit enhanced by
mortgage pool insurance, will provide the Company with an alternative source of
adjustable-rate Mortgage Securities that meet the Qualifying Interests test for
purposes of maintaining the Company's exemption under the Investment Company
Act. In the past few years, most of the providers of mortgage pool insurance
have stopped providing such insurance. Therefore, in the future the General
Partners expect that the Company will be increasingly more reliant on
adjustable-rate Mortgage Securities issued and guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac than on privately issued adjustable-rate mortgage
certificates as its source of Qualifying Interests in real estate when meeting
its Investment Company Act requirements.
MORTGAGE LOANS. Mortgage Loans are originated by or purchased from savings
and loan institutions, commercial banks, investment banks, mortgage originators,
mortgage conduits and other mortgage banking institutions who specialize in the
origination, disposition and servicing of Mortgage Securities or Mortgage Loans
throughout the United States. The Company may acquire Mortgage Loans directly
from originators and from entities holding Mortgage Loans originated by others.
All Mortgage Loans acquired by the Company will have adjustable interest rates
and may be subject to periodic or lifetime interest rate caps. In the event the
Company acquires Mortgage Loans which are not credit enhanced or which are not
guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae, FHA or private insurers for
securitization, the Company will be subject to the risk of loss on such Mortgage
Loans and, as a result of any such loss, would bear the loss of principal
between the value of such mortgaged property and the outstanding indebtedness,
as well as the loss of interest. The Company may securitize Mortgage Loans it
acquires to create Mortgage Securities. See "--Securitization of Mortgage
Loans." Under the terms of the Company's investment policies, the Mortgage Loans
acquired by the Company, together with the Company's investments in Other
Investment assets may not constitute more than 30% of the Company's investment
portfolio.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
Mortgage Securities in which the Company may invest may include
collateralized mortgage obligations and multiclass pass-through securities.
Collateralized mortgage obligations are debt obligations issued by special
purpose entities that are secured by mortgage-backed certificates, including, in
many cases, certificates issued by government and government-related guarantors,
including Ginnie Mae, Fannie Mae and Freddie Mac, together with certain funds
and other collateral. Multiclass pass-through securities are equity interests in
a trust composed of Mortgage Loans or other Mortgage Securities. Payments of
principal and interest on underlying collateral provide the funds to pay debt
service on the collateralized mortgage obligations or make scheduled
distributions on the multiclass pass-through securities. Collateralized mortgage
obligations and multiclass pass-through securities may be issued by agencies or
instrumentalities of the U.S. government or by private organizations. The
discussion of collateralized mortgage obligations in the following paragraphs is
similarly applicable to multiclass pass-through securities.
In a collateralized mortgage obligation, a series of bonds or certificates
is issued in multiple classes. Each class of collateralized mortgage
obligations, often referred to as a "tranche," is issued at a specific coupon
rate (which, as discussed below, may be an adjustable rate subject to a cap) and
has a stated maturity or final distribution date. Principal prepayments on
collateral underlying a collateralized mortgage obligation may cause it to be
retired substantially earlier than the stated maturities or final distribution
dates. Interest is paid or accrues on all classes of a collateralized mortgage
obligation on a monthly, quarterly or semi-annual basis. The principal and
interest on underlying Mortgage Loans may be allocated among the several classes
of a series of a collateralized mortgage obligation in many ways. In a common
structure, payments of principal, including any principal prepayments, on the
underlying Mortgage Loans are applied to the classes of the series of a
collateralized mortgage obligation in the order of their respective stated
maturities or final distribution dates, so that no payment of principal will be
made on any class of a collateralized mortgage obligation until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. Depending on the type of collateralized mortgage obligation
acquired by the Company, the Company's investment in collateralized mortgage
obligations may be subject to risks associated with fluctuations in short-term
interest rates and prepayment rates. An increase in short-term interest rates
could cause a greater increase in the rate paid by the Company on its borrowings
than the rate paid to the Company on a particular collateralized mortgage
obligation, thereby adversely affecting the Company's earnings and the payment
of distributions to stockholders. Similarly, if there is an increase in
prepayment rates resulting in a shortening of the expected life of the Company's
investment in a particular collateralized mortgage obligation, the Company's
earnings and the payment of distributions could be adversely affected.
Other types of collateralized mortgage obligation issues include classes
such as parallel pay collateralized mortgage obligations, some of which, such as
Planned Amortization Class Collateralized Mortgage Obligations, provide
protection against prepayment uncertainty. Parallel pay collateralized mortgage
obligations are structured to provide payments of principal on certain payment
dates to more than one class. These simultaneous payments are taken into account
in calculating the stated maturity date or final distribution date of each class
which, as with other collateralized mortgage obligations structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. Planned Amortization Class Collateralized Mortgage Obligations
generally require payment of a specified amount of principal on each payment
date so long as prepayment rates on the underlying collateral fall within a
specified range. Planned Amortization Class Collateralized Mortgage Obligations
are always parallel pay collateralized mortgage obligations with the required
principal payment on such securities having the highest priority after interest
has been paid to all classes.
Other types of collateralized mortgage obligation issues include Targeted
Amortization Class Collateralized Mortgage Obligations, which are similar to
Planned Amortization Class Collateralized Mortgage
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Obligations. While Planned Amortization Class Collateralized Mortgage
Obligations maintain their amortization schedule within a specified range of
prepayment speeds, Targeted Amortization Class Collateralized Mortgage
Obligations are generally targeted to a narrow range of prepayment speeds or a
specified prepayment speed. Targeted Amortization Class Collateralized Mortgage
Obligations can provide protection against prepayment uncertainty since cash
flows generated from higher prepayment rates of the underlying mortgage-related
assets are applied to the various other pass-through tranches so as to allow the
Targeted Amortization Class Collateralized Mortgage Obligations to maintain
their amortization schedule.
Collateralized mortgage obligations may be subject to certain rights of
issuers thereof to redeem such collateralized mortgage obligations 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
and multifamily collateralized mortgage obligations are supported by private
credit enhancements similar to those used for privately issued certificates and
are often issued as senior-subordinated Mortgage Securities (i.e., a series of
pass-through certificates or collateralized mortgage obligations in which one or
more classes have a prior right to receive principal and/or interest payments
from the underlying pool of Mortgage Loans). The Company will only acquire
collateralized mortgage obligations or multiclass pass-through certificates that
constitute debt obligations or beneficial ownership in grantor trusts holding
Mortgage Loans, or regular interests in REMICs, or that otherwise constitute
Qualified REIT Assets (provided that the Company has obtained a favorable
opinion of its tax advisor or a ruling from the IRS to that effect).
One or more tranches of a collateralized mortgage obligation may have coupon
rates which reset periodically at a specified increment over an index such as
LIBOR. These adjustable-rate tranches are known as "floating-rate collateralized
mortgage obligations." Floating-rate collateralized mortgage obligations may be
backed by fixed or adjustable-rate mortgages. To date, fixed-rate mortgages have
been more commonly utilized for this purpose. Floating-rate collateralized
mortgage obligations are typically issued with lifetime caps on the coupon rate
thereon. These caps represent a ceiling beyond which the coupon rate on a
floating-rate collateralized mortgage obligation may not be increased regardless
of increases in the interest rate index to which the floating-rate
collateralized mortgage obligation is geared.
DISTRIBUTION POLICY
Following the Merger, the Company intends to distribute substantially all of
its taxable income (which generally does not equal net income as calculated in
accordance with GAAP) to stockholders as distributions. The Company intends to
declare distributions on its Common Stock quarterly. The distribution policy is
subject to revision by, and all distributions by the Company will be made at the
discretion of, the Board of Directors. The amount of such distributions will be
affected by a number of factors, including the Company's actual cash available
for distribution, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant.
In order to maintain its qualification as a REIT, the Company will be
required to make annual distributions to stockholders in an amount equal to at
least 95% of its taxable income (excluding net capital gains). In the event that
cash available for distribution is insufficient to meet these distribution
requirements, the Company could be required to borrow the amount of the
deficiency or sell assets to obtain the cash necessary to make the distribution
required to retain REIT status.
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MANAGEMENT OF THE COMPANY
The Board of Directors will direct the management of the business and
affairs of the Company but will retain the Advisor to manage the Company's
day-to-day affairs and the Board of Directors intends to delegate to the Advisor
responsibilities with respect to, among other things, overseeing the portfolio
of assets of the Company and the acquisition or disposition of investments.
Initially, the Board of Directors will be comprised of seven directors, a
majority of whom will be Independent Directors. The Board of Directors will
establish written policies on investments and borrowings and will monitor the
administrative procedures, investment operations and performance of the Company
and the Advisor to assure that such policies are carried out. Until modified by
the directors, the Company will follow the policies on investments and
borrowings set forth in this Consent Solicitation Statement/Prospectus.
Pursuant to the Charter, the seven-member Board of Directors will be divided
into three classes. All of the initial directors will be designated by the
General Partners. The Class I and Class II directors will each consist of two
directors, one of whom in each class will be an Independent Director. The Class
III directors will consist of three directors, two of whom will be Independent
Directors.
The term of the initial Class I directors will terminate on the date of the
1998 annual meeting of stockholders; the term of the initial Class II directors
will terminate on the date of the 1999 annual meeting of stockholders; and the
term of the initial Class III directors will terminate on the date of the 2000
annual meeting of stockholders. At each annual meeting of stockholders,
directors of the class to be elected shall be elected for a three-year term.
Directors will hold office until the annual meeting for the year in which their
terms expire and until their successors shall be elected and qualify. The terms
of the initial directors will commence on the Effective Date.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
As of the Effective Date, the Directors and Officers of the Company will be
as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD
- -------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Michael B. Yanney........................... 63 Chairman of the Board
Stewart Zimmerman........................... 53 President and Chief Executive Officer and
Director
Gary Thompson............................... 54 Chief Financial Officer
William S. Gorin............................ 39 Executive Vice President
Ronald A. Freydberg......................... 37 Senior Vice President
Michael L. Dahir............................ 49 Director
George V. Janzen............................ 68 Director
George H. Krauss............................ 55 Director
Gregor Medinger............................. 53 Director
W. David Scott.............................. 35 Director
</TABLE>
Michael B. Yanney will be Chairman of the Board of Directors and will serve
as a Director of the Company. Since 1984, Mr. Yanney has served as the Chairman
and Chief Executive Officer of America First and its predecessors, a financial
services firm located in Omaha, Nebraska, that manages public investment funds
which have raised over $1.5 billion. From 1977 until the organization of America
First, Mr. Yanney was principally engaged in the ownership and management of
commercial banks. From 1961 to 1977, Mr. Yanney was employed by Omaha National
Bank and Omaha National Corporation (subsequently merged into FirsTier Financial
which was merged into First Bank), where he held various positions, including
the position of Executive Vice President and Treasurer of the holding company.
Mr. Yanney also serves as a member of the boards of directors of Burlington
Northern Santa Fe Corporation, Forest Oil Corporation, WorldCom, Inc., Lozier
Corporation, Freedom Communications,
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Inc., PKS Information Services, Inc., Mid-America Apartment Communities, Inc.,
Magnum Resources, Inc. and Rio Grande Medical Technologies, Inc.
Stewart Zimmerman will be President and Chief Executive Officer and a
Director of the Company. He has been Executive Vice President of America First
since January 1989, during which time he has served in a number of positions:
President and Chief Operating Officer of America First REIT; President of
several America First Mortgage Funds including America First Participating
Preferred Mortgage Funds 1 & 2, Capital Source I & II and the America First
Tax-Exempt Mortgage Funds 1 & 2. From September 1986 to September 1988, he
served as a Managing Director and Director of Security Pacific Merchant Bank
responsible for Mortgage Trading and Finance. Prior to that time, he served as
First Vice President of E.F. Hutton & Company, Inc., where he was responsible
for mortgage-backed securities trading and sales distribution, and Vice
President of Lehman Brothers, where he was responsible for the distribution of
mortgage products. From 1968 to 1972, Mr. Zimmerman was Vice President of Zenith
Mortgage Company and Zenith East Inc., a national mortgage banking and brokerage
company specializing in the structuring and sales of mortgage assets to the
institutional financial community.
Gary Thompson will serve as Chief Financial Officer of the Company. He
serves as financial vice president of America First and is responsible for
financial accounting and tax reporting for all America First funds. Prior to
1989, Mr. Thompson was an audit partner at KPMG Peat Marwick. He is a certified
public accountant.
William S. Gorin will be Executive Vice President of the Company. From 1989
to 1997 Mr. Gorin held various positions with PaineWebber Incorporated/Kidder,
Peabody & Co. Incorporated, New York, New York, most recently serving as a First
Vice President in the Research Department. Prior to that position, Mr. Gorin was
Senior Vice President in the Special Products Group. From 1982 to 1988, Mr.
Gorin was employed by Shearson Lehman Hutton, Inc./E.F. Hutton & Company, Inc.,
New York, New York, in various positions in corporate finance and direct
investments. Mr. Gorin has an MBA from Stanford University.
Ronald A. Freydberg will be Senior Vice President of the Company. From 1995
to 1997 Mr. Freydberg served as a Vice President of Pentalpha Capital, in
Greenwich, Connecticut, where he was a quantitative analysis and structuring
specialist. In that capacity he designed a variety of interactive pricing and
forecasting models, including a customized subordinate residential and
commercial mortgage-backed analytical program and an ARM REIT five-year
forecasting model. In addition, he worked with various financial institutions on
the acquisition and sale of residential, commercial and asset-backed securities.
From 1988 to 1995, Mr. Freydberg held various positions with J.P. Morgan & Co.
in New York, New York. From 1994 to 1995, he was with the Global Markets Group.
In that position he was involved in all aspects of commercial mortgage-backed
securitization and sale of distressed commercial real estate; including
structuring, due diligence and marketing. From 1985 to 1988, Mr. Freydberg was
employed by Citicorp in New York, New York.
Michael L. Dahir will serve as Director of the Company. From 1988 to the
present Mr. Dahir has served as President and Chief Executive Officer of Omaha
State Bank. From 1974 to 1988 he held various positions with Omaha National Bank
including Vice President, investment department head, Senior Vice President and
Chief Financial Officer of FirsTier Holding Company which acquired Omaha
National in 1984. Mr. Dahir is a Director of the College of St. Mary, Omaha,
Nebraska and the Jesuit Middle School, also located in Omaha.
George V. Janzen will serve as Director of the Company. He has been an
independent investment consultant since 1990. From 1993 to 1995, Mr. Janzen
served as a director of America First REIT, Inc. Mr. Janzen served as Fund
President of the America First Tax-Exempt Mortgage Fund from 1985 until 1990.
From 1966 to 1977, he was president and chief executive officer of Southwest
National Bank of El Paso and its successor, First City National Bank of El Paso.
From 1977 to 1985, Mr. Janzen was engaged in the management of his personal
investments.
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George H. Krauss will serve as Director of the Company. He served from 1983
to 1993 as the presiding partner of, and he is currently of counsel to, Kutak
Rock, a national law firm with over 200 lawyers in eight states and the District
of Columbia. Mr. Krauss has been a member of Kutak Rock since 1972 and has
extensive experience in the corporate, merger and acquisition, and regulatory
areas of the firm's practice. In addition to his legal education, Mr. Krauss has
a Masters of Business Administration and is a registered Professional Engineer.
Mr. Krauss has served on the board of directors of numerous companies. He is
currently a member of the board of directors of Gateway 2000, Inc., a computer
manufacturing and distribution company with over $5 billion in sales in 1996,
which is listed on the NYSE. He is also a member of the board of the managing
general partner of America First Financial Fund which is listed on the NASDAQ.
Gregor Medinger will serve as Director of the Company. He is President of BV
Capital Markets, New York, New York, and has been with that company for 14
years. From 1971 to 1980, he worked for Banque Worms, a French merchant bank,
concentrating in cross-border mergers and acquisitions. From 1969 to 1971, Mr.
Medinger worked in the International Department of Bankers Trust. Mr. Medinger
has extensive experience in the investment banking field, he has worked on a
variety of transactions ranging from initial public offerings of companies from
emerging markets to cross-border leveraged buyouts to dual currency bonds.
Gregor Medinger also headed the tax-exempt financings that BV Capital has done
in the last ten years. Mr. Medinger has a law degree from the University of
Vienna.
W. David Scott will serve as Director of the Company. He is President and
Chief Executive Officer of Magnum Resources, Inc., a privately held corporation
which focuses on commercial real estate. Mr. Scott was Vice President and
Director of Cornerstone Bank Group from 1991 to 1994 and prior to that was an
accountant with Peter Kiewit Sons', Inc. He serves on the boards of
Brownell-Talbot School, the Salvation Army, Boy Scouts of America and the A-OK
Foundation.
EXECUTIVE COMPENSATION
The executive officers of the Company will receive no cash compensation for
serving as an executive officer of the Company; however, pursuant to the terms
of the Stock Option Plan, the Compensation Committee of the Board of Directors
may, subject to certain restrictions, grant options to the executive officers to
purchase Common Stock of the Company. See "Stock Option Plan."
EMPLOYMENT AGREEMENTS
Following the Merger, the Advisor will assume, on the Effective Date, the
employment agreements between America First and each of Mr. Zimmerman, Mr. Gorin
and Mr. Freydberg dated as of October 23, July 11 and July 16, 1997,
respectively (each, an "Employment Agreement"). Each Employment Agreement has an
initial term of approximately three years. The Employment Agreements provide
for: (i) an annual base salary of (a) $269,200 for Mr. Zimmerman, (b) $150,000
for Mr. Gorin and (c) $132,500 for Mr. Freydberg; (ii) an annual bonus in such
amount as the Compensation Committee of the Board of Directors shall determine
in its discretion, based on the achievement of target earning levels of the
Company; (iii) a guaranteed bonus for the year ended December 31, 1997 of (a)
$50,000 payable to Mr. Gorin on or before March 31, 1998 and $50,000 payable to
Mr. Gorin on or before June 30, 1998 and (b) $100,000 payable to Mr. Freydberg
on or before March 31, 1998; (iv) an option to purchase a percentage of the
issued and outstanding equity interest of the Advisor equal to (a) 10% in the
case of Mr. Zimmerman, which option is fully vested, (b) 6% in the case of Mr.
Gorin, which options have a term of ten years and vest over a five year period
beginning July 1, 1998, and (c) 3% in the case of Mr. Freydberg, which options
have a term of ten years and vest over a five year period beginning July 1,
1998; (v) eligibility to participate in any stock option plans adopted by the
Company during the term of employment, including the Stock Option Plan described
below; and (vi) eligibility to participate in America First's 401(k) retirement
plan and health plan and all other executive compensation, employee benefit and
welfare plans or programs generally applicable to senior executives of America
First which may in the
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future be implemented by America First. With respect to the payment of
discretionary annual bonuses, the Employment Agreements do not limit the
Compensation Committee's discretion in determining the amounts payable to each
of Messrs. Zimmerman, Gorin and Freydberg. Each Employment Agreement may be
terminated for "cause" (as defined in each Employment Agreement) or, generally,
upon the earlier of (i) the employee's death, (ii) the expiration of a
continuous period of 180 days during which the employee is "disabled" (as
defined in each Employment Agreement), (iii) the expiration of 30 days after
notice of voluntary termination by the employee (or shorter period as agreed
upon by the parties to the Employment Agreement), or (iv) June 30, 2000.
STOCK OPTION PLAN
The Company has adopted the Stock Option Plan which will provide for the
discretionary grant by the Compensation Committee of the Board of Directors of
incentive stock options which meet the requirements of Section 422 of the Code,
non-qualified stock options and dividend equivalent rights. The effective date
of the Option Plan is December 15, 1997. Immediately following the Effective
Date, the Company expects to prepare and file a registration statement relating
to the offer and sale by the Company of shares of Common Stock pursuant to the
Stock Option Plan.
Under the Stock Option Plan, Incentive stock options and dividend equivalent
rights may be granted to the officers and employees of the Company and
non-qualified stock options and dividend equivalent rights may be granted to
officers, directors and employees of the Company and the Advisor and other
persons expected to provide significant services (of a type expressly approved
by the Compensation Committee as covered services for these purposes) to the
Company. The exercise price for any option granted under the 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 Stock Option Plan will be
to provide incentive to key employees, officers, directors and others expected
to provide significant services to the Company, including the employees,
officers and directors of the Company and the Advisor, to encourage proprietary
interest in the Company, to encourage such key employees to remain in the employ
of the Company and the Advisor, to attract new employees with outstanding
qualifications, and to afford additional incentive to others to increase their
efforts in providing significant services to the Company and the Advisor. The
Compensation Committee will determine the eligibility of employees, officers,
directors and others expected to provide significant services to the
participating companies based on, among other factors, the position and
responsibilities of such individuals, the nature and value to the participating
company of such individuals accomplishments and potential contribution to the
success of the participating company whether directly or through its
subsidiaries.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the optionees under the Stock Option Plan will be authorized to
purchase an aggregate of up to 10% of the outstanding shares of the Company's
Common Stock, not to exceed 1,000,000 shares. The shares issued upon exercise of
an option may be either authorized but unissued shares or treasury shares of the
Company or shares purchased on the open market. If an option granted under the
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 Stock Option Plan. Unless previously terminated by the Board
of Directors, the Stock Option Plan will terminate on December 15, 2007, and no
options may be granted under the Stock Option Plan thereafter.
Options granted under the 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 select participants from
among eligible persons and to determine at the time an option is granted whether
it is intended to be a incentive stock option or a non-qualified stock option,
and when and in what increments shares covered by the option may be purchased.
No options may be granted under the 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 any class of stock of the
Company.
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Each option will terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be exercisable
either 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 Stock Option Plan is
payable in full (i) certified or bank cashier's check, (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 optionee, (iv) by any combination of the
foregoing or (v) by a full-recourse promissory note executed by the optionee.
The terms of the promissory note may be changed from time to time by the
Compensation Committee to comply with applicable IRS or Commission regulations
or other relevant pronouncements.
The Board may from time to time, with respect to any shares at the time not
subject to options, suspend or discontinue the Stock Option Plan or revise or
amend it in any respect whatsoever. The Board may amend the Stock Option Plan as
it shall deem advisable, except that no amendment may adversely affect an
optionee with respect to options previously granted unless such amendments are
in connection with compliance with applicable laws; provided that the Board may
not make any amendment in the Stock Option Plan that would, if such amendment
were not approved by the holders of the Common Stock, cause the Stock Option
Plan to fail to comply with any requirement or applicable law or regulation,
unless and until the approval of the holders of such Common Stock is obtained.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company will have an Audit Committee comprised of
Messrs. Janzen and Scott. The Audit Committee's duties will include the review
and oversight of all transactions among the Company and its directors, officers,
holders of 5% or more of its shares of Common Stock or any affiliates, periodic
review of the Company's financial statements and meetings with the Company's
independent auditors. At the discretion of the Board of Directors, members of
the Audit Committee may receive additional compensation for serving on such
committee. The Bylaws will require that the entire Audit Committee be comprised
of Independent Directors.
COMPENSATION COMMITTEE. The Company will have a Compensation Committee
comprised of Messrs. Yanney, Krauss and Medinger. The duties of the Compensation
Committee will include determining the compensation of the Company's executive
officers and the administration of the Company's Stock Option Plan. The Bylaws
will require that a majority of the members of the Compensation Committee be
Independent Directors. At the discretion of the Board of Directors, members of
the Compensation Committee may receive additional compensation for serving on
such committee.
INVESTMENT COMMITTEE. The Company will have an Investment Committee
comprised of Messrs. Dahir and Krauss. The duties of the Investment Committee
will include establishing investment guidelines and criteria relating to the
acquisition of Mortgage Securities and Mortgage Loans which (i) are not issued
or guaranteed by an agency of the U.S. government or (ii) are not rated within
the rating categories set forth in the Company's investment policies.
VACANCIES ON THE BOARD OF DIRECTORS
A vacancy on the Board of Directors created by the death, resignation, or
incapacity of a Director or by an increase in the number of directors (within
the limits referred to above) may be filled by the required vote of stockholders
or the vote of a majority of the remaining directors (with respect to a vacancy
created by the death, resignation, or incapacity of an Independent Director, the
remaining Independent Directors shall nominate a replacement). A director so
chosen by the stockholders shall hold office for the balance of the term then
remaining. A director so chosen by the remaining directors shall hold office
until the next annual meeting of stockholders, at which time the stockholders
shall elect a director to hold office for the
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balance of the term then remaining. Any Director may resign at any time and may
be removed only for cause by the holders of at least 80% of the combined voting
power of all classes of shares of capital stock entitled to vote in the election
for directors voting together as a single class.
COMPENSATION OF DIRECTORS
Members of the Board of Directors who are not Independent Directors will not
receive any cash compensation for serving as a member of the Board of Directors
and likewise will not receive any compensation for attending meetings or for
serving on any committees of the Board of Directors; however, members of the
Board of Directors will receive reimbursement of travel and other expenses and
other out-of-pocket disbursements incurred in connection with attending any
meetings.
Independent Directors will be entitled to receive compensation for serving
as directors at the rate of $5,000 per annum in cash and shares of Common Stock
having an aggregate value of $10,000, based on the fair market value at the date
of issuance, and may be granted options under the Company's Stock Option Plan in
addition to the expense reimbursement for attending meetings described above. At
the discretion of the Board of Directors, Independent Directors may be granted
additional cash compensation for serving on a committee of the Board of
Directors.
THE ADVISOR
The Advisor is a newly organized Maryland corporation that is owned and
controlled by the members of America First.
DIRECTORS AND OFFICERS OF THE ADVISOR. The directors and officers of the
Advisor are set forth below. These officers of the Advisor may also provide
services to the Company on behalf of the Advisor.
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD
- -------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Michael B. Yanney........................... 63 Chairman of the Board
Stewart Zimmerman........................... 53 President and Chief Executive Officer and
Director
Gary Thompson............................... 54 Chief Financial Officer
William S. Gorin............................ 39 Executive Vice President
Ronald A. Freydberg......................... 37 Senior Vice President
George H. Krauss............................ 55 Director
</TABLE>
Biographical information with respect to Messrs. Yanney, Zimmerman,
Thompson, Gorin, Freydberg and Krauss is set forth above.
THE ADVISORY AGREEMENT. The Company entered into an Advisory Agreement with
the Advisor for an initial term of five years, beginning on the Effective Date.
Thereafter, successive extensions, each for a period not to exceed one year, may
be made by agreement between the Company and the Advisor, subject to an
affirmative vote of a majority of the Independent Directors of the Board of
Directors. The Advisory Agreement may be terminated by the Company upon 60 days'
written notice, without cause, by a majority vote of the Independent Directors
of the Board of Directors or by a vote of the holders of a majority of the
outstanding shares of Common Stock having the right to vote. In addition, the
Company has the right to terminate the Advisory Agreement upon the happening of
certain specified events, including a material breach by the Advisor of any
provision contained in the Advisory Agreement not cured within 30 days. In the
event that the Advisory Agreement is terminated without cause or not renewed by
the Company, the Company is obligated to pay the Advisor a termination or
non-renewal fee determined by an independent appraisal.
The Advisor at all times will be subject to the supervision of the Board of
Directors and will only have such functions and authority as the Company may
delegate to it. The Advisor will be responsible for the
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day-to-day operations of the Company and will perform such services and
activities relating to the assets and operations of the Company as may be
appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Board of
Directors;
(ii) representing the Company in connection with the purchase,
accumulation, financing and securitization of Mortgage Loans and Mortgage
Securities;
(iii) arranging for the issuance of Mortgage Securities from a pool of
Mortgage Loans;
(iv) furnishing reports and statistical and economic research to the
Company regarding the investment activities and results of operations of the
Company and the services performed for the Company by the Advisor;
(v) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data regarding the market maintained by
certain nationally recognized dealers in Mortgage Loans and Mortgage
Securities identified by the Board of Directors from time to time, and
providing data and advice to the Board of Directors in connection with the
identification of such dealers;
(vi) providing the executive and administrative personnel and services
required in rendering services to the Company;
(vii) administering the day-to-day operations of the Company and
performing and supervising the performance of such administrative functions
necessary in the management of the Company as may be agreed upon by the
Advisor and the Board of Directors, including collection of revenues and
payment of the expenses, debts and obligations and maintenance of
appropriate computer services to perform such administrative functions;
(viii) communicating on behalf of the Company with the holders of equity
and debt securities of the Company as required to satisfy the reporting and
other requirements of any governmental or regulatory bodies or agencies and
maintaining effective relations with such holders;
(ix) designating a servicer for those Mortgage Loans sold to the Company
by originators that have elected not to service such loans and arranging for
the monitoring and administering of such servicer;
(x) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(xi) engaging in hedging activities on behalf of the Company, consistent
with the Company's qualification as a REIT;
(xii) supervising compliance with REIT provisions of the Code and
maintaining exemption from the Investment Company Act;
(xiii) upon request by, and in accordance with the directions of, the
Board of Directors, investing or reinvesting any money of the Company;
(xiv) qualifying and causing the Company to qualify to do business in all
applicable jurisdictions;
(xv) causing the Company to retain qualified accountants and tax experts
for at least a two-year period to assist in developing appropriate
accounting procedures and testing systems and conducting quarterly
compliance reviews; and
(xvi) complying with and using its best efforts to cause the Company to
comply with all applicable laws.
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<PAGE>
MONITOR SERVICING. The Advisor will monitor and administer the servicing of
the Company's Mortgage Loans, other than those Mortgage Loans pooled to back
Mortgage Securities. Such monitoring and administrative services will include,
but will not be limited to, the following activities: serving as the Company's
consultant with respect to the servicing of Mortgage Loans; collection of
information and submission of reports pertaining to the Mortgage Loans and to
moneys remitted to the Advisor or the Company by servicers; periodic review and
evaluation of the performance of each servicer to determine its compliance with
the terms and conditions of its servicing agreement and, if deemed appropriate,
recommending to the Company the termination of such servicing agreement; acting
as a liaison between servicers and the Company and working with servicers to the
extent necessary to improve their servicing performance; review of and
recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to the Mortgage Loans; review
of servicers' delinquency, foreclosing and other reports on Mortgage Loans;
supervising claims filed under any mortgage insurance policies; and enforcing
the obligation of any servicer to repurchase Mortgage Loans from the Company.
The Advisor may enter into subcontracts with other parties, including its
affiliates, to provide any such services for the Advisor.
MANAGEMENT FEES. The Advisor will receive a per annum base management fee
payable monthly in arrears in an amount equal to 1.1% of the first $300 million
of the Stockholders' Equity (as defined herein), plus .80% of the portion of the
Stockholders' Equity of the Company above $300 million. The Company will also
pay the Advisor, as incentive compensation for each fiscal quarter, an amount
equal to 20% of the dollar amount by which the annualized Return on Equity for
such fiscal quarter exceeds the amount necessary to provide an annualized Return
on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
The ability of the Company to achieve an annualized Return on Equity in
excess of the Ten-Year U.S. Treasury Rate plus 1% and of the Advisor to earn the
incentive compensation described in the preceding paragraph is dependent upon
the level and volatility of interest rates, the Company's ability to react to
changes in interest rates and to utilize successfully the operating strategies
described herein, and other factors, many of which are not within the Company's
control.
The Advisor's base fee shall be calculated by the Advisor within 15 days
after the end of each month, and such calculation shall be promptly delivered to
the Company. The Company shall pay the base management fee within 30 days after
the end of each month. The Advisor shall compute the incentive compensation
payable within 45 days after the end of each fiscal quarter, and the Company
shall pay the incentive compensation with respect to each fiscal quarter within
15 days following the delivery to the Company of the Advisor's written statement
setting forth the computation of the incentive fee for such quarter.
EXPENSES. The Company shall pay all of its expenses and shall reimburse the
Advisor for documented expenses of the Advisor incurred on the Company's behalf.
Notwithstanding the foregoing, the Advisor shall be responsible for paying
compensation of the Company's officers and other personnel required for the
Company's day-to-day operations. Expense reimbursement will be made within 30
days after the end of each month.
LIMITS OF RESPONSIBILITY. Pursuant to the Advisory Agreement, the Advisor
will not assume any responsibility other than to render the services called for
thereunder in good faith and will not be responsible for any action of the Board
of Directors in following or declining to follow any of its advice or
recommendations. The Advisor and its directors, officers, stockholders and
employees will not be liable to the Company, any subsidiary of the Company, the
Independent Directors, the Company's stockholders or any subsidiary's
stockholders for acts or omissions performed under or in connection with the
Advisory Agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties. The Company has agreed to indemnify the Advisor, its directors and its
officers with respect to all expenses, losses, damages, liabilities, demands,
charges and
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claims arising from acts or omissions of the Advisor made in good faith in the
performance of its duties under the Advisory Agreement. The Advisory Agreement
does not prevent the Advisor or any of its affiliates from engaging in other
businesses or from rendering services of any kind to any other person or entity,
including investment in or advisory services of any kind to others investing in
any type of real estate investment, including investments which meet the
principal investment objectives of the Company.
LEGAL PROCEEDINGS
There is no material litigation pending involving the Partnerships, the
General Partners or the Company, nor, to the knowledge of any of the foregoing
entities, is any material litigation threatened or pending against such entity,
other than routine litigation arising in the ordinary course of business.
CONFLICTS OF INTEREST
GENERAL PARTNERS. The General Partners initiated and participated in the
structuring of the Merger and, as a result, have substantial conflicts of
interest with respect to its completion due to interests and affiliations
different from those of Unitholders. The conflicts of interest of the General
Partners arise in part due to their parent-subsidiary relationship with America
First. First, the Advisor will be an affiliate of America First. Pursuant to the
Advisory Agreement, the Company may not terminate the Advisor, except for cause,
until the fifth anniversary of the closing of the Merger. Also, the Advisor will
be able to receive fees based on the amount of Stockholders' Equity and earnings
of the Company. The Advisor will have the ability, subject to the terms and
conditions of the Advisory Agreement, to grow the Company's assets and thereby
increase the amount of fees it can earn.
Second, in connection with the organization of the Company, the General
Partners were issued 90,621 shares of Common Stock. These shares were allocated
between the General Partners in proportion to the Partnerships' relative Net
Asset Values. Based on such allocation, America First Capital Associates Limited
Partnership Three received 32,261 shares of Common Stock in exchange for its
general partner interest in Prep Fund 1 and America First Capital Associates
Limited Partnership Six received an aggregate 58,360 shares of Common Stock in
exchange for its general partner interests in Prep Fund 2 and Pension Fund.
The General Partners will not receive any additional shares in connection
with the Merger. The allocation of such shares of Common Stock to the General
Partners is based generally on the provisions of the Partnership Agreements of
the Partnerships that allocate to the General Partners the right to receive 1%
of distributions made by the Partnerships out of operating cash flow. The
Partnership Agreement for each Partnership also provides for the allocation of
1% of liquidating distributions to the General Partner but only after
Unitholders have first received distributions from all sources from the
Partnership equal to a complete return of the capital invested by them in the
Partnership. If the provisions relating to the distribution of liquidating
distributions had been selected as the basis for the allocation of the merger
consideration between the General Partner and Unitholders in each Partnership,
the General Partners would have been entitled to receive in the aggregate fewer
than 1% of the shares of Common Stock to be outstanding immediately following
the Merger (an estimated 55,000 shares as opposed to the 90,621 shares
contemplated by the Merger Agreement). The General Partners thus have a conflict
of interest in the method selected for allocating shares of Common Stock between
the General Partner and Unitholders in the Merger. In spite of this conflict,
the Special Committee nevertheless determined that it is fair to the Unitholders
for the General Partners to retain a full 1% of the shares of Common Stock to be
outstanding following the Merger (assuming Maximum Participation) based
primarily on its belief that the Merger does not represent a liquidation of the
Partnerships but rather a transformation and continuation of the Partnerships as
a growing business enterprise within the vehicle of the Company. Upon completion
of the Merger (assuming Maximum Participation), the 90,621 shares of Common
Stock issued to the General Partners will have an estimated value, based on the
September 30, 1997 pro forma book value per share of the Company, of
approximately $773,000. As indicated herein under "THE PROPOSED MERGER--
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Recommendations of the General Partners and the Special Committee; Fairness
Determination," mortgage REITs generally are valued at more than one times their
book value in the public markets and, as a result, the shares of Common Stock
issued to the General Partners may have a trading value that is higher than
their pro forma book value. In addition to surrendering their rights to receive
any additional shares in connections with the Merger, the General Partners also
paid the Company an aggregate of $1,000 for the 90,621 shares of Common Stock
issued to them in connection with the organization of the Company. In the event
that the Merger is not consummated, the shares of Common Stock issued to the
General Partners are not expected to have any substantial value.
Third, following the Merger, the General Partners may be indemnified for
acts or omissions occurring before the Merger for which the General Partners and
certain of their affiliates would not have been indemnified before the Merger.
Until the Merger is consummated, each General Partner will continue to be
accountable to its Partnership and Unitholders as a fiduciary. The Partnership
Agreement of (i) Prep Fund 1 provides that the Partnership will indemnify and
hold harmless its General Partner and the General Partner's affiliates for any
loss or liability, except for certain liabilities under the Securities Act of
1933, as amended (the "Securities Act"), incurred by the General Partner, its
affiliates or the Partnership by reason of any act performed or omitted to be
performed in connection with the business of the Partnership, except in the case
of fraud, bad faith, negligence, misconduct or breach of fiduciary duty and (ii)
each of Prep Fund 2 and Pension Fund provides that the Partnership will
indemnify and hold harmless its General Partner and the General Partner's
affiliates for any loss or liability, except for certain liabilities under
federal or state securities laws, incurred by the General Partner, its
affiliates or the Partnership by reason of any act performed or omitted to be
performed in connection with the business of the Partnership, except in the case
of fraud, bad faith, negligence, intentional misconduct or breach of fiduciary
duty. Upon consummation of the Merger, the Company will enter into
indemnification agreements with the General Partners and their respective
partners that will expand the rights to indemnification and exculpation
currently held by the General Partners and their affiliates. Instead of
eliminating rights to indemnification and exculpation in the case of negligence
or breach of fiduciary duty to the Partnerships or any Unitholder, the General
Partners and their partners will, following the Merger, be entitled to
indemnification and to be exculpated against liabilities to the Partnerships and
their Unitholders in all cases, except for breaches of duty of loyalty or acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law or in any transaction in which a General Partner or one
of its affiliates receives an improper personal benefit.
Following the consummation of the Merger, certain officers and directors of
the Company may enter into business arrangements or transactions with the
Company or the Advisor which may give rise to conflicts of interest between such
officers and directors and the Company or the Advisor. Any such arrangement or
transaction will require the approval of the Board of Directors, including a
majority of the directors who are disinterested in such matters.
THE ADVISOR. The Advisor and its parent entity, America First, may have
certain conflicts of interest with the Company. First, in addition to its base
management fee under the Advisory Agreement, the Advisor will have the
opportunity to earn incentive compensation for each fiscal quarter in an amount
equal to 20% of the Return on Equity (before deduction of such incentive
compensation), in excess of the amount that would produce an annualized Return
on Equity before incentive fee equal to the Ten-Year U.S. Treasury Rate plus 1%.
In evaluating Mortgage Securities and Mortgage Loans for investment by, and in
developing and implementing other operating strategies of, the Company, 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 of Mortgage Securities
and Mortgage Loans.
Second, the Advisor and America First (including officers, directors and/or
partners for their own account or that of others) have formed and may in the
future form other entities, some of which may engage in business that is
competitive with the Company. Further, officers, directors and employees of the
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Advisor or America First may for their own account acquire Mortgage Securities,
Mortgage Loans or other mortgage related assets similar to those acquired by the
Company; provided, however, that the Advisor shall be obligated to present to
the Company any suitable investment opportunity before acquiring it for its own
account.
Third, certain directors and officers of the Advisor and America First are
engaged in other businesses including businesses engaged in investing in
Mortgage Securities and Mortgage Loans. Accordingly, such persons will have
conflicts of interest in allocating management time, services and functions
among the Company, on behalf of the Advisor, and the other businesses in which
they are engaged.
The Company and the Advisor will enter into agreements with America First
pursuant to which America First will (i) manage properties acquired by the
Company as a result of either the Merger or foreclosures upon properties
securing Mortgage Loans and (ii) provide accounting services to the Company. In
addition, the Company and the Advisor may in the future enter into a number of
business arrangements with America First other than those governed by such
agreements and the Advisory Agreement, some of which may give rise to conflicts
of interest between the Advisor and America First and the Company. Any such
relationships or transactions will require the approval of the Board of
Directors, including a majority of the Independent Directors.
THE MANAGEMENT OF THE COMPANY. Certain officers and directors of the
Company may have conflicts of interest with the Company and its stockholders,
including that four of the executive officers and three of the members of the
Board of Directors of the Company will be employed by the Advisor or America
First.
THE PROPOSED MERGER
BACKGROUND OF THE MERGER
Units in the Partnerships were offered to the public in three separate
offerings from 1986 through 1988. The Partnerships were formed to invest their
original capital, on an unleveraged basis, principally in Mortgage Securities,
PREPs and, to a lesser extent, in participating Mortgage Loans collateralized by
multifamily properties and then to liquidate their investments and distribute
the proceeds from such liquidation to Unitholders generally within 12 years of
purchase (i.e., by 1999 for Prep Fund 1 and by 2000 for Prep Fund 2 and Pension
Fund), subject to the right of the General Partners to extend the date of
liquidation to December 31, 2036 in the case of Prep Fund 1 and December 31,
2017 in the case of Prep Fund 2 and Pension Fund.
Prep Fund 1, Prep Fund 2 and Pension Fund raised a total of $119,450,540,
$33,678,080 and $18,119,480, respectively, from their public offerings, which
resulted in net proceeds to the Partnerships of $111,178,590, $31,034,350 and
$16,697,101, respectively. The balance of the net proceeds from the offerings by
the Partnerships were used to pay certain organizational and offering expenses
and to fund reserves. The General Partners believe that the net proceeds from
the public offerings were used substantially in accordance with the plans
outlined in their offering documents.
The primary objectives of the Partnerships were to provide investors with
(i) safety and preservation of capital, (ii) regular cash distributions and
(iii) a potential for capital appreciation from enhanced yield from investments
in PREPs and other equity-related real estate investments. Investment safety was
enhanced by selecting mortgage assets which were guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac. The Partnerships were also organized with the
objective of providing Unitholders with capital appreciation over the projected
12-year holding period of the assets.
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The following table, which was prepared by management of the General
Partners, summarizes the financial history and performance of the Partnerships
from their inception through March 31, 1997.
PARTNERSHIP PERFORMANCE
<TABLE>
<CAPTION>
CASH DISTRIBUTIONS THROUGH MARCH 31, 1997
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BOOK VALUE NET ASSET VALUE REPRESENTING
TOTAL CAPITAL AS OF AS OF OUT OF RETURN OF
PARTNERSHIP RAISED(1) MARCH 31, 1997 MARCH 31, 1997(2) NET INCOME(3) CAPITAL(4) TOTAL(5)
- ----------------------- -------------- -------------- ----------------- ------------- ------------- --------------
Prep Fund 1.......... $ 119,450,540 $ 48,622,180 $ 53,169,546 $37,779,871 $ 60,823,286 $ 98,603,157
Prep Fund 2.......... 33,678,080 17,009,960 18,533,307 10,930,563 12,757,131 23,687,694
Pension Fund......... 18,119,480 10,376,464 10,896,068 6,076,322 6,269,746 12,346,068
-------------- -------------- ----------------- ------------- ------------- --------------
Total............ $ 171,248,100 $ 76,008,604 $ 82,598,921 $54,786,756 $ 79,850,163 $ 134,636,919
-------------- -------------- ----------------- ------------- ------------- --------------
-------------- -------------- ----------------- ------------- ------------- --------------
PER UNIT DATA:
Prep Fund 1 Unit..... $ 20.00 $ 8.42 $ 9.21 $ 6.6128 $ 10.2421 $ 16.8549
Prep Fund 2 BUC...... 20.00 10.67 11.63 6.6419 7.6283 14.2702
Pension Fund BUC..... 20.00 11.45 12.03 6.8896 6.9213 13.8109
</TABLE>
- ------------------------
(1) Total capital raised for Prep Fund 1 represents 5,722,527 Prep Fund 1 Units
sold by Prep Fund 1 at $20 per Unit and 100 Fund Certificates sold by
America First Participating/Preferred Equity Mortgage Fund at $50,000 per
Fund Certificate for total initial capital raised of $119,450,540.During
1996, the 100 Fund Certificates were exchanged in accordance with their
terms for 250,000 Prep Fund 1 Units at the rate of 2,500 Prep Fund 1 Units
per Fund Certificate.Total capital raised for Prep Fund 2 represents
1,683,904 Prep Fund 2 BUCs sold by Prep Fund 2 at $20 per Unit for total
initial capital raised of $33,678,080.Total capital raised for Pension Fund
represents 905,974 Pension BUCs sold by Pension Fund at $20 per Unit for
total initial capital raised of $18,119,480.
(2) See TERMS OF THE MERGER--Allocation of Common Stock.
(3) Represents distributions to Unitholders classified as income pursuant to
GAAP.
(4) Represents distributions to Unitholders classified as return of capital
pursuant to GAAP.
(5) Represents all cash distributions to Unitholders of each Partnership since
such Partnership's inception.
As reflected in the above table, the Partnerships have been able to provide
Unitholders with regular cash distributions; however, they have been less
successful in preserving Unitholders' capital or providing enhanced yield or
appreciation in the value of the Units. As also indicated above in the table,
the Net Asset Value of the Units in each of the Partnerships is now below the
initial public offering price paid by the Unitholders for such Units.
The decline in the Net Asset Value of the Units is partially attributable to
the existing self-liquidating nature of the Partnerships which have made return
of capital distributions to Unitholders out of principal repayments received by
the Partnerships from their Mortgage Loans and from the mortgages underlying
their Mortgage Securities. The General Partners also attribute the decline in
the Net Asset Value of the Units to the payment of fees and expenses incurred in
connection with the organization of the Partnerships and a decrease in the value
of PREPs and other equity-related real estate assets owned by the Partnerships.
The General Partners believe that the structure of the Partnerships, as
finite-life, fixed portfolio investment vehicles, has limited the flexibility
and liquidity of the Partnerships to react to changes in market conditions and
interest rates and implement new strategies to benefit Unitholders and the
Partnerships. The General Partners have concluded that Unitholders are unlikely
to realize the full benefit
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from their investments in the Partnerships if the Partnerships continue to
operate in accordance with their respective Partnership Agreements and existing
business plans or if they commence an orderly liquidation of their investment
portfolios.
In the spring of 1996, the General Partners began considering different
approaches for the Partnerships in an effort to enhance the value of the
investments held by Unitholders. In the course of performing such analysis, the
General Partners observed that mortgage REITs, which hold investments that are
similar in terms of investment type and credit quality to those held by the
Partnerships, are more highly valued (as a multiple of their earnings and book
value) by the public equity markets than are the Partnerships. These
circumstances led the General Partners to begin an assessment of the feasibility
of converting the Partnerships to a mortgage REIT structure. The General
Partners considered the Partnerships to be especially well positioned for such a
conversion due to the investment similarities between the Partnerships and the
typical mortgage REIT.
In December 1996, Michael Yanney and George Krauss on behalf of the General
Partners approached PaineWebber to discuss the feasibility of converting the
Partnerships to the mortgage REIT structure. The General Partners sought the
advice of PaineWebber due to PaineWebber's substantial experience in the
mortgage REIT sector.
On December 5, 1996, the General Partners, acting through the Board of
Managers of America First, met to discuss various items relating to the business
of the Partnerships. At this meeting, the Board of Managers engaged in a
discussion regarding the possible conversion of the Partnerships into a mortgage
REIT. At this meeting, Stewart Zimmerman on behalf of the General Partners
addressed the Board of Managers regarding the proposed transaction, outlining
the benefits of converting the Partnerships into the mortgage REIT structure and
a general time table for the completion of such a transaction. Also at this
meeting, the Board of Managers authorized and directed the General Partners to
investigate further the feasibility, costs and benefits of such a transaction
and to report to the Board of Managers regarding the results of such
investigation, as well as on other alternatives available to the Partnerships
that could enhance Unitholder value.
On February 13, 1997, the Board of Managers met and discussed the impending
expiration of the grandfather rule which had protected the Partnerships from
being taxed as corporations and discussed the goals of the proposed transaction.
Present at the meeting were certain members of the management of the General
Partners, including Stewart Zimmerman, George Krauss, Maurice Cox and Gary
Thompson.
On March 18, 1997, the General Partners caused the Partnerships to engage
PaineWebber as their financial advisor relating to the proposed transaction by
entering into the financial advisory agreement with PaineWebber. Following the
retention of PaineWebber by the Partnerships, representatives of PaineWebber and
members of management of America First, including Michael Yanney, Michael
Thesing, Stewart Zimmerman, George Krauss, Maurice Cox and Gary Thompson, met on
numerous occasions to analyze the prospects of converting the Partnerships to
the mortgage REIT structure and to develop a business plan, financial forecasts
and appropriate advisory arrangements for the new mortgage REIT.
On March 25, 1997, the Board of Managers met to discuss and ratify the
engagement of PaineWebber as the Partnerships' financial advisor in connection
with the proposed reorganization of the Partnerships into an externally managed
mortgage REIT and the financial advisory agreement between the Partnerships and
PaineWebber. Present at the meeting were certain members of the management of
the General Partners, including Stewart Zimmerman, George Krauss and Gary
Thompson, who participated in the discussion of, and answered questions relating
to, the engagement of PaineWebber and the financial advisory agreement.
At a meeting of the Board of Managers on June 17, 1997, the Board of
Managers determined to organize a special committee of members of the Board of
Managers who would be charged with representing the interests of Unitholders in
the proposed transaction. The Board of Managers sought
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members who were not part of the management of America First or the General
Partners and would not be part of management or would not be a director of the
Company or the Advisor following the Merger. The Board of Managers thus voted to
appoint the Special Committee, consisting of Dr. Massengale (chair), Mr. Kubat
and Dr. Carter, all of whom met the standards established by the Board of
Managers. Each of the Special Committee members do not own any equity interest
in America First or any of the General Partners, except Dr. Carter who owns 6%
equity interest in America First. The Board of Managers determined that Dr.
Carter's equity interest in America First, which in effect would translate into
a right to receive approximately 5,400 of the 90,621 shares of Common Stock to
be issued to the General Partners in connection with the Merger, was immaterial
in the context of the larger transaction. The Special Committee was also granted
the authority to engage such investment banking or other experts it deemed
necessary to advise it in connection with its activities. Also at this meeting,
certain members of management of the General Partners, including Stewart
Zimmerman, Maurice Cox and Gary Thompson, and representatives of PaineWebber
presented to the Special Committee an overview of the proposed transaction and
the mortgage REIT sector, as well as provided to the committee information
relating to the operation of a mortgage REIT. Also present at the meeting were
representatives of Rogers & Wells LLP, which had been engaged to act as counsel
for the Partnerships in the proposed merger.
Following the meeting of the Board of Managers on June 17, 1997, the Special
Committee held its first meeting to discuss the proposed transaction and to
engage professionals to advise the Special Committee. Present at this meeting
was a representative of Christy & Viener, who made a presentation to the Special
Committee relating to the role of the Special Committee in the transaction and
the legal issues relating thereto. Christy & Viener was then engaged to act as
special counsel to the Special Committee. Next, a representative of Oppenheimer
made a presentation regarding the experience of Oppenheimer in rendering
fairness opinions in similar transactions and the methodology proposed to be
used by Oppenheimer in its analysis of the transaction should it be retained by
the Special Committee. At this meeting, the Special Committee determined to
engage Oppenheimer as its financial advisor for purposes of rendering a fairness
opinion in the proposed transaction. The Special Committee's decision to engage
Oppenheimer was based upon Oppenheimer's experience and reputation and the fee
charged for its services.
On June 23, 1997, Rogers & Wells LLP distributed drafts of documents
relating to the proposed transaction, including the Merger Agreement, the
Advisory Agreement and certain of the Company's organizational documents. There
ensued over the next month a series of conference calls and negotiations
followed by revisions and recirculations of drafts of such documents.
On June 26, 1997, the Special Committee again met to discuss issues related
to the proposed transaction, including the amount of initial distributions of
the Company, the use of Net Asset Values for allocating the shares of Common
Stock among the Partnerships and the risks associated with the Company's
business. The Special Committee then reviewed and considered the drafts of
documents relating to the proposed transaction. Present at the meeting was a
representative of Christy & Viener.
On June 27, 1997, the Special Committee again met to discuss the proposed
transaction involving the Partnerships. At this meeting, the Special Committee
first held discussions with representatives of Oppenheimer and Christy & Viener
regarding the terms of Oppenheimer's engagement. The meeting was then joined by
members of management of the General Partners, including Stewart Zimmerman and
George Krauss, and by representatives of PaineWebber and Rogers & Wells LLP. The
representative of PaineWebber made a financial presentation to the Special
Committee which was followed by a discussion of issues related to the Merger,
including the characteristics required of management of a mortgage REIT, the
role of PaineWebber following the Merger, trading values of the Common Stock
following the Merger and the effect of various interest rate environments on
such values, risks of changes in interest rates on the performance of the
Company and strategies to mitigate such risks, and the amount of Common Stock to
be owned by management of the REIT. The terms of the Advisory Agreement were
discussed and compared to other advisory agreements in the mortgage REIT sector.
The Special Committee analyzed and reviewed
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a draft of the Consent Solicitation Statement/Prospectus and other issues with
the representative of Rogers & Wells LLP, including the structure of the Merger.
The Special Committee then reviewed the allocation of Common Stock among the
Partnerships, including the methodologies used to determine Net Asset Values for
the Merger.
On July 8, 1997, the Special Committee again met to discuss the terms of the
engagement of Oppenheimer and Christy & Viener. Present at the meeting was a
representative of Christy & Viener. The meeting was then joined by members of
management of the General Partners, including Stewart Zimmerman and Gary
Thompson, and representatives of PaineWebber, Rogers & Wells LLP and
Oppenheimer. Oppenheimer then made a presentation to the Special Committee
relating to its fairness opinion. The Special Committee discussed with
representatives of the management of the General Partners the allocation of
Merger expenses, the choices to be made by Unitholders in Pension Fund regarding
the Merger and the effect of such choices on the Company. The Special Committee
then discussed the Advisory Agreement.
On July 16, 1997, the Special Committee again met to discuss issues related
to the proposed transaction. Present at the meeting were representatives of
Christy & Viener, Rogers & Wells LLP, PaineWebber, Oppenheimer and members of
management of the General Partners, including Stewart Zimmerman and Gary
Thompson. The Special Committee first met separately with Oppenheimer and
Christy & Viener. At this portion of the meeting, Oppenheimer informed the
Special Committee of its preliminary conclusion that the Merger is fair, from a
financial point of view, to Unitholders. In connection therewith, Oppenheimer
described in detail the methodologies and financial models it employed in
determining the liquidation value of the Mortgage Securities and other assets of
the Partnerships as well as the present value of such assets on a continuation
or going concern basis. In addition, the Special Committee and Oppenheimer
discussed the differences between using Net Asset Value or trading value in
connection with the allocation of value among the Partnerships. The meeting was
then joined by members of management of the General Partners, PaineWebber and
Rogers & Wells LLP. The Special Committee then reviewed with PaineWebber the
terms of the Advisory Agreement as such terms compared to those currently in
place in the mortgage REIT industry.
On July 25, 1997, a further meeting of the Special Committee was held.
Present at the meeting were representatives of Christy & Viener, Rogers & Wells
LLP, PaineWebber, Oppenheimer and members of management of the General Partners,
including Stewart Zimmerman, George Krauss and Gary Thompson. At this meeting,
representatives of Rogers & Wells LLP reviewed the final drafts of the Merger
Agreement and the related transactional documents with the members of the
Special Committee. The Special Committee also reviewed the results of a
comparative valuation analysis presented by management of the General Partner.
At this meeting, Oppenheimer also orally delivered its Fairness Opinion to the
Committee. The Special Committee then determined that the Merger is fair to, and
in the best interests of, the Unitholders and voted to approve the Merger and
the Merger Agreement and to recommend that the Unitholders vote FOR the approval
of the Merger and the adoption of the Merger Agreement. In addition, with Dr.
Carter abstaining due to the potential conflict of interest associated with his
equity ownership in America First, the Special Committee also determined the
fairness of the Advisory Agreement and voted to approve the aspect of the
transaction that results in the allocation of 1% of the shares of Common Stock
to be outstanding following the Merger (assuming Maximum Participation) to the
General Partners.
On July 28, 1997, the Board of Managers met to discuss the Special
Committee's determinations regarding to the Merger. Present at the meeting were
representatives of Rogers & Wells LLP and members of management of the General
Partners, including George Krauss, Maurice Cox and Gary Thompson. At this
meeting, the Special Committee reported its determinations regarding the Merger,
including the recommendation that the Board of Managers approve the Advisory
Agreement, to the Board of Managers. The General Partners, acting through the
Board of Managers, then determined that the Merger is in the best interest of,
and is fair to, Unitholders, and voted to approve the Merger, the Merger
Agreement and the Advisory Agreement and voted to recommend that Unitholders
approve the Merger.
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On July 29, 1997, the Partnerships and the Company executed the Merger
Agreement and issued a press release announcing the proposed transaction.
FAIRNESS OPINION
GENERAL. The Special Committee retained Oppenheimer to render its Fairness
Opinion, dated as of July 28, 1997, as to the fairness to the Unitholders, from
a financial point of view, of the Merger, including the allocation of Common
Stock among the Partnerships assuming either Maximum Participation or,
alternatively, that Pension Fund does not participate in the Merger. The full
text of the Fairness Opinion, which contains a description of the assumptions
and qualifications made, matters considered and limitations imposed on the
review and analysis, is set forth in Appendix B-1 and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations of
the Fairness Opinion are described below. The summary set forth below does not
purport to be a complete description of the analyses used by Oppenheimer in
rendering the Fairness Opinion.
In connection with its engagement, Oppenheimer was not requested to serve as
financial advisor to the General Partners or any other party in the negotiation
of the terms of the Merger. Oppenheimer was not requested to and does not make
any recommendation to the Unitholders regarding the Merger. Also, Oppenheimer
was not requested to and did not analyze or give any effect to the impact of any
federal, state or local income taxes to the Unitholders arising out of the
Merger contemplated herein.
Oppenheimer, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. The Special Committee's
selection of Oppenheimer was based upon Oppenheimer's experience and reputation
and the fee charged for its services.
The Special Committee did not place any limitation on the scope of
Oppenheimer's investigation or review. The General Partners and the Partnerships
have agreed to indemnify Oppenheimer against certain liabilities arising out of
Oppenheimer's engagement to prepare and deliver the Fairness Opinion. In
addition, the General Partners and the Partnerships have agreed to cause the
Company to become an additional indemnifying party upon consummation of the
Merger. Upon consummation of the Merger, the Partnerships' indemnity obligations
will also become obligations of the Company.
INFORMATION REVIEWED. In rendering its Fairness Opinion, which is dated
July 28, 1997, and as the basis therefor, Oppenheimer, among other things,
reviewed: a draft of this Consent Solicitation Statement/ Prospectus; the
Prospectus dated October 2, 1986 for Prep Fund 1; the Prospectus dated October
1, 1987 for Prep Fund 2; the Prospectus dated March 3, 1988 for Pension Fund;
audited financial statements for each Partnership for calendar year 1996; the
Form 10-K for each Partnership for the year ended December 31, 1996 and the Form
10-Q for each Partnership for the quarter ended March 31, 1997; documents
describing each Partnership's PREPs, Prep Fund 1's Equity Interests and Prep
Fund 1's Participating Loan, including partnership and other agreements; audited
financial statements for calendar years 1994, 1995 and 1996 and unaudited
financial statements and other financial information for the three-month period
ending March 31, 1997 and March 31, 1996 for each property (the "Properties")
underlying a PREP, an Equity Interest or the Participating Loan; pro forma
balance sheets of the Company assuming the Merger was consummated on March 31,
1997 and pro forma statements of operations of the Company for the year ended
December 31, 1996 and for the three months ended March 31, 1997 assuming the
Merger was consummated on January 1, 1996; financial forecasts of future
operations of the Company covering each of the years in the five-year period
ended December 31, 2002, assuming the Merger occurred January 1, 1998; a
business plan of the Company; and certain other financial and other information
that was publicly available or furnished to Oppenheimer by the Partnerships,
PaineWebber and the Company.
In addition, Oppenheimer held discussions with representatives of the
Partnerships, PaineWebber and the Company concerning the Partnerships' and the
Company's historical and current operations, financial
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condition and prospects, inspected each of the Properties, except the Property
located in Amelia, Ohio, interviewed Property managers at the Properties
inspected, reviewed certain publicly available information of selected companies
whose securities are publicly traded that Oppenheimer deemed generally
comparable to the Company, and conducted such other investigations, financial
analyses and studies, and reviewed such other information and factors as it
deemed appropriate for the purposes of the Fairness Opinion.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS. In rendering the Fairness
Opinion, Oppenheimer relied, without assuming responsibility for independent
verification, on the accuracy and completeness of (i) all historical financial
and operating data, financial analyses, reports and other information relating
to the Partnerships that were publicly available or furnished or communicated to
Oppenheimer by or on behalf of the Special Committee; (ii) the financial
forecasts of Prep Fund 1 prepared by the General Partners for the
two-and-one-half year period ended December 31, 1999 and the financial forecasts
of Prep Fund 2 and Pension Fund prepared by the General Partners for the
three-and-one-half year period ended December 31, 2000 that were furnished to
Oppenheimer by or on behalf of the Special Committee; and (iii) the financial
forecasts of the Company prepared by the General Partners for the five-year
period following the consummation of the Merger furnished to Oppenheimer by or
on behalf of the Special Committee. With respect to the financial forecasts
furnished to Oppenheimer, Oppenheimer assumed, with the Special Committee's
approval, that they reflected the best current judgment of the General Partners
as to future financial performance of the Partnerships and the Company,
respectively, and that there was a reasonable probability that the forecasts
would prove to be substantially correct. Oppenheimer did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnerships.
The preparation of a Fairness Opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analyses or summary description. Accordingly, Oppenheimer believes that
its analyses must be considered as a whole and that considering any portion of
such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying its Fairness Opinion. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
herein. In addition, analyses relating to the value of Mortgage Securities,
PREPs, Equity Interests, the Participating Loan and other assets and/or the
business of Partnerships and the Company do not purport to be appraisals or to
reflect the prices at which such assets or the business of the Partnerships may
actually be sold.
Oppenheimer expressed no opinion as to the price or trading range at which
the Common Stock would trade on the NYSE following completion of the Merger. It
is likely that, at least during the immediate period following the consummation
of the Merger, the Company's Common Stock will trade below the estimated range
of values.
The Fairness Opinion was based solely upon information available to
Oppenheimer and the economic market and other circumstances that existed as of
the date of the Fairness Opinion. Oppenheimer used historical financial
information through June 30, 1997 for the Mortgage Securities, through May 31,
1997 for the Partnership's other assets and other liabilities and through March
31, 1997 for the PREPs, Equity Interests, and Participating Loan. Events
occurring after such date could materially affect the assumptions and
conclusions contained in the Fairness Opinion.
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SUMMARY OF ANALYSIS AND METHODOLOGY. The following paragraphs summarize the
significant quantitative and qualitative analyses performed by Oppenheimer in
arriving at the Fairness Opinion. Oppenheimer considered all such quantitative
and qualitative analyses in connection with its analysis, and no one method of
analysis was given particular emphasis. All references to the conversion of
Units into shares of Common Stock are based upon the General Partners'
allocation of shares of Common Stock among the Partnerships.
Mortgage Securities yield rates were obtained from discussions with
Oppenheimer traders active in the Mortgage Securities markets. In determining
appropriate capitalization rates and discount rates underlying its analysis,
Oppenheimer utilized as a base the most recent annual estimates of rates
provided by a national real estate service company to the General Partner for
rental apartment complexes in selected markets throughout the United States
which were then adjusted based upon Oppenheimer's inspection of the Properties
to develop a range of capitalization and discount rates for each Property.
In determining the adequacy of the rates, Oppenheimer inspected each of the
Properties, examined recent surveys of institutional investors conducted by
Cushman & Wakefield, Inc., Real Estate Research Corporation, the National
Multi-Housing and the Urban Land Institute, held discussions with institutional
investors active in the acquisition of multifamily residential properties
similar to those invested in or owned by the Partnerships or which secured a
mortgage in which a Partnership held an interest, and reviewed such other
information and factors as it deemed appropriate.
LIQUIDATION ANALYSIS
VALUATION OF MORTGAGE SECURITIES. Oppenheimer determined for each of the
Mortgage Securities owned by the Partnerships the individual Mortgage Security's
issuer, the original amount of securities issued in the offering, the amount of
originally issued securities currently outstanding, the rate of interest
payable, the weighted average coupon rate of interest, the stated maturity, the
remaining maturity (if less than the originally stated maturity), the weighted
average maturity, and for the most recent 12 months, the rate at which the
individual mortgages which comprised the offering were prepaid before their
individually scheduled maturities. Oppenheimer then grouped the Mortgage
Securities by issuer, coupon rate, and stated maturity. Utilizing publicly
available data and information from Oppenheimer traders active in the Mortgage
Securities markets, Oppenheimer calculated the liquidation value of the Mortgage
Securities, after payment of selling commissions, assuming the Mortgage
Securities were liquidated as of June 30, 1997.
CAPITALIZATION RATE VALUATION ANALYSIS--PREPS, EQUITY INTERESTS AND
PARTICIPATING LOAN. Oppenheimer assumed the entities that own the Properties in
which the Partnerships own a PREP, an Equity Interest or Participating Loan sold
the Properties as of June 30, 1997. Oppenheimer applied capitalization rates
ranging from 9% to 11% to each Property's forecasted net income after capital
expenditures ("Cash Flow") for the period April 1, 1997 to March 31, 1998 to
determine a range of its capitalized value. Oppenheimer believes a
capitalization rate analysis provides a basis for estimating what a real estate
investor would be willing to pay for a particular property. Oppenheimer then
deducted the estimated expenses associated with sale of the Properties. For
those Properties in which the Partnerships owned a PREP, Oppenheimer then
deducted the outstanding balance of the Mortgage Loan encumbering the Property,
accrued and unpaid interest, if any, and working capital loans, if any, and
assumed distribution, based upon the provisions of the agreement governing the
PREPs, of the balance remaining, if any, among the owners of the Properties,
including the Partnerships. For those Properties in which Prep Fund 1 owns an
Equity Interest, Oppenheimer then deducted the outstanding balance of the
Mortgage Loan encumbering the Property, accrued and unpaid interest, if any, and
working capital loans, if any, and assumed distribution of the remainder, if
any, to the Partnership. For the Property in which Prep Fund 1 owns the
Participating Loan, Oppenheimer compared the amount of sales proceeds remaining
after deducting the estimated expenses associated with the sale of the Property
to the remaining balance of the Participating Loan encumbering the Property, and
allocated to Prep Fund 1 its pro rata share of the proceeds of sale of
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the Property to the extent sales proceeds were available to repay the
Participating Loan encumbering the Property.
CONCLUSIONS. For Prep Fund 1, Oppenheimer added the liquidation value of
the Partnership's Mortgage Securities to the liquidation value of its PREPs,
Equity Investments and Participating Loan, and deducted the estimated expenses
associated with liquidating Prep Fund 1, including general and administrative
expenses. To the resulting range of values, Oppenheimer then added Prep Fund 1's
other assets and subtracted its other liabilities.
For Prep Fund 2 and Pension Fund, Oppenheimer added the liquidation value of
the Partnership's Mortgage Securities to the liquidation value of the
Partnership's PREPs and deducted the estimated expenses associated with
liquidating the Partnership, including general and administrative expenses. To
the resulting range of values, Oppenheimer then added the Partnership's other
assets and subtracted its other liabilities.
Oppenheimer's analysis indicated a range of values for Prep Fund 1 of $51.0
million to $52.4 million (or $8.83 to $9.08 per Unit) compared to the estimated
value of $58.0 million to $73.6 million (or $10.04 to $12.75 per Unit), assuming
each Unit is converted into 1.00 shares of Common Stock and each share is valued
as determined by utilizing the methodology described below in "--Valuation of
the Company-- Consolidation of the Partnerships into the Company--Comparative
Company Analysis," and an estimated value of $57.8 million to $63.8 million (or
$10.00 to $11.04 per Unit), assuming each Unit is converted into 1.00 shares of
Common Stock and each share is valued as determined utilizing the methodology
described below in "--Valuation of the Company--Consolidation of the
Partnerships into the Company--Discounted Cash Flow Analysis."
Oppenheimer's analysis indicated a range of values for Prep Fund 2 of $17.6
million to $17.7 million (or $11.06 to $11.13 per Unit) compared to the
estimated value of $20.2 million to $25.7 million (or $12.67 to $16.10 per
Unit), assuming each Unit is converted into approximately 1.26 shares of Common
Stock and each share is valued as determined by utilizing the methodology
described below in "--Valuation of the Company--Consolidation of the
Partnerships into the Company--Comparative Company Analysis," and an estimated
value of $20.1 million to $22.2 million (or $12.63 to $13.94 per Unit), assuming
each Unit is converted into approximately 1.26 shares of Common Stock and each
share is valued as determined utilizing the methodology described below in
"--Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis."
Oppenheimer's analysis indicated a range of values for Pension Fund of $10.6
million to $10.7 million (or $11.75 to $11.79 per Unit) compared to the
estimated value of $11.9 million to $15.1 million (or $13.11 to $16.65 per
Unit), assuming each Unit is converted into approximately 1.31 shares of Common
Stock and each share is valued as determined by utilizing the methodology
described below in "--Valuation of the Company--Consolidation of the
Partnerships into the Company--Comparative Company Analysis," and an estimated
value of $11.8 million to $13.1 million (or $13.07 to $14.42 per Unit), assuming
each Unit is converted into approximately 1.31 shares of Common Stock and each
share is valued as determined utilizing the methodology described below in
"--Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis."
Oppenheimer believes the liquidation analysis supports its fairness
determination because the implied range of values of the Units assuming they are
converted into shares of Common Stock in the Merger is greater than the implied
range of equity values of the Partnerships under the liquidation analysis.
CONTINUATION ANALYSIS
VALUATION OF THE PARTNERSHIPS ON A CONTINUING BASIS. Oppenheimer performed
an analysis of the Partnerships assuming Prep Fund 1 continued to operate on an
ongoing basis from July 1, 1997 through
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December 31, 1999 and Prep Fund 2 and Pension Fund continued to operate from
July 1, 1997 through December 31, 2000.
Prep Fund 1. Oppenheimer assumed Prep Fund 1 continued to own its portfolio
of Mortgage Securities from July 1, 1997 through December 31, 1999 at which time
the portfolio was liquidated. Oppenheimer assumed the entities which own
Properties in which the Partnership owns a PREP interest, an Equity Interest or
a Participating Loan sold such Properties as of December 31, 1999. Oppenheimer
calculated (i) Cash Flow from future operations of the Properties based on
financial forecasts provided by the General Partner and (ii) the proceeds
expected to be available from sale of the Properties at the conclusion of the
forecast period. In connection with this analysis, Oppenheimer estimated such
sales proceeds by capitalizing Cash Flow for the period January 1, 2000 to
December 31, 2000 at 9.5% to 11.5% for each Property.
Prep Fund 2 and Pension Fund. Oppenheimer assumed Prep Fund 2 and Pension
Fund continued to own their portfolios of Mortgage Securities from July 1, 1997
through December 31, 2000 at which time the portfolios were liquidated.
Oppenheimer assumed the entities that own the Properties in which the
Partnerships own PREPs sold the Properties as of December 31, 2000. Oppenheimer
calculated (i) Cash Flow from future operations of the Properties based on
financial forecasts provided by the General Partner and (ii) the proceeds
expected to be available from sale of the Properties at the conclusion of the
forecast period. In connection with this analysis, Oppenheimer estimated such
sales proceeds by capitalizing Cash Flow for the period January 1, 2001 to
December 31, 2001 at 9.5% to 11% for each Property.
In connection with the Continuation of the Partnerships --Valuation of the
Partnerships on a Continuing Basis analysis for each of the Partnerships,
Oppenheimer then deducted the projected annual fees due the respective General
Partners and the projected general and administrative expenses associated with
operating each Partnership on an annual basis for the forecast period from the
estimated annual cash available for distribution of the Partnerships, allocated
the remainder between the Unitholders and the General Partners based upon the
terms of the respective Partnership Agreements and discounted the projected
distribution to Unitholders to present value utilizing discount rates of 6% for
the portion of the cash available for distribution received from the
Partnership's Mortgage Securities and 12% for the portion of the cash available
for distribution received from the Partnership's PREPs, Equity Interests, or
Participating Loan. To the resulting range of values, Oppenheimer added the
estimated value, as of June 30, 1997 of each Partnership's other assets and
subtracted the estimated value, as of June 30, 1997 of each Partnership's other
liabilities.
Oppenheimer's analysis indicated an implied range of present values for Prep
Fund 1 of $8.63 to $8.80 per Unit compared to the estimated value per Unit of
$10.04 to $12.75, assuming each Unit is converted into 1.00 shares of Common
Stock and each share is valued as determined by utilizing the methodology
described below in "--Valuation of the Company--Consolidation of the
Partnerships into the Company-- Comparative Company Analysis" and an implied
range of present values per Unit of $10.00 to $11.04, assuming each Unit is
converted into 1.00 shares of Common Stock and each share is valued as
determined by utilizing the methodology described below in "--Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis."
Oppenheimer's analysis indicated an implied range of present values for Prep
Fund 2 of $10.71 to $11.01 per Unit compared to the estimated value per Unit of
$12.67 to $16.10, assuming each Unit is converted into approximately 1.26 shares
of Common Stock and each share is valued as determined by utilizing the
methodology described below in "--Valuation of the Company--Consolidation of the
Partnerships into the Company--Comparative Company Analysis" and an implied
range of present values per Unit of $12.63 to $13.94, assuming each Unit is
converted into approximately 1.26 shares of Common Stock and each share is
valued as determined by utilizing the methodology described below in "--
Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis."
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Oppenheimer's analysis also indicated an implied range of present values for
Pension Fund of $11.16 to $11.37 per Unit compared to the estimated value per
Unit of $13.11 to $16.65, assuming each Unit is converted into approximately
1.31 shares of Common Stock and each share is valued as determined by utilizing
the methodology described below in "--Valuation of the Company--Consolidation of
the Partnerships into the Company--Comparative Company Analysis" and an implied
range of present values per Unit of $13.07 to $14.42, assuming each Unit is
converted into approximately 1.31 shares of Common Stock and each share is
valued as determined by utilizing the methodology described below in "--
Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis."
Oppenheimer believes this analysis supports its fairness determination
because the implied range of values of the Units in each Partnership, assuming
they are converted into shares of Common Stock in the Merger for each
Partnership, is greater than the implied range of equity values for such Units
assuming the continuation of the Partnerships.
VALUATION OF THE COMPANY
CONSOLIDATION OF THE PARTNERSHIPS INTO THE COMPANY--COMPARATIVE COMPANY
ANALYSIS. Oppenheimer assumed the Merger occurred as of January 1, 1998
assuming Pension Fund did not participate and, alternatively, assuming Maximum
Participation. Oppenheimer utilized the business plans and projections of future
operations of the Company prepared by the Company, with the assistance of
PaineWebber, to estimate the value of the Company. Oppenheimer reviewed the
forecast of net income per share developed by the General Partners and reflected
in their financial forecasts and business plan. Oppenheimer derived ranges of
values for the shares of Common Stock by applying forecasted net income per
share of the Company upon consummation of the Merger for the calendar year ended
December 31, 1999, the first stabilized calendar year occurring after
implementation of the Company's business plan, to the corresponding range of net
income multiples for certain comparative companies which Oppenheimer considered
comparative to the Company. The comparative companies selected by Oppenheimer
were: Capstead Mortgage Corporation; Dynex Capital, Inc. (formerly Resource
Mortgage Capital, Inc.); Imperial Credit Mortgage Holdings, Inc.; INMC Mortgage
Holdings, Inc. (formerly CWM Mortgage Holdings, Inc.); Redwood Trust, Inc.; and
Thornburg Mortgage Assets Corporation (collectively, the "Comparative
Companies"). The Comparative Companies represented six REITs which own
residential mortgage assets similar to the assets the Company will purchase upon
consummation of the Merger which will be the predominantly Mortgage Securities.
The per share forecasted net income and net income multiples for certain
Comparative Companies were based on average First Call net income estimates for
calendar year 1998, the last period for which such estimates were currently
available. In calculating the net income multiples for the selected period, the
June 30, 1997 closing stock prices of the Comparative Companies were used. Based
on this analysis, Oppenheimer allocated to each Partnership the number of shares
of Common Stock each Partnership would receive based upon the allocation
percentages utilized by the General Partners. Oppenheimer observed that the net
income multiples for the Comparative Companies, excluding the Comparative
Companies with the lowest and highest net income multiples for the year ended
December 31, 1998, ranged from 9.33x to 11.85x. Based on the foregoing,
Oppenheimer estimated a range of values of the shares of Common Stock (assuming
the Pension Fund does not participate and assuming Maximum Participation) of
$9.85 to $12.75. Unitholders should be aware that estimates of values of the
shares of Common Stock are not intended and should not be construed as a
prediction of estimates as to the trading price of the shares of Common Stock
upon consummation of the Merger. It is likely, at least during the immediate
period following the completion of the Merger, that the shares of Common Stock
will trade below the estimated ranges of values.
CONSOLIDATION OF THE PARTNERSHIPS INTO THE COMPANY--DISCOUNTED CASH FLOW
ANALYSIS. Oppenheimer analyzed the Company on a consolidated basis based upon a
discounted cash flow analysis utilizing forecasted net income and forecasted
distributions prepared by the General Partners for the period
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January 1, 1998 through December 31, 2002. Oppenheimer derived a range of per
share values for the Company by calculating the present value of projected cash
distributions and a terminal equity value. Oppenheimer assumed a range of
discount rates of 9.81% to 10.88% for the projected distributions of the Company
which Oppenheimer believes appropriately reflects the risks inherent in the
ownership of the Common Stock. Terminal equity values were calculated using
forecasted net income for the period October 1, 2002 to December 31, 2002 which
was then annualized and terminal net income multiples of 9.2x to 10.2x (as
calculated above), with the resulting range of values discounted to present
value at discount rates ranging from 9.81% to 10.88%. The discount rates assumed
by Oppenheimer were the inverse of the terminal net income multiples which were
calculated utilizing the median price/1998 estimated earnings per share of the
Comparative Companies as the midpoint in a 100 basis point range. The projected
distributions were derived from the financial projections of the Company
provided to Oppenheimer by the General Partners. Based on the foregoing,
Oppenheimer estimated a range of value for the shares of Common Stock (assuming
Pension Fund does not participate and assuming Maximum Participation) of $9.85
to $12.75.
ALLOCATION OF COMMON STOCK IN THE CONSOLIDATION
In assessing the fairness to Unitholders of the allocation of shares of
Common Stock among each of the Partnerships, Oppenheimer observed that, assuming
Maximum Participation, the shares of Common Stock will be allocated as follows:
Prep Fund 1, 63.7%; Prep Fund 2, 22.2%; and Pension Fund, 13.1%. In the
following analyses, Oppenheimer utilized the aggregate values of each
Partnership determined above under "--Liquidation Analysis--Valuation of
Mortgage Securities" and "--Liquidation Analysis--Capitalization Rate Valuation
Analysis--PREPs, Equity Interests and Participating Loan," as applicable, to
determine a range of allocation percentages of shares of Common Stock among the
Partnerships and compared such range with the allocation percentages utilized by
the General Partners to allocate shares of Common Stock among each of the
Partnerships.
Prep Fund 1. Oppenheimer compared the percentage of shares of Common Stock
to be allocated to Prep Fund 1 to the range of percentages determined by (i)
comparing the low end of the range of values for Prep Fund 1 to the total of the
low end of the range of values for Prep Fund 1 and the high end of the combined
range of values for Prep Fund 2 and Pension Fund (which amounts to 58.1%) and
(ii) comparing the high end of the range of values for Prep Fund 1 to the total
of the high end of the range of values for Prep Fund 1 and the low end of the
combined range of values for Prep Fund 2 and Pension Fund (which amounts to
69%). Oppenheimer believes that this analysis supports its opinion that the
allocation of shares of Common Stock to Prep Fund 1 is fair to the Unitholders
of Prep Fund 1 from a financial point of view because the percentage of Common
Stock allocated to Prep Fund 1 is within the range of the percentages determined
in the above analysis.
Prep Fund 2. Oppenheimer compared the percentage of shares of Common Stock
to be allocated to Prep Fund 2 to the range of percentages determined by (i)
comparing the low end of the range of values for Prep Fund 2 to the total of the
low end of the range of values for Prep Fund 2 and the high end of the combined
range of values for Prep Fund 1 and Pension Fund (which amounts to 18.3%) and
(ii) comparing the high end of the range of values for Prep Fund 2 to the total
of the high end of the range of values for Prep Fund 2 and the low end of the
combined range of values for Prep Fund 1 and Pension Fund (which amounts to
26.7%). Oppenheimer believes that this analysis supports its opinion that the
allocation of shares of Common Stock to Prep Fund 2 is fair to the Unitholders
of Prep Fund 2 from a financial point of view because the percentage of Common
Stock allocated to Prep Fund 2 is within the range of the percentages determined
in the above analysis.
Pension Fund. Oppenheimer compared the percentage of shares of Common Stock
to be allocated to Pension Fund to the range of percentages determined by (i)
comparing the low end of the range of values for Pension Fund to the total of
the low end of the range of values for Pension Fund and the high
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<PAGE>
end of the combined range of values for Prep Fund 1 and Prep Fund 2 (which
amounts to 10.5%) and (ii) comparing the high end of the range of values for
Pension Fund to the total of the high end of the range of values for Pension
Fund and the low end of the combined range of values for Prep Fund 1 and Prep
Fund 2 (which amounts to 16.1%). Oppenheimer believes that this analysis
supports its opinion that the allocation of shares of Common Stock to Pension
Fund is fair to the Unitholders of Pension Fund from a financial point of view
because the percentage of shares of Common Stock allocated to Pension Fund is
within the range of the percentages determined in the above analysis.
Oppenheimer has analyzed, but did not give significant weight to, the
trading history of Prep Fund 1 which trades on the NASDAQ, Prep Fund 2 which
trades on the AMEX and Pension Fund which trades in the informal secondary
market for limited partnership interests. Oppenheimer also reviewed the
components of each Partnership's other assets and other liabilities and analyzed
the method used to allocate the shares of Common Stock among the Partnerships by
the General Partners.
CONCLUSIONS. Based on the foregoing analysis, and subject to the
assumptions, limitations and qualifications noted above and in its Fairness
Opinion, Oppenheimer concluded that the Merger, including the allocation of
shares of Common Stock among the Partnerships, is fair from a financial point of
view to the Unitholders of the Partnerships, assuming either Maximum
Participation or, alternatively, that Pension Fund does not participate in the
Merger.
BRINGDOWN FAIRNESS OPINION. In connection with its written confirmatory
opinion delivered on February 10, 1998, Oppenheimer performed the following
procedures to update certain analyses made in connection with the delivery of
the Fairness Opinion:
Oppenheimer, among other things, reviewed: a draft of this Consent
Solicitation Statement/ Prospectus; the Prospectus dated October 2, 1986 for
Prep Fund 1; the Prospectus dated October 1, 1987 for Prep Fund 2; the
Prospectus dated March 3, 1988 for Pension Fund; audited financial
statements for each Partnership for calendar year 1996; the Form 10-K for
each Partnership for the year ended December 31, 1996 and the Form 10-Q for
each Partnership for the quarter ended September 30, 1997; documents
describing each Partnership's PREPs, Prep Fund 1's Equity Interests and Prep
Fund 1's Participating Loan, including partnership and other agreements;
audited financial statements for calendar years 1994, 1995 and 1996 and
unaudited financial statements and other financial information for the
nine-month period ending September 30, 1997 for each Partnership; pro forma
balance sheets of the Company assuming the Merger was consummated on
September 30, 1997 and pro forma statements of operations of the Company for
the year ended December 31, 1996 and for the nine months ended September 30,
1997 assuming the Merger was consummated on January 1, 1996; financial
forecasts of future operations of the Company covering each of the years in
the five-year period ended December 31, 2002, assuming the Merger occurred
January 1, 1998; a business plan of the Company; and certain other financial
and other information that was publicly available or furnished to
Oppenheimer by the Partnerships, PaineWebber and the Company.
In addition, Oppenheimer held discussions with representatives of the
Partnerships, PaineWebber and the Company concerning the Partnerships' and
the Company's historical and current operations, financial condition and
prospects, updated publicly available information regarding the Comparable
Companies, and conducted such other investigations, financial analyses and
studies, and reviewed such other information and factors as it deemed
appropriate for the purposes of the confirmatory opinion.
In rendering the confirmatory opinion, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
the information it reviewed and the confirmatory opinion is subject to the same
qualifications and limitations as the Fairness Opinion. The full text of the
confirmatory opinion, which contains a description of the assumptions and
qualifications made, matters considered and limitations imposed on the review
and analysis, is set forth in Appendix B-2 and should be read in its entirety.
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<PAGE>
The confirmatory opinion was based solely upon information available to
Oppenheimer and the economic market and other circumstances that existed as of
the date of the confirmatory opinion. Oppenheimer used historical financial
information through December 31, 1997 for the Mortgage Securities, through
November 30, 1997 for the Partnership's other assets and other liabilities and
through March 31, 1997 for the PREPs, Equity Interests and Participating Loan.
Events occurring after such dates could materially affect the assumptions and
conclusions contained in the confirmatory opinion.
In performing such analyses, Oppenheimer observed that (i) the liquidation
analysis continues to support its fairness determination because the implied
range of values of the Units assuming they are converted into shares of Common
Stock in the Merger is greater than the implied range of equity values of the
Partnerships under the updated liquidation analysis and (ii) the continuation
analysis continues to support its fairness determination because the implied
range of values of the Units in each Partnership, assuming they are converted
into shares of Common Stock in the Merger for each Partnership, is greater than
the implied range of equity values for such Units assuming the continuation of
the Partnerships under the updated continuation analysis.
Based on the foregoing, and subject to the assumptions, limitations and
qualifications noted above and in the confirmatory opinion, Oppenheimer
confirmed that the Merger, including the allocation of shares of Common Stock
among the Partnerships, continues to be fair from a financial point of view to
the Unitholders of the Partnerships, assuming either Maximum Participation or,
alternatively, that Pension Fund does not participate in the Merger.
FEES PAID. As compensation for rendering the Fairness Opinion, Oppenheimer
received a fee of $475,000, consisting of a $150,000 retainer paid at the time
of Oppenheimer's engagement, and $325,000 paid upon delivery of the Fairness
Opinion. No additional fee was paid to Oppenheimer in connection with the
delivery of its confirmatory opinion.
FINANCIAL ADVISOR
PaineWebber has been engaged by the Partnerships to serve as their financial
advisor relating to the proposed Merger. The selection by the Partnerships of
PaineWebber was based upon PaineWebber's substantial experience in the
residential mortgage REIT sector. From January 1, 1985 through July 15, 1997,
PaineWebber acted as manager in 13 residential mortgage REIT common stock
offerings raising over $700 million in capital. Furthermore, PaineWebber, as
part of its investment banking business, is regularly engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for
corporations and other entities.
PaineWebber rendered financial advice to the Partnerships with respect to
the development and implementation of an operating structure and a business
strategy for the Company, including reviewing the asset types to be purchased,
the liability structures to be used to finance the assets and the Company's
desired leverage ratio. PaineWebber also assisted the Partnerships in developing
the Company's business plan and investment strategy and guidelines and in
determining the contract terms and other arrangements between the Company and
the Advisor. In addition, PaineWebber assisted the Partnerships and management
of their General Partners in developing financial forecasts for the Company
which are described herein under "--Recommendations of the General Partners and
the Special Committee; Fairness Determination." In performing these services,
PaineWebber, among other things, (i) conducted discussions with members of
senior management of the Partnerships, the General Partners and America First,
respectively, concerning the past, current and future business, operations and
assets, present financial condition and future prospects of the Partnerships;
(ii) reviewed historical information with respect to the Partnerships; (iii)
compared the financial terms and arrangements between the Company and the
Advisor with the financial terms and arrangements of other selected externally
advised residential mortgage REITs and their respective external advisors that
PaineWebber deemed to be relevant; and (iv) reviewed other
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<PAGE>
financial studies and analysis based on publicly available information and
information provided by the General Partners.
In connection with its engagement, PaineWebber provided information to the
Partnerships that assisted management of the General Partners in developing a
comparative valuation analysis for the Company. See "--Recommendations of the
General Partners and the Special Committee; Fairness Determination." In
particular, PaineWebber identified certain comparative companies for use by
management of the General Partners in this analysis. The Comparative Companies
identified by PaineWebber were: Capstead Mortgage Corporation; Dynex Capital,
Inc. (formerly Resource Mortgage Capital, Inc.); Imperial Credit Mortgage
Holdings, Inc.; INMC Mortgage Holdings, Inc. (formerly CWM Mortgage Holdings,
Inc.); Redwood Trust, Inc.; and Thornburg Mortgage Asset Corporation.
PaineWebber informed the management of the General Partners that these
Comparative Companies were appropriate for inclusion in the comparative
valuation analysis, because they are all of the publicly traded mortgage REITs
and PaineWebber considered them to be reasonably similar to the Company
following the consummation of the Merger and the implementation by the Company
of its proposed business plan. PaineWebber advised the management of the General
Partners that it did not believe it appropriate to include property REITs in the
Comparative Companies. The Comparative Companies identified by PaineWebber for
use by the General Partners were the same companies selected and used by
Oppenheimer in connection with its preparation of the Fairness Opinion.
In addition to identifying the Comparative Companies, PaineWebber also
analyzed for the management of the General Partners certain historical,
operating and stock market performance data of the Comparative Companies.
PaineWebber compared the closing price per share of common stock of the
Comparative Companies on June 30, 1997 to the 1997 and 1998 First Call net
income per share estimates of the Comparative Companies. PaineWebber reported to
the Partnerships that the median of the net income multiples for the Comparative
Companies was 11.0x for 1997 and 9.7x for 1998. For the portion of the
comparative valuation analysis which assumes that the Units are converted into
shares of Common Stock, these multiples were applied to the forecasted net
income of the Company for the second year of its operations, which is expected
to be the first full year after the Merger that the Company will have completed
the portfolio realignment anticipated by its business plan. "First Call" is a
data service that monitors and publishes a compilation of earnings estimates
produced by selected research analysts regarding companies of interest to
institutional investors. See "--Recommendations of the General Partners and the
Special Committee; Fairness Determination."
PaineWebber also provided certain statistical information to the management
of the General Partners related to the relationship of trading prices and book
values of the Comparative Companies as of June 30, 1997. This information
reflected that the book value multiples of the Comparative Companies ranged from
1.5x to 2.3x with a median of 2.1x.
PaineWebber also provided other information to the management of the General
Partners relating to the Comparative Companies, including information relating
to whether the Comparative Companies are self-administered or externally advised
and to the terms of the compensation arrangements for the externally advised
Comparative Companies.
PaineWebber did not, in connection with its engagement by the Partnerships,
render a fairness opinion to the Partnerships or the General Partners. In
addition, PaineWebber has informed the management of the General Partners that
its analysis of certain historical, operating and stock market performance data
of the Comparative Companies should not be construed as a prediction by
PaineWebber of the price at which the shares of Common Stock of the Company may
trade following the completion of the Merger.
Pursuant to a letter agreement dated March 18, 1997, between the
Partnerships and PaineWebber, the Partnerships have agreed to pay to PaineWebber
for the services provided by PaineWebber hereunder a fee of $500,000 plus
certain expenses. Of the $500,000, $50,000 was paid upon execution of the letter
agreement, $300,000 is due upon closing of the Merger and $150,000 will be due
on December 31, 1998. The letter agreement provides that if, prior to December
31, 1998, PaineWebber lead manages an equity offering for the Company, the
$150,000 portion of the fee will be credited against the management fee paid to
PaineWebber in the equity offering.
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RECOMMENDATIONS OF THE GENERAL PARTNERS AND THE SPECIAL COMMITTEE; FAIRNESS
DETERMINATION
The General Partners, together with the Special Committee, have determined
that the Merger is fair to, and in the best interests of, the Unitholders.
Accordingly, the General Partners have approved the Merger and the Merger
Agreement and the General Partners and the Special Committee have recommended
that the Unitholders vote FOR the approval of the Merger and the adoption of the
Merger Agreement. In reaching this determination, the General Partners and the
Special Committee considered a number of factors, as well as consulted with
PaineWebber, legal counsel and, in the case of the General Partners, the
Partnerships' accountants, and received the Fairness Opinion from Oppenheimer.
In assessing the Merger, the General Partners and the Special Committee
considered a comparative valuation analysis prepared by management of the
General Partners. As part of their analysis of the Merger, the General Partners
and the Special Committee reviewed financial forecasts for the Company that were
developed by management of the General Partners, with the assistance of
PaineWebber. These forecasts cover the first five years of the Company's
operations following the completion of the Merger. In developing the financial
forecasts, management of the General Partners made the following principal
assumptions: (i) the Company would have a minimum of $72 million of available
capital; (ii) such capital, on a leveraged basis, would be fully invested after
the second full quarter of the Company's operations; (iii) the Company's
Mortgage Securities would initially aggregate approximately $70 million in
principal amount growing to approximately $800 million by the end of the third
full quarter following the consummation of the Merger; (iv) approximately 24% of
these Mortgage Securities would consist of six-month LIBOR Mortgage Securities,
74% of one-year Constant Maturity Treasury Rate Mortgage Securities and 2% of
fixed rate Mortgage Securities currently held by the Partnerships; (v) the
weighted average yield of Company's Mortgage Securities would initially be
approximately 7.0% per annum; (vi) the Company would initially borrow
approximately $730 million to finance the Mortgage Securities and these
borrowings would initially bear interest at a weighted average rate of 5.7% per
annum; (vii) the Company would expend approximately $1 million per annum in
hedging costs and these costs would be incurred through the purchase of interest
rate cap agreements; (viii) the Company would maintain an equity-to-assets ratio
of 8% to 10%; (ix) stable interest rates would be maintained over the forecast
period; (x) the Company would complete future equity offerings totaling $200
million over the forecast period (four $50 million Common Stock offerings
completed in the first quarter of each consecutive year); (xi) the Cash Merger
Payment would be made to stockholders in year one of operations for the amount
that earnings per share over such first year is below $1.06; and, (xii) a stock
price yield of 9% based on the prior four quarters' earnings. In preparing the
financial forecasts, management of the General Partners relied upon certain
historical financial and operating data, reports and other information that were
publicly available. The General Partners and the Special Committee have
concluded, based in part on the advice and assistance provided by PaineWebber,
that the assumptions underlying the forecasts are reasonable. The independent
public accountants for the Company have not examined or compiled the following
financial forecasts, and, accordingly, do not provide any assurance with respect
to such information.
The following table sets forth a summary of the financial forecasts prepared
by management of General Partners and used by the General Partners and the
Special Committee in assessing the Merger:
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<PAGE>
FORECASTED INCOME STATEMENT
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR 1 OF YEAR 2 OF YEAR 3 OF YEAR 4 OF YEAR 5 OF
OPERATION OPERATION OPERATION OPERATION OPERATION
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest Income(1).................................... $ 44,970 $ 95,088 $ 134,215 $ 173,390 $ 212,565
Premium Amortization.................................. (5,163) (11,145) (15,846) (20,570) (25,308)
----------- ----------- ---------- ---------- ----------
Interest Income, Net............................ 39,807 83,943 118,369 152,820 187,257
Interest Expense(2)................................... (29,064) (63,432) (89,626) (115,856) (142,085)
Hedging Cost.......................................... (674) (1,451) (2,057) (2,664) (3,271)
General and Administrative Expenses(3)................ (2,127) (3,610) (4,841) (6,078) (7,319)
----------- ----------- ---------- ---------- ----------
Net Income...................................... $ 7,942 $ 15,450 $ 21,845 $ 28,222 $ 34,582
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Net Income Per Share.................................. $ 0.88 $ 1.08 $ 1.18 $ 1.26 $ 1.33
Book Value Per Share as of Period End................. $ 7.77 $ 8.20 $ 8.87 $ 9.44 $ 9.94
</TABLE>
- ------------------------
(1) Interest income represents income, excluding servicing, on six-month LIBOR
Mortgage Securities, multifamily and single-family Mortgage Loans and
one-year Constant Maturity Treasury Rate Mortgage Securities.
(2) Interest expense represents expenses incurred in connection with the reverse
repurchase agreements entered into by the Company.
(3) General and administrative expenses includes, among other things, management
and incentive compensation fees payable to the Advisor.
The foregoing forecasts of net income of the Company involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance and achievements of the Company to be materially different
from future results, performance and achievements expressed or implied by such
forecasts. The actual net income of the Company will depend to a large extent on
a number of factors that cannot be predicted with certainty or which may be
outside of the control of the Company and its executive officers, the Board of
Directors or the Advisor, including general business, market and economic
conditions, supply and demand for Mortgage Securities and Mortgage Loans,
fluctuations in interest rate levels, changes in tax laws and other factors. The
factors that could cause the actual results, performance and achievements of the
Company to differ materially from the foregoing forecasts are disclosed herein,
including, without limitation, those factors disclosed under the headings "RISK
FACTORS" and "MANAGEMENT OF THE COMPANY -- Conflicts of Interest."
The financial forecasts were also incorporated by management of the General
Partners into one of the components of the comparative valuation analysis that
was also used by the General Partners and the Special Committee as part of their
review and analysis of the Merger. This analysis, which supported the General
Partner's and the Special Committee's determination that the Merger is in the
best interest of Unitholders, compared estimated values of the Units assuming
they are converted into shares of Common Stock in the Merger, to estimated
values of the Units (i) assuming the Partnerships continue to operate in
accordance with their existing Partnership Agreements and business plans, (ii)
assuming the Partnerships commenced an orderly liquidation of their investment
portfolios on June 30, 1997 or (iii) based on recent trading or secondary market
prices of the Units.
For the purposes of determining the estimated ranges of values of the Units
assuming they are converted into shares of Common Stock in the Merger,
management of the General Partner applied the forecasted net income per share of
the Company for the second year of its operations, which is expected to be the
first full year after the Company will have completed the portfolio realignment
anticipated by its business plan to the median of forecasted net income per
share multiples of the Comparative Companies
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for 1997 and 1998. As indicated herein under "-- Financial Advisor," PaineWebber
compared the closing price per share of common stock of the Comparative
Companies on June 30, 1997 to the 1997 and 1998 First Call net income per share
estimates of the Comparative Companies and reported to the management of the
General Partners that the median of the net income multiples for the Comparative
Companies was 11.0x for 1997 and 9.7x for 1998. Applying the forecasted net
income per share for the Company for its second year of operations to the net
income multiples developed by PaineWebber for the Comparative Companies,
management of the General Partners estimated ranges of values for the Common
Stock upon completion of the Merger. Management of the General Partners then
multiplied such estimated values by the exchange ratio per Unit for each of the
Partnerships to determine the estimated value of the Units assuming they are
converted to shares of Common Stock.
The estimated ranges of values of the Units included in the comparative
valuation analysis assuming the Partnerships (i) continue to operate in
accordance with their existing Partnership Agreements and business plans or (ii)
commenced an orderly liquidation of their investment portfolios on June 30, 1997
were the same estimated ranges used by Oppenheimer in the analysis underlying
its Fairness Opinion. The General Partners and the Special Committee have
reviewed Oppenheimer's methodology in developing such estimated values and
believe that such methodology is reasonable. See "-- Fairness Opinion." The
recent trading prices included in this analysis (i) for Prep Fund 1 Units and
Prep Fund 2 BUCs were based on the average of the last reported sales prices of
such Units on the NASDAQ and the AMEX, respectively, for the 45 consecutive
trading days preceding the date prior to the public announcement of the Merger
and (ii) for Pension BUCs were based on the average trading prices of such Units
in the secondary markets from January 1, 1997 through June 30, 1997.
The following table summarizes the results of the comparative valuation
analysis and also presents the included values as a percentage of the historical
book value of the Partnership:
COMPARATIVE VALUATION ANALYSIS(1)
<TABLE>
<CAPTION>
ESTIMATED VALUE OF
UNITS ASSUMING
CONVERSION TO SHARES
OF COMMON STOCK
ESTIMATED ESTIMATED
IN THE NEW COMPANY CONTINUATION LIQUIDATION VALUE(3)
VALUE(2)
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
HIGH LOW HIGH LOW HIGH LOW
PARTNERSHIP VALUE VALUE VALUE VALUE VALUE VALUE
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
ESTIMATED VALUATION:
Prep Fund 1............................................ $ 11.88 $ 10.48 $ 8.80 $ 8.63 $ 9.08 $ 8.83
Prep Fund 2............................................ $ 14.97 $ 13.20 $ 11.01 $ 10.71 $ 11.13 $ 11.06
Pension Fund........................................... $ 15.56 $ 13.72 $ 11.37 $ 11.16 $ 11.79 $ 11.75
ESTIMATED VALUATION AS A PERCENTAGE OF HISTORICAL BOOK VALUE OF THE PARTNERSHIPS(5):
Prep Fund 1............................................ 141% 124% 105% 102% 108% 105%
Prep Fund 2............................................ 140% 124% 103% 100% 104% 104%
Pension Fund........................................... 136% 120% 99% 97% 103% 103%
<CAPTION>
<S> <C>
RECENT
TRADING
PARTNERSHIP PRICES(4)
- ------------------------------------------------------- -----------
ESTIMATED VALUATION:
Prep Fund 1............................................ $ 8.63
Prep Fund 2............................................ $ 12.19
Pension Fund........................................... $ 9.49
ESTIMATED VALUATION AS A PERCENTAGE OF HISTORICAL BOOK
Prep Fund 1............................................ 102%
Prep Fund 2............................................ 114%
Pension Fund........................................... 83%
</TABLE>
- ------------------------
(1) Based on information available as of June 30, 1997, except with respect to
the recent trading prices of the Units.
(2) See THE PROPOSED MERGER -- Fairness Opinion -- Summary of Analysis and
Methodology.
(3) Represents the amount that would have been distributed with respect to each
Unit if the Partnerships had sold their Mortgage Securities, Mortgage Loans
and other assets on June 30, 1997, subject to
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certain assumptions.See THE PROPOSED MERGER--Fairness Opinion--Summary of
Analysis and Methodology.
(4) For Prep Fund 1 Units and Prep Fund 2 BUCs, the average of the last reported
sales prices of such Units on the NASDAQ and the AMEX, respectively, for the
45 consecutive trading days preceding the date prior to the public
announcement of the Merger.For Pension BUCs, the average trading prices of
such Units in the secondary markets from January 1, 1997 through June 30,
1997.
(5) Mortgage REITs are typically valued in the public markets on the basis of
either a trading price to book value or a trading price to earnings.The
historical book value of the Units was used in the comparative valuation
analysis, as opposed to earnings of the Partnerships, because historical
book value is a measure which is applicable to all three scenarios contained
in the comparative valuation analysis.The historic book value per Unit as of
March 31, 1997 for Prep Fund 1 was $8.42, Prep Fund 2 was $10.67 and Pension
Fund was $11.45.
The General Partners and the Special Committee viewed as favorable the
comparative valuation analysis that was prepared by management of the General
Partners which supported their determination that the Merger is in the best
interests of, and fair to, Unitholders. In this analysis, the estimated ranges
of values of the Units assuming they are converted to shares of Common Stock in
the Merger are substantially above the estimated ranges of values of the Units
assuming the Partnerships continue to operate in accordance with their existing
Partnership Agreements and business plans or assuming the Partnerships were to
have commenced an orderly liquidation of their investment portfolios on June 30,
1997 and are above the recent trading or secondary market prices of the Units
that were used in the analysis.
In assessing the comparative valuation analysis, the General Partners and
the Special Committee recognized that the valuation estimates used in the
analysis are subject to significant uncertainties, variables and assumptions, as
well as varying market conditions, and no assurance can be given that the
estimated values indicated could ever be realized. The General Partners and the
Special Committee also recognized that there is substantial uncertainty as to
the prices at which the shares of Common Stock will trade following the Merger
and it is possible that the shares will trade below the other values in this
analysis. See "RISK FACTORS--Risks Associated with the Merger--Uncertain Market
Price of Common Stock After the Merger." The comparative valuation analysis was
based on information available as of June 30, 1997 (except for the recent
trading prices of the Units). It is not anticipated that management of the
General Partners will update the comparative valuation analysis or any of the
information contained therein.
In spite of these uncertainties, the General Partners and the Special
Committee believe that the comparative valuation analysis, when considered
together with the anticipated effect of the Merger and with all the other
differences between continued ownership of Units as compared with the receipt of
shares of Common Stock, supports their determinations relating to the Merger.
In addition to the comparative valuation analysis, the General Partners and
the Special Committee also considered the Fairness Opinion, which supported
their determination that the Merger is fair to Unitholders, and the following
additional factors relating to the Merger, which supported their determination
that the Merger is in the best interests of Unitholders:
POTENTIAL FOR COMPANY GROWTH; ENHANCED ACCESS TO CAPITAL. The Company,
which will operate as a mortgage REIT, will attempt to extend the business
plans and investment methods and policies of the Partnerships. Following the
Merger, the Company will have the potential for enhanced access to and
flexibility in obtaining additional equity capital and debt financing. In
particular, the Company will have the ability to fund future portfolio
growth through the issuance of additional publicly traded securities and the
raising of funds from borrowings under secured and unsecured debt
obligations. As a result of the anticipated increase in the total amount of
net income to be generated by the Company on the difference between the
yield on any additional Mortgage Security or Mortgage Loan and the
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cost of capital to acquire such investment, the General Partners and the
Special Committee believe that any future growth in the size of the
Company's portfolio will be accretive to its earnings over time. The
Partnerships are currently limited under their respective Partnership
Agreements in their ability to raise additional capital. Following the
Merger, the Company will not be subject to the same capital-raising
limitations. In addition, the size and structure of the Company should
provide financing alternatives presently not available to the Partnerships.
The General Partners and the Special Committee believe that the larger total
market capitalization of the Company, as compared to those of the individual
Partnerships, will encourage additional and continuing investment, in many
cases by institutional investors (which tend to favor companies with large
market capitalizations), which may over time lead to an increase in the
trading multiple and share price of the Company.
POTENTIAL INCREASED DISTRIBUTIONS. The Company is expected to have the
potential to further increase distributions over time through further growth
in earnings.
FLEXIBLE OPERATING STRUCTURE. The Merger will provide a capital and
operating structure that will allow the Company to respond more efficiently
to, and to anticipate the occurrence of, changing conditions in the U.S.
equity markets (including interest rate fluctuations), thereby potentially
reducing the adverse effects of such changes.
POTENTIAL FOR ADDITIONAL INVESTMENTS IN MORTGAGE ASSETS. Currently, the
Partnerships have fully invested their capital in static portfolios of
fixed-rate Mortgage Securities, Mortgage Loans, PREPs and certain other
investments and lack the structural flexibility to make additional
investments in Mortgage Securities or Mortgage Loans. Following the Merger,
the Company will be positioned to grow, or alter the composition of, its
investment portfolio through the acquisition of adjustable-rate Mortgage
Securities and Mortgage Loans. These Mortgage Securities and Mortgage Loans
typically adjust annually, semiannually or monthly in connection with
prevailing interest rates subject to certain periodic cap restrictions.
Accordingly, the underlying value of the Company's portfolio will be less
sensitive to fluctuations in interest rates than the portfolios of the
individual Partnerships.
DIVERSIFICATION. The Company's portfolio of Mortgage Securities and
Mortgage Loans will be more diversified in terms of number and type of
investments and risk profile than the current portfolio of any individual
Partnership. In particular, the Company will own a growth-oriented portfolio
consisting primarily of adjustable-rate Mortgage Securities and Mortgage
Loans as compared to the Partnerships' static portfolios of fixed-rate
Mortgage Securities and Mortgage Loans. Such diversification may be further
enhanced through the Company's acquisition of additional adjustable-rate
Mortgage Securities and Mortgage Loans. Supporting their determination that
the Merger is in the best interests of Unitholders, the General Partners and
the Special Committee believe that the increased size and diversity of the
Company's portfolio will reduce the dependence of the performance of
Unitholders' investments on any particular investment or group of
investments.
ENHANCED LIQUIDITY. Currently, the Prep Fund 1 Units are included for
quotation on the NASDAQ and the Prep Fund 2 BUCs are listed on the AMEX. The
Pension BUCs are not currently listed or regularly traded on a national
securities exchange or quoted in the automated quotation system of any
registered securities association or other over-the-counter market.
Following the Merger, the anticipated listing of the shares of Common Stock
on the NYSE and the Company's larger equity market capitalization and growth
strategy should enhance the liquidity of investments held by Unitholders,
especially for those Unitholders in Pension Fund who currently do not have
an active trading market in which to dispose of their Units.
ACHIEVEMENT OF ANTICIPATED OPERATION EFFICIENCIES. Primarily as a result
of the increased earnings expected to be generated by the Company as
compared to the Partnerships on a combined basis, the realignment of the
Company's portfolio in accordance with its business plan and the changes
relating to the payment of compensation and expense reimbursements under the
Advisory Agreement as compared to the payment of compensation and expense
reimbursements under the Partnership
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Agreements, the Merger is expected to result in the achievement of operating
efficiencies for the Company compared to the Partnerships.
TAX-DEFERRAL. The Merger offers Unitholders an opportunity to exchange
their Units for shares of Common Stock of the Company on a basis expected to
be tax-free for federal income tax purposes. See "FEDERAL INCOME TAX
CONSIDERATIONS--Tax Treatment of the Merger for Partnerships and
Unitholders."
SIMPLIFIED TAX REPORTING. Stockholders of the Company will no longer be
required to use Schedule K-1s in connection with the preparation of annual
tax returns, but instead will receive the 1099-DIV forms from the Company.
1099-DIV forms are required to be issued by January 31 of each year whereas
Schedule K-1s are generally not received until March or April of each year.
Holders of Pension BUCs electing the Retention Option will continue to
receive Schedule K-1s. Stockholders generally will not be required to file
state income tax returns or pay state income taxes outside their state of
residence with respect to income on their Common Stock.
The General Partners and the Special Committee (with Dr. Carter abstaining
due to the potential conflict of interest associated with his equity ownership
in America First) have also concluded that it is fair to Unitholders, as
outlined herein, to allocate the shares of Common Stock among the Partnerships
in accordance with their respective Net Asset Values (see "TERMS OF THE
MERGER--Allocation of Common Stock") and to allocate the shares of Common Stock
between the General Partners and the Unitholders in accordance with the terms of
the Merger Agreement which provides that the General Partners will retain 1% of
the shares of Common Stock outstanding following the Merger (assuming Maximum
Participation). The allocation of such shares of Common Stock to the General
Partners is based generally on the provisions of the Partnership Agreements of
the Partnerships that allocate to the General Partners the right to receive 1%
of distributions made by the Partnerships out of operating cash flow. The
Partnership Agreement of each Partnership also provides for the allocation of 1%
of liquidating distributions to the General Partners, but only after Unitholders
have first received distributions from all sources from the Partnership equal to
a complete return of the capital invested by them in the Partnerships. If the
provisions relating to the distribution of liquidating distributions had been
selected as the basis for the allocation of the merger consideration between the
General Partners and Unitholders, the General Partners, assuming a Merger
closing date of December 31, 1997, would have been entitled to receive in the
aggregate fewer than 1% of the shares of Common Stock to be outstanding
immediately following the Merger (an estimated 55,000 shares as opposed to the
90,621 shares contemplated by the Merger Agreement). The General Partners and
the Special Committee nevertheless consider it fair for the General Partners to
retain a full 1% of the shares of Common Stock to be outstanding following the
Merger (assuming Maximum Participation) based primarily on their belief that the
Merger does not represent a liquidation of the Partnerships, but rather a
transformation and continuation of the Partnerships as a growing business
enterprise within the vehicle of the Company. In addition, the General Partners
and the Special Committee noted that each General Partner's share of liquidating
distributions from its Partnership increases with each regular payment of
distributions by such Partnership because each General Partner will be entitled
to receive a full 1% of liquidating distributions from its Partnership once such
Partnership has paid total distributions to its Unitholders equal to the initial
capital invested by Unitholders in the Partnership.
Supporting their determination that the Merger is fair to Unitholders, the
General Partners and the Special Committee further believe that, in view of the
similarities between the Partnerships in terms of their investment objectives
and policies as well as in their mortgage asset portfolios, there is no material
difference among the individual Partnerships with respect to determinations
related to the allocation of shares of Common Stock among the Partnerships.
Although the Merger was not negotiated at arm's length, the General Partners
and the Special Committee also believe that the Merger has been structured so as
to be procedurally fair to, and in the best
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interests of, Unitholders. In reaching this determination, the General Partners
and the Special Committee considered all of the factors outlined herein as a
whole and did not specifically quantify any specific factor in reaching their
conclusion. The General Partners have organized the Special Committee and
charged such committee with the responsibility of representing the interests of
Unitholders in the negotiation and planning of the terms of the Merger. See
"--Background of the Merger." The Special Committee in turn retained Oppenheimer
to render the Fairness Opinion to the Unitholders. The General Partners and the
Special Committee also thoroughly analyzed the Merger and its alternatives in
consultation with PaineWebber, legal counsel and the Partnerships' accountants.
The General Partners also structured the Merger to give the Unitholders in
Pension Fund, the Pension BUCs of which are not currently traded on a national
securities exchange or quoted on the NASDAQ, the opportunity to elect the
Retention Option and remain in their current position as Unitholders of Pension
Fund if they so choose. Because the Units in Prep Fund 1 and Prep Fund 2 are
publicly traded and Unitholders can sell their Units in such Partnerships at any
time, the General Partners did not believe that it was necessary to include a
similar option for these two Partnerships. In considering the fairness of the
Merger, the General Partners and the Special Committee also analyzed both the
participation of all of the Partnerships in the Merger and the participation of
only Prep Fund 1 and Prep Fund 2 in the Merger as such scenarios related to the
operation of the Company following the Merger.
In assessing the Merger, the General Partners and the Special Committee also
noted that the Partnerships currently pay distributions to Unitholders out of
their earnings and as a return of invested capital. For the three months ended
September 30, 1997, Prep Fund 1, Prep Fund 2 and Pension Fund paid distributions
per Unit totalling $0.2649, $0.3267 and $.3233, respectively, while generating
net income over this period of $0.12, $0.05 and $0.07, respectively. As a
result, the quantity of the income producing assets held by the Partnerships has
been declining each quarter which will eventually erode the ability of the
Partnerships to maintain distributions at current levels. Following the Merger,
the Company's policy will be generally to refrain from paying return of capital
distributions to stockholders (except for the Cash Merger Payment), but instead
to pay as distributions substantially all of the Company's taxable income.
Primarily as a result of this factor, it is expected that the quarterly
distributions payable by the Company on the shares of Common Stock issued in
respect of each Unit in the Merger will be lower on a quarterly basis over the
first year following the Merger than the total distributions (which include
amounts paid out of both net income and as a return of capital) made by the
Partnerships for the three months ended September 30, 1997. See "THE COMPANY
- --Distribution Policy." The Merger Agreement, however, provides that the Company
will make the Cash Merger Payment, which will be paid in four equal quarterly
payments of $.2650 per share of Common Stock during the first year following the
Merger, to stockholders entitled to receive distributions. During the first year
following the Merger, any distributions paid to stockholders by the Company out
of earnings will have the effect of reducing the amount of the Cash Merger
Payment so that the amount paid to stockholders during this first year will
still be, in the aggregate, equal to $1.06 per share. The General Partners
anticipate that the Company will fund the Cash Merger Payment, to the extent it
is required to be paid to stockholders during the first year following the
Merger, out of the proceeds from sales of Mortgage Securities and Mortgage
Loans, short-term borrowings or existing cash reserves. See "TERMS OF THE
MERGER--Cash Merger Payment." At an exchange ratio for each Unit in Prep Fund 1,
Prep Fund 2 and Pension Fund of 1.0x, 1.26x and 1.31x, respectively, into shares
of Common Stock, the minimum quarterly payment to be made in respect of each
Unit in Prep Fund 1, Prep Fund 2 and Pension Fund exchanged in the Merger will
equal $.2650, $.3346 and $.3461, respectively. Following the completion of the
initial one-year period, the Company intends to pay quarterly distributions as
determined by the Board of Directors.
In addition, the General Partners and the Special Committee considered that
the effects of the Merger may differ with each Unitholder and may be
disadvantageous to certain Unitholders, depending on their individual
circumstances and investment objectives. Further, the General Partners and the
Special Committee also considered the following negative factors relating to the
Merger:
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UNCERTAIN MARKET PRICE OF COMMON STOCK. There is substantial uncertainty
as to the prices at which the shares of Common Stock will trade following
the Merger. Following the Merger, the market value of the Common Stock could
be substantially affected by numerous factors. Accordingly, the possibility
exists that the trading price of the shares of Common Stock may be lower
than the proportionate Net Asset Value estimated for each Unit.
PAYMENT OF DISTRIBUTIONS FOLLOWING THE REALIGNMENT OF THE COMPANY'S
PORTFOLIO. Even after the completion of the realignment of the Company's
investment portfolio, there is no assurance that the Company will be able to
generate sufficient net income to fund the payment of distributions to
stockholders at a rate that will exceed the rate of total distributions
(which include amounts paid out of both net income and as a return of
capital) currently being paid by the Partnerships.
FUNDAMENTAL CHANGE IN NATURE OF INVESTMENTS. Unitholders who become
holders of Common Stock will have fundamentally changed the nature of their
investments and their rights will be different from their current rights as
Unitholders in their respective Partnerships. In comparison to the
Partnerships, the Company will have a more diverse investment strategy with
greater opportunity for growth. Such growth potential, however, is
accompanied by greater risks, such as those associated with the Company's
leveraging and hedging strategies, than those posed by continued investment
in the Partnerships.
LACK OF OPERATING HISTORY. The Company will be a newly formed
corporation, with no operating history as a publicly traded REIT.
CONFLICTS OF INTEREST FACING THE GENERAL PARTNERS. There are substantial
conflicts of interest facing the General Partners with respect to the
completion of the Merger, including, as indicated above, that (i) the
Advisor will be an affiliate of the General Partners and therefore the
owners of the General Partners will benefit from the completion of the
Merger by indirectly receiving fees pursuant to the Advisory Agreement and
(ii) the General Partners determined the method of allocation of the Common
Stock between themselves and Unitholders.
MERGER EXPENSES. The Partnerships or the Company will pay all expenses
of the Merger, including solicitation expenses, whether or not the Merger is
consummated. The payment of such expenses will reduce the net worth of the
Company following the Merger.
NO ASSURANCE BENEFITS OF MERGER WILL BE REALIZED. Considerable time and
resources will be required to be devoted by the Advisor in order to
implement the business plan of the Company and to achieve the anticipated
benefits of the Merger. Because the success of the Company will depend on
numerous factors, including the interest rates on the Company's
adjustable-rate Mortgage Securities and Mortgage Loans, the cost of the
Company's borrowing, the cost and effectiveness of the Company's risk
management strategies, reserve requirements and the operating expenses of
the Company, there can be no assurance the Company will be able to achieve
the benefits of the proposed Merger and successfully implement its business
plan.
The General Partners and the Special Committee did not believe that the
negative factors were sufficient, either individually or collectively, to
outweigh the advantages of the Merger.
The foregoing discussion of the information and factors considered by the
General Partners and the Special Committee is not intended to be exhaustive but
includes material factors considered by the General Partners and the Special
Committee. The General Partners and the Special Committee did not assign
relative weights to the above factors or determine that any factor was of
particular importance. A determination of various weightings would, in the view
of the General Partners and the Special Committee, be impractical. Rather, the
General Partners and the Special Committee viewed their position and
recommendations as being based on the totality of the information presented to,
and considered by, them.
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ASSESSMENT OF ALTERNATIVES TO THE MERGER
As part of the assessment by the General Partners and the Special Committee
of the Merger, they considered, in addition to the comparative valuation
analysis, the following additional factors with regard to the analyzed
alternatives:
CONTINUATION OF THE PARTNERSHIPS. In assessing the Merger, they considered
the advantages and disadvantages of keeping the Partnerships intact and
continuing to operate them in accordance with their respective Partnership
Agreements and existing business plans. If the Partnerships were to continue in
their current form, they would remain separate legal entities, with their own
assets and liabilities, governed by their respective Partnership Agreements. In
managing the businesses of the Partnerships, the General Partners would continue
to take whatever actions they deemed were appropriate in satisfying their
fiduciary obligations to the Unitholders and the Partnerships. Continuing the
Partnerships without a change has a number of benefits, including (i) the
Partnerships would remain separate entities, with their own assets and
liabilities, and their original investment objectives, consistent with the
guidelines, restrictions and safeguards in their respective Partnership
Agreements; (ii) there would be no change in the nature of the Unitholders'
investments; (iii) the Unitholders' investment in the Partnerships would not be
exposed to the additional risks associated with the implementation and operation
of the Company's new business plan compared to the Partnerships'; (iv) the
Partnerships would liquidate their holdings and distribute the proceeds from
such liquidation in accordance with their respective business plans; (v) the
Unitholders would continue to defer certain income taxes on Partnership
distributions; and (vi) the Partnerships would not incur any expenses in
connection with the Merger, which are estimated to be approximately $1,660,000.
In addition, continuing the Partnerships without change avoids the risks
inherent in the Merger. These risks include, among others, the implementation of
the Company's new business plan and investment strategy, the uncertain market
value of the Common Stock, the change in distribution policies, the fundamental
change in the nature of investment held by Unitholders who receive Common Stock
and the substantial conflicts of interests of the General Partners. See "RISK
FACTORS-- Risks Associated with the Merger."
In an effort to maximize the value of the Unitholders' investments in the
Partnerships and to enhance the capital-raising and investment flexibility of
the Partnerships, the General Partners ultimately decided to take advantage of
the growing acceptance of mortgage REITs in the U.S. equity markets and proceed
with the Merger. The General Partners and Special Committee concluded that
maintaining the Partnerships as separate entities may have the following
potentially negative results when compared with the benefits that the General
Partners and Special Committee perceive may be derived from the Merger: (i)
limitations on growth and capital raising; (ii) limitations on new investments;
(iii) with respect to the Pension BUCs, lower liquidity of investment on a
current basis due to the illiquid nature of the market for Pension BUCs; (iv)
less flexibility and control in actively managing the portfolio; and (v)
duplicative general and administrative expenses.
LIQUIDATION OF THE PARTNERSHIPS. Although the investment objectives and
policies of the Partnerships do not contemplate the commencement of the
liquidation of the portfolios of Mortgage Securities, Mortgage Loans, PREPs and
other investments until 1999, in the case of Prep Fund 1, and 2000, in the case
of Prep Fund 2 and Pension Fund, the General Partners and the Special Committee
assessed the possibility of commencing the orderly liquidation of the
Partnerships and distributing the net proceeds from such liquidation to
partners. The commencement of the liquidation of the Partnerships at the present
time would not have required the consent of the Unitholders even though the
investment objectives and policies do not contemplate the liquidation of Prep
Fund 1 for an additional two years and Prep Fund 2 and Pension Fund for an
additional three years.
In a liquidation of the Partnerships, Unitholders would benefit by avoiding
the risks of continuing their ownership of the Partnerships and those associated
with the Merger. In addition, the Unitholders
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<PAGE>
would have the potential to reinvest the net proceeds received in the
liquidation in similar or different investments.
However, because the historical amount of return on capital distributions
received by Unitholders (approximately $79.9 million) plus the amount that would
be received by Unitholders if the Partnerships' investments were liquidated at
their respective Net Asset Values (estimated to be approximately $82.6 million)
would be less than the amount originally invested by such Unitholders in the
Partnerships (approximately $171.2 million), the General Partners and Special
Committee have determined that to attempt to liquidate the Partnerships'
investments at the current time would likely result in Unitholders not achieving
the full benefits from their investment in the Partnerships. See "THE PROPOSED
MERGER-- Background of the Merger." The liquidation of the Partnerships would
also involve certain transaction costs, such as legal fees and various other
closing costs, which would further reduce the amount of net proceeds available
for distribution to partners. In addition, even though the Company's business
plan contemplates the realignment of its portfolio through the sale of a
substantial portion of its fixed-rate assets and the acquisition of
adjustable-rate Mortgage Securities and Mortgage Loans, the General Partners and
the Special Committee have concluded for the reasons outlined above that, based
on the comparative valuation analysis prepared by management of the General
Partners, liquidation at the current time would be premature and would not
provide the Unitholders with their best option to realize the optimum return on
their investments in the Partnerships. As the comparative valuation analysis
indicates, the estimated ranges of values of the Units assuming they are
converted to shares of Common Stock in the Merger are substantially above the
estimated ranges of values of the Units assuming the Partnerships were to have
commenced an orderly liquidation of their investment portfolios on June 30,
1997. See "THE PROPOSED MERGER--Recommendations of the General Partners and the
Special Committee; Fairness Determination."
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TERMS OF THE MERGER
GENERAL
The following description of the Merger and the Merger Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached as Appendix A to this Consent
Solicitation Statement/Prospectus and incorporated herein by reference.
Unitholders are urged to read the Merger Agreement in its entirety. Capitalized
terms used but not defined in this section shall have the meanings ascribed to
them in the Merger Agreement.
EFFECTS OF THE MERGER
The Merger Agreement, which is dated as of July 29, 1997, provides that,
subject to the approval of Unitholders representing a majority of outstanding
Prep Fund 1 Units and outstanding Prep Fund 2 BUCs, respectively, and the
satisfaction or waiver of the other conditions to the Merger, Prep Fund 1 and
Prep Fund 2 will merge with and into the Company, whereupon the separate
existence of Prep Fund 1 and Prep Fund 2 will cease and all the assets and
liabilities of Prep Fund 1 and Prep Fund 2 will vest in the Company. On the
Effective Date, the conversion of Prep Fund 1 Units and Prep Fund 2 BUCs into
Common Stock pursuant to the Merger Agreement will be effected as described
below. The Merger Agreement also provides that Pension Fund will participate in
the Merger if approved by Unitholders representing a majority of outstanding
Pension BUCs. If Pension Fund participates in the Merger, it will be merged with
Partnership Merger Sub and will remain as the surviving limited partnership, the
general partner of Pension Fund will be the Company and Pension BUCs, except for
those held by Unitholders that retain their investments in Pension Fund through
the election of the Retention Option, will be converted into Common Stock
pursuant to the Merger Agreement as described below. In connection with the
organization of the Company, the General Partners were issued 90,621 shares of
Common Stock and will not be issued any additional shares as a result of the
Merger. The Charter and the Bylaws of the Company will be as described below in
"CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER AND BYLAWS." Following
completion of the Merger, the directors and executive officers of the Company
will be the individuals identified above in "MANAGEMENT OF THE COMPANY --
Directors and Executive Officers of the Company."
EFFECTIVE DATE OF THE MERGER
Following the satisfaction or waiver (where permissible) of the terms and
conditions of the Merger Agreement, the Merger will be consummated and become
effective on the date and at the time the Certificate of Merger is duly filed
with the Secretary of State of the State of Delaware and the Articles of Merger
are duly filed with the Department of Assessments and Taxation of the State of
Maryland, which filings will be made as soon as practicable following the
approval of the Merger by Unitholders.
ALLOCATION OF COMMON STOCK
The number of shares to be allocated among the Partnerships in the Merger
was based on the relative Net Asset Values of each such Partnership determined
as of March 31, 1997. In determining the method of allocation of shares of
Common Stock among the Partnerships, the General Partners also considered
allocating shares based on the current trading values of the Partnerships, but
concluded that an allocation based on Net Asset Value would more fairly allocate
the shares among the Partnerships because Pension Fund is not publicly traded on
an existing market.
"Net Asset Value" of each Partnership is equal to an amount calculated as
follows:
(i) the value of the Mortgage Securities based on publicly available
data relating to the trading prices of the Mortgage Securities as of March
31, 1997; plus
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(ii) the value of PREPs, Equity Interests and the Participating Loans
held as of March 31, 1997, adjusted to eliminate the value of assets
disposed of since that date, based on the following: (A) PREPs: based on
management's best estimate of the amount which would have been received
under the terms of the PREP agreements if the underlying properties were
sold for an amount equal to net realizable value; (B) Participating Loan:
based on management's best estimate of the net realizable value of such
assets, which is based on the discounted estimated future cash flows
therefrom; and (C) Equity Interests: based on management's best estimate of
the net realizable value of such assets, which is based on the discounted
estimated future cash flows therefrom; plus
(iii) the amount of any undistributed cash and other assets held by the
Partnership as of March 31, 1997; less
(iv) the amount of the Partnership's accounts and distributions payable
(including, without limitation, Partnership indebtedness and deferred fees
payable to the General Partners and affiliates) as of March 31, 1997; less
(v) the amount of any mortgage notes payable by the Partnership as of
March 31, 1997.
Set forth below is a table which shows the derivation of the Net Asset
Values as of March 31, 1997 for each Partnership based upon the formula above:
DERIVATION OF NET ASSET VALUES
<TABLE>
<CAPTION>
PREP FUND 1 PREP FUND 2 PENSION FUND
------------- ------------- -------------
<S> <C> <C> <C>
Mortgage Securities................................................. $ 36,588,153 $ 14,392,382 $ 7,672,490
Real estate assets.................................................. 17,522,269 1,896,859 717,695
Undistributed cash and other assets................................. 9,314,599 2,500,516 2,659,244
Accounts and distributions payable.................................. (664,642) (256,450) (153,361)
Mortgage notes payable.............................................. (9,590,833) -- --
------------- ------------- -------------
Net Asset Value..................................................... $ 53,169,546 $ 18,533,307 $ 10,896,068
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The shares of Common Stock to be allocated to each Partnership in the Merger
will be reallocated among the partners in that Partnership in accordance with
the terms of the Merger Agreement. The Merger Agreement provides that the
General Partners will retain 1% of the shares of Common Stock outstanding
following the Merger (assuming Maximum Participation). In connection with the
organization of the Company, the General Partners were issued 90,621 shares of
Common Stock and will not be issued any additional shares as a result of the
Merger. See "THE PROPOSED MERGER -- Recommendations of the General Partners and
the Special Committee; Fairness Determination."
The following table sets forth certain information (assuming Maximum
Participation) relating to the initial capital contributions of Unitholders and
the General Partners, the Net Asset Value of each Partnership, the number of
shares
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of Common Stock offered to Unitholders and the General Partners in each
Partnership and the aggregate amounts of cash distributions previously paid by
each Partnership to its Unitholders.
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE NUMBER OF
AGGREGATE SHARES OF COMMON STOCK
AMOUNT OF TO BE ISSUED TO
SHARES OF UNITHOLDERS(1)(2) AGGREGATE
COMMON STOCK -------------------------- NUMBER OF
INITIAL CAPITAL TO BE ASSUMING SHARES OF
CONTRIBUTIONS ALLOCATED PENSION FUND COMMON STOCK
-------------------------- IN THE MERGER ASSUMING DOES NOT ISSUED
GENERAL NET TO EACH MAXIMUM PARTICIPATE TO GENERAL
PARTNERSHIP UNITHOLDERS PARTNERS ASSET VALUES PARTNERSHIP PARTICIPATION IN MERGER PARTNERS(3)
- --------------------------- ------------- ----------- ------------ -------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prep Fund 1................ $ 108,728,013 $ 100 $ 53,169,546 64.4% 5,775,797 5,775,797 --
Prep Fund 2................ 31,034,350 100 18,533,307 22.4% 2,012,336 2,012,336 --
Pension Fund............... 16,697,101 100 10,896,068 13.2% 1,183,373 -- --
------------- ----- ------------ -------------- ------------ ------------
Total.................. $ 156,459,464 $ 300 $ 82,598,921 100.0% 8,971,506 7,788,133 90,621
------------- ----- ------------ -------------- ------------ ------------
------------- ----- ------------ -------------- ------------ ------------
<CAPTION>
PER UNIT
---------------------------
NUMBER OF
SHARES OF
NET ASSET COMMON STOCK
PARTNERSHIP VALUE TO BE ISSUED
- --------------------------- ----------- --------------
<S> <C> <C>
Prep Fund 1................ $ 9.21 1.00 x
Prep Fund 2................ 11.63 1.262758 x
Pension Fund............... 12.03 1.306189 x
Total..................
</TABLE>
- ------------------------
(1) To the extent that Unitholders of Pension BUCs elect the Retention Option,
the total number of shares of Common Stock to be issued in the Merger will
be reduced by the number of shares of Common Stock equal in proportion to
the ratio that the Net Asset Value attributable to Pension BUCs held by
Unitholders electing the Retention Option bears to the combined Net Asset
Value of all the Partnerships.
(2) The number of shares of Common Stock issued to each Unitholder will be
rounded to the nearest whole share.Cash payments in lieu of fractional
shares will be issued, along with the initial issuance of shares of Common
Stock, following the consummation of the Merger.
(3) The number of shares of Common Stock issued to the General Partners assumes
Maximum Participation.To the extent that Pension Fund does not participate
in the Merger, the number of shares issuable to the General Partners will be
reallocated among the General Partners of Prep Fund 1 and Prep Fund 2.
CASH MERGER PAYMENT
The Merger Agreement provides that the Company will make the Cash Merger
Payment, which will be paid in four equal quarterly payments of $.2650 per share
of Common Stock during the first year following the Merger, to stockholders
entitled to receive distributions. During the first year following the Merger,
any distributions paid to stockholders by the Company out of earnings will have
the effect of reducing the amount of the Cash Merger Payment so that the amount
paid to stockholders during this first year will still be, in the aggregate,
equal to $1.06 per share. The General Partners anticipate that the Company will
fund the Cash Merger Payment, to the extent it is required to be paid to
stockholders during the first year following the Merger, out of the proceeds
from sales of Mortgage Securities and Mortgage Loans, short-term borrowings or
existing cash reserves. The General Partners believe that the Company, with an
initial unleveraged capital base of an estimated $72 million, will have the
resources available to pay these payments over the one-year period following the
consummation of the Merger.
Because the size of the Company's investment portfolio will be reduced in
connection with the distribution of the Cash Merger Payment, the General
Partners anticipate that the sale of Mortgage Securities and Mortgage Loans and
the use of borrowings or reserves to fund such Cash Merger Payment will
adversely affect the Company's future earnings and the payment of distributions
on the Common Stock. For example, if the Company were unable to generate any
earnings at all during the first year following the Merger, it would be required
to sell assets valued at approximately $9.5 million in order to fund the Cash
Merger Payment. As a result of the sale of such assets, the Company's investment
portfolio would be reduced by approximately 13%, which in turn could diminish
the Company's future earnings by approximately the same percentage. Accordingly,
there is no assurance that, after the first year following the Merger, the
Company will be able to generate sufficient net income to fund the payment of
distributions to stockholders at a rate that will equal the Cash Merger Payment.
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THE MERGER AGREEMENT
CONDITIONS TO THE MERGER. Each Partnership's participation in the Merger is
subject to the affirmative vote of Unitholders representing a majority of the
outstanding Units in such Partnership. Pursuant to the Merger Agreement, the
Merger is also subject to the satisfaction of certain conditions, including each
of the following: (i) the participation in the Merger of Prep Fund 1 and Prep
Fund 2; (ii) continuing approval for listing of the Common Stock on the NYSE;
(iii) the absence of (a) any suspension of trading of, or limitation on prices
for, securities generally on the NYSE, (b) a declaration of a banking moratorium
by federal or state authorities or any suspension of payments by banks in the
United States (whether mandatory or not) or of the extension of credit by
lending institutions in the United States, or (c) in the case of any of the
foregoing existing on the date of this Consent Solicitation
Statement/Prospectus, any material acceleration or worsening thereof; (iv) the
absence of any injunction or other legal prohibition against the Merger; (v) the
effectiveness of the Registration Statement on Form S-4 to be filed under the
Securities Act of which this Consent Solicitation Statement/Prospectus forms a
part (the "Registration Statement") and the absence of a stop order with respect
thereto; (vi) the receipt of certain legal opinions as to, among other things,
the Company's status as a REIT and that the Company is not an "investment
company" as defined in the Investment Company Act; (vii) the receipt of all
necessary consents and approvals, on or before (and remaining in effect at) the
Effective Date; and (viii) the absence of any event or any matter brought to the
attention of the General Partners that, in the sole judgment of the General
Partners, materially affects, whether adversely or otherwise, the Partnerships,
the Company or the Merger.
The obligation of each Partnership to effect the Merger is further
conditioned on the following: (i) the continuing accuracy in all material
respects of the representations and warranties made by the other Partnerships in
the Merger Agreement; (ii) the performance in all material respects of all
agreements and covenants to be performed by the other Partnerships under the
Merger Agreement; (iii) there having been no change in the other Partnerships'
business, results of operations or financial condition which would have a
material adverse effect on the Company; and (iv) the receipt of consents and
waivers from third parties which if not obtained would have a material adverse
effect on the other Partnerships or the Company. Materiality for the purpose of
clauses (i), (iii) and (iv) above is defined in the Merger Agreement as events
resulting in aggregate net economic losses to any of the Partnerships, the
Company or the Partnership Merger Sub in excess of the greater of $1,000,000 or
5% of Net Asset Value.
TERMINATION. The Merger Agreement may be terminated prior to the Effective
Date, before approval of Unitholders is obtained, as follows: (i) by mutual
written consent of the Partnerships; (ii) by any of the Partnerships upon a
breach of any representation or warranty on the part of Prep Fund 1 or Prep Fund
2 or the breach in any material respect of any covenant or agreement of Prep
Fund 1 or Prep Fund 2 set forth in the Merger Agreement; (iii) by any
Partnership (but such termination shall only be with regard to the obligations
of Pension Fund under the Merger Agreement), upon a breach of any representation
or warranty on the part of Pension Fund or the breach in any material respects
of any covenant or agreement of Pension Fund set forth in the Merger Agreement;
provided, however, that the right to cause a termination of the Merger Agreement
or to cause the termination of the obligations of Pension Fund under the Merger
Agreement shall not be available to any party that has breached its
representations or warranties or has breached in any material respects any of
its covenants or agreements under the Merger Agreement; (iv) by any of the
Partnerships if the Merger shall not have been consummated before June 30, 1998;
(v) by any of the Partnerships if the approval of a majority of holders of
either Prep Fund 1 Units or Prep Fund 2 BUCs is not obtained; (vi) by any of the
Partnerships (but such termination shall only be with regard to the obligations
of Pension Fund hereunder), if the approval of a majority in interest of the
holders of Pension Fund shall not have been obtained on or prior to June 30,
1998; (vii) by any of the Partnerships if prior to the approval of the
Unitholders of Prep Fund 1 or Prep Fund 2, the General Partner of either Prep
Fund 1 or Prep Fund 2 or the Special Committee (acting with regard to such
Partnership) shall have withdrawn or modified its approval or recommendation of
the Merger or the Merger Agreement; and (viii) by any of the Partnerships (but
such termination shall only be with regard to
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the obligations of Pension Fund hereunder), if the General Partner of Pension
Fund (or the Special Committee acting with respect to Pension Fund) shall have,
in compliance with the provisions of this Agreement, withdrawn or modified its
approval or recommendation of the Merger or this Agreement.
WAIVER; EXTENSION. The General Partners (with the concurrence of the
Special Committee) acting on behalf of the Partnerships and the Company may, by
an appropriate instrument executed at any time prior to the Effective Date,
whether before or after the approvals of the Unitholders are obtained, amend,
modify or waive compliance with any of the provisions of the Merger Agreement;
provided that after the receipt of such approvals, no amendment, modification or
waiver may be made which alters the amount or changes the form of the
consideration to be delivered to the Unitholders in the Merger or that in any
way, in the reasonable judgment of the General Partners, adversely affects such
Unitholders unless a majority in interest of the adversely affected Unitholders
consents to such amendment, modification or waiver. In the event that the Merger
Agreement is amended, modified or waived, in any material respect, prior to the
receipt of Unitholder approval, the General Partners will revise the relative
disclosure contained in this Consent Solicitation Statement/Prospectus to
reflect such amendment, modification or waiver and will promptly mail such
revised Consent Solicitation Statement/Prospectus to Unitholders. The mailing of
any such revised Consent Solicitation Statement/Prospectus will not affect the
validity of any Consent Form already received by the Exchange Agent, but
Unitholders will be permitted to revoke previously submitted Consent Forms for
the period that Consent Forms may be revoked as provided under "THE CONSENT
SOLICITATION -- Consent Procedures." In the event that the Merger Agreement is
amended, modified or waived following the receipt of Unitholder approval, in a
manner which alters the amount or changes the form of the consideration to be
delivered to the Unitholders in the Merger or that in any way, in the reasonable
judgment of the General Partners, adversely affects such Unitholders, the
General Partners will not proceed to close the Merger unless they first revise
the relative disclosure contained in this Consent Solicitation
Statement/Prospectus to reflect such change and re-solicit the consent of the
adversely affected Unitholders.
NO SOLICITATION. The Merger Agreement provides that each of the
Partnerships shall not initiate, solicit (including by way of furnishing
non-public information or assistance) any inquiries or make any proposal that
constitutes, or may reasonably be expected to lead to, any Competing Transaction
(as defined below) or authorize or permit any of its partners, Unitholders,
officers, directors or employees or any representative retained by it to take
any such action, and each must notify the others in writing of all of the
relevant details relating to all inquiries and proposals which it may receive
relating to any of such matters. "Competing Transaction" means any of the
following (other than the transactions contemplated by the Merger Agreement):
(i) any merger, consolidation, share exchange, business combination or other
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 30% or more of the assets of any Partnership in a single
transaction or series of transactions, excluding any bona fide financing
transactions which do not, individually or in the aggregate, have as a purpose
or effect the sale or transfer of control of such assets; (iii) any tender offer
or exchange offer for 30% or more of the outstanding Units of any Partnership or
the filing of a registration statement under the Securities Act in connection
therewith; or (iv) any public announcements of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
Notwithstanding the above-described non-solicitation provision and other
provisions of the Merger Agreement, to the extent required by the fiduciary
obligations of the General Partners of any of the Partnerships, as determined in
good faith based on the advice of outside counsel, any of the General Partners
may: (i) disclose to its Unitholders any information required by law to be
disclosed, (ii) in response to an unsolicited request therefor, participate in
discussions or negotiations with, or furnish information pursuant to a customary
confidentiality agreement to, any person in connection with a Competing
Transaction proposed by such person and (iii) approve or recommend (and, in
connection therewith, withdraw or modify its approval or recommendation of the
Merger) a Superior Competing Transaction (which is defined in the Merger
Agreement as a bona fide proposal of a Competing
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Transaction made by a third party which the applicable General Partner
determines in good faith (based on the advice of its investment banking firm) to
be more favorable to its Unitholders than the Merger).
EXPENSES. Each of the Partnerships shall generally bear their own expenses
in connection with the Merger. Notwithstanding the foregoing, each Partnership
has agreed in the Merger Agreement that if the Merger Agreement is terminated by
any of the Partnerships pursuant to clauses (v) or (vii) (or clauses (vi) or
(viii) with regard to Pension Fund) described above and such Partnership (each
such Partnership being referred to herein as the "Competing Transaction
Partnership") shall have, on or prior to the date of such termination, received
a proposal constituting a Competing Transaction that has not been offered on
substantially equivalent terms (as determined in good faith by the Special
Committee) to any of the other Partnerships (each such other Partnership being
referred to herein as an "Excluded Partnership"), then the Competing Transaction
Partnerships agree to reimburse each Excluded Partnership for the Excluded
Partnership's share of the out-of-pocket expenses incurred in connection with
the Merger Agreement and the other transactions contemplated thereby (including,
without limitation, all attorneys', accountants' and investment banking fees and
expenses), plus any expenses incurred in enforcing the provisions of the
obligations thereunder.
CONDUCT OF THE PARTNERSHIPS' BUSINESSES PENDING COMPLETION OF THE MERGER.
COVENANTS OF THE PARTNERSHIPS. The Merger Agreement provides that, except
as contemplated by the Merger Agreement, during the period from the date of the
Merger Agreement to the Effective Date, each of the Partnerships: (i) will carry
on its business in the usual, regular and ordinary course, substantially in the
same manner as previously conducted and, to the extent consistent therewith, use
commercially reasonable efforts to preserve intact its current business
organization, goodwill, ongoing businesses and status as a partnership for
purposes of taxation and (ii) will not (A) split, combine or reclassify any of
its Units or partnership interests, or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for Units or
partnership interests or purchase, redeem or otherwise acquire any Units or
partnership interests; (B) issue, deliver or sell, or grant any option or other
right in respect of, any Units or partnership interests, any other voting or
redeemable securities of or any securities convertible into, or any rights,
warrants or options to acquire, any such Units, except to the respective
Partnership or any subsidiary; (C) amend its Partnership Agreement; (D) cause
itself or any of its subsidiaries to merge or consolidate with any person; (E)
make any tax election (unless required by law or necessary to preserve the
respective Partnership's status as a partnership); or (F) except as required by
GAAP, the Commission or applicable law, change in any material manner any of its
methods, principles or practices of accounting.
CERTAIN ADDITIONAL COVENANTS. The Merger Agreement provides that each of
the Partnerships will (i) not take any action that would cause its
representations and warranties to become untrue or any conditions to closing not
be satisfied; (ii) cooperate with one another in preparing, responding to the
Commission in respect of, and causing to be mailed to Unitholders this Consent
Solicitation Statement/ Prospectus and the Registration Statement in which it is
included; (iii) use its best efforts to cause the conditions precedent to the
Merger to become satisfied and to cause the expeditious consummation of the
Merger, including (A) making governmental filings and taking all reasonable
steps to obtain required governmental consents and approvals, (B) obtaining
necessary non-governmental third-party consents, and (C) defending legal
proceedings challenging the Merger or the Merger Agreement except that none of
the parties to the Merger Agreement is required to take any such action that
would cause a court or administrative order to be issued restraining
consummation of the Merger; (iv) provide prompt notice to the other parties to
the Merger Agreement of breaches by it of representations, warranties or
covenants in the Merger Agreement; (v) consult with one another prior to making
any public statements regarding the Merger; (vi) use its best efforts to have
the NYSE approve for listing, upon official notice of issuance, the Common Stock
to be issued in the Merger; and (vii) comply with certain other customary
covenants.
INDEMNIFICATION. Each Partnership will and, from and after the Effective
Date, the Company will, indemnify, defend and hold harmless each person who is
now or has been at any time prior to the date of
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the Merger Agreement or who becomes prior to the Effective Date, a General
Partner or an affiliate of such General Partner of such Partnership against all
losses, claims, damages, costs, expenses (including attorneys' fees and
expenses), liabilities or judgments or amounts that are paid in settlement of,
with the approval of the indemnifying party (which approval shall not be
unreasonably withheld), or otherwise in connection with any threatened or actual
claim, action, suit, proceeding or investigation based on or arising out of the
fact that such person is or was a General Partner or an affiliate of such
General Partner of such Partnership at or prior to the Effective Date, whether
asserted or claimed prior to, or at or after, the Effective Date ("Partnership
Indemnified Liabilities"), including all Partnership Indemnified Liabilities
based on, or arising out of, or pertaining to the Merger Agreement, in each case
to the full extent permitted by applicable law (and such Partnership or the
Company, as the case may be, will pay expenses in advance of the final
disposition of any such action or proceeding to each such indemnified party to
the full extent permitted by its respective Partnership Agreement or law, as the
case may be, subject to limitations set forth in the Merger Agreement).
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various
representations and warranties relating to, among other things: (i) the due
organization, power and standing of the Partnerships and similar corporate
matters; (ii) the capital structure of the Partnerships; (iii) the
authorization, execution, delivery and enforceability of the Merger Agreement;
(iv) conflicts under the Partnership Agreements or other organizational
documents of the Partnerships, violations of any instruments or law and required
consents or approvals; (v) certain documents filed by each of the Partnerships
with the Commission and the accuracy of information contained therein; (vi)
conduct of business in the ordinary course and the absence of certain changes or
events; (vii) litigation; (viii) brokers' and finders' fees with respect to the
Merger; (ix) compliance with laws; (x) contracts and indebtedness; (xi) tangible
property and assets; (xii) books and records; (xiii) the accuracy of the
information furnished for inclusion in the Registration Statement; and (xiv) the
vote required to approve the Merger.
CONSEQUENCES IF MERGER NOT COMPLETED
If the Merger is not consummated for any reason, the Partnerships intend to
continue to operate as ongoing businesses in their current forms. There will be
no change in their investment objectives, policies or restrictions. No other
transaction is currently being considered by the General Partners with respect
to the Partnerships as an alternative to the Merger, although the Partnerships
may from time to time explore other alternatives.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting in
accordance with GAAP. Assuming Maximum Participation, Prep Fund 1 will be deemed
to the be the acquirer of the other Partnerships under the purchase method
because its Unitholders will be allocated the largest number of shares of Common
Stock in the Merger. Accordingly, the Merger will result, for financial
accounting purposes, in the effective purchase by Prep Fund 1 of all the Units
of Prep Fund 2 and Pension Fund. As the surviving entity for financial
accounting purposes, the assets and liabilities of Prep Fund 1 will be recorded
by the Company at their historical cost and the assets and liabilities of Prep
Fund 2 and Pension Fund will be adjusted to fair value.
FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger will be paid
by the Partnerships (pro rata in accordance with their aggregate Net Asset
Values), whether or not the Merger is consummated. If,
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however, the Merger is consummated, the Company will be allocated the entire
amount of these costs. The following is an estimate of such expenses.
<TABLE>
<S> <C>
Financial Advisor Fees and Expenses..................................... $ 400,000
Registration, Listing and Filing Fees................................... 100,000
Legal Fees.............................................................. 325,000
Fairness Opinion........................................................ 475,000
Accounting Fees and Expenses............................................ 25,000
Solicitation Fees and Expenses.......................................... 35,000
Printing and Engraving Expenses......................................... 150,000
Postage................................................................. 40,000
Miscellaneous........................................................... 110,000
---------
Total............................................................... $1,660,000
---------
---------
</TABLE>
DELIVERY OF THE CERTIFICATES FOR UNITS
Promptly after the Effective Date of the Merger, the Exchange Agent shall
mail to each Unitholder of record holding certificates representing Units that
were converted into the right to receive shares of Common Stock as of the
Effective Date ("Unit Certificates"), a letter of transmittal (a "Letter of
Transmittal") (which shall specify that delivery shall be effected, and risk of
loss and title to the Unit Certificates shall pass, only upon delivery of the
Unit Certificates to the Exchange Agent) containing instructions for use in
effecting the surrender of the Unit Certificates in exchange for the shares of
Common Stock.
Upon the surrender of any Unit Certificates to the Exchange Agent in
connection with the Merger, by any holder thereof, together with a duly
completed and executed Letter of Transmittal, such holder will be issued and
mailed a certificate representing the number of shares of Common Stock and any
dividends or other distributions to which such holder is entitled as described
above. From and after the Effective Date of the Merger, each Unit Certificate
will evidence only the right to receive Common Stock, except those Unit
Certificates held by Unitholders of Pension Fund electing the Retention Option
which will continue to represent Pension BUCs.
UNITHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED CONSENT FORM.
THEY SHOULD RETAIN SUCH CERTIFICATES UNTIL THEIR RECEIPT OF THE LETTER OF
TRANSMITTAL AFTER THE EFFECTIVE DATE OF THE MERGER.
All shares of Common Stock shall be issued upon the surrender of Unit
Certificates and there shall be no further registration of transfers on the
transfer books of the Partnerships of Units which were outstanding immediately
prior to the Effective Date, except that certificates representing Pension BUCs
held by Unitholders electing the Retention Option may be transferred and such
transfer may be recorded on the transfer book of Pension Fund. The cash payments
to be made in lieu of fractional shares of Common Stock shall be made as soon as
practicable after the Exchange Agent determines the aggregate amount of cash
available to make such payments. If, after the Effective Date, Unit Certificates
are presented to the Company for any reason, they shall be cancelled and
exchanged. No interest will be paid or accrued on the shares of Common Stock. No
Unitholder will be entitled to distributions or other rights in respect of any
fractional interest other than cash in lieu of fractional shares of Common Stock
to which any Unitholder may be entitled.
The Company or the Exchange Agent shall be entitled to deduct and withhold
from the shares of Common Stock otherwise payable pursuant to the Merger
Agreement to any Unitholder such amounts as the Company or the Exchange Agent is
required to deduct and withhold with respect to the making of such payment under
the Code, or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Company or the Exchange Agent, such withheld
amounts shall be treated for all
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purposes as having been paid to the Unitholder in respect of which such
deduction and withholding was made by the Company or the Exchange Agent.
In the event of a transfer of ownership of Unit Certificates which is not
registered in the transfer records of the appropriate Partnership, payment may
be made to a person other than the person in whose name the Unit Certificate so
surrendered is registered if such Unit Certificate shall be properly endorsed or
otherwise be in proper form for transfer and the person requesting such payment
either shall pay any transfer or other taxes required by reason of such payment
being made to a person other than the registered holder of such Unit Certificate
or establish to the satisfaction of the Company that such tax or taxes have been
paid or are not applicable.
None of the Company, the Partnerships, Partnership Merger Sub or the
Exchange Agent shall be liable to any person in respect of any shares of Common
Stock delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. Any portion of the shares of Common Stock
delivered to the Exchange Agent that remains unclaimed for six months after the
Effective Date shall be redelivered by the Exchange Agent to the Company, upon
demand, and any holders of certificates who have not theretofore complied with
the exchange procedure described above and in the Letter of Transmittal shall
thereafter look only to the Company for delivery of the shares of Common Stock,
subject to applicable abandoned property, escheat and other similar laws.
Shares of Common Stock to be issued to Unitholders in connection with the
Merger will be freely transferable under the Securities Act, except for shares
issued to any person who may be deemed to be an "affiliate" of the Partnerships
or the Company within the meaning of Rule 144 or Rule 145 under the Securities
Act. It is expected that such affiliates of the Partnerships or the Company will
be able to sell such shares without registration in accordance with the
applicable limitations of Rules 144 and 145 under the Securities Act.
DISSENTERS' RIGHT OF APPRAISAL
Under the Delaware Act, Unitholders will have no appraisal, dissenters' or
similar rights in connection with the Merger. Therefore, Unitholders will not be
entitled to receive cash payment in exchange for the fair value of their Units
if they do not vote in favor of the Merger and the Merger is approved and
consummated. Instead, holders of Prep Fund 1 Units will be able to sell their
Units on the NASDAQ, holders of Prep Fund 2 BUCs will be able to sell their
Units on the AMEX, and holders of Pension BUCs will be able to retain their
Pension BUCs and their investment in Pension Fund or sell their Pension BUCs in
the secondary market.
RETENTION OPTION
Pension Fund will be merged with and into the Partnership Merger Sub, and,
upon completion of the Merger, will remain as the surviving limited partnership.
The General Partner of Pension Fund will become a wholly owned subsidiary of the
Company. The Unitholders in Pension Fund will exchange their Units for an
aggregate maximum of 1,183,373 shares of Common Stock in the Company at the rate
of approximately 1.31 shares of Common Stock per Unit. However, Unitholders in
Pension Fund will be given the opportunity to elect the Retention Option,
whereby those Unitholders in Pension Fund making such election would remain as
Unitholders in Pension Fund, in lieu of receiving shares of Common Stock of the
Company, by retaining the same security that was originally issued to, or
subsequently acquired by, such Unitholder. In order to elect the Retention
Option, Unitholders in Pension Fund must properly complete, sign and return a
Retention Option Form, in accordance with the procedures set forth herein under
"THE CONSENT SOLICITATION -- Exercise of the Retention Option." If a Unitholder
in Pension Fund fails to properly complete, sign and return a Retention Option
Form and Pension Fund participates in the Merger, such Unitholder will receive
shares of Common Stock in connection with the Merger.
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In providing for the Retention Option, the General Partners wanted to be
responsive to those Unitholders in Pension Fund who might not want to modify
their current investment in Pension Fund. As explained in the following
discussion, following the Merger, the investments of Unitholders who elect the
Retention Option will remain substantially unchanged.
OWNERSHIP. Following the Merger, the owners of Pension Fund will consist of
the Company and the Unitholders in Pension Fund that elect the Retention Option.
These owners will, in accordance with their percentage interests in Pension
Fund, jointly derive economic benefits from Pension Fund's existing assets.
GOVERNING AGREEMENTS. Following the Merger, Pension Fund will continue to
be a "finite-life" Delaware limited partnership governed by, and operated in
accordance with, its Agreement of Limited Partnership, dated as of May 25, 1988,
as amended by an Amendment to the Agreement of Limited Partnership, dated June
8, 1988.
MANAGEMENT. Following the Merger, America First Capital Associates Limited
Partnership Six, a Delaware limited partnership, will continue to be the General
Partner of Pension Fund. However, in connection with the Merger, America First
Capital Associates Limited Partnership Six will be acquired by the Company and
will no longer be an indirect subsidiary of America First. Although being
acquired by the Company, the General Partner of Pension Fund will continue to
manage the affairs of Pension Fund. In accordance with Pension Fund's existing
business plans and investment policies, the General Partner will continue to
emphasize providing Unitholders in Pension Fund with safety and preservation of
capital and regular cash distributions. Further, Unitholders will continue to be
entitled to vote on matters related to Pension Fund only as provided by its
Partnership Agreement or the Delaware Act and decisions relating to the
operation and management of the Partnership will continue to be made by the
General Partner. Under Pension Fund's Partnership Agreement, Unitholders will
continue to have voting rights only with respect to four specific areas: (i) the
amendment of the Partnership Agreement; (ii) the approval or disapproval of the
sale or other disposition of 75% or more of the assets of Pension Fund; (iii)
the dissolution of Pension Fund; or (iv) the removal and replacement of the
General Partner. Further, due to the potential conflicts of interest that may
exist between the General Partner, which will be owned by the Company following
the Merger, and Unitholders who elect the Retention Option, the General Partner
will not, following the Merger, modify any of the investment objectives or
policies of Pension Fund unless such modification is approved by a majority in
interest of Unitholders electing the Retention Option. Even if the Merger were
not to occur, conflicts interest would still exist between the General Partner
on the one hand, which is owned by America First, and Unitholders on the other
hand.
ALLOCATION OF NET PROFITS AND NET LOSSES AND PAYMENT OF
DISTRIBUTIONS. Following the Merger, Unitholders in Pension Fund will continue
to be allocated net income and net loss in accordance with the existing
provisions of its Partnership Agreement and will continue to receive
distributions on a monthly basis. Such distributions will not be fixed in amount
and will depend solely upon Pension Fund's operating results and sale,
refinancing or mortgage payment proceeds. A portion of such distributions will
continue to be made out of earnings and profits, while the balance will
represent return of capital.
INVESTMENT AND FINANCING POLICIES. Following the Merger, Pension Fund will
continue to hold its existing unleveraged portfolio of fixed-rate Mortgage
Securities and other related assets. Upon consummation of the Merger, Pension
Fund's portfolio will not be integrated with the assets acquired by the Company
in the Merger from Prep Fund 1 and Prep Fund 2, but will continue to be held by
Pension Fund. The Company, as an owner of some portion of the equity in Pension
Fund, will derive benefits from its share of Pension Fund assets. Pursuant to
its Partnership Agreement, Pension Fund will not be able to (i) borrow funds to
purchase additional assets nor will Pension Fund's assets be pledged as
collateral for the Company's borrowings, (ii) issue additional equity to raise
capital or (iii) reinvest the proceeds from the sale of any of its assets.
Rather, in the ordinary course of business, as Pension Fund's assets are
liquidated, the proceeds from sales of its assets will be distributed to
Unitholders electing the Retention Option and the Company in accordance with
their relative percentage interests in Pension Fund.
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LIQUIDITY. Following the Merger, Pension BUC's will continue to be freely
transferable, except that pursuant to the Partnership Agreement (i) transfers
must be recorded on the books of Pension Fund and will require the presentation
of a properly executed transfer application certificate, (ii) the General
Partner of Pension Fund may defer any transfers that would cause more than 45%
of the Pension BUCs to be transferred within the previous 12 months in order to
preserve the status of Pension Fund for federal income tax purposes and (iii)
the General Partner of Pension Fund may impose further restrictions on the
transfer of Pension BUCs in order to prevent Pension Fund from being classified
as a "publicly traded partnership" for purposes of federal income taxation. In
addition, following the Merger, Pension BUCs will continue not to be listed or
traded on a securities exchange or other established trading market. It is not
possible to predict with any certainty how the trading in Pension BUC's will be
affected by the Merger. However, since the organization of Pension Fund, only
3.17% of Pension BUC's have been transferred, suggesting that under current
circumstances, Unitholders in Pension Fund do not enjoy any significant
liquidity in their investments.
TERM OF EXISTENCE. Pension Fund was organized with the intention to
liquidate its investments and then to distribute the proceeds from such
liquidation to Unitholders in Pension Fund generally within 12 years of purchase
(i.e., by the year 2000), subject to the right of the General Partner to extend
the date of liquidation to December 31, 2017. To the extent that the complete
liquidation of Pension Fund has not been completed by the end of the year 2000,
the Company has agreed to cause the redemption of Pension BUCs held by
Unitholders electing the Retention Option, effective as of December 31, 2000
(the "Redemption Date"). The redemption of the Pension BUCs will be effected at
their net asset value. For this purpose, net asset value will be equal to (i)
the sum of (A) the value of Mortgage Securities held by Pension Fund as of the
Redemption Date, which will be based on publicly available data relating to the
trading prices of the Mortgage Securities; (B) the appraised value of the PREPs
held by Pension Fund as of the Redemption Date, which will be based on an
independent appraisal of such assets arranged by the Company; and (C) the amount
of any undistributed cash and other assets held by Pension Fund as of the
Redemption Date; less (ii) the sum of (A) the amount of Pension Fund's accounts
and distributions payable (including, without limitation, indebtedness and
deferred fees payable to the General Partners and affiliates) as of the
Redemption Date; and (B) the amount of any mortgage notes payable by Pension
Fund as of the Redemption Date. The determination of net asset value and the
selection of the independent appraisers will be approved by the independent
directors of the Company.
FEES AND EXPENSES; ALLOCATION OF EXPENSES. Following the Merger, Pension
Fund will continue to reimburse its General Partner for costs and expenses
incurred by the General Partner in connection with its operations. The amount
payable by Pension Fund will not exceed the amount payable by Pension Fund for
reimbursements to the General Partner over the last full calendar year following
the closing of the Merger. Following the Merger, the fee structure of Pension
Fund will also not be changed.
RISKS OF LOSS OR BANKRUPTCY. Upon consummation of the Merger, the risks of
loss and bankruptcy, and the insulation from such risks, for Pension Fund and
its Unitholders will be the same as it was prior to the Merger. Because the
assets of Pension Fund will be segregated from those of Prep Fund 1 and Prep
Fund 2 and the investment and financing policies of Pension Fund will remain
constant, Unitholders in Pension Fund will not bear any of the additional risks
which may be associated with the implementation of the Company's new business
plan.
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THE CONSENT SOLICITATION
INTRODUCTION
This Consent Solicitation Statement/Prospectus is accompanied by a separate
Consent Form which is being solicited by the General Partners in connection with
an action by written consent of the Unitholders to approve the Merger to be
taken on or about March 31, 1998, or at any time after the required approval of
Unitholders is received. The mailing of this Consent Solicitation
Statement/Prospectus to Unitholders commenced on or about February 27, 1998.
RESPONSE DATE
In order to be counted in the vote on the Merger, the Consent Form must be
completed, dated, signed by a Unitholder and received by the Exchange Agent by
5:00 PM, local time, on March 31, 1998. The General Partners may, however,
extend the solicitation period, one or more times, for any reason, including
where a number of votes sufficient to consummate the Merger has not been
received by such date. All Consent Forms should be mailed to the Exchange Agent,
at 110 Wall Street, New York, New York 10005, Attention: Tracy Isola.
RECORD DATE AND VOTE REQUIRED
The General Partners have fixed the close of business on February 25, 1998
as the Record Date for determining the Unitholders entitled to vote on the
Merger.
Each Unit entitles the holder thereof to one vote. The Merger will require
the approval of Unitholders representing a majority in interest of outstanding
Prep Fund 1 Units and of Prep Fund 2 Units, or 2,887,899 of the 5,775,797 Prep
Fund 1 Units outstanding on the Record Date and 796,802 of the 1,593,604 Prep
Fund 2 BUCs outstanding on the Record Date. Unitholders representing a majority
in interest of outstanding Pension BUCs, or 452,987 of 905,974 Pension BUCs
outstanding on the Record Date, will be required for Pension Fund to participate
in the Merger.
CONSENT PROCEDURES
A Consent Form which is properly completed, dated, signed and returned will
be deemed to constitute a consent to the Merger unless the Consent Form is
marked to the contrary. Each Unitholder must either consent to, deny consent to
or abstain from consenting to the Merger with respect to all of such
Unitholder's Units in a particular Partnership. The failure to return a Consent
Form has the effect of, and is the equivalent to, abstaining from consenting to
the Merger. Abstentions and broker non-votes (if any) will have the same effect
as denying consent to the Merger. The General Partners and the Company shall be
entitled to rely on the completed and signed Consent Forms and shall not be
liable to Unitholders for any acts undertaken in accordance with such Consent
Forms' instructions and/or directions; PROVIDED, HOWEVER, such acts were
undertaken in good faith, with such care as a prudent person would use under
similar circumstances. If a Unitholder executes a Consent Form with no
instructions indicated thereon, Units represented by such Consent Form will be
voted in favor of the Merger. A Unitholder who holds Units in more than one
Partnership may elect differently as to each Partnership's participation in the
Merger. Each Consent Form will be valid for 11 months from its date of
execution. If the Consent Forms expire prior to the completion of the Merger,
the Merger will not be consummated.
A Consent Form may be withdrawn or revoked by the Unitholder submitting it
by providing written notice of such withdrawal or revocation to the Exchange
Agent or by submitting a Consent Form having a later date. A written statement
by the Unitholder which affirmatively withdraws or revokes such Unitholder's
Consent Form and includes such Unitholder's signature shall constitute an
effective written notice of withdrawal or revocation. A Consent Form may be
withdrawn or revoked at any time until the later of (i) the Response Date or
(ii) the receipt by the Exchange Agent of consents to the Merger from
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Unitholders owning a majority of the outstanding Units in such Partnership.
Written notice of withdrawal or revocation of a Consent Form by a Unitholder
should be mailed to the Exchange Agent at 110 Wall Street, New York, New York
10005, Attention: Tracy Isola.
Delivery of a Consent Form is at the risk of a Unitholder. The Consent Form
will be effective only when it is actually received by the Exchange Agent. A
self-addressed, postage-prepaid envelope to be used in returning completed
Consent Forms has been included with this Consent Solicitation Statement/
Prospectus.
The Exchange Agent will be exclusively responsible for the tabulation of the
Consent Forms received from Unitholders with regard to the Merger. Upon the
written request of a Unitholder, or his duly authorized representative who has
been so designated in writing, the Exchange Agent will promptly furnish to such
person the most current available tabulation of the results of the solicitation
relating to the Merger.
Consents to the Merger are being solicited from Unitholders by the General
Partners. Employees or other representatives of affiliates of the General
Partners, including America First, may solicit consents to the Merger by use of
the mails, in person, or by telephone, telegram, or other means. Certain of
those employees may be engaged solely for the purpose of participating in the
solicitation of consents, but none of the compensation paid to any of such
employees will be contingent on the outcome of their solicitation efforts or the
approval of the Merger. The General Partners have retained the Exchange Agent to
assist in the solicitation of consents. Brokerage house nominees, custodians and
fiduciaries will be requested to forward soliciting materials to beneficial
owners of Units held of record by them and the Partnerships will reimburse such
persons for their reasonable expenses in doing so. In addition, representatives
of the General Partners may meet with brokers, financial analysts and other
members of the investment community to discuss the Merger.
EXERCISE OF THE RETENTION OPTION
A Unitholder holding Pension BUCs seeking to exercise the Retention Option
must elect to retain its Pension BUCs by properly completing, signing and
returning a Retention Option Form to the Exchange Agent no later than the
Response Date. The failure of a Unitholder to comply with the procedure
described above will have the effect of, and is equivalent to, affirmatively
waiving such Unitholder's right to elect the Retention Option.
If the Merger is consummated, a Unitholder who votes against the Merger but
does not elect the Retention Option will receive shares of Common Stock in the
Company. A Unitholder who votes against the Merger is not required to elect the
Retention Option. The Retention Option Form should only be executed and
completed by Unitholders who wish to retain their investment in Pension Fund in
the form of Pension BUCs.
Election of the Retention Option is at the risk of the electing Unitholder.
Election of the Retention Option will be effective only when the Retention
Option Form on which it is elected is actually received by the Exchange Agent.
Election of the Retention Option may be revoked or withdrawn by written notice
to the Exchange Agent at any time prior to the closing date of the Merger.
EFFECT OF CONSENT
A consent by a Unitholder to the Merger with respect to a Partnership in
which such Unitholder holds Units will constitute such Unitholder's consent to
the following: (i) the entering into and execution of the Merger Agreement by
the General Partner on behalf of such Partnership; (ii) the merger of such
Partnership with the Company or, in the case of Pension Fund, the merger with
and into the Partnership Merger Sub in accordance with the terms of the Merger
Agreement; and (iii) the taking of any action by the General Partner of such
Partnership, necessary or advisable in the opinion of the General Partner, to
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consummate the Merger, including all transactions set forth in this Consent
Solicitation Statement/ Prospectus.
SOLICITATION EXPENSES
The Partnerships will bear the expenses of their respective consent
solicitations including the cost of preparing and mailing the Consent
Solicitation Statement/Prospectus, Consent Form and Retention Option Form. The
Exchange Agent will be paid a fee of $10,000 plus out-of-pocket expenses for its
engagement in connection with the Merger. The General Partners anticipate that
the cost of the consent solicitation, in aggregate, will not exceed $35,000. In
addition to the mails, the Consent Solicitation Statement/Prospectus, Consent
Form and Retention Option Form may be sent and received by telegram, cablegram,
datagram or other electronic transmission.
THE GENERAL PARTNERS AND THE SPECIAL COMMITTEE RECOMMEND VOTING FOR THE
MERGER. EACH UNITHOLDER MUST MAKE A DETERMINATION BASED UPON SUCH UNITHOLDER'S
PERSONAL SITUATION, AND SUCH DECISION SHOULD BE BASED UPON A CAREFUL EXAMINATION
OF THE UNITHOLDER'S PERSONAL FINANCES, INVESTMENT OBJECTIVES, LIQUIDITY NEEDS,
TAX SITUATION AND EXPECTATIONS AS TO THE COMPANY'S FUTURE GROWTH. UNITHOLDERS
SHOULD NOT SEND ANY UNIT CERTIFICATES WITH THEIR CONSENT FORMS.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The following summary of the terms of the capital stock of the Company does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and Bylaws, each of which is filed as an
exhibit to the Registration Statement of which this Consent Solicitation
Statement/Prospectus is a part.
GENERAL
The Charter will provide that the Company may issue up to 500 million shares
of capital stock, all with a par value of $0.01 per share. Initially, 375
million of such shares will be classified as Common Stock and 125 million of
such shares will be classified as excess stock ("Excess Stock"). Upon completion
of the Merger, 9,062,127 shares of Common Stock will be outstanding (assuming
Maximum Participation) and no shares of Excess Stock will be outstanding. One
million shares of Common Stock will be reserved for issuance under the Stock
Option Plan.
The Board of Directors will be authorized (i) to classify and reclassify any
unissued shares of any series of capital stock; (ii) to provide for the issuance
of shares in other classes or series, including preferred stock in one or more
series; (iii) to establish the number of shares in each class or series; and
(iv) to fix the preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms and
conditions of redemption of such class or series.
COMMON STOCK
All shares of Common Stock, when issued in connection with the Merger, will
be duly authorized, fully paid and nonassessable. Except as described below, the
holders of the Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. No cumulative
voting rights for the election of directors will attach to the shares of Common
Stock. Subject to the provisions of law and any preferential rights with respect
to any outstanding capital stock, holders of Common Stock are entitled to
receive ratably such dividends or other distributions as may be declared by the
Board of Directors out of funds legally available therefor. If the Company is
liquidated or dissolved, subject to the right of any holders of the capital
stock to receive preferential distributions, each outstanding share of Common
Stock (and Excess Stock arising from Common Stock) will be entitled to
participate
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ratably in the net assets remaining after payment of, or adequate provision for,
all known debts and liabilities of the Company. Holders of shares of Common
Stock will have no conversion, sinking fund, redemption or preemptive rights to
subscribe for any securities of the Company.
The transfer agent and registrar for Common Stock of the Company is Service
Data Corporation.
ADDITIONAL CLASSES OF STOCK
Additional classes of stock, including preferred stock, may be issued from
time to time, in one or more series, as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board of Directors, or a
committee thereof, will be required by the MGCL and the Charter to set for each
such series, subject to the provisions of the Charter regarding Excess Stock,
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to the dividends or other distributions, qualifications and terms
or conditions of redemption, as are permitted under the MGCL. The Board of
Directors could authorize the issuance of capital stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction which holders of some, or a majority, of the shares of Common Stock
might believe to be in their best interests or in which holders of some, or a
majority, of the Common Stock might receive a premium for their Common Stock
over the then market price of such Common Stock. On the Effective Date, no
preferred stock will be outstanding, and as of the date hereof, the Board of
Directors has no present plans to issue any preferred stock.
RESTRICTIONS ON TRANSFER
In order for the Company to qualify as a REIT under the Code, the Common
Stock must be beneficially owned by 100 or more persons during at least 335 days
of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than during its first taxable year). Also, not more than 50%
of the number or value of the outstanding shares of Common Stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain exempt entities) during the last half of a taxable year or
during a proportionate part of a shorter taxable year (other than during its
first taxable year).
The Charter will provide that, subject to certain exceptions, no stockholder
or "group" within the meaning of Section 13(d)(3) of the Exchange Act may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than the Ownership Limit, which is equal to 9.8% of the number or value of the
outstanding shares of capital stock of the Company. The Board of Directors may
waive the Ownership Limit if evidence satisfactory to the Board of Directors is
presented that such Ownership Limit will not jeopardize the Company's status as
a REIT. As a condition to such waiver, the Board of Directors may require
opinions of counsel satisfactory to it and must receive an undertaking from the
applicant with respect to preserving the REIT status of the Company. The
Ownership Limit will not apply if the Board of Directors and the stockholders of
the Company determine that it is no longer in the best interests of the Company
to attempt to qualify, or to continue to qualify, as a REIT.
If shares of Common Stock and/or preferred stock in excess of the Ownership
Limit, or shares which would cause the Company to be beneficially owned by fewer
than 100 persons or cause the Company to become "closely held" under Section
856(h) of the Code, are issued or transferred to any person, such issuance or
transfer shall be void AB INITIO and the intended transferee will acquire no
rights to the Common Stock and/or preferred stock. Shares issued or transferred
that would cause any stockholder (a "Prohibited Owner") to own more than the
Ownership Limit or the Company to become "closely held" under Section 856(h) of
the Code will constitute shares of Excess Stock. All Excess Stock will be
transferred, without action by the Prohibited Owner, to a trust (the "Trust")
for the exclusive benefit of one or more charitable beneficiaries (the
"Charitable Beneficiary") selected by the Company, and the Prohibited Owner
shall not acquire any rights in such shares. Such automatic transfer shall be
deemed to be effective as of the close of business on the Business Day (as
defined in the Charter) prior to the date of
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such violative transfer. The trustee of the Trust (the "Trustee") shall be
appointed by the Company and shall be independent of the Company and the
Prohibited Owner. The Prohibited Owner shall have no right to receive dividends
or other distributions with respect to, or be entitled to vote, any Excess Stock
held in the Trust. Any dividend or other distribution paid prior to the
discovery by the Company that Excess Stock has been transferred to the Trustee
shall be paid by the recipient of such dividend or distribution to the Trustee
upon demand for the benefit of the Charitable Beneficiary, and any dividend or
other distribution authorized but unpaid shall be paid when due to the Trustee.
The Trustee shall have all dividend and voting rights with respect to the shares
of Excess Stock held in the Trust, which rights shall be exercised for the
exclusive benefit of the Charitable Beneficiary. Any dividend or distribution so
paid to the Trustee shall be held in trust for the Charitable Beneficiary.
Within 20 days of receiving notice from the Company that Excess Stock of the
Company has been transferred to the Trust, the Trustee shall sell the Excess
Stock held in the Trust to a person, designated by the Trustee, whose ownership
of the shares will not violate the ownership limitations set forth in the
Charter. Upon such sale, any interest of the Charitable Beneficiary in the
Excess Stock sold shall terminate and the Trustee shall distribute the net
proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary
as follows. The Prohibited Owner shall receive the lesser of (i) the price paid
by the Prohibited Owner for the Excess Stock or, if the Prohibited Owner did not
give value for the Excess Stock in connection with the event causing the Excess
Stock to be held in the Trust (e.g., a gift, devise or other such transaction),
the Market Price (as defined in the Charter) of such Excess Stock on the day of
the event causing the Excess Stock to be held in the Trust and (ii) the price
per share received by the Trustee from the sale or other disposition of the
Excess Stock held in the Trust. Any net sale proceeds in excess of the amount
payable to the Prohibited Owner shall be paid immediately to the Charitable
Beneficiary. If, prior to the discovery by the Company that Excess Stock has
been transferred to the Trust, such Excess Stock is sold by a Prohibited Owner,
then (i) such Excess Stock shall be deemed to have been sold on behalf of the
Trust and (ii) to the extent that the Prohibited Owner received an amount for
such Excess Stock that exceeds the amount that such Prohibited Owner was
entitled to receive pursuant to the aforementioned requirement, such excess
shall be paid to the Trustee upon demand.
The Ownership Limit provision will not be automatically removed even if the
REIT provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration is increased. Any
change in the Ownership Limit would require an amendment to the Charter. Such
amendment to the Charter will require the affirmative vote of holders owning a
majority of the outstanding Common Stock and any other class of capital stock
with such voting rights. In addition to preserving the Company's status as a
REIT, the Ownership Limit may have the effect of precluding an acquisition of
control of the Company without the approval of the Board of Directors.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% of the number or value of outstanding shares of the
Company (or 1% if there are more than 200 but fewer than 2,000 stockholders or
.5% if there are less than 200 stockholders) must file an affidavit with the
Company containing the information specified in the Charter within 30 days after
January 1 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to determine the Company's status as a REIT and to
insure compliance with the Ownership Limit.
DIVIDEND REINVESTMENT PLAN
Upon consummation of the Merger, the Company intends to institute a Dividend
Reinvestment Plan whereby stockholders may automatically reinvest cash
distributions from the Company in additional shares
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of Common Stock. Service Data Corporation will act as independent agent for
those stockholders who wish to participate in the Dividend Reinvestment Plan.
Unitholders may elect to participate in the Dividend Reinvestment Plan by
indicating such election in the space provided for such purpose on the Consent
Form and returning the Consent Form to the Company prior to the Response Date.
After consummation of the Merger, stockholders who have not already done so will
have the opportunity to elect to participate in the Dividend Reinvestment Plan
by submitting an election notice to the Company on the appropriate form provided
for this purpose.
The following is a summary of the principal terms of the Dividend
Reinvestment Plan. A copy of the Dividend Reinvestment Plan is attached to this
Consent Solicitation Statement/Prospectus as Appendix C, and the following
summary is qualified in its entirety by reference thereto.
All distributions paid in respect of shares of Common Stock owned by
participants in the Dividend Reinvestment Plan will be paid directly to the DRP
Agent, which will hold them in a non-interest-bearing account of a bank having
capital and surplus of not less than $25 million pending investment in shares of
Common Stock within 30 days thereafter. The bank account will be specially
designated as being for the benefit of the Dividend Reinvestment Plan, and
disbursements will be permitted from such account only for purchases of shares
of Common Stock under the Dividend Reinvestment Plan or for the return of funds
to participants. If a participant's distribution is not large enough to buy a
full share of Common Stock, such participant will be credited with fractional
shares, computed to three decimal places.
The DRP Agent may use the distributions of participants to purchase
additional shares of Common Stock for such participants either (i) in the open
market or (ii) from the Company, if the Board of Directors, in its discretion,
determines to register additional shares of Common Stock for issuance to
participants in the Dividend Reinvestment Plan. Any shares purchased from the
Company will be purchased at a 3% discount from the prevailing market price of
such shares as reported on the NYSE at the time of purchase. This latter
approach may dilute the interests of holders of Common Stock not participating
in the Dividend Reinvestment Plan. If the Company does not register additional
shares of Common Stock, there is no assurance that shares will be available in
the open market for the Dividend Reinvestment Plan. It is expected that during
the first year immediately following the Effective Date, no additional shares of
Common Stock will be registered by the Company and therefore any such purchases
will only be made on the open market. To the extent shares are not available for
purchase, the DRP Agent will distribute any unused portion of the distributions
to the participants.
In connection with the purchase of shares of Common Stock under the Dividend
Reinvestment Plan, a reinvestment service charge will be payable to the DRP
Agent in proportion to each participant's share of the total cost of acquiring
such shares for all participants. Such service charges will include brokerage
commissions incurred in effecting purchases under the Dividend Reinvestment
Plan. Other costs incurred in administering the Dividend Reinvestment Plan will
be borne by the Company.
Shares of Common Stock received pursuant to the Dividend Reinvestment Plan
will entitle participants to the same rights as shares of Common Stock issued in
the Merger.
Each participant will, on a quarterly basis, be sent a detailed statement
showing the distributions received, the number and price of shares of Common
Stock purchased, the service charge and the total number of shares held by the
DRP Agent for such participant's account under the Dividend Reinvestment Plan.
In addition, the DRP Agent will, on an annual basis, send each participant tax
information regarding shares under the Dividend Reinvestment Plan for the
calendar year.
Stockholders who participate in the Dividend Reinvestment Plan will be taxed
on their proportionate share of the Company's REIT taxable income in the same
manner as if they received their distributions in cash. Thus, taxable
participants will incur a tax liability even though they do not receive any cash
distributions. See "FEDERAL INCOME TAX CONSIDERATIONS."
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Experience under the Dividend Reinvestment Plan may indicate that changes
are desirable. Accordingly, the Company reserves the right to amend or
supplement any aspect of the Dividend Reinvestment Plan, effective with respect
to any distribution paid subsequent to the written notice of such amendment or
supplement, provided that such notice is sent to participants in the Dividend
Reinvestment Plan at least ten days before the record date for a distribution.
The Company also reserves the right to terminate the Dividend Reinvestment Plan
or to change the DRP Agent, for any reason at any time, upon written notice of
such termination or change to all participants.
CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Charter and Bylaws. The summary does not purport to be complete and is subject
to and qualified in its entirety by reference to the MGCL and the Charter and
Bylaws.
BOARD OF DIRECTORS
The Company's Charter and Bylaws provide that the number of directors of the
Company initially shall be seven, and thereafter may be increased or decreased
pursuant to the Bylaws of the Company, but shall never be less than the minimum
number permitted by the MGCL. Under the Charter, a majority of the entire Board
of Directors will consist of Independent Directors.
Pursuant to the Charter, the Board of Directors will be divided into three
classes. The Class I and Class II directors consist of two directors each, one
of whom in each class is an Independent Director. The Class III directors
consist of three directors, two of whom are Independent Directors. The term of
the initial Class I directors will terminate on the date of the Company's 1998
annual meeting of stockholders; the term of the initial Class II directors will
terminate on the date of the 1999 annual meeting of stockholders; and the term
of the initial Class III directors will terminate on the date of the 2000 annual
meeting of stockholders. At each annual meeting of stockholders, directors of
the class to be elected shall be elected for a three-year term. The terms of the
initial directors will commence on the Effective Date.
The Charter provides that any director, or the entire Board of Directors,
may be removed only for cause and then only by the affirmative vote of at least
80% of the votes entitled to be cast in the election of directors. This
provision will preclude stockholders from removing incumbent directors, except
upon a substantial affirmative vote.
Vacancies on the Board of Directors resulting from death, resignation,
removal, retirement or other cause will be filled by a vote of the stockholders
or a majority of the directors then in office. A director so chosen by the
stockholders shall hold office for the balance of the term then remaining. A
director so chosen by the remaining directors shall hold office until the next
annual meeting of stockholders, at which time the stockholders shall elect a
director to hold office for the balance of the term then remaining.
BUSINESS COMBINATIONS
The MGCL prohibits 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 (i) who beneficially owns 10% or more of the voting
power of the corporation's shares or (ii) who is an affiliate or associate of
the corporation who, at any time within the two-year period prior to the date in
question, was an Interested Stockholder or an affiliate or an associate thereof.
Such business combinations are prohibited for five years after the most recent
date on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by all holders of voting shares of the
corporation and (b) two-thirds of the votes entitled to be cast by all holders
of voting shares of the corporation other than voting shares held by the
Interested Stockholder or an affiliate or associate of the
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Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's stockholders receive a "minimum
price" (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Board of Directors, in connection with the formation
of the Company, has exempted from these provisions of the MGCL any business
combination with America First, any of its present or future affiliates and
associates or any person acting in concert or as part of a group with any of the
foregoing persons. This exemption is, in accordance with the provisions of the
MGCL, permitted to be granted by the board of directors of a Maryland
corporation. The effect of the exemption granted by the Company is that such
provisions of the MGCL will not apply to any business combination involving the
Company and America First.
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 or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by such
a person, 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 of stock the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means, subject to certain exceptions, the acquisition of, ownership of, or the
power to direct the exercise of voting power with respect to, "control shares."
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the "control shares" (except those for which voting rights have
previously been approved) for fair value determined, without regard to voting
rights, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for "control shares" are approved at a stockholders
meeting and the 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 stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of control share acquisition.
The "control share acquisition" statute does not apply to stock acquired in
a merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation. The Bylaws contain a provision exempting from the "control
share acquisition" statute any and all acquisitions of America First, any of its
present or future affiliates and associates or any person acting in concert or
as part of a group with any of the foregoing persons.
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The business combination statute and the "control share acquisition" statute
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer.
AMENDMENT TO CHARTER
The Charter of the Company may be amended only by the affirmative vote of
the holders of not less than a majority of all of the votes entitled to be cast
on the matter, except that an 80% vote will be required to amend the Charter (i)
for certain changes relating to the Board of Directors, (ii) to limit
stockholder proposals and nominations, (iii) to change the voting requirements
for Charter amendments and (iv) to change the voting requirements for Bylaw
amendments. The Charter provisions relating to the limitations of liability and
indemnification may only be amended prospectively.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Charter provides that (i) 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 (a)
pursuant to the Company's notice of the meeting, (b) by or at the direction of
the Board of Directors or (c) 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 (ii) 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 may be made only (a) pursuant to the Company's notice of the meeting,
(b) by 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.
The provisions in the Charter on removal of directors, the provisions of the
MGCL regarding business combinations and control share acquisitions and the
advance notice provisions of the Bylaws could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares over the
then-prevailing market price or which such holders might believe to be otherwise
in their best interests.
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FEDERAL SECURITIES LAW CONSEQUENCES
All Common Stock issued to Unitholders in connection with the Merger will be
freely transferable without restriction under the Securities Act, except that
any Common Stock received by persons who are deemed to be "affiliates" (as such
term is defined under the Securities Act) of the Company or a Partnership may be
sold by them only in transactions permitted by the resale provisions of Rule 145
under the Securities Act, the exemption relating to sales by affiliates
contained in Rule 144 under the Securities Act or as otherwise permitted under
the Securities Act. Persons who may be deemed to be "affiliates" of the Company
or the Partnerships generally include individuals or entities that control, are
controlled by or are under common control with, the Company or the Partnerships
and generally include executive officers, directors, general partners and
principal stockholders. The 90,621 shares of Common Stock issued to the General
Partners in connection with the formation of the Company are "restricted
securities" within the meaning of the Securities Act and may not be resold by
them in absence of registration under the Securities Act unless an exemption
from registration is available.
In general, Rule 144, as currently in effect, provides that a person (or
persons whose securities are aggregated in accordance with Rule 144) who has
beneficially owned "restricted securities" (defined generally as securities
acquired from the issuer or an affiliate in a nonpublic transaction) for at
least one year, as well as any persons who purchase unrestricted stock on the
open market who may be deemed affiliates of the Company, would be entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then outstanding number of shares of Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding each such sale. Sales under Rule 144 are also subject
to certain manner-of-sale provisions, notice requirements and the availability
of current public information about the Company. After Common Stock is held for
two years, a person who is not deemed an "affiliate" of the Company is entitled
to sell such Common Stock under Rule 144 without regard to the volume
limitations described above. Sales of Common Stock by affiliates will continue
to be subject to the volume limitations.
In general, Rule 145 provides that, for one year following the Effective
Date, an affiliate of a Partnership (together with certain related persons)
would be entitled to sell Common Stock acquired in connection with the Merger
only through unsolicited "broker transactions" or in transactions directly with
a "market maker," as such terms are defined in Rule 144. Additionally, the
number of shares to be sold by an affiliate of a Partnership (together with
certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 may not exceed the greater of 1% of
the outstanding Common Stock or the average weekly trading volume of such shares
during the four calendar weeks preceding such sale. Rule 145 will remain
available to affiliates if the Company remains current with its informational
filings with the Commission under the Exchange Act. One year after the Effective
Date, an affiliate will be able to sell such Common Stock without being subject
to such manner of sale or volume limitations provided that the Company is
current with its Exchange Act informational filings and such affiliate is not
then an affiliate of the Company. Two years after the Effective Date, an
affiliate of a Partnership will be able to sell such Common Stock without any
restrictions so long as such affiliate has not been an affiliate of the Company
for at least three months prior to the date of such sale.
Prior to the Merger, there has been no public market for the Common Stock
and the effect, if any, that future market sales of restricted Common Stock or
Common Stock held by an affiliate of the Company or the Partnerships or the
availability of such Common Stock for sale will have on the market price
prevailing from time to time cannot be predicted. Nevertheless, sales of
substantial amounts of such Common Stock or the perception that such sales may
occur could adversely affect prevailing market prices for the Common Stock.
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COMPARATIVE RIGHTS AND OBLIGATIONS OF UNITHOLDERS AND STOCKHOLDERS
The following is a comparison of certain specific attributes associated with
the ownership of Units and the ownership of Common Stock. Prior to the Merger,
the rights and obligations of the Unitholders will be governed by their
respective Partnership Agreements. Following the Merger, Unitholders (except for
those Unitholders in Pension Fund electing the Retention Option) will become
stockholders of the Company.
FORM OF ORGANIZATION
UNITHOLDERS. Each of the Partnerships is a limited partnership formed under
the Delaware Act. Each Partnership is treated as a partnership for federal
income tax purposes.
STOCKHOLDERS. The Company is organized as a corporation under the MGCL. The
Company intends to elect and qualify for taxation as a REIT under the Code.
QUALIFICATION AS A REIT UNDER THE CODE WILL ALLOW THE COMPANY TO DEDUCT
DISTRIBUTIONS TO STOCKHOLDERS WHICH EFFECTIVELY ELIMINATES THE "DOUBLE TAXATION"
THAT TYPICALLY RESULTS WHEN A CORPORATION EARNS INCOME AND DISTRIBUTES DIVIDENDS
TO STOCKHOLDERS.
DURATION OF EXISTENCE
UNITHOLDERS. Each Partnership was formed with the intent of liquidating its
holdings and distributing the proceeds from such liquidation within 12 years of
purchase (i.e., by 1999 for Prep Fund 1 and by 2000 for Prep Fund 2 and Pension
Fund), subject to the right of General Partners to extend the date of
liquidation to December 31, 2036 in the case of Prep Fund 1 and December 31,
2017 in the case of Prep Fund 2 and Pension Fund. The Partnerships are not
required to dispose of any investment by any particular time but are required to
distribute the proceeds from the sale, refinancing, or other disposition of
assets or repayment of Mortgage Securities or Mortgage Loans to Unitholders.
Each Partnership can also be dissolved at an earlier date upon the occurrence of
certain events relating to the bankruptcy, death, dissolution, withdrawal,
removal or adjudication of incompetence of the General Partner, and upon a vote
to dissolve the Partnership by a majority in interest of the Unitholders.
Alternatively, Unitholders in Prep Fund 1 and Prep Fund 2 may liquidate their
investments on the NASDAQ or AMEX, respectively.
STOCKHOLDERS. In accordance with the MGCL and the Charter, the Company will
continue its existence indefinitely. The Company will not have any restrictions
on reinvesting assets after the sale of Mortgage Securities or Mortgage Loans
other than those required to maintain the Company's REIT status. Therefore, the
General Partners believe that the Company will be in a position to take
advantage of economic opportunities as they are presented. Because the Company
currently does not have any restrictions on the reinvestment of funds,
stockholders assume the risk of such reinvestment and will not be entitled to an
immediate distribution of proceeds from the sale, refinancing or other
disposition of assets or repayment of Mortgage Loans or Mortgage Securities. The
Company may be dissolved upon approval of the Board of Directors and a majority
vote of the stockholders. Alternatively, stockholders may liquidate their
investments in the Company on the NYSE.
UNITHOLDERS RECEIVING SHARES OF COMMON STOCK AS A RESULT OF THE MERGER WILL
EXCHANGE A FINITE-LIFE INVESTMENT FOR AN INFINITE-LIFE INVESTMENT IN AN ENTITY
WITH THE FLEXIBILITY TO REINVEST ASSETS AND TAKE ADVANTAGE OF OPPORTUNITIES AS
THEY ARE PRESENTED.
BUSINESS
UNITHOLDERS. The Partnerships were organized to hold only a fixed and
unleveraged pool of assets for a limited time. The Partnerships currently hold a
portfolio of Mortgage Securities collateralized by first Mortgage Loans on
multifamily properties or pools of single-family mortgages which are guaranteed
as to the timely payment of principal and interest by either Ginnie Mae or
Fannie Mae and, in the case of Prep Fund 1, two participating first Mortgage
Loans on multifamily properties financed jointly with an affiliated
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mortgage fund and all of the equity interest in two limited partnerships owning
multifamily properties. The Partnerships also hold PREPs in the partnerships
that own the multifamily properties collateralizing such Mortgage Securities.
The Partnerships cannot raise additional capital through equity offerings or
assumption of debt.
STOCKHOLDERS. The Company will operate as a non-traditional financial
institution and its investments will consist of a growing and diversified
portfolio consisting primarily of adjustable-rate Mortgage Securities, Mortgage
Loans and other assets. The Company may also securitize Mortgage Loans. The
Company will leverage its assets to increase the size of its Mortgage Securities
and Mortgage Loans portfolio and generate income based on the difference between
the yield on its investments and the cost of its borrowings. Following the
Merger, the Company's portfolio of Mortgage Securities and Mortgage Loans will
be subject to additional risks not associated with the Partnerships' current
investment portfolios. The Company will make use of hedging transactions to
reduce the impact of certain adverse changes in interest rates on its net
interest income. Certain of the powers and limitations with respect to the
business operations conferred in the Partnership Agreements will not be
applicable to the business activities of the Company. The Company may be able to
take advantage of financing opportunities that may not be available to the
Partnerships. Additional capital may be raised through all available sources,
including additional equity financing, borrowing from banks, institutional
investors, public and private debt markets or other financing vehicles which
will be dependent upon the equity and debt market conditions, interest rates and
other factors including the Company's policy on limiting debt. Many of these
additional forms of financing also expose the Company to additional risks which
do not exist with respect to the Partnerships, including the risk of default and
foreclosure on any assets securing debt.
The Charter also permits the Company to engage in any lawful act or activity
for which corporations may be formed under the laws of the State of Maryland,
which includes any act or activity required to permit the Company to acquire and
own a diversified portfolio of Mortgage Securities and Mortgage Loans.
UNLIKE THE PARTNERSHIPS, THE COMPANY WILL LEVERAGE ITS ASSETS, INVEST
GENERALLY IN ADJUSTABLE-RATE MORTGAGE SECURITIES AND MORTGAGE LOANS AND SEEK TO
GENERATE INCOME BASED ON THE DIFFERENCE BETWEEN THE YIELD ON ITS INVESTMENTS AND
THE COST OF ITS BORROWINGS.
INVESTMENT AND FINANCING OBJECTIVES AND POLICIES
UNITHOLDERS. The Partnerships' principal business objectives are to provide
investors (i) safety and preservation of capital, (ii) regular cash
distributions and (iii) a potential for enhanced yield from participations in
the net cash flow and net capital appreciation from the financed properties
received under the terms of the PREPs. Pursuant to the Partnership Agreements,
the Partnerships may not use leverage to purchase investments, may not issue
additional equity to raise capital and may not reinvest proceeds from their
investments. The General Partners may not alter the investment policies and
objectives of the Partnerships.
STOCKHOLDERS. The investment objectives of the Company are to provide
distributions of income and the potential for capital appreciation as reflected
in the market price of the Common Stock, and to expand the capital and asset
base of the Company. The Company intends to continue its operations for an
indefinite period of time and is not precluded from raising new capital through
the issuance of equity securities, including senior securities with priority
over the Common Stock as to cash flow, distributions and liquidation proceeds,
or from reinvesting cash flow or sale or financing proceeds in Mortgage
Securities or Mortgage Loans, except to the extent such reinvestment precludes
the Company from satisfying the REIT distribution requirements. Except as
otherwise restricted, the Board of Directors has the power to modify or alter
the operating policies of the Company without the consent of the stockholders.
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UNLIKE THE PARTNERSHIPS, THE COMPANY WILL HAVE THE FLEXIBILITY TO TAKE
ADVANTAGE OF INVESTMENT AND FINANCING OPPORTUNITIES AS THEY ARISE. THE COMPANY
WILL BE POSITIONED TO EXTEND THE BUSINESS PLANS AND INVESTMENT METHODS AND
POLICIES OF THE PARTNERSHIPS, BUT WILL DO SO IN A MANNER INTENDED TO ENCOURAGE
GROWTH, INCREASE EARNINGS AND DISTRIBUTIONS AND ENHANCE THE VALUE OF
UNITHOLDERS' INVESTMENTS.
NATURE OF INVESTMENT
UNITHOLDERS. The Units constitute equity interests entitling each
Unitholder to his or her pro rata share of cash distributions made to
Unitholders. The Partnership Agreements specify how the cash available for
distribution is to be shared among the General Partners and the Unitholders. The
distributions payable to Unitholders are not fixed in amount and depend upon
each Partnership's operating results and sale, refinancing or mortgage payment
proceeds.
STOCKHOLDERS. The Common Stock will constitute equity interests in the
Company. Each stockholder will be entitled to its pro rata share of
distributions made with respect to the Common Stock and a greater opportunity
for capital appreciation than Unitholders. The distributions payable to
stockholders are not fixed in amount and are only paid when authorized by the
Board of Directors in accordance with applicable law. In order to qualify as a
REIT, the Company must distribute on an annual basis at least 95% of REIT
taxable income.
BOTH THE UNITS AND SHARES OF COMMON STOCK CONSTITUTE EQUITY INTERESTS
ENTITLING THE HOLDERS THEREOF TO PARTICIPATE IN THE DISTRIBUTIONS OF THE
PARTNERSHIPS AND THE COMPANY, RESPECTIVELY. DISTRIBUTIONS PAYABLE WITH RESPECT
TO THE UNITS AND SHARES OF COMMON STOCK DEPEND UPON THE PERFORMANCE OF THE
PARTNERSHIPS AND THE COMPANY, RESPECTIVELY.
BORROWING POLICIES
UNITHOLDERS. Pursuant to its Partnership Agreement, Prep Fund 1 may not
borrow money for any purpose. Prep Fund 2 and Pension Fund may not borrow money
for the acquisition of assets, although they are permitted to borrow funds for
working capital or to protect existing investments.
STOCKHOLDERS. The Company will employ a leveraging strategy to increase its
assets by borrowing against its Mortgage Securities and Mortgage Loans. By
leveraging its portfolio in this manner, the Company expects to maintain an
equity-to-assets ratio of 8% to 10%. If the ratio of the Company's equity-
to-total assets, measured on a historical cost basis, falls below 8%, then,
subject to the source of income limitations applicable to the Company as a REIT,
the Company will take action to increase its equity-to-assets ratio to 8% of
total assets or greater when measured on a historical cost basis through normal
portfolio amortization, sale of assets or other steps as necessary. The
Company's Mortgage Securities and Mortgage Loans will be financed primarily at
short-term borrowing rates through the utilization of reverse repurchase
agreements, borrowings under lines of credit and other secured or unsecured
financings.
UNITHOLDERS WHO BECOME STOCKHOLDERS WILL HAVE INVESTED IN AN ENTITY THAT MAY
INCUR DEBT IN THE ORDINARY COURSE OF BUSINESS. THE INCURRENCE OF SUBSTANTIAL
DEBT INCREASES THE RISK OF INVESTMENT.
EXPECTED DISTRIBUTIONS AND PAYMENTS
UNITHOLDERS. Prep Fund 1 currently pays a monthly distribution of $.0883
per Prep Fund 1 Unit (which, annualized, equals $1.06 per Prep Fund 1 Unit). For
the nine months ended September 30, 1997, 47% of the distributions of Prep Fund
1 were made out of the earnings and profits and the balance represented return
of capital. Prep Fund 2 currently pays a monthly distribution of $.1084 per Prep
Fund 2 BUC (which, annualized, equals $1.29 per Prep Fund 2 BUC). For the nine
months ended September 30, 1997, 35% of the distributions of Prep Fund 2 were
made out of the earnings and profits and the balance represented return of
capital. Pension Fund currently pays a monthly distribution of $.1073 per
Pension BUC (which, annualized, equals $1.30 per Pension BUC). For the nine
months ended September 30, 1997,
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40% of the distributions of Pension Fund were made out of the earnings and
profits and the balance represented return of capital.
STOCKHOLDERS. Following the Merger, the Company intends to distribute
substantially all of its taxable income (which generally does not equal net
income as calculated in accordance with GAAP) to stockholders as distributions.
The Company intends to declare distributions on its Common Stock quarterly. The
distribution policy is subject to revision by, and all distributions by the
Company will be made at the discretion of, the Board of Directors. The amount of
such distributions will be affected by a number of factors, including the
Company's actual cash available for distribution, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant.
In order to maintain its qualification as a REIT, the Company will be
required to make annual distributions to stockholders in an amount equal to at
least 95% of its taxable income (excluding net capital gains). In the event that
cash available for distribution is insufficient to meet these distribution
requirements, the Company could be required to borrow the amount of the
deficiency or sell assets to obtain the cash necessary to make the distribution
required to retain REIT status.
In addition to the payment of distributions out of taxable income, the
Merger Agreement provides that the Company will make the Cash Merger Payment,
which will be paid in four equal quarterly payments of $.2650 per share of
Common Stock during the first year following the Merger, to stockholders
entitled to receive distributions; provided, however, any distributions paid to
stockholders by the Company out of earnings during this first year will have the
effect of reducing the amount of the Cash Merger Payment so that the amount paid
to stockholders will still be, in the aggregate, equal to $1.06 per share. The
General Partners anticipate that the Company will fund the Cash Merger Payment,
to the extent it is required to be paid to stockholders during the first year
following the Merger, out of the proceeds from sales of Mortgage Securities and
Mortgage Loans, short-term borrowings or existing cash reserves.
WHILE THE PARTNERSHIPS CURRENTLY PAY DISTRIBUTIONS TO UNITHOLDERS OUT OF
THEIR EARNINGS AND AS A RETURN OF INVESTED CAPITAL, THE COMPANY'S POLICY WILL BE
GENERALLY TO REFRAIN FROM PAYING RETURN OF CAPITAL DISTRIBUTIONS TO STOCKHOLDERS
(EXCEPT FOR THE CASH MERGER PAYMENT), BUT INSTEAD TO DISTRIBUTE AS DISTRIBUTIONS
SUBSTANTIALLY ALL OF THE COMPANY'S TAXABLE INCOME. IN ADDITION, FOR THE FIRST
YEAR FOLLOWING THE MERGER, THE COMPANY'S POLICY, WHICH SHALL NOT CHANGE UNDER
ANY CIRCUMSTANCE, WILL BE TO PROVIDE STOCKHOLDERS WITH THE CASH MERGER PAYMENT,
WHICH WILL BE PAID IN FOUR EQUAL QUARTERLY PAYMENTS OF $.2650 PER SHARE OF
COMMON STOCK. THE GENERAL PARTNERS ANTICIPATE THAT THE COMPANY WILL FUND THE
CASH MERGER PAYMENT, TO THE EXTENT IT IS REQUIRED TO BE PAID TO STOCKHOLDERS
DURING THE FIRST YEAR FOLLOWING THE MERGER, OUT OF THE PROCEEDS FROM SALES OF
MORTGAGE SECURITIES AND MORTGAGE LOANS, SHORT-TERM BORROWINGS OR EXISTING CASH
RESERVES.
MANAGEMENT
UNITHOLDERS. The General Partner of each Partnership is authorized to
manage and control the business of such Partnership within the authority granted
by the respective Partnership Agreement. The General Partners may be removed by
a vote of a majority in interest of Unitholders in the respective Partnerships
but are not elected in regular elections. The Unitholders have no right to
engage or take part in the management of the business and affairs of the
Partnership other than voting on the sale of substantially all the assets,
liquidation, and other limited matters. See "--Voting Rights" below. The General
Partners have general liability for all partnership obligations, other than
those that are non-recourse. Under the Delaware Act and the Partnership
Agreements, each General Partner is accountable to the respective Partnership as
a fiduciary and consequently is required to exercise good faith and integrity in
all of its dealings with respect to partnership affairs. Each Partnership
Agreement provides that such Partnership will indemnify and hold harmless its
General Partner and the General Partner's affiliates for any loss or liability
(except for certain liabilities under the Securities Act, or, in the case of
Prep Fund 2 and Pension Fund, certain liabilities under federal or state
securities laws) incurred by the General Partner, its
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affiliates or the Partnerships by reason of any act performed or omitted to be
performed in connection with the business of the Partnership, except in the case
of fraud, bad faith, negligence, intentional misconduct (any misconduct in the
case of Prep Fund 1) or breach of fiduciary duty.
STOCKHOLDERS. The business and affairs of the Company will be managed under
the direction of a seven-member Board of Directors. The Company will contract
with the Advisor to manage its day-to-day affairs and to provide other services
to the Company. The Board of Directors will be divided into three classes, and
stockholders will vote annually on the election of one of the three classes. A
majority of the directors will be Independent Directors. Officers will serve at
the pleasure of the Board of Directors. Under the MGCL, the directors are
required to perform their duties in good faith, in a manner reasonably believed
to be in the best interests of the Company and with such care as an ordinarily
prudent person in a like position would use under similar circumstances. The
MGCL, the Charter and Bylaws include provisions that (i) limit the liability of
directors and officers of the Company to the Company and its stockholders for
money damages in most circumstances; (ii) in certain circumstances, obligate the
Company, to the maximum extent permitted by Maryland law, to indemnify and to
pay or reimburse reasonable expenses to a director or officer of the Company in
advance of final disposition of a proceeding to which he is made a party by
reason of his service in that capacity or, at the request of the Company, in
that capacity with another entity; and (iii) require the Company to indemnify a
director or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity. The Company intends to take full advantage of those provisions
and enter into agreements with the Company's directors and officers,
indemnifying them to the fullest extent permitted by Maryland law. Any member of
the Board of Directors, or the entire Board of Directors, may be removed only
for cause and then only by the affirmative vote of at least 80% of the votes
entitled to be cast in the election of directors.
FOLLOWING THE MERGER, STOCKHOLDERS WILL VOTE ANNUALLY ON THE ELECTION OF
DIRECTORS, WHILE UNITHOLDERS DO NOT VOTE ANNUALLY ON THE ELECTION OF THE GENERAL
PARTNERS. THE ADVISOR WILL MANAGE THE DAY-TO-DAY OPERATIONS OF THE COMPANY. THE
RIGHTS OF STOCKHOLDERS AGAINST MANAGEMENT OF THE COMPANY IN CERTAIN
CIRCUMSTANCES ARE MORE LIMITED THAN THE RIGHTS OF UNITHOLDERS AGAINST THE
GENERAL PARTNERS.
FEES AND EXPENSES
UNITHOLDERS. The Partnerships reimburse the General Partners for costs and
expenses incurred in connection with the operation of the Partnerships
including, among other things, reimbursable salaries and benefits, investor
services and custodial fees, professional fees and expenses, insurance
registration fees, report preparation and distribution, consulting and travel
expenses, telephone expenses and other expenses.
In addition, the General Partners are entitled to administrative fees
payable by the Partnerships to the extent not paid by the owners of the
underlying properties in an amount equal to .35% per annum of the outstanding
principal amount of investments. For the calendar years 1994, 1995, 1996 and the
nine months ended September 30, 1997, the Partnerships paid administrative fees
to the General Partners totalling $259,101, $288,278, $258,443 and $192,493,
respectively, and property owners paid administrative fees to the General
Partners totalling $57,879, $41,593, $81,482 and $29,997, respectively. In
addition, the General Partner of Prep Fund 1 received administrative fees of
$88,780 during 1997 in conjunction with the repayment of the Jackson Park Place
Participating Loan.
General Partners or their affiliates may also be entitled to property
management fees in the event a Partnership takes over active management of a
property. For the calendar years 1994, 1995, 1996 and the nine months ended
September 30, 1997, property owners paid property management fees to an
affiliate of the General Partners of $133,862, $267,702, $314,246, and $264,352,
respectively.
STOCKHOLDERS. The Company shall pay all of its expenses including the cost
of equipment and shall reimburse the Advisor for documented expenses of the
Advisor incurred on its behalf. Notwithstanding the
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foregoing, the Advisor shall be responsible for paying compensation of the
Company's officers and other personnel required for the Company's day-to-day
operations. For the first full fiscal year following the Merger, it is
anticipated that the operating expenses of the Company, including rent and other
overhead expenses but excluding salaries and benefits expected to be paid to the
Company's directors, executive officers and employees by the Advisor will amount
to approximately $2,127,000.
The Advisor will receive a per annum base management fee payable monthly in
arrears in an amount equal to 1.1% of the first $300 million of the
Stockholders' Equity, plus .80% of the portion of the Stockholders' Equity of
the Company above $300 million. The Company will also pay the Advisor, as
incentive compensation for each fiscal quarter, an amount equal to 20% of the
dollar amount by which the annualized Return on Equity of the Company for such
fiscal quarter exceeds the amount necessary to provide an annualized Return on
Equity equal to the Ten-Year U.S. Treasury Rate plus 1%. The Advisor shall
reserve a portion of any incentive compensation paid by the Company for
distributions as bonuses to its employees in amounts to be determined by its
board of directors.
FOLLOWING THE MERGER, THE COMPANY WILL OPERATE MORE EFFICIENTLY THAN THE
PARTNERSHIPS. THE GENERAL PARTNERS CONSIDER A COMPARISON OF THE EFFICIENCY RATIO
(I.E., OPERATIONAL EXPENSES DIVIDED BY THE SUM OF NET INTEREST INCOME PLUS
NON-INTEREST INCOME) OF THE COMPANY, WHICH MEASURES THE COST INCURRED TO PRODUCE
EARNINGS FOR A GIVEN PERIOD, TO THAT OF THE PARTNERSHIPS ON A COMBINED BASIS TO
BE AN APPROPRIATE MEANS OF ASSESSING THE RELATIVE OPERATIONAL EFFICIENCIES OF
THE COMPANY AND THE PARTNERSHIPS. PRIMARILY AS A RESULT OF THE INCREASED
EARNINGS EXPECTED TO BE GENERATED BY THE COMPANY AS COMPARED TO THE PARTNERSHIPS
ON A COMBINED BASIS, THE REALIGNMENT OF THE COMPANY'S PORTFOLIO IN ACCORDANCE
WITH ITS BUSINESS PLAN AND THE CHANGES RELATING TO THE PAYMENT OF COMPENSATION
AND EXPENSE REIMBURSEMENTS UNDER THE ADVISORY AGREEMENT AS COMPARED TO THE
PAYMENT OF COMPENSATION AND EXPENSE REIMBURSEMENTS UNDER THE PARTNERSHIP
AGREEMENTS, THE EFFICIENCY RATIO OF THE COMPANY IS EXPECTED TO BE 18.9% FOR THE
SECOND YEAR OF OPERATIONS FOLLOWING THE CLOSING OF THE MERGER AS COMPARED TO THE
EFFICIENCY RATIO OF THE PARTNERSHIPS ON A COMBINED BASIS OF 24.2%, 20.7% AND
18.1% FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, RESPECTIVELY.
POTENTIAL DILUTION
UNITHOLDERS. The Partnerships are not authorized to issue additional equity
securities.
STOCKHOLDERS. The Charter provides that the Company may issue up to 500
million shares of capital stock, par value $0.01 per share, with 375 million
being designated as Common Stock and 125 million of such shares being designated
as Excess Stock. The Board of Directors will be authorized (i) to classify and
reclassify any unissued shares of any series of capital stock; (ii) to provide
for the issuance of shares in other classes or series; (iii) to establish the
number of shares in each class or series; and (iv) to fix the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms and conditions of redemption of such
class or series. The issuance of such additional shares may result in the
dilution of the relative voting power of each share of Common Stock issued in
connection with the Merger.
UNLIKE THE PARTNERSHIPS, THE BOARD OF DIRECTORS WILL BE AUTHORIZED TO ISSUE
ADDITIONAL EQUITY SECURITIES FOLLOWING THE MERGER.
POTENTIAL DILUTION OF PAYMENT RIGHTS
UNITHOLDERS. Since the Partnerships are not authorized to issue additional
equity securities, there can be no dilution of distributions to Unitholders.
STOCKHOLDERS. The Board of Directors will be authorized to issue additional
shares of Common Stock or preferred stock, beyond the shares to be issued upon
completion of the Merger. The issuance of such additional shares may result in
the dilution of the interests of the stockholders in distributions of the
Company.
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UNLIKE THE PARTNERSHIPS, THE BOARD OF DIRECTORS WILL BE AUTHORIZED TO ISSUE
ADDITIONAL EQUITY SECURITIES WHICH MAY DILUTE THE PAYMENT RIGHTS OF
STOCKHOLDERS.
POTENTIAL REDEMPTION OR REPURCHASE
UNITHOLDERS. The General Partners of the Partnerships may set aside funds
in the Partnership's reserve account in order to repurchase Units in open market
transactions, provided that Units so purchase are retired.
STOCKHOLDERS. The Board of Directors may, at its sole discretion, determine
to repurchase shares from time to time out of surplus funds, if any, to further
the business objectives of the Company.
THE PARTNERSHIPS MAY REPURCHASE THEIR RESPECTIVE UNITS IN OPEN MARKET
TRANSACTIONS. THE COMPANY WILL BE ABLE TO REPURCHASE SHARES OF COMMON STOCK TO
FURTHER THE BUSINESS OBJECTIVES OF THE COMPANY.
LIQUIDITY AND TRANSFERABILITY
UNITHOLDERS. Prep Fund 1 Units are currently included for quotation on the
NASDAQ and the Prep Fund 2 BUCs are listed on the AMEX. The Pension BUCs are not
currently traded, although limited transfers of such Units are effected from
time to time through an informal secondary market. The Units are freely
transferable, except that pursuant to the Partnership Agreements (i) transfers
must be recorded on the books of the respective Partnership and the Partnerships
may require presentation of evidence of transfers (in the case of Pension Fund,
a transfer requires presentation of a properly executed transfer application
certificate), (ii) the General Partners may defer any transfers that would cause
more than 45% of the Units of the respective partnership to be transferred
within the previous 12 months in order to preserve the status of the
Partnerships for federal income purposes, and (iii) the General Partner of
Pension Fund may impose further restrictions on the transfer of Pension BUCs in
order to prevent Pension Fund from being classified as a "publicly traded
partnership" for purposes of federal income taxation. Additionally, the
securities laws of some states create investor suitability requirements which
potential transferees must satisfy.
STOCKHOLDERS. The shares of Common Stock will be listed on the NYSE and
will be freely tradeable. For the Company to qualify as a REIT under the Code,
during the last half of a taxable year, not more than 50% of its outstanding
Common Stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) and the Common Stock must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year.
FOLLOWING THE MERGER, THE LISTING OF THE SHARES OF COMMON STOCK ON THE NYSE
AND THE COMPANY'S LARGER EQUITY MARKET CAPITALIZATION AND GROWTH STRATEGY SHOULD
ENHANCE THE LIQUIDITY OF THE SHARES OF COMMON STOCK HELD BY UNITHOLDERS IN ALL
OF THE PARTNERSHIPS AND IN PARTICULAR FOR HOLDERS OF PENSION BUCS.
ANTI-TAKEOVER PROVISIONS
UNITHOLDERS. The Partnership Agreements contain the following provisions
which could have the effect of delaying, deferring or preventing a transaction
or a change in control of the Partnerships that might involve a premium price
for Units or otherwise be in the best interest of Unitholders: (i) the General
Partners are not regularly elected by, and can only be removed upon the vote of
a majority in interest of, Unitholders; and (ii) while the Units are generally
freely transferable, they are subject to certain restrictions. See "--Liquidity
and Transferability" above.
STOCKHOLDERS. The Charter and Bylaws contain the following provisions which
could have the effect of delaying, deferring or preventing a transaction or a
change of control of the Company that might involve a premium price for shares
or otherwise be in the best interest of stockholders: (i) the Ownership Limit;
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(ii) a staggered Board of Directors; (iii) removal of directors only for cause
and upon vote of 80% of capital stock entitled to vote in director elections;
(iv) authorization of Board of Directors to classify and reclassify any
authorized but unissued capital stock; and (v) a vote of 80% of the capital
stock entitled to vote in director elections to amend the Bylaws and certain
provisions of the Charter. Furthermore, the "business combinations" and "control
share" provisions of the MGCL could have similar effects.
CERTAIN PROVISIONS OF THE ORGANIZATIONAL DOCUMENTS OF THE PARTNERSHIPS AND
THE COMPANY COULD BE USED TO DETER ATTEMPTS TO OBTAIN CONTROL OF THE
PARTNERSHIPS AND THE COMPANY IN TRANSACTIONS NOT APPROVED BY THE GENERAL
PARTNERS AND THE BOARD OF DIRECTORS, RESPECTIVELY. THE CHARTER AND BYLAWS WILL
ALSO CONTAIN CERTAIN PROVISIONS NECESSARY TO ENSURE CONTINUED REIT STATUS.
PROVISIONS OF THE MGCL MAY HAVE SIMILAR EFFECTS.
TAXATION OF TAXABLE INVESTORS
UNITHOLDERS. The Partnerships are treated as partnerships for federal
income tax purposes. Partnerships are not subject to tax, but the Unitholders
report their allocable share of partnership income and loss on their respective
tax returns. Unitholders are taxed on income or loss allocated to them whether
or not cash distributions are made to the Unitholders. Generally, interest
income, as well as market discount and original issue discount income, if any,
from the Partnerships are portfolio income and income or loss arising from
equity investments (such as PREPs) are "passive" income to the Unitholders.
Generally, any passive income allocated to Unitholders may offset "passive"
losses from their other investments. Generally, passive losses allocated to
Unitholders may not be used to offset portfolio income. Generally, by March or
April of each year, Unitholders receive annual Schedule K-1 forms with respect
to information for inclusion on their federal income tax returns.
STOCKHOLDERS. As a corporation qualifying as a REIT, the Company generally
can deduct distributions to stockholders, which effectively eliminates the
"double taxation" that results when a corporation earns income and distributes
distributions to stockholders. Distributions received by stockholders generally
will constitute portfolio income, which cannot be offset by "passive" losses.
Distributions may, in certain circumstances, constitute a larger portion of
taxable income than in the case of the Partnerships, primarily because the
taxable portion of a REIT distribution is computed under less favorable
depreciation rules than those applicable to partnership deductions. To the
extent the Company has net income (after taking into account the deduction for
distributions paid), such income will be taxed at the Company level at standard
corporate tax rates. Each January, stockholders will be mailed the less complex
Form 1099-DIV for corporate distributions. Stockholders will pay federal, state
and local income tax, if any, on distributions from the Company.
WHILE UNITHOLDERS RECEIVE COMPLEX SCHEDULE K-1 FORMS AND MUST REPORT THEIR
ALLOCABLE SHARE OF PARTNERSHIP INCOME OR LOSS ON THEIR INDIVIDUAL TAX RETURNS
WHETHER OR NOT DISTRIBUTIONS ARE MADE TO THEM, STOCKHOLDERS WILL RECEIVE SIMPLE
1099-DIV FORMS AND WILL PAY TAXES ONLY ON DISTRIBUTIONS FROM THE COMPANY. AS A
REIT UNDER THE CODE, THE COMPANY CAN DEDUCT DISTRIBUTIONS TO STOCKHOLDERS, THUS
ELIMINATING "DOUBLE TAXATION."
VOTING RIGHTS
UNITHOLDERS. The Unitholders are entitled to vote only as provided under
the Delaware Act and the Partnership Agreements. The Unitholders, by vote of a
majority in interest thereof, are required to (i) amend the Partnership
Agreement; (ii) approve or disapprove the sale or other disposition of 75% or
more of the assets of the Partnership; (iii) dissolve the Partnership; or (iv)
remove and replace the General Partner.
Under the Delaware Act and the Partnership Agreements, decisions relating to
the operation and management of the Partnership are made by the General Partner.
If a limited partner were granted additional voting rights, the possibility
exists under the Code that the partnership structure and the terms of the
Partnership Agreement would be disregarded. In such event, the Partnership may
be taxed as an association and thus would be subject to "double taxation"
similar to a corporation.
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STOCKHOLDERS. The holders of the Common Stock will be entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders, subject to the provisions of the Charter regarding the restriction
on transfer of stock to ensure the continued qualification of the Company as a
REIT under the Code. Stockholders of a Maryland corporation are generally
entitled to vote on any material transactions or actions relating to such
corporation (as advised by the board of directors of such corporation), and such
transactions or actions may not be consummated without the approval of the
requisite number of stockholders. These instances include: (i) the right to
elect the board of directors and thus participate in the management of the
corporation; (ii) the right to amend the corporation's charter and Bylaws; (iii)
the determination to dissolve the corporation; (iv) the determination to merge
the corporation with or into another entity; (v) the determination to approve or
disapprove the sale of all or substantially all of the corporation's assets; and
(vi) any other matters which are properly brought before the stockholders.
Maryland corporations are also generally required to hold annual meetings which
allow stockholders to vote for directors. No cumulative voting rights for the
election of directors will attach to the shares of Common Stock.
FOLLOWING THE MERGER, STOCKHOLDERS OF THE COMPANY WILL ENJOY GREATER VOTING
RIGHTS THAN UNITHOLDERS OF THE PARTNERSHIPS, INCLUDING THE RIGHT TO VOTE
ANNUALLY ON THE ELECTION OF THE BOARD OF DIRECTORS WHILE UNITHOLDERS DO NOT VOTE
ANNUALLY ON THE ELECTION OF GENERAL PARTNERS.
MEETINGS
UNITHOLDERS. Meetings of a Partnership may be called by its General
Partner, and are required to be called upon written request of Unitholders
holding more than 10% of the then outstanding Units of the relevant Partnership.
There are no regular meeting dates. Each Unitholder may authorize any person or
persons to act for him by proxy in all matters as to which such Unitholder is
entitled to vote.
STOCKHOLDERS. The Company will hold annual meetings for holders of Common
Stock, among other things, for the election of directors. A special meeting of
holders of Common Stock will be called upon the written request of the holders
of 50% of the outstanding shares of Common Stock and may be called by a majority
of the Board of Directors. The holders of a majority of the outstanding shares
of Common Stock present in person or by proxy will constitute a quorum at any
annual or special meeting of holders of Common Stock. At any meeting of such
holders, any holder entitled to vote thereat may vote by proxy.
FOLLOWING THE MERGER, MEETINGS OF STOCKHOLDERS ARE EXPECTED TO BE HELD
ANNUALLY, OR AT OTHER TIMES UPON THE OCCURRENCE OF CERTAIN EVENTS. THE
PARTNERSHIP AGREEMENTS DO NOT REQUIRE ANNUAL MEETINGS OF UNITHOLDERS, ALTHOUGH
OTHER MEETINGS CAN BE HELD IN CERTAIN LIMITED CIRCUMSTANCES.
RIGHT TO INSPECT BOOKS AND RECORDS
UNITHOLDERS. The Partnership Agreements require each Partnership to make
its books and records, including a list of the names and addresses of
Unitholders, available to Unitholders and authorize any Unitholder, or his duly
authorized representative, to copy and examine the books and records of the
Partnership at its principal office during ordinary business hours, upon
reasonable request and at the expense of the Unitholder. Unitholders may also
receive copies of such documents upon written request. Each Unitholder has the
right under the Delaware Act to obtain a current list of the names and last
known business, residence or mailing address of each partner upon reasonable
demand for any purpose reasonably related to the Unitholder's interest in the
Partnership, subject to such reasonable standards as are set forth in the
Partnership Agreements.
STOCKHOLDERS. The Company will be required to keep complete and accurate
books with respect to its business at its principal executive office. The books
will be maintained for financial accounting purposes on the accrual basis, in
accordance with GAAP. Stockholders will be entitled to have access to the
Bylaws, minutes of the proceedings of stockholders' meetings, annual statements
of affairs of the Company and voting trust agreements filed with the Company at
reasonable times upon reasonable notice to the
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Company, subject to certain limitations, including those intended to protect
confidential business information. Each stockholder has the right under the MGCL
to obtain, upon written request, a statement showing all stock and securities
issued by the Company during a specified period of not more than the preceding
12 months. In addition, each stockholder or group of stockholders who have owned
5% or more of the outstanding stock of any class of capital stock for at least
six months shall have, upon written request and for a proper purpose reasonably
related to that stockholder's interest as a stockholder in the Company, the
right to have access to the books, records and stock ledger of the Company.
THE INSPECTION RIGHTS OF STOCKHOLDERS ARE SIMILAR TO THE INSPECTION RIGHTS
OF UNITHOLDERS. ALSO, THE RIGHTS OF HOLDERS OF COMMON STOCK OF THE COMPANY TO
OBTAIN LISTS OF STOCKHOLDERS ARE SUBSTANTIALLY SIMILAR TO THE RIGHTS OF
UNITHOLDERS TO OBTAIN LISTS OF UNITHOLDERS.
REPORTS
UNITHOLDERS. The Partnerships furnish each Unitholder with information
required to be set forth in the Unitholder's individual federal income tax
return no later than March or April of each year on complex Schedule K-1 forms.
Within 120 days after the end of each fiscal year, each Partnership also
furnishes the Unitholders with a report that contains financial statements of
such Partnership (prepared in accordance with GAAP) rendered by independent
certified public accountants, including a detailed statement of (i) all
transactions with its General Partner and its affiliates, and (ii) fees,
commissions, compensation and other benefits paid or accrued to its General
Partner and its affiliates for such year, showing the amount paid or accrued to
each recipient and the services performed. Also, within 60 days after the end of
each of the first three quarters of each year, each Partnership furnishes the
Unitholders with an unaudited report for such quarter (prepared in accordance
with GAAP) which includes a balance sheet, statement of income, changes in
partners' capital, changes in financial condition, statement of cash available
for distribution and a report of the activities of the respective Partnership
during such quarter.
STOCKHOLDERS. The rights of Company stockholders to receive reports on the
Company will be substantially similar to the rights of Unitholders to receive
reports regarding the Partnerships. The Company will furnish to each
stockholder, within 120 days after the close of each fiscal year, reports
containing certain financial statements of the Company for such fiscal year,
including a balance sheet and statements of operations and cash flow, which will
be audited by a nationally recognized firm of independent certified public
accountants. The Company will also provide stockholders with unaudited quarterly
reports. In addition, the Company will mail stockholders distribution
information on Form 1099-DIV in January of each year.
THE RIGHTS OF STOCKHOLDERS AND UNITHOLDERS TO RECEIVE REPORTS ARE
SUBSTANTIALLY THE SAME.
LIABILITIES
UNITHOLDERS. Under the Delaware Act, a limited partner of a limited
partnership is not liable for the obligations of the partnership unless he is
deemed to be participating in the control of the business of such partnership,
in which event he may be liable to persons who transact business with such
partnership reasonably believing, based upon such limited partner's conduct,
that such limited partner is a general partner of the partnership. Under the
amended Delaware Act, a limited partner is not liable for a return of his
contribution unless such return constitutes a wrongful distribution. Generally,
under the amended Delaware Act, a limited partner who knowingly receives a
wrongful distribution is liable to the partnership for the amount of the
distribution for a period of three years from the date of the distribution.
STOCKHOLDERS. As stockholders of a Maryland corporation, Unitholders that
receive shares of Common Stock of the Company in the Merger will not be subject
to any personal liability (as stockholders) for the acts or obligations of the
Company.
UNDER LIMITED CIRCUMSTANCES, UNITHOLDERS FACE THE POSSIBILITY OF PERSONAL
LIABILITY FOR WRONGFUL RETURN TO THEM OF THEIR CAPITAL CONTRIBUTIONS, WHILE
STOCKHOLDERS DO NOT FACE SIMILAR PERSONAL LIABILITIES AS HOLDERS OF SECURITIES
IN THE COMPANY.
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FIDUCIARY RESPONSIBILITIES AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the MGCL, each director of the Company will be required to perform his
duties as a director in good faith, in a manner he believes to be in the best
interests of the Company and with the care that an ordinary prudent person in a
like position would use under similar circumstances. Acts or omissions of a
director not amounting to a violation of this statutory standard may not be the
basis for imposition of any liability of the director, either for legal or
equitable relief. Under the Delaware Act, the General Partners are accountable
to the Partnerships and the Unitholders as fiduciaries and consequently must
exercise good faith and integrity in handling affairs of the Partnerships.
Unitholders who have questions concerning the duties of the directors and
officers with respect to the Company or the duties of the General Partners with
respect to any of the Partnerships should consult their counsel.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter will
contain such a provision which eliminates such liability to the maximum extent
permitted by the MGCL.
The Charter (i) will require the Company, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to its directors and officers,
whether serving the Company, or at its request, any other entity and (ii) will
authorize, to the maximum extent permitted by Maryland law, to permit itself to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to other employees and agents, whether serving the
Company, or at its request, any other entity.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter will not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was 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. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation, or in a
suit claiming improper benefit, except for expenses ordered by a court. In
addition, the MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the corporation as authorized by the
Bylaws and (b) a written statement by or on his behalf to repay the amount paid
or reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met. To the extent that the foregoing provisions
concerning indemnification apply to actions arising under the Securities Act,
the Company has been advised that, in the opinion of the Commission, such
provisions are contrary to public policy and therefore are not enforceable.
By comparison, each Partnership Agreement provides that such Partnership
will indemnify and hold harmless its General Partner and the General Partner's
affiliates for any loss or liability (except for certain liabilities under the
Securities Act, or, in the case of Prep Fund 2 and Pension Fund, certain
liabilities under federal or state securities laws) incurred by the General
Partner, its affiliates or the Partnerships by reason of any act performed or
omitted to be performed in connection with the business of the
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Partnership, except in the case of fraud, bad faith, negligence, intentional
misconduct (any misconduct in the case of Prep Fund 1) or breach of fiduciary
duty.
The rights of stockholders against management of the Company in certain
circumstances are more limited than the rights of Unitholders against the
General Partners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY
The following table contains information concerning the ownership of Common
Stock by each person known to the General Partners that is expected to be a
beneficial owner of more than 5% of Common Stock upon completion of the Merger,
as well as the anticipated ownership of Common Stock by each of the Company's
directors, by each of the Company's executive officers and by directors and
executive officers as a group. Directors are designated by an asterisk.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ------------------------------------------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Michael B. Yanney(2)..................................................... 47,675(3) *
Stewart Zimmerman........................................................ 2,462(3) *
Gary Thompson............................................................ 4,973(3) *
William S. Gorin......................................................... -- *
Ronald A. Freydberg...................................................... -- *
Michael L. Dahir(2)...................................................... -- *
George V. Janzen(2)...................................................... -- *
George H. Krauss(2)...................................................... 7,703(3) *
Gregor Medinger(2)....................................................... -- *
W. David Scott(2)........................................................ -- *
All directors and executive officers as a group (10 persons)............. 62,813 *
</TABLE>
- ------------------------
*Less than 1%.
(1) For purposes of this table, a person is deemed to be a beneficial owner of
shares of Common Stock if that person has the right to acquire such shares
within 60 days of consummation of the Merger by the exercise of any stock
option or any other right to convert or exchange outstanding securities.
Units and stock options held by a person are deemed to have been exchanged
or exercised for the purpose of computing the percentage of outstanding
shares of Common Stock beneficially owned by such person, but shall not be
deemed to have been exchanged or exercised for the purpose of computing the
percentage of outstanding shares of Common Stock beneficially owed by any
other person. Additionally, for purposes of this table, a person or entity
shall be deemed to be a beneficial owner of shares of Common Stock if such
person or entity has or shares either investment or voting power with
respect to such shares.
(2) Director of the Company.
(3) Shares of Common Stock are owned of record by America First. Messrs. Yanney,
Zimmerman, Thompson and Krauss own a 52.61%, 2.72%, 5.49% and 8.50% interest
in American First, respectively.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion describes the material federal income tax
considerations to the Unitholders and the Company of the transactions
contemplated in this Consent Solicitation Statement/Prospectus. This discussion
is based upon the Code, applicable income tax regulations under the Code as such
regulations
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may be amended from time to time (including temporary regulations) ("Treasury
Regulations") judicial authority, and administrative rulings and practice, all
as of the date of this Consent Solicitation Statement/ Prospectus. There can be
no assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements or
conclusions set forth herein. Any such changes could have an adverse impact on
the tax consequences of the Merger and/or an investment in the Company. The
income tax consequences of the transactions contemplated herein and of an
investment in the Company may not be the same for all Unitholders. This
discussion focuses on Unitholders who are individual citizens or residents of
the United States and further briefly summarizes issues which may affect certain
Unitholders which are tax-exempt investors. In addition, no representations are
made as to state or local tax consequences resulting from the transactions
contemplated herein or an investment in the Company. ACCORDINGLY, THIS
DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND
UNITHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THEIR
PARTICULAR CIRCUMSTANCES IN RELATION TO THE TAX CONSIDERATIONS DESCRIBED HEREIN.
OPINIONS OF COUNSEL
Rogers & Wells LLP, counsel to the Company, has rendered its opinion,
subject to various assumptions and conditioned upon certain representations as
to factual matters as set forth herein, that (i) commencing with its taxable
year ending December 31, 1998, the Company will be organized in conformity with
the requirements for qualification and taxation as a REIT under the Code and
that the proposed method of operation of the Company will permit it to so
qualify, (ii) the Merger will be treated as a transfer of assets by Prep Fund 1
and Prep Fund 2 and a transfer of Units by Pension Fund Unitholders which do not
elect the Retention Option for Common Stock qualifying for treatment under
Section 351 of the Code, followed by a tax-free distribution of such Common
Stock by Prep Fund 1 and Prep Fund 2 to their Unitholders, and (iii) the
discussion that follows fairly summarizes the material federal income tax
considerations associated with the Merger and the operation of the Company. It
should be noted that some of the tax consequences of the contemplated
transactions are subject to various interpretations. Unlike a tax ruling, an
opinion of counsel is not binding on the IRS or any court, and no assurance can
be given that the IRS will not challenge the status of the Company as a REIT for
federal income tax purposes or any of the other views expressed in this
discussion. The opinion of Rogers & Wells LLP will be based on representations
of the General Partners as to the current composition and value of the
Partnerships' assets. Such opinion will also be based upon a conclusion that the
Merger will not be treated as a transfer to an investment company under Section
351(e) of the Code. However, neither the courts nor the IRS has ruled on the
application of Section 351(e) in connection with an exchange of partnership
units for shares or a transaction similar to the Merger. Accordingly, there can
be no assurance that the IRS will agree with the conclusions of Rogers & Wells
LLP. With respect to the opinion of Rogers & Wells LLP relating to the
qualification of the Company as a REIT, it should be noted that the Company's
continued qualification as a REIT in current and future taxable years will
depend upon whether the Company meets and continues to meet the various
qualification tests imposed under the Code (discussed below). Rogers & Wells LLP
will not review compliance with these tests on a periodic or continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operations for the current or future taxable years will satisfy such
requirements. See "-- Requirements for Qualification as a REIT -- Failure to
Qualify."
CERTAIN TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND COMMON STOCK
Unitholders are treated as limited partners of the Partnerships for federal
income tax purposes. The Partnerships are not subject to federal income
taxation, and instead each Unitholder is required to take into account his or
her share of the income or loss of such Partnership, regardless of whether any
cash is distributed. Upon consummation of the Merger, the Unitholders (other
than those Unitholders in Pension Fund which elect the Retention Option) will
receive Common Stock in exchange for their interests in such
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Partnership. See "COMPARATIVE RIGHTS AND OBLIGATIONS OF UNITHOLDERS AND
STOCKHOLDERS."
A REIT is generally not subject to tax on income which it timely distributes
to its stockholders. However, the ownership of Common Stock pursuant to the
Merger will affect the character and amount of income reportable by a Unitholder
in the future. Currently, as the owners of Units in a Partnership, Unitholders
must take into account their distributive shares of all income, loss and
separately stated Partnership items, regardless of the amount of any
distributions of cash to such Unitholders. Such information is supplied to each
Unitholder annually on a Schedule K-1. The character of the income recognized by
Unitholders is dependent upon the assets and activities of the Partnership and
may, in some circumstances, be treated as passive income.
In contrast to the treatment of Unitholders, stockholders of the Company
will be taxed based on the amount of distributions received from the Company.
Each stockholder will receive a Form 1099-DIV reporting the amount of taxable
and nontaxable distributions paid to him or her during the preceding year. The
taxable portion of such distributions depends on the amount of the Company's
earnings and profits. The character of income to stockholders is not dependent
on its character to the Company and is generally ordinary dividend income to the
stockholders. In addition, such income is classified as portfolio income under
the passive loss rules, except with respect to capital gains dividends,
discussed below. Furthermore, should the Company incur a taxable loss, such loss
will not be passed through to the stockholders. Certain other differences
attributable to the Company's status as a REIT are discussed below. See "--
Treatment of the Company as a REIT" and "-- Taxation of the Company's
Stockholders -- Taxation of Taxable Domestic Stockholders."
TAX TREATMENT OF THE MERGER FOR PARTNERSHIPS AND UNITHOLDERS
OVERVIEW. The Merger will be effected as described herein under "TERMS OF
THE MERGER." Section 351 of the Code provides that no gain or loss is recognized
if property is transferred by one or more persons to a corporation solely in
exchange for stock of such corporation and immediately after such exchange the
transferors own at least 80% of the corporation's voting stock and 80% of all
other classes of the corporation's stock. When a transaction involves more than
one transferor of property pursuant to a single integrated transaction, the
transaction can qualify under Section 351 if the transferors as a group satisfy
the 80% control test immediately after the exchange.
The Merger should be treated as a transfer of assets by Prep Fund 1 and Prep
Fund 2 and a transfer of Units by Pension Fund Unitholders which do not elect
the Retention Option for Common Stock qualifying for treatment under Section 351
of the Code, followed by a tax-free distribution of such Common Stock by Prep
Fund 1 and Prep Fund 2 to their Unitholders.
TAX CONSEQUENCES OF MERGER. Assuming that the Merger qualifies as a
tax-free exchange under Section 351, Prep Fund 1 and Prep Fund 2 (and therefore
the Unitholders of Prep Fund 1 and Prep Fund 2) and the Unitholders of Pension
Fund which do not elect the Retention Option should not recognize gain or loss
upon the transfer of assets or Units to the Company for Common Stock, except to
the extent a Partnership or Pension Fund Unitholder receives cash in lieu of
fractional shares. A Partnership or Pension Fund Unitholder who receives cash in
lieu of fractional shares will recognize gain (but not loss) equal to the lesser
of (i) the amount of cash proceeds received and (ii) the difference between (a)
the sum of the fair market value of the Common Stock and cash proceeds received
plus the amount of such transferor's liabilities assumed or taken subject to by
the Company and (b) the adjusted tax basis of the assets or Units surrendered.
Any such gain should be treated as capital gain. Any gain recognized by Prep
Fund 1 or Prep Fund 2 should be allocated among their Unitholders in connection
with the terms of their respective Partnership Agreements.
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For tax purposes, the Common Stock deemed to be received by Prep Fund 1 and
Prep Fund 2 should be deemed to be distributed by such Partnerships to their
Unitholders with the tax consequences described below in "-- Liquidation and
Termination of Partnerships."
The tax basis of shares of Company Common Stock received by a Pension Fund
Unitholder which did not elect the Retention Option should equal such
Unitholder's basis in the Units transferred after adjustment for the operations
of Pension Fund during the taxable year of the Merger decreased by the amount of
cash received by such Unitholder and such Unitholder's share of the liabilities
of Pension Fund and increased by the amount of gain, if any, recognized by such
Unitholder pursuant to the Merger. The holding period of a Pension Fund
Unitholder which does not elect the Retention Option in the Common Stock should
generally include the period such Unitholder held its Units.
A Unitholder's suspended passive losses under Section 469 of the Code, if
any, should be available to utilize against gain, if any, attributable to a
passive activity of the Partnership recognized pursuant to the Merger. Any
passive losses not so utilized generally should not be available until the
Unitholder disposes of his entire interest in the Company.
CASH MERGER PAYMENT. The stockholders will receive a Cash Merger Payment of
$1.06 per share payable in four equal quarterly installments. The amount of such
Cash Merger Payment will be reduced by any distributions by the Company out of
earnings and profits. To the extent that the Company has earnings and profits
during the first year following the Merger equal to the amount of the Cash
Merger Payment, the Cash Merger Payment should be taxed to stockholders of the
Company as described below in "--Taxation of the Company's Stockholders." If,
however, the earnings and profits during the first year following the Merger are
less than the amount of the Cash Merger Payment, the tax treatment of such
excess amount is unclear. Because the Cash Merger Payment is made to the
stockholders of record at the applicable quarterly record date, the Company
believes such excess amounts should be treated as regular distributions.
However, a risk exists that any Cash Merger Payment distributions in excess of
the Company's earnings and profits for the initial year following the Merger
would be treated as contingent "boot" in a transaction otherwise qualifying for
treatment under Section 351 of the Code. In such case, stockholders would
recognize their share of gain, if any, realized on the formation of the Company
(including the liquidation of Prep Fund 1 and Prep Fund 2) to the extent the
amount of the Cash Merger Payment received exceeds their proportionate share of
the Company's earnings and profits for the year. The characterization of such
gain would depend upon the character of the assets transferred and whether the
partnership interests were held as capital assets.
LIQUIDATION AND TERMINATION OF PARTNERSHIPS. Upon the deemed receipt of
Common Stock pursuant to the Merger, Prep Fund 1 and Prep Fund 2 should each be
treated as making a liquidating distribution to their Unitholders of the Common
Stock received in the Merger. The taxable year of Prep Fund 1 and Prep Fund 2
will end at such time. Unitholders must report, in their taxable year that
includes the Merger, their share of all income, gain, loss, deduction and credit
for Prep Fund 1 and Prep Fund 2 for the period ending on the date of the Merger
(including their allocable share of gain, if any, resulting from the Merger as
described above). A Unitholder whose taxable year differs from the Partnership's
could have "bunching" of income from the Partnership and the Company because of
the short taxable year of the Partnership. However, a Unitholder whose taxable
year is the calendar year should not experience any "bunching" of income.
The distribution by Prep Fund 1 and Prep Fund 2 of Common Stock to its
Unitholders should be tax-free to such Partnerships and the Unitholders. The
Unitholders of Prep Fund 1 and Prep Fund 2 should have a basis in the Common
Stock equal to such Unitholder's basis in his or her Units less such
Unitholder's share of liabilities of the Partnership after adjustment for such
Unitholder's distributive share of income, gain, loss, deduction and credit for
the final taxable year of the Partnership as well as distributions received in
such final taxable year (other than the distribution of Common Stock to the
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Unitholders). The holding period of a Unitholder of Prep Fund 1 and Prep Fund 2
in the Common Stock should generally include the period of time his or her
Partnership held its assets.
If Unitholders of Pension Fund holding more than 50% of the total interest
in profits and capital of Pension Fund exchange their Units in Pension Fund for
Common Stock, Pension Fund will be deemed to have been terminated and reformed
for tax purposes under Section 708(b)(1)(B) of the Code. As a result of such
termination, Pension Fund will be deemed to have contributed to a newly formed
partnership all of its assets and liabilities in exchange for an interest in the
partnership, and, immediately thereafter, distributed the interests of the newly
formed partnership to the Unitholders of Pension Fund electing the Retention
Option and the Company. These deemed transactions should not result in the
recognition of gain or loss by the Unitholders electing the Retention Option or
the Company. However, the taxable year of Pension Fund would come to an end
requiring Unitholders electing the Retention Option to include their share of
all income, gain, loss or deduction of Pension Fund as discussed above with
respect to the Unitholders of Prep Fund 1 and Prep Fund 2.
TAX CONSEQUENCES TO COMPANY
The Company should not recognize gain or loss as a result of the Merger. The
basis of the assets received by the Company from Prep Fund 1 and Prep Fund 2
should equal such Partnerships' tax basis in such assets on the date of the
Merger increased by any gain recognized by such Partnerships pursuant to the
Merger. The Company's basis in the Units received by Pension Fund Unitholders
should equal the aggregate basis of such Unitholders in their Units on the date
of the Merger increased by any gain recognized by such Unitholders pursuant to
the Merger.
If for any reason the Merger was not an exchange under Section 351 of the
Code, the transfers would be taxable transactions resulting in realization of
gain or loss by Prep Fund 1, Prep Fund 2 and Unitholders; however, the Company
would not recognize any gain or loss. The overall amount of gain or loss
realized by Prep Fund 1 and Prep Fund 2 would equal the difference between (i)
the sum of the fair market value of the Common Stock received by such
Partnerships in the Merger (increased by the amount of liabilities of such
Partnerships assumed or taken subject to by the Company) and (ii) the adjusted
tax basis of the assets exchanged therefor. The amount of such gain or loss
realized by Prep Fund 1 and Prep Fund 2 would be allocated among their
respective Unitholders in accordance with the terms of their respective
Partnership Agreements. The overall amount of gain or loss realized by a Pension
Fund Unitholder which did not elect the Retention Option would equal the
difference between (a) the sum of the fair market value of the Common Stock
received by such Unitholder plus the amount of such Unitholder's allocable share
of liabilities of Pension Fund, if any, assumed or taken subject to by the
Company and (b) the adjusted tax basis of the Units exchanged therefor.
In general, any gains or losses realized with respect to the Merger would be
treated as capital gains or losses, except for any portion of gain attributable
to a Partnership's "unrealized receivables" or "substantially appreciated
inventory" which would be treated as ordinary income. Under Section 267(a) of
the Code, a loss may not be recognized in connection with a sale or exchange
between related parties even though the loss is realized for tax purposes. In
certain circumstances, Prep Fund 1, Prep Fund 2 or a group of Unitholders of
Pension Fund could be treated as a related party of the Company, thereby
preventing the recognition of any loss realized if the Merger was a taxable
transaction. For purposes of Section 469 of the Code, gains or losses realized
which are attributable to equity interests of the Partnerships would be treated
as passive activity income or loss. In general, a taxpayer who disposes of his
or her entire interest in a passive activity in a taxable transaction to an
unrelated party during a taxable year is entitled to treat the excess of passive
losses from such activity (including any prior suspended losses) over such
year's passive income or gains from all activities as not being subject to
passive activity loss limitations. Accordingly, the Merger, if a taxable
transaction, would allow Unitholders (other than those Unitholders in Pension
Fund which elect the Retention Option or which are subject to the Section 267(a)
related party rules discussed above) to deduct suspended passive activity
losses, if any, attributable to their investment in a Partnership.
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TREATMENT OF THE COMPANY AS A REIT
The Company expects that it will be organized and will operate in such a
manner so as to qualify for taxation as a REIT under Sections 856 through 860 of
the Code commencing with its taxable year ending December 31, 1998 and the
Company intends to operate in such a manner in the future. No assurance can be
given, however, that the Company will operate in a manner so as to qualify or
remain qualified as a REIT.
In the opinion of Rogers & Wells LLP, commencing with its taxable year
ending December 31, 1998, the Company will be organized in conformity with the
requirements for qualification and taxation as a REIT under the Code and its
proposed method of operation will permit it to so qualify. This opinion is based
on various assumptions and is conditioned upon certain representations set forth
below made by the Company as to factual matters. Moreover, such qualification
and taxation as a REIT depends upon the Company's ability to meet, through
actual annual operating results, distribution levels and diversity of stock
ownership, the various qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by Rogers & Wells LLP on a
periodic or continuing basis. Accordingly, no assurance can be given that the
actual results of the Company's operations for any one taxable year will satisfy
such requirements. See "-- Requirements for Qualification as a REIT -- Failure
to Qualify."
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT and distributes to its
stockholders at least 95% of its REIT taxable income, it generally will not be
subject to federal corporate income tax on the portion of its ordinary income or
capital gain that is timely distributed to stockholders. This treatment
substantially eliminates the "double taxation" (at the corporate and stockholder
levels) that generally results from investment in a corporation. If the Company
were to fail to qualify as a REIT, it would be taxed at rates applicable to
corporations on all of its income, whether or not distributed to its
stockholders. Even if the Company qualifies as a REIT, it may be subject to
federal income or excise tax as follows:
(i) The Company will be taxed at regular corporate rates on REIT taxable
income and net capital gains not distributed to stockholders.
(ii) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference, if any.
(iii) If the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property, other than
foreclosure property and dispositions of property that occur due to
involuntary conversion, held primarily for sale to customers in the ordinary
course of business) such income will be subject to a 100% tax.
(iv) If the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the greater of the amount
by which the Company fails the 75% or 95% test, multiplied by a fraction
intended to reflect the Company's profitability.
(v) If the Company should fail to distribute during each calendar year
at least the sum of (1) 85% of its REIT ordinary income for such year, (2)
95% of its REIT capital gain net income for such year and (3) any
undistributed taxable income from prior years, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts
actually distributed.
(vi) If the Company has (1) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise on default on a loan
secured by such property) which is held primarily for sale to customers in
the
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ordinary course of business or (2) other non-qualifying income from
foreclosure property, it will be subject to tax on such income at the
highest corporate rate.
(vii) If the Company acquires assets from a C corporation (i.e.,
generally a corporation subject to tax at the corporate level) in a
transaction in which the bases of the acquired assets in the Company's hands
are determined by reference to the bases of the assets (or any other
property) in the hands of the C corporation, and the Company recognizes net
gain on the disposition of such assets in any taxable year during the
ten-year period (the "Restriction Period") beginning on the date on which
such assets were acquired by the Company, then, pursuant to guidelines
issued by the IRS, the excess of the fair market value of such property at
the beginning of the applicable Restriction Period over the Company's
adjusted basis in such property as of the beginning of such Restriction
Period will be subject to a tax at the highest corporate rate.
REQUIREMENTS FOR QUALIFICATION AS A REIT
GENERAL. The Code defines a REIT as a corporation, trust or association:
(i) which 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 common stock;
(iii) which would be taxable as a domestic corporation but for Sections
856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(v) which has the calendar year as its taxable year;
(vi) the beneficial ownership of which is held by 100 or more persons;
(vii) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals; and
(viii) which meets certain income and asset tests, described below.
Conditions (i) through (v), inclusive, must be met during the entire taxable
year and condition (vi) 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. However, conditions (vi) and (vii) will not apply until after the first
taxable year for which an election is made to be taxed as a REIT. The Company's
taxable year will be the calendar year.
Following the consummation of the Merger, the Company will satisfy the share
ownership requirement set forth in (vi) and (vii) above (the "100 stockholder"
and "five or fewer" requirements). In order to ensure continuing compliance with
these ownership requirements, the Company will place certain restrictions on the
transfer of its stock to prevent further concentration of stock ownership. See
"DESCRIPTION OF CAPITAL STOCK OF THE COMPANY -- Restrictions on Transfer."
Moreover, to evidence compliance with these requirements, the Company must
maintain records which disclose the actual ownership of its outstanding Common
Stock. In fulfilling its obligation to maintain these records, the Company must,
and will, demand written statements each year from the record holders of
designated percentages of its Common Stock disclosing the actual owners of such
Common Stock. A list of those persons failing or refusing to comply with such
demand must be maintained as a part of the Company's records. Although a failure
to make such demand or ascertain the actual ownership of its shares will not
cause a disqualification of REIT status, a monetary fine will result. A
stockholder failing or refusing to comply with the Company's written demand must
submit with his or her tax return a similar statement and certain other
information.
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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 is deemed to receive the income of the
partnership attributable to such share. In addition, the character of assets and
gross income of the partnership shall retain the same character in the hands of
the REIT. Thus, the Company's proportionate share of the assets, liabilities and
items of income of Pension Fund and any other partnership in which the Company
may be a direct or indirect partner in the future will be treated as assets,
liabilities and items of income of the Company, to the extent of its respective
interest therein, for purposes of applying the requirements described herein.
See "-- Tax Aspects of the Company's Investments in Partnerships -- General."
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of the subsidiary are
treated as assets, liabilities and items of the REIT itself. Thus, any qualified
REIT subsidiary of the Company will be ignored for federal income tax purposes,
and all assets, liabilities and items of income, credit and deduction of such
subsidiary will be treated as assets, liabilities and items of the Company.
ASSET TESTS. In order for the Company to maintain its qualification as a
REIT, at the close of each quarter of its taxable year, it must satisfy three
tests relating to the nature of its assets. For purposes of these tests, where
the Company owns an interest in a partnership, it will be treated as owning a
proportionate part of the partnership's assets. See "-- Tax Aspects of the
Company's Investments in Partnerships -- General."
(i) At least 75% of the value of the Company's total assets must be
represented by any combination of interests in real property, interests in
mortgages on real property and shares in other qualified REITs ("Qualified
REIT Assets"), as well as cash, cash items, and certain government
securities.
(ii) Not more than 25% of the Company's total assets may be represented
by securities other than those in the 75% asset class.
(iii) Of the investments included in the 25% 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 (excluding securities of a
qualified REIT subsidiary, as defined in the Code, or another qualified
REIT).
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter.
The Company believes that it will satisfy the requirements for the three
asset tests described above. The Company intends to maintain adequate records of
the value of its assets to ensure compliance with the asset tests and to take
such other actions within 30 days after the close of any quarter as may be
required to cure any noncompliance. In particular, at of the end of each
calendar quarter, the Company will limit and diversify its ownership of
securities that do not constitute Qualified REIT Assets as necessary to satisfy
the REIT asset tests described above.
When purchasing Mortgage Securities, the Company and its counsel may rely on
opinions of counsel for the issuer or sponsor of such securities given in
connection with the offering of such securities, or statements made in related
offering documents, for purposes of determining whether and to what extent those
securities constitute Qualified REIT Assets for purposes of the REIT asset tests
and produce income which qualifies under the REIT gross income tests discussed
below.
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INCOME TESTS. In order for the Company to maintain its qualification as a
REIT, it must satisfy two separate percentage tests relating to the source of
its gross income in each taxable year. For purposes of these tests, where the
Company invests in a partnership, the Company will be treated as receiving its
proportionate share of the gross income of the partnership, and such gross
income will retain the same character in the hands of the Company as it had in
the hands of the partnership. See "-- Tax Aspects of the Company's Investments
in Partnerships -- General."
THE 75% TEST. At least 75% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from specified real estate sources, including (i) rents from real
property, (ii) interest on obligations secured by mortgages on real
property or on interests in real property, (iii) gain from the sale or
other disposition of real property (including interests in real property
and interests in mortgages on real property) not held primarily for sale
to customers in the ordinary course of business, (iv) dividends or other
distributions on, and gain (other than from prohibited transactions) from
the sale or disposition of, shares in other REITs, (v) abatements and
refunds of taxes on real property, (vi) income and gain derived from
foreclosure property, (vii) amounts (other than amounts the determination
of which depends in whole or part on the income or profits of any person)
received or accrued as consideration for entering into agreements to make
loans secured by mortgages on real property or on interests in real
property, or to purchase or lease real property (including interests in
real property and mortgages on interests in real property), and (viii)
income from qualified types of temporary investments.
THE 95% TEST. At least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from the same items which qualify under the 75% income test or
from dividends, interest and gain from the sale or disposition of stock
or securities, or from any combination of the foregoing. Payments made to
the Company pursuant to an interest rate swap, cap agreement, option,
futures contract, forward rate agreement, or any other similar financial
instrument, entered into by a REIT in a transaction to reduce the
interest rate risks with respect any indebtedness incurred or to be
incurred to acquire or carry real estate assets ("Qualified Hedges"), and
any gain from the sale or disposition of such Qualified Hedge instruments
will also be includible for purposes of the 95% test.
The term "interest" 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 the 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.
Generally, if a loan is secured by both personal property and real property,
interest must be allocated between the personal property and the real property,
with only the interest allocable to the real property qualifying as mortgage
interest under the 75% gross income test. Treasury Regulations provide that if a
loan is secured by both personal and real property and the fair market value of
the real property as of the commitment date (generally, the date on which the
REIT's obligation to make the loan becomes binding) equals or exceeds the amount
of the loan, the entire interest amount will qualify under the 75% gross income
test. If the amount of the loan exceeds the fair market value of the real
property as of the commitment date, the interest income multiplied by a
fraction, the numerator of which is the fair market value of the real property
as of the commitment date, and the denominator of which is the amount of the
loan. The interest income allocated to the personal property is an amount equal
to the excess of the total interest income over the interest income allocated to
the real property.
Interest earned on Mortgage Securities and Mortgage Loans will qualify as
"interest" for purposes of both the 95% and 75% gross income tests to the extent
such assets are treated as obligations secured by mortgages on real property or
on interests in real property. However, income attributable to securities and
obligations that are not treated as secured by mortgages on real property or on
interests in real property,
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or to assets which are not otherwise Qualified REIT Assets, will not qualify
under the 75% gross income test. Such income will qualify under the 95% gross
income test, however, if such income constitutes interest, dividends or gain
from the sale or disposition of stock or securities. In addition, income from
loan guarantee fees, mortgage servicing contracts or other contracts will not
qualify under either the 95% or 75% gross income test if such income constitutes
fees for services rendered by the Company or is not treated as interest (on
obligations secured by mortgages on real property or on interests in real
property for purposes of the 75% gross income test). Similarly, items of income
from hedging, including the sale of hedges, will not qualify under the 95% or
75% gross income tests unless such hedges constitute Qualified Hedges, in which
case such income will only qualify under the 95% gross income test.
In order to comply with the 95% and 75% gross income tests, the Company will
limit substantially all of the assets that it acquires to Mortgage Loans,
Mortgage Securities or obligations that are treated as obligations secured by
mortgages on real property or on interests in real property or to other
Qualified REIT Assets. As a result, the Company may limit the type of assets,
including hedging contracts, that it otherwise might acquire and, therefore, the
type of income it otherwise might receive.
Although the Company will receive some income that is not qualifying income
for purposes of the 75% and 95% gross income tests, the General Partners believe
that the aggregate amount of such non-qualifying income, in any taxable year,
will not cause the Company to exceed the limits on non-qualifying income under
the 75% and 95% gross income tests.
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT in such year if (i)
it attaches a schedule of the sources of its gross income to its federal income
tax return for such year, (ii) the inclusion of any incorrect information in its
return was not due to fraud with intent to evade tax and (iii) the Company's
failure to meet such tests is due to reasonable cause and not due to willful
neglect. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. Even if
these relief provisions apply, the Company still will be subject to a tax
imposed with respect to the excess net income. See "--Taxation of the Company as
a REIT."
SALE OF ASSETS. Any gain realized by the Company on the sale of any
property (including Mortgage Loans and Mortgage Securities) held as inventory or
other property held primarily for sale to customers in the ordinary course of
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Such prohibited transaction income may also have an
adverse effect upon the Company's ability to satisfy the income tests for
qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of a trade
or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. If the Company were to
sell Mortgage Securities on a regular basis, there is a risk that such sales
would constitute prohibited transactions and that all of the profits therefrom
would be subject to a 100% tax.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "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
non-cash income. In addition, if the Company disposes of any asset during its
Restriction Period, the Company will be required to distribute at least 95% of
the built-in gain (after tax), if any, recognized on the disposition of such
asset. 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
tax return for such year and if paid on or before the first regular dividend
payment 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
on the undistributed amount at regular capital gains and ordinary corporate tax
rates. Moreover, 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 net capital gain income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a nondeductible 4% excise tax on the excess of such required distribution over
the amounts actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. It is possible that the Company, from time to
time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement due to timing differences between (i) the actual
receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in calculating the
taxable income of the Company. For instance, the Company may realize income
without a corresponding payment, as in the case of original issue discount or
accrued interest on defaulted Mortgage Loans. In order to avoid any problem with
the 95% distribution requirement, the Company will closely monitor the
relationship between its REIT taxable income and cash flow and, if necessary,
may borrow funds in order to satisfy the distribution requirements.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying a "deficiency dividend"
to its stockholders in a later year, which may be included in the Company's
deduction for dividends paid in 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 interest based on the amount of any deduction taken for
deficiency dividends.
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FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of 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 ineligible for qualification as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
GENERAL. The Company will hold a direct interest in Pension Fund and an
indirect interest in America First Participating/Preferred Equity Mortgage Fund.
In general, a partnership is not subject to federal income tax. Rather, each
partner includes in its taxable income or loss its allocable share of the
partnership's items of income, gain, loss, deduction and credit, without regard
to whether the partner receives a distribution from such partnership. The
Company will include its proportionate share of the foregoing items of Pension
Fund and America First Participating/Preferred Equity Mortgage Fund for purposes
of the various REIT income tests and in the computation of its REIT taxable
income. See "-- Requirements for Qualification as a REIT--Income Tests." Any
resultant increase in the Company's REIT taxable income will increase its
distribution requirements (see "--Requirements for Qualification as a
REIT--Annual Distribution Requirements"), but will not be subject to federal
income tax in the hands of the Company provided that such income is distributed
by the Company to its stockholders. Moreover, for purposes of the REIT asset
tests (see "--Requirements for Qualification as a REIT--Asset Tests"), the
Company will include its proportionate share of assets held by Pension Fund and
America First Participating/Preferred Equity Mortgage Fund.
The Company believes that Pension Fund and America First
Participating/Preferred Equity Mortgage Fund are properly treated as
partnerships for federal income tax purposes. If, however, either Pension Fund
or America First Participating/Preferred Equity Mortgage Fund was treated as an
association taxable as a corporation, the Company would most likely fail to
qualify as a REIT. See "--Requirements for Qualification as a REIT--Failure to
Qualify." Furthermore, in such a situation the entity treated as a corporation
would be subject to corporate income taxes.
SALE OF ASSETS. Generally, any gain realized by a partnership on the sale
of assets held by such partnership will constitute either short-term, mid-term,
or long-term capital gain or loss depending on the length of time the
partnership has held such asset. However, under REIT rules, the Company's share
of any gain realized by Pension Fund or the Fund on the sale of any property
held as inventory or other property held primarily for sale to customers in the
ordinary course of a trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See
"--Requirements for Qualification as a REIT--Income Tests" and "--Sale of
Assets."
TAXATION OF THE COMPANY'S STOCKHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable domestic stockholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by such stockholders as ordinary
income and will not be eligible for the dividends received deduction generally
available to corporations. Domestic stockholders generally are stockholders who
are (i) citizens or residents of the United States, (ii) corporations,
partnerships or other entities created or organized in or under the laws of the
United States or any political subdivision thereof, or (iii) estates or trusts
the income of which is subject to United States federal income taxation
regardless of its source. Any dividend declared by the Company in October,
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November or December of any year payable to a stockholder of record on a
specific 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
dividend is actually paid by the Company during January of the following
calendar year.
Distributions that are designated as capital gain dividends will be taxed as
gains from the sale or exchange of a capital asset (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 its stock. However,
corporate stockholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. The Company may elect to retain and pay
income tax on any net long-term capital gain in which case domestic stockholders
of the Company would include in their income as long-term capital gain their
proportionate share of such net long-term capital gain. A domestic stockholder
would also receive a refundable tax credit for such stockholder's proportionate
share of the tax paid by the Company on such retained capital gains and an
increase in its basis in the stock of the Company in an amount equal to the
difference between the undistributed long-term capital gains and the amount of
tax paid by the Company.
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 shares of Common Stock, but rather will
reduce the adjusted basis of such shares. To the extent that such distributions
exceed the adjusted basis of a stockholder's shares of Common Stock, they will
be included in income as gain from the sale or exchange of a capital asset,
assuming the Common Stock is a capital asset in the hands of the stockholder.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. In general, a stockholder
will realize capital gain or loss on the disposition of shares of Common Stock
equal to the difference between (i) the sales price for such shares and (ii) the
adjusted tax basis of such shares. Gain or loss realized upon the sale or
exchange of Common Stock by a stockholder will generally constitute short-term
or long-term capital gain or loss depending on the length of time the
stockholder has held such shares. An individual, trust or estate that holds
shares of Common Stock for more than 18 months will generally be subject to a
maximum tax of 20% on gains from the sale or disposition of such shares. See
"--Recent Legislation" below. Losses incurred upon a sale or exchange of shares
of Common Stock by a stockholder who has held such shares for six months or less
(after applying certain holding period rules) will be deemed a long-term capital
loss to the extent of any capital gain dividends received by the selling
stockholder with respect to such Common Stock.
Distributions from the Company and gain from the disposition of shares will
not be treated as passive activity income. Distributions from the Company (to
the extent they do not constitute a return of capital) will generally be treated
as investment income for purposes of the investment interest limitations. Gain
from the disposition of shares and capital gain dividends will not be treated as
investment income unless the taxpayer elects to have the gain taxed at ordinary
income rates.
The Company does not expect to acquire or retain residual interests issued
by REMICs. Such residual interests, if acquired by a REIT, could generate excess
inclusion income taxable to the REIT's stockholders in proportion to the
dividends received from the REIT. Excess inclusion income cannot be offset by
net operating losses of a stockholder. If the stockholder of a REIT holding a
residual interest in a REMIC is a tax-exempt entity, the excess inclusion income
is fully taxable to such stockholder as unrelated business taxable income. If
allocated to a Non-U.S. Stockholder (as defined below), the excess inclusion
income is subject to federal income tax withholding without reduction pursuant
to any otherwise applicable tax treaty. Potential investors, and, in particular,
tax-exempt entities, are urged to consult with their tax advisors concerning
this issue. A REIT, rather than its stockholders, will be taxed (at the highest
corporate tax rate) on the amount of excess inclusion income for the taxable
year allocable to shares of Common Stock held by disqualified organizations
(generally, tax-exempt entities not subject to tax on unrelated business income,
including governmental organizations).
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The Company intends to finance the acquisition of Mortgage Securities and
Mortgage Loans by entering into secured lending transactions or reverse
repurchase agreements, which are essentially loans secured by the Company's
Mortgage Securities and Mortgage Loans. If the IRS were to successfully take the
position that such secured lending transactions or reverse repurchase agreements
result in the Company having issued debt instruments (i.e., the secured loans or
the reverse repurchase agreements) with differing maturity dates secured by a
pool of mortgage loans, the Company could be treated, in whole or in part, as a
taxable mortgage pool. In this case, a portion of the Company's income could be
characterized as excess inclusion income which would subject stockholders (or
the Company, to the extent Common Stock is held by disqualified organizations)
to the tax treatment described above with respect to residual interests in
REMICs. The Company intends to take the position that such an arrangement would
not create a taxable mortgage pool or excess inclusion income. In the absence of
any definitive authority on this issue, there can be no assurance regarding
whether secured loans or reverse repurchase agreements will not cause the
Company to realize excess inclusion income.
BACKUP WITHHOLDING. The Company will report to its domestic stockholders
and the IRS the amount of dividends paid during each calendar year, and the
amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a stockholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such stockholder (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 applicable requirements of the backup withholding rules. A
stockholder who does not provide the Company with its correct taxpayer
identification number may also 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 distributions made to any stockholders who fail to
certify their non-foreign status to the Company. The United States Treasury has
recently issued final regulations (the "Final Regulations") regarding the
withholding and information reporting rules discussed above. In general, the
Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and modify
reliance standards. The Final Regulations are generally effective for payments
made on or after January 1, 1999, subject to certain transition rules.
Prospective purchasers of Common Stock should consult their own tax advisors
concerning the adoption of the Final Regulations and the potential effect on
their ownership of Common Stock.
TAXATION OF TAX-EXEMPT STOCKHOLDERS. Most tax-exempt entities, including
employees' pension trusts, are not subject to federal income tax except to the
extent of their receipt of UBTI. The IRS has issued a revenue ruling in which it
held that amounts distributed by a REIT to tax-exempt employees' pension trusts
do not constitute UBTI. Based upon this ruling and the analysis therein,
distributions by the Company to a stockholder that is a tax-exempt entity
generally should not constitute UBTI, provided that the tax-exempt entity has
not financed the acquisition of its shares with "acquisition indebtedness"
within the meaning of the Code and the shares of Common Stock are not otherwise
used in an unrelated trade or business of the tax-exempt entity.
In addition, under certain circumstances, a percentage of distributions made
by a REIT to a tax-exempt employee's pension trust that owns more than 10% (by
value) of the REIT will be treated as UBTI. Such percentage is determined by
dividing the gross income of the REIT that is derived from an "unrelated trade
or business" (determined as if the REIT were a pension trust) by the gross
income of the REIT for the year in which the dividends are paid. This rule only
applies, however, if (i) the percentage of gross income of the REIT that is
derived from an unrelated trade or business for the year in which the dividends
are paid is at least 5%, (ii) the REIT qualifies as a REIT only because the
pension trust is not treated as a single individual for purposes of the "five or
fewer rule" (see "--Requirements for Qualification as a REIT--General") and
(iii) (a) one pension trust owns more than 25% of the value of the REIT, or (b)
a group of pension trusts each individually holding more than 10% of the value
of the REIT
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collectively owns more than 50% of the value of the REIT. The Company currently
does not expect this rule to apply to it.
In addition, tax-exempt investors may also be subject to tax on
distributions from the Company to the extent the Company has excess inclusion
income. See "--Taxation of the Company's Stockholders-- Taxation of Taxable
Domestic Stockholders."
CERTAIN TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
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 limited summary of such rules. The
discussion does not consider any specific facts or circumstances that may apply
to a particular Non-U.S. Stockholder. Prospective Non-U.S. Stockholders are
urged to consult with their own tax advisors to determine the impact of federal,
state, and local income tax laws with regard to an investment in Common Stock,
including any information reporting and backup withholding requirements.
In general, Non-U.S. Stockholders will be subject to regular United States
federal income taxation with respect to their investment in shares of Common
Stock in the same manner as a U.S. stockholder (i.e., at graduated rates on a
net basis, after allowance of deductions) if such investment is "effectively
connected" with the conduct by such Non-U.S. Stockholder of a trade or business
in the United States. A Non-U.S. Stockholder that is a corporation and that
receives income with respect to its investment in shares of Common Stock that is
(or is treated as) "effectively connected" with the conduct of a trade or
business in the United States may also be subject to the 30% branch profits tax
imposed under Section 884 of the Code, which is payable in addition to the
regular United States corporate income tax. The following discussion addresses
only the United States federal income taxation of Non-U.S. Stockholders whose
investment in shares of Common Stock is not "effectively connected" with the
conduct of a trade or business in the United States. Prospective investors whose
investment in shares of Common Stock may be "effectively connected" with the
conduct of a United States trade or business should consult their own tax
advisors as to the tax consequences thereof.
ORDINARY DIVIDENDS. Dividend distributions made by the Company to a
Non-U.S. Stockholder that are neither attributable to gain from the sale or
exchange by the Company of United States real property interest and not
designated by the Company as capital gains dividends will be treated as ordinary
income dividends to the extent that they are made out of current or accumulated
earnings and profits of the Company. Generally, such distributions will be
subject to withholding of United States federal income tax on a gross basis
(that is without allowance of deductions) at a 30% rate or such reduced rate as
may be specified by an applicable income tax treaty. Under certain treaties,
however, reduced withholding rates generally applicable to dividends do not
apply to dividends paid by a REIT, such as the Company.
Pursuant to the Final Regulations, dividends paid to an address in a country
outside the United States are no longer presumed to be paid to a resident of
such country for purposes of determining the applicability of withholding
discussed above and the availability of a reduced tax treaty rate. A Non-U.S.
Stockholder who wishes to claim the benefit of an applicable treaty rate is now
required to satisfy certain certification and other requirements.
NON-DIVIDEND DISTRIBUTIONS. Distributions made by the Company in excess of
its current and accumulated earnings and profits will not be taxable to a
Non-U.S. Stockholder to the extent that they do not exceed the adjusted basis
that the Non-U.S. Stockholder has in his or her shares of Common Stock, but
instead will reduce the adjusted basis of such shares (but not below zero). To
the extent that such distributions exceed the adjusted basis that a Non-U.S.
Stockholder has in his or her shares of Common Stock, the amount of such excess
will be treated as gain from the sale of such shares, the tax treatment of which
is described below.
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For withholding tax purposes, the Company will treat all distributions as if
made out of its current or accumulated earnings and profits and thus intends to
withhold at the rate of 30% (or a reduced treaty rate if applicable) on the
amount of any distribution (other than distributions designated as capital gain
dividends discussed below) made to a Non-U.S. Stockholder. A Non-U.S.
Stockholder may seek a refund from the IRS of any amount withheld if it is
subsequently determined that such distribution was, in fact, in excess of the
Company's then current and accumulated earnings and profits and the amount
withheld exceeded the Non-U.S. Stockholder's United States tax liability, if
any, with respect to the distribution.
CAPITAL GAIN DIVIDENDS. Distributions made by the Company to a Non-U.S.
Stockholder that are designated by the Company at the time of distribution as
capital gain dividends (other than those arising from a sale or disposition of a
United States real property interest ("USRPI")) generally will not be subject to
United States federal income taxation unless the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for more than
183 days or more during the taxable year and has a "tax home" in the United
States, in which case the individual will be subject to a 30% withholding tax on
the amount of such individual's gain.
Under FIRPTA, a distribution made by the Company to a Non-U.S. Stockholder,
to the extent attributable to gains from dispositions of USRPIs by the Company,
will be considered effectively connected with a U.S. trade or business, without
regard to whether such distribution is designated as capital gain dividend.
Accordingly, a Non-U.S. Stockholder will be taxed on such distributions at the
same capital gains rate applicable to U.S. stockholders (including any
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA may also
be subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption. The Company is required to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
DISPOSITIONS OF COMMON STOCK. Unless the Common Stock constitutes a USRPI,
a sale of Common Stock by a Non-U.S. Stockholder generally will not be subject
to United States taxation under FIRPTA. Under FIRPTA, gain or loss realized on
the sale or exchange of a USRPI by a Non-U.S. Stockholder is treated by statute
as effectively connected with a U.S. trade or business as a matter of law,
without regard to the particular facts and circumstances. Shares of a
corporation generally are treated as a USRPI only if the fair market value of
USRPIs owned by the corporation equals or exceeds 50% of the fair market value
of its total assets. If at no time within the five years preceding the sale or
exchange of shares in the Company the shares constituted a USRPI, gain or loss
on the sale or exchange will not be treated as effectively connected with a U.S.
trade or business by reason of FIRPTA. While ownership of real property within
the U.S. (including ownership of interests in certain entities) is always a
USRPI, a loan secured by a mortgage on U.S. real property constitutes a USRPI
only if the amounts payable by the borrower are contingent on the income or
receipts of the borrower or the property or otherwise based on the property. The
Company believes it is unlikely that more than 50% of its assets will constitute
USRPIs or that it will derive significant gain from the sale or exchange of
USRPIs, although whether it derives income from USRPIs will depend upon the
facts as they ultimately develop. The Common Stock will not constitute a USRPI
if the Company is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period, less
than 50% in value of its shares are held directly or indirectly by Non-U.S.
Stockholders. It is currently anticipated that the Company will be a
domestically controlled REIT, and therefore that the sale of Common Stock will
not be subject to taxation under FIRPTA. Because the Common Stock will be
publicly traded, however, no assurance can be given that the Company will
continue to be a domestically controlled REIT.
Even if the Company does not constitute a domestically controlled REIT, a
Non-U.S. Stockholder's sale of Common Stock generally will not be subject to tax
under FIRPTA as a sale of a United States real property interest provided that
(i) the Company's Common Stock is "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market and (ii) the selling
Non-U.S.
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Stockholder held 5% or less of the Company's outstanding Common Stock at all
times during a specified testing period.
Gains not subject to FIRPTA will nonetheless be taxable in the United States
to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States. In such case, the
nonresident alien will be subject to a 30% U.S. withholding tax on the amount of
such individual's gain.
If gain on the sale of shares of Common Stock were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as a
domestic stockholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals) and the purchase of the Common Shares would be
required to withhold and remit to the IRS 10% of the purchase price.
OTHER TAX CONSIDERATIONS
DIVIDEND REINVESTMENT PLAN. Stockholders participating in the Dividend
Reinvestment Plan will be deemed to have received the gross amount of any cash
distributions which would have been paid by the Company to such stockholders had
they not elected to participate. These deemed distributions will be treated as
actual distributions from the Company generally. Participants in the Dividend
Reinvestment Plan are subject to federal income tax on the amount of the deemed
distributions to the extent that such distributions represent dividends or
gains, even though they receive no cash. Shares of Common Stock received under
the Dividend Reinvestment Plan will have a holding period beginning with the day
after purchase, and a tax basis equal to their cost (which is the gross amount
of the deemed distribution).
STATE AND LOCAL TAXES. The Company or its Stockholders or both may be
subject to state, local or other taxation in various state, local or other
jurisdictions, including those in which they transact business or reside. The
tax treatment in such jurisdictions may differ from the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult with their own tax advisors regarding the effect of state, local and
other tax laws on an investment in the Common Stock of the Company.
RECENT LEGISLATION
The Taxpayer Relief Act of 1997 (the "Taxpayer Relief Act") contains
significant changes to the taxation of capital gains of individuals, trusts and
estates. The maximum rate of tax on net capital gains of individuals, trusts and
estates from the sale or exchange of capital assets held for more than 18 months
has been reduced to 20%, and the maximum rate is reduced to 18% for assets
acquired after December 31, 2000 and held for more than five years. The maximum
rate for long-term capital gains attributable to the sale of depreciable real
property held for more than 18 months is 25% to the extent of the deductions for
depreciation with respect to such property (other than certain depreciation
subject to recapture as ordinary income). The maximum rate of capital gains tax
for capital assets held for more than one year but not more than 18 months
remains at 28%. In addition, pursuant to Notice 97-64, Temporary Regulations, to
be issued, will provide that capital gains allocated to a stockholder by the
Company may be designated as a 20% rate gain distribution, an unrecaptured
Section 1250 gain distribution (subject to a 25% rate), or a 28% rate gain
distribution. Unless specifically designated otherwise by the Company, all
distributions designated as capital gain distributions are presumed to be 28%
rate gain distributions. In determining the amounts which may be designated as
each class of capital gains dividends, a REIT must calculate its net capital
gains as if it were an individual subject to a marginal tax rate of 28%. The
taxation of capital gains of corporations was not changed by the Taxpayer Relief
Act.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS GIVING EFFECT TO THE MERGER
The Partnerships' investments currently consist primarily of fixed-rate
Mortgage Securities and Mortgage Loans. All of the Partnerships' Mortgage
Securities and non-participating Mortgage Loans are issued or guaranteed by an
agency of the U.S. government. In addition, the Partnerships own PREPs,
participating Mortgage Loans and other real estate interests. The Partnerships
do not employ leverage in their financing strategies and thus their operating
results depend primarily on the interest payments received from their Mortgage
Securities and Mortgage Loans. The cash available for distribution by the
Partnerships is also supplemented by principal payments received by the
Partnerships from their investments. Over the three-year period ended December
31, 1996, a substantial share of the cash available for distribution by the
Partnerships has been derived from the receipt by the Partnerships of principal
as opposed to interest payments. For the years ended December 31, 1996, 1995 and
1994, respectively, 41%, 45% and 41% of the cash available for distribution by
the Partnerships has been funded out of principal payments. Further, because the
Partnerships hold exclusively fixed-rate Mortgage Securities and Mortgage Loans,
their operating results are not generally affected by changes in broader market
interest rates, except to the extent that rising rates may trigger earlier
prepayments of Mortgage Loans. The Partnerships have funded their operations out
of the equity invested by Unitholders in the original offerings by the
Partnerships, as well as from the interest and principal payments received by
the Partnerships over time. The principal use of funds generated by the
operations of the Partnerships has been the payment of operating expenses and
distributions to Unitholders.
Upon completion of the Merger, the Partnerships (assuming Maximum
Participation) will be combined within the Company and the Company will
implement the business plan and investment, financing and hedging strategies
described in this Consent Solicitation Statement/Prospectus. In implementing its
business plan, the Company will employ leverage in its capital structure and
will seek to maintain an equity-to-assets ratio (I.E., total equity of the
Company as percentage of its total assets) of approximately 8% to 10%. The
Company will convert a substantial portion of the investments held by the
Partnerships from primarily fixed-rate Mortgage Securities and Mortgage Loans to
primarily adjustable-rate Mortgage Securities and Mortgage Loans. As a result,
following the Merger, changes in interest rates will impact the Company's
earnings in various ways. Rising short-term interest rates may temporarily
negatively affect the Company's earnings and, conversely, falling short-term
interest rates may temporarily increase the Company's earnings. This impact can
occur for several reasons and may be mitigated by portfolio prepayment activity.
First, the Company's borrowings will react to changes in interest rates sooner
than the Company's Mortgage Securities and Mortgage Loans because the weighted
average next repricing date of the borrowings is expected to be a shorter time
period than the weighted average next repricing date of its Mortgage Securities
and Mortgage Loans. Second, interest rates on Mortgage Securities and Mortgage
Loans are generally limited to an increase of either 1% or 2% per adjustment
period (commonly referred to as the periodic cap) and the Company's borrowings
do not have similar limitations. Following the Merger, the Mortgage Securities
and Mortgage Loans to be held by the Company will, with regard to at least 70%
of the Company's assets, be similar in terms of credit quality to those
currently held by the Partnerships. The Company, however, will also invest a
portion of its capital in Other Investment assets which, while containing a
greater level of credit risk and liquidity risk than the core portfolio, are
also expected to yield more than such core portfolio.
Further, the Company, unlike the Partnerships, will also manage its
portfolio and vary its investments over time with a view to enhance the total
return of the portfolio. The Company will sell an asset when there is an
opportunity to replace it with an alternative investment that has an expected
higher long-term yield or more attractive interest rate sensitivity
characteristics. The Company will also engage in the risk management strategies
described herein which, while lowering the total returns of the Company from its
investments, will limit the Company's exposure to risks associated with the
lifetime interest rate caps if its market interest rates rise above specified
levels.
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Following the Merger, the Company's primary source of funds for its
investment activities will be the equity currently represented in the
investments held by the Partnerships, borrowed funds under reverse repurchase
agreement transactions with one-month to twelve-month maturities, monthly
payments of principal and interest on its Mortgage Securities and Mortgage
Loans, borrowings from line of credit facilities and possibly proceeds from
asset sales as needed. The Company is expected to enter into borrowing
arrangements with different financial institutions. Although the Company lacks
commitments for such arrangements at the current time, the General Partners
expect that financing arrangements of the types needed by the Company are and
will continue to be generally available.
Because the Company will borrow money based on the fair value of its
Mortgage Securities and Mortgage Loans and because increases in short-term
interest rates can negatively impact the valuation of Mortgage Securities, the
Company's borrowing ability could be limited and lenders may initiate margin
calls in the event short-term interest rates increase. Further, as a result of
either changes in interest rates, changes in credit performance of a mortgage
pool or a downgrade of a mortgage pool issuer, the Company may find it difficult
to borrow against such assets and, therefore, may be required to sell certain
Mortgage Securities and/or Mortgage Loans in order to maintain liquidity. If
required, these sales could be at prices lower than the carrying value of the
assets, which would result in losses. Additionally, the Company's Other
Investments will be of lower credit quality compared to the core portfolio and
have less liquidity than securities in the core portfolio, but are expected to
provide opportunities for greater total returns for the Company.
The business plan of the Company contemplates that the principal uses of the
funds for the Company will involve the payment of interest from its borrowings,
the payment of advisory fees to the Advisor and the payment of distributions to
its stockholders. The Code requires that the Company distribute to its
stockholders at least 95% of its REIT taxable income and that it comply with
other tests described herein which are described herein under "FEDERAL INCOME
TAX CONSIDERATIONS--Treatment of the Company as a REIT."
Following the Merger, it is also expected that the Company will be operated
more efficiently than the Partnerships. One of the measures used by industry
analysts in determining a financial institution's operating efficiency is its
so-called efficiency ratio (I.E., operational expenses divided by the sum of net
interest income plus non-interest income). This ratio essentially measures the
costs incurred by a financial institution to produce its earnings for a given
period. On a historical basis for the years ended December 31, 1996, 1995 and
1994, the efficiency ratio of the Partnerships on a combined basis was 24.2%,
20.7% and 18.1%, respectively. Primarily as a result of the increased earnings
expected to be generated by the Company as compared to the Partnerships on a
combined basis, the realignment of the Company's portfolio in accordance with
its business plan and the changes relating to the payment of compensation and
expense reimbursements under the Advisory Agreement as compared to the payment
of compensation and expense reimbursements under the Partnership Agreements, the
Company's efficiency ratio is estimated to be 21.1%, 18.9%, 18.1%, 17.7% and
17.5% for the Company's fiscal years one through five, respectively, following
the consummation of the Merger.
Further, the Company will conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940. If the
Company were to become regulated as an investment company, then the Company's
use of leverage would be substantially reduced. The Investment Company Act
exempts entities that are "primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate."
Under current interpretation of the staff of the SEC, in order to qualify for
this exemption, the Company must maintain at least 55% of its assets in
Qualifying Interests. The assets that the Company may acquire, therefore, may be
limited by the provisions of the Investment Company Act. In connection with any
acquisition of a class of Mortgage Security junior to other classes of Mortgage
Securities in the right to receive payment from the underlying Mortgage Loans,
the Company intends, where appropriate to obtain foreclosure rights with respect
to the underlying Mortgage Loans, although there can be no assurance that it
will be able to do so on acceptable
141
<PAGE>
terms. As a result of obtaining such rights, the Company believes that the
related subordinated interest in such class of Mortgage Security will constitute
Qualifying Interests for the purpose of the Investment Company Act. The Company
does not intend, however, to seek an exemptive order, no-action letter or other
form of interpretive guidance from the Commission on these positions. If the
Commission were to take a different position with respect to whether any such
subordinated interest constitutes a Qualifying Interest, the Company could,
among other things, be required either (i) to change the manner in which it
conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company.
EXPERTS
The financial statements and the related financial statement schedules of
Prep Fund 1, Prep Fund 2 and Pension Fund as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 and the
balance sheet of the Company as of November 12, 1997 have been included or
incorporated by reference in the Registration Statement of which this Consent
Solicitation Statement/Prospectus is a part in reliance upon the reports of
Coopers & Lybrand L.L.P., independent certified public accountants, given upon
the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered pursuant
to this Consent Solicitation Statement/Prospectus and certain tax matters
related to the Partnerships and the Company as described under "FEDERAL INCOME
TAX CONSIDERATIONS" will be passed upon by Rogers & Wells LLP, New York, New
York. With regard to certain matters of Maryland law, Rogers & Wells LLP will
rely on the opinion of Piper & Marbury L.L.P., Baltimore, Maryland.
142
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Consent Solicitation
Statement/Prospectus:
"Acquisition Committee" means an investment acquisition committee comprised
of certain of the Company's executive officers and directors charged with the
duty of approving certain investments proposed by the Advisor.
"Adjustable-rate" means, with respect to any Mortgage Security or Mortgage
Loan, a security or loan which, by its terms, resets its interest or coupon
rate.
"Advisor" means America First Mortgage Advisory Corporation, or any
successor thereto, which will (i) manage the Company's Mortgage Securities and
Mortgage Loans and (ii) provide other services to the Company pursuant to the
Advisory Agreement.
"Advisory Agreement" means the agreement between the Company and the
Advisor.
"America First" means America First Companies L.L.C., the entity that
controls the General Partners.
"AMEX" means the American Stock Exchange.
"Board of Directors" means the Board of Directors of the Company.
"Board of Managers" means the Board of Managers of America First.
"Bylaws" means the bylaws of the Company, as the same may be amended from
time to time.
"Cash Flow" means, for a given Property, forecasted net income after capital
expenditures.
"Cash Merger Payment" means a one-time cash payment of $1.06 per share,
which will be paid in four equal quarterly payments of $.2650 per share of
Common Stock during the first year following the Merger, to stockholders
entitled to receive distributions; provided, however, any distributions paid to
stockholders by the Company out of earnings during this first year will have the
effect of reducing the amount of such payment so that the amount paid to
stockholders will still be, in the aggregate, equal to $1.06 per share.
"Cautionary Statements" means the factors that could cause the actual
results, performance and achievements of the Company to differ materially from
the financial forecasts disclosed in this Consent Solicitation
Statement/Prospectus.
"Certificate of Deposit Rate" means the weekly average of secondary market
interest rates on negotiable certificates of deposit, as published by the
Federal Reserve Board in its Statistical Release H.15(519), Selected Interest
Rates. If the Certificate of Deposit Rate cannot be calculated as above, the
Company will choose a new Certificate of Deposit Rate that is based upon
comparable information.
"Charitable Beneficiary" means a charitable beneficiary, selected by the
Company, for the exclusive benefit of which Excess Stock will be held in trust.
"Charter" means the Articles of Incorporation of the Company, as the same
may be amended, supplemented or restated from time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Company" means America First Mortgage Investment, Inc., a newly formed,
externally managed Maryland corporation which expects to qualify as a real
estate investment trust for federal income tax purposes.
143
<PAGE>
"Comparative Companies" means Capstead Mortgage Corporation, Dynex Capital,
Inc. (formerly Resource Mortgage Capital, Inc.), Imperial Credit Mortgage
Holdings, Inc., INMC Mortgage Holdings, Inc. (formerly CWM Mortgage Holdings,
Inc.), Redwood Trust, Inc., and Thornburg Mortgage Asset Corporation.
"Competing Transaction" means any of the following (other than the
transactions contemplated by the Merger Agreement): (i) any merger,
consolidation, share exchange, business combination or other similar
transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 30% or more of the assets of any Partnership in a single
transaction or series of transactions, excluding any bona fide financing
transactions which do not, individually or in the aggregate, have as a purpose
or effect the sale or transfer of control of such assets; (iii) any tender offer
or exchange offer for 30% or more of the outstanding Units of any Partnership or
the filing of a registration statement under the Securities Act in connection
therewith; or (iv) any public announcements of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
"Competing Transaction Partnership" means a Partnership which has received a
proposal constituting a Competing Transaction and has terminated the Merger
Agreement pursuant to clauses (v) or (vi) (clauses (vi) or (viii) with regard to
Pension Fund) of Section 8.1 of the Merger Agreement.
"Consent Form" means the consent form to be used by Unitholders to consent
to, deny consent to, or to abstain from consenting to the Merger and the other
transactions described herein.
"Consent Solicitation Statement/Prospectus" means this Consent Solicitation
Statement/Prospectus, which is to be distributed to the Unitholders.
"Constant Maturity Treasury Rate" means the weekly average yield of U.S.
Treasury securities, adjusted to a constant maturity, as published by the Board
of Governors of the Federal Reserve System.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act.
"Directors" means the members of the Board of Directors of the Company.
"DRP Agent" means Service Data Corporation which will act as independent
agent for the stockholders who wish to participate in the Dividend Reinvestment
Plan.
"Effective Date" means the date the Merger will become effective which will
be upon the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware and the Articles of Merger with the Department of
Assessments and Taxation of the State of Maryland.
"11th District Cost of Funds Index" means the index made available monthly
by the Federal Home Loan Bank Board of the cost of funds to members of the
Federal Home Loan Bank 11th District.
"Employment Agreements" means the employment agreements between America
First and each of Mr. Zimmerman, Mr. Gorin and Mr. Freydberg dated as of October
23, July 11 and July 16, 1997, respectively, which the Advisor will assume on
the Effective Date.
"Equity Interests" means Prep Fund 1's equity investments in two limited
partnerships which own multifamily properties.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means each of certain pension, profit-sharing, employee
benefit, or retirement plans or individual retirement accounts.
"ERISA Plan Asset Regulations" means regulations of the Department of Labor
that define "plan assets."
144
<PAGE>
"Excess Stock" means any shares of Common Stock that would result in a
person owning shares of Common Stock in excess of the Ownership Limit or cause
the Company to become "closely held" under Section 856(h) of the Code that is
not otherwise permitted by the Charter, Bylaws or Board of Directors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means Kissel-Blake Inc. which has been appointed by the
General Partners to act as exchange agent in connection with the Merger.
"Excluded Partnership" means a Partnership that is not a Competing
Transaction Partnership.
"Fairness Opinion" means the written opinion dated as of July 28, 1997,
delivered by Oppenheimer, to the effect that the consideration to be paid by the
Company in the Merger is fair from a financial point of view to the Unitholders.
"Fannie Mae" means the Federal National Mortgage Association.
"FHA" means the Federal Housing Administration.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"First Call" is a data service that monitors and publishes a compilation of
earnings estimates produced by selected research analysts regarding companies of
interest to institutional investors.
"Forecasted Net Income" means the net income of the Company developed by the
General Partners and reflected in their financial forecasts.
"Freddie Mac" means the Federal Home Loan Mortgage Corporation.
"Fund Certificates" means Exchangeable Pass-through Certificates
representing assigned limited partnership interests in the Fund.
"GAAP" means generally accepted accounting principles.
"General Partners" means, collectively, America First Capital Associates
Limited Partnership Three and America First Capital Associates Limited
Partnership Six.
"Ginnie Mae" means the Government National Mortgage Association.
"Independent Directors" means those members of the Board of Directors who
are neither executive officers of the Company nor executive officers or
directors of the Advisor.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the outstanding stock of a corporation.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRA" means individual retirement account.
"IRS" means the Internal Revenue Service.
"Letter of Transmittal" means the letter of transmittal to be mailed by the
Exchange Agent to each holder of Unit Certificates after the effective date of
the Merger containing instructions for use in effecting the surrender of the
Unit Certificates in exchange for shares of Common Stock.
"LIBOR" means the London Inter-Bank Offered Rate.
"Maximum Participation" means that all of the Partnerships participate in
the Merger and no Unitholders in Pension Fund elect the Retention Option.
"Merger" means the proposed combination of the Company and the Partnerships.
145
<PAGE>
"Merger Agreement" means the agreement and plan of merger, dated as of July
29, 1997, among the Company, the Partnership Merger Sub, and the Partnerships.
"MGCL" means the Maryland General Corporation Law.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage Loans" means mortgage loans that are eligible for including in a
pool that would collateralize Mortgage Securities.
"Mortgage Securities" means mortgaged-backed securities, including
adjustable-rate securities and private-issue securities.
"NASDAQ" means the NASDAQ Stock Market.
"Net Asset Value" means the net asset value of the Partnerships calculated
by the General Partners for purposes of allocating the shares of Common Stock to
be issued in the Merger.
"Net Income" means the net income of the Company determined in accordance
with GAAP before the Advisor's incentive compensation, the deduction for
dividends paid and any net operating loss deductions arising from losses in
prior periods. The Company's interest expenses for borrowed money shall be
deducted in calculating Net Income.
"Non-U.S. Stockholder" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.
"NYSE" means the New York Stock Exchange.
"Oppenheimer" means CIBC Oppenheimer Corp.
"Other Investment" assets means pass-through certificates, multi-class
pass-throughs or collateralized mortgage obligations backed by Mortgage Loans on
single-family, multifamily, commercial or other real estate-related properties
so long as they are rated at least investment grade at the time of purchase by
either S&P or Moody's, (e.g., securities having a security rating of BBB, Baa or
better) or are considered to be of equivalent credit quality as determined by
the Advisor and approved by the Investment Committee.
"Ownership Limit" means a provision, contained in certain organizational
documents of the Company, limiting the ownership of the Common Stock to 9.8% of
the outstanding shares of any class of stock.
"PaineWebber" means PaineWebber Incorporated.
"Participating Loan" means Prep Fund 1's investment in one participating
first Mortgage Loan.
"Partnership Agreements" means the Agreements of Limited Partnership of each
of Prep Fund 1, Prep Fund 2 and Pension Fund.
"Partnership Indemnified Liabilities" means those losses incurred by a
General Partner or an affiliate of such General Partner that are indemnified by
either the Partnership or the Company pursuant to the terms of the Merger
Agreement. See "TERMS OF THE MERGER -- The Merger Agreement -- Indemnification."
"Partnership Merger Sub" means AF Merger, L.P., a wholly owned Delaware
limited partnership subsidiary of the Company.
"Partnerships" means, collectively, Prep Fund 1, Prep Fund 2 and Pension
Fund.
"Pension BUCs" means the outstanding Beneficial Unit Certificates
representing assigned limited partnership units in Pension Fund.
"Pension Fund" means America First Prep Fund 2 Pension Series Limited
Partnership, a Delaware limited partnership.
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<PAGE>
"Prep Fund 1" means America First Participating/Preferred Equity Mortgage
Fund Limited Partnership, a Delaware limited partnership.
"Prep Fund 1 Units" means the outstanding Exchangeable Units representing
assigned limited partnership interests in Prep Fund 1.
"Prep Fund 2" means America First Prep Fund 2 Limited Partnership, a
Delaware limited partnership.
"Prep Fund 2 BUCs" means the outstanding Beneficial Unit Certificates
representing assigned limited partnership interests in Prep Fund 2.
"PREPs" means preferred real estate participations.
"Prohibited Owner" means any stockholder that owns shares of Common Stock in
excess of the Ownership Limit.
"Properties" means the properties underlying a PREP, an Equity Interest or
the Participating Loan.
"Qualified Hedge" means a bona fide interest rate swap or cap agreement to
hedge any variable rate indebtedness incurred or to be incurred to acquire or
carry real property or interests in mortgages on real property.
"Qualified REIT Assets" means interests in real property, interests in
mortgages on real property and shares in other qualified REITs.
"Qualifying Interests" means investments in mortgages and other liens on and
interest in real estate that qualify an entity for exemption under the
Investment Company Act.
"Record Date" means February 25, 1998, the date of record for determining
Unitholders entitled to vote on the Merger.
"Registration Statement" means the Registration Statement on Form S-4,
together with this Consent Solicitation Statement/Prospectus, including any
amendments thereto.
"REIT" means a real estate investment trust qualified as such under Sections
856 to 860 of the Code and applicable Treasury Regulations.
"REMIC" means real estate mortgage investment conduit.
"Response Date" means March 31, 1998, the date by which Consent Forms must
be received to be counted in the vote on the Merger.
"Restriction Period" means the ten-year period beginning on the date on
which the Company acquires assets from a C corporation (I.E., generally a
corporation subject to tax at the corporate level) in a transaction in which the
bases of the acquired assets in the Company's hands are determined by reference
to the bases of the assets (or any other property) in the hands of the C
corporation.
"Retention Option" means the option which will be given to Unitholders in
Pension Fund, in lieu of receiving shares of Common Stock in the Company, to
remain as Unitholders in Pension Fund.
"Retention Option Form" means the Form accompanying this Consent
Solicitation Statement/ Prospectus for the election of the Retention Option by
Unitholders in Pension Fund.
"Return on Equity" for any period means that amount produced by dividing the
Company's Net Income for such period by its Stockholders' Equity for such
period. For purposes of calculating the incentive compensation payable to the
Advisor, Return on Equity is not related to the actual distributions received by
stockholders.
"S&P" means Standard & Poor's Corporation.
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<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Selected Mortgage REITs" means public residential mortgage REITs selected
by PaineWebber in connection with its financial advice rendered to the
Partnerships, that, based on published financial information, operating
statistics and market trading information, PaineWebber deemed to be reasonably
similar to the Company following the consummation of the Merger.
"Special Committee" means a special committee of Independent Directors of
America First formed by the General Partners to represent the interests of
Unitholders in connection with the Merger.
"Stock Option Plan" means the Company's 1997 Stock Option Plan.
"Stockholders' Equity" means the excess of total assets of the Company minus
its total liabilities as determined in accordance with GAAP.
"Superior Competing Transaction" means, as defined in the Merger Agreement,
a bona fide proposal of a Competing Transaction made by a third party which the
applicable General Partner determines in good faith (based on the advice of its
investment banking firm) to be more favorable to its Unitholders than the
Merger.
"Tax-Exempt Investors" means tax-exempt investors including IRAs, Keogh
plans, pension and profit sharing plans and other qualified retirement plans.
"Ten-Year U.S. Treasury Rate" means the average of the weekly average yield
to maturity for U.S. Treasury securities (adjusted to a constant maturity of ten
years) as published weekly by the Federal Reserve Board during a quarter.
"Treasury Regulations" means income tax regulations promulgated under the
Code as such regulations may be amended from time to time (including temporary
regulations).
"Trust" means a trust to which any Excess Stock of the Company will be
transferred for the benefit of a Charitable Beneficiary.
"Trustee" means the trustee of any Trust.
"UBTI" means unrelated business taxable income as defined in Section 512 of
the Code.
"Unit Certificates" means certificates representing Units that were
converted into the right to receive shares of Common Stock as of the Effective
Date.
"Unitholders" means the holders of Units in each of the Partnerships.
"Units" means Prep Fund 1 Units, Prep Fund 2 BUCs and Pension BUCs.
"USRPI" means a United States real property interest. page #s for financials
set with cross refs. do not delete codes
148
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants............................................ F-2
Balance Sheet at November 12, 1997........................................... F-3
Notes to Balance Sheet at November 12, 1997.................................. F-4
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Financial Information.............................................. F-5
Pro Forma Statements of Income for the Nine Months Ended September 30,
1997......................................................................... F-6
Pro Forma Statements of Income for the Year Ended December 31, 1996.......... F-7
Pro Forma Balance Sheets as of September 30, 1997............................ F-8
Notes to Pro Forma Financial Statements...................................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
America First Mortgage Investments, Inc.
We have audited the accompanying balance sheet of America First Mortgage
Investments, Inc. as of November 12, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of America First Mortgage Investments,
Inc. as of November 12, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
November 13, 1997
F-2
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
BALANCE SHEET
NOVEMBER 12, 1997
<TABLE>
<S> <C>
Asset............................................................................... $ 1,000
---------
---------
Cash
Stockholders' Equity
Common stock, $.01 par value; 10,000,000 shares authorized 90,621 shares issued
and
outstanding....................................................................... $ 906
Additional Paid-In Capital.......................................................... 94
---------
Total Stockholders' Equity.................................................... $ 1,000
---------
---------
</TABLE>
The accompanying notes are an integral part of the balance sheet.
F-3
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO BALANCE SHEET
NOVEMBER 12, 1997
1. ORGANIZATION
America First Mortgage Investments, Inc. (the Company) was incorporated in
Maryland on July 24, 1997. The Company has not yet commenced operations.
The Company has issued 90,621 shares of common stock to the general partners
of America First Participating/Preferred Equity Mortgage Fund (PREP Fund 1),
America First PREP 2 (PREP Fund 2) and America First PREP Fund 2 Pension Series
Limited Partnership (Pension Fund) (collectively referred to as the "PREP
Funds") for consideration of $1,000. The Company intends to issue up to
8,971,506 additional shares of common stock to holders of Exchangeable Units and
Beneficial Unit Certificates of the PREP Funds in the ratio of one share of
common stock for each PREP Fund 1 Exchangeable Unit, approximately 1.26 shares
of common stock for each PREP Fund 2 Beneficial Unit Certificate and
approximately 1.31 shares of common stock for each Pension Fund Beneficial Unit
Certificate.
2. FEDERAL INCOME TAXES
The Company expects to elect and qualify to be taxed as a real estate
investment trust (REIT) under the provisions of the Internal Revenue Code and
the corresponding provisions of state law. Accordingly, the Company will not be
subject to federal or state income tax to the extent of its distributions to
stockholders. In order to maintain its status as REIT, the Company is required,
among other requirements, to distribute at least 95% of its taxable income.
3. RELATED PARTY TRANSACTIONS
America First Mortgage Advisory Corporation (the Advisor) will manage the
operations and investments of the Company and perform administrative services
for the Company for which it will receive a per annum base management fee
payable monthly in arrears in an amount equal to 1.10% per annum of the first
$300 million of Stockholders' Equity of the Company, plus .80% per annum of the
portion of Stockholders' Equity of the Company above $300 million. The Company
will also pay the Advisor, as incentive compensation for each fiscal quarter, an
amount equal to 20% of the dollar amount by which the annualized Return on
Equity for such fiscal quarter exceeds the amount necessary to provide an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
America First Properties Management Company L.L.C. (the Manager), will
provide property management services for certain of the multifamily properties
to be obtained by the Company. The Manager will receive a management fee equal
to a stated percentage of the gross revenues generated by the property under
management, ranging from 3.75% to 5% of gross revenues.
F-4
<PAGE>
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
Given the structure of the proposed Merger, the composition of the Company
after the Merger will differ depending on (i) whether Pension Fund participates
in the Merger and (ii) if Pension Fund participates, the number of Unitholders
in Pension Fund electing the Retention Option.
To assist Unitholders in analyzing the Merger, two presentations of pro
forma financial statements have been prepared to show the impact of the Merger
based upon two assumptions. The first presentation of pro forma financial
statements assumes Pension Fund does not participate in the merger while the
second presentation assumes Maximum Participation.
The pro forma balance sheets of the Company have been prepared as if the
Merger was consummated on September 30, 1997. The pro forma statements of income
of the Company for the year ended December 31, 1996, and for the nine months
ended September 30, 1997, assume that the Merger was consummated on January 1,
1996. Since the Merger will be accounted for using the purchase method of
accounting, the pro forma financial statements have been prepared using this
method. Under the purchase method Prep Fund 1 will be deemed to be the acquirer
of the other Partnerships because its Unitholders will be allocated the largest
number of shares of Common Stock. As the surviving entity for accounting
purposes, Prep Fund 1's assets and liabilities will be recorded by the Company
at their historical cost, with the assets and liabilities of the other
Partnership(s) recorded at their estimated fair values.
The pro forma financial statements are based upon available information and
upon certain assumptions, as set forth in the notes to pro forma financial
statements, that the General Partners believe are reasonable in the
circumstances. The pro forma financial statements do not give effect to the
anticipated realignment of the investment portfolio or the implementation of the
Company's business plan. Thus, these pro forma financial statements do not
purport to represent what the Company's financial position or results of
operations would actually have been if the Merger in fact had occurred on such
dates or at the beginning of such periods or the Company's financial position or
results of operations for any future date or period.
F-5
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
PRO FORMA STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSUMING PENSION FUND ASSUMING
DOES NOT PARTICIPATE MAXIMUM PARTICIPATION
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREP FUND 1 PREP FUND 2 PRO FORMA PRO FORMA PENSION FUND PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------ ----------- ----------- ------------- ----------- -----------
Revenues:
Mortgage and mortgage-
backed securities
income................ $2,024,656 $ 765,119 $ -- $2,789,775 $ 424,589 $ -- $3,214,364
Equity in earnings of
property
partnerships.......... 377,458 138,815 -- 516,273 59,852 -- 576,125
Rental income........... 1,897,467 -- -- 1,897,467 -- -- 1,897,467
Interest income on
participating loans... 177,639 -- -- 177,639 -- -- 177,639
Interest income on
temporary cash
investments and U.S.
government
securities............ 419,125 94,255 -- 513,380 103,058 -- 616,438
Total revenues........ 4,896,345 998,189 -- 5,894,534 587,499 -- 6,482,033
Expenses:
General and
administrative
expenses.............. 813,779 429,334 (845,133)(E) 1,269,034 218,942 (94,171)(E) 1,473,578
(7,658)(F) (6,523)(F)
315,000(G) 86,296(J)
20,038(I)
543,674(J)
Real estate operating
expenses.............. 1,104,990 -- -- 1,104,990 -- -- 1,104,990
Depreciation............ 226,882 -- -- 226,882 -- -- 226,882
Interest expense........ 565,595 -- -- 565,595 -- -- 565,595
------------ ------------ ----------- ----------- ------------- ----------- -----------
Total expenses........ 2,711,246 429,334 25,921 3,166,501 218,942 (14,398) 3,371,045
------------ ------------ ----------- ----------- ------------- ----------- -----------
Net income................ $2,185,099 $ 568,855 $ (25,921) $2,728,033 $ 368,557 $ 14,398 $3,110,988
------------ ------------ ----------- ----------- ------------- ----------- -----------
------------ ------------ ----------- ----------- ------------- ----------- -----------
Net income per share...... $ 0.35 $ 0.34
Weighted average number of
shares outstanding
during the period....... 7,866,801 9,062,128
</TABLE>
See accompanying notes to pro forma financial statements.
F-6
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSUMING PENSION FUND ASSUMING
DOES NOT PARTICIPATE MAXIMUM PARTICIPATION
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREP FUND 1 PREP FUND 2 PRO FORMA PRO FORMA PENSION FUND PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------ ----------- ----------- ------------ ----------- -----------
Revenues:
Mortgage-backed
securities income..... $3,011,347 $1,231,344 $ -- $4,242,691 $ 660,229 $ -- $4,902,920
Equity in earnings of
property
partnerships.......... 264,179 53,802 -- 317,981 20,381 -- 338,362
Rental income........... 2,465,655 -- -- 2,465,655 -- -- 2,465,655
Interest income on
participating loans... 240,432 -- -- 240,432 -- -- 240,432
Interest income on
temporary cash
investments and U.S.
government
securities............ 442,931 24,302 -- 467,233 94,739 -- 561,972
Gain on sale of
mortgage-backed
securities............ -- 3,157 -- 3,157 -- -- 3,157
Gain on sale of PREPs... -- 598,867 -- 598,867 226,587 -- 825,454
------------ ------------ ----------- ----------- ------------ ----------- -----------
Total revenues........ 6,424,544 1,911,472 -- 8,336,016 1,001,936 -- 9,337,952
Expenses:
General and
administrative
expenses.............. 895,961 313,422 (917,965)(E) 1,452,822 172,499 (107,224)(E) 1,624,460
(10,211)(F) (8,698)(F)
420,000(G) 115,061(J)
26,717(I)
724,898(J)
Real estate operating
expenses.............. 1,320,270 -- -- 1,320,270 -- -- 1,320,270
Depreciation............ 302,510 -- -- 302,510 -- -- 302,510
Interest expense........ 842,875 -- -- 842,875 -- -- 842,875
------------ ------------ ----------- ----------- ------------ ----------- -----------
Total expenses........ 3,361,616 313,422 243,439 3,918,477 172,499 861 4,090,115
------------ ------------ ----------- ----------- ------------ ----------- -----------
Net income.............. $3,062,928 $1,598,050 $(243,439) $4,417,539 $ 829,437 $ (861) $5,247,837
------------ ------------ ----------- ----------- ------------ ----------- -----------
------------ ------------ ----------- ----------- ------------ ----------- -----------
Net income per share.... $ 0.56 $ 0.58
----------- -----------
----------- -----------
Weighted average number
of shares outstanding
during the period..... 7,906,350 9,101,677
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to pro forma financial statements.
F-7
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
PRO FORMA BALANCE SHEETS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSUMING PENSION FUND ASSUMING
DOES NOT PARTICIPATE MAXIMUM PARTICIPATION
------------------------ ------------------------
PREP FUND 1 PREP FUND 2 PRO FORMA PRO FORMA PENSION FUND PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED (HISTORICAL) ADJUSTMENTS COMBINED
----------- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and temporary cash
investments, at cost which
approximates market
value..................... 1$0,393,926 $2,306,281 $(871,670)(H) $11,828,537 $2,568,226 $(148,765)(H) $14,247,998
Investment in mortgage-
backed securities......... 34,653,964 14,200,926 (267,610)(A) 49,255,090 7,534,693 (125,476)(C) 56,664,307
667,810(B)
Investment in and advances
to preferred equity
participants (PEPs), net
of valuation allowance.... 1,503,551 -- 1,896,859(A) 3,400,410 -- 717,695(C) 4,118,105
Investment in real estate... 4,021,034 -- -- 4,021,034 -- -- 4,021,034
Investment in participating
loans, net of valuation
allowance................. 860,000 -- -- 860,000 -- -- 860,000
Interest receivable......... 276,909 92,361 -- 369,270 56,488 -- 425,758
Investment evaluation fees,
net....................... 570,163 -- -- 570,163 -- -- 570,163
Other assets................ 2,732,530 44,459 (39,566)(A) 3,378,260 34,922 (33,704)(C) 3,379,478
640,837(H) --
----------- ------------ ----------- ----------- ------------ ----------- -----------
5$5,012,077 $16,644,027 $2,026,660 $73,682,764 $10,194,329 $ 409,750 $84,286,843
----------- ------------ ----------- ----------- ------------ ----------- -----------
----------- ------------ ----------- ----------- ------------ ----------- -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Liabilities:
Accounts payable.......... $ 227,927 $ 64,707 -- $ 292,634 $ 45,830 -- $ 338,464
Distributions payable..... 515,834 174,492 -- 690,326 98,193 -- 788,519
Mortgage notes payable.... 6,800,000 -- -- 6,800,000 -- -- 6,800,000
----------- ------------ ----------- ----------- ------------ ----------- -----------
7,543,761 239,199 -- 7,782,960 144,023 -- 7,926,983
----------- ------------ ----------- ----------- ------------ ----------- -----------
Stockholders' Equity:
General Partner........... 100 100 (200)(D) -- 100 (100)(D) --
Unitholders............... 46,974,698 16,468,915 1,525,496(A) -- 10,042,885 565,836(C) --
(64,969,109)(D) (10,608,721)(D)
Net unrealized holding gains
(losses).................. 493,518 (64,187) 64,187(A) 1,161,328 7,321 (7,321)(C) 1,161,328
667,810(B)
Stockholders' equity........ -- -- 64,969,309(D) 64,738,476 -- 10,608,821(D) 75,198,532
(230,833)(H) (148,765)(H)
----------- ------------ ----------- ----------- ------------ ----------- -----------
47,468,316 16,404,828 2,026,660 65,899,804 10,050,306 409,750 76,359,860
----------- ------------ ----------- ----------- ------------ ----------- -----------
5$5,012,077 $16,644,027 $2,026,660 $73,682,764 $10,194,329 $ 409,750 $84,286,843
----------- ------------ ----------- ----------- ------------ ----------- -----------
</TABLE>
See accompanying notes to pro forma financial statements.
F-8
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
(A) The historical balance sheet of Prep Fund 2 has been adjusted to reflect the
impact of applying the purchase method of accounting to this transaction.
The net assets of Prep Fund 2 are being adjusted to their estimated fair
value of $17,994,511. The fair value is equal to: (1) the amount the
Partnership would receive under the terms of the preferred real estate
participations if the underlying properties were sold for an amount equal to
the net realizable value; (ii) the market value of the mortgage-backed
securities based on quoted market prices; (iii) any undistributed cash and
other assets; less (iv) any outstanding liabilities owed by the Partnership.
The net realizable value of the underlying properties is determined by
management based on the discounted estimated future cash flows from the
properties, including estimated sales proceeds. The calculation of
discounted estimated future cash flows includes certain variables such as
the assumed inflation rate for rents and expenses, capitalization rates and
discount rates. These variables are supplied to management by an independent
real estate appraisal firm based upon local market conditions for each
property.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) the investment in mortgage-backed securities and
the investments in and advances to PREPs, net of valuation allowance, have
been adjusted to fair value as described above, (ii) intangible items
included in other assets have been eliminated as these items were assigned
no value; (iii) the net unrealized holding losses on mortgage-backed
securities has been eliminated because the mortgage-backed securities market
values become their cost basis; and (iv) the net effect of those changes to
the assets and liabilities has been applied to the partners' capital
account.
(B) The historical balance sheet of Prep Fund 1 has been adjusted to reflect all
of the mortgage-backed securities as available-for-sale since the Company
intends to replace a substantial portion of the Partnership's current
portfolio. As a result, the mortgage-backed securities have been adjusted to
market value based on quoted market prices and the net unrealized holding
gain on mortgage-backed securities has been reflected as a component of
stockholders' equity.
(C) The historical balance sheet of Pension Fund has been adjusted to reflect
the impact of applying the purchase method of accounting to this
transaction. The net assets of Pension Fund are being adjusted to their
estimated fair value of $10,608,821. The fair value is equal to: (i) the
amount the Partnership would receive under the terms of the preferred real
estate participations if the underlying properties were sold for an amount
equal to the net realizable value; (ii) the market value of the mortgage-
backed securities based on quoted market prices; (iii) any undistributed
cash and other assets; less (iv) any outstanding liabilities owed by the
Partnership. The net realizable value of the underlying properties is
determined by management based on the discounted estimated future cash flows
from the properties, including estimated sales proceeds. The calculation of
discounted estimated future cash flows includes certain variables such as
the assumed inflation rate for rents and expenses, capitalization rates and
discount rates. These variables are supplied to management by an independent
real estate appraisal firm based upon local market conditions for each
property.
The effect of purchase accounting on the balance sheet results in the
following adjustments: (i) the investment in mortgage-backed securities and
the investments in and advances to PREPs, net of valuation allowance, have
been adjusted to fair value as described above, (ii) intangible items
included in other assets have been eliminated as these items were assigned
no value; (iii) the net unrealized holding losses on mortgage-backed
securities has been eliminated because the mortgage-backed securities market
values become their cost basis; and (iv) the net effect of those changes to
the assets and liabilities has been applied to the partners' capital
account.
F-9
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(D) Represents reclassification of the existing general partners' and unit
holders' capital to stockholders' equity.
(E) Under the terms of the Advisory Agreement, the Advisor is responsible for
compensation of the Company's officers and other personnel whereas, pursuant
to the terms of each Partnership's partnership agreement, compensation costs
and administrative fees were allocated to the respective Partnership. As
such, general and administrative expenses have been adjusted to reflect the
elimination of compensation costs that will be paid by the Advisor and the
elimination of administrative fees. The Advisor will receive a management
fee as described in footnote J.
(F) Represents the elimination of historical amortization of Ginnie Mae
acquisition costs for Prep Fund 2 and Pension as these items were assigned
no value in adjusting to fair value in applying the purchase method of
accounting.
(G) Represents additional incremental costs expected to be incurred in
conjunction with operating the Company. These incremental costs consist of:
(i) board of directors fees and expenses of $60,000 for the nine months and
$80,000 for the year as the Company will have its own board of directors;
(ii) liability insurance of $48,000 for the nine months and $64,000 for the
year for the Company's directors and officers; (iii) legal fees of $61,500
for the nine months and $82,000 for the year associated with operating the
Company as a REIT; (iv) rent expense of $75,000 for the nine months and
$100,000 for the year for the Company's office space; (v) membership costs
of $18,750 for the nine months and $25,000 for the year related to the New
York Stock Exchange; (vi) maintenance costs of $30,000 for the nine months
and $40,000 for the year associated with upgrading the Company's systems;
(vii) printing costs of $14,250 for the nine months and $19,000 for the year
associated with communications to investors; and (viii) bank servicing fees
of $7,500 for the nine months and $10,000 for the year associated with
increased transaction volume.
(H) Represents the following adjustments to record transaction costs expected to
be incurred: (i) a decrease in cash for anticipated transaction costs
remaining to be incurred of $1,020,435; (ii) goodwill of $640,837 resulting
from Prep Fund 1's proportionate share of the transaction costs; and (iii) a
reduction to stockholders' equity for Prep Fund 2's (and Pension Fund's
assuming full participation) proportionate share of the transaction costs.
Prep 2's and Pension Fund's proportionate share of the transaction costs
have been excluded from the pro forma statements of operations. (Note that
these expenses will be paid by the partnerships (pro rata in accordance with
their aggregate Net Asset Values) whether or not the Merger is consummated.)
(I) Represents the amortization of goodwill using the straight line method over
a period of 40 years. The amortization expense is included in general and
administrative expenses.
(J) Represents the base management fee payable to the Advisor pursuant to the
terms of the Advisory Agreement. The base management fee is 1.1% of the
first $300 million of the stockholders' equity plus .8% of the portion of
the stockholders' equity of the Company above $300 million. For purposes of
the pro forma financial statements, the base management fee is based on the
pro forma stockholders' equity at September 30, 1997, for all periods
presented. The Advisor was not entitled to an incentive fee for any of the
periods presented in the pro forma financial statements. Expenses incurred
by the Advisor and reimbursed by the Company are included in pro forma
general and administrative expenses, or in certain circumstances may be
capitalized by the Company. Reimbursable costs included in the Company's
general and administrative expenses or capitalized that are not part of the
base management fee amounted to $1,234,152 (of which $806,292 is included in
general and
F-10
<PAGE>
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
administrative expenses and $427,860 has been capitalized) for the nine
months ended September 30, 1997, and $734,747 (all of which is included in
general and administrative expenses) for the year ended December 31, 1996.
These costs include, but are not limited to, board of directors fees and
expenses, supplies, mailing expense, telephone expense, insurance, travel
and meals, printing, legal, accounting, rent, systems, transfer agent
expenses and transaction costs incurred in connection with the Merger.
F-11
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 29, 1997,
AMONG
AMERICA FIRST MORTGAGE INVESTMENTS, INC.,
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE
FUND LIMITED PARTNERSHIP,
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP,
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP,
AND
AF MERGER, L.P.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
ARTICLE I
The Merger
SECTION 1.1 The Merger.............................................................................. 2
SECTION 1.2 Closing................................................................................. 2
SECTION 1.3 Effective Date.......................................................................... 2
SECTION 1.4 Effects of the Merger................................................................... 2
SECTION 1.5 Organizational Documents................................................................ 3
(a) The Company............................................................................. 3
(b) Pension Fund............................................................................ 3
SECTION 1.6 Officers and Directors.................................................................. 3
SECTION 1.7 General Partner of Pension fund......................................................... 3
SECTION 1.8 Principal Executive Office.............................................................. 3
ARTICLE II
Effect of the Merger on the Exchange Units
of the Partnerships; Exchange of Certificates
SECTION 2.1 Effect on Exchange Units; Conversion of Exchange Units.................................. 3
SECTION 2.2 Exchange of Certificates................................................................ 4
(a) Exchange Agent.......................................................................... 4
(b) Provision of Common Stock............................................................... 4
(c) Exchange Procedure...................................................................... 4
(d) Record Dates; Distributions with Respect to Unconverted Exchange Units.................. 5
(e) No Further Ownership Rights in Exchange Units........................................... 5
(f) No Liability............................................................................ 5
(g) No Fractional Shares.................................................................... 6
(h) Withholding Rights...................................................................... 6
ARTICLE III
Representations and Warranties
SECTION 3.1 Representations and Warranties of the Partnerships...................................... 7
(a) Organization, Standing and Power of the Partnership..................................... 7
(b) Capital Structure....................................................................... 7
(c) Authority; Noncontravention; Consents................................................... 8
(d) SEC Documents; Financial Statements; Undisclosed Liabilities............................ 9
(e) Absence of Certain Changes or Events.................................................... 9
(f) Litigation.............................................................................. 10
(g) Brokers; Fees and Expenses.............................................................. 10
(h) Compliance with Laws.................................................................... 10
(i) Contracts; Debt Instruments............................................................. 11
(j) Tangible Property and Assets............................................................ 11
(k) Books and Records....................................................................... 11
(l) Registration Statement.................................................................. 12
(m) Vote Required........................................................................... 12
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IV
Covenants
SECTION 4.1 Conduct of Business by the Partnerships................................................. 12
SECTION 4.2 Other Actions........................................................................... 13
SECTION 4.3 Payments of Dividends By the Company.................................................... 13
ARTICLE V
Additional Covenants
SECTION 5.1 Preparation of the Registration Statement and the Consent Solicitation
Statement/Prospectus.................................................................... 13
SECTION 5.2 Best Efforts; Notification.............................................................. 14
SECTION 5.3 No Solicitation of Transactions......................................................... 14
SECTION 5.4 Public Announcements.................................................................... 15
SECTION 5.5 Listing of Common Stock................................................................. 15
SECTION 5.6 Indemnification......................................................................... 15
ARTICLE V
Conditions Precedent
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger.............................. 17
(a) Approval of Unitholders of Prep Fund 1 and Prep Fund 2.................................. 17
(b) Listing of Common Stock................................................................. 17
(c) Absence of Certain Conditions........................................................... 18
(d) Registration Statement.................................................................. 18
(e) No Injunctions or Restraints............................................................ 18
(f) Opinion Related to Partnership Status of the Partnership................................ 18
(g) Opinion Related to REIT Status of the Company........................................... 18
(h) The Investment Company Act Opinion...................................................... 18
(i) Consents and Approvals.................................................................. 18
(j) Absence of Material Adverse Effects..................................................... 18
SECTION 6.2 Conditions to Obligations of the Partnerships........................................... 19
(a) Representations and Warranties.......................................................... 19
(b) Performance of Obligations of the Other Partnerships.................................... 19
(c) Material Adverse Change................................................................. 19
(d) Consents................................................................................ 20
SECTION 6.3 Conditions to Obligations of Pension Fund............................................... 20
ARTICLE VII
General Partner Actions
SECTION 7.1 General Partner Actions................................................................. 20
ARTICLE VIII
Termination, Amendment and Waiver
SECTION 8.1 Terminiation............................................................................ 20
SECTION 8.2 Expenses................................................................................ 21
SECTION 8.3 Effect of Termination................................................................... 22
SECTION 8.4 Amendment............................................................................... 22
SECTION 8.5 Waiver.................................................................................. 22
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IX
General Provisions
SECTION 9.1 Nonsurvival of Representations and Warranties........................................... 23
SECTION 9.2 Notices................................................................................. 23
SECTION 9.3 Interpretation.......................................................................... 24
SECTION 9.4 Counterparts............................................................................ 24
SECTION 9.5 Entire Agreement; No Third-Party Beneficiaries.......................................... 24
SECTION 9.6 Governing Law........................................................................... 24
SECTION 9.7 Assignment.............................................................................. 24
SECTION 9.8 Enforcement............................................................................. 24
ARTICLE X
Certain Definitions
SECTION 10.1 Certain Definitions..................................................................... 25
Exhibits
A Charter of the Company
B Bylaws of the Company
C Amended Charter of the Company
D Pension Fund Agreement
E Certificate of Limited Partnership of Pension Fund
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER (the "AGREEMENT"), dated as of July 29, 1997,
among AMERICA FIRST MORTGAGE INVESTMENTS, INC., a Maryland corporation (the
"COMPANY"), AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED
PARTNERSHIP, a Delaware limited partnership ("PREP FUND 1"), AMERICA FIRST PREP
FUND 2 LIMITED PARTNERSHIP, a Delaware limited partnership ("PREP FUND 2"),
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP, a Delaware limited
partnership ("PENSION FUND" and together with Prep Fund 1 and Prep Fund 2, the
"PARTNERSHIPS") and AF MERGER, L.P., a Delaware limited partnership subsidiary
of the Company ("PARTNERSHIP MERGER SUB").
RECITALS
WHEREAS, certain terms used herein shall have the meanings assigned to them
in Article X of this Agreement;
WHEREAS, the Board of Directors of the Company and the general partners of
each of the Partnerships (the "GENERAL PARTNERS"), together with the Special
Committee (as herein defined), have determined that it is advisable and in the
best interest of the Company and Partnership Merger Sub, on the one hand, and
the Partnerships, on the other hand, and their respective stockholders and
Unitholders, as the case may be, to proceed with the strategic business
combination involving the five entities on the terms described in this
Agreement, pursuant to which (i) Prep Fund 1 and Prep Fund 2 will merge with the
Company, the Company will be the surviving corporation in such merger and each
Prep Fund 1 Unit and Prep Fund 2 BUC will be converted into the right to receive
common stock, par value $0.01 per share, of the Company (the "COMMON STOCK") and
(ii) Pension Fund will merge with Partnership Merger Sub, Pension Fund will be
the surviving limited partnership in such merger and each Pension BUC will be
converted into the right to receive Common Stock, except for those Pension BUCs
held by Unitholders electing to exercise their option to retain their current
investment in Pension Fund (the "RETENTION OPTION") (the transactions described
in (i) and (ii) above being referred to herein as the "MERGER");
WHEREAS, the Company, as the surviving corporation in the Merger with Prep
Fund 1 and Prep Fund 2, intends that, following the Merger, it shall be subject
to taxation as a real estate investment trust (a "REIT") within the meaning of
the Internal Revenue Code of 1986, as amended (the "CODE"); and
WHEREAS, Pension Fund, as the surviving limited partnership in the Merger
with Partnership Merger Sub, intends that, following the Merger, it shall
continue to be subject to taxation as a partnership under the Code.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, (i) in accordance with the Maryland General Corporation
Law (the "MGCL") and the Delaware Revised Uniform Limited Partnership Act (the
"DRULPA"), Prep Fund 1 and Prep Fund 2 shall be merged with and into the Company
at the Effective Time (as defined below) and (ii) in accordance with DRULPA,
Pension Fund shall be merged with Partnership Merger Sub at the Effective Time.
Following the Merger, (i) the separate existence of Prep Fund 1 and Prep Fund 2
shall cease and the Company shall continue as the surviving corporation and
shall succeed to and assume all the rights and obligations of Prep Fund 1 and
Prep Fund 2 in accordance with the MGCL and DRULPA and (ii) the separate
existence of Partnership Merger Sub shall cease and Pension Fund shall continue
as the surviving limited partnership and shall succeed to and assume all the
rights and obligations of Partnership Merger Sub in accordance with the DRULPA.
A-2
<PAGE>
SECTION 1.2 CLOSING. The closing of the Merger will take place at 10:00
A.M. Eastern Time, on a date to be specified by the parties, which (subject to
satisfaction or waiver of the conditions set forth in Sections 6.2 and 6.3)
shall be no later than the second business day after satisfaction or waiver of
the conditions set forth in Section 6.1 (the "CLOSING DATE"), at the offices of
Rogers & Wells, 200 Park Avenue, New York, New York 10166, unless another date
or place is agreed to in writing by the parties hereto.
SECTION 1.3 EFFECTIVE DATE. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article VI, the parties
shall file the articles of merger, certificate of merger or other appropriate
documents for the merger of Prep Fund 1 and Prep Fund 2 with and into the
Company executed in accordance with Section 3-110 of the MGCL and Section 17-211
of the DRULPA and the certificate of merger or other appropriate documents for
the merger of Pension Fund with Partnership Merger Sub executed in accordance
with Section 17-211 of the DRULPA (collectively, the "ARTICLES OF MERGER") and
shall make all other filings or recordings required under the MGCL or the DRULPA
to effect the Merger. The Merger shall become effective at such time as the
Articles of Merger have been duly filed with the Department of Assessments and
Taxation of the State of Maryland and the Office of the Secretary of State of
the State of Delaware, or at such other time as the parties shall specify in the
Articles of Merger (the time and the date the Merger becomes effective being,
the "EFFECTIVE TIME" and the "EFFECTIVE DATE," respectively), it being
understood that the parties shall cause the Effective Time to occur on the
Closing Date.
SECTION 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in the MGCL or the DRULPA, as appropriate.
SECTION 1.5 ORGANIZATIONAL DOCUMENTS.
(a) THE COMPANY. The Articles of Incorporation of the Company as in effect
on the date hereof are substantially in the form of EXHIBIT A hereto (the
"CHARTER"). The bylaws of the Company as in effect on the date hereof are
substantially in the form of EXHIBIT B hereto (the "BYLAWS"). Prior to the
Effective Time, the Charter shall be amended and restated by the Amended and
Restated Articles of Incorporation substantially in the form of EXHIBIT C hereto
(the "AMENDED CHARTER") and as amended shall continue to be in effect after the
Merger.
(b) PENSION FUND. The Agreement of Limited Partnership, dated as of May 25,
1988, of Pension Fund as in effect on the date hereof and substantially in the
form of EXHIBIT D hereto (the "PENSION FUND AGREEMENT"), shall be in effect
after the Merger. The certificate of limited partnership of Pension Fund in
effect on the date hereof and substantially in the form of EXHIBIT E hereto,
shall continue to be in effect after the Merger.
SECTION 1.6 OFFICERS AND DIRECTORS. The officers of the Company
immediately following the Effective Time shall continue to be the officers of
the Company. The Board of Directors of the Company immediately following the
Effective Time shall continue to be composed of the current members of the Board
of Directors of the Company.
SECTION 1.7 GENERAL PARTNER OF PENSION FUND. Immediately following the
Effective Time, the general partner of Pension Fund shall continue to be America
First Capital Associates Limited Partnership Six, a Delaware limited partnership
("AFCA 6").
SECTION 1.8 PRINCIPAL EXECUTIVE OFFICE. The principal executive office of
the Company following the Effective Date shall continue to be in New York, New
York.
A-3
<PAGE>
ARTICLE II
EFFECT OF THE MERGER ON THE EXCHANGE UNITS
OF THE PARTNERSHIPS; EXCHANGE OF CERTIFICATES
SECTION 2.1 EFFECT ON EXCHANGE UNITS; CONVERSION OF EXCHANGE UNITS. By
virtue of the Merger and without any action on the part of any Unitholder
participating in the Merger:
(a) At the Effective Time, each issued and outstanding Prep Fund 1 Unit,
Prep Fund 2 BUC and Pension BUC (except those Pension BUCs held by Unitholders
electing the Retention Option) shall be converted into the right to receive from
the Company 1.00, 1.262758 and 1.306189, respectively, fully paid and
nonassessable shares of Common Stock. At the Effective Time, all such Exchange
Units shall no longer be outstanding and shall automatically be canceled and
retired and all rights with respect thereto shall cease to exist, and each
holder of a certificate representing any such Exchange Unit (an "EXCHANGE UNIT
CERTIFICATE") shall cease to have any rights with respect thereto, except the
right to receive, upon surrender of such certificate in accordance with Section
2.2(c), certificates representing the shares of Common Stock required to be
delivered under this Section 2.1 and any cash in lieu of fractional shares of
Common Stock to be issued or paid in consideration therefor upon surrender of
such certificate (the "MERGER CONSIDERATION") and any dividends or other
distributions to which such holder is entitled pursuant to Section 2.2(d), in
each case, without interest and less any required withholding taxes.
(b) Notwithstanding the foregoing, the parties understand that following the
Merger the rights of each stockholder of the Company under this Section 2.1 will
be subject to the ownership limitations and other related provisions contained
in the Amended Charter.
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time, the Company and the
Partnerships shall jointly appoint a bank or trust company to act as exchange
agent (the "EXCHANGE AGENT") for the exchange of the Merger Consideration upon
surrender of Exchange Unit Certificates or cancellation of uncertificated
Exchange Units, as the case may be.
(b) PROVISION OF COMMON STOCK. The Company shall provide to the Exchange
Agent on or before the Effective Time, for the benefit of the Unitholders
participating in the Merger, sufficient shares of Common Stock issuable in
exchange for the issued and outstanding Exchange Units pursuant to Section 2.1.
(c) EXCHANGE PROCEDURE. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
Exchange Unit Certificate whose Units were converted into the right to receive
the Merger Consideration pursuant to Section 2.1, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Exchange Unit Certificates shall pass, only upon delivery of the Exchange
Unit Certificates to the Exchange Agent and shall be in a form and have such
other provisions as the Company may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Exchange Unit Certificates in exchange
for the Merger Consideration. Upon surrender of a Exchange Unit Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly completed and executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Exchange Unit Certificate
shall be entitled to receive in exchange therefor the Merger Consideration and
any dividends or other distributions to which such holder is entitled pursuant
to Section 2.2(d), and the Exchange Unit Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Exchange Units
which is not registered in the transfer records of the appropriate Partnership,
payment may be made to a person other than the person in whose name the Exchange
Unit Certificate so surrendered is registered if such Exchange Unit Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment either shall pay any transfer or other taxes
required by reason of such payment being made to a person other than the
registered holder of such Exchange Unit Certificate or establish to the
satisfaction of the Company that such tax or taxes have been paid or are not
applicable. Until surrendered as contemplated by this Section
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2.2, each Exchange Unit Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration, without interest, into which the Exchange Units
theretofore represented by such Exchange Unit Certificate shall have been
converted pursuant to Section 2.1 and any dividends or other distributions to
which such holder is entitled pursuant to Section 2.2(d). No interest will be
paid or will accrue on the Merger Consideration upon the surrender of any
Exchange Unit Certificate or on any cash payable pursuant to Section 2.2(d) or
Section 2.2(g).
(d) RECORD DATES; DISTRIBUTIONS WITH RESPECT TO UNCONVERTED EXCHANGE UNITS.
(i) From the date of this Agreement, the Company and the Partnerships
shall cooperate to establish and maintain record and payment dates for regular
quarterly cash distributions on their respective capital stock and Units, such
that the record and payment dates, respectively, for each of the Company and the
Partnerships occur on the same calendar date.
(ii) No dividends or other distributions with respect to Exchange Units
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Exchange Unit Certificate with respect to the Exchange Units
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder pursuant to Section 2.2(g), in each case until the
surrender of such Exchange Unit Certificate in accordance with this Article II.
Subject to the effect of applicable abandoned property, escheat or similar laws,
following surrender of any such Exchange Unit Certificate there shall be paid to
the holder of such Exchange Unit Certificate, without interest, (A) at the time
of such surrender, the amount of any cash payable in lieu of any fractional
share of Common Stock to which such holder is entitled pursuant to Section
2.2(g) and (B) if such Exchange Unit Certificate is exchangeable for one or more
whole shares of Common Stock, (x) at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Common Stock and (y) at
the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender and with
a payment date subsequent to such surrender payable with respect to such whole
shares of Common Stock.
(e) NO FURTHER OWNERSHIP RIGHTS IN EXCHANGE UNITS. All Merger Consideration
paid upon the surrender of Exchange Unit Certificates in accordance with the
terms of this Article II (and any cash paid pursuant to Section 2.2(g)) shall be
deemed to have been paid in full satisfaction of all rights pertaining to the
Exchange Units theretofore represented by such Exchange Unit Certificates,
subject, however, to the obligation of the Company to pay, without interest, any
dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by the Partnerships on such
Exchange Units in accordance with the terms of this Agreement or prior to the
date of this Agreement and which remain unpaid at the Effective Time and have
not been paid prior to such surrender, and there shall be no further
registration of transfers on the transfer books of the Partnerships of the
Exchange Units which were outstanding immediately prior to the Effective Time
(except for transfers of Pension BUCs held by Unitholders electing the Retention
Option). If, after the Effective Time, Exchange Unit Certificates are properly
presented to the Company they shall be canceled and exchanged as provided in
this Article II.
(f) NO LIABILITY. None of the Company, the Partnerships, Partnership Merger
Sub or the Exchange Agent shall be liable to any person in respect of any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Any portion of the Merger
Consideration delivered to the Exchange Agent pursuant to this Agreement that
remains unclaimed for six months after the Effective Time shall be redelivered
by the Exchange Agent to the Company, upon demand, and any holders of Exchange
Unit Certificates who have not theretofore complied with Section 2.2(c) shall
thereafter look only to the Company for delivery of the Merger Consideration,
subject to applicable abandoned property, escheat and other similar laws.
(g) NO FRACTIONAL SHARES.
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(i) No certificates or scrip representing fractional shares of Common
Stock shall be issued upon the surrender for exchange of Exchange Unit
Certificates, and such fractional share interests will not entitle the owner
thereof to vote, to receive dividends or to any other rights of a stockholder of
the Company.
(ii) Notwithstanding any other provision of this Agreement, each holder
of Exchange Units exchanged in the Merger who would otherwise have been entitled
to receive a fraction of a share of Common Stock (after taking into account all
Exchange Unit Certificates delivered by such holder) shall receive, from the
Exchange Agent in accordance with the provisions of this Section 2.2(g), a cash
payment in lieu of such fractional share of Common Stock representing such
holder's proportionate interest, if any, in the net proceeds from the sale by
the Exchange Agent in one or more transactions (which sale transactions shall be
made at such times, in such manner and on such terms as the Exchange Agent shall
determine in its reasonable discretion) on behalf of all such holders of the
aggregate of the fractional shares of Common Stock which would otherwise have
been issued (the "FRACTIONAL SHARES"). The sale of the Fractional Shares by the
Exchange Agent shall be executed on the New York Stock Exchange (the "NYSE") or
such other nationally recognized securities exchange (collectively, a "NATIONAL
EXCHANGE") on which the Common Stock is traded through one or more member firms
of the NYSE or a National Exchange and shall be executed in round lots to the
extent practicable. Until the net proceeds of such sale or sales have been
distributed to the holders of Exchange Unit Certificates, the Exchange Agent
will hold such proceeds in trust (the "EXCHANGE TRUST") for the holders of
Exchange Unit Certificates. The Company shall pay all commissions, transfer
taxes and other out-of-pocket transaction costs, including the expenses and
compensation of the Exchange Agent, incurred in connection with this sale of the
Fractional Shares. As soon as practicable after the determination of the amount
of cash, if any, to be paid to holders of Exchange Unit Certificates in lieu of
any fractional shares of Common Stock, the Exchange Agent shall make available
such amounts to such holders of Exchange Unit Certificates without interest.
(h) WITHHOLDING RIGHTS. The Company or the Exchange Agent shall be entitled
to deduct and withhold from the Merger Consideration otherwise payable pursuant
to this Agreement to any Unitholder such amounts as the Company or the Exchange
Agent is required to deduct and withhold with respect to the making of such
payment under the Code, or any provision of state, local or foreign tax law. To
the extent that amounts are so withheld by the Company or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Exchange Units, in respect of which such
deduction and withholding was made by the Company or the Exchange Agent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS. Each of
the Partnerships represents and warrants to the other Partnerships, the Company
and Partnership Merger Sub as follows:
(a) ORGANIZATION, STANDING AND POWER OF THE PARTNERSHIP. The Partnership is
a limited partnership duly organized and validly existing under the laws of
Delaware and has the requisite power and authority to carry on its business as
now being conducted. The Partnership is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
businesses or the ownership of its assets makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in the aggregate, would not have a material adverse
effect on the businesses, properties, assets, financial conditions or results of
operations of the Partnership (a "PARTNERSHIP MATERIAL ADVERSE EFFECT").
(b) CAPITAL STRUCTURE. Prep Fund 1 represents and warrants that (i) its sole
general partner is America First Capital Associates Limited Partnership Three, a
Delaware limited partnership ("AFCA 3"), (ii) its sole limited partner is
America First Fiduciary Corporation Number Six, a Nebraska corporation ("AFFC
6"), and (iii) on the date hereof, there were 5,775,797 Prep Fund 1 Units
representing limited partnership
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interests in Prep Fund 1 assigned by AFFC 6 outstanding. Prep Fund 2 represents
and warrants that (i) its sole general partner is AFCA 6, (ii) its sole limited
partner is America First Fiduciary Corporation Number Fourteen, a Nebraska
corporation ("AFFC 14"), and (iii) on the date hereof, there were 1,593,604 Prep
Fund 2 BUCs representing limited partnership interests in Prep Fund 2 assigned
by AFFC 14 outstanding. Pension Fund represents and warrants that (i) its sole
general partner is AFCA 6, (ii) its sole limited partner is America First
Fiduciary Corporation Number Sixteen, a Nebraska corporation ("AFFC 16"), and
(iii) on the date hereof, there were 905,974 Pension BUCs representing limited
partnership interests in Pension Fund assigned by AFFC 16 outstanding. On the
date of this Agreement, except as set forth in this Section 3.1(b), no other
Units of the Partnership were outstanding. All outstanding Units are validly
issued, fully paid and nonassessable and not subject to preemptive rights. There
are no bonds, debentures, notes or other indebtedness of the Partnership having
the right to vote (or convertible into, or exchangeable for, securities having
the right to vote) on any matters on which Unitholders may vote. There are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Partnership is
a party or by which such entity is bound, obligating the Partnership to issue,
deliver or sell, or cause to be issued, delivered or sold, additional Units,
voting securities or other ownership interests of or obligating the Partnership
to issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking. There are no
outstanding contractual obligations of the Partnership to repurchase, redeem or
otherwise acquire any Units, voting securities or other ownership interests in
the Partnership or make any material investment (in the form of a loan, capital
contribution or otherwise) in any Person.
(c) AUTHORITY; NONCONTRAVENTION; CONSENTS. The Partnership has the requisite
power and authority to enter into this Agreement. The Partnership has the
requisite power and authority, subject to approval of the Merger, this Agreement
and any other transactions contemplated hereby by the requisite vote of the
Unitholders (the "UNITHOLDER APPROVALS"), to consummate the Merger and other
transactions contemplated by this Agreement to which the Partnership is a party.
The execution and delivery of this Agreement by the Partnership and the
consummation by the Partnership and other transactions contemplated hereby to
which the Partnership is a party have been duly executed and authorized by all
necessary action on the part of the Partnership, subject to approval of this
Agreement pursuant to the Unitholder Approvals. This Agreement has been duly
executed and delivered by the Partnership and constitutes a valid and binding
obligation of the Partnership, enforceable against such entity in accordance
with its terms. The execution and delivery of this Agreement by the Partnership
does not, and the consummation of the Merger and other transactions contemplated
hereby and thereby to which the Partnership is a party and compliance by the
Partnership with the provisions of this Agreement will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or result
in the creation of any pledge, claim, lien, charge, encumbrance or security
interest of any kind or nature whatsoever (a "LIEN") upon any of the properties
or assets of the Partnership under (i) the partnership agreement (the
"PARTNERSHIP AGREEMENT") or certificate of limited partnership of the
Partnership, each as amended or supplemented to the date of this Agreement, (ii)
any loan or credit agreement, note, bond, mortgage, indenture, reciprocal
easement agreement, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Partnership or its properties or assets
or (iii) subject to the governmental filings and other matters referred to in
the following sentence, any judgement, order, decree, statute, law, ordinance,
rule or regulation (collectively "LAWS") applicable to the Partnership or its
properties or assets, other than, in the case of clause (ii) or (iii), any such
conflicts, violations, defaults, rights or Liens that individually or in the
aggregate would not (x) have a Partnership Material Adverse Effect or (y)
prevent the consummation of the Merger or other transactions contemplated
hereby. No consent, approval, order or authorization of, or registration,
declaration or filing with, any federal, state or local government or any court,
administrative authority or agency (a "GOVERNMENTAL ENTITY"), is required by or
with respect to the Partnership in connection with the execution and delivery of
this Agreement by the Partnership or the consummation by the Partnership of the
Merger and other transactions contemplated
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hereby and thereby, except for (i) the filing with the Securities and Exchange
Commission ("SEC") of (x) a consent solicitation statement/prospectus (the
"CONSENT SOLICITATION STATEMENT/PROSPECTUS") relating to the approval by
Unitholders of the Merger, this Agreement and the other transactions
contemplated by this Agreement, and a registration statement relating to the
issuance of the Merger Consideration ("REGISTRATION STATEMENT") in which the
Consent Solicitation Statement/Prospectus will be included as a prospectus and
(y) such reports under Section 13(a) and Section 14 of the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), as may be required in connection
with this Agreement and the other transactions contemplated by this Agreement,
(ii) the filing of the Articles of Merger for the Merger with the Department of
Assessments and Taxation of the State of Maryland and the Office of the
Secretary of State of the State of Delaware, (iii) such other consents,
approvals, orders, authorizations, registrations, declarations and filings
which, if not obtained or made, would not prevent or delay in any material
respect the consummation of the Merger or any of the transactions contemplated
by this Agreement or otherwise prevent the Partnership from performing its
obligations under this Agreement in any material respect or have, individually
or in the aggregate, a Partnership Material Adverse Effect.
(d) SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Each of
Prep Fund 1, Prep Fund 2 and Pension Fund have filed all required reports,
schedules, forms, statements and other documents with the SEC since December 31,
1986, June 30, 1987 and March 31, 1988, respectively (the "PARTNERSHIP SEC
DOCUMENTS"). All of the Partnership SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and the Exchange Act and, in each case, the
rules and regulations promulgated thereunder applicable to such Partnership SEC
Documents. None of the Partnership SEC Documents at the time of filing contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except to the extent such statements have been modified or
superseded by later filed Partnership SEC Documents. There is no unresolved
violation, criticism or exception by any Governmental Entity of which the
Partnership has received written notice with respect to such entity or statement
which, if resolved in a manner unfavorable to the Partnership could have a
Partnership Material Adverse Effect. The financial statements of the Partnership
included in the Partnership SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles ("GAAP") (except, in the case of
interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of the Partnership as of
the dates thereof and the results of operations and cash flows of the
Partnership for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments). Except as permitted by
Section 4.1 (for the purposes of this sentence, as if Section 4.1 had been in
effect since December 31, 1996), the Partnership does not have any liabilities
or obligations of any nature (whether accrued, absolute, contingent or
otherwise) required by GAAP to be set forth on a balance sheet of the
Partnership or in the notes thereto and which, individually or in the aggregate,
would have a Partnership Material Adverse Effect.
(e) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the
Partnership SEC Documents filed and publicly available prior to the date of this
Agreement (referred to collectively as the "PARTNERSHIP FILED SEC DOCUMENTS"),
since the date of the most recent financial statements included in the
Partnership Filed SEC Documents (the "FINANCIAL STATEMENT DATE") and to the date
of this Agreement, the Partnership has conducted its business only in the
ordinary course and there has not been (i) any material adverse change in the
business, financial condition or results of operations of the Partnership that
has resulted or would result, individually or in the aggregate, in Economic
Losses (as defined in Section 6.2 below) of the greater of $1,000,000 or 5% of
the Net Asset Value (as hereinafter defined) of such Partnership (a "PARTNERSHIP
MATERIAL ADVERSE CHANGE"), nor has there been any occurrence or circumstance
that with the passage of
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time would reasonably be expected to result in a Partnership Material Adverse
Change, (ii) except for regular quarterly distributions not in excess of $.2649
per Unit in the case of Prep Fund 1, $.3354 per unit in the case of Prep Fund 2,
and $.3314 per Unit in the case of Pension Fund, with customary record and
payment date, any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Units, (iii) any split, combination or reclassification of any of the Units or
any issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for, or giving the right to acquire by
exchange or exercise, Units, except as permitted by Section 4.1, (iv) any
damage, destruction or loss, whether or not covered by insurance, that has or
would have a Partnership Material Adverse Effect or (v) any change in accounting
methods, principles or practices by the Partnership materially affecting its
assets, liabilities or business, except insofar as may have been disclosed in
the Partnership Filed SEC Documents or required by a change in GAAP.
(f) LITIGATION. Except as disclosed in the Partnership Filed SEC Documents
and other than routine tort litigation arising from the ordinary course of
operations of the Partnership which are covered by adequate insurance, there is
no suit, action or proceeding pending or, to the knowledge of the Partnership,
threatened against or affecting such entity that, individually or in the
aggregate, could reasonably be expected to (i) have a Partnership Material
Adverse Effect or (ii) prevent the consummation of the Merger or any of the
transactions contemplated by this Agreement, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against the Partnership having, or which, insofar as reasonably can be foreseen,
in the future would have, any such effect.
(g) BROKERS; FEES AND EXPENSES. No broker, investment banker, financial
advisor or other person, other than PaineWebber Incorporated ("PAINEWEBBER"),
the fees and expenses of which, as set forth in a letter agreement between the
General Partners and PaineWebber, will be paid by the Partnerships pro rata in
accordance with their respective net asset values as used to determine the
allocation of Common Stock among the Partnerships in the Merger (the "NET ASSET
VALUES") and Oppenheimer & Co. ("OPPENHEIMER"), the fees and expenses of which,
as set forth in a letter agreement between the General Partners, together with
the Special Committee and Oppenheimer, will be paid by the Partnerships pro rata
in accordance with their respective Net Asset Values, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the Merger based upon arrangements made by or on behalf of the
Partnership.
(h) COMPLIANCE WITH LAWS. Except as disclosed in the Partnership Filed SEC
Documents, the Partnership has not violated or failed to comply with any
statute, law, ordinance, regulation, rule, judgment, decree or order of any
Governmental Entity applicable to its business, properties or operations, except
for violations and failures to comply that would not, individually or in the
aggregate, reasonably be expected to result in a Partnership Material Adverse
Effect.
(i) CONTRACTS; DEBT INSTRUMENTS.
(i) The Partnership is not in violation of or in default under, in any
material respect (nor does there exist any condition which upon the passage of
time or the giving of notice or both would cause such a violation of or default
under), any material loan or credit agreement, note, bond, mortgage, indenture,
lease, permit, concession, franchise or license, or any agreement to acquire
real property, or any other material contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties or
assets is bound, except for violations or defaults that would not, individually
or in the aggregate, result in a Partnership Material Adverse Effect.
(ii) Except for any of the following expressly identified in the most
recent financial statements contained in the Partnership Filed SEC Documents and
except as permitted by Section 4.1, there are no loan or credit agreements,
notes, bonds, mortgages, indentures and other agreements and instruments
outstanding pursuant to which the Partnership is indebted in an aggregate
principal amount in excess of $2,000,000 per item or pursuant to which such
indebtedness may be incurred. For purposes of this Section
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3.1(i)(ii), "INDEBTEDNESS" shall mean, with respect to any person, without
duplication, (A) all indebtedness of such person for borrowed money, whether
secured or unsecured, (B) all obligations of such person under conditional sale
or other title retention agreements related to property purchased by such
person, (C) all capitalized lease obligations of such person, (D) all
obligations of such person under interest rate or currency hedging transactions
(valued at the termination value thereof), (E) all guarantees of such person of
any such indebtedness of any other person and (F) any agreements to provide any
of the foregoing.
(j) TANGIBLE PROPERTY AND ASSETS. The Partnership has good and marketable
fee simple title to, those assets set forth in its most recent report filed with
the SEC on Form l0-Q, free and clear of all Liens other than (i) any statutory
Lien arising in the ordinary course of business by operation of law with respect
to a liability that is not yet due or delinquent and (ii) any easement,
restriction or minor imperfection of title or similar Lien which individually or
in the aggregate with other such Liens does not materially impair the value of
the property or asset subject to such Lien or the use of such property or asset
in the conduct of the business of the Partnership.
(k) BOOKS AND RECORDS.
(i) The books of account and other financial records of the Partnership
are in all material respects true, complete and correct, have been maintained in
accordance with good business practices, and are accurately reflected in all
material respects in the financial statements included in the Partnership Filed
SEC Documents.
(ii) The Partnership has made available to the other Partnerships true
and correct copies of the partnership agreement and, if applicable, certificate
of limited partnership of the Partnership as amended to date.
(l) REGISTRATION STATEMENT. The information furnished by the Partnership for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(m) VOTE REQUIRED. The affirmative vote of at least a majority of the
outstanding Units of the Partnership is the only vote of any security holder in
the Partnership (under applicable law or otherwise) to approve the Merger, this
Agreement and the other transactions contemplated hereby.
ARTICLE IV
COVENANTS
SECTION 4.1 CONDUCT OF BUSINESS BY THE PARTNERSHIPS. During the period
from the date of this Agreement to the Effective Time, the Partnerships shall
carry on their respective businesses in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted and, to the extent
consistent therewith, use commercially reasonable efforts to preserve intact its
current business organization, goodwill, ongoing businesses and its status as a
partnership within the meaning of the Code. Without limiting the generality of
the foregoing, the following additional restrictions shall apply. During the
period from the date of this Agreement to the Effective Time, except as
otherwise contemplated by this Agreement, each Partnership shall not (and shall
not authorize or commit or agree to):
(a) (i) split, combine or reclassify any Units or partnership interests or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for Units or partnership interests or (ii) purchase,
redeem or otherwise acquire any Units or partnership interests;
(b) issue, deliver or sell, or grant any option or other right, in respect
of, any Units or partnership interests, any other voting or redeemable
securities of the Partnership or any securities convertible into, or any rights,
warrants or options to acquire, any such voting securities or convertible or
redeemable securities, except to the respective Partnership;
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(c) amend the partnership agreement of the respective Partnership;
(d) merge or consolidate with any Person;
(e) make any tax election (unless required by law or necessary to preserve
the respective Partnership's status as a partnership);
(f) (i) change in any material manner any of its methods, principles or
practices of accounting, except as may be required by the SEC, applicable law or
GAAP or (ii) make or rescind any express or deemed election relating to tax
matters; or
(g) pay any distribution except regular quarterly distributions that are not
in excess of $.2649, $.3354 or $.3314 per Unit of Prep Fund 1, Prep Fund 2 or
Pension Fund, respectively.
SECTION 4.2 OTHER ACTIONS. Each of the Partnerships shall not take any
action that would result in (i) any of the representations and warranties of
such party (without giving effect to any "knowledge" qualification) set forth in
this Agreement that are qualified as to materiality becoming untrue, (ii) any of
such representations and warranties (without giving effect to any "knowledge"
qualification) that are not so qualified becoming untrue in any material respect
or (iii) except as contemplated by Section 7.1, any of the conditions to the
Merger set forth in Article VI not being satisfied.
SECTION 4.3 PAYMENTS OF DIVIDENDS BY THE COMPANY. The Company has set, for
the first year following the Merger, the rate of its quarterly distributions to
stockholders at $.265 per share of Common Stock ($1.06 on an annual basis);
PROVIDED, HOWEVER, the payment of such distributions shall be subject to the
provisions of Section 2-311 of the MGCL.
ARTICLE V
ADDITIONAL COVENANTS
SECTION 5.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE CONSENT
SOLICITATION STATEMENT/ PROSPECTUS.
(a) As soon as practicable following the date of this Agreement, the
Partnerships shall prepare and file with the SEC a preliminary Registration
Statement in form and substance satisfactory to each of the Partnerships in
which the Consent Solicitation Statement/Prospectus will be included as a
prospectus. Each of the Partnerships shall use its best efforts to (i) respond
to any comments of the SEC and (ii) have the Registration Statement declared
effective under the Securities Act and the rules and regulations promulgated
thereunder as promptly as practicable after such filing and to keep the
Registration Statement effective as long as is necessary to consummate the
Merger. Each Partnership shall use its best efforts to mail the Consent
Solicitation Statement/Prospectus to the Unitholders as promptly as practicable
after the Registration Statement is declared effective. Each party will notify
the other promptly of the receipt of any comments from the SEC and of any
request by the SEC for amendments or supplements to the Registration Statement
the Consent Solicitation Statement/Prospectus or for additional information and
will supply the other Partnerships with copies of all correspondence between
such party or any of its representatives and the SEC with respect to the
Registration Statement or the Consent Solicitation Statement/Prospectus. The
Registration Statement and the Consent Solicitation Statement/Prospectus shall
comply in all material respects with all applicable requirements of Law.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Registration Statement or the Consent Solicitation
Statement/Prospectus, the Partnership, as the case may be, shall promptly inform
the other Partnerships of such occurrences and cooperate in filing with the SEC,
and/or mailing to the Unitholders such amendment or supplement in a form
reasonably acceptable to the Partnerships.
(b) Each Partnership covenants that the Consent Solicitation
Statement/Prospectus shall include the recommendation of the General Partner of
such Partnership to the effect the Merger and this Agreement are fair to, and in
the best interests of, Unitholders and a recommendation of the Special Committee
(the
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"SPECIAL COMMITTEE") of the board of Managers of America First Companies L.L.C.
in favor of the Merger and this Agreement; PROVIDED, however, that the
recommendation of such General Partner or the Special Committee may not be
included or may be withdrawn, modified or amended if such General Partner or the
Special Committee shall approve or recommend a Superior Competing Transaction
(as defined below) or enter into an agreement with respect to such Superior
Competing Transaction and the General Partner of such Partnership and the
Special Committee determines in good faith that they are in compliance with
Section 7.1.
SECTION 5.2 BEST EFFORTS; NOTIFICATION.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the Partnerships agrees to use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other Partnerships in doing all things necessary, proper
or advisable to fulfill all conditions applicable to such party pursuant to this
Agreement and to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated hereby,
including (i) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings and the taking of all reasonable steps as
may be necessary to obtain an approval, waiver or exemption from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) the obtaining of all
necessary consents, approvals, waivers or exemption from non-governmental third
parties, (iii) the defending of any lawsuits or other legal proceedings, whether
judicial or administrative, challenging the Merger, this Agreement or the
consummation of the Merger and the other transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed, and (iv) the execution
and delivery of any additional instruments necessary to consummate the Merger
and the other transactions contemplated by, and to fully carry out the purposes
of, this Agreement; PROVIDED, HOWEVER, that a party shall not be obligated to
take any action pursuant to the foregoing if the taking of such action or the
obtaining of any waiver, consent, approval or exemption is reasonably likely to
result in the imposition of a condition or restriction of the type referred to
in Section 6.1(e).
(b) Each Partnership shall give prompt notice to the other Partnerships, if
(i) any representation or warranty made by it contained in this Agreement that
is qualified as to materiality becomes untrue or inaccurate in any respect or
any such representation or warranty that is not so qualified becomes untrue or
inaccurate in any material respect or (ii) it fails to comply with or satisfy in
any material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement; PROVIDED, HOWEVER, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
SECTION 5.3 NO SOLICITATION OF TRANSACTIONS. Subject to Section 7.1, each
of the Partnerships shall not directly or indirectly, through any officer,
director, employee, agent, investment banker, financial advisor, attorney,
accountant, broker, finder or other representative, initiate or solicit
(including by way of furnishing non-public information or assistance) any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Competing Transaction (as defined below), or authorize
or permit any of its partners, Unitholders, officers, directors, employees or
agents, attorneys, investment bankers, financial advisors, accountants, brokers,
finders or other representatives retained by it to take any such action. Each of
the Partnerships shall notify the other parties in writing (as promptly as
practicable) of all of the relevant details relating to all inquiries and
proposals which it or any such officer, director, employee, agent, investment
banker, financial advisor, attorney, accountant, broker, finder or other
representative may receive relating to any of such matters and if such inquiry
or proposal is in writing, each of the Partnerships shall deliver to the other
parties a copy of such inquiry or proposal. For purposes of this Agreement,
"COMPETING TRANSACTION" shall mean any of the following (other than the Merger
and the other transactions contemplated by this Agreement): (i) any merger,
consolidation, share exchange, business combination, or similar transaction
involving a Partnership; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 30% or more of the assets of such Partnership
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in a single transaction or series of related transactions, excluding any bona
fide financing transactions which do not, individually or in the aggregate, have
as a purpose or effect the sale or transfer of control of such assets; (iii) any
tender offer or exchange offer for 30% or more of the outstanding Units of such
Partnership or the filing of a registration statement under the Securities Act
in connection therewith; or (iv) any public announcements of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
SECTION 5.4 PUBLIC ANNOUNCEMENTS. Each Partnership and the Company will
consult with the other parties before issuing, and provide the other parties the
opportunity to review and comment upon, any press release or other public
statements with respect to the Merger and shall not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange. The parties agree that
the initial press release to be issued with respect to the Merger will be in the
form agreed to by the parties hereto prior to the execution of this Agreement.
SECTION 5.5 LISTING OF COMMON STOCK. The Company will promptly prepare and
submit to the NYSE a listing application covering the Common Stock issuable in
the Merger. Prior to the Effective Time, the Company shall use its best efforts
to have the NYSE approve for listing, upon official notice of issuance, the
Common Stock to be issued in the Merger.
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SECTION 5.6 INDEMNIFICATION.
(a) (i) Each Partnership and, from and after the Effective Time, the Company
shall, indemnify, defend and hold harmless each person who is now or has been at
any time prior to the date hereof or who becomes prior to the Effective Time, a
General Partner or an affiliate of such General Partner of such Partnership or
an officer or a member of the board of managers or board of directors, (or any
regular or Special Committee thereof, including the Special Committee) or any
committee thereof of any such general partner or affiliate (the "INDEMNIFIED
PARTIES") against all losses, claims, damages, costs, expenses (including
attorneys' fees and expenses), liabilities or judgments or amounts that are paid
in settlement of, with the approval of the indemnifying party (which approval
shall not be unreasonably withheld), or otherwise in connection with any
threatened or actual claim, action, suit, proceeding or investigation based on
or arising out of the fact that such person is or was a General Partner or an
affiliate of such General Partner of such Partnership or an officer or a member
of the board of managers or board of directors (or any regular or special
committee thereof, including the Special Committee) or any committee thereof of
any such general partner or affiliate at or prior to the Effective Time, whether
asserted or claimed prior to, or at or after, the Effective Time ("PARTNERSHIP
INDEMNIFIED LIABILITIES"), including all Partnership Indemnified Liabilities
based on, or arising out of, or pertaining to this Agreement or the Merger, in
each case to the full extent a Partnership is permitted under its Partnership
Agreement to indemnify its own partners or the Company is permitted under
Maryland law to indemnify such persons, as the case may be, (and such
Partnership or the Company, as the case may be, will pay expenses in advance of
the final disposition of any such action or proceeding to each Indemnified Party
to the full extent permitted by law, subject to the limitations set forth in
Section 5.6(a)(iii)).
(ii) Any Indemnified Parties proposing to assert the right to be
indemnified under this Section 5.6 shall, promptly after receipt of notice of
commencement of any action against such Indemnified Parties in respect of which
a claim is to be made under this Section 5.6 against any Partnership and/or the
Company (collectively, the "INDEMNIFYING PARTIES"), notify the Indemnifying
Parties of the commencement of such action, enclosing a copy of all papers
served. If any such action is brought against any of the Indemnified Parties and
such Indemnified Parties notify the Indemnifying Parties of its commencement,
the Indemnifying Parties will be entitled to participate in and, to the extent
that they elect by delivering written notice to such Indemnified Parties
promptly after receiving notice of the commencement of the action from the
Indemnified Parties, to assume the defense of the action and after notice from
the Indemnifying Parties to the Indemnified Parties of their election to assume
the defense, the Indemnifying Parties will not be liable to the Indemnified
Parties for any legal or other expenses except as provided below and except for
the reasonable costs of investigation subsequently incurred by the Indemnified
Parties in connection with the defense. If the Indemnifying Parties assume the
defense, the Indemnifying Parties shall have the right to settle such action
without the consent of the Indemnified Parties; PROVIDED, HOWEVER, that the
Indemnifying Parties shall be required to obtain such consent (which consent
shall not be unreasonably withheld) if the settlement includes any admission of
wrongdoing on the part of the Indemnified Parties or any decree or restriction
on the Indemnified Parties or their partners, officers or directors; PROVIDED,
FURTHER, that no Indemnifying Parties, in the defense of any such action shall,
except with the consent of the Indemnified Parties (which consent shall not be
unreasonably withheld), consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Parties of a release from all
liability with respect to such action. The Indemnified Parties will have the
right to employ their own counsel in any such action, but the fees, expenses and
other charges of such counsel will be at the expense of such Indemnified Parties
unless (i) the employment of counsel by the Indemnified Parties has been
authorized in writing by the Indemnifying Parties, (ii) the Indemnified Parties
have reasonably concluded (based on advice of counsel) that there may be legal
defenses available to them that are different from or in addition to those
available to the Indemnifying Parties, (iii) a conflict or potential conflict
exists (based on advice of counsel to the Indemnified Parties) between the
Indemnified Parties and the Indemnifying Parties (in which case the Indemnifying
Parties will not have the right to direct the defense of such action on behalf
of the
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Indemnified Parties) or (iv) the Indemnifying Parties have not in fact employed
counsel to assume the defense of such action within a reasonable time after
receiving notice of the commencement of the action, in each of which cases the
reasonable fees, disbursements and other charges of counsel will be at the
expense of the Indemnifying Parties.
(iii) It is understood that the Indemnifying Parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm admitted to practice in such jurisdiction at any one time for
all such Indemnified Parties unless (a) the employment of more than one counsel
has been authorized in writing by the Indemnifying Parties, (b) any of the
Indemnified Parties have reasonably concluded (based on advice of counsel) that
there may be legal defenses available to them that are different from or in
addition to those available to other Indemnified Parties or (c) a conflict or
potential conflict exists (based on advice of counsel to the Indemnified
Parties) between any of the Indemnified Parties and the other Indemnified
Parties, in each case of which the Indemnifying Parties shall be obligated to
pay the reasonable fees and expenses of such additional counsel or counsels.
(iv) The Indemnifying Parties will not be liable for any settlement of
any action or claim effected without their written consent (which consent shall
not be unreasonably withheld).
(b) The provisions of this Section 5.6 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his or her heirs and
personal representatives and shall be binding on all successors and assigns of
the Partnerships and the Company.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligation of each party to effect the Merger and to consummate
the other transactions contemplated by this Agreement to occur on the Closing
Date is subject to the satisfaction or waiver on or prior to the Effective Time
of the following conditions:
(a) APPROVAL OF UNITHOLDERS OF PREP FUND 1 AND PREP FUND 2. The approval of
Unitholders representing a majority in interest of the Prep Fund 1 Units and
Unitholders representing a majority in interest of the Prep Fund 2 BUCs.
(b) LISTING OF COMMON STOCK. The NYSE or another National Exchange shall
have approved for listing the Common Stock to be issued in the Merger and such
approval shall remain in effect at the Effective Time.
(c) ABSENCE OF CERTAIN CONDITIONS. The absence at the Effective Time of (a)
any suspension of trading of, or limitation on prices for, securities generally
on the NYSE, (b) a declaration of a banking moratorium by federal or state
authorities or any suspension of payments by banks in the United States (whether
mandatory or not) or of the extension of credit by lending institutions in the
United States, or (c) in the case of any of the foregoing existing on the date
of the Consent Solicitation Statement/Prospectus, any material acceleration or
worsening thereof.
(d) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings by the SEC seeking a stop order.
(e) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions contemplated by this
Agreement shall be in effect.
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(f) OPINION RELATED TO PARTNERSHIP STATUS OF THE PARTNERSHIP. The
Partnerships shall have received an opinion dated as of the Closing Date of
Rogers & Wells, subject to certificates, letters and assumptions, reasonably
satisfactory to the Partnerships that each Partnership was organized and has
operated in conformity with the requirements for qualification as a partnership
within the meaning of the Code since 1986 in the case of Prep Fund 1, 1987 in
the case of Prep Fund 2 and 1988 in the case of Pension Fund, and not as a
corporation or an association taxable as a corporation.
(g) OPINION RELATED TO REIT STATUS OF THE COMPANY. The Partnerships shall
have received an opinion dated as of the Closing Date of Rogers & Wells, subject
to certificates, letters and assumptions, reasonably satisfactory to the
Partnerships that following the Merger (after giving effect thereto), the
Company's proposed method of operation will enable it to meet the requirements
for qualification and taxation as a REIT under the Code.
(h) THE INVESTMENT COMPANY ACT OPINION. The Partnerships shall have received
an opinion dated as of the Closing Date of Rogers & Wells, subject to
certificates, letters and assumptions, reasonably satisfactory to the
Partnerships, to the effect that neither the Company nor any of its Subsidiaries
is an "investment company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of 1940, as amended.
(i) CONSENTS AND APPROVALS. The receipt of all necessary consents and
approvals on or before (and remaining in effect at) the Effective Time.
(j) ABSENCE OF MATERIAL ADVERSE EFFECTS. The absence of any event or any
matter brought to the attention of the General Partners that, in the sole
judgment of the General Partners, materially affects, whether adversely or
otherwise, the Partnerships, the Company or the Merger.
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIPS. The obligations
of each of the Partnerships to effect the Merger and to consummate the other
transactions contemplated in this Agreement to occur on the Closing Date are
further subject to the following conditions, any one or more of which may be
waived by such Partnership:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the other Partnerships (without giving effect to any "materiality" qualification
or limitation) set forth in this Agreement shall be true and correct as of the
Closing Date, as though made on and as of the Closing Date, except to the extent
the representation or warranty is expressly limited by its terms to another
date, and the other Partnerships shall have received a certificate (which
certificate may be qualified by knowledge to the same extent as such
representations and warranties are so qualified) signed on behalf of such
Partnership by the General Partner of such entity to such effect. This condition
shall be deemed satisfied notwithstanding any failure of a representation or
warranty of such Partnership to be true and correct as of the Closing Date
(without giving effect to any materiality qualification) if the aggregate amount
of Economic Losses (as defined below) that would reasonably be expected to arise
as a result of the failures of such representations and warranties to be true
and correct as of the Closing Date does not exceed the greater of $1,000,000 or
5% of the Net Asset Value of such Partnership (such amount to be calculated by
counting in all cases from the first dollar of such Economic Losses without
giving effect to the $1,000,000 or 5% of the Net Asset Value limitation set
forth in Section 3.1(e)). "ECONOMIC LOSSES," as used in this Section 6.2, shall
mean any and all net damage, net loss (including diminution in the value of
properties or assets which diminution, with regard to permanent cash flow losses
from any property or assets that produces cash flow, shall be measured by
multiplying the annual net cash flow produced by such property or asset over the
12-month period preceding the date of the applicable loss by a factor of 10),
net liability or expense suffered by such Partnership, but shall not include any
claims, damages, loss, expense or other liability resulting from any class
action or Unitholders' or partners' derivative lawsuits relating to the
Transactions against such Partnership, if any, filed subsequent to the date of
this Agreement or any amounts paid or expenses incurred by such Partnership in
obtaining non-governmental third party consents, as contemplated by Section 5.2.
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(b) PERFORMANCE OF OBLIGATIONS OF THE OTHER PARTNERSHIPS. The other
Partnerships shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the
Effective Time, and each Partnership shall have received a certificate signed on
behalf of each of the other Partnerships by the General Partner of each of the
other Partnerships to such effect.
(c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there has
been no material adverse change in the business, results of operations or
financial condition of any of the other Partnerships, that have resulted or
would result, individually or in the aggregate, in Economic Losses of the
greater of $1,000,000 or 5% of the Net Asset Value of such to any of the
Partnerships or the Company. Each Partnership shall have received a certificate
of the General Partner of each of the other Partnerships to the effect that
there has been no such material adverse change.
(d) CONSENTS. All consents and waivers from third parties necessary in
connection with the consummation of the Merger and the other transactions
contemplated by this Agreement shall have been received, other than such
consents and waivers from third parties, which, if not obtained, would not
result, individually or in the aggregate, in Economic Losses of the greater of
$1,000,000 or 5% of the Net Asset Value of the Partnerships or the Company.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF PENSION FUND. The obligation of
Pension Fund to effect the Merger and to consummate the other Transactions
contemplated to occur on the Closing Date is further subject to the approval of
the Merger by a majority in interest of Unitholders holding the outstanding
Pension BUCs.
ARTICLE VII
GENERAL PARTNER ACTIONS
SECTION 7.1 GENERAL PARTNER ACTIONS. Notwithstanding Section 5.3 or any
other provision of this Agreement to the contrary, to the extent required by the
fiduciary obligations of the General Partner of any Partnership, as determined
in good faith based on the advice of outside counsel, such General Partner may:
(a) disclose to its Unitholders any information required to be disclosed
under applicable law;
(b) in response to an unsolicited request therefor, participate in
discussions or negotiations with, or furnish information with respect to itself
pursuant to a customary confidentiality agreement (as determined by its outside
counsel) to, any person in connection with a Competing Transaction proposed by
such person; and
(c) approve or recommend (and in connection therewith withdraw or modify its
approval or recommendation of the Merger or this Agreement) a Superior Competing
Transaction (as defined below) or enter into an agreement with respect to such
Superior Competing Transaction (for purposes of this Agreement, "SUPERIOR
COMPETING TRANSACTION" means a bona fide proposal of a Competing Transaction
made by a third party which the applicable General Partner determines in good
faith (based on the advice of its investment banking firm) to be more favorable
to its Unitholders than the Merger), as the case may be.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Date whether before or after Unitholder Approvals are
obtained:
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(a) by mutual written consent of the Partnerships duly authorized by their
respective General Partners and approved by the Special Committee;
(b) by any Partnership, upon a breach of any representation or warranty on
the part of Pension Fund 1 or Pension Fund 2 or the breach in any material
respect of any covenant or agreement of Pension Fund 1 or Pension Fund 2 set
forth in this Agreement; or (ii) by any Partnership (but such termination shall
only be with regard to the obligations of Pension Fund hereunder), upon a breach
of any representation or warranty on the part of Pension Fund or the breach in
any material respects of any covenant or agreement of Pension Fund set forth in
this Agreement; PROVIDED, HOWEVER, that the right to cause a termination of this
Agreement or to cause the termination of the obligations of Pension Fund under
this Section 8.1(b) shall not be available to any party that has breached its
representations or warranties or has breached in any material respects any of
its covenants or agreements hereunder;
(c) by any Partnership, if the Merger shall not have been consummated before
June 30, 1998;
(d) by any of the Partnerships, if the approval of a majority in interest of
the holders of outstanding Prep Fund 1 Units or a majority in interest of the
holders of Prep Fund 2 BUCs shall not have been obtained on or prior to June 30,
1998;
(e) by any of the Partnerships (but such termination shall only be with
regard to the obligations of Pension Fund hereunder), if the approval of a
majority in interest of the holders of Pension Fund shall not have been obtained
on or prior to June 30, 1998;
(f) by any Partnership, if prior to the approval of the Unitholders of such
Partnership the General Partner of Prep Fund 1 or Prep Fund 2 (or the Special
Committee acting with respect to such Partnership) shall have, in compliance
with the provisions of this Agreement, changed its recommendation with respect
to or withdrawn or modified its approval of the Merger or this Agreement; or
(g) by any Partnership (but such termination shall only be with regard to
the obligations of Pension Fund hereunder), if the General Partner of Pension
Fund (or the Special Committee acting with respect to Pension Fund) shall have,
in compliance with the provisions of this Agreement, changed its recommendation
with respect to or withdrawn or modified its approval of the Merger or this
Agreement.
SECTION 8.2 EXPENSES.
(a) Except as otherwise specified in this Section 8.2 or agreed in writing
by the parties, all costs and expenses incurred in connection with this
Agreement, the Merger and the other transactions contemplated hereby shall be
paid by the Partnerships (pro rata in accordance with their aggregate Net Asset
Values from cash on hand) whether or not the Merger is consummated. If, however,
the Merger is consummated, the Company will be allocated the entire amount of
the expenses referred to in this paragraph (a).
(b) Notwithstanding the foregoing, each Partnership agrees that, if this
Agreement shall be terminated pursuant to Section 8.1(d) or (f) (or the
obligations of Pension Fund shall have been terminated pursuant to Section
8.1(e) or (g)) and such Partnership (each such Partnership being referred to
herein as the "COMPETING TRANSACTION PARTNERSHIP") shall have, on or prior to
the date of such termination, received a proposal constituting a Competing
Transaction that has not been offered on substantially equivalent terms (as
determined in good faith by the Special Committee) to any of the other
Partnerships (each such other Partnership being referred to herein as an
"EXCLUDED PARTNERSHIP"), then the Competing Transaction Partnerships agree to
reimburse each Excluded Partnership for such Excluded Partnership's share of the
out-of-pocket expenses incurred in connection with this Agreement and the other
transactions contemplated hereby (including, without limitation, all attorneys',
accountants' and investment banking fees and expenses), plus any expenses
incurred in enforcing the provisions of this Section 8.2.
SECTION 8.3 EFFECT OF TERMINATION. In the event of termination of this
Agreement by any Partnership as provided in Section 8.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of any Partnership, other than Section 8.2, this Section 8.3
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and Article IX and except to the extent that such termination results from a
willful breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
SECTION 8.4 AMENDMENT. This Agreement may be amended or modified by the
General Partners (with the concurrence of the Special Committee) acting on
behalf of the Partnerships and the Company in writing by appropriate instrument
executed at any time before or after any Unitholder Approvals are obtained and
prior to the Effective Date; PROVIDED, HOWEVER, that, after Unitholder Approvals
are obtained, no such amendment, modification or supplement shall be made which
alters the amount or changes the form of the consideration to be delivered to
such Unitholders or alters or changes any of the terms or conditions of this
Agreement if such alteration or change would, in the reasonable judgment of the
General Partners, adversely affect such Unitholders unless a majority in
interest of the adversely affected Unitholders consents to such amendment,
modification or supplement.
SECTION 8.5 WAIVER. Compliance with any of the provisions of this
Agreement may be waived by the General Partners (with the concurrence of the
Special Committee) acting on behalf of the Partnerships and the Company in
writing by appropriate instrument executed at any time before or after any
Unitholder Approvals are obtained and prior to the Effective Date; PROVIDED,
HOWEVER, that, after Unitholder Approvals are obtained, no such waiver shall be
made which alters or changes any of the terms or conditions of this Agreement if
such alteration or change would, in the reasonable judgment of the General
Partners, adversely affect such Unitholders unless a majority in interest of the
adversely affected Unitholders consents to such waiver.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 9.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 9.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy numbers (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to the Partnerships or any of the General Partners, to
1004 Farnam Street
Omaha, Nebraska 68102
Attn: Maurice E. Cox, Jr.
Fax: (402) 345-8966
with a copy to:
Rogers & Wells
200 Park Avenue
New York, New York 10166
Attn: Alan L. Gosule, Esq.
Jay L. Bernstein, Esq.
Fax: (212) 878-8375
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(b) if to the Company or Partnership Merger Sub, to
399 Park Avenue
19th Floor
New York, New York 10022
Attn: Stewart Zimmerman
Fax: (212) 935-8760
Rogers & Wells
200 Park Avenue
New York, NY 10166
Attn: Alan L. Gosule, Esq.
Jay L. Bernstein, Esq.
Fax: (212) 878-8375
SECTION 9.3 INTERPRETATION. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
SECTION 9.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 9.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
and the other agreements entered into in connection with the Transactions (a)
constitute the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter of this Agreement and, (b) except for the provisions of Article
II and Section 5.6, are not intended to confer upon any person other than the
parties hereto any rights or remedies.
SECTION 9.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF
LAWS THEREOF.
SECTION 9.7 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned or delegated, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 9.8 ENFORCEMENT. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in any Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself (without
making such submission exclusive) to the personal jurisdiction of any federal
court located in the State of Delaware or any Delaware state court in the event
any dispute arises out of this Agreement or any of the Transactions contemplated
by this Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court.
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ARTICLE X
CERTAIN DEFINITIONS
SECTION 10.1 CERTAIN DEFINITIONS. For purposes of this Agreement:
"AFFILIATE" of any person means another person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such first person.
"EXCHANGE UNITS" means the Units (except for those Pension BUCs held by
Unitholders electing the Retention Option) of those Partnerships participating
in the Merger.
"NET ASSET VALUE" means the net asset value of the Partnerships calculated
by the General Partners for purposes of allocating the shares of Common Stock to
be issued in the Merger.
"PENSION BUCS" means Beneficial Unit Certificates representing assigned
limited partnership interests in Pension Fund.
"PERSON" means an individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization or other
entity.
"PREP FUND 1 UNITS" means Exchangeable Units representing assigned limited
partnership interests in Prep Fund 1.
"PREP FUND 2 BUCS" means Beneficial Unit Certificates representing assigned
limited partnership interests in Prep Fund 2.
"SUBSIDIARY" of any person means any corporation, partnership, limited
liability company, joint venture or other legal entity of which such person
(either directly or through or together with another Subsidiary of such person)
owns 50% or more of the voting stock or other equity interests of such
corporation, partnership, limited liability company, joint venture or other
legal entity.
"UNITHOLDERS" means the holders of Units.
"UNITS" means Prep Fund 1 Units, Prep Fund 2 BUCs and Pension BUCs.
IN WITNESS WHEREOF, Prep Fund 1, Prep Fund 2, Pension Fund, the Company and
Partnership Merger Sub have caused this Agreement to be signed by their
respective officers thereunto duly authorized, all as of the date first written
above.
AMERICA FIRST PARTICIPATING/PREFERRED
EQUITY MORTGAGE FUND LIMITED
PARTNERSHIP
By: AMERICA FIRST CAPITAL ASSOCIATES
LIMITED PARTNERSHIP THREE,
its general partner
By: AMERICA FIRST COMPANIES L.L.C.,
its general partner
<TABLE>
<S> <C> <C> <C> <C>
By: /s/ MICHAEL THESING
-----------------------------------------
Michael Thesing
Title: Vice President
</TABLE>
A-21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
AMERICA FIRST PREP FUND 2 LIMITED
PARTNERSHIP
By: AMERICA FIRST CAPITAL ASSOCIATES
LIMITED PARTNERSHIP SIX,
its general partner
By: AMERICA FIRST COMPANIES L.L.C.,
its general partner
By: /s/ MICHAEL THESING
-----------------------------------------
Michael Thesing
Title: Vice President
</TABLE>
AMERICA FIRST PREP FUND 2 PENSION
SERIES LIMITED PARTNERSHIP
By: AMERICA FIRST CAPITAL ASSOCIATES
LIMITED PARTNERSHIP SIX,
its general partner
By: AMERICA FIRST COMPANIES L.L.C.,
its general partner
<TABLE>
<S> <C> <C> <C> <C>
By: /s/ MICHAEL THESING
-----------------------------------------
Michael Thesing
Title: Vice President
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By: /s/ STEWART ZIMMERMAN
------------------------------------------------
Stewart Zimmerman
Title: President
AF MERGER, L.P.
By: AMERICA FIRST MORTGAGE INVESTMENTS,
INC., its general partner
By: /s/ STEWART ZIMMERMAN
-----------------------------------------
Stewart Zimmerman
Title: President
</TABLE>
A-22
<PAGE>
APPENDIX B-1
OPINION OF OPPENHEIMER
<PAGE>
July 28, 1997
Special Committee of the Management Board
America First Companies L.L.C.
1004 Farnam Street
Omaha, Nebraska 68102
Gentlemen:
You have requested our opinion (the "Fairness Opinion") as to whether the
proposed combination (the "Merger") of America First Mortgage Investments, Inc.
(the "Company") and America First Participating/Preferred Equity Mortgage Fund
Limited Partnership ("Prep Fund 1"), America First Prep Fund 2 Limited
Partnership ("Prep Fund 2"), and America First Prep Fund 2 Pension Series
Limited Partnership ("Pension Fund", and together with Prep Fund 1 and Prep Fund
2, the "Partnerships"), including the allocation of shares of common stock of
the Company (the "Common Stock") among the Partnerships is fair to the
Unitholders, from a financial point of view. We have issued our Fairness Opinion
on the basis of (i) participation of the three Partnerships and (ii)
participation solely of Prep Fund 1 and Prep Fund 2. All capitalized terms used
in this Fairness Opinion shall have the same meaning as set forth in the
Preliminary Consent Solicitation Statement/Prospectus.
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by the non-employee managers (the "Special Committee") of America First
Companies L.L.C. for the purpose of, and will receive a fee for, rendering this
Fairness Opinion.
In connection with this Fairness Opinion, we have reviewed, among other
things: a draft of the Consent Solicitation Statement/Prospectus; the Prospectus
dated October 2, 1986 for the Prep Fund 1; the Prospectus dated October 1, 1987
for Prep Fund 2; the Prospectus dated March 3, 1988 for Pension Fund; audited
financial statements for each Partnership for calendar year 1996; the Form 10-K
for each partnership for the year ended December 31, 1996 and the Form 10-Q for
each Partnership for the quarter ended March 31, 1997; documents describing each
Partnership's PREPs, Prep Fund 1's Equity Interests, and Prep Fund 1's
Participating Loan, including partnership and other agreements; audited
financial statements for calendar years 1994, 1995 and 1996 and unaudited
financial statements and other financial information for the three months period
ending March 31, 1997 for each Property underlying a PREP, Prep Fund 1's Equity
Interests, and Prep Fund 1's Participating Loan; pro forma balance sheets of the
Company assuming the Merger was consummated on March 31, 1997 and pro forma
statements of operations of the Company for the year ended December 31, 1996 and
for the three months ended March 31, 1997 assuming the Merger was consummated on
January 1, 1996; financial forecasts of future operations of the Company
covering each of the years in the five year period ended December 31, 2002,
assuming the Merger occurred January 1, 1998; a business plan of the Company;
and certain other financial and other information that was publicly available or
furnished to Oppenheimer by the Partnerships, PaineWebber, and the Company.
In addition, Oppenheimer held discussions with representatives of the
Partnerships, PaineWebber and the Company concerning the Partnerships'
historical and current operations, financial condition and prospects and the
Company's financial condition and prospects, inspected each of the Properties,
except the Property located in Amelia, Ohio, underlying the PREPs, Prep Fund 1's
Equity Interests, and Prep Fund 1's Participating Loan, interviewed property
managers at the Properties inspected, reviewed certain publicly available
information of selected companies whose securities are publicly traded that
Oppenheimer deemed generally comparable to the Company, and conducted such other
investigations, financial analyses and studies, and reviewed such other
information and factors as it deemed appropriate for the
B-1-1
<PAGE>
purposes of rendering this Fairness Opinion. Oppenheimer's Fairness Opinion is
based upon analysis of the foregoing factors in light of our assessment of
general economic, financial and market conditions as they exist on the date
hereof. Events occurring after such date could materially affect the assumptions
and conclusions contained in this Fairness Opinion. We have not been requested
or engaged and did not undertake to reaffirm or revise our Fairness Opinion or
otherwise comment upon any events occurring after the date thereof.
In rendering this Fairness Opinion, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
(i) all historical and operating data, financial analysis, reports and other
information relating to the Partnerships that were publicly available or
furnished or communicated to Oppenheimer by or on behalf of the Special
Committee; (ii) the financial forecasts of the Partnerships prepared by the
General Partners that were furnished to Oppenheimer by or on behalf of the
Special Committee; and (iii) the financial forecasts of the Company prepared by
the General Partners furnished to Oppenheimer by or on behalf of the Special
Committee. With respect to the financial forecasts furnished to Oppenheimer,
Oppenheimer assumed, with the Special Committee's approval, that they reflected
the best current judgment of the General Partners as to future financial
performance of the Partnerships and the Company, respectively, and that there
was a reasonable probability that the forecasts would prove to be substantially
correct. Oppenheimer did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Partnerships.
Furthermore, Oppenheimer expresses no opinion as to the price or trading
range at which the Company's Common Stock would trade following the completion
of the Merger.
Oppenheimer was not requested to serve as financial advisor to the Special
Committee, the General Partners or the Partnerships or to assist in the
structuring of the proposed transaction. Additionally, Oppenheimer did not
analyze the impact of any federal, state or local income taxes to the
Unitholders arising out of the proposed transaction.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. However, this Fairness Opinion may be included in
the Consent Statement/Proxy distributed to the Unitholders in connection with
the proposed Merger. We have been engaged by the Special Committee for the
purpose of rendering this Fairness Opinion, in connection with which we will
receive a fee payable in installments (i) upon engagement and (ii) upon the
rendering of the Fairness Opinion.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that, as of the date hereof, the
proposed Merger, including the allocation of shares of Common Stock among the
Partnerships is fair, from a financial point of view, to the Unitholders in such
Partnerships.
Very truly yours,
OPPENHEIMER & CO., INC.
B-1-2
<PAGE>
APPENDIX B-2
BRINGDOWN OPINION OF OPPENHEIMER
<PAGE>
February 10, 1998
Special Committee of the Management Board
America First Companies L.L.C.
1004 Farnam Street
Omaha, Nebraska 68102
Gentlemen:
You have requested our opinion (the "Bring Down Fairness Opinion") as to
whether the proposed combination (the "Merger") of America First Mortgage
Investments, Inc. (the "Company") and America First Participating/Preferred
Equity Mortgage Fund Limited Partnership ("Prep Fund 1"), America First Prep
Fund 2 Limited Partnership ("Prep Fund 2"), and America First Prep Fund 2
Pension Series Limited Partnership ("Pension Fund", and together with Prep Fund
1 and Prep Fund 2, the "Partnerships"), including the allocation of shares of
common stock of the Company (the "Common Stock") among the Partnerships is fair
to the Unitholders, from a financial point of view. We have issued our Bring
Down Fairness Opinion on the basis of (i) participation of the three
Partnerships and (ii) participation solely of Prep Fund 1 and Prep Fund 2. We
issued our original Fairness Opinion as of July 28, 1997 (the "Fairness
Opinion"). All capitalized terms used in this Bring Down Fairness Opinion shall
have the same meaning as set forth in the Preliminary Consent Solicitation
Statement/Prospectus.
CIBC Oppenheimer Corp. ("CIBC Oppenheimer"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate, estate and
other purposes. As part of our engagement, we have been retained by the
non-employee managers (the "Special Committee") of America First Companies
L.L.C. for the purpose of, and have received a fee for, rendering this Bring
Down Fairness Opinion.
In connection with this Bring Down Fairness Opinion, we have reviewed, among
other things: the Preliminary Consent Solicitation Statement/Prospectus; the
Prospectus dated October 2, 1986 for Prep Fund 1; the Prospectus dated October
1, 1987 for Prep Fund 2; the Prospectus dated March 3, 1988 for Pension Fund;
audited financial statements for each Partnership for calendar year 1996; the
Form 10-K for each Partnership for the year ended December 31, 1996 and the Form
10-Q for each Partnership for the quarter and nine month period ended September
30, 1997; documents describing each Partnership's PREPs, Prep Fund 1's Equity
Interests, and Prep Fund 1's Participating Loan, including partnership and other
agreements; audited financial statements for calendar years 1994, 1995 and 1996
and unaudited financial statements and other financial information for the three
month period ending March 31, 1997 for each Property underlying a PREP, Prep
Fund 1's Equity Interests, and Prep Fund 1's Participating Loan; pro forma
balance sheets of the Company assuming the Merger was consummated on September
30, 1997 and pro forma statements of operations of the Company for the year
ended December 31, 1996 and for the nine months ended September 30, 1997
assuming the Merger was consummated on January 1, 1996; financial forecasts of
future operations of the Company covering each of the years in the five year
period ended December 31, 2002, assuming the Merger occurred January 1, 1998; a
business plan of the Company; and certain other financial and other information
that was publicly available or furnished to CIBC Oppenheimer by the
Partnerships, PaineWebber, and the Company. Management has indicated that there
has been no material change in the operations of the properties underlying the
PREPs, Prep Fund 1's Equity Interests, or Prep Fund 1's Participating Loan since
March 31, 1997. Management has also indicated to us that there has been no
material change in the Company's business plan since March 31, 1997.
B-2-1
<PAGE>
In addition, CIBC Oppenheimer held discussions with representatives of the
Partnerships, PaineWebber and the Company concerning the Partnerships'
historical and current operations, financial condition and prospects and the
Company's financial condition and prospects, reviewed certain publicly available
information of selected companies whose securities are publicly traded that CIBC
Oppenheimer deemed generally comparable to the Company, and conducted such other
investigations, financial analyses and studies, and reviewed such other
information and factors as it deemed appropriate for the purposes of rendering
this Bring Down Fairness Opinion. CIBC Oppenheimer's Bring Down Fairness Opinion
is based upon analysis of the foregoing factors in light of our assessment of
general economic, financial and market conditions as they exist on the date
hereof. Events occurring after such date could materially affect the assumptions
and conclusions contained in this Bring Down Fairness Opinion.
In rendering this Bring Down Fairness Opinion, CIBC Oppenheimer relied,
without assuming responsibility for independent verification, on the accuracy
and completeness of (i) all historical and operating data, financial analysis,
reports and other information relating to the Partnerships that were publicly
available or furnished or communicated to CIBC Oppenheimer by or on behalf of
the Special Committee; (ii) the financial forecasts of the Partnerships prepared
by the General Partners that were furnished to CIBC Oppenheimer by or on behalf
of the Special Committee; and (iii) the financial forecasts of the Company
prepared by the General Partners furnished to CIBC Oppenheimer by or on behalf
of the Special Committee. With respect to the financial forecasts furnished to
CIBC Oppenheimer, CIBC Oppenheimer assumed, with the Special Committee's
approval, that they reflected the best current judgment of the General Partners
as to future financial performance of the Partnerships and the Company,
respectively, and that there was a reasonable probability that the forecasts
would prove to be substantially correct. CIBC Oppenheimer did not make an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of the Partnerships.
Furthermore, CIBC Oppenheimer expresses no opinion as to the price or
trading range at which the Company's Common Stock would trade following the
completion of the Merger.
CIBC Oppenheimer was not requested to serve as financial advisor to the
Special Committee, the General Partners or the Partnerships or to assist in the
structuring of the proposed transaction. Additionally, CIBC Oppenheimer did not
analyze the impact of any federal, state or local income taxes to the
Unitholders arising out of the proposed transaction.
It is understood that this Bring Down Fairness Opinion is not to be quoted,
referred to, excerpted or summarized in whole or in part, or used for any
purpose, without our written consent. However, this Bring Down Fairness Opinion
may be included in the Consent Solicitation Statement/ Proxy distributed to the
Unitholders in connection with the proposed Merger. We have been engaged by the
Special Committee for the purpose of rendering the Fairness Opinion and this
Bring Down Fairness Opinion, in connection with which we received a fee payable
in installments (i) upon engagement and (ii) upon the rendering of the Fairness
Opinion.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that, as of the date hereof, the
proposed Merger, including the allocation of shares of Common Stock among the
Partnerships is fair, from a financial point of view, to the Unitholders in such
Partnerships.
Very truly yours,
CIBC Oppenheimer Corp.
B-2-2
<PAGE>
APPENDIX C
DIVIDEND REINVESTMENT PLAN
<PAGE>
FORM OF
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
DIVIDEND REINVESTMENT PLAN
AS OF , 1998
America First Mortgage Investments, Inc. (the "Company"), has adopted a
Dividend Reinvestment Plan (the "Plan"), subject to the terms and conditions set
forth below.
1. As agent for the stockholders of the Company who have elected to
participate in the Plan (the "Participants"), Service Data Corporation (the
"Agent"), shall receive such percentage (as specified by each Participant) of
the cash distributions paid by the Company in respect of shares of Common Stock
held by such Participant, including distributions paid in respect of any full or
fractional share of Common Stock acquired under the Plan. The Agent shall apply
such funds as follows:
The Agent shall purchase additional shares of Common Stock for the
Participants' accounts, either (i) in the open market through securities
broker-dealers, including affiliates of the Company, to the extent shares of
Common Stock are available on the New York Stock Exchange or otherwise, at
prices competitive with prevailing market prices and on such other terms as the
Agent may determine; or (ii) from the Company at a price per share equal to 97%
of the prevailing market price of the Common Stock on the New York Stock
Exchange at the time of purchase.
2. A stockholder of the Company whose shares of Common Stock are registered
in the name of a nominee cannot become a Participant in the Plan, unless (i)
such nominee may legally participate in the Plan on behalf of such stockholder
or (ii) such shares of Common Stock are re-registered in the name of such
stockholder. Participation in the Plan will commence with the next dividend
payable after receipt of the Participant's authorization, provided it is
received before the record date for that dividend.
3. In making purchases for the Participants' accounts, the Agent may
commingle the funds of any Participant with those of other Participants.
4. The Agent shall invest Participants' distributions in shares of Common
Stock promptly following the payment date with respect thereto. To the extent
that any purchase of shares of Common Stock by the Agent would cause a
Participant or any other person to exceed the 9.8% ownership limit or otherwise
violate the Company's Charter, such purchase shall be void AB INITIO and such
Participant shall be entitled to receive cash distributions (without interest)
equal in amount to the value of the shares of Common Stock which would have been
acquired as a result of such purchase.
If sufficient shares of Common Stock for all Plan Participants are not
available for purchase by the Agent, the Agent will allocate the available
shares of Common Stock to Participants' accounts on a pro rata basis. The
distributions not so invested shall be held in a non-interest bearing account at
a bank with capital and surplus of not less than $25,000,000, pending investment
in shares of Common Stock within 30 days thereafter. The bank account shall be
designated as being for the benefit of the Plan, and disbursements shall be
permitted from such account only for purchases of shares of Common Stock or for
the return of funds to Participants. If a Participant's distribution is not
large enough to buy a full share of Common Stock, such Participant will be
credited with fractional shares of Common Stock, computed to three decimal
places. To the extent shares of Common Stock are not available within 30 days
after the Agent receives the distributions, the Agent will distribute the
distributions in cash to the Participants.
Under certain circumstances, compliance with the rules and regulations of
the Securities and Exchange Commission may require temporary suspension of
purchases by the Agent or may require that purchases be spread over a period of
more than 30 days, in which event such purchases will be made or resumed as of
when permitted by such rules and regulations. The Agent may rely and act upon an
opinion of counsel concerning the suspension or timing of purchases and, in such
event, will not be accountable to
C-1
<PAGE>
Participants for its inability to make purchases of shares of Common Stock. The
Agent shall hold the shares of Common Stock of all Participants together in the
name of its nominee.
5. Neither the Company nor the Agent shall have any responsibility or
liability concerning the value or any change in the value of the shares of
Common Stock acquired for any Participant's account.
6. The Agent shall distribute to Participants any proxy solicitation
material, received by it from the Company, which is attributable to shares of
Common Stock held in the Plan. The Agent shall vote any shares of Common Stock
that it holds for the account of a Participant in accordance with such
Participant's written instructions. If a Participant does not direct the Agent
how to vote the shares of Common Stock, the Agent shall not vote those shares of
Common Stock.
7. The Agent shall, on a quarterly basis, send to each Participant a
statement of account describing any distributions received, the number of shares
of Common Stock purchased, the purchase price per share, the service charge and
the total shares of Common Stock accumulated, including fractional shares of
Common Stock, under the Plan. The Agent, on an annual basis, shall send tax
information to each Participant for income earned on shares of Common Stock in
the Plan for the calendar year.
8. Certificates evidencing shares of Common Stock will not be issued for
shares of Common Stock credited to a Participant's account, unless the
Participant otherwise requests in writing. A service charge to be established
from time to time may be charged by the Agent to a Participant in connection
with each such issuance. No certificates will be issued for a fractional share
of Common Stock.
9. In connection with the purchase of shares of Common Stock under the
Plan, a reinvestment service charge will be payable by the Participants to the
Agent in proportion to each Participant's share of the total cost of acquiring
such shares for all Participants, such service charges will include brokerage
commissions incurred by the Agent in effecting purchases of Common Stock under
the Plan. The Company will have other costs incurred in administering the Plan.
10. No Participant shall have any right to draw checks or drafts against his
account or to give instructions to the Company or the Agent, except as expressly
provided herein.
11. Taxable Participants will be taxed on their proportional share of the
Company's taxable income in the same manner as if they received their
distribution in cash. Thus, taxable Participants will incur a tax liability even
though they do not receive any cash distribution.
12. A Participant may terminate an account and his participation in the
Plan, at any time, by written notice to the Agent at 2424 South 130th Circle,
Omaha, Nebraska 68144 or such other address as may be specified by the Agent. To
be effective for any distribution such notice must be received on or before the
record date for such distribution. The Company may terminate the Plan itself, at
any time, by written notice mailed to a Participant or to all Participants, as
the case may be, at the address or addresses shown on their accounts or such
more recent address as a Participant may furnish to the Agent in writing. Upon
termination of the Plan, the Agent shall send to each Participant, after
deduction of a service charge, certificates evidencing the whole shares of
Common Stock of the Participant in such Participant's account and, as soon as
practicable, will pay by check the value of any fractional share of Common Stock
in the Participant's account (if valued at more than $1.00), based on the market
price of the shares of Common Stock, plus any funds held by the Plan in the
Participant's account. Market price, with respect to such fractional share of
Common Stock, shall be determined, on the day following the date on which a
Participant's individual termination notice is received by the Agent, as
follows: the last sales price on that day or, if no sale takes place on such
day, latest sale price as quoted on the New York Stock Exchange. A fractional
share credited to a terminated account and valued at more than $1.00 will always
be paid by check at the price determined by the applicable method above. The
Agent shall deduct a service charge of $5.00 from the Participant's account in
connection with each termination of a Participant's individual participation in
the Plan.
C-2
<PAGE>
If a Participant disposes of all the shares of Common Stock registered on
the books of the Company in his name, then, when given notice by the Company or
the Participant regarding such disposition, the Agent shall request, in writing,
that the Participant indicate what disposition is to be made of the shares of
Common Stock in the Participant's account with the Agent. If the Agent does not
receive instructions from the Participant in such a case within 60 days of such
written request, it may, in its discretion, terminate the Participant's further
participation in the Plan by distributing shares of Common Stock representing
the whole shares of Common Stock in a Participant's account and making payment
by check for any fractional share and/or funds held in the Participant's
account, or continue to reinvest the distributions paid in respect of the shares
of Common Stock in the account until otherwise notified in writing.
13. Neither the Company nor the Agent shall be liable for any act done in
good faith or for any failure to act done in good faith, including, without
limitation, any claim of liability (i) arising out of failure to terminate a
Participant's account upon such Participant's death, prior to receipt of notice
in writing of such death, or (ii) arising out of the timing of purchases or
sales of shares of Common Stock for a Participant's account or the prices at
which shares of Common Stock are purchased or sold for a Participant's account.
14. Each Participant agrees to notify the Agent promptly in writing of any
change of address. Notices to the Participant may be given by letter addressed
to the Participant at his last address of record with the Agent.
15. The terms and conditions of this Plan may be amended or supplemented by
the Company, at any time, including, but not limited to, the right to terminate
the Plan or to substitute a new agent to act as agent for the Participants, by
mailing an appropriate notice, at least 10 days prior to the record date for
distributions, to each Participant at his last address of record. Such amendment
or supplement shall be deemed conclusively accepted by each Participant, except
those Participants from whom the Agent receives written notice of termination
prior to the effective date thereof.
16. This Plan and a Participant's election to participate in it shall be
governed by the laws of the State of Maryland.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Maryland General Corporation Law ("MGCL"), Article
Eighth, Paragraph (a)(5) of the Company's Charter provides for indemnification
of directors and officers of the Company, as follows:
The Corporation may provide any indemnification permitted by the general
laws of Maryland and shall indemnify current and former directors,
officers, agents and employees as follows: (A) the Corporation shall
indemnify its directors and officers, whether serving the Corporation
or, at its request, any other entity, to the full extent required or
permitted by the general laws of the State of Maryland now or hereafter
in force, including the advance of expenses under the procedures and to
the full extent permitted by law and (B) the Corporation shall indemnify
other employees and agents, whether serving the Corporation or at its
request any other entity, to such extent as shall be authorized by the
Board of Directors or the Corporation's Bylaws and be permitted by law.
The foregoing rights of indemnification shall not be exclusive of any
other rights to which those seeking indemnification may be entitled. The
Board of Directors may take such action as is necessary to carry out
these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such bylaws, resolutions or
contracts implementing such provisions or such further indemnification
arrangements as may be permitted by law. No amendment of the Charter of
the Corporation or repeal of any of its provisions shall limit or
eliminate the right to indemnification provided hereunder with respect
to acts or omissions occurring prior to such amendment or repeal or
shall limit or eliminate the rights granted under indemnification
agreements entered into by the Corporation and its directors, officers,
agents and employees.
The Company's Bylaws contain indemnification procedures that implement those
of the Charter. The MGCL permits a corporation to indemnify its 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 action or omission was unlawful.
As permitted by the MGCL, Article Eighth, Paragraph (a)(6) of the Company's
Charter provides for limitation of liability of directors and officers of the
Company, as follows:
To the fullest extent permitted by Maryland statutory or decisional law,
as amended or interpreted, no current and former director or officer of
the Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate
the benefits provided to directors and officers under this provision
with respect to any act or omission which occurred prior to such
amendment or repeal.
The MGCL permits the charter of a Maryland corporation to include a
provision limiting the liability of its directors and officers to the
corporation and 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.
II-1
<PAGE>
As permitted under Section 2-418(k) of the MGCL, the Company has purchased
and maintains insurance on behalf of its directors and officers against any
liability asserted against such directors and officers in their capacities as
such, whether or not the registrant would have the power to indemnify such
persons under the provisions of Maryland law governing indemnification.
ITEM 21 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are filed as part of this Registration Statement:
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 --Agreement and Plan of Merger by and among the Company, America First Participating/ Preferred
Equity Mortgage Fund Limited Partnership ("Prep Fund 1"), America First Prep Fund 2 Limited
Partnership ("Prep Fund 2"), America First Prep Fund 2 Pension Series Limited Partnership ("Pension
Fund") and AF Merger, L.P., dated as of July 29, 1997 (included as Appendix A to the Consent
Solicitation Statement/Prospectus included in Part I of this Registration Statement)
3.1 --Articles of Incorporation of the Company*
3.2 --Form of Amended and Restated Articles of Incorporation of the Company*
3.3 --Bylaws of the Company*
3.4 --Form of Amended and Restated Bylaws of the Company*
3.5 --Agreement of Limited Partnership, dated May 25, 1988, of Pension Fund (incorporated herein by
reference to Form 10-K, dated December 31, 1988, filed Pension Fund with the Securities and
Exchange Commission (File No. 33-13407))
3.6 --Agreement of Limited Partnership of AF Merger, L.P.*
4.1 --Specimen of Common Stock Certificate of the Company*
5.1 --Opinion of Rogers & Wells LLP as to the legality of the Common Stock
5.2 --Opinion of Piper & Marbury L.L.P. regarding certain matters of Maryland law*
8.1 --Opinion of Rogers & Wells LLP regarding certain tax matters
10.1 --Form of Advisory Agreement by and between the Company and America First Mortgage Advisory
Corporation*
10.2 --Employment Agreement of Stewart Zimmerman*
10.3 --Employment Agreement of William S. Gorin*
10.4 --Employment Agreement of Ronald A. Freydberg*
10.5 --Form of 1997 Stock Option Plan of the Company*
10.6 --Form of Dividend Reinvestment Plan (included as Appendix C to the Consent Solicitation
Statement/Prospectus included in Part I of this Registration Statement)
12 --Statement of Computation of Ratios*
21 --List of Subsidiaries of the Company*
23.1 --Consent of CIBC Oppenheimer Corp. (included in its opinion contained in Appendix B-1 and Appendix
B-2 to the Consent Solicitation Statement/Prospectus included in Part I of this Registration
Statement)
23.2 --Consent of Coopers & Lybrand L.L.P.
23.3 --Consent of Rogers & Wells LLP (included in its opinions as Exhibits 5.1 and 8.1 herein)
23.4 --Consent of Piper & Marbury L.L.P. (included in its opinion as Exhibit 5.2 herein)*
23.5 --Consent of Michael L. Dahir, Proposed Director*
23.6 --Consent of George V. Janzen, Proposed Director*
23.7 --Consent of Gregor Medinger, Proposed Director*
23.8 --Consent of W. David Scott, Proposed Director*
24 --Power of Attorney (included in Part II of the original Registration Statement)*
99.1 --Form of Consent Form for Prep Fund 1*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
99.2 --Form of Consent Form for Prep Fund 2*
99.3 --Form of Consent Form for Pension Fund*
99.4 --Form of Retention Option Form for Pension Fund*
</TABLE>
- ------------------------
* Previously Filed.
(b) Financial Statement Schedules
The financial statement schedules are incorporated by reference to Prep Fund
1's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Prep
Fund 1's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997 (as amended by Form 10-Q/A No. 1 filed on November 24, 1997, Form
10-Q/A No. 2 filed on December 16, 1997 and Form 10-Q/A No. 3 filed on January 9
1998), Prep Fund 2's Annual Report for the fiscal year ended December 31, 1996,
Prep Fund 2's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997, Pension Fund's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 (as amended by Form 10-K/A filed on October 29,
1997) and Pension Fund's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997.
(c) Information Provided Pursuant to Item 4(b) of Form S-4
The opinions of CIBC Oppenheimer Corp. dated as of July 28, 1997 and
February 10, 1998 are included as Appendix B-1 and Appendix B-2, respectively,
to the Consent Solicitation Statement/Prospectus included in Part I of this
Registration Statement.
ITEM 22 UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Not withstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the
initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
(2) (a) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(b) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment 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.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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.
(4) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
(5) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of New York,
New York, on February 13, 1998.
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By: /s/ STEWART ZIMMERMAN
-----------------------------------------
Stewart Zimmerman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
------------------------
Pursuant to the requirements of the Securities Act, this Registration
Statement on Form S-4 of America First Mortgage Investments, Inc. has been
signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE & CAPACITY DATE
- ------------------------------ -------------------------- -------------------
/s/ MICHAEL B. YANNEY*
- ------------------------------ Chairman of the Board of February 13, 1998
Michael B. Yanney Directors
/s/ GEORGE H. KRAUSS*
- ------------------------------ Director February 13, 1998
George H. Krauss
/s/ STEWART ZIMMERMAN
- ------------------------------ President, Chief Executive February 13, 1998
Stewart Zimmerman Officer and Director
/s/ GARY THOMPSON*
- ------------------------------ Chief Financial Officer February 13, 1998
Gary Thompson
- ------------------------
* By Stewart Zimmerman, Attorney-in-Fact.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE NO.
- ------------- ------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
2.1 --Agreement and Plan of Merger by and among the Company, Prep Fund 1, Prep Fund 2, Pension
Fund and AF Merger, L.P., dated as of July 29, 1997 (included as Appendix A to the
Consent Solicitation Statement/Prospectus included in Part I of this Registration
Statement)
3.1 --Articles of Incorporation of the Company*
3.2 --Form of Amended and Restated Articles of Incorporation of the Company*
3.3 --Bylaws of the Company*
3.4 --Form of Amended and Restated Bylaws of the Company*
3.5 --Agreement of Limited Partnership, dated May 25, 1988, of Pension Fund (incorporated
herein by reference to Form 10-K, dated December 31, 1988, filed Pension Fund with the
Securities and Exchange Commission (File No. 33-13407))
3.6 --Agreement of Limited Partnership of AF Merger, L.P.*
4.1 --Specimen of Common Stock Certificate of the Company*
5.1 --Opinion of Rogers & Wells LLP as to the legality of the Common Stock
5.2 --Opinion of Piper & Marbury L.L.P. regarding certain matters of Maryland law*
8.1 --Opinion of Rogers & Wells LLP regarding certain tax matters
10.1 --Form of Advisory Agreement by and between the Company and America First Mortgage Advisory
Corporation*
10.2 --Employment Agreement of Stewart Zimmerman*
10.3 --Employment Agreement of William S. Gorin*
10.4 --Employment Agreement of Ronald A. Freydberg*
10.5 --Form of 1997 Stock Option Plan of the Company*
10.6 --Form of Dividend Reinvestment Plan (included as Appendix C to the Consent Solicitation
Statement/Prospectus included in Part I of this Registration Statement)
12 --Statement of Computation of Ratios*
21 --List of Subsidiaries of the Company*
23.1 --Consent of CIBC Oppenheimer Corp. (included in its opinion as Appendix B-1 and Appendix
B-2 to the Consent Solicitation Statement/Prospectus included in Part I of this
Registration Statement)
23.2 --Consent of Coopers & Lybrand L.L.P.
23.3 --Consent of Rogers & Wells LLP (included in its opinions as Exhibits 5.1 and 8.1 herein)
23.4 --Consent of Piper & Marbury L.L.P. (included in its opinion as Exhibit 5.2 herein)*
23.5 --Consent of Michael L. Dahir, Proposed Director*
23.6 --Consent of George V. Janzen, Proposed Director*
23.7 --Consent of Gregor Medinger, Proposed Director*
23.8 --Consent of W. David Scott, Proposed Director*
24 --Power of Attorney (included in Part II of the original Registration Statement)*
99.1 --Form of Consent Form for Prep Fund 1*
99.2 --Form of Consent Form for Prep Fund 2*
99.3 --Form of Consent Form for Pension Fund*
99.4 --Form of Retention Option Form for Pension Fund*
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
[R&W Letterhead]
EXHIBIT 5.1
February 10, 1998
America First Mortgage Investments, Inc.
1004 Farnam Street
Omaha, Nebraska 68102
Re: America First Mortgage Investments, Inc.
Ladies and Gentlemen:
We have acted as special counsel to America First Mortgage Investments, Inc., a
Maryland corporation (the "Company"), in connection with the Company's
registration statement on Form S-4 (as the same may be amended or supplemented
from time to time, the "Registration Statement"), including the Consent
Solicitation Statement/Prospectus included therein at the time the Registration
Statement is declared effective (the "CSS/P"), filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), with respect to the offer and sale of up to 8,971,506
shares of common stock, par value $0.01 per share, (the "Common Stock") of the
Company. As described in the CSS/P, the Common Stock will be issuable upon
consummation of the Merger (as herein defined) to Unitholders in each of America
First Participating/Preferred Equity Mortgage Fund Limited Partnership, a
Delaware limited partnership ("Prep Fund 1"), and America First Prep Fund 2
Limited Partnership, a Delaware limited partnership ("Prep Fund 2"), and, if it
participates in the Merger, to Unitholders in America First Prep Fund 2 Pension
Series Limited Partnership, a Delaware limited partnership ("Pension Fund"). The
Merger will be effected pursuant to an Agreement and Plan of Merger, dated July
29, 1997 (the "Merger Agreement"), which contemplates (a) the merger of Prep
Fund 1 and Prep Fund 2 with and into the Company and (b) the merger of AF
Merger, L.P., a Delaware limited partnership, with Pension Fund, which will
survive the Merger becoming a subsidiary of the Company ((a) and (b) together
shall be referred to herein as the "Merger"). This opinion is being provided at
your request in connection with the filing of the Registration Statement.
In rendering the opinion expressed herein, we have examined the Registration
Statement, the Merger Agreement, the Company's Amended and Restated Articles of
Incorporation (the "Charter") and Bylaws, and certain minutes of corporate
proceedings and/or written consents of the Company's Board of Directors (the
"Resolutions"). We have also examined and relied as to factual matters upon the
representations, warranties and other statements contained in originals or
copies, certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinions expressed below.
In our examination of the aforesaid documents, we have assumed the genuineness
of all signatures, the authenticity of all documents, certificates and
instruments submitted to us as originals and the conformity with originals of
all documents submitted to us as copies.
We assume that (i) prior to the issuance of any shares of Common Stock there
will exist, under the Charter, the requisite number of authorized but unissued
shares of Common Stock; (ii) appropriate certificates representing shares of
Common Stock will be executed and delivered upon issuance and sale of any such
shares, and will comply with all applicable requirements of Maryland law; (iii)
that immediately prior to the Merger, the Charter and Bylaws will be in full
force and effect, and no further amendment of the Charter or Bylaws will be
pending or will have been proposed; (iv) that immediately prior to the Merger,
the Company will be validly existing and in good standing under the General
Corporation Law of Maryland; (v) that immediately prior to the Merger, the Board
of Directors of the Company (including any committee thereof) will have taken no
action other than that which is set forth in the Resolutions that bears upon, or
is inconsistent with, the subject matter of the Resolutions; (vi) that
immediately prior to the
<PAGE>
Merger, all conditions to the issuance of the Common Stock by the Company set
forth in the Merger Agreement will have been satisfied or waived (to the extent
such waiver is permitted by law); and (vii) that the Common Stock is offered and
exchanged as described in the CSS/P.
Based upon the foregoing, and such examination of law as we have deemed
necessary, we are of the opinion that when the Registration Statement has become
effective under the Act and the shares of Common Stock have been issued in the
manner and for the consideration contemplated by the Merger Agreement, the
Registration Statement and the CSS/P, such shares of Common Stock issued thereby
will be duly authorized, validly issued, fully paid and non-assessable by the
Company.
The opinion set forth herein is limited to the federal laws of the United
States, and the laws of the States of New York and Maryland. To the extent that
the opinion set forth herein is dependent on the laws of the State of Maryland,
we have relied, with your permission, on the opinion of Piper & Marbury L.L.P.
of even date herewith. Our opinion, to the extent based upon such reliance, is
limited by the qualifications, assumptions and conditions set forth in such
opinion in addition to those set forth herein.
The opinion set forth herein is rendered as of the date hereof and we disclaim
any undertaking to update this letter or otherwise advise you as to any changes
of law or fact that may hereafter be brought to our attention. This opinion is
rendered to you and may not be relied upon by anyone else without our prior
written consent in each instance.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the CSS/P.
Very truly yours,
/s/ Rogers & Wells LLP
2
<PAGE>
EXHIBIT 8.1
February 10, 1998
America First Mortgage Investments, Inc.
1004 Farnham Street
Omaha, Nebraska 68102
Re: PROPOSED MERGER AND REIT STATUS
Ladies and Gentlemen:
You have requested our opinion with respect to certain federal income tax
matters in connection with the transactions contemplated by the Merger Agreement
dated as of July 29, 1997 (the "Merger Agreement"), among America First
Participating/Preferred Equity Mortgage Fund Limited Partnership ("Prep Fund
1"), America First Prep Fund 2 Limited Partnership ("Prep Fund 2"), America
First Prep Fund 2 Pension Series Limited Partnership ("Pension Fund"),
(collectively, the "Partnerships"), America First Mortgage Investments, Inc.
(the "Company"), and A.F. Merger, L.P. ("Partnership Merger Sub"). The
transactions include the merger of Prep Fund 1 and Prep Fund 2 into the Company,
and the merger of Partnership Merger Sub into Pension Fund (collectively, the
"Merger"). As a result of the Merger, the holders ("Unitholders") of units of
Prep Fund 1 ("Prep Fund 1 Units"), Beneficial Unit Certificates of Prep Fund 2
("Prep Fund 2 BUCs") and Beneficial Unit Certificates of Pension Fund ("Pension
BUCs" and, together with the Prep Fund 1 Units and the Prep Fund 2 BUCs,
"Units"), other than Pension BUC Unitholders electing the Retention Option, will
terminate their interests in the Partnerships and receive shares of Common Stock
in the Company. All capitalized terms used herein have their respective
meanings set forth in the Merger Agreement unless otherwise stated.
In rendering the opinion stated below, we have examined and relied, with
your consent, upon the following:
The Merger Agreement;
The Prospectus/Consent Solicitation Statement, dated February 10, 1998
(the "Prospectus/Consent Solicitation Statement");
The Amended and Restated Agreements of Limited Partnership of the
Partnerships, (collectively, the "Partnership Agreements"); and
such other documents, records and instruments as we have deemed
necessary in order to enable us to render the opinion referred to in
this letter.
In our examination of the foregoing documents, we have assumed, with your
consent, that (i) all documents reviewed by us are original documents, or true
and accurate copies of original documents, and
<PAGE>
have not been subsequently amended, (ii) the signatures of each original
document are genuine, (iii) each party who executed the document had proper
authority and capacity, (iv) all representations and statements set forth in
such documents are true and correct, (v) all obligations imposed by any such
documents on the parties thereto have been or will be performed or satisfied in
accordance with their terms and (vi) the Company, Prep Fund 1, Prep Fund 2 and
Pension Fund have at all times been and the Company and Pension Fund will at all
times continue to be organized and operated in accordance with the terms of such
documents. We have further assumed, with your consent, the accuracy of the
statements and descriptions of the Company's and Pension Fund's intended
activities as described in the Merger Agreement, the Prospectus/Consent
Solicitation Statement and the Partnership Agreements, and that the Company and
Pension Fund have operated and will continue to operate in accordance with the
method of operation described in the Merger Agreement, the Prospectus/Consent
Solicitation Statement and the Partnership Agreements.
For purposes of rendering the opinions stated below, we have further
assumed, with your consent, the accuracy of the representations contained in the
Certificate of Representations dated February 10, 1998 provided to us by the
Company (the "Company Certificate"). These representations generally relate to
the qualification of the Company as a REIT for federal income tax purposes and
the qualification of the Merger as a tax-free transfer for federal income tax
purposes. For purposes of rendering the opinions stated below, we have also
assumed, with your consent, the accuracy of the representations contained in the
Certificate of Representations dated February 10, 1998 provided to us by the
Partnerships (the "Partnership Certificate"). These representations generally
relate to the qualification of the Merger as a tax-free transfer for federal
income tax purposes and to the organization and operation of Prep Fund 1, Prep
Fund 2, and Pension Fund.
Based upon and subject to the foregoing, we are of the opinion that:
(i) the Merger will be treated for federal income tax purposes as a
transfer of assets by Prep Fund 1 and Prep Fund 2 and a transfer of Pension
BUCs by the Unitholders of Pension BUCs for shares of Common Stock
qualifying for treatment under Section 351 of the Code followed by a tax-
free distribution of such Common Stock by Prep Fund 1 and Prep Fund 2 to
their Unitholders;
(ii) commencing with its taxable year ending December 31, 1998, the Company
will be organized and operated in conformity with the requirements for
qualification and taxation as a REIT within the meaning of Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code")
and the Company's proposed method of operation will permit the Company to
continue to so qualify; and
(iii) the discussion contained in the Prospectus/Consent Solicitation
Statement under the heading "Federal Income Tax Considerations" fairly
summarizes the material federal income tax considerations associated with
the Merger and the operation of the Company.
The opinions stated above represent our conclusions as to the application
of federal income tax laws existing as of the date of this letter to the
transactions contemplated in the Merger Agreement and the Prospectus/Consent
Solicitation Statement and we can give no assurance that legislative enactments,
administrative changes or court decisions may not be forthcoming that would
modify or supersede our opinion. An opinion of counsel merely represents
counsel's judgement with respect to the probable outcome on the merits and is
not binding on the Internal Revenue Service ("IRS") or the courts. It should be
noted that some of the tax consequences of the Merger are subject to differing
interpretations and that the opinions stated above are based upon a conclusion
that the Merger will not be treated as a transfer to an investment company under
Section 351(e) of the Code. However, neither the courts nor the IRS has ruled
<PAGE>
on the application of Section 351(e) in connection with an exchange of
partnership units for shares or a transaction similar to the Merger.
Accordingly, there can be no assurance that positions contrary to our opinion
will not be taken by the IRS, or that a court considering the issues would not
hold contrary to such opinion.
The opinions set forth above represent our conclusions based upon the
documents, facts and representations referred to above. Any material amendments
to such documents, changes in any significant facts or inaccuracy of such
representations could affect the opinions referred to herein. Moreover, the
Company's qualification and taxation as a REIT depend upon the Company's ability
to meet, through actual annual operating results, requirements under the Code
regarding income, assets, distributions and diversity of stock ownership.
Because the Company's satisfaction of these requirements will depend on future
events, no assurance can be given that the actual results of the Company's
operations for any one taxable year will satisfy the tests necessary to qualify
as or be taxed as a REIT under the Code. Although we have made such inquiries
and performed such investigations as we have deemed necessary to fulfill our
professional responsibilities as counsel, we have not undertaken an independent
investigation of all of the facts referred to in this letter, the Partnership
Certificate and the Company Certificate.
The opinions set forth in this letter: (i) are limited to those matters
expressly covered; no opinion is to be implied in respect of any other
matter;(ii) are as of the date hereof; and (iii) may not be relied on by any
other person or entity other than you or your stockholders without our prior
written consent.
We hereby consent to the filing of this opinion letter as an exhibit to
the Company's Registration Statement on Form S-4 and the reference to this
firm under the caption "Federal Income Tax Considerations" in the
Prospectus/Consent Solicitation Statement.
Very truly yours,
/s/ Roger & Wells LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-4 of our reports dated March 26, 1997 on our audits of the financial
statements and related financial statements schedules of PREP Fund 1, PREP Fund
2 and Pension Fund as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 and to the inclusion of our report
dated November 13, 1997 on our audit of the balance sheet of America First
Mortgage Investments, Inc. as of November 12, 1997. We also consent to the
reference of our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
February 12, 1998
