[FLAG]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
As filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 333-63061
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________
FORTRESS INVESTMENT CORP.
(Exact name of Registrant as specified in its charter)
_________________
1301 Avenue of the Americas
New York, NY 10019
(212) 798-6100
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Randal A. Nardone
Chief Operating Officer and Secretary
Fortress Investment Corp.
1301 Avenue of the Americas
New York, NY 10019
(212) 798-6100
(Name, Address, including zip code, and telephone number,
including area code, of agent for service)
_________________
Copy to:
David J. Goldschmidt
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
(212) 735-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. |_|
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.
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
20,916,739 Shares
FORTRESS INVESTMENT CORP.
Common Stock
This Prospectus relates to shares of Common Stock of Fortress
Investment Corp. ("Fortress") which may be offered and sold from time to
time by the holders named herein or by their transferees, pledgees, donees
or successors pursuant to this Prospectus. Certain of the shares offered
hereby were issued and sold on June 10, 1998 and July 1, 1998
(collectively, the "Original Offering") to NationsBank Montgomery
Securities LLC, as Initial Purchaser, and subsequently resold by the
Initial Purchaser in transactions exempt from the registration requirements
of the Securities Act of 1933, as amended. In addition, certain of the
shares offered hereby were sold directly by Fortress to Fortress Investment
Group LLC (the "Manager"), its affiliates and employees (the "Private
Placement"). The Company has no present intention of listing the Common
Stock on Nasdaq or a national securities exchange.
All of the shares offered hereby are being offered by the
stockholders described above (the "Selling Stockholders"). The shares may
be sold by the Selling Stockholders from time to time directly to
purchasers or through agents, underwriters or dealers. The Selling
Stockholders will receive all of the net proceeds from the sale of the
shares. Fortress will not receive any proceeds from the sale of these
shares. The holders will pay all underwriting discounts, selling
commissions and transfer taxes, if any, applicable to any such sale.
Fortress is responsible for payment of all other expenses incident to the
registration of the shares. See "Selling Stockholders" and "Plan of
Distribution."
Fortress invests in real estate-related assets on a global basis.
Fortress is the sole general partner of Fortress Partners, L.P. (the
"Operating Partnership" and, collectively with Fortress and their
subsidiaries, the "Company"), through which most of the investments of the
Company are made. The Principals of the Manager are Messrs. Wesley R.
Edens, Robert I. Kauffman, Randal A. Nardone and Erik P. Nygaard (the
"Principals"). The Manager manages the day-to-day operations of the
Company. The Principals own all of the equity of the Manager and are
officers and directors of both Fortress and the Manager. Fortress has no
ownership interest in the Manager. The Manager, its affiliates and
employees own approximately 12.8% of the equity of the Company (20.7% upon
exercise of outstanding options). The Manager receives a management fee
from the Company, and incentive fees based on certain performance criteria.
For the period from May 11, 1998 (date of formation) to December 31, 1998,
the Company paid the Manager a management fee of $6 million. See "The
Manager and the Management Agreement."
Fortress expects to qualify as a real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, as amended, commencing
with its taxable period ended December 31, 1998.
See "Risk Factors" beginning on page 2 for material risks relevant
to an investment in the shares of Common Stock, including, among others:
o Conflicts of interest may arise among Fortress, the
Operating Partnership, the Manager and the Principals,
which may result in decisions that do not fully reflect
the best interests of all of the stockholders of
Fortress. The Principals are officers and directors of
both the Company and the Manager. The Management
Agreement was not negotiated on an arm's length basis.
The Management Agreement provides for substantial fees to
the Manager, including a substantial termination fee. The
Company may acquire with the approval of its independent
directors, assets from the Manager on the advice of the
Manager, whose interest in such a transaction may be
adverse to that of the Company. Officers of the Company
who also serve as officers or directors of the Manager
may not have adequate time to devote to the Company.
o The management agreement with Fortress entitles the
Manager to receive (1) substantial base management fees
regardless of the performance of the Company's portfolio,
and (2) incentive fees based on such performance, which
may lead the Manager to place emphasis on the
maximization of revenues which could result in increased
risk to the value of the invested portfolio.
o The Company was formed in May 1998 and has a limited
operating history. There can be no assurance that the
Manager will be able to implement successfully the
Company's strategies.
o The Company has broad discretion in the types and
percentages of any types of real estate-related assets
included in its portfolio and may change its investment
and operating policies and strategies at any time without
the consent of the stockholders of Fortress which could
result in the Company making investments that are
different from, and possibly riskier than, the Company's
investments described in this Prospectus.
o The Company competes with respect to its acquisition of
investments with other investors, including other REITs
and private real estate investment funds, some of which
have greater resources than the Company, and there can be
no assurance that the Company will be able to bid
successfully against such competitors.
o The Company relies on the Manager for advisory and
management services, and on key personnel of the Manager,
including the Principals, whose continued service is not
guaranteed. If any of the Principals or other key
personnel ceased working for the Manager, the potential
diminution in the quality of the Manager's service might
adversely affect the Company.
o Real estate-related investments are generally relatively
illiquid and therefore the ability of the Company to vary
its investments in response to changes in economic and
market conditions is limited.
o The Company invests in commercial real properties,
including net leased properties, which are subject to
risk of non-payment by the applicable tenant, and various
types of commercial mortgage loans, which may be subject
to significant credit risk, resulting in possible losses,
particularly in the event of an economic downturn.
o The Company invests in residential and commercial
mortgage loans, which may be subject to significant
credit risk, resulting in possible losses. Many of the
loans acquired by the Company are subperforming or
distressed and the Company is therefore dependent on the
sufficiency of the collateral. If the collateral on a
non-performing loan is insufficient, the Company will
suffer losses.
o The Company invests in real estate and mortgage loans
secured by real estate outside the United States. Changes
in exchange rates may decrease the value of these
investments. Regulatory and tax law changes in the
countries in which the Company invests may also decrease
the value of its investments.
o The Company leverages its real estate-related assets,
which can compound losses and reduce the funds available
for distribution to stockholders. The Company's leverage
policy presently permits the Company to leverage its
assets up to 90%.
o If the Company fails to qualify as a REIT, it will be
subject to income tax at regular corporate rates, which
will reduce the cash available for distribution to its
shareholders.
o The Company may make a distribution of capital or of
assets at the discretion of its Board of Directors that
may not be in the best interests of all of its stockholders.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1999.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
AVAILABLE INFORMATION.........................................................................................1
OFFERING SUMMARY..............................................................................................2
The Company................................................................................................2
Summary Risk Factors.......................................................................................2
Investment Strategy........................................................................................5
Investments................................................................................................5
The Manager and the Management Agreement...................................................................7
Conflicts of Interest......................................................................................9
Restrictions on Ownership of Stock.........................................................................9
Use of Proceeds...........................................................................................10
Distribution Policy.......................................................................................10
Tax Status of the Company.................................................................................10
Organization and Relationships............................................................................11
Summary Historical and Pro Forma Consolidated Financial Information.......................................12
RISK FACTORS.................................................................................................15
Conflicts of Interest in Relationship with the Manager....................................................15
Newly-Organized Corporation; Limited Operating History....................................................16
Broad Discretion on Investments; Appropriate Investments May Not Be Available.............................16
Competition...............................................................................................16
External Management of the Company........................................................................16
Dependence on Key Personnel...............................................................................16
Real Estate is Illiquid and Value is Dependent on Conditions Beyond Company's Control.....................17
Risks Related to Investments in Mortgage Loans............................................................17
International Investments are Subject to Currency Conversion Risks and Uncertainty of Foreign Laws
and Markets.........................................................................................18
Geographic Concentration of Properties. .................................................................19
Significant Concentrations in Credit Risk. ..............................................................19
No Significant Limitation on Leverage; Leverage Can Reduce Income Available for Distribution. ...........19
Financing through Repurchase Agreements May Result in Margin Calls Which the Company Cannot
Meet on Favorable Terms. ..........................................................................20
Hedging Transactions May Result in Losses.................................................................20
Interest Rate Risks.......................................................................................20
Foreign Currency Exchange Rate Risk.......................................................................20
Derivative Transactions May Result in Losses..............................................................21
Multi-Sector and Multi-Jurisdiction Investment Strategy Requires Broad Expertise..........................21
Strategic Partnership and Joint Venture Investments Involve Additional Risks Relating to Third Party
Partners............................................................................................21
Failure to Qualify as a REIT Would Result in Higher Taxes and Reduced Cash Available for Stock
holders.............................................................................................21
The Company's Insurance May Not Cover All Losses..........................................................22
Environmental Compliance Costs and Liabilities May Affect Results of Operations...........................22
Year 2000 Compliance......................................................................................23
Failure to Raise Additional Capital on Acceptable Terms May Adversely Affect the Company;
Additional Capital May Dilute Stockholders' Interests...............................................24
Property Taxes Decrease Returns on Real Estate............................................................24
Compliance with Americans with Disabilities Act and Other Changes in Governmental Rules and
Regulations May Be Costly...........................................................................24
Board of Directors May Change Policies Without Stockholder Consent........................................24
Conflicts Relating to a Sister Co.........................................................................24
Market for Common Stock May Not Develop...................................................................24
Loss of Investment Company Act Exemption Would Adversely Affect the Company...............................25
Plans Should Consider ERISA Risks of Investing in Common Stock............................................25
Stock Ownership Limit May Restrict Business Combination Opportunities.....................................25
Maryland Takeover Statutes May Prevent a Change of Control................................................26
Authorized But Unissued Preferred Stock May Prevent a Change in Control...................................26
Stockholder Rights Plan Could Inhibit a Change in Control.................................................26
Staggered Board and Other Provisions of the Charter and Bylaws May Prevent Change in Control..............26
Limitation on Liability of Manager and Officers and Directors of the Company..............................27
Possible Legislative or Other Actions Affecting Tax Consequences..........................................27
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS....................................................28
THE COMPANY..................................................................................................29
Investments...............................................................................................29
Credit Leased Real Estate.................................................................................29
Schedule of Lease Expirations.............................................................................31
Loan Portfolios...........................................................................................31
Financings................................................................................................32
Borrowings................................................................................................33
Competition...............................................................................................34
Recent Developments.......................................................................................34
INVESTMENT STRATEGY..........................................................................................35
General .................................................................................................35
Targeted Investments......................................................................................36
Investment Management.....................................................................................37
The Sister Co. and Preferred Stock Affiliates.............................................................37
Policies With Respect to Certain Other Activities.........................................................38
THE MANAGER AND THE MANAGEMENT AGREEMENT.....................................................................40
The Manager...............................................................................................40
The Manager's Experience..................................................................................40
Officers of the Manager...................................................................................40
The Management Agreement..................................................................................45
Management Compensation Summary...........................................................................48
Management Fee............................................................................................49
Management Incentives.....................................................................................50
Limits of Responsibility..................................................................................51
Conflicts of Interest in Relationship with the Manager....................................................52
MANAGEMENT...................................................................................................53
Directors and Executive Officers of the Company...........................................................53
Executive Compensation....................................................................................54
Directors.................................................................................................54
Stock Options.............................................................................................55
Liability and Indemnification of Officers and Directors...................................................56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................................57
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.........................................................58
USE OF PROCEEDS..............................................................................................58
DISTRIBUTION POLICY..........................................................................................58
PRICE RANGE OF COMMON STOCK..................................................................................59
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.......................................................60
CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL STATEMENTS........................................................63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...........................................................................................63
Overview .................................................................................................63
General .................................................................................................63
Results of Operations.....................................................................................63
Acquisition Indebtedness..................................................................................65
Liquidity and Capital Resources...........................................................................66
Inflation.................................................................................................67
Funds from Operations.....................................................................................67
Quantitative and Qualitative Disclosures about Market Risk................................................68
Market Risk Exposure......................................................................................68
Risk Measurement: Sensitivity Analysis....................................................................68
Fair Values...............................................................................................75
Cash Flow and Earnings....................................................................................75
Year 2000 Compliance......................................................................................70
DESCRIPTION OF SECURITIES....................................................................................72
General .................................................................................................72
Common Stock..............................................................................................72
Preferred Stock...........................................................................................73
Power to Issue Additional Shares of Common Stock and Preferred Stock......................................73
Stockholder Rights Plan...................................................................................73
Dividend Reinvestment Plan................................................................................75
Transfer Agent and Registrar..............................................................................75
Transfer Restrictions.....................................................................................75
Book-Entry Only Issuance -- The Depository Trust Company..................................................77
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF FORTRESS' CHARTER AND BYLAWS.........................................................................80
Classification of the Board of Directors..................................................................80
Removal of Directors......................................................................................80
Business Combinations.....................................................................................80
Control Share Acquisitions................................................................................81
Amendment to the Charter..................................................................................81
Dissolution of Fortress...................................................................................81
Advance Notice of Director Nominations and New Business...................................................82
Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter and Bylaws..................82
COMMON STOCK AVAILABLE FOR FUTURE SALE.......................................................................83
OPERATING PARTNERSHIP AGREEMENT..............................................................................84
General .................................................................................................84
General Partner Not to Withdraw...........................................................................84
Capital Contributions.....................................................................................84
Issuance of Additional Limited Partnership Interests......................................................84
Redemption Rights.........................................................................................85
Operations................................................................................................85
Distributions; Preferred Incentive Return.................................................................85
Allocations...............................................................................................86
Term......................................................................................................86
Tax Matters...............................................................................................86
FEDERAL INCOME TAX CONSIDERATIONS............................................................................87
Taxation of the Company...................................................................................87
Requirements for Qualification............................................................................88
Failure to Qualify........................................................................................93
Taxation of Taxable U.S. Stockholders.....................................................................93
Taxation of Stockholders on the Disposition of the Common Stock...........................................94
Taxation of Tax-Exempt Stockholders.......................................................................94
Taxation of Non-U.S. Stockholders.........................................................................95
Possible Legislative or Other Actions Affecting Tax Consequences..........................................96
State, Local and Foreign Tax Consequences.................................................................96
Sister Co.................................................................................................96
ERISA CONSIDERATIONS.........................................................................................97
The Acquisition and Holding of Common Stock...............................................................97
The Treatment of the Company's Underlying Assets Under ERISA..............................................97
SELLING STOCKHOLDERS........................................................................................100
PLAN OF DISTRIBUTION........................................................................................100
LEGAL MATTERS...............................................................................................101
EXPERTS.....................................................................................................101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................................................F-1
</TABLE>
AVAILABLE INFORMATION
Fortress has filed with the Securities and Exchange Commission
(the "Commission") in Washington D.C. a Registration Statement on Form S-11
(as amended, the "Registration Statement") of which this Prospectus is a
part under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
to which reference is hereby made. Statements contained in this Prospectus
as to the content of any contract, agreement or other document are
summaries of the material terms of such contract, agreement or other
document. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved. The
Registration Statement (including the exhibits thereto) filed by Fortress
with the Commission may 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 will also be available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois
60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission also maintains a website
that contains reports, proxy and information statements and other
information. The website address is http://www.sec.gov.
Upon the effectiveness of the Registration Statement, Fortress
will be subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, will file reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information
statements and other information can be inspected and copied at the
addresses set forth above. Fortress will report its financial statements on
a year ended December 31. Fortress intends to furnish its stockholders with
annual reports containing consolidated financial statements audited by its
independent certified public accountants and with quarterly reports
containing unaudited consolidated financial statements for each of the
first three quarters of each fiscal year.
OFFERING SUMMARY
Following is a summary of all material information relating to the
Company and an investment in the shares of Common Stock. The following
summary is subject to, and qualified in its entirety by, the more detailed
information included elsewhere in this Prospectus. All references to
dollars are to U.S. Dollars unless otherwise specified.
The Company
The Company invests in real estate-related assets on a global
basis, focusing on undervalued and distressed assets. The Company's
investment activities primarily include (i) investing in net leased real
estate; (ii) investing in portfolios of distressed, sub-performing and
performing residential, multifamily and commercial mortgage loans; and
(iii) providing financing to third party owners of real estate and
portfolios of mortgage loans, in each case with respect to assets located
in the U.S. and in foreign jurisdictions.
The Company is externally managed and advised by the Manager. The
Manager's professionals combine real estate, risk management, structured
finance, capital markets, financial engineering and legal expertise, with
respect to both dollar and non-dollar denominated investments. The
Principals have an average of over 15 years of real estate-related
experience, although they have no prior experience managing a REIT. The
Principals own all of the equity of the Manager and are officers and
directors of both the Company and the Manager. The Company has no ownership
interest in the Manager. The Manager, its employees and affiliates own
approximately 12.8% of the equity of the Company (20.7% upon exercise of
outstanding options). The Manager receives an annual management fee from
the Company and incentive fees based on certain performance criteria. See
"The Manager and the Management Agreement."
Fortress was incorporated in the State of Maryland in May 1998 and
expects to be taxed as a REIT under the Code commencing with its taxable
period ended December 31, 1998. The Operating Partnership was formed in the
State of Delaware in May 1998. The principal executive offices of the
Company are located at 1301 Avenue of the Americas, New York, New York
10019. The Company's telephone number is (212) 798-6100.
Summary Risk Factors
An investment in the shares of Common Stock involves various
material risks, and prospective investors should consider carefully the
matters discussed under "Risk Factors" prior to an investment in the
Company. Such risks
include, among others:
o Conflicts of Interests. Conflicts of interest may arise
among Fortress, the Operating Partnership, the Manager
and the Principals, which may result in decisions that do
not fully reflect the best interests of all of the
stockholders of Fortress. The Principals are officers and
directors of both the Company and the Manager. The
Management Agreement was not negotiated on an arm's
length basis. The Management Agreement provides for
substantial fees to the Manager, including a substantial
termination fee. The Company may acquire with the
approval of its independent directors, assets from the
Manager on the advice of the Manager, whose interest in
such a transaction may be adverse to that of the Company.
Officers of the Company who also serve as officers or
directors of the Manager may not have adequate time to
devote to the Company.
o Substantial Management Fees. The Management Agreement
entitles the Manager to receive (1) substantial base
management fees regardless of the performance of the
Company's portfolio, and (2) incentive fees based on such
performance, which may lead the Manager to place emphasis
on the maximization of revenues which could result in
increased risk to the value of the invested portfolio. In
addition, the Company must pay the Manager a substantial
termination fee if the Company terminates the Management
Agreement.
o Limited Operating History. The Company was formed in May
1998 and has limited operating history and none of the
Principals has experience operating a REIT. There can be
no assurance that the Manager will be able to implement
successfully the Company's strategies.
o Broad Investment Discretion. The Company has broad
discretion in the types and percentages of any types of
real estate-related assets which may be included in its
portfolio and may change its investment and operating
policies and strategies at any time without the consent
of the stockholders of Fortress, which could result in
the Company making investments that are different from,
and possibly riskier than, the Company's investments
described in this Prospectus.
o Competition. The Company competes with respect to its
acquisition of assets with several other companies,
including other REITs and private real estate investment
funds, some of which have greater resources than the
Company and there can be no assurance that the Company
will be able to bid successfully against such competitors.
o Dependence on Outside Manager. The Company relies on the
Manager for advisory and management services and on key
personnel of the Manager, including the Principals, whose
continued service is not guaranteed. The Company does not
have any employees and relies on the facilities,
personnel and resources of the Manager to conduct its
operations. If any of the Principals or other key
personnel ceased working for the Manager, the potential
diminution in the quality of the Manager's service might
adversely affect the Company.
o Real Estate is Illiquid. Real estate-related investments
are generally relatively illiquid and therefore the
ability of the Company to vary its investments in
response to changes in economic and market conditions is
limited.
o Mortgage Loans are Subject to Default. The Company
invests in residential and commercial mortgage loans,
which may be subject to significant credit risk,
resulting in possible losses. Many of the loans acquired
by the Company are subperforming or distressed and the
Company will therefore be dependent on the sufficiency of
the collateral. If the collateral on a non-performing
loan is insufficient, the Company will suffer losses.
o International Investments are Subject to Exchange Rate
Fluctuations and Other Risks. The Company invests in real
estate and mortgage loans secured by real estate outside
the United States. Changes in exchange rates may decrease
the value of these investments. Regulatory and tax law
changes in the countries in which the Company invests may
also decrease the value of its investments.
o Leverage May Compound Losses. The Company leverages its
real estate-related assets, which can compound losses and
reduce the funds available for distribution to
stockholders. The Company's leverage policy presently
permits the Company to leverage its assets up to 90%.
o Leased Properties Subject to Non-payment of Rent. The
Company invests in commercial real properties, including
net leased properties, which are subject to risk of
non-payment by the applicable tenant, particularly in the
event of an economic downturn.
o Geographic Concentration. The Company has a large
percentage of its assets in a few geographic areas. An
economic or real-estate market downturn in any of these
areas could adversely affect the value of a significant
proportion of the Company's assets.
o Significant Concentration of Credit Risk. A significant
portion of the Company's assets are leased to two
tenants. A diminution in the credit quality of either of
these tenants would lead to a greater consequent
diminution in asset value of those assets than if the
Company had a broader and more diverse group of high
credit quality tenants.
o Hedging Transactions May Cause Losses. The Company hedges
its interest rate and currency risks through the use of
derivative instruments. Hedging transactions, which are
conducted to limit losses, may actually limit gains and
increase the Company's exposure to losses.
o Interest Rate Fluctuations May Cause Losses. Interest
rate fluctuations may adversely affect the Company's
investments and operating results since certain of the
Company's investments may be leveraged through
floating-rate financings, and certain investments may be
floating rate loans. Changes in interest rates may affect
the Company's earnings by changing the amount of interest
sensitive income and interest sensitive expenses. In
addition, interest rate fluctuations can adversely affect
the value of the Company's fixed rate investments.
o Failure to Qualify as a REIT Will Result in Increased
Taxes and Reduced Cash Available for Distributions. If it
fails to qualify as a REIT, Fortress will be subject to
income tax at regular corporate rates, which will reduce
the cash available for distribution to stockholders of
Fortress.
o No Established Trading Market. There is no established
market for the Common Stock and the Company has no
present intention of listing the Common Stock on Nasdaq
or a national securities exchange, which may affect the
value and liquidity of an investment in the Common Stock.
o Ownership Limitations May Inhibit Change in Control.
Ownership of the Common Stock by any stockholder is
generally limited to 9.8% of the aggregate value of the
outstanding shares of any class or series of capital
stock of Fortress, which may make it more difficult to
change control of Fortress even where such change may be
in the best interest of Fortress' stockholders. The
Company's Board of Directors have exercised their right
under the Charter to exempt the Principals and the
Manager (and certain of its affiliates) from this
restriction and to permit a shareholder fund (which
represents several shareholders) to purchase up to 15% of
the Company's outstanding stock.
o Anti-Takeover Provisions May Inhibit Change in Control.
Each of (1) provisions in the Company's Stockholder
Rights Agreement, (2) provisions in the Company's
Charter, (3) provisions in the Company's Charter
authorizing the Board of Directors to issue a series of
preferred stock without stockholders approval and (4)
provisions of the Maryland General Corporation Law could
have the effect of discouraging a takeover or other
transaction in which stockholders might receive a premium
for their shares.
o Tax Law Changes May Adversely Affect the Company. The
Company has been organized to take advantage of the
positive tax consequences applicable to REITs. If these
laws are changed, the Company's activities, structure and
operations may be adversely affected.
o Distributions. The Company may make a distribution of
capital or of assets at the discretion of its Board of
Directors that may not be in the best interests of all of
the stockholders.
o Restrictions Imposed by Tax Law. The REIT qualification
rules impose limitations on the types of investments and
activities which the Company may undertake. Such
limitations may, in some cases, preclude the Company from
pursuing the most economically beneficial investment
alternatives.
Investment Strategy
The Company's investment activities are primarily focused on real
estate-related assets that produce cash flows that are undervalued, whether
due to the credit quality of the obligors, the value of the underlying
assets, the complexity of the transaction, the viability of the capital
structure, the accuracy and availability of information or the availability
of appropriate operating systems. The Principals believe that they can add
value to these types of assets through (a) increasing and stabilizing cash
flows through restructuring and workouts, (b) creating optimal servicing
and operating systems, (c) gathering and monitoring asset-specific and
obligor-specific information and (d) developing appropriate short-term and
long-term capital structures for the assets, including securitizations,
negotiated restructurings and liquidations.
The Company's targeted investments include:
o Credit Leased Real Estate. The Company invests in
commercial properties which are generally leased on a
long-term basis to high credit quality tenants, including
both government and private sector entities.
o Loan Portfolios. The Company invests in portfolios of
distressed, sub-performing and performing residential,
multifamily and commercial mortgage loans and related
properties acquired in foreclosure or by deed-in-lieu of
foreclosure.
o Financings. The Company provides financing, primarily
short-term, secured loans, to third-party owners of real
estate or portfolios of mortgage loans.
o Other Investments. In addition to three targeted lines of
business, the Company may pursue other real
estate-related investments.
Investments are made in assets located in the U.S. and in foreign
jurisdictions. The Principals have several years of experience in each of
these investment activities, in particular managing BlackRock Asset
Investors ("BAI") and the Global Principal Finance Group ("GPF") at UBS
Securities LLC ("UBS"), each of which also invested in the above types of
real-estate related assets. See "The Manager and the Management Agreement".
The Company has no limits on how much it may invest in each or any of these
categories of assets. The Company will decide whether to purchase a
particular asset on a case by case basis.
The Company may, from time to time, identify assets that it
believes may be advantageous investments but that may be inappropriate
(whether for REIT qualification, tax or other reasons) for investment, in
whole or in part, by Fortress or which may otherwise be determined by the
Manager and the Company, based on general prudent considerations, to be
inappropriate, in whole or in part, for investment by the Company. In order
to permit stockholders of Fortress to participate in the economic benefits
that may be associated with such inappropriate assets, the Company may from
time to time to cause the Operating Partnership to form one or more
subsidiary corporations, partnerships or other entities (each, a "Sister
Co."), which would not be taxed as a REIT. The Company has no present
intention of forming a Sister Co.
Investments
Set forth below is a summary of the Company's more significant
investments at December 31, 1998. See "The Company -- Investments" for
additional information regarding each of these investments.
Credit Leased Real Estate
Fortress owns 13 office properties primarily leased to the General
Services Administration of the U.S. Government (the "GSA" and such
properties, the "GSA Properties"), two forward projects to be primarily
leased to the GSA upon completion (the "GSA Forward Projects"), and five
office properties in Canada leased primarily to Bell Canada (the "Bell
Canada Portfolio"). The total net rentable square feet in the entire
portfolio of credit leased real estate, including the GSA Forward Projects,
is approximately 4.6 million.
<TABLE>
<CAPTION>
GSA PROPERTIES
Net
Rentable
Square % of Square
Property Address City/Submarket State Feet Primary Tenant Footage
---------------- -------------- ----- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
696 Virginia Road Concord/CBD MA 104,527 GSA 100.0%
380 Westminister St. Providence/CBD RI 163,000 GSA 100.0%
1325 J Street Sacramento/CBD CA 323,395 GSA 70.4%
116 Lake View Suffolk VA 320,000 GSA 100.0%
150 Corporate Dr. Norfolk VA 58,600 GSA 100.0%
1600 Callowhill Philadelphia, CBD PA 93,553 GSA 81.0%
1900 River Rd Burlington/Suburban Philadelphia NJ 1,048,631 GSA 100.0%
755 Parfet Street Lakewood/Suburban Denver CO 81,912 GSA 96.4%
4820 University Square Huntsville AL 125,000 GSA 100.0%
16401 E. Centre Tech Pkwy. Aurora/Suburban Denver CO 116,500 GSA 100.0%
999 E Street NW Washington/CBD DC 162,038 GSA 90.0%
1433 West Loop Street Houston, Galleria TX 138,000 GSA 92.0%
8808-8810 Rio San Diego Dr. San Diego/Mission Valley
(acquired March 1999) CA 144,327 GSA 91.4%
---------
SUB-TOTAL 2,879,483
---------
</TABLE>
<TABLE>
<CAPTION>
GSA FORWARD PROJECTS
Net
Rentable
Square % of Square
Property Address City/Submarket State Feet Primary Tenant Footage
---------------- -------------- ----- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
901 N Fifth Street Kansas City, KS/CBD KS 200,311 GSA 100.0%
Ninth & Locust Streets Kansas City, MO/CBD MO 204,611 GSA 100.0%
---------
SUB-TOTAL 404,922
---------
SUB-TOTAL-GSA PROPERTIES 3,284,405
---------
</TABLE>
<TABLE>
<CAPTION>
BELL CANADA PORTFOLIO
Net
Rentable
Square % of Square
Property Address City/Submarket Province Feet Primary Tenant Footage
---------------- -------------- ----- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
20-40 Norelco Drive and Toronto/North York ON 624,786 Bell Canada 100.0%
83 Signet Drive
2 Fieldway Road Etobicoke (Toronto)/ Metro West ON 177,212 Bell Canada 99.9%
100 Dundas Street London/CBD ON 322,056 Bell Canada 95.3%
449 Princess Street Kingston/CBD ON 45,691 Bell Canada 100.0%
66 Bay Street Hamilton/CBD ON 118,787 Bell Canada 100.0%
---------
SUB-TOTAL- BELL CANADA 1,288,532
---------
TOTAL CREDIT LEASED REAL ESTATE PORTFOLIO 4,572,937
=========
</TABLE>
<TABLE>
<CAPTION>
LOAN PORTFOLIOS
Number of
Portfolio Underlying Properties Unpaid Principal Balance
- --------- --------------------- ------------------------
<S> <C> <C>
U.S. Commercial Loan Portfolio (1) 13 $24.7 million (3)
Residential Loan Portfolio (2) 1,445 $54.4 million (4)
Canadian Loan Portfolio (Commercial and 355 $41.1 million
Residential)
(1) 96% ownership
(2) 50% ownership
(3) includes $8.1 million held by an unconsolidated subsidiary
(4) includes $16.7 million held by an unconsolidated subsidiary
</TABLE>
<TABLE>
<CAPTION>
FINANCINGS
Borrowers Asset Type Unpaid Principal Balance
- --------- ---------- ------------------------
<S> <C> <C>
Building Materials Retailer Loan Mortgages $91.7 million
New York Property Company Credit Facility Credit Facility Secured
by Mortgage Loans $13.0 million
Canadian Commercial Loan Facility Mortgages $5.1 million
Loan Secured by Mortgage Pool Mortgages $27.6 million
</TABLE>
The Manager and the Management Agreement
The business and investment affairs of the Company are managed by
the Manager. The Principals are the founders and sole owners of the
Manager.
The Principals, the Manager (or an affiliate of the Manager) and
certain employees of the Manager purchased an aggregate of approximately
$53.7 million of shares of Common Stock and Units, at a price per share or
per Unit, as the case may be, of $18.65 (the price to investors in the
Original Offering, net of discounts to the Initial Purchaser). The
Principals, the Manager (or an affiliate of the Manager) and employees of
the Manager currently own approximately 12.8% of the equity interests of
the Company on a fully diluted basis. In addition, the Company has granted
the Manager (or an affiliate of the Manager) options (the "Manager Awards")
representing the right to acquire an additional 2,091,673 shares of Common
Stock (or, at the election of the Company, Units) (equal to 10% of the
total common stock of the Company upon the closing of the Original Offering
and the Private Placement), at an exercise price per share of Common Stock
or per Unit, as the case may be, equal to $20.00, with such price subject
to adjustment as necessary to preserve the value of such Manager Awards in
connection with the occurrence of certain events (including capital
dividends and capital distributions made by the Company). Additional
Manager Awards may be granted in connection with future issuances of
additional equity by the Company, subject to the approval of the
Independent Directors (i.e., directors who are not officers of Fortress or
the Manager).
On June 10, 1998, Fortress and the Operating Partnership entered
into the Management and Advisory Agreement (the "Management Agreement")
with the Manager. The Management Agreement has an initial term of three
years, with automatic one-year extensions after the initial three-year
term, subject to certain termination rights. The Management Agreement
provides for a substantial termination fee to the Manager equal to the
amount of the Management Fee (as defined below) earned by the Manager
during the twelve-month period preceding such termination, which may make
it more difficult for the Company to terminate the Management Agreement.
See "The Manager and the Management Agreement -- The Management Agreement"
for a full discussion of the termination provisions.
The Manager, pursuant to the Management Agreement and under the
direction of Fortress' Board of Directors and the Investment Guidelines
described herein, formulates investment strategies for the Company,
arranges for the acquisition of assets by the Company, arranges for
financing for the Company, monitors the performance of the Company's assets
and provides certain advisory, administrative and managerial services in
connection with the operation of the Company. For performing these
services, the Manager receives an annual management fee (the "Management
Fee") in an amount equal to 1.5% of the Gross Equity of the Company. The
Management Fee is calculated and paid monthly. The term "Gross Equity" for
any period means (A) the sum of (i) the Company's Total Equity, plus (ii)
the value of contributions made by partners, if any, other than the General
Partner, from time to time, to the capital of the Operating Partnership or
any other subsidiary of the Company, less (B) any capital dividends or
capital distributions made by Fortress to its stockholders or by the
Operating Partnership to its partners. The Independent Directors of
Fortress may adjust the Management Fee in the future under certain
conditions. See "The Manager and the Management Agreement."
To provide an incentive for the Manager to enhance the value of
the Common Stock, the Manager (or an affiliate thereof) receives a
quarterly incentive return (the "Preferred Incentive Return") on a
cumulative, but not compounding, basis in an amount equal to the product of
(A) 25% of the dollar amount by which (l)(a) the Funds From Operations
(before the Preferred Incentive Return) of the Company per share of Common
Stock and per Unit (based on the weighted average number of shares of
Common Stock and Units outstanding) plus (b) gains (or losses) from debt
restructuring and gains (or losses) from sales of property and other assets
per share of Common Stock and per Unit (based on the weighted average
number of shares of Common Stock and Units outstanding), exceed (2) an
amount equal to (a) the weighted average of the price per share of Common
Stock and Units in the Original Offering and the Private Placement and the
price per share of Common Stock (and/or Units) in any subsequent offerings
by the Company (adjusted for prior capital dividends or capital
distributions) multiplied by (b) a simple interest rate of 10% per annum
(divided by four to adjust for quarterly calculations) multiplied by (B)
the weighted average number of shares of Common Stock and Units
outstanding. See "The Manager and the Management Agreement -- Management
Incentives."
The Company paid the Manager a Management Fee of $6.0 million for
1998 (which represented less than a full year). The Company did not pay the
Manager a Preferred Incentive Return attributable to this period or any
other compensation for this period. The Manager incurred expenses of
approximately $1.2 million in 1998 which were reimbursed by the Company
pursuant to the Management Agreement. These expenses included, but were not
limited to, accounting, software development, loan tracking, data
management, risk analysis, performance measurement, legal, investor
communications and public relations services.
The Company estimates that it will pay the Manager a Management
Fee of approximately $5,800,000 during calendar year 1999. This estimate is
based upon the following assumptions: (1) that the Gross Equity of the
Company will be $388,000,000 (the current Gross Equity at the date hereof)
and (2) no other equity will be raised by the Company during such period.
The Company believes that, during calendar year 1999, assuming its
investments remain constant, it is unlikely that a Preferred Incentive
Return will be paid to the Manager. However, the Company is currently
unable to determine with any certainty whether a Preferred Incentive Return
will be paid in calendar 1999. There is no other compensation payable to
the Manager or its affiliates for calendar 1999, other than the
reimbursement of expenses.
Conflicts of Interest
The Company is subject to various potential conflicts of interest
arising out of the relationships with the Manager and their respective
affiliates, including, among others that: (1) the Principals own all of the
equity of the Manager and may therefore have an incentive to increase
returns for the Manager, even if inconsistent with the interests of all of
the stockholders of the Company; (2) the Management Agreement was not
negotiated at arm's length and therefore there is a risk that it is not as
favorable to the Company as an agreement negotiated at arm's length; (3)
the Manager receives (a) a substantial base fee which is payable regardless
of the performance of the Company's portfolio, (b) incentive fees based on
such performance and (c) a substantial termination fee, which may make it
more difficult for the Company to terminate the Management Agreement; and
(4) the Company's executive officers serve as officers and/or directors of
the Manager and, except as described below, are not restricted in the
amount of time devoted to such activities. See "Risk Factors -- Conflicts
of Interest in Relationship with the Manager."
To address the risks related to these potential conflicts, the
Fortress charter requires that a majority of the members of Fortress's
Board of Directors be unaffiliated with the Manager or the Principals
("Independent Directors"). See "The Company -- Directors and Executive
Officers." The Board of Directors has established general guidelines for
the Company's investments, borrowings and operations (the "Investment
Guidelines"). Although the Manager performs the day-to-day investment
operations of the Company, the Independent Directors review transactions on
a quarterly basis to ensure compliance with the Investment Guidelines.
However, in such reviews, the Independent Directors rely primarily on
information provided by the Manager and transactions subject to such review
may be difficult or impossible to unwind if not deemed appropriate.
The Principals continue to be responsible for the day to day
management of BAI and its affiliated funds until their liquidation, which
is expected to occur in September of 1999. BAI is a closed end registered
investment company. The fund, which was established in 1995 and fully
invested in 1997, invested in loan portfolios and real estate and provided
real estate financing to third parties. The Company has no current plans to
purchase any assets from BAI in connection with BAI's liquidation.
The Management Agreement does not specify any minimum standard of
time that the Manager is required to devote to the Company. The Management
Agreement generally limits the Manager's right to engage in business or to
render services to others that compete with the Company until an amount
equal to 95% of the Company's Total Equity has been invested (other than in
short-term temporary investments). As used herein, the term "Total Equity"
shall mean the total equity capital raised by the Company. Notwithstanding
the foregoing, the Manager and its affiliates are not restricted from
managing (i) any Sister Co., if formed, (ii) BAI or (iii) certain "Excluded
Investments" which include (a) investments made or committed to by the
Principals, the Manager or their affiliates prior to the closing of the
Original Offering, (b) any investment as to which the equity invested by
the Principals, the Manager or their affiliates is equal to or less than
$3,000,000, and (c) any investments made during any period of time that the
exclusivity provisions of the Management Agreement are not in effect (i.e.
during any period of time in which 95% or more of the Total Equity (as
defined) of the Company has been invested other than in short-term,
temporary investments), in each case together with investments relating to
the foregoing investments. In connection with each of the foregoing (a),
(b) and (c), the Manager may undertake business activities which may be
directly or indirectly competitive with the Company. See "Risk Factors --
Conflicts of Interest in Relationship with the Manager."
Restrictions on Ownership of Stock
Due to limitations on the concentration of ownership of a REIT
imposed by the Code, the Charter prohibits any stockholder from directly or
indirectly owning more than 9.8% of the aggregate number of the outstanding
shares of any class or series of stock of Fortress (the "Stock Ownership
Limit"). Notwithstanding the foregoing, the Board of Directors has
exercised its right under the Charter to exempt the Principals and the
Manager (and certain affiliates thereof) from such limitation. See
"Description of Securities -- Transfer Restrictions." The Manager (or an
affiliate) currently owns 12.8% of the Common Stock and has options to
acquire an additional 10% of the Common Stock. The Board of Directors has
also exercised such right to exempt a non-affiliated shareholder fund
(which represents several investors) from such limitation. Such fund
currently owns 13.7% of the Common Stock and is limited to ownership of
14.99% of the Company's Common Stock. In addition, the Charter limits
equity ownership in the Company by Plans (as defined herein) (and similar
investors) to less than 25% of the value of any class of equity securities
issued by the Company prior to the date the Common Stock qualifies as a
class of "publicly-offered securities" (within the meaning of Department of
Labor Regulation (29 C.F.R.) Section 2510.3-101(b)(2)). See "Risk Factors
- -- Plans Should Consider ERISA Risks of Investing in Common Stock" and
"ERISA Considerations -- The Treatment of the Company's Underlying Assets
Under ERISA."
Use of Proceeds
The Selling Stockholders will receive all of the proceeds from the
sale of the Offered Securities. The Company will not receive any proceeds
from the sale of the Offered Securities. The proceeds of the Original
Offering were used to make the investments described under "The Company --
Investments" and for general corporate purposes. See "Use of Proceeds."
Distribution Policy
The Operating Partnership intends to make distributions to its
partners, including Fortress, as General Partner of the Operating
Partnership. Fortress intends to make distributions to its stockholders of
all or substantially all of its net taxable income each year (subject to
certain adjustments) so as to qualify as a REIT under the Code. See
"Federal Income Tax Considerations." Fortress may, under certain
circumstances, make a distribution of capital or of assets. Such
distributions, if any, will be made at the discretion of Fortress's Board
of Directors. See "Risk Factors -- Board of Directors May Change Policies
Without Stockholder Consent."
Tax Status of the Company
Fortress will elect to be taxed as a REIT under sections 856
through 860 of the Code for its taxable period ended December 31, 1998. For
as long as Fortress is taxed as a REIT, Fortress will generally not be
subject to federal corporate income tax on its taxable income that is
distributed to its stockholders. REITs are subject to a number of
organizational and operational requirements, including a requirement that
they currently distribute at least 95% of their annual taxable income.
Although Fortress does not intend to request a ruling from the Internal
Revenue Service (the "IRS") as to its REIT status. Management believes
that, based upon the Company's investments and operating activities to
date, Fortress qualifies as a REIT. Failure to qualify as a REIT would
subject Fortress to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates
and distributions to Fortress' stockholders would not be deductible by
Fortress. Even if Fortress qualifies for taxation as a REIT, it may be
subject to certain federal, state, local and foreign taxes on its income
and property. In connection with Fortress's election to be taxed as a REIT,
the Charter imposes restrictions on the transfer of the Common Stock if, as
a result of such transfer, the transferee's interest in Fortress would
exceed the Stock Ownership Limit. See "Risk Factors -- Failure to Qualify
as a REIT Would Result in Higher Taxes and Reduced Cash Available for
Stockholders."
Organization and Relationships
VISIO CHART HERE
The relationship among Fortress, the Operating Partnership and the
Manager and the equity ownership thereof is depicted in the diagram shown
below and described in the accompanying notes.
[GRAPHIC OMITTED]
o Fortress was initially capitalized through the issuance
of 50 shares of Common Stock to Fortress Principal
Investment Holdings LLC ("FPIH"), an affiliate of the
Manager which is wholly owned by the Principals. Fortress
subsequently issued an aggregate of 2,685,248 shares of
Common Stock to FPIH and to certain employees of the
Manager and 18,231,441 shares of Common Stock to
investors in the Original Offering.
o Fortress contributed the proceeds from the stock
issuances described above to the Operating Partnership in
exchange for a 100% general partnership interest and
serves as the sole general partner of the Operating
Partnership. In addition, Fortress Principal Investment
Group LLC ("FPIG") purchased 5 Units and owns a nominal
limited partnership interest in the Operating
Partnership. FPIG also holds options to acquire 2,091,673
shares of common stock of Fortress.
o The Company has made the investments described below
under "The Company -- Investments" directly or through
the Operating Partnership, and the Company has formed
additional subsidiaries or affiliates in cases where the
Company has determined that the use of a separate entity
is advisable.
o At December 31, 1998, Fortress held non-voting preferred
stock of Austin Holdings Corporation ("Austin")
representing a 95% economic ownership interest. Fortress
Principal Investment Group LLC is the holder of the 5%
voting common stock. Austin's assets consist primarily of
interests in entities that own certain assets, primarily
foreclosed real estate intended for sale, which were
originally acquired as part of loan pool acquisitions and
which were determined to have characteris tics
unfavorable for ownership by a REIT. Additionally, Austin
Holdings has an approximately 43% ownership interest in
Calmco Servicing LP, a mortgage loan servicing company
acquired in December 1998 that currently services
approximately 23,000 residential mortgage loans.
Summary Historical and Pro Forma Consolidated Financial Information
The following tables sets forth summary historical financial
information for the Company. The unaudited pro forma operating information
is presented as if certain pro forma transactions had occurred as of the
beginning of the periods indicated and therefore incorporates certain
assumptions that are included in the Company's Unaudited Pro Forma
Consolidated Financial Statements. The unaudited pro forma balance sheet
information is presented as if an acquisition of a real estate property
acquired subsequent to December 31, 1998, had occurred on December 31,
1998. The unaudited pro forma financial information does not purport to
represent what the Company's financial position or
actually would have been had the pro forma transactions, in fact, occurred
on such date or at the beginning of the periods indicated, or to project
the Company's financial position or results of operations at any future
date or for any future period. The historical and unaudited pro forma
financial information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations and the "Consolidated Unaudited Pro Forma Financial Statements".
Dollar amounts are shown in thousands except for per share data.
<TABLE>
<CAPTION>
Pro Forma Historical
For the Year For the Period
Ended May 11, 1998 to
December 31, December 31,
OPERATING DATA: 1998 1998
----------------- ------------------
Revenues:
<S> <C> <C>
Rental revenue $ 42,000 $ 20,297
Interest income 18,962 18,962
Gain on resolution of loans 2,584 2,584
Escalation and other income 9,578 4,045
------------- -------------
Total revenues 73,124 45,888
------------- -------------
Expenses:
Interest expense 20,150 12,693
Property operating expenses and real estate taxes 16,686 7,027
Management fee 6,000 6,000
Depreciation and amortization 8,870 4,165
General and administrative and other expenses 3,502 3,502
Loan servicing fees 1,291 1,291
------------- -------------
Total Expenses 56,499 34,678
------------- -------------
Income Before Minority Interest 16,625 11,210
Minority Interest in Income of Consolidated Subsidiaries (570) (570)
------------- -------------
Net Income $ 16,055 $ 10,640
============= =============
Net Income per Share Basic and Diluted $ 0.77 $ 0.51
============= =============
Dividends Declared per Share (1) $ 0.81 $ 0.55
============= =============
Weighted Average Number of Common Shares Outstanding, Basic and
Diluted 20,916,739 20,862,000
============= =============
BALANCE SHEET DATA (December 31, 1998):
Cash $ 92,506 $ 97,333
Revenue - producing real estate, net 409,869 383,073
Loans receivable, net 216,717 216,717
Total assets 784,270 765,650
Debt 355,465 336,845
Stockholders' equity 384,924 384,924
OTHER INFORMATION:
Cash flow provided by (used in):
Operating activities $ 14,507
Investing activities (638,613)
Financing activities 721,670
Funds From Operations (2) $ 14,337
</TABLE>
(notes on following page)
(1) In addition to the dividends declared in 1998, the Company declared a
special dividend of approximately $0.04 per share in 1999 in order to
distribute 100% of 1998 taxable income.
(2) The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 (the "White Paper") defines Funds From
Operations as net income (loss) (computed in accordance with generally
accepted accounting principles ("GAAP")), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate
related depreciation and amortization. The Company believes Funds From
Operations is helpful to investors as a measure of the performance of
a REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors
with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. The Company computes Funds
From Operations in accordance with the standards established by the
White Paper, which may differ from the methodology for calculating
Funds From Operations utilized by other REITs, and, accordingly, many
not be comparable to such other REITs. Funds From Operations does not
represent amounts available for management's discretionary use because
of needed capital expenditures, debt service obligations, property or
loan acquisitions, dividends and distributions or other commitments
and uncertainties. Funds From Operations should not be considered as
an alternative to net income (determined in accordance with GAAP) as
an indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to
make dividends/distributions. Funds From Operations is calculated as
follows (dollars in thousands):
Net income $10,640
Real estate depreciation and
amortization 3,697
-------
Funds From Operations $14,337
=======
RISK FACTORS
An investment in the shares of Common Stock involves various
risks. Set forth below are all of the material risks relating to an
investment in the shares of Common Stock. Before purchasing shares of the
Common Stock offered hereby, prospective investors should give special
consideration to the information set forth below, in addition to the
information set forth elsewhere in this Prospectus.
Conflicts of Interest in Relationship with the Manager. The
Company is subject to various potential conflicts of interest arising from
its relationship with the Manager.
The Principals are the senior officers and owners of the Manager
and are also directors or senior officers of the Company. As a result, the
Management Agreement was not negotiated at arm's-length and may be on terms
that are not as favorable to the Company as if they had been negotiated
with a third party.
It may be difficult for the Company to terminate the Management
Agreement and any such termination would result in significant costs to the
Company. The Management Agreement may be terminated after the initial
three-year term, and annually thereafter, upon the affirmative vote of at
least two-thirds of the Independent Directors, or by a vote of the holders
of a majority of the outstanding shares of Common Stock, based upon
unsatisfactory performance that is materially detrimental to the Company or
the determination that the compensation to the Manager is not fair, subject
to the Manager's right to prevent such a compensation termination by
accepting a mutually acceptable reduction of fees. The Manager will be
provided 60 days' prior notice of any such termination and will be paid a
termination fee equal to the amount of the Management Fee earned by the
Manager during the twelve-month period preceding such termination. In
addition, following any termination of the Management Agreement, the
Manager may require the Company to purchase the portion of the Manager's
(or its affiliate's) limited partnership interest in the Operating
Partnership attributable to the Preferred Incentive Return at a price equal
to the amount that would be distributed to the Manager (or an affiliate) if
the Company's assets were sold for their fair market value (as determined
by an appraisal, taking into account, among other things, the expected
future value of the underlying investments) or otherwise continue to pay
the Preferred Incentive Return to the Manager (or an affiliate). See "The
Manager and the Management Agreement -- The Management Agreement." These
provisions may increase the effective cost to the Company of terminating
the Management Agreement, thereby adversely affecting the Company's ability
to terminate the Manager without cause.
In addition to its Management Fee, the Manager (or an affiliate of
the Manager) may be entitled to receive the Preferred Incentive Return as
incentive compensation based in part upon the Company's achievement of
targeted levels of Funds From Operations. In evaluating investments and
other management strategies, the opportunity to earn incentive compensation
based on Funds From Operations may lead the Manager to place undue emphasis
on the maximization of Funds From Operations at the expense of other
criteria, such as preservation of capital, in order to achieve a higher
incentive compensation and could result in increased risk to the value of
the invested portfolio. In addition, the incentive compensation is
calculated and earned based upon the results of each quarter. Therefore,
the Manager (or an affiliate) could earn incentive compensation based upon
one quarter's results, including during a year for which the Company
experiences a net loss. See "The Manager and the Management Agreement."
The "non-compete" provision contained in the Employment Agreement
between each of the Principals and the Manager, which restricts the
Principals from engaging in investment activity which is competitive with
the Company, does not prohibit the Principals from (a) managing one or more
Sister Co's., (b) acquiring and managing the Excluded Investments and (c)
managing the BAI assets, each of which may limit the time the Principals
devote to the Company. "Excluded Investments," shall mean (i) investments
made or committed to be made by the Principals, the Manager or their
affiliates prior to the closing of the Original Offering, (ii) any
investment as to which the equity invested by the Principals, the Manager
or their affiliates is equal to or less than $3,000,000, and (iii) any
investments made during any period of time that the exclusivity provisions
of the Management Agreement are not in effect (i.e., during any period of
time in which 95% or more of the Total Equity (as defined) of the Company
has been invested), in each case together with investments relating to the
foregoing investments. Furthermore, "non-compete" provisions in employment
agreements may not, under certain circumstances, be enforceable as a matter
of state law. See "The Manager and the Management Agreement."
Pursuant to the Management Agreement, the conduct of the daily
operations of the Company by the Manager and its affiliates are not
required to be approved by Fortress' Independent Directors. The Independent
Directors review the Investment Guidelines and the Company's investment
policies annually, and the Company's investments quarterly. However, in
conducting this review, the Independent Directors rely primarily on
information provided to them by the Manager. Furthermore, transactions
entered into by the Manager may be difficult or impossible to unwind by the
time they are reviewed by the Independent Directors.
The Company may acquire assets from the Manager if a majority of
the Independent Directors approves the transaction in advance. However, in
making these decisions, the Independent Directors will rely primarily on
information provided by the Manager in determining whether the price is
fair and whether the investment is otherwise
in the best interest of Fortress and its stockholders.
Newly-Organized Corporation; Limited Operating History. The
Company was organized in May 1998 and has a limited operating history. In
addition, although the Principals and other officers have experience
investing in and managing real estate-related assets, such persons have
never managed a REIT.
Broad Discretion on Investments; Appropriate Investments May Not
Be Available. The Manager has great latitude in the context of the
Investment Guidelines in determining the types of assets it may decide are
proper investments for the Company. No assurance can be made that the
Manager's decisions in this regard will result in a profit for the Company.
In addition, there can be no assurance that the Company will identify
assets that meet its investment criteria, that the Company will be
successful in acquiring any assets that may be identified or that any such
assets will produce a return on the Company's investment. The Company may
invest in highly leveraged companies or assets, which may increase the
likelihood of a loss of the Company's property through foreclosure.
Competition. The Company is subject to significant competition in
seeking to make investments, in particular, acquisitions of mortgage loans.
This competition often takes the form of a bidding process in which the
Company bids against other potential purchasers, including other REITs,
investment banks and real estate investment funds. Some of the Company's
competitors have greater resources than the Company and there can be no
assurance that the Company will be able to bid successfully in any such
bidding process. Certain real estate assets are also sold in negotiated
transactions. While the Company believes that the contacts of the Manager's
employees will provide it with opportunities, there can be no assurance
that this will be the case.
External Management of the Company. The Company does not have any
employees and relies on the facilities, personnel and resources of the
Manager to conduct its operations. The Company depends on the continuing
ability of the Manager to hire and retain knowledgeable personnel. The
Company is subject to the risk that the Manager will terminate the
Management Agreement and that no suitable replacement can be found to
manage the Company. In the future, the Company may consider the effect of
transactions whereby the Manager could be merged into the Company, or other
means by which the Company may become self-managed and self-administered.
However, there can be no assurance that the Company will become
self-managed or self-administered in the future.
Dependence on Key Personnel. The Company believes that its success
depends to a significant extent upon the experience of the Principals,
whose continued service is not guaranteed. The loss of any such person or
the loss of all of such persons at a particular point in time could have a
material adverse effect on the operations of the Company through a
diminished ability to obtain investment opportunities and to structure and
execute the Company's investments and business plan. In addition, the
Company may not successfully recruit additional personnel and any
additional personnel that are recruited may not have the requisite skills,
knowledge or experience necessary or desirable to enhance the incumbent
management. Neither the Company nor the Manager maintains key man life
insurance with respect to any of its executive officers. See "The Manager
and the Management Agreement."
Real Estate is Illiquid and Value is Dependent on Conditions
Beyond Company's Control. Real estate-related investments are relatively
illiquid and therefore the ability of the Company to liquidate its
investments in response to changes in economic and other conditions will be
limited. Further, no assurances can be given that the fair market value of
any assets acquired by the Company will not decrease in the future. The
underlying value of the assets and the Company's income and ability to make
distributions to Fortress' stockholders are dependent upon the ability of
the Manager to operate the assets in a manner sufficient to maintain or
increase revenues in excess of operating expenses and debt service or, in
the case of real property leased to one or more lessees, the ability of the
lessees to make rent payments. Revenues may be adversely affected by
adverse changes in national or local economic conditions, competition from
other properties offering the same or similar services, changes in interest
rates and in the availability, cost and terms of mortgage loans, the impact
of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements (particularly
in older structures), changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse
changes in zoning laws, and other factors which are beyond the control of
the Company.
Risks Related to Investments in Mortgage Loans. Investments in
mortgage loans may carry certain risks which are not present in other types
of investments, including, without limitation, the following:
Commercial Mortgage Loans Involve a Risk of Loss.
Commercial mortgage loans involve a high degree of risk because of
a variety of factors, including the following: (i) a commercial
mortgage lender is dependent for repayment on the successful
operation of the mortgaged property and tenant businesses
operating therein, (ii) such loans are not usually recourse to the
borrower and (iii) such loans may have terms that include
amortization schedules longer than the stated maturity of the
applicable loan and provide for balloon payments at a stated
maturity rather than periodic principal payments. In addition, the
value of commercial real estate can be affected significantly by
the supply and demand in the market for that type of property.
Volatility of Values of Mortgaged Properties May Affect
Adversely the Company's Mortgage Loans. Commercial real estate
values and net operating income derived therefrom are subject to
volatility and may be affected adversely by a number of factors,
including, but not limited to, national, regional and local
economic conditions, changes in local property tax rates, local
real estate conditions, changed or continued weakness in specific
industry segments, general public perceptions of the safety,
convenience, services and attractiveness of the property, the
willingness and ability of the property's owner to provide capable
management and adequate maintenance, to make capital expenditures
and improvements and to provide leasing concessions, construction
quality, age and design, and increases in operating expenses (such
as energy costs).
Borrowers May Default. With respect to its investments in
mortgage loans, the Company will be subject to risks of borrower
defaults, bankruptcies, fraud and special hazard losses that are
not covered by standard hazard insurance. In the event of any
default under mortgage loans held by the Company, the Company will
bear a risk of loss of principal to the extent of any deficiency
between the value of the collateral and the principal amount of
the mortgage loan, and may not receive interest payments on such
mortgage loan, which could have a material adverse effect on the
Company's cash flow from operations. In the event of the
bankruptcy of a mortgage loan borrower, the mortgage loan to such
borrower will be deemed to be secured only to the extent of the
value of the underlying collateral at the time of bankruptcy (as
determined by the bankruptcy court), and the lien securing the
mortgage loan will be subject to the avoidance powers of the
bankruptcy trustee or debtor-in-possession to the extent the lien
may be unenforceable under state law. Foreclosure of a mortgage
loan can be an expensive and lengthy process which could have a
substantial negative effect on the Company's anticipated return on
the foreclosed mortgage loan.
Distressed and Sub-Performing Mortgage Loans Have a
Greater Risk of Default. The Company may purchase non-performing
and sub-performing mortgage loans, as well as mortgage loans that
have had a history of delinquencies. These mortgage loans may be
in default at the time of purchase or may have a greater
than normal risk of future defaults and delinquencies, as compared
to a pool of newly originated, high quality mortgage loans of
comparable type, size and geographic concentration. Returns on an
investment of this type depend on the borrower's ability of the
lender to make required payments or, in the event of default, the
ability of the lender to foreclose and liquidate the mortgage
loans. Foreclosure and liquidation, particularly in a bankruptcy
proceeding, may be time consuming and expensive. Additionally,
properties acquired as a result of foreclosure upon mortgages that
were either non-performing or sub-performing when acquired by the
Company will most likely not qualify as "foreclosure property"
under the rules governing REITs. Because any such property will
likely be deemed to be "dealer property" under the Code and
because the sale of such "dealer property" by a REIT is a
prohibited transaction the gain on which is subject to a 100% tax
law, gain from the sale of such properties by the Company will be
subject to a 100% tax. Further, under such rules governing REITs,
certain income derived from properties that do qualify as
"foreclosure properties" will be taxed at the maximum federal
income tax rate applicable to corporations. These federal income
tax rules regarding REIT properties which are acquired by
foreclosure may limit the Company's ability to realize a profit on
its investment in a mortgage loan. There can be no assurance that
a defaulted mortgage loan can be liquidated successfully, on
favorable terms or in a timely fashion. The value of a particular
property may be adversely affected by the supply and demand in the
market for that type of property.
Distressed and Sub-Performing Mortgage Loans Provide
Inconsistent Cash Flow. The cashflow created by a portfolio of
distressed and sub-performing mortgage loans is inconsistent and
may vary widely from month to month. In circumstances where the
Company has leveraged its investment in such a portfolio, it is
possible that, in a given month, there will not be enough cash to
service the related debt. In such a case, the Company will need to
service the debt from other cashflow, which could create adverse
tax implications, or default on the related loan.
Valuation of Mortgage Loans May Decrease While
Warehousing Mortgage Loans for Securitizations. The Company may
acquire mortgage loans with the intention of securitizing such
mortgage loans. The pricing assumptions used when acquiring
mortgage loans may differ from pricing assumptions applicable when
related securities are issued. For example, the spread between AAA
10-year mortgage-backed securities and 10-year US Treasury bonds
widened significantly in the three month period between July 1998
and October 1998. As a result, the value of mortgage loans held
for securitization during such time would have decreased. If
spreads widen materially again in the future, such changes may
have an adverse impact on the valuation of a securitization
contemplated by the Company.
Unsatisfactory Third-Party Servicing of Mortgage Loans
May Result in Under-Performance of Assets. The Company relies upon
third-party mortgage loan servicers to manage its mortgage loans
portfolios including the collection of payments from its
borrowers, foreclosure on defaulted mortgage loans and the
liquidation of foreclosed properties. Successful servicing of
mortgage loans depends upon the quality of the servicing
organization and the expertise of its asset managers. The Company
seeks to control servicing quality through contractual
arrangements between the Company and the servicer providing for,
among other things, the enforcement of policies and procedures
established by the Company, rights to terminate the arrangement by
the Company and monitoring of performance by the Company. However,
there can be no assurance that third party servicers will perform
satisfactorily and that inadequate servicing will not lead to
under- performance by certain of the Company's mortgage loan
assets.
International Investments are Subject to Currency Conversion Risks
and Uncertainty of Foreign Laws and Markets. The Company invests in real
estate, and mortgage loans secured by real estate, located outside of the
U.S. The Company's international operations are subject to most of the same
risks associated with its U.S. operations as well as additional risks, such
as fluctuations in foreign currency exchange rates, unexpected changes in
regulatory requirements, heightened risks of political and economic
instability in certain geographic locations, difficulties in managing
international operations, potentially adverse tax consequences, enhanced
accounting and control expenses and the burden of complying with a wide
variety of foreign laws. Legal systems abroad may differ in a number of
respects from the U.S. legal system, including requiring transfer taxes and
added taxes on certain transfers, imposing limits on usurious interest
rates and subjecting lenders to liability for inappropriate lending. The
Company's Investment Guidelines do not subject the Company to any
limitations on foreign investments in general, on investment in any
particular country or investment in any particular foreign asset class. See
also "-- Geographic Concentration of the Properties."
Geographic Concentration of Properties. Approximately 12% of the
Company's assets relate to a single property located in Burlington, New
Jersey, and approximately 8%, 7% and 6% relate to several properties
located in California, Canada, and Virginia, respectively. Adverse
conditions in these areas (including business layoffs or downsizing,
industry slowdowns, changing demographics and other factors) and local real
estate conditions (such as oversupply of or reduced demand for office and
industrial properties) may have an adverse effect on the value of the
Company's properties. A material decline in the demand and/or the ability
of tenants to pay rent for office and industrial space in these geographic
areas may result in a material decline in the demand for the Company's
office or industrial space and the Company's cash available for
distribution, which may have a material adverse effect greater than if the
Company had a more geographically diverse portfolio of properties. The same
is true with respect to the properties underlying the Company's commercial
and residential loan portfolios which are similarly effected by adverse
economic, political or business developments and natural hazard risks that
may affect the areas in which they are located and, ultimately, the ability
of property owners to make payments of principal and interest on the
underlying mortgages will be affected. The most significant geographic
concentration of mortgage loans is in California at 3% of total assets. See
also "-- International Investments are Subject to Currency Conversion Risks
and Uncertainty of Foreign Laws."
Significant Concentrations in Credit Risk. Approximately 44% and
8%, respectively, of the Company's revenues are derived from two entities:
the General Services Administration of the United States Government
("Government") and Bell Canada, a wholly owned subsidiary of BCE Inc. and
Canada's largest supplier of telecommunications services. As a result of
this concentration, if either entity were no longer a high credit quality
tenant, the value of a greater portion of the Company's assets would be
reduced than would have occurred if the Company's assets were leased to a
more diverse group of high credit quality tenants. The Company's Investment
Guidelines do not impose any limits on the amount or percent of total
assets that the Company can invest in assets leased to any one tenant.
No Significant Limitation on Leverage; Leverage Can Reduce Income
Available for Distribution. The Company leverages its portfolio through
borrowings, generally through the use of bank credit facilities, repurchase
agreements, mortgage loans on real estate and other borrowings. The
percentage of leverage varies depending on the Company's ability to obtain
credit facilities and the lender's estimate of the stability of the
portfolio's cash flow. The Company currently has a policy limiting the use
of leverage to the value of 90% of its assets. To the extent that changes
in market conditions cause the cost of such financing to increase relative
to the income that can be derived from the assets acquired, the Company's
return on its investment and cash available for distribution to Fortress'
stockholders may be reduced.
Leverage can create an opportunity for increased returns on
equity, but at the same time creates risks. For example, debt service
payments can reduce the net income available for distributions to
stockholders. The Company leverages assets only when there is an
expectation that it will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial.
Moreover, there can be no assurance that the Company will be able to meet
its debt service obligations and, to the extent that it cannot, the Company
risks the loss of some or all of its assets to foreclosure or sale to
satisfy its debt obligations. Changes in the general level of interest
rates can affect the Company's income by affecting the spread between the
Company's income on its assets and interest-bearing liabilities, as well
as, among other things, the value of the Company's interest-earning assets
and its ability to realize gains from the sale of assets. There is no
specified limitation on the Company's indebtedness, and the Charter and
Bylaws do not limit the amount of indebtedness the Company can incur. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a description of the material terms of the Company's
financing.
Financing through Repurchase Agreements May Result in Margin Calls
Which the Company Cannot Meet on Favorable Terms. The Company may leverage
certain of its investments through repurchase agreements. Risks associated
with such financing arrangements include the possibility of a decrease in
the value of the assets which may lead to margin calls which the Company
will have to satisfy. There can be no assurance that the Company will have
the funds available to satisfy any such margin calls.
Hedging Transactions May Result in Losses. Changes in interest
rates and changes in foreign currency exchange rates may adversely affect
the Company's investments. Such rates are highly sensitive to many factors,
including governmental, monetary and tax policies, domestic and
international economic and political considerations, fiscal deficits, trade
surpluses or deficits, regulatory requirements and other factors beyond the
control of the Company. The Company employs a hedging strategy to limit the
effects of changes in such rates on its operations, including engaging in
interest or currency rate swaps, caps, floors and other interest or
currency rate exchange contracts. The use of these types of derivatives to
hedge the Company's assets and liabilities carries certain risks, including
the risk that losses on a hedge position will reduce the funds available
for distribution to stockholders and, indeed, that such losses may exceed
the amount invested in such instruments. There is no perfect hedge for any
investment, and a hedge may not perform its intended use of off-setting
losses on an investment. Moreover, with respect to certain of the
instruments used as hedges for the Company's assets and liabilities, the
Company is exposed to the risk that the counterparties with which the
Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an
off-setting transaction with respect to an open position. Consequently, the
profitability of the Company may be adversely affected during any period as
a result of changing interest or currency rates. Moreover, the Company's
hedging strategy may be affected by limitations imposed by the REIT income
tests on the amount of gross income that the Company may recognize purely
as a result of increases in the value of foreign currencies in which the
Company's assets are denominated ("gross foreign currency income"). Gross
foreign currency income recognized by the Company in respect of its foreign
currency denominated or related assets (including, for example, debt
instruments and derivative instruments) is not qualifying income for
purposes of the REIT 75% or 95% income tests. Therefore, in general, if
either of a foreign currency denominated asset or the derivative instrument
used to hedge the currency exchange risk with respect to such asset
produces gross foreign currency income, such income will be included in the
Company's non-qualifying income for such taxable year even if such income
is exactly offset by a foreign currency loss on the accompanying position.
However, the Code provides for a safe harbor for certain technically
defined "qualified hedging transactions" pursuant to which the Company may
avoid recognizing non-qualifying gross foreign currency income in respect
of certain of its foreign currency denominated assets and the hedging
transactions that correspond to them. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests."
Interest Rate Risks. Changes in interest rates may adversely
affect the Company. Such rates are highly sensitive to many factors
including governmental, monetary and tax policies, domestic and
international economic and political considerations, fiscal deficits, trade
surpluses or deficits, regulatory requirements and other factors beyond the
control of the Company. Interest rate risk is the exposure of the Company's
financial situation to adverse movements in interest rates including the
spread between two rates and the shape of the yield curve. Changes in
interest rates may affect the Company's earnings by changing the amount of
interest sensitive income and interest sensitive expenses. Changes in
interest rates also change the value of the Company's assets and
liabilities. For example, if interest rates increase after the Company has
acquired a long-term fixed rate mortgage loan with short-term floating rate
financing it could face both a decline in the asset value of the long-term
fixed rate mortgage loan and reduced earnings due to increased financing
costs. Changes in interest rates may also cause prepayment risk and
reinvestment risk. The Company uses a hedging strategy to limit the effects
of changes in interest rates on its operations, including engaging in
interest rate swaps, caps, floors and other interest rate contracts.
Foreign Currency Exchange Rate Risk. The Company's financial
position is affected by foreign currency rate changes, which occur due to a
variety of factors including changes in interest rates. A change in foreign
currency exchange rates may adversely impact returns on the Company's
non-dollar denominated investments both in the Company's basis in the
investment and current cashflow. The Company acquires investments with
imprecise cashflow and exit strategies which increases the difficulty in
perfectly hedging such investments against foreign currency rate changes.
The Company's hedging strategy seeks to limit the effects of changes in
foreign exchange rates on its operations. Such strategy includes engaging
in currency rate swaps, caps, floors and other currency rate contracts.
Derivative Transactions May Result in Losses. The Board of
Directors has adopted a general policy with respect to the use of
derivatives which generally allows the Company to use derivatives where
appropriate, but does not set forth specific policies and procedures. The
Company uses derivative instruments including forwards, futures, swaps and
options in its risk management strategy to limit the effects of changes in
interest or foreign currency rates on its operations. The use of
derivatives to hedge the Company's assets and liabilities carries certain
risks, including the risk that losses on a hedge position will reduce the
funds available for distribution to stockholders and, indeed, that such
losses may exceed the amount invested in such instruments. The specific
risks associated with the use of derivatives include credit risk, market
risk, liquidity risk, legal risk and operational risk. Credit risk is the
risk associated with the failure of a counterparty to perform its
contractual obligation. Market risk arises from adverse interest rate or
foreign currency volatility which may either cause the value of an
instrument held by the Company to decrease or cause the Company to utilize
cash otherwise payable to stockholders to pay counterparties. The Company
faces liquidity risk with respect to certain of the instruments used as
hedges for the Company's assets and liabilities. This risk arises from the
fact that the counterparties with which the Company trades may cease making
markets and quoting prices in such instruments, which may render the
Company unable to enter into an off-setting transaction with respect to an
open position. The Company also faces the risk that a contract relating to
a derivative instrument cannot be legally enforced due to improper
authorization or documentation. Risks associated with the Company's use of
derivatives also include operational risk relating to risk system failures
and failure by personnel to follow procedures for processing transactions.
Prior to hedging an investment, the Company's senior management reviews the
relevant financial products available to hedge such investment and then
analyzes the associated risks in addition to the tax and accounting
treatment of such products. Nevertheless, there is no perfect hedge for any
investment and a hedge may not perform its intended use of off-setting
potential losses of an investment. As a consequence to the aforementioned
risks, the profitability of the Company may be adversely affected during
any period as a result of the use of derivatives.
Multi-Sector and Multi-Jurisdiction Investment Strategy Requires
Broad Expertise. The Company's current strategy is to acquire assets across
a variety of real estate product-types in a variety of geographic
locations. Accordingly, the Company will be required to maintain or retain
expertise, relationships and market knowledge across a broad range of
product-types and geographic regions, and will be subject to the market
conditions affecting each such product-type in various markets, including
such factors as the local economic climate, business layoffs, industry
slowdowns, changing demographics, and local supply and demand issues
affecting each such market. This multi-sector and multi-jurisdiction
approach could require more management time, staff support and expense than
a company whose focus is dedicated to a greater extent on a single
product-type in fewer jurisdictions than the Company.
Strategic Partnership and Joint Venture Investments Involve
Additional Risks Relating to Third Party Partners. The Company may, from
time to time, participate with other entities in asset ownership through
joint ventures or strategic partnerships. See "Investment Strategy -
Investment Management." Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partners or co-venturers might become
bankrupt, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with
the business interests or goals of the Company and that such partners or
co-venturers may be in a position to take actions contrary to the Company's
requests or contrary to the Company's policies or objectives, including the
Company's policy with respect to maintaining its qualification as a REIT.
There is no limitation under the Company's organizational documents as to
the amount of funds that may be invested in partnerships or joint ventures.
Failure to Qualify as a REIT Would Result in Higher Taxes and
Reduced Cash Available for Stockholders. Fortress operates in a manner so
as to qualify as a REIT for federal income tax purposes. Although Fortress
does not intend to request a ruling from the IRS as to its REIT status,
Fortress has received an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP with respect to its qualification as a REIT. Investors should be aware,
however, that opinions of counsel are not binding on the IRS or any court.
The opinion of Skadden, Arps, Slate, Meagher & Flom LLP represents only the
view of counsel to Fortress based on counsel's review and analysis of
existing law and on certain factual representations as to factual matters
and covenants made by the Company and the Manager. Furthermore, both the
validity of the opinion and the continued qualification of Fortress as a
REIT will depend on Fortress' satisfaction of certain asset, income,
organizational, distribution and stockholder ownership requirements on a
continuing basis, the results of which will not be monitored by Skadden,
Arps, Slate, Meagher & Flom LLP. If Fortress were to fail to qualify as a
REIT in any taxable year, Fortress would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, and distributions to stockholders would not be
deductible by Fortress in computing its taxable income. Any such corporate
tax liability could be substantial and would reduce the amount of cash
available for distribution to stockholders, which in turn could have an
adverse impact on the value of, and trading prices for, the Common Stock.
Unless entitled to relief under certain Code provisions, Fortress also
would be disqualified from taxation as a REIT for the four taxable years
following the year during which Fortress ceased to qualify as a REIT. See
"Federal Income Tax Considerations -- Failure to Qualify."
Fortress has received an opinion of Skadden, Arps, Slate, Meagher
& Flom LLP that it is in compliance with the REIT income and assets tests.
However, such compliance may be adversely affected in the event that, as a
result of a Sister Co. being deemed a "stapled entity" for federal income
tax consequences, the assets and income of such Sister Co. are deemed to be
the assets and revenue of Fortress.
Fortress must distribute annually at least 95% of its net taxable
income (excluding any net capital gain) in order to avoid corporate income
taxation of the earnings that it distributes. In addition, Fortress 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. The amount of any net
long-term capital gains that Fortress elects to retain and pay income tax
on will be treated as distributed for purposes of the 4% excise tax. See
"Federal Income Tax Considerations -- Distribution Requirements."
Fortress intends to make distributions to its stockholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. However, differences in timing between the recognition of
taxable income and the actual receipt of cash could require the Company to
sell assets or borrow funds on a short-term or long-term basis to meet the
95% distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of Fortress' net taxable
income could cause Fortress (i) to sell assets in adverse market conditions
or (ii) to distribute amounts that would otherwise be spent on future
acquisitions, capital expenditures or repayment of debt.
The Company's Insurance May Not Cover All Losses. The Company
endeavors to maintain comprehensive insurance on each of the real
properties it owns, including liability and fire and extended coverage, in
amounts sufficient to permit the replacement of the properties in the event
of a total loss, subject to applicable deductibles. The Company endeavors
to obtain coverage of the type and in the amount customarily obtained by
owners of properties similar to the applicable real properties.
Consequently, the Company believes that the insurance coverage it maintains
on its real estate properties is adequate. There are certain types of
losses, however, generally of a catastrophic nature, such as earthquakes,
floods and hurricanes, that may be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances,
environmental considerations, and other factors also might make the
insurance proceeds insufficient to repair or replace a property if it is
damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company might not be adequate to restore its economic
position with respect to the affected real property.
Environmental Compliance Costs and Liabilities May Affect Results
of Operations. The Company's operating costs may be affected by the
obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of complying with
future legislation with respect to the assets, or loans secured by assets,
with environmental problems that materially impair the value of the assets.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may
be liable for the costs of removal or remediation of hazardous or toxic
substances on, under, or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence
of hazardous or toxic substances, or the failure to remediate properly such
property, may adversely affect the owner's ability to borrow by using such
real property as collateral. Persons who arrange for the transportation,
disposal or treatment of hazardous or toxic substances may also be liable
for the costs of removal or remediation of such substances at the disposal
or treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law
principles could be used to impose liability for releases of hazardous
materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators
of real properties for personal injury associated with exposure to released
ACMs or other hazardous materials. Environmental laws may also impose
restrictions on the manner in which a property may be used or transferred
or in which businesses may be operated, and these restrictions may require
expenditures. In connection with the ownership and operation of properties,
the Company may be potentially liable for any such costs. The cost of
defending against claims of liability or remediating contaminated property
and the cost of complying with such environmental laws could materially
adversely affect the Company's results of operations and financial
condition.
The Company obtains Phase I environmental site assessments
("ESAs") prepared by qualified independent environmental engineers in
connection with all material acquisitions. The purpose of ESAs is to
identify potential sources of contamination for which the commercial real
estate-related assets may be responsible and to assess the status of
environmental regulatory compliance. It is possible, however, that these
ESAs will not reveal all environmental liabilities or that such commercial
real estate-related assets may be subject to material environmental
liabilities of which the Company is unaware.
ESA reports are performed as part of the due diligence process
for:
o all equity real estate purchases;
o large assets, highly leveraged loans, real estate owned, non and
sub-performing loans, and other assets that, based on other due
diligence, raise environmental concerns; and
o assets in which Fortress receives a security interest as lender
in connection with financings.
ESAs have been performed for all material investments. Based on
these ESAs, to the Company's knowledge, there are no material environmental
issues relating to any of the Company's properties. However, there can be
no assurance that any such ESA would have identified all potential
environmental problems at a site or that any such undiscovered
environmental problem would not be material.
Year 2000 Compliance. The Company recognizes that the arrival of
the year 2000 poses a challenge to the ability of all systems to recognize
the date change from December 31, 1999 to January 1, 2000. The Company
believes, based on internal evaluations and discussions with its current
systems vendor, that its software applications and operational programs
will properly recognize calendar dates beginning in the year 2000. In
addition, the Company is discussing with its major vendors, servicers of
the Company's mortgage portfolios and tenants, the possibility of any
interface difficulties relating to the year 2000 which may affect the
Company. To date, no significant concerns have been identified; however,
there can be no assurance that there will not be any year 2000-related
operating problems or expenses that will arise with the Company's computer
systems and software or in connection with the Company's interface with the
computer systems and software of the Company's vendors, servicers of the
Company's mortgage portfolios and tenants. The total cost to the Company of
its Year 2000 compliance activities has not been and is not anticipated to
be material to the Company's financial position or results of operations in
any period; however, there can be no assurance that the Company will not
experience unanticipated costs. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Failure to Raise Additional Capital on Acceptable Terms May
Adversely Affect the Company; Additional Capital May Dilute Stockholders'
Interests. The ability of the Company to implement its growth strategy
depends on access to capital necessary to invest in assets. The Company may
access capital through the use of borrowings or subsequent issuances of
Common Stock or other securities. The failure to obtain necessary capital
could have a material adverse effect on the Company's ability to acquire
assets. There can be no assurance that the Company will be successful in
raising sufficient additional equity or debt capital on acceptable terms
and such capital, if raised, would dilute the interest of the holders of
the Common Stock and Units.
Property Taxes Decrease Returns on Real Estate. Each real property
is subject to real property taxes and, in some instances, personal property
taxes. The real and personal property taxes on properties in which the
Company invests may increase or decrease as property tax rates change and
as the properties are assessed or reassessed by taxing authorities. If
property taxes on the Company's investments increase, the Company's cash
available for distribution to Fortress' stockholders will be adversely
affected.
Compliance with Americans with Disabilities Act and Other Changes
in Governmental Rules and Regulations May Be Costly. Under the Americans
with Disabilities Act of 1990 (the "ADA"), certain public properties are
required to meet certain federal requirements related to access and use by
disabled persons. Real properties acquired by the Company may not be in
compliance with the ADA. If a property is not, the Company will be required
to make modifications to such property to bring it into compliance, or face
the possibility of an imposition of fines or an award of damages to private
litigants. In addition, changes in governmental rules and regulations or
enforcement policies affecting the use and operation of the real
properties, including changes to building codes and fire and life-safety
codes, may occur. If the Company were required to make substantial
modifications at the real properties to comply with the ADA or other
changes in governmental rules and regulations, the Company's ability to
make expected distributions to Fortress' stockholders could be adversely
affected.
Board of Directors May Change Policies Without Stockholder
Consent. The major policies of the Company, including its investment
policy, the Investment Guidelines and other policies with respect to
acquisitions, financing, growth, operations, debt and distributions, are
determined by its Board of Directors. The Board of Directors may amend or
revise the Investment Guidelines and other policies, or approve
transactions that deviate from these policies, from time to time without a
vote of the stockholders of Fortress. Fortress may, under certain
circumstances, make a distribution of capital or of assets. Such
distributions, if any, will be made at the discretion of Fortress' Board of
Directors and may not be in the best interests of all of the Company's
stockholders.
Conflicts Relating to a Sister Co. If a Sister Co. is formed and
the ownership of a Sister Co. and the Company differ over time, conflicts
of interest may develop. The Manager and its employees might be unable to
devote sufficient attention to the affairs of both the Company and a Sister
Co. and might expend resources on the Sister Co. to the detriment of the
Company. Investment opportunities may arise which are suitable investments
for both the Sister Co. and the Company and the Manager may decide to
pursue such opportunities on behalf of the Sister Co. rather than the
Company. Although no assurances can be made, provisions in a Sister Co.'s
formation documents are expected to (i) provide that a Sister Co. may enter
into transactions with the Company to the extent deemed beneficial by their
respective boards of directors (and the Company may enter into an
intercompany agreement with the Sister Co. with respect thereto) and (ii)
generally prohibit a Sister Co. from engaging in activities or making
investments appropriate for a REIT unless the Company was first given the
opportunity but elected not to pursue such activities or investments.
Notwithstanding the foregoing, the Manager and the Board of Directors are
subject to various potential conflicts of interest as a result of the
relationships with a Sister Co. and the Company. However, the formation
documents of a Sister Co. and any agreements between the Company and the
Sister Co. would not be negotiated at arm's-length. As a result the terms
of any such agreements might not be as favorable to the Company as if
negotiated with a third party in an arm's length transaction.
Market for Common Stock May Not Develop. The Company has no
current plan to list the Common Stock on any national securities exchange
or Nasdaq. No assurance can be given as to (i) the likelihood that an
active market for the Common Stock will develop, (ii) the liquidity of any
such market, (iii) the ability of the stockholders to sell their Common
Stock, or (iv) the prices that stockholders may obtain for their Common
Stock.
Loss of Investment Company Act Exemption Would Adversely Affect
the Company. The Company believes that it will not be, and conducts its
operations so as not to become, regulated as an investment company under
the Investment Company Act of 1940 (the "Investment Company Act"). The
Investment Company Act exempts entities that, directly or through
majority-owned subsidiaries, 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
interpretations by the Staff of the Securities and Exchange Commission, in
order to qualify for this exemption, the Company, among other things, must
maintain at least 55% of its assets in Qualifying Interests and also may be
required to maintain an additional 25% in Qualifying Interests or other
real estate-related assets. The assets that the Company may acquire,
therefore, may be limited by the provisions of the Investment Company Act.
In addition, the Company could, among other things, be required either (a)
to change the manner in which it conducts its operations to avoid being
required to register as an investment company or (b) to register as an
investment company, either of which could have an adverse effect on the
Company and the market price for the Common Stock.
Plans Should Consider ERISA Risks of Investing in Common Stock.
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, a "Plan") and
(ii) any person who is a "party in interest" or "disqualified person" with
respect to a Plan. Consequently, the fiduciary of a Plan contemplating an
investment in the shares of Common Stock should consider whether the
Company, any other person associated with the issuance of the shares of
Common Stock, or any affiliate of the foregoing is or might become a "party
in interest" or "disqualified person" with respect to the Plan and, if so,
whether an exemption from such prohibited transaction rules is applicable.
In addition, federal regulations provide that, subject to certain
exceptions, the assets of an entity in which a Plan holds an equity
interest may be treated as assets of an investing Plan, in which event, the
underlying assets of such entity (and transactions involving such assets)
would be subject to such prohibited transaction provisions. The Company has
taken steps to qualify the Company for one or more of the exceptions
available under such regulations and thereby prevent the assets of the
Company from being treated as assets of any investing Plan. Specifically,
the Company allocated less than 25% of the Original Offering to Plans (and
similar investors) and the Company's Charter limits equity ownership in the
Company by Plans (and similar investors) to less than 25% of the value of
any class of equity issued by the Company. In addition, the Charter
provides that no Plan may purchase shares of Common Stock without the
Company's prior approval. Once the Common Stock qualifies as a class of
"publicly offered securities" (as such term is defined in such regulations)
or the Company qualifies for another exemption under the Plan Asset
Regulations, the 25% limitation (and the associated provisions) ceases to
be applicable. See "ERISA Considerations -- The Treatment of the Company's
Underlying Assets Under ERISA."
Stock Ownership Limit May Restrict Business Combination
Opportunities. In order for Fortress to maintain its qualification as a
REIT under the Code, not more than 50% in value of its outstanding shares
of capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) at any
time during the last half of Fortress' taxable year (other than the first
taxable year for which the election to be treated as a REIT has been made).
The Charter generally prohibits any stockholder from directly or indirectly
owning more than 9.8% of the aggregate value of the outstanding shares of
any class or series of stock of Fortress, which 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 of Common Stock over the then-prevailing market price or which such
holders might believe to be otherwise in their best interests. Pursuant to
the Charter, the Board has exempted the Manager and the Principals and
their affiliates from this provision and has also exempted a single
non-affiliated shareholder fund from this provision. Such fund has been
specifically restricted by the Board to ownership of 14.99% of the Common
Stock. See "Description of Securities -- Transfer Restrictions" and
"Federal Income Tax Considerations -- Requirements for Qualification" and
"-- Stockholder Rights Plan Could Inhibit Change of Control" below.
Maryland Takeover Statutes May Prevent a Change of Control. As a
Maryland corporation, Fortress is subject to various provisions of the
Maryland General Corporation Law (the "MGCL"), which (a) (i) prohibit
certain "business combinations" (including certain issuances of equity
securities) between a Maryland corporation and any person who beneficially
owns ten percent or more of the voting power of the corporation's shares
(an "Interested Stockholder") or an affiliate thereof for five years after
the most recent date on which the Interested Stockholder becomes an
Interested Stockholder and (ii) thereafter generally require any such
business combination to be approved by two super-majority stockholder votes
and (b) provide that "control shares" of a Maryland corporation acquired in
a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. These provisions 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 of Common Stock over the then-prevailing market
price or which such holders might believe to be otherwise in their best
interests. See "Certain Provisions of Maryland Law and of Fortress' Charter
and Bylaws -- Business Combinations" and "-- Control Share Acquisitions."
Authorized But Unissued Preferred Stock May Prevent a Change in
Control. The Charter of Fortress authorizes the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred
Stock, $.01 par value per share ("Preferred Stock"), and to classify or
reclassify any unissued shares of Common Stock or Preferred Stock and to
set the preferences, rights and other terms of such classified or
reclassified shares. Although the Board of Directors has no such current
intention, it could establish a series of Preferred Stock that could have
the effect of delaying or preventing a change in control of the Company
even if a majority of the holders of the Company's Common Stock believed
such change of control was in their best interest. See "Description of
Securities -- Preferred Stock."
Stockholder Rights Plan Could Inhibit a Change in Control.
Fortress has adopted a stockholder rights agreement (the "Rights
Agreement"). Under the terms of the Rights Agreement, in general, if a
person or group acquires more than 15% of the outstanding shares of Common
Stock (an "Acquiring Person"), all other stockholders of Fortress will have
the right to purchase securities from the Company at a discount to such
securities' fair market value, thus causing substantial dilution to the
Acquiring Person. The Rights Agreement may have the effect of inhibiting or
impeding a change in control and, therefore, could adversely affect the
stockholders' ability to realize a premium over the then-prevailing market
price for the Common Stock in connection with such a transaction. In
addition, since the Board of Directors of Fortress can prevent the Rights
Agreement from operating, in the event the Board approves of an Acquiring
Person, the Rights Agreement gives the Board of Directors significant
discretion over whether a potential acquiror's efforts to acquire a large
interest in the Company will be successful. Because the Rights Agreement
contains provisions that are designed to assure that the Principals, the
Manager and its affiliates will never, alone, be considered a group that is
an Acquiring Person, the Rights Agreement provides the Principals, the
Manager and its affiliates with certain advantages under the Rights
Agreement that are not available to other stockholders. See "Description of
Securities -- Stockholder Rights Plan."
Staggered Board and Other Provisions of the Charter and Bylaws May
Prevent Change in Control. The Company's Board of Directors is divided into
three classes of directors. The initial terms of the Class I, Class II and
Class III directors will expire in 1999, 2000 and 2001, respectively.
Beginning in 1999, directors of each class will be chosen for three-year
terms upon the expiration of their current terms and each year one class of
directors will be elected by the stockholders. The staggered terms of
directors may reduce the possibility of a tender offer or an attempt to
change control of the Company even though a tender offer or change in
control might be in the best interest of the stockholders. See "Certain
Provisions of Maryland Law and the Company's Charter and Bylaws -
Classification of the Board of Directors."
The Charter and Bylaws also contain other provisions that may
delay, defer or prevent a transaction or a change in control of the Company
that might involve a premium price for the Common Stock or otherwise be in
the best interest of the stockholders. See "Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws - Removal of Directors," "--
Advance Notice of Directors Nominations and New Business."
Limitation on Liability of Manager and Officers and Directors of
the Company. As permitted by the MGCL, the Charter contains a provision
which limits the liability of a director or officer to Fortress and its
stockholders for money damages to the maximum extent permitted by Maryland
Law. The MGCL permits limiting such liability, except for liability
resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action.
The Company will indemnify the Manager and its partners from any action or
claim brought or asserted by any party by reason of any allegation that the
Manager or one or more of its partners is otherwise accountable or liable
for the debts or obligations of the Company or its affiliates. In addition,
the Manager and its partners will not be liable to the Company, and the
Company will indemnify the Manager and its partners, for acts performed
pursuant to the Management Agreement, except for claims arising from acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. See "The Manager
and the Management Agreement -- Limits of Responsibility."
Possible Legislative or Other Actions Affecting Tax Consequences.
The present Federal income tax treatment of an investment in Fortress may
be modified by legislative, judicial or administrative action at any time,
and any such action may affect investments and commitments previously made.
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes.
Revisions in Federal tax laws and interpretations thereof could adversely
affect an investment in Fortress. It cannot be predicted whether, when, in
what forms, or with what effective dates, the tax laws applicable to
Fortress or an investment in its Common Stock will be changed.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements which
are subject to various risks and uncertainties, including without
limitation statements relating to the operating performance of the
Company's investments and financing needs and the implementation of the
Company's plan to address Year 2000 issues. Forward- looking statements,
which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project" or similar expressions. The Company's ability to predict results
or the actual effect of future plans or strategies is inherently uncertain.
Although the Company believes that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, the
Company's actual results and performance or progress with respect to its
plan to address Year 2000 issues could differ materially from those set
forth in the forward-looking statements. Factors which could have a
material adverse effect on the operations and future prospects of the
Company include, but are not limited to, changes in economic conditions
generally and the real estate and bond markets specifically,
legislative/regulatory changes (including changes to laws governing the
taxation of real estate investment trusts ("REITs"), availability of
capital, interest rates and interest rate spreads, the Year 2000 compliance
of vendors (including vendors of the Company's computer information
systems) or third party service providers (including the Company's primary
bank, payroll processor, loan servicers and property managers), generally
accepted accounting principles, and policies and guidelines applicable to
REITs, and those factors discussed in "Risk Factors -- Year 2000" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance." These risks and uncertainties should
be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
THE COMPANY
Fortress invests in real estate-related assets on a global basis
focusing on undervalued and distressed assets. The Company's investment
activities primarily include (i) investing in net leased real estate; (ii)
investing in portfolios of distressed, sub-performing and performing
residential, multifamily and commercial mortgage loans; and (iii) providing
financing to third party owners of real estate and portfolios of mortgage
loans, in each case with respect to assets located in the U.S. and in
foreign jurisdictions. The Company is externally managed and advised by the
Manager. The Manager employs 43 professionals in offices in New York,
Toronto and London and expects to open an office in Tokyo in 1999. The
Manager's professionals combine real estate, risk management, structured
finance, capital markets, financial engineering and legal expertise, with
respect to both dollar and non-dollar denominated investments.
The Company was formed in May 1998 by the Principals. The
Principals and several of the employees of the Manager previously worked
together prior to forming the Company in the Global Principal Finance
("GPF") group of UBS Securities, where they were engaged in real estate
related investment activities substantially similar to the Company. Prior
thereto, the Principals and several of the employees of the Manager worked
together managing BlackRock Asset Investors and its affiliated funds
("BAI").
BAI is a closed end registered investment company. The Principals
continue to manage BAI until its liquidation, which is expected to occur in
September of 1999. The fund invested in loan portfolios and real estate and
provided real estate financing to third parties. The Company has no current
plans to purchase any assets from BAI in connection with BAI's liquidation.
GPF was established in May 1997 by UBS and the Principals, as
employees of UBS, to continue the investment activities of the Principals
after BAI was fully invested. The Principals were responsible for managing
the day-to-day operations of GPF throughout its existence, which ended with
the complete liquidation of the portfolio acquired by GPF. In July and
August 1998, the Company acquired a portion of its portfolio from UBS
(representing the remaining unliquidated asset portfolio of GPF at that
time). See "-- Investments" below.
Fortress was incorporated in the State of Maryland in May 1998.
Fortress expects to be taxed as a REIT under the Code commencing with its
taxable year ended December 31, 1998. The Operating Partnership was formed
in the State of Delaware in May 1998. The principal executive offices of
the Company are located at 1301 Avenue of the Americas, New York, New York
10019. The Company's telephone number is (212) 798-6100.
Investments
In connection with the Principals' departure from UBS to form
Fortress, and the liquidation of the portfolio acquired by GPF (the "GPF
Assets"), the Company has purchased certain of the GPF Assets from UBS. In
addition, the Company has made several other investments since its
inception and continuously reviews investment opportunities. The following
is a summary of the Company's investment assets as of December 31, 1998,
unless otherwise noted.
Credit Leased Real Estate
Fortress owns 13 office properties primarily leased to the GSA
(the "GSA Properties"), two forward projects to be primarily leased to the
GSA upon completion (the "GSA Forward Projects"), and five office
properties in Canada leased primarily to Bell Canada (the "Bell Canada
Portfolio"). The total net rentable square feet in the entire portfolio of
credit leased real estate, including the forward transactions, is
approximately 4.6 million square feet and the current annual rent is
approximately $56.3 million. Fortress believes that these properties are
adequately covered by insurance against potential loss. The chart set forth
below describes the 20 properties in some detail.
<TABLE>
<CAPTION>
GSA PROPERTIES
Net
Rentable
Property Square
Address (2)(8) City/Submarket(1) state Feet Year Built Ownership % Use
- -------------------- --------------- ------ ------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
696 Virginia Road Concord/CBD MA 104,527 1970, GutRehab 1998 100% Office
380 Westminister St. Providence/CBD RI 163,000 1983 100% Office
1325 J Street Sacramento/CBD CA 323,395 1990 100% Office
Office
Office
Office
116 Lake View Suffolk VA 320,000 1994 100% Office
150 Corporate Dr. Norfolk VA 58,600 1994 100% Office
1600 Callowhill Philadelphia,CBD PA 93,553 1910 100% Office
Renovated 1989 Office
Burlington/Suburban Warehouse
1900 River Rd Philadelphia NJ 1,048,631 1970 100% Distribution Center
Lakewood/Suburban
755 Parfet Street Denver CO 81,912 1974 100% Office
Renovated 1993/4 Office
Office
4820 University
Square Huntsville AL 125,000 1994 100% Office
16401 E. Centre Aurora/Suburban
Tech Pkwy. Denver CO 116,500 1998 100% Office
999 E Street NW Washington/CBD DC 162,038 1930 100% Office
Renovated 1983 Office
Office
1433 West Loop Houston,
Street Galleria TX 138,000 1972 100% Office
Renovated Office
1996 Office
Office
Office
8808-8810 Rid San San Diego/Mission
Diego Dr. (5) Valley CA 144,327 1998 To Be 100% Office
---------
Office
SUB-TOTAL 2,879,483
---------
</TABLE>
<TABLE>
<CAPTION>
Tenant Current Annual
Net Lease Rent Per Real Lease
% of Square Rentable Start Lease Credit Annual Square Estate Renewal
Name of Tenant Footage Square Feet Date Exp Date Rating Rent (7) Foot Taxes (6) Option
- ---------------------- ----------- ----------- ------ -------- ------ ------------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GSA 100.0% 104,527 3/12/98 2/28/18 AAA $1,856,400 17.76 $65,312 None
GSA 100.0% 163,000 4/1/83 3/31/0 AAA $2,700,699 16.57 $440,984 Two 5 Year
GSA 69.8% 225,858 11/1/90 10/31/10 AAA $4,976,496 22.68 $597,940 None
State of California 26.8% 86,596 12/1/90 9/30/02 A $2,083,477 None
Le Bou & 1325 J
Street LP 2.5% 8,208 11/1/90 Various N/R $255,915 None
GSA 0.6% 1,850 11/1/90 1/18/01 AAA $41,292 None
GSA 100.0% 320,000 5/10/93 5/9/13 AA $4,089,614 12.78 $351,454 One 5 Year
GSA 100.0% 58,600 9/1/94 9/31/05 AA $720,069 12.29 $64,200 One 5 Year
GSA 81.0% 76,063 4/4/90 4/3/05 AAA $1,644,117 21.57 $202,248 None
Community College of
Philadelphia 19.0% 17,490 6/30/97 6/30/02 N/R $374,202 None
GSA 100.0% 1,048,631 12/14/90 12/13/10 AAA $9,969,190 9.51 $657,096 None
GSA 47.4% 38,800 7/1/94 8/21/10 AAA $447,339 11.58 $94,732 None
GSA 49.0% 40,100 8/29/94 8/28/09 AAA $465,932 None
Various (2 Private) 3.9% 3,012 2/1/98 12/30/00 N/R $36,144 None
GSA 100.0% 125,000 10/7/94 10/6/04 AAA $1,585,062 12.68 $73,200 None
GSA 100.0% 116,500 5/19/98 5/18/18 AAA $1,766,296 15.16 $195,300 None
GSA 63.3% 102,612 9/30/97 9/30/97 AAA $2,650,234 27.52 $510,540 None
GSA 26.7% 43,314 9/30/97 9/30/07 AAA $1,092,512 None
Hard Rock Cafe 9.7% 15,700 8/1/98 7/31/13 BBB+ $705,373 None
GSA 92.0% 128,337 6/1/97 5/31/12 AAA $1,712,582 13.13 $150,066 None
Texas Premier Bank 2.2% 2,618 5/1/97 4/30/07 N/R $25,447 None
Kames Investment Group 1.5% 1,825 4/1/97 3/31/02 N/R $21,900 None
PJS of Houston Inc. 1.7% 2,065 8/1/95 7/31/00 N/R $23,293 None
Realmark 1.8% 2,117 1/1/99 12/31/00 N/R $14,734 None
GSA 91.4% 131,986 11/6/98 1/15/13 AAA $3,019,840 21.95 TBD(6) None
North American
Mortgage Company 8.6% 12,341 2/1/98 1/31/03 BBB- $147,598 None
--------- -----------
2,877,150 $42,425,757
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
GSA FORWARD PROJECTS
Property
Address (2)(8) city/Submarket(1) state NRSF Year Built Ownership % Use
- -------------------- --------------- ------ ----- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
901 N Fifth Street Kansas City,KS/CBD KS 200,311 1999 To Be 100% Office
Ninth & Locust Kansas City,
Streets MO/CBD MO 204,611 1999 To Be 100% Office
-------
SUB-TOTAL 404,922
-------
SUB-TOTAL (GSA Properties) 3,284,405
---------
</TABLE>
<TABLE>
<CAPTION>
Tenant Current Annual
Net Lease Rent Per Real Lease
% of Square Rentable Start Lease Credit Annual Square Estate Renewal
Name of Tenant Footage Square Feet Date Exp Date Rating Rent (7) Foot Taxes (6) Option
- ---------------------- ----------- ----------- ------ -------- ------ ------------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proj
GSA 100.0% 200,311 6/1/1999 6/30/99 AAA $3,672,477 18.33 TBD 10 Year
Proj
GSA 100.0% 204,611 6/1/1999 6/30/99 AAA $3,737,256 18.27 TBD None
------- ----------
404,922 $7,409,733
------- ----------
3,282,072 $49,835,490
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
BELL CANADA PORTFOLIO
Property Address City/Submarket (1) Province NRSF Year Built Ownership % Use
- -------------------- ------------------ -------- ----- ---------- ----------- ------------
20-40 Norelco Drive Industrial/
<S> <C> <C> <C> <C> <C> <C>
& 83 Signet Drive Toronto/North York ON 624,786 1960/1975/1978 100% Distribution
Etobicoke (Toronto)/
2 Fieldway Road (4) Metro West ON 177,212 1971/expanded 1975 100% Office
100 Dundas Street (4) London/CBD ON 322,056 1981 100% Office
449 Princess Street Kingston/CBD ON 45,691 1981 100% Office
66 Bay Street Hamilton/CBD ON 118,787 1974 100% Office
---------
SUB-TOTAL (Bell Canada) 1,288,532
---------
TOTAL CREDIT LEASED REAL ESTATE PORTFOLIO 4,572,937
---------
</TABLE>
<TABLE>
<CAPTION>
Net Rentable Lease Annual Lease
% of Square Tenant Start Lease Credit Annual Real Estate Renewal
Name of Tenant Footage Square Feet Date Exp Date Rating Rent (3) Taxes (6) Option
- ---------------------- ---------- ------------ ------ -------- ------ -------- ----------- --------
One 5 Year at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bell Canada 100.0% 624,786 2/26/99 3/31/07 A $3,146,725 5.04 $830,716 market
One 5 Year at
Bell Canada 9.9% 177,058 2/26/99 3/31/04 A $926,320 5.23 $455,753 market
One 5 Year at
Bell Canada 95.3% 306,760 2/26/99 3/31/06 A $1,533,800 5.00 $1,916,688 market
One 5 Year at
Bell Canada 100.0% 45,691 2/26/99 3/31/03 A $228,455 5.00 $71,490 market
One 5 Year at
Bell Canada 100.0% 118,787 2/26/99 3/31/03 A $632,040 5.32 $540,823 market
------- ----------
1,273,082 $6,467,340
--------- ----------
4,555,154 $56,302,830
--------- -----------
</TABLE>
(1) CBD means central business district.
(2) See Financial Statements, Footnote #2, Investments in Real Estate,
for a description of depreciation and estimated lives.
(3) Insurance, Parking, Janitorial, Security, Repairs & Maintenance,
Management Personnel, and Elevator Costs are reimbursed at 115% of
actual cost on a pro rata basis; Utilities and HVAC are reimbursed
at 110% of actual cost on a pro rata basis, and Realty Taxes are
reimbursed at 101% of actual cost on a pro rata basis. In
addition, the tenant pays $.60PSF per annum in years one through
five to cover capitalizable costs, even if none occur in a given
year, at all properties except Norelco/Signet Drives.
(4) Fortress will be undertaking capital repair projects for the
underground parking facilities at 100 Dundas Street and 2 Fieldway
in the summer of 1999.
(5) Property acquired in March 1999.
(6) 1998 is the base year.
(7) These numbers represent the December 1998 rents annualized.
(8) See "Borrowings" for description of loans related to these properties.
The following schedule represents the leases expiring over the next 10
years.
<TABLE>
<CAPTION>
Schedule of Lease Expirations
% of Gross(1)
Annual Rent
No. of Tenants Sq/Ft of Annual Rent of Represented
Leases Expiring Expiring Leases Expiring Leases (2) by Expiring Leases
--------------- --------------- ------------------- ------------------
<S> <C> <C> <C> <C>
1999 5 8,949 $ 54,138 .11%
2000 2 3,123 $ 38,027 .08%
2001 5 40,945 $ 629,968 1.33%
2002 3 105,910 $ 2,479,579 5.24%
2003 3 294,804 $ 3,733,687 7.89%
2004 2 294,054 $ 2,721,868 5.75%
2005 1 76,063 $ 1,644,117 3.47%
2006 1 303,596 $ 1,945,421 4.11%
2007 3 765,759 $ 7,807,801 16.49%
2008 -- -- -- --
</TABLE>
- ------------------------------------
(1) As a percentage of expected 1999 lease rent.
(2) Based upon 1999 annual rent amount.
Loan Portfolios
Canadian Loan Portfolio. In August 1998, the Company purchased
from UBS (Canada) a portfolio of Canadian mortgage loans. As of December
31, 1998, the portfolio consisted of 355 mortgage loans and REO properties
located throughout Canada with an unpaid principal balance of approximately
$41.1 million. The assets securing the loans are commercial and residential
properties.
U.S. Commercial Loan Portfolio: In August 1998, the Company
purchased from UBS a portfolio of U.S. commercial mortgage loans. In
December 1998, the Company conducted an auction of certain of the assets in
the U.S. Commercial Loan Portfolio and sold 26 of the assets for an
aggregate sale price of approximately $42.4 million. As of December 31,
1998, the portfolio consisted of 13 mortgage loans and REO properties
located primarily in California, Florida and New York with an unpaid
principal balance of approximately $24.7 million (including $8.1 million
owned by Fortress' unconsolidated subsidiary). The assets securing the
loans are primarily office, industrial, retail and multifamily properties.
Residential Loan Portfolio: In August 1998, the Company purchased
from UBS interests in two separate Residential Loan Portfolios.
Simultaneously, the portfolios were restructured to provide Fortress sole
beneficial ownership of certain of the loans in the portfolios, instead of
a participation in each. In October 1998, Fortress sold a fifty percent
participation in its portfolio to a third party for a purchase price equal
to one-half of the Company's cost of acquiring the portfolio. Fortress, by
agreement with the third-party purchaser, retains control over the
portfolio. As of December 31, 1998, the Residential Loan Portfolio
consisted of approximately 1,445 mortgage loans and real estate owned
("REO") assets with an unpaid principal balance of approximately $54.4
million (including $16.7 million owned by Fortress's unconsolidated
subsidiary).
Financings
Residential Servicer Loan: In August 1998, the Company purchased
from UBS a loan to an entity related to the Company which, at the time of
the loan purchase, serviced the mortgage loans comprising the Residential
Loan Portfolio. At the time, the Residential Servicer Loan had an unpaid
principal balance of approximately $42 million. The loan had a coupon of
400 basis points over one-month LIBOR and was secured by the borrower's
equity interest in certain residential loans as well as certain additional
collateral. The loan had an unpaid principal balance of approximately $28
million at December 31, 1998, and was paid in full in early January 1999.
Second Residential Servicer Loan: In August 1998, the Company
purchased from UBS a loan to another affiliate of the servicer described
above. At purchase, the Second Residential Servicer Loan had an unpaid
principal balance of approximately $16 million. The loan had a coupon of
400 basis points over one-month LIBOR and was secured by residential,
commercial and other mortgage loans and REO. The loan matured and was paid
in full in November 1998.
New York Property Company Credit Facility: In August 1998, the
Company purchased from UBS a credit facility to a single-family REO
rehabilitation company located in New York with an unpaid principal balance
of approximately $16 million. The facility has a coupon of 410 basis points
over one-month LIBOR and a maturity date in August 2000. The loan is
secured by mortgages on residential properties located in the New York
metropolitan area. As of December 31, 1998, the unpaid principal balance on
the facility was approximately $13 million.
French Commercial Mortgage Loan: In August 1998, the Company
purchased from an affiliate of UBS a loan to an affiliate of a Boston-based
investment manager with an unpaid principal balance of approximately $53
million. The loan had a coupon of 250 basis points over the three-month
Paris Interbank Offered Rate and was secured by an office building located
near Paris, France. The loan matured and was paid in full in December 1998.
Building Material Retailer Loan: In August 1998, the Company
purchased from UBS a loan to a building materials retailer, which, in
December 1998 had completed a Chapter 11 reorganization, with an unpaid
principal balance of approximately $96 million. The loan has a coupon of
400 basis points over one-month LIBOR and a maturity date in December 2004.
The loan was secured by 123 properties (retail stores and warehouse
facilities) located throughout the midwest and southwest sections of the
United States. The loan, as of December 31, 1998, was secured by 118
properties and had an unpaid principal balance of approximately $91.7
million.
Canadian Real Estate Lending Company: In July 1998, the Company
purchased the contract rights from UBS to a credit-facility with a publicly
traded real estate and mezzanine lending company. The facility has a coupon
of 350 basis points over Canadian BA and a maturity date of July 1999 with
two additional six month extensions. The loan is secured by the pledge of
28 assets with an aggregate dollar value of $39 million. As of December 31,
1998, the unpaid principal balance on the facility was approximately $5.1
million.
Real Estate Servicing and Due Diligence Provider Loan: In July
1998, the Company purchased from UBS a loan to a co-investor in a pool of
commercial mortgage loans and REO. At purchase, the Real Estate Servicing
and Due Diligence Provider Loan had an unpaid principal balance of
approximately $2.1 million. The loan had a coupon of 250 basis points over
one-month LIBOR and was secured by their interest in the commercial
mortgage portfolio. The loan was paid off in December 1998.
Borrowings
GSA Properties. In July 1998, the Company (and certain of its
subsidiaries) entered into a $234.2 million loan agreement with a large
insurance company. This loan financed the GSA Properties and was funded by
medium term notes issued by an affiliate of the lender. The loan bears
interest at a rate equal to three-month LIBOR plus 0.68% and is recourse
only to the GSA Properties. The interest rate increases to three-month
LIBOR plus 400 basis points in August 2002. After three years, all excess
cash generated by the collateral will be applied to reduce the principal
amount of the loan. The loan matures in February 2008. Pursuant to the
related loan agreement, the Fortress borrower covenanted to maintain a
tangible net worth equal to or greater than the greater of (i) 15% of the
aggregate all-in cost of the GSA Properties and (ii) $20 million. As the
loan does not amortize prior to its fourth year, the principal balance as
of December 31, 1998 remained approximately $234.2 million.
Bell Canada Portfolio. In March 1999, the Company (and certain of
its subsidiaries) entered into a $35.1 million loan agreement with three
Canadian institutions. This loan provided leverage for the Company's
investment in the Bell Canada Portfolio and bears interest at a fixed rate
equal to 7.25%. The loan is secured primarily by the properties in the Bell
Canada Portfolio and matures in April 2002.
Canadian Loan Portfolio. This portfolio was financed by a loan for
$39.5 million from the Canadian affiliate of a large U.S. investment bank
effective August 14, 1998. The loan bears interest at a rate of one month
Can BA plus 1.5%. The balance at December 31, 1998 was $30.0 million and
Fortress repaid the loan in January 1999.
Building Materials Retailer Loan and U.S. Commercial Loan
Portfolio: The Company (and certain of its subsidiaries) entered into a
$105.2 million repurchase agreement (the "Repo Financing") with a large
investment bank effective as of August 14, 1998. A $57.5 million portion of
the Repo Financing related to the Building Materials Retailer Loan and the
remaining $47.7 million related to the U.S. Commercial Loan Portfolio. The
Repo Financing is recourse to the specific assets with an ultimate
guarantee from the Company. Borrowings under the Repo Financing bear
interest at an interest rate equal to one-month LIBOR plus 1.25% per annum.
The Repo Financing matures on August 14, 1999. In December 1998, Fortress
paid off the portion of the Repo Financing relating to the U.S. Commercial
Loan Portfolio from the proceeds of the auction described above under " --
Loan Portfolios - U.S. Commercial Loan Portfolio". As of December 31, 1998,
the balance of the Repo Financing was approximately $53.3 million. The Repo
Financing requires that the Company's indebtedness never exceed six times
the consolidated net worth of the Company and its subsidiaries. It also
requires that such consolidated net worth shall never fall below $300
million.
Residential Loan Portfolio, Residential Servicer Loan and Second
Residential Servicer Loan: The Company (and certain of its subsidiaries)
also entered into a repurchase agreement (the "Second Repo Financing") with
another large investment bank effective as of August 14, 1998. The balance
at the close of this repo was approximately $76.2 million, with
approximately $33.3 million relating to the Residential Loan Portfolio,
approximately $31 million relating to the Residential Servicer Loan and
approximately $11.9 million relating to the Second Residential Servicer
Loan. The Second Repo Financing is recourse to the specific assets with an
ultimate guarantee from the Company. Borrowings under the Second Repo
Financing bear interest at an interest rate equal to one-month LIBOR plus
3.00% per annum. The Second Repo Financing had different maturities for the
different assets financed thereby. Fortress paid off the portions of the
Second Repo Financing relating to the Residential Servicer Loan and the
Second Residential Servicer Loan in December 1998. The maturity date for
the portion of the Second Repo Financing relating to the Residential Loan
Portfolio is August 14, 1999. The outstanding balance of the Second Repo
Financing on December 31, 1998 was $19.4 million. The Second Repurchase
Agreement requires that the consolidated net worth of the Company and its
subsidiaries never fall below $325 million.
When the Company sold a fifty percent participation in its
Residential Loan Portfolio in October 1998, the purchaser of the
participation agreed to assume one-half of the obligations under the
portion of the Second Repo Financing related to the Residential Loan
Portfolio.
French Commercial Mortgage Loan: This asset was financed by a
$53.4 million repurchase agreement from a large U.S. investment bank and
the loan was paid off in December 1998, simultaneously with the payoff on
the asset.
Subsequent to December 31, 1998, the Company entered into two
significant additional borrowings: a $35.1 million loan secured by the
properties leased to Bell Canada (7.25%, due in April 2002) and an $18.6
million loan secured by a property leased to GSA acquired in March 1999
(one month LIBOR plus 1.4% due in March 2002).
Competition
The Company is subject to significant competition in seeking to
make certain types of investments. This competition often takes the form of
a bidding process in which the Company bids against other potential
purchasers, including other REITs, investment banks and real estate
investment funds. Some of the Company's competitors have greater resources
than the Company and there can be no assurance that the Company will be
able to bid successfully in any such bidding process. Certain real estate
assets are also sold in negotiated transactions. While the Company believes
that the contacts of the Manager's employees will provide it with such
opportunities, there can be no assurance that this will be the case.
Recent Developments
On March 5, 1999, the Company acquired a real estate property
leased to GSA for a purchase price of $27 million financed with an $18.6
million borrowing maturing in March 2002. On March 4, 1999 the Company
obtained a fixed rate debt financing in the amount of $35.1 million secured
by the real estate properties leased to Bell Canada. The loan bears
interest at 7.25% and matures in April 2002. On April 21, 1999, the Company
purchased approximately $200 million of CMBS and unsecured REIT debt,
approximately 63% of which were investment grade and 37% BB- rated. The
Company financed approximately $150 million of this investment with
repurchase agreements maturing in October 1999.
INVESTMENT STRATEGY
General
The investment activities of the Company are primarily focused on
real estate-related assets that produce cash flows that are undervalued,
whether due to the credit quality of the obligors, the value of the
underlying assets, the complexity of the transaction, the viability of the
capital structure, the accuracy and availability of information or the
availability of appropriate operating systems. The Principals believe that
they can add value to these types of assets through (a) increasing and
stabilizing cash flows through restructuring and workouts, (b) creating
optimal servicing and operating systems, (c) gathering and monitoring
asset-specific and obligor-specific information and (d) developing
appropriate short-term and long-term capital structures for the assets.
The Company pursues financing for its investments that allow it to
enhance equity returns and maintain maximum flexibility while maintaining
an acceptable level of risk. One of the benefits of an improving real
estate market is a concurrent improvement in the real estate lending
environment, especially in the U.S. where borrowers are able to take
advantage of greater leverage at relatively lower cost with greater
structuring flexibility. In addition, the marked expansion of the
availability of debt capital through the capital markets has further
increased borrowers' options. The Company plans to take advantage of both
the traditional lender markets and the securitization markets in securing
the best available financing for the Company's investments. The Company
expects to establish an acquisition credit facility or facilities with one
or more financial institutions to enable it to finance acquisitions on an
interim basis while it pursues optimal permanent financing structures.
Recent events in the third quarter of 1998, which included an
overall tightening of debt liquidity, could materially affect the Company's
business plans. Because of such events, the Company may encounter
difficulty obtaining financing for its investments and, even when such
financing is available, the rates charged by lenders may be unattractive to
the Company. Subsequent to the third quarter of 1998, financing has become
significantly more available but debt liquidity generally has not returned
to the levels seen prior to that time. This fact may impact the Company's
investment strategies on a going-forward basis.
The Company believes that it can utilize the same investment
strategy it has successfully employed in the United States in various
foreign markets. The Manager maintains offices in New York, Toronto and
London and expects to open an office in Tokyo to build international
relationships that will enable it to source and evaluate international
investments. In addition to those professionals permanently positioned
abroad, a majority of the Manager's U.S.-based professionals have
frequently transacted business in international markets.
The Company believes that the past experience of the Principals in
managing operations similar to the business of the Company enables the
Company to have access to a broad array of capital markets and may enable
it to utilize its Common Stock and Units as tax-advantaged acquisition
currencies.
The Company employs certain hedging instruments as a risk
management tool and it will use Treasury, mortgage, Eurodollar, and
currency futures and options (on cash and futures), interest rate, currency
and mortgage swaps, caps and floors and other financial instruments in an
attempt to maximize risk-adjusted returns to the extent such strategies do
not adversely affect Fortress' qualification as a REIT.
The officers and directors may change the investment strategy and
policies of the Company without a vote of stockholders. The Company may
acquire assets from the Manager or its affiliates, including securities of
the Manager or its affiliates. There are no limitations on such
transactions, except that they must comply with the Company's general
Investment Guidelines and the Management Agreement.
Targeted Investments
The Company engages primarily in: (i) investing in net leased real
estate ("Credit Leased Real Estate"); (ii) investing in portfolios of
distressed, sub-performing and performing residential, multifamily and
commercial mortgage loans ("Loan Portfolios"); and (iii) providing
financing to third party owners of real estate and portfolios of mortgage
loans ("Financings"), in each case with respect to assets located in the
U.S. and in foreign jurisdictions. All such investments may be made
directly or indirectly, such as in the form of an investment in a vehicle
created to hold such assets, or may be in the form of investments in the
equity of operating companies that own such assets. The Company does not
intend that its investment in securities of other issuers will require it
to register as an "investment company" under the Investment Company Act of
1940, as amended, and the Company would intend to divest securities before
any such registration would be required.
Credit Leased Real Estate consists of residential and commercial
properties which are generally leased on a long-term basis to high credit
quality tenants (i.e. tenants whose long term unsecured debt carries
investment grade rating), including both government and private sector
entities. The majority of the Company's leased assets are leased to the GSA
and Bell Canada. The Company expects to acquire Credit Leased Real Estate
in privatizations and from developers and other owners, including
institutional owner/users in purchase/leaseback transactions. The Manager
has developed a standardized underwriting process and acquisition
guidelines regarding tenant credit risk, environmental and structural
matters. The due diligence process includes phase I environmental site
assessments and structural analysis by nationally recognized third-party
service providers, legal review of all documentation and full appraisals
(including market studies).
The Company also is pursuing in foreign jurisdictions the
acquisition of real estate assets that are currently owned and operated by
government or quasi government entities, large corporations or unions and
leased to members of their constituency at subsidized rents. Currently, the
Principals believe that a number of these entities are considering
disposing of their housing stock on a bulk sale basis.
Loan Portfolios consist primarily of distressed, sub-performing
and performing residential, multifamily and commercial mortgage loans and
related properties acquired in foreclosure or by deed-in-lieu of
foreclosure. Although governmental and institutional bulk sales of Loan
Portfolios in the U.S., particularly by the Resolution Trust Corporation
and the U.S. Department of Housing and Urban Development, have abated
substantially in recent years, the Company believes that there will
continue to be opportunities to acquire Loan Portfolios from a wide variety
of sources, including banks, savings institutions, finance companies
(including "sub-prime" lenders), leasing companies, mortgage companies,
insurance companies and governmental agencies. Subject to compliance with
the REIT rules, the Company may also acquire Loan Portfolios by acquiring
operating companies that own such portfolios.
Financings consist primarily of relatively short-term (ranging
from 12 to 36 months), secured loans to third party owners of real estate
or portfolios of mortgage loans. The Company believes that Financings of
particular asset classes, or Financings in particular jurisdictions, as to
which there is a relative shortage of capital, represent an opportunity to
generate attractive risk-adjusted returns with relatively modest leverage.
The Company also intends to engage in Financings for various strategic
purposes, including (a) developing relationships with borrowers that will
lead to future equity investment opportunities and (b) using these
transactions as an efficient and relatively low-risk method of acquiring
information and developing expertise, particularly as to legal, regulatory
and tax matters in foreign jurisdictions.
Other Investments. In addition to the Company's three targeted
lines of business discussed above, the Company intends to continue to
pursue a variety of real estate-related transactions whenever it believes
such investments will enable the Company to achieve attractive
risk-adjusted returns. The Company may from time to time issue securities
collateralized by mortgages or engage in other securitizations. In certain
cases, the Company may create or invest in operating companies in
connection with asset acquisitions in order to enhance the value of the
assets as well as to create platforms for further investment. The Company
has in the past either created or directly invested in real estate
operating companies in connection with the acquisition of pools of
sub-performing, non-performing or non-dollar assets. The Company believes
that having a direct interest in an operating company provides it with two
primary advantages: (i) it enables the Company to directly control workout
and resolution of the assets and (ii) it provides the Company with a
platform for future investments that have similar operating needs.
Investment Management
The Company expects that the value of its investments will be
enhanced through the application of innovative capital market strategies
and aggressive asset management. The Manager's employees each focus on
specialized areas necessary to maximize execution, including (i) capital
markets and risk management, (ii) financial engineering, (iii) asset
valuation and management, and (iv) structured finance. Each of these areas
is further supplemented by the use of appropriate third party service
providers, including lawyers, accountants, investment bankers, appraisers,
environmental engineers and other consultants. Each transaction will be
monitored by a deal manager who has ultimate responsibility for all
decisions taken with respect to a transaction. Once an investment is made,
the asset management group will track and report on its progress and pro
forma future performance.
The Company relies, in appropriate cases, on strategic partners to
provide specific expertise in local markets or with respect to unique
assets. "Strategic Partners" are partners/investors that the Company
believes provide valuable real estate operating experience and
efficiencies. These partners/investors invest alongside the Company in
order to ensure coincident economic interests. The Manager, when
appropriate, will require a strategic partner to co-invest in the
transaction to align its compensation with the success of the transaction.
Through these relationships, the Company can gain local presence in
strategic markets and hands-on knowledge of the assets underlying its
investments, as well as access to proprietary transactions. The Manager has
developed a network of such partners and intends to continue to expand such
relationships as it pursues the Company's investment strategy.
The Sister Co. and Preferred Stock Affiliates
The Company may, from time to time, identify assets that it
believes may be advantageous investments but that may be inappropriate
(whether for REIT qualification, tax or other reasons) for investment, in
whole or in part, by Fortress or which may otherwise be determined by the
Manager and the Company, based on general prudent considerations, to be
inappropriate, in whole or in part, for investment by the Company. In order
to permit stockholders of Fortress to participate in the economic benefits
that may be associated with such inappropriate assets, the Company may from
time to time to cause the Operating Partnership to form one or more
subsidiary corporations, partnerships or other entities (each, a "Sister
Co."), which would not be taxed as a REIT. The Operating Partnership would
initially contribute capital to the Sister Co., together with, on behalf of
Fortress Investment Group LLC, an affiliate of the Manager, as the initial
limited partner of the Operating Partnership (the "Initial Limited
Partner"), a pro rata portion of the capital of the Operating Partnership
allocable to the Initial Limited Partner's contributed capital, which will
be sufficient to permit the Sister Co. to make such identified investments,
in exchange for all of the issued and outstanding equity interests in the
Sister Co. The Operating Partnership would then distribute the equity
interests in the Sister Co. to Fortress, as general partner, and any
limited partner. Then, Fortress would distribute the Sister Co. equity
interests to the stockholders of Fortress. The board of directors and
executive officers of the Sister Co. will initially be identical to the
Board of Directors and executive officers of Fortress. Concurrently
therewith, or immediately subsequent thereto, the Sister Co. and the
Manager will form an operating partnership upon substantially the same
terms and conditions as the Operating Partnership Agreement (including with
respect to the distribution of the incentive return to the Manager (or an
affiliate of the Manager)). The Sister Co. and its operating partnership
will immediately thereafter enter into a management agreement (or
agreements) with the Manager on substantially the same terms and conditions
as the Management Agreement. The Company anticipates that all investments
determined by the Manager to be appropriate for the Company will continue
to be made by the Company, but that investment opportunities which the
Manager believes are not appropriate for a REIT, but which otherwise are
attractive investments, will be made by the Sister Co. The Company has no
present intention of forming a Sister Co. Furthermore, to the extent that
certain synergies are possible between the Company and the Sister Co., the
Company intends to maximize the opportunities presented by such synergies.
For example, the Company and the Sister Co. may jointly acquire interests
in assets and businesses, such as hotels or healthcare facilities, where
the Company will acquire title to underlying real property and lease such
property to the Sister Co., at market rents (including rents based upon a
percentage of gross revenues), while the Sister Co. acquires and operates
the operating business in order to comply with the Code. The Company
anticipates that such synergies will provide the Company with substantial
advantages in making investments over other companies; however, no
assurance can be made that the Company will be successful in creating and
implementing such synergies.
Essentially, the formation of the Sister Co. will permit
stockholders of Fortress who retain their shares of the Sister Co. to
participate in the real estate operations of the Company (including
ownership of real property) and the Sister Co.'s operation of operating
businesses and other assets which may not otherwise be appropriate for a
REIT, with the Company's principal focus being on real estate investments
while the Sister Co.'s principal function will be as an operating company.
The operating activities and operating assets made available to the Sister
Co. by the Company are designed to provide Fortress' stockholders with the
long-term benefits of ownership in an entity devoted to the conduct of
operating business activities, in addition to their ownership interest in
the Company. The Common Stock of Fortress and the equity interests of the
Sister Co. may be owned and transferred, subject to applicable securities
laws restrictions, separately and independently of each other, and, thus,
will not necessarily provide a paired investment with the Company on an
ongoing basis. After the initial formation of the Sister Co. and the
distribution of its equity interests, the Sister Co. and the Company will
pursue independent sources of financing and are expected ultimately to have
differing ownership. In order to avoid adverse tax consequences to the
Company, the Sister Co.'s charter may provide that no Person may own more
than 9.8% of the Sister Co.'s outstanding stock.
In addition, in order to permit stockholders of Fortress to
participate in the economic benefits that may be associated with
non-qualifying assets, the Company, to the extent permitted by law, may,
from time to time, transfer such assets which are not, or which may produce
income which is not, qualifying assets or income for purposes of certain
REIT asset or income tests to an entity in which the Company will hold all
or substantially all of the preferred equity and third parties will hold
all or substantially all of the common equity interests. The Company has
established a preferred stock affiliate which holds certain assets which
the Company has determined are not, or which may produce income which is
not, qualifying assets or income for purposes of the REIT asset or income
tests. For a description of the Company's preferred stock subsidiary,
Austin Holdings Corporation, see Footnote 6 to the Company's Consolidated
Financial Statements. See "Risk Factors -- Conflicts Relating to the Sister
Co." and "Federal Income Tax Consequences -- Requirements for
Qualification."
Policies With Respect to Certain Other Activities
If the Board of Directors determines that additional funding is
required, the Company may raise such funds through additional equity
offerings, debt financing, retention of cash flow (subject to provisions in
the Code concerning taxability of undistributed REIT taxable income) or a
combination of these methods.
In the event that the Board of Directors determines to raise
additional equity capital, it has the authority, without shareholder
approval, to issue additional Common Stock or Preferred Stock of the
Company in any manner and on such terms and for such consideration it deems
appropriate, including in exchange for property.
Borrowings may be made by Fortress, the Operating Partnership or
another subsidiary. Indebtedness may be in the form of bank borrowings,
secured or unsecured, and publicly or privately placed debt instruments,
purchase money obligations to the sellers of properties, long-term,
tax-exempt bonds or other publicly or privately placed debt instruments,
financing from banks, institutional investors or other lenders, any of
which indebtedness may be unsecured or may be secured by mortgages or other
interest in the property. Such indebtedness may be recourse to all or any
part of the Company's assets or may be limited to the particular property
to which the indebtedness relates.
The Company has authority to offer its Common Stock or other
equity or debt securities in exchange for property and to repurchase or
otherwise reacquire its shares or any other securities and may engage in
such activities in the future. Similarly, the Company may offer additional
interests in the Operating Partnership that are exchangeable into Common
Shares or, at the Company's option, cash, in exchange for property. The
Company also may make loans to the Operating Partnership or another
subsidiary.
Subject to the percentage of ownership limitations and gross
income tests necessary for REIT qualification, the Company may invest in
securities of other REITs, other entities engaged in real estate activities
or securities of other issuers, including for the purpose of exercising
control over such entities.
The Company may engage in the purchase and sale (or turnover) of
investments. The Company does not underwrite the securities of other
issuers.
THE MANAGER AND THE MANAGEMENT AGREEMENT
The Manager
The Manager was founded by Messrs. Wesley R. Edens, Robert I.
Kauffman, Randal A. Nardone and Erik P. Nygaard.
The Manager employs 43 professionals in New York, Toronto and
London and expects to open an office in Tokyo in 1999. Its executive
offices are located at 1301 Avenue of the Americas, New York, New York
10019 and the telephone number of its executive offices is (212) 798-6100.
In connection with the Original Offering, the Principals, the
Manager (or an affiliate of the Manager) and certain employees of the
Manager purchased an aggregate of approximately $53.7 million of shares of
Common Stock and Units, at $18.65 per share (the price to investors in the
Original Offering, net of discounts to the Initial Purchaser) and own in
the aggregate approximately 12.8% of the equity interests of the Company on
a fully diluted basis. In addition, the Company has granted the Manager an
option to purchase 2,091,673 shares of the Company at $20.00 per share.
The Manager's Experience
The Manager's professionals combine real estate, risk management,
structured finance, capital markets, financial engineering and legal
expertise with respect to both dollar and non-dollar denominated
investments.
Prior to forming the Company, the Principals conducted real
estate-related investment activities substantially similar to those of the
Company on behalf of BAI and GPF. BAI, a closed end registered investment
company, is a real estate and mortgage debt fund established in 1995 with
contributions from several major institutional investors. The Principals
have been responsible for the day-to-day management of BAI since its
formation. The fund invested in loan portfolios and real estate and
provided real estate financing to third parties. The Principals will
continue to manage BAI through its liquidation which is expected to be
substantially completed by September 1999. The continuing obligations of
the Principals to BAI may limit the amount of time they can devote to the
Company prior to the dissolution of BAI. The Company has no current plans
to purchase any assets from BAI in connection with its liquidation. GPF was
established in May 1997 by UBS and the Principals, as employees of UBS, to
continue the investment activities of the Principals after BAI was fully
invested. The Principals were responsible for managing the day-to-day
operations of GPF since its inception. This responsibility ended with the
complete liquidation of the portfolio acquired by GPF.
Officers of the Manager
The following table sets forth certain information with respect to
the senior officers of the Manager. The Principals are the senior officers
of the Manager and are also directors and/or senior officers of Fortress.
Otherwise, no senior officer of the Manager is a, or is related by blood,
marriage or adoption to any other, director or senior officer or principal
of the Company or the Manager or any of their respective affiliates.
Name Age Position Held
Wesley R. Edens 37 Chief Executive Officer and Chairman
of the Board of Directors
Robert I. Kauffman 35 President and Director
Randal A. Nardone 43 Chief Operating Officer and Secretary
Erik P. Nygaard 39 Chief Information Officer and Treasurer
The principal occupations for the last several years of the senior
officers, officers and other key professionals of the Manager, as well as
other information, is set forth below.
Senior Officers
Wesley R. Edens has been the Chief Executive Officer of the
Manager and Fortress and the Chairman of the Board of Directors of Fortress
since inception. Mr. Edens recently co-founded the Manager with Messrs.
Kauffman, Nardone and Nygaard, having previously been head of GPF, as well
as a Managing Director of UBS from May 1997 to May 1998. Mr. Edens was
responsible for all aspects of GPF's operations, including setting
investment strategy, creating transaction flow, advising on financing,
asset management and acquisition issues and overseeing the day-to-day
activities. Prior to joining GPF, Mr. Edens was a principal and Managing
Director of BlackRock Financial Management, Inc. ("BFM") and the Chief
Operating Officer of BAI and BlackRock Capital Finance, L.P. ("BCF"), the
entity which managed BAI from October 1993. Mr. Edens will continue as
principal and Managing Director of BFM and Chief Operating Officer of BAI
and BCF until the liquidation of BAI and the assets managed by BCF, which
is expected to be in September 1999. In addition, Mr. Edens was formerly a
partner and Managing Director of Lehman Brothers, where he was head of the
Non-Agency Mortgage Trading Desk. Mr. Edens was primarily responsible for
initially building Lehman's commercial and non-agency mortgage effort. Mr.
Edens received a B.S. degree in Finance and Computer Science from Oregon
State University.
Robert I. Kauffman has been the President of the Manager and
Fortress and a member of the Board of Directors of Fortress since
inception. Mr. Kauffman was previously the head of the acquisitions and
risk management department of GPF as well as a Managing Director of UBS
from May 1997 to May 1998. Mr. Kauffman was responsible for the evaluation
of potential investment opportunities and the coordination of due diligence
protocols. In addition, Mr. Kauffman was responsible for all of the capital
markets activities of GPF, including hedging transactions and the issuance
of securities. Prior to joining UBS in 1997, Mr. Kauffman was a principal
of BFM and Managing Director of BAI and BCF, where he was also responsible
for the acquisition and risk management of BAI. Mr. Kaufman will continue
as principal of BFM and Managing Director of BAI and BCF until the
liquidation of BAI and the assets managed by BCF which is expected to be in
September 1999. Prior to joining BlackRock, Mr. Kauffman was an Executive
Director of Lehman Brothers International ("LBI") in London from December
1992, responsible for all of LBI's foreign asset-based financing, including
capital commitments, risk management and securitization. In addition, Mr.
Kauffman was responsible for the expansion of LBI's non-performing mortgage
loan business into the U.K. residential mortgage market and the acquisition
by LBI of a U.K. mortgage servicing operation to resolve acquired assets.
Mr. Kauffman received a B.S. degree in Business Administration from
Northeastern University.
Randal A. Nardone has been the Chief Operating Officer and
Secretary of the Manager and Fortress since inception. Mr. Nardone was
previously the head of the structured finance and contract finance
departments of GPF as well as a Managing Director of UBS from May 1997 to
May 1998. Mr. Nardone was responsible for the structuring, negotiation and
documentation of all transactions. Prior to joining UBS in 1997, Mr.
Nardone was a principal of BFM and Managing Director of BAI and BCF, where
he also ran the structured finance and contract finance groups. Mr. Nardone
will continue as principal of BFM and Managing Director of BAI and BCF
until the liquidation of BAI and the assets managed by BCF, which is
expected to be in September 1999. Prior to joining BlackRock, Mr. Nardone
was a partner and a member of the executive committee at the law firm of
Thacher Proffitt & Wood. Mr. Nardone joined Thacher Proffitt & Wood in 1980
and became head of its structured finance group of 40 lawyers in 1993. Mr.
Nardone received a B.A. degree in English and Biology from the University
of Connecticut and a J.D. degree from the Boston University School of Law.
Erik P. Nygaard has been the Chief Information Officer and
Treasurer of the Manager and Fortress since inception. Mr. Nygaard was
previously the head of the financial engineering department of GPF as well
as a Managing Director of UBS from May 1997 to May 1998. Mr. Nygaard was
responsible for all aspects of information technology and cash flow
analysis, which included portfolio pricing, securitization modeling,
investor reporting, monthly monitoring of all assets, and portfolio
performance projections. Prior to joining UBS, Mr. Nygaard was a principal
of BFM and Managing Director of BAI and BCF. Mr. Nygaard will continue as
Managing Director of BFM and Managing Director of BAI and BCF until the
liquidation of BAI and the assets managed by BCF, which is expected to be
in September 1999. Mr. Nygaard was also head of the financial engineering
group at BAI, which handled all aspects of information technology and cash
flow analysis. From April 1990 to July 1994, Mr. Nygaard was a Director at
Nomura Securities International, where he was responsible for all aspects
of over $30 billion in REMIC issuances as head of the Mortgage Structuring
Group. Mr. Nygaard received a B.S. degree in Electrical Engineering and
Computer Science from the Massachusetts Institute of Technology.
Officers and Key Professionals of the Manager
Jonathan Ashley joined the Manager in May 1998 as a Managing
Director and concentrates in the structured finance and contract finance
group. Mr. Ashley previously worked for GPF at UBS from May 1997. Prior to
joining UBS, Mr. Ashley worked for BlackRock Capital Finance ("BCF"), the
operating subsidiary of BAI, from April 1996 to May 1997. Prior to joining
BCF, Mr. Ashley worked at Morgan Stanley, Inc. in its Real Estate
Investment Banking Group, where he focused on commercial real estate
securitizations. Prior to joining Morgan Stanley, Mr. Ashley was in the
Structured Finance Group at the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP. Mr. Ashley received a B.A. degree in History from Tufts
University and a J.D. degree from the University of Pennsylvania Law
School.
Andrew Berman joined the Manager in May 1998 as a Vice President
and concentrates in the financial engineering group. He worked for GPF at
UBS from January 1998. Prior to joining UBS, Mr. Berman worked for BCF from
December 1994 to January 1998. Prior to joining BCF, Mr. Berman was a Vice
President in the Fixed Income Trading Group at PaineWebber Incorporated.
Mr. Berman received a B.A. degree in Mathematics from Macalester College.
Lawrence Botel joined the Manager in May 1998 as a Vice President
and concentrates in the real estate group. He previously worked for GPF at
UBS and BCF from 1997. Prior to joining BCF, Mr. Botel worked at Mutual of
New York in its Real Estate Group from 1993 to 1997. Mr. Botel received a
B.S.B.A. degree in Finance from Georgetown University and an M.B.A. degree
in Finance from the University of Chicago Graduate School of Business.
Christopher Chee joined the Manager in May 1998 as a Vice
President and concentrates in the structured finance and contract finance
group. He previously worked for GPF at UBS since January 1998. Prior to
joining UBS, Mr. Chee worked for BFM from 1994 to 1995 and thereafter at
BCF to 1998. Mr. Chee received a B.A. degree in History from the University
of Pennsylvania.
Brydon Cruise joined the Manager in May 1998 as a Managing
Director and concentrates in the real estate group in Canada. He previously
worked for GPF at UBS (Canada) from June 1997. Prior to joining UBS, Mr.
Cruise worked as Vice President of Mortgage Placements at Brazos Advisors
Canada from September 1995 to 1997 and as Vice President for Citibank
Canada, Real Estate Capital Markets from April 1990 to 1995. Mr. Cruise
graduated from Wilfrid Laurier University with an honors B.B.A. degree in
Finance.
William Doniger joined the Manager in May 1998 as a Managing
Director and concentrates in the structured finance and contract finance
group. He previously worked for GPF at UBS since January 1998. Prior to
joining UBS, Mr. Doniger worked for BCF from January 1996 through December
1997. Prior to that, Mr. Doniger was in the structured finance group of the
law firm of Thacher Proffitt & Wood. Mr. Doniger graduated from Princeton
University with an A.B. degree in History and received a J.D. degree from
American University.
Lilly H. Donohue joined the Manager in May 1998 as a Vice
President and concentrates in the structured finance and contract finance
group. She previously worked for GPF at UBS since January 1998. Prior to
joining UBS, Ms. Donohue worked for BFM from 1992 to 1995 and thereafter at
BCF to 1998. Ms. Donohue graduated from Boston University with a B.S.B.A.
degree in Finance.
Charles P. Duffy joined the Manager in December 1998 as a Vice
President and concentrates in the financial reporting group. He previously
worked for D.E. Shaw & Co. and Zurich Capital Markets Inc., in Controller
roles. Prior to that he was Budget Director for Robert Martin Company, a
regional New York area real estate firm. He is a licensed Certified Public
Accountant in the State of New York. Mr. Duffy graduated from Clarkson
University with a B.S. degree in Computer-Based Management Systems and an
M.B.A. degree in General Business.
Barry Edinburg joined the Manager in May 1998 as a Vice President
and concentrates in the structured finance and contract finance group. He
previously worked for GPF at UBS since January 1998. Prior to joining UBS,
Mr. Edinburg worked for BCF from March through December 1997. Mr. Edinburg
graduated from Tufts University with a B.A. degree in Psychology and
received a J.D. degree from Boston University School of Law.
Gregory A. Jundanian joined the Manager in May 1998 as a Vice
President and concentrates in the structured finance and contract finance
group. He previously worked for GPF at UBS from May 1997. Prior to joining
UBS, Mr. Jundanian worked for BCF from January 1996 through May 1997. Prior
to joining UBS, Mr. Jundanian worked for Lehman Brothers Inc. since 1984.
Mr. Jundanian graduated from the College of the Holy Cross with a B.S.
degree in History, from the University of Massachusetts with an Ed.M.
degree in International Education and from Boston University with an M.B.A.
degree in Finance.
John Katz joined the Manager in May 1998 as a Vice President and
concentrates in the real estate group. He previously worked for GPF at UBS
and BCF since April 1997. Prior to that, Mr. Katz worked for Citicorp Real
Estate from 1993 to 1997. Mr. Katz graduated from Tufts University with a
B.A. degree in History, and from Columbia University with an M.B.A. degree
in Finance.
Brian Linett joined the Manager in November 1998 as a Vice
President and Controller. He previously worked as a manager and Certified
Public Accountant in the State of New York for the E&Y Kenneth Leventhal
Real Estate Group, a division of Ernst & Young LLP, concentrating in
initial public offerings and accounting for real estate transactions. Mr.
Linett graduated from The State University at Albany with a B.S. degree in
Accounting.
Alfred Marrapodi joined the Manager in May 1998 as a Managing
Director and concentrates in the contract finance group. He previously
worked for GPF at UBS from July 1997. Prior to joining UBS, Mr. Marrapodi
worked for PaineWebber Incorporated from February 1983 where he was a
Managing Director in charge of the Mortgage Origination Services Group. Mr.
Marrapodi graduated from Pace University with a B.A. degree in Finance.
Kelly Marshall joined the Manager in June 1998 as a Managing
Director and concentrates in the real estate group in Canada. He previously
worked for Cornerstone Capital Corp., a Toronto based corporate finance
advisory group specializing in equity and mezzanine real estate capital
placements. Prior to that, Mr. Marshall worked as Vice President of asset
management and origination at Brazos Advisors Canada from September 1995 to
1997 and acted in various roles for Olympia & York Canary Wharf, Ltd. Mr.
Marshall graduated from Wilfrid Laurier University with an honors B.B.A.
degree.
Scott Mezzo joined the Manager in May 1998 as a Vice President and
concentrates in the financial reporting group. He previously worked for GPF
at UBS from March 1998. Prior to joining UBS, Mr. Mezzo worked for
PaineWebber Incorporated from September 1993 where he was a Vice President
in the Asset Sales and Trading Group. Mr. Mezzo graduated from Pace
University with a B.B.A. degree in General Business.
Mark H. Newman joined the Manager in May 1998 as a Managing
Director and concentrates in the real estate group in London. He previously
worked for Gentra Inc., a Toronto Stock Exchange 300 listed company,
specializing in real estate lending and acquisitions from 1993. At Gentra,
he held various positions culminating in his promotion to Head -- Loan
Workout Group in 1996 and President of the Lending Group in 1997. Mr.
Newman graduated from Dartmouth College with a B.A. degree and from
Dalhousie University in Halifax, Nova Scotia, with his L.L.B. degree.
J. Douglas Rippeto, Jr. joined the Manager in May 1998 as a Vice
President and concentrates in the real estate group. He previously worked
for GPF at UBS from August 1997. Prior to joining UBS, Mr. Rippeto worked
for CBA Mortgage Partners, L.P. from June 1994 to July 1997. Prior to
joining CBA, Mr. Rippeto worked for The Chase Manhattan Bank, N.A. in its
Real Estate Finance Group from June 1993 to May 1994. Mr. Rippeto graduated
from Vanderbilt University with a B.A. degree in History and Political
Science and from Cornell University's Johnson Graduate School of Management
with an M.B.A degree in Finance.
John Schrenker joined the Manager in May 1998 as a Vice President
and concentrates in the real estate group. He previously worked for GPF at
UBS from November 1997. Prior to joining UBS, Mr. Schrenker was a Director
at Jones Lang Wootton USA in the Investment Sales and Real Estate
Securities groups from January 1995 to October 1997. Mr. Schrenker
graduated from Bucknell University with a B.A. degree in Economics.
Gordon Smith joined the Manager in May 1998 as a Managing Director
and concentrates in the real estate group in London. He previously worked
for GPF at UBS since 1998. Prior to joining UBS, Mr. Smith worked for
BlackRock U.K. Investors in London and was responsible for managing the
Annington Homes transaction from December 1996 to January 1998. Prior to
that time, Mr. Smith worked for BCF in New York from February 1995 to
December 1996. Prior to that time, Mr. Smith was a Vice President for the
CB Commercial Real Estate Group from 1985 to 1994. Mr. Smith graduated from
Santa Clara University with a B.S. degree in Economics and an M.B.A. degree
in Finance.
Peter Smith joined the Manager in May 1998 as a Vice President and
concentrates in the financial engineering group . He previously worked for
GPF at UBS from May 1997. Prior to joining UBS, Mr. Smith worked for BCF
from 1996 to 1997. Mr. Smith was a Vice President at CRIIMI MAE Inc. from
1991 to 1996. Mr. Smith graduated from Radford University with a B.B.A.
degree in Finance and from George Washington University with a M.B.A.
degree in Finance.
Blair Welch joined the Manager in May 1998 as a Vice President and
concentrates in the real estate group in Canada. He previously worked for
GPF at UBS from July 1997. Prior to joining UBS, Mr. Welch worked for each
of Bankers Trust and Brazos Advisors Canada. Mr. Welch graduated from the
University of British Columbia with a Bachelor of Commerce degree in Urban
Land Economics.
Brady Welch joined the Manager in August 1998 as a Vice President
and real estate group in Canada. He previously worked for Truscan Property
Corporation, a wholly owned subsidiary of Canada Trust, specializing in
real estate acquisitions and asset management of class A office buildings
in major Canadian centers. Prior to Truscan, Mr. Welch worked as an asset
manager for Brazos Advisors Canada from September 1995 to 1997. Mr. Welch
graduated form Mount Allison University with a Bachelor of Commerce degree
in Accounting & Finance.
The senior officers and other professionals have significant
expertise in real estate, risk management, structured finance, capital
markets, financial engineering and legal fields; however, none of such
persons has previously managed a REIT. See "Risk Factors -- Newly Organized
Corporation; Limited Operating History."
Each of the Principals has an employment agreement (each, an
"Employment Agreement") with the Manager, for a three year term ending June
1, 2001 (the "Non-Competition Expiration Date"). Each Employment Agreement
includes a clause (the "Non-Competition Clause"), under which each of the
Principals is precluded, until the Non-Competition Expiration Date, from
engaging in any business which is directly competitive with a material
business in which the Manager or the Company is engaged or from serving as
a partner, officer, director, consultant, employee or equity holder
(subject to limited exceptions and the Excluded Investments as described
under "-- Conflicts of Interest in Relationship with the Manager") of any
company or business organization which is so engaged. The Employment
Agreements provide (i) that the Company shall be a third-party beneficiary
of the Non-Competition Clause and (ii) that the Non-Competition Clause may
not be amended, waived, terminated or otherwise modified without the prior
consent of a majority of the Independent Directors and the Manager has
acknowledged and agreed that the Principals may serve as directors and
executive officers of Fortress. "Non-compete" clauses in employment
agreements may not, under certain circumstances, be enforceable under state
law.
The Management Agreement
The Company entered into the Management Agreement dated as of June
10, 1998 with the Manager for an initial three-year term. The Management
Agreement provides for automatic one-year extensions after the initial
three-year term. After the initial three-year term, the Manager's
performance will be reviewed annually and the Management Agreement may be
terminated annually upon the affirmative vote of at least two-thirds of the
Independent Directors, or by a vote of the holders of a majority of the
outstanding shares of Common Stock, based upon unsatisfactory performance
that is materially detrimental to the Company or a determination by the
Independent Directors of Fortress that the compensation to the Manager is
not fair, subject to the Manager's right to prevent such a compensation
termination by accepting a mutually acceptable reduction of fees. The
Manager will be provided 60 days' prior notice of any such termination and
will be paid a termination fee equal to the amount of the Management Fee
earned by the Manager during the twelve-month period preceding such
termination which may make it more difficult for the Company to terminate
the Agreement. Following any termination of the Management Agreement, the
Company shall be entitled to purchase the portion of the Manager's (or an
affiliate's) limited partnership interest attributable to the Preferred
Incentive Return at a price equal to the amount that would be distributed
to the Manager (or an affiliate), in its capacity as the Initial Limited
Partner, if the Company's assets were sold for cash at their then current
fair market value (as determined by an appraisal, taking into account,
among other things, the expected future value of the underlying
investments) or otherwise continue to pay the Preferred Incentive Return to
the Manager (or an affiliate). In addition, if the Company does not elect
to so purchase the Manager's (or an affiliate's) limited partnership
interest attributable to the Preferred Incentive Return, the Manager (or an
affiliate) will have the right to require the Company to purchase the same
at the price discussed above. In addition, the Management Agreement may be
terminated by the Company at any time for cause, which is defined as fraud,
misappropriation of funds, willful violation of the Management Agreement,
or gross negligence, without payment of the termination fee. The Manager
may at any time assign certain duties under the Management Agreement to any
affiliate of the Manager provided that Messrs. Edens, Kauffman, Nardone and
Nygaard also jointly manage and supervise the day-to-day business and
operations of such affiliate and provided, further, that the Manager shall
be fully responsible to the Company for all errors or omissions of such
assignee.
The Management Agreement requires the Manager to manage the
business affairs of the Company in conformity with the policies and the
Investment Guidelines that are approved and monitored by the Board of
Directors of Fortress. The Manager will be required to prepare regular
reports for the Board of Directors of Fortress that will review the
Company's acquisitions, portfolio composition and characteristics, credit
quality, performance and compliance with the Investment Guidelines and
policies approved by the Board of Directors of Fortress.
The Manager's management of the Company at all times will be under
the direction of Fortress' Board of Directors and will have only such
functions and authority as the Company may delegate to it. The Manager will
be responsible for the day-to-day operations of the Company and will
perform (or cause to be performed) such services and activities relating to
the assets and operations of the Company as may be appropriate, including,
without limitation, the following:
(i) serving as the Company's consultant with respect to
formulation of investment criteria and preparation of Investment
Guidelines and policies for the approval of the Board of
Directors;
(ii) investigating and selecting possible investment
opportunities and acquisitions, property and investment analysis,
market and economic surveys, on-site physical inspections, review
and projection of income and construction, renovation and/or
operating expenses and supervising and negotiating the arrangement
of financing;
(iii) conducting negotiations with real estate brokers,
owners of property and their agents and representatives,
investment bankers and owners of privately and publicly held real
estate companies;
(iv) engaging and supervising, on behalf of the Company
and at the Company's expense, independent contractors which
provide real estate brokerage, investment banking and leasing
services, mortgage brokerage and other financial services and such
other services as may be required relating to the Company's
investments;
(v) negotiating on behalf of the Company for the sale,
exchange or other disposition of any of the Company's investments;
(vi) coordinating and managing operations of any joint
venture or co-investment interests held by the Company and
conducting all matters with any joint venture or co-investment
partners;
(vii) coordinating and supervising, on behalf of the
Company and at the Company's expense, all property managers,
leasing agents and developers for the administration, leasing,
management and/or development of any of the Company's investments;
(viii) providing executive and administrative personnel,
office space and office services required
in rendering services to the Company;
(ix) administering the day-to-day operations of the
Company and performing and supervising the performance of such
other administrative functions necessary to the management of the
Company as may be agreed upon by the Manager and the Board of
Directors, including the collection of revenues and the payment of
the Company's debts and obligations and maintenance of appropriate
computer services to perform such administrative functions;
(x) communicating on behalf of the Company with the
holders of any equity or debt securities of the Company as
required to satisfy the reporting and other requirements of any
governmental bodies or agencies or trading markets and to maintain
effective relations with such holders;
(xi) counseling the Company in connection with policy
decisions to be made by the Board of Directors;
(xii) evaluating and recommending overall hedging
strategies to the Board of Directors and, upon the approval by the
Board of Directors of such overall hedging strategies, engaging in
hedging activities on behalf of the Company, consistent with the
Company's status as a REIT and with the Investment
Guidelines;
(xiii) counseling the Company regarding the maintenance
of its status as a REIT and monitoring compliance with the various
REIT qualification tests and other rules set out in the Code and
Treasury Regulations thereunder;
(xiv) counseling the Company regarding the maintenance of
its exemption from the Investment Company Act and monitoring
compliance with the requirements for maintaining an exemption from
that Act;
(xv) assisting the Company in developing criteria for
asset purchase commitments that are specifically tailored to the
Company's investment objectives and making available to the
Company its knowledge and experience with respect to mortgage
loans, real estate and other real estate-related assets;
(xvi) representing and making recommendations to the
Company in connection with asset privatization, investments in
operating companies, loan origination (including on a portfolio
basis) and the purchase and commitment to purchase and finance of
mortgage loans (including on a portfolio basis), real estate and
other real estate-related assets, and the sale and commitment to
sell such assets;
(xvii) monitoring the operating performance of the
Company's investments and providing periodic reports with respect
thereto to the Board of Directors, including comparative
information with respect to such operating performance and
budgeted or projected operating results;
(xviii) investing or reinvesting any money of the Company
(including investing in short-term investments pending investment
in long-term asset investments, payment of fees, costs and
expenses, or payments of dividends or distributions to
stockholders and partners of the Company), and advising the
Company as to its capital structure and capital raising;
(xix) causing the Company to retain qualified accountants
and legal counsel, as applicable, to assist in developing
appropriate accounting procedures, compliance procedures and
testing systems with respect to financial reporting obligations
and compliance with the REIT provisions of the Code and to conduct
quarterly compliance reviews with respect thereto;
(xx) causing the Company to qualify to do business in all
applicable jurisdictions and to obtain and maintain all
appropriate licenses;
(xxi) assisting the Company in complying with all
regulatory requirements applicable to the Company in respect of
its business activities, including preparing or causing to be
prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and
documents, if any, required under the Exchange Act;
(xxii) taking all necessary actions to enable the Company
to make required tax filings and reports, including soliciting
stockholders for required information to the extent provided by
the REIT provisions of the Code;
(xxiii) handling and resolving all claims, disputes or
controversies (including all litigation, arbitration, settlement
or other proceedings or negotiations) in which the Company may be
involved or to which the Company may be subject arising out of the
Company's day-to-day operations, subject to such limitations or
parameters as may be imposed from time to time by the Board of
Directors;
(xxiv) using commercially reasonable efforts to cause
expenses incurred by or on behalf of the Company to be reasonable
or customary and within any budgeted parameters or Investment
Guidelines set by the Board of Directors from time to time;
(xxv) performing such other services as may be required
from time to time for management and other activities relating to
the assets of the Company as the Board of Directors shall
reasonably request or the Manager shall deem appropriate under the
particular circumstances; and
(xxvi) using commercially reasonable efforts to cause the
Company to comply with all applicable
laws.
The Manager performs portfolio management services on behalf of
the Company pursuant to the Management Agreement with respect to the
Company's investments. Such services include, but are not limited to,
consulting with the Company on the purchase and sale of, and other
investment opportunities in connection with, the Company's portfolio of
assets, collection of information and submission of reports pertaining to
the Company's assets, interest rates, and general economic conditions,
periodic review and evaluation of the performance of the Company's
portfolio of assets, acting as liaison between the Company and banking,
mortgage banking, investment banking and other parties with respect to the
purchase, financing and disposition of assets, and other customary
functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including its affiliates, to provide any
such services to the Company, subject to the Company's prior approval and
subject to the Manager's responsibility for such subcontractor's work.
The Manager performs monitoring services on behalf of the Company
pursuant to the Management Agreement with respect to loan servicing
activities provided by third parties. Such monitoring services will
include, but not be limited to, the following activities: negotiating
servicing agreements; acting as a liaison between the servicers of the
assets and the Company; review of servicers' delinquency, foreclosure and
other reports on assets; supervising claims filed under any insurance
policies; and enforcing the obligation of any servicer to repurchase
assets. The Manager may enter into subcontracts with other parties,
including its affiliates, to provide any such services for the Manager,
subject to the Company's prior approval.
Pursuant to the Management Agreement, the Manager has agreed, at
all times during which it is serving as manager of the Company, to maintain
a tangible net worth of at least $1,000,000. In addition, the Manager
maintains "errors and omissions" insurance coverage in an amount which is
comparable to that customarily maintained by other managers or servicers of
other assets similar to those held by the Company.
The Manager may engage property and/or asset managers on behalf of
the Company to provide property management, leasing and/or similar services
to the Company with respect to its assets; provided that any such contracts
entered into with affiliates of the Manager shall be on terms no more
favorable to such affiliate than would be obtained from a third party on an
arm's-length basis and subject to such other terms respecting contracts and
assignments to affiliates as set forth elsewhere in this Prospectus.
The Principals have informed the Company that, upon satisfaction
of their responsibilities under their agreement with BFM to manage the
assets of BAI (the "BAI Management Contract"), they intend to discuss with
the Board of Directors of Fortress various methods to convert the Company
to a self-advised structure. Upon such conversion, all or a portion of the
following may occur, either in a single transaction or in a series of
transactions: (a) the Management Agreement would terminate and the
employees of the Manager (which may include the Principals) would become
direct employees of the Company, (b) the Management Fee otherwise payable
to the Manager pursuant to the Management Agreement would not be payable to
the Manager, and instead the Company would be responsible for all salaries
and overhead costs applicable to such employees of the Manager, (c) the
exclusivity provisions of the Management Agreement would be set forth in
amendments to the Employment Agreements between the Company and such
employees and (d) the Company's obligation to pay the Preferred Incentive
Return (as discussed below) to the Manager (or an affiliate of the Manager)
would terminate. Any such conversion transaction will be subject to the
approval of the Manager and the Independent Directors with respect to,
among other things, the structure of such conversion transaction(s) and the
consideration therefor.
Management Compensation Summary
Below is a summary of the compensation, fees and other amounts
paid by the Company to the Manager for 1998 and the projected amount to be
paid in 1999. For a description of the calculation and other terms of these
amounts see "-- Management Fee," "-- Management Incentives," and
"Management - Stock Options".
May 11, 1998 (inception) to Estimated
December 31, 1998 Annual 1999*
--------------------------- ------------
Management Fee $6.0 million $5.8 million
Expenses $1.2 million $1.5 million
Management Incentive Fees none none
Manager Awards Options to purchase 2,091,673
shares at $20.00 per share
- --------------
* Assuming no further equity raised or investment activity by the Company.
The Company does not currently pay any compensation to the Principals or to
the officers of the Company.
Management Fee
The Manager receives an annual Management Fee equal to 1.5% of the
Company's Gross Equity. The term "Gross Equity" for any period means (A)
the sum of (i) the Company's Total Equity, plus (ii) the value of
contributions made by partners, if any, other than the General Partner,
from time to time, to the capital of the Operating Partnership or any other
subsidiary of the Company, less (B) any capital dividends or capital
distributions made by Fortress to its stockholders or by the Operating
Partnership to its partners. The Management Fee is intended to compensate
the Manager for providing management and advisory services to the Company
and for a reimbursement of all costs. In the event of termination of the
Management Agreement by the Company other than for cause (as specifically
described in the Management Agreement), the Company is required to pay the
Manager a termination fee equal to the amount of the Management Fee earned
by the Manager during the 12 month period immediately preceding such
termination. Following any termination of the Management Agreement as
aforesaid, the Company may purchase the portion of the Manager's (or an
affiliate's) limited partnership interest attributable to the Preferred
Incentive Return at a price equal to the amount that would be distributed
to the Manager (or an affiliate) if the Company's assets were sold for
their fair market value (as determined by an appraisal, taking into
account, among other things, the expected future value of the underlying
investments) or otherwise continue to pay the Preferred Incentive Return to
the Manager (or an affiliate). In addition, if the Company does not elect
to so purchase the Manager's (or an affiliate's) limited partnership
interest attributable to the Preferred Incentive Return, the Manager (or an
affiliate) will have the right to require the Company to purchase the same
at the price described above. See "-- Management Incentives" below.
The Company paid the Manager a Management Fee of $6 million for
1998 (which represented less than a full year). The Company did not pay the
Manager a Preferred Incentive Return (as described below under "--
Management Incentives") attributable to this period or any other
compensation for this period.
The Company estimates that it will pay the Manager a Management
Fee of approximately $5,800,000 during calendar year 1999. This estimate is
based upon the following assumptions: (1) that the Gross Equity of the
Company will be $388,000,000 (the Current Gross Equity at the date hereof)
and (2) no other equity will be raised by the Company during such period.
The Company believes that, during calendar year 1999, assuming its
investments remain constant, a Preferred Incentive Return is unlikely to be
paid to the Manager. However, the Company is currently unable to determine
with any certainty whether a Preferred Incentive Return will be paid in
calender 1999. There is no other compensation payable to the Manager or its
affiliates for such period. The Company estimates that the Manager will
incur expenses of approximately $1.5 million in 1999 which will be
reimbursed by the Company pursuant to the Management Agreement. These
expenses are expected to include, but not be limited to, accounting,
software development, loan tracking, data management, risk analysis,
performance measurement, legal, investor communications and public
relations services.
Costs and Reimbursements. Because the Manager's employees or
affiliates perform certain legal, accounting, due diligence tasks and other
services that outside professionals or outside consultants otherwise would
perform, the Manager or such affiliates are paid or reimbursed for the cost
of performing such tasks, provided that such costs and reimbursements are
no greater than those which would be paid to outside professionals or
consultants on an arm's-length basis. Further, the Manager will be
reimbursed for any expenses incurred in contracting with third parties,
including affiliates of the Manager, for the special servicing of assets of
the Company.
The Manager will use the proceeds from its Management Fee in part
to pay compensation to its officers and employees who, notwithstanding that
certain of them also are officers of the Company, receive no cash
compensation directly from the Company.
Expenses. The Company does not maintain an office or employ
full-time personnel. Instead it relies on the facilities and resources of
the Manager to conduct its operations, and it is required to pay
out-of-pocket expenses. Expense reimbursements to the Manager are made
monthly.
Payment of Fees. The Management Fee is payable monthly in arrears
based upon the weighted average of the Company's Gross Equity for such
month. The Company is obligated to pay the Management Fee and any other
expenses on the first business day of each calendar month.
Subject to the limitations set forth below, the Company will also
pay all operating expenses, except those specifically required to be borne
by the Manager under the Management Agreement. The operating expenses
required to be borne by the Manager include the compensation of Manager's
officers and employees, rent for facilities, and other "overhead" expenses.
The expenses that will be paid by the Company will include (but not
necessarily be limited to) issuance and transaction costs incident to the
acquisition, disposition and financing of investments, legal and auditing
fees and expenses, the compensation and expenses of the Independent
Directors, the costs associated with the establishment and maintenance of
any credit facilities and other indebtedness of the Company (including
commitment fees, legal fees, closing costs, etc.), or any other securities
offerings of the Company, the costs of printing and mailing proxies and
reports to stockholders, costs incurred by employees of the Manager for
travel on behalf of the Company, costs associated with any computer
software or hardware that is used solely for the Company, costs to obtain
liability insurance to indemnify the Company's Directors and officers and
the compensation and expenses of the Company's custodian and transfer
agent.
Management Incentives
The Manager (or an affiliate of the Manager) is entitled to
receive a quarterly incentive return (the "Preferred Incentive Return") on
its Units on a cumulative, but not compounding, basis in an amount equal to
the product of (A) 25% of the dollar amount by which (1)(a) the Funds From
Operations (before the Preferred Incentive Return) of the Company per share
of Common Stock and per Unit (based on the weighted average number of
shares of Common Stock and Units outstanding) plus (b) gains (or losses)
from debt restructuring and gains (or losses) from sales of property and
other assets per share of Common Stock and per Unit (based on the weighted
average number of shares of Common Stock and Units outstanding), exceed (2)
an amount equal to (a) the weighted average of the price per share of
Common Stock and Units sold in the Original Offering and the Private
Placement and the prices per share of Common Stock (or Unit) in any
subsequent offerings by the Company (adjusted for prior capital dividends
or capital distributions) multiplied by (b) a simple interest rate of 10%
per annum (divided by four to adjust for quarterly calculations) multiplied
by (B) the weighted average number of shares of Common Stock and Units
outstanding. "Funds From Operations," as defined by the National
Association of Real Estate Investment Trusts ("NAREIT"), means net income
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and gains (or losses) from sales of property, plus
depreciation and amortization on real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. Funds From Operations
does not represent cash generated from operating activities in accordance
with GAAP and should not be considered as an alternative to net income as
an indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.
The ability of the Company to generate Funds From Operations in
excess of the 10% rate described above, and of the Manager (or an
affiliate) to earn the Preferred Incentive Return described in the
preceding paragraph, is dependent upon the Company's ability to execute
successfully the investment strategies described herein, and other factors,
many of which are not within the Company's or the Manager's control.
Upon any termination of the Management Agreement by either party,
the Company shall be entitled to purchase the portion of the Manager's (or
an affiliate's) limited partnership interest attributable to the Preferred
Incentive Return from the Manager (or an affiliate) for a cash purchase
price equal to the amount of the Preferred Incentive Return that would be
distributed to the Manager (or an affiliate), in its capacity as the
Initial Limited Partner, if all of the Company's assets were sold for cash
at their then current fair market value (taking into account, among other
things, expected future performance of the underlying investments) or
otherwise continue to pay the Preferred Incentive Return to the Manager (or
an affiliate). In addition, if the Company does not elect to so purchase
the Manager's (or an affiliate's) limited partnership interest attributable
to the Preferred Incentive Return, the Manager (or an affiliate) will have
the right to require the Company to purchase the same at the price
described above. In either case, such fair market value shall be determined
by independent appraisal to be conducted by a nationally recognized
appraisal firm mutually agreed upon by the Company and the Manager. If the
Company and the Manager are unable to agree upon an appraisal firm, then
each of the Company and the Manager is to choose an independent appraisal
firm to conduct an appraisal. In such event, (i) if the appraisals prepared
by the two appraisers so selected are the same or differ by an amount that
does not exceed 20% of the higher of the two appraisals, such fair market
value will be deemed to be the average of the appraisals as prepared by
each party's chosen appraiser, and (ii) if these two appraisals differ by
more than 20% of such higher amount, the two appraisers together are to
select a third appraisal firm to conduct an appraisal. If the two
appraisers are unable to agree as to the identity of such third appraiser,
either of the Manager and the Company may request that the American
Arbitration Association ("AAA") select the third appraiser. The fair market
value of the Company's assets will then be deemed to be the amount
determined by such third appraiser, but in no event less than the lower of
the two initial appraisals or more than the higher of such two initial
appraisals.
Pursuant to the Option Plan, the Company has granted an affiliate
of the Manager options (the "Manager Awards") representing the right to
acquire 2,091,673 shares of Common Stock (or, at the election of the
Company, Units) (equal to 10% of the shares of Common Stock and Units of
the Company outstanding immediately upon the closing of the Original
Offering and the Private Placement), at an exercise price per share of
Common Stock or per Unit, as the case may be, equal to $20.00, with such
price subject to adjustment as necessary to preserve the value of such
Manager Awards in connection with the occurrence of certain events
(including capital dividends and capital distributions made by the
Company). The purpose of the Manager Awards is to provide a means of
performance-based compensation in order to provide an incentive for the
Manager to enhance the value of Fortress' Common Stock.
Limits of Responsibility
Pursuant to the Management Agreement, the Manager will not assume
any responsibility other than to render the services called for thereunder
and will not be responsible for any action of Fortress' Board of Directors
in following or declining to follow its advice or recommendations. The
Manager, its directors and its officers will not be liable to the Company,
any subsidiary of the Company, the Directors, Fortress' stockholders or any
subsidiary's stockholders for acts performed in accordance with and
pursuant to the Management Agreement, except by reason of acts constituting
bad faith, willful misconduct, gross negligence, or reckless disregard of
their duties under the Management Agreement. The Company has agreed to
indemnify the Manager, its directors and its officers with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising
from acts of the Manager not constituting bad faith, willful misconduct,
gross negligence, or reckless disregard of duties, performed in good faith
in accordance with and pursuant to the Management Agreement. The Manager
has agreed to indemnify the Company, its directors and officers with
respect to all expenses, losses, damages, liabilities, demands, charges and
claims arising from acts of the Manager constituting bad faith, willful
misconduct, gross negligence or reckless disregard of its duties under the
Management Agreement. The Manager shall carry errors and omissions and
other customary insurance.
Conflicts of Interest in Relationship with the Manager
The Company, on the one hand, and the Manager and its affiliates,
on the other, will enter into a number of relationships other than those
governed by the Management Agreement, some of which may give rise to
conflicts of interest. Moreover, two of the members of the Board of
Directors of Fortress and all of its officers are also employed
by the Manager.
Pursuant to the Management Agreement, the conduct of the daily
operations of the Company by the Manager and its affiliates are not
required to be approved by Fortress' Independent Directors. The Independent
Directors review the Investment Guidelines and the Company's investment
policies annually, and the Company's investments quarterly. However, in
conducting this review, the Independent Directors rely primarily on
information provided to them by the Manager. Furthermore, transactions
entered into by the Manager may be difficult or impossible to unwind by the
time they are reviewed by the Independent Directors.
The Company may acquire assets from the Manager if a majority of
the Independent Directors approves the transaction in advance. However, in
making these decisions, the Independent Directors will rely primarily on
information provided by the Manager in determining whether the price is
fair and whether the investment is otherwise in the best interest of
Fortress and its stockholders.
The Manager may obtain third party appraisals for investments
purchased from the Manager or its affiliates, but the Independent Directors
are likely to rely substantially on information and analysis provided by
the Manager to evaluate the Company's Investment Guidelines, compliance
therewith and other matters relating to the Company's investments.
Moreover, appraisals are not always reliable indicators of the value of
assets.
The Management Agreement generally limits the Manager's right to
engage in business or to render services to others that compete with the
Company until an amount equal to 95% of the Company's Total Equity has been
invested (other than in short-term temporary investments) by the Company
(and for these purposes contributions to a Sister Co. shall be deemed to be
"investments" of the Company's Total Equity). As used herein, the term,
"Total Equity" shall mean the total equity capital raised by Fortress.
Notwithstanding the foregoing, the Manager will be permitted under the
Management Agreement at any time (a) to manage the Sister Co., (b) to
manage BAI, together with its affiliated funds, and (c) to acquire and
manage "Excluded Investments," which shall mean (i) investments made or
committed to be made by the Principals, the Manager or their affiliates
prior to the closing of the Original Offering, (ii) any investment as to
which the equity invested by the Principals, the Manager or their
affiliates is equal to or less than $3,000,000, and (iii) any investments
made during any period of time that the exclusivity provisions of the
Management Agreement are not in effect (i.e., during any period of time in
which 95% or more of the Total Equity of the Company has been invested), in
each case together with investments relating to the foregoing investments.
Subject to the foregoing, the Management Agreement does not specify any
minimum amount of time that the Manager is required to devote to the
Company. See "Conflicts of Interest."
If a Sister Co. is formed and its equity interests are distributed
to the partners and stockholders of the Company, the Sister Co. will rely
on the Company and the Manager to provide investments to it. Provisions in
the Sister Co.'s formation documents will (i) provide that the Sister Co.
will enter into transactions with the Company to the extent deemed
beneficial by their respective boards of directors (and the Company may
enter into an intercompany agreement with the Sister Co. with respect
thereto) and (ii) generally prohibit the Sister Co. from engaging in
activities or making investments appropriate for a REIT unless the Company
was first given the opportunity but elected not to pursue such activities
or investments. The Manager and the Board of Directors may be subject to
various potential conflicts of interest as a result of the relationships
with the Sister Co. and the Company.
The market in which the Company purchases assets is characterized
by rapid evolution of products and services and, thus, there may in the
future be relationships between the Company and the Manager and its
affiliates, in addition to those described herein.
MANAGEMENT
Directors and Executive Officers of the Company
The following table sets forth certain information about the
directors and senior officers of Fortress.
Name Age Position Held
- ------------------ --- ---------------------------------------
Wesley R. Edens 37 Chief Executive Officer and Chairman of
the Board of Directors (Class III)
Robert I. Kauffman 35 President and Director (Class II)
Mark H. Burton 40 Independent Director (Class III)
Douglas L. Jacobs 51 Independent Director (Class II)
Stuart A. McFarland 51 Independent Director (Class I)
Randal A. Nardone 43 Chief Operating Officer and Secretary
Erik P. Nygaard 39 Chief Information Officer and Treasurer
The Board of Directors is divided into three classes of directors.
The initial terms of the Class I, Class II and Class III directors will
expire in 1999, 2000 and 2001, respectively. Beginning in 1999, directors
of each class will be chosen for three-year terms upon the expiration of
their current terms and each year one class of directors will be elected by
the stockholders. All officers serve at the discretion of the Board of
Directors.
The principal occupation for the last five years of each
Independent Director of Fortress, as well as some other information, is set
forth below. For biographical information on Messrs. Edens, Kauffman,
Nardone and Nygaard, see "The Manager and the Management Agreement."
Mark H. Burton has been a director of Fortress since May 1998. Mr.
Burton is a Managing Director in the Financial Services Group at Lehman
Brothers Inc. This group has primary coverage responsibility for Investment
Banking clients in the Bank, Savings and Loan, Consumer and Commercial
Finance, Insurance, Brokerage and Asset Management businesses. Mr. Burton
is the senior banker for many of the firm's priority bank, savings and loan
and finance company relationships. Mr. Burton, a graduate of Dartmouth
College, joined Lehman Brothers in 1981, becoming a Managing Director in
1990 and Partner in 1991. During his eighteen years with the firm, his
responsibilities have included a broad array of disciplines critical to
appropriately serving his client base; structured finance/asset
securitization, mergers and acquisitions, corporate finance and real estate
finance/principal transactions.
Douglas L. Jacobs has been a director of Fortress since May 1998.
Mr. Jacobs is a Senior Vice President and Treasurer of Fleet Financial
Group ("Fleet"), a $97 billion diversified regional financial services
company. Mr. Jacobs is primarily responsible for all balance sheet
management activities, including Fleet's debt funding, capital management,
securities portfolios, residential mortgage portfolios, and asset/liability
management activities. In addition, Fleet's Capital Markets Group, which
specializes in foreign exchange, interest rate risk products and short-term
securities sales to middle market customers, reports to Mr. Jacobs. Mr.
Jacobs also serves as a Director of Fleet Mortgage Group and Fleet Venture
Capital. Prior to his appointment as Treasurer of Fleet, Mr. Jacobs served
in a variety of roles at Fleet, including Senior Vice President in charge
of Secondary Marketing at Fleet Mortgage Group. He has also been
responsible for a number of special transactions connected with Fleet's
acquisition of banking franchises, the public sale and subsequent
repurchase of Fleet Mortgage Group, and a bulk sale of distressed
commercial real estate-related assets. From 1972 until 1988, Mr. Jacobs was
employed by Citibank, N.A., most recently as Division Executive of Citicorp
Investment Bank, where he was responsible for the development and oversight
of the Mortgage-Backed Securities Division. Mr. Jacobs is a graduate of
Amherst College with a degree in Chemistry and the Wharton School of the
University of Pennsylvania with an M.B.A. degree in Finance.
Stuart A. McFarland has been a director of Fortress since May
1998. Mr. McFarland is a Managing Partner of Federal City Capital Advisors,
LLC ("FCCA"), a strategic advisory and corporate financial services firm
located in Washington, DC. FCCA's clients include start-up companies, high
growth corporations, Fortune 100 businesses and government-sponsored
enterprises. Mr. McFarland has had a long involvement in financial
services, working at various times as Executive Vice President and General
Manager of GE Capital Mortgage Services, President and CEO of GE Capital
Asset Management Corporation, Chairman, President and CEO of Skyline
Financial Services Corporation, and as a consultant and advisor to James
Ford, the Chairman and CEO of Ford Motor Credit Company. At the request of
the Federal Home Loan Bank Board, Mr. McFarland was the President and CEO
of National Permanent Federal Savings Bank in Washington, DC. Prior to this
position, Mr. McFarland served as Executive Vice President and Chief
Financial Officer of the Federal National Mortgage Association ("Fannie
Mae"), where he was part of a team of executives that re-engineered the
organization into an aggressive, innovative, profit-oriented organization.
Prior to working at Fannie Mae, Mr. McFarland was a Director and President
of Ticor Mortgage Insurance Company. Mr. McFarland serves on the Board of
Directors and the Executive Committee of the Center for Housing Policy, the
Advisory Board of Lender's Service, Inc., the Board of Trustees of the
National Building Museum, and the Board of Trustees of the Greater
Washington Research Center. Mr. McFarland attended Lafayette College in
Easton, Pennsylvania, where he earned an A.B. degree in Government and Law
in 1970.
Executive Compensation
Directors and senior officers of Fortress will be required to
devote only so much of their time to the Company's affairs as is necessary
or required for the effective conduct and operation of the Company's
business. Because the Management Agreement provides that the Manager will
assume principal responsibility for managing the affairs of the Company,
the officers of Fortress, in their capacities as such, are not expected to
devote substantial portions of their time to the affairs of the Company and
will not receive compensation from the Company. However, in their
capacities as officers or employees of the Manager, or its affiliates, they
will devote such portion of their time to the affairs of the Manager as is
required for the performance of the duties of the Manager under the
Management Agreement. See "The Manager and the Management Agreement -- the
Management Fee," "-- Management Incentives" and "Management -- Stock
Options."
Directors
The Board of Directors is divided into three classes of directors.
The initial terms of the Class I, Class II and Class III directors will
expire in 1999, 2000 and 2001, respectively. Beginning in 1999, directors
of each class will be chosen for three-year terms upon the expiration of
their current terms and each year one class of directors will be elected by
the stockholders. All officers serve at the discretion of the Board of
Directors. Fortress will pay an annual director's fee to each Independent
Director equal to $15,000, with no additional fee to be paid for the first
four meetings of the Board of Directors. After the first four meetings,
each Independent Director will be paid a fee of $1,000 for each additional
meeting of the Board of Directors attended in person by such Independent
Director. All members of the Board of Directors of Fortress will be
reimbursed for their costs and expenses in attending all meetings of the
Board of Directors. In addition, an annual fee of $1,000 will be paid to
the chair of any committee of the Board of Directors of Fortress.
Affiliated directors, however, will not be separately compensated by the
Company. Fees to the Independent Directors may be made by issuance of
Common Stock, based on the value of such Common Stock at the date of
issuance, rather than in cash.
The Charter of Fortress provides that, except during a period not
to exceed 60 days in the case of a vacancy, the majority of the members of
the Board of Directors will at all times be Independent Directors.
Stock Options
Fortress has adopted the Fortress Investment Corp. Non-Qualified
Stock Option and Incentive Award Plan (the "Option Plan") to provide
incentives to attract and retain the highest qualified directors, officers,
employees, advisors, consultants and other personnel. The Option Plan will
be administered by the Compensation Committee.
Stock Options
The Option Plan permits the granting of options to purchase Common
Stock that do not qualify as incentive stock options under section 422 of
the Code ("Non-Qualified Options"). The option exercise price of each
option will be determined by the Compensation Committee and may be less
than 100% of the fair market value of the Common Stock subject to such
option on the date of grant.
The terms of each option will be fixed by the Compensation
Committee. The Compensation Committee will determine at what time or times
each option may be exercised and, subject to the provisions of the Option
Plan, the period of time, if any, after retirement, death, disability or
termination of employment during which options may be exercised. Options
may be made exercisable in installments, and the exercisablity of options
may be accelerated by the Compensation Committee. Upon exercise of options,
the option exercise price must be paid in full either in cash or by
certified or bank check or other instrument acceptable to the Compensation
Committee or, if the Compensation Committee so permits, by delivery of
shares of Common Stock already owned by the optionee or delivery of a
promissory note. The exercise price may also be delivered to Fortress by a
broker pursuant to irrevocable instructions to the broker from the
optionee.
At the discretion of the Compensation Committee, stock options
granted under the Option Plan may include a "re-load" feature pursuant to
which an optionee exercising an option by the delivery of shares of Common
Stock would automatically be granted an additional stock option (with an
exercise price equal to the fair market value of the Common Stock on the
date the additional stock option is granted) to purchase that number of
shares of Common Stock equal to the number delivered to exercise the
original stock option. The purpose of this feature is to enable
participants to exercise options using previously owned shares of Common
Stock while continuing to maintain their previous level of equity ownership
in Fortress.
Stock Option Grants
Pursuant to the Option Plan, the Company granted an affiliate of
the Manager options (the "Manager Awards") representing the right to
acquire 2,091,673 shares of Common Stock (or, at the election of the
Company, Units) (equal to 10% of the shares of Common Stock and Units of
the Company outstanding immediately upon the closing of the Original
Offering and the Private Placement). Such Manager Awards will have an
exercise price per share of $20.00, with such price subject to adjustment
as necessary to preserve the value of such Manager Awards in connection
with the occurrence of certain events (including capital dividends and
capital distributions made by the Company). Additional Manager Awards may
be granted to the Manager (or an affiliate of the Manager) or to employees
of the Manager (or an affiliate of the Manager) in connection with the
issuance of additional stock by the Company, subject to the approval of the
Compensation Committee of the Board of Directors. Manager Awards granted in
connection with any future issuance of equity interests in the Company will
have an exercise price per share of Common Stock equal to the initial
offering price of such additional equity interests, subject to adjustment
as necessary to preserve the value of such options in connection with the
occurrence of certain events. The Manager Awards granted at the closing of
the Original Offering and the Private Placement will not be exercisable
until the date (the "Option Effective Date") that is the earlier to occur
of (1) the date that a registration statement filed by Fortress under the
Securities Act, registering the sale of any common stock of Fortress, is
declared effective by the Securities and Exchange Commission and (2) June
5, 1999 (the first anniversary of the Closing Date). From and after the
Option Effective Date, one thirtieth (1/30) of the Manager Awards will
become exercisable on the first day of each of the following thirty
calendar months, or earlier upon the occurrence of certain events, such as
a change of control of the Company or the termination of the Management
Agreement, or such other vesting schedule as the Compensation Committee of
the Board of Directors may determine. The Manager Awards expire on the
tenth anniversary of June 10, 1998, the first closing date of the Original
Offering (the "First Closing Date"). The Manager Awards will be
administered by the Compensation Committee, a majority of whose members
will be Independent Directors.
Liability and Indemnification of Officers and Directors
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 (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action.
The Charter contains such a provision which eliminates such liability to
the maximum extent permitted by the MGCL.
The Charter authorizes Fortress, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a)
any present or former director or officer of Fortress or (b) any individual
who, while a director of Fortress and at the request of Fortress, serves or
has served as a director, officer, partner or trustee of another
corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise from and against any claim
or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of Fortress. The Bylaws obligate Fortress, 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 (a) any present
or former director or officer of Fortress who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director of Fortress and at the request of Fortress, serves or
has served as a director, officer, partner or trustee of another
corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to
the proceeding by reason of his service in that capacity. The Charter and
Bylaws also permit Fortress to indemnify and advance expenses to any person
who served a predecessor of Fortress in any of the capacities described
above and to any employee or agent of Fortress or a predecessor of
Fortress.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does 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, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal
benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. 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 and (b) a written
undertaking 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. See "Description of Securities -- Limitation of
Liability and Indemnification of Directors and Officers." Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling Fortress pursuant
to the foregoing provisions, Fortress has been informed that in the opinion
of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, the total
number of shares of Common Stock beneficially owned, and the percent so
owned, by (i) each person known by Fortress to own more than 5% of the
Common Stock, (ii) each of Fortress' directors and executive officers and
(iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership (1)
--------------------------------------------------------
Number
Name and Address of Beneficial Owner of Shares Percent
- --------------------------------------------------------- --------------------------- -----------------------
<S> <C> <C>
Fortress Principal Investment Holdings LLC (2)........... 2,825,747 (3) 13.4% (4)
Wallace R. Weitz & Company (5)........................... 2,875,142 13.7% (4)
Wellington Management (6)................................ 1,500,000 7.1% (4)
Wesley R. Edens (2)...................................... 2,825,747 (7) 13.4% (4)
Robert I. Kauffman (2)................................... 2,825,747 (7) 13.4% (4)
Randal A. Nardone (2).................................... 2,825,747 (7) 13.4% (4)
Erik P. Nygaard (2)...................................... 2,825,747 (7) 13.4% (4)
Mark H. Burton (2)....................................... __ __
Douglas A. Jacobs (2).................................... __ __
Stuart A. McFarland (2).................................. __ __
All directors and executive officers as a group
(eight persons)................................. 2,825,747 (5) 13.4% (4)
</TABLE>
- -----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Shares of Common
Stock subject to options or warrants currently exercisable, or
exercisable within 60 days of the date hereof, are deemed
outstanding for computing the percentage of the person holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person.
(2) The address of Fortress Principal Investment Holdings LLC and all
officers and directors listed above are in care of Fortress.
(3) Includes 5 shares issuable upon redemption of 5 Units in the
Operating Partnership owned by Fortress Principal Investment Group
LLC. Includes 140,444 shares underlying Manager Awards representing
2/30ths of the 2,091,673 shares (representing 10% of the total
outstanding equity of the Company upon completion of the Original
Offering and the Private Placement) underlying Manager Awards,
1/30th of which shall be exercisable each month after the
Registration Statement, of which this Prospectus forms a part,
becomes effective. See "Management -- Stock Options" for a
description of the Manager Awards. Excludes 1,951,234 shares issued
pursuant to Manager Awards which are not currently exercisable.
(4) Percentage amount assumes the exercise by such persons of all
options to acquire shares of Common Stock and no exercise by any
other person.
(5) The address for Wallace R. Weitz & Company ("Weitz") is 1125 South
103rd Street, Omaha, NE 68124. Weitz, by agreement with the Board,
currently owns 13.7% of the Common Stock of the Company and is
restricted in its ownership of the Common Stock to a maximum of
14.99%.
(6) The address for Wellington Management is 75 State Street, Boston,
MA 02109.
(7) All shares are held by Fortress Principal Investment Holdings LLC or
Fortress Principal Investment Group LLC, in which Messrs. Edens,
Kauffman, Nardone and Nygaard own all of the beneficial interests.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Manager manages the operations of the Company pursuant to the
Management Agreement, for which it receives the fees described herein.
Messrs. Edens, Kauffman, Nardone and Nygaard, executive officers and, in
the case of Messrs. Edens and Kauffman, directors of Fortress, are the
founders and principal owners of the Manager. As a result, the Management
Agreement was not negotiated in an arms-length transaction. See "The
Manager and the Management Agreement -- The Management Agreement," "--
Management Incentives," "-- Limits of Responsibility," "-- Certain
Relationships; Conflicts of Interest" and "Management -- Stock Options."
In addition, Fleet National Bank provided the Company with
approximately $19 million in financing in connection with the purchase of
an office building in San Diego, CA, for which Fleet received an up-front
fee of approximately $108,000. Douglas Jacobs, a Director of Fortress, is a
Senior Vice President and Treasurer of Fleet Financial Group.
The Company has not entered into any other transactions in which
any other director or officer or stockholder of the Company or the Manager
had any material interest.
USE OF PROCEEDS
The Selling Stockholders will receive all of the proceeds from the
sale of the Offered Securities. The Company will not receive any proceeds
from the sale of the Offered Securities. The net proceeds from the Original
Offering were used to make the investments described under "The Company --
Investments."
DISTRIBUTION POLICY
In order to avoid corporate income taxation on the earnings that
it distributes, Fortress must distribute to its stockholders an amount at
least equal to (i) 95% of its REIT taxable income (determined before the
deduction for dividends paid and excluding any net capital gain) plus (ii)
95% of the excess of its net income from foreclosure property (as defined
in Section 856 of the Code) over the tax imposed on such income by the Code
less (iii) any excess noncash income (as determined under the Code). See
"Federal Income Tax Considerations." The actual amount and timing of
distributions, however, will be at the discretion of the Board of Directors
and will depend upon the financial condition of Fortress in addition to the
requirements of the Code.
Subject to the distribution requirements referred to in the
immediately preceding paragraph, Fortress intends, to the extent
practicable, to invest substantially all of the principal from repayments,
sales and refinancings of the Company's assets in Real Estate-Related
Assets and Other Assets. Fortress may, however, under certain
circumstances, make a distribution of principal or of assets. Such
distributions, if any, will be made at the discretion of Fortress' Board of
Directors.
It is anticipated that distributions generally will be taxable as
ordinary income to non-exempt stockholders of Fortress, although a portion
of such distributions may be designated by Fortress as long-term capital
gain or may constitute a return of capital. Fortress will furnish annually
to each of its stockholders a statement setting forth distributions paid
during the preceding year and their federal income tax status. For a
discussion of the federal income tax treatment of distributions by
Fortress, see "Federal Income Tax Considerations -- Taxation of the
Company" and "-- Taxation of Taxable U.S. Stockholders."
The declaration and payment of dividends by a Sister Co., if any,
will be made by the Sister Co.'s board of directors from time to time based
on such considerations as the Sister Co.'s board of directors deems
relevant, will be payable only out of funds legally available therefor
under the law of the state of the Sister Co.'s formation and will be
subject to any limitations which may be contained in the debt instruments
of the Sister Co.
PRICE RANGE OF COMMON STOCK
There is no established market for the Common Stock, which is not
listed on any securities exchange, and trading in the Common Stock has not
been quoted on any interdealer or over-the-counter bulletin board since the
Original Offering. The Common Stock is eligible for trading in the Private
Offering, Resales and Trading through Automated Linkages Market of the
National Association of Securities Dealers, Inc. (the "PORTAL Market"). As
of April 30, 1999, there were approximately 320 holders of record of
Fortress's Common Stock.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The selected historical consolidated financial information set
forth below has been derived from Fortress' audited financial statements.
The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the
Consolidated Financial Statements and Notes thereto each included elsewhere
herein. Dollar amounts are expressed in thousands except per share data.
<TABLE>
<CAPTION>
Historical
For the Period
May 11, 1998 to
OPERATING INFORMATION: December 31, 1998
---------------------
Revenues:
<S> <C>
Rental revenue $ 20,297
Interest income 18,962
Gain on resolution of loans 2,584
Escalation and other income 4,045
--------------
Total revenues 45,888
--------------
Expenses:
Interest expense 12,693
Property operating expenses and real estate taxes 7,027
Management fee 6,000
Depreciation and amortization 4,165
General and administrative and other expenses 3,502
Loan servicing fees 1,291
--------------
Total Expenses 34,678
--------------
Income Before Minority Interest 11,210
Minority Interest in Income of Consolidated Subsidiaries (570)
--------------
Net Income $ 10,640
==============
Net Income per Share Basic and Diluted $ 0.51
==============
Dividends Declared per Share (1) $ 0.55
==============
Weighted Average Number of Common Shares Outstanding, Basic and Diluted 20,862,000
==============
BALANCE SHEET DATA:
December 31, 1998
---------------------
Cash $ 97,333
Revenue - producing real estate, net 383,073
Loans receivable, net 216,717
Total assets 765,650
Debt 336,845
Stockholders' equity 384,924
OTHER INFORMATION:
Cash flow provided by (used in):
Operating activities $ 14,507
Investing activities (638,613)
Financing activities 721,670
Funds From Operations (2) $ 14,337
(see notes on following page)
</TABLE>
(1) In addition to the dividends declared in 1998, the Company declared a
special dividend of approximately $0.04 per share in 1999 in order to
distribute 100% of 1998 taxable income.
(2) The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 (the "White Paper") defines Funds From
Operations as net income (loss) (computed in accordance with generally
accepted accounting principles ("GAAP")), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate
related depreciation and amortization. The Company believes Funds From
Operations is helpful to investors as a measure of the performance of
a REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors
with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. The Company computes Funds
From Operations in accordance with the standards established by the
White Paper, which may differ from the methodology for calculating
Funds From Operations utilized by other REITs, and, accordingly, may
not be comparable to such other REITs. Funds From Operations does not
represent amounts available for management's discretionary use because
of needed capital expenditures, debt service obligations, property or
loan acquisitions, dividends and distributions or other commitments
and uncertainties. Funds From Operations should not be considered as
an alternative to net income (determined in accordance with GAAP) as
an indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to
make dividends/distributions. Funds From Operations is calculated as
follows (dollars in thousands):
Net income $10,640
Real estate depreciation and
amortization 3,697
-------
Funds From Operations $14,337
=======
CONSOLIDATED UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
The consolidated unaudited pro forma financial statements set forth
below present the consolidated historical financial statements of Fortress
and its subsidiaries as of December 31, 1998 and for the period from May
11, 1998 (date of formation) to December 31, 1998, and have been derived
from the Company's audited consolidated financial statements. The pro forma
consolidated financial statements of the Company assume the Company will
maintain its status as a REIT and have been prepared to show the effects of
certain significant transactions entered into by the Company since its
formation. These transactions include the purchase of (i) thirteen
properties leased to the General Service Administration of the U.S.
Government (the "GSA Properties") purchased at various times during 1998
and the first quarter of 1999 and the related financing arrangements, and
(ii) seven properties leased to Bell Canada (the "Bell Canada Properties")
purchased in October of 1998 (collectively, referred to as the "Pro Forma
Transactions"). These transactions are fully described in the related notes
to the pro forma financial statements. The other assets acquired by the
Company relate principally to the purchase of individual mortgage loans and
mortgage loan pools. In management's judgment, the Company's investment in
loans does not constitute the purchase of businesses. Accordingly, effects
of these transactions are not included in the pro forma adjustments.
The pro forma statement of operations assumes the Pro Forma
Transactions occurred on January 1, 1998, unless otherwise indicated in the
accompanying notes. The pro forma balance sheet assumes that the Pro Forma
Transactions (along with the associated debt) consummated subsequent to
December 31, 1998, occurred on December 31, 1998. The pro forma statement
of operations presents the entire 1998 fiscal year which includes a period
of approximately four and one half months prior to the Company's actual
existence. For this four and one half month period, only the effects of the
Pro Forma Transactions are included and no adjustments have been made to
include the pro forma effects of certain administrative expenses or
operations from the Company's other investments and related debt.
Accordingly, the pro forma financial statements are not necessarily
indicative of what the actual financial position or results of operations
of the Company would have been as of or for the year ended December 31,
1998, nor do they purport to be indicative of the financial position or the
results of operations of future periods. The financial statements should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the audited Historical Consolidated
Financial Statements and the Notes thereto each included elsewhere herein.
<TABLE>
<CAPTION>
Fortress Investment Corp. and Subsidiaries
Unaudited Consolidated Pro Forma Balance Sheet
December 31, 1998
(In thousands)
Historical Pro forma Ad
(A) justments Pro Forma
-------------------- -------------------------- ------------------
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 97,333 $ (4,827)M $ 92,506
Marketable securities available for sale,
at fair value 9,521 - 9,521
Land 38,677 1,600M 40,277
Building and improvements, net 344,396 25,196M 369,592
Loans receivables, net 216,717 - 216,717
Foreclosed real estate 3,813 - 3,813
Accounts receivable 6,122 - 6,122
Accrued interest receivable 2,122 - 2,122
Deferred rent 5,072 - 5,072
Deposits 12,958 (3,518)M 9,440
Investment in unconsolidated subsidiary 11,973 - 11,973
Deferred hedge of anticipated transaction 13,103 - 13,103
Deferred costs, net 2,760 169M 2,929
Prepaid expenses and other assets, net 1,083 - 1,083
-------------------- -------------------------- ------------------
Total Assets $ 765,650 $ 18,620 $ 784,270
==================== ========================== ==================
Liabilities, Minority Interest and Stockhold
ers' Equity:
Liabilities:
Repurchase agreements $ 102,689 $ - $ 102,689
Loan payable 234,156 18,620M, O 252,776
Unearned rental revenue 1,184 - 1,184
Dividends payable 6,275 - 6,275
Due to manager 1,783 - 1,783
Deferred hedge liabilities 17,388 - 17,388
Derivative interest payable 5,293 - 5,293
Other liabilities 7,354 - 7,354
-------------------- -------------------------- ------------------
Total liabilities 376,122 18,620 394,742
-------------------- -------------------------- ------------------
Commitments and contingencies - - -
Minority interest 4,604 - 4,604
-------------------- -------------------------- ------------------
Stockholders' Equity:
Preferred stock, par value $.01 per share autho
rized 100,000,000 shares, no shares issued
and outstanding - - -
Common stock, $.01 par value, 500,000,000
shares authorized, 20,916,739 shares issued
and outstanding 209 - 209
Additional paid-in capital 388,045 - 388,045
Dividends in excess of earnings (864) - (864)
Accumulated other comprehensive income
(loss) (2,466) - (2,466)
-------------------- -------------------------- ------------------
Total stockholders' Equity 384,924 - 384,924
-------------------- -------------------------- ------------------
Total Liabilities, Minority Interest and $ 765,650 $ 18,620 $ 784,270
Stockholders' Equity
==================== ========================== ==================
</TABLE>
<TABLE>
<CAPTION>
Fortress Investment Corp. and Subsidiaries
Unaudited Consolidated Pro Forma Statement of Operations and
Comprehensive Income For the Year Ended December 31, 1998
(Amounts In thousands Except Per Share Data)
May 11, 1998 to Year Ended
December 31, 1998 December 31,
Historical GSA Bell Canada 1998
(A) (B) (C) Pro Forma
--------------------- ------------------ -------------------- ----------------
Revenues:
<S> <C> <C> <C> <C>
Rental revenue $ 20,297 $ 19,133D $ 2,570I $ 42,000
Interest income 18,962 - - 18,962
Gain on resolution of loans 2,584 - - 2,584
Dividends on marketable securities,
available for sale 713 - - 713
Escalations and other income 3,332 1,102E 4,431J 8,865
--------------------- ------------------ -------------------- ----------------
Total revenues 45,888 20,235 7,001 73,124
--------------------- ------------------ -------------------- ----------------
Expenses:
Interest expense on loan payable 5,992 7,295F - 13,449
162M -
Interest expense on purchase agree
ments and other 6,701 - - 6,701
Property operating expenses 7,027 5,397G 4,262K 16,686
Management fee 6,000 6,000
General and administrative expenses 2,396 - - 2,396
Depreciation and amortization 4,165 4,023H 682L 8,870
Loan servicing fees 1,291 - - 1,291
Other expenses 1,106 - - 1,106
--------------------- ------------------ -------------------- ----------------
Total Expenses 34,678 16,877 4,944 56,499
--------------------- ------------------ -------------------- ----------------
Income before minority interest 11,210 3,358 2,057 16,625
Minority interest in consolidated sub
sidiaries (570) - - (570)
--------------------- ------------------ -------------------- ----------------
Net income 10,640 3,358 2,057 16,055
--------------------- ------------------ -------------------- ----------------
Other comprehensive income:
Foreign currency transaction adjust
ments (231) - - (231)
Unrealized loss on securities (2,235) - - (2,235)
--------------------- ------------------ -------------------- ----------------
Other comprehensive income (loss) (2,466) - - (2,466)
--------------------- ------------------ -------------------- ----------------
Comprehensive income $ 8,174 $ 3,358 $ 2,057 $ 13,589
===================== ================== ==================== ================
Net income per share basic and di
luted (N) $ 0.51 - - $ 0.77
===================== ================== ==================== ================
Weighted average number of com 20,862,000 - - 20,916,739
mon shares outstanding, basic and
diluted
===================== ================== ==================== ================
</TABLE>
Fortress Investment Corp. and Subsidiaries
Notes to Unaudited Consolidated Pro Forma Financial Statements
(A) Historical amounts were derived from the audited consolidated financial
statements of the Company as of and for
the period May 11, 1998 (date of formation) to December 31, 1998.
(B) The pro forma operations of the GSA Properties contain the historical
unaudited results of operations of 13 of the GSA Properties for the period
from January 1, 1998 to the date of acquisition of the respective assets.
Two of the GSA Properties commenced operations in February and May of 1998,
and accordingly, the historical results of operations for these two
properties are from commencement of their operations to the purchase
closing dates. One of the GSA Properties (described in Note M) was
purchased in March of 1999, and commenced operations in November of 1998.
Therefore, historical operations are included for this property from the
commencement of its operations to December 31, 1998.
The GSA Properties purchased during 1998 were as follows:
<TABLE>
<CAPTION>
Initial Costs
-----------------------------------
Commence-
Building and Date of ment of
Type of Property Location Land Improvements Encumbrances Acquisition Operations
<S> <C> <C> <C> <C> <C> <C>
Office Building Huntsville, Alabama $ 351,000 $ 12,180,000 $ 8,872,000 7/7/98 1/1/98
Office Building Sacramento, California 8,125,000 55,687,000 43,991,000 7/7/98 1/1/98
Office Building Aurora, Colorado 720,000 12,167,000 9,023,000 7/7/98 2/6/98
Office Building Parfet, Colorado 459,000 5,388,000 4,470,000 7/7/98 1/1/98
Office Building Washington, D.C. 6,482,000 29,749,000 27,182,000 7/31/98 1/1/98
Office Building Concord, Massachu
setts 2,100,000 14,175,000 11,528,000 7/27/98 5/1/98
Warehouse Burlington, New Jersey 4,850,000 89,390,000 66,091,000 7/7/98 1/1/98
Office Building Callowhill, Pennsylva
nia 1,095,000 12,977,000 9,442,000 7/7/98 1/1/98
Office Building Providence,
Rhode Island 1,630,000 16,824,000 13,420,000 7/7/98 1/1/98
Office Building Houston, Texas 2,800,000 11,092,000 10,366,000 7/10/98 1/1/98
Office Building Norfolk, Virginia 318,000 5,044,000 4,046,000 7/7/98 1/1/98
Office Building Suffolk, Virginia 924,000 36,450,000 25,725,000 7/7/98 1/1/98
--------------- ----------------- --------------
TOTALS: $ 29,854,000 $ 310,123,000 $234,156,000
================ ================== ============
</TABLE>
(C) The pro forma operations of Bell Canada Properties contain the pro
forma unaudited results of operations of the seven properties purchased in
the Bell Canada acquisition. These properties were owner-occupied until
March 26, 1998, and therefore, had no rental operations until that time.
Accordingly, the pro forma results of operations for these properties are
reflected for the period from March 27, 1998 to October 7, 1998 (the date
of purchase). The total cost of such properties was $55,666,000 allocated
as follows: land $8,822,000, buildings $46,844,000.
(D) Reflects leases in place on real estate at the time of acquisition.
Lease revenue was included for the GSA properties for the period from
January 1, 1998 to the date of acquisition for the ten properties which had
operations as of January 1, 1998. For the two properties which were not
operating as of January 1, 1998, lease revenue was determined from the
commencement of operations of the respective properties to the dates of
acquisition. For the property purchased in 1999 which commenced operations
in November of 1998 (described in Note M), lease revenue was included from
the commencement of operations to December 31, 1998.
(E) Represents pro forma adjustments for escalations and other income for
the properties described in (B) above, including annual operating expense
escalations and real estate tax expense reimbursements.
(F) Reflects pro forma effects of financing the purchase of GSA Properties.
A $234,156,000 financing facility was obtained in July of 1998 to complete
the acquisition of twelve of the properties with an interest rate of 3
month LIBOR + 68 bp. The interest rate on this facility on December 31,
1998 was 5.74% The amount financed has been allocated to each property and
associated pro forma interest expense has been included from the date for
which operations are reflected.
(G) Represents pro forma adjustments for property expenses for the
properties described in (B) above, including insurance, real estate taxes,
repairs and maintenance, labor, cleaning, utilities and management fees.
(H) Represents pro forma adjustments for depreciation and amortization for
the properties described in (B) above. Building costs are depreciated over
a 40 year life, leasing commissions are amortized over the lives of the
related leases.
(I) Represents pro form adjustments for rental revenue under net leases for
the properties described in (C) above for the period from March 27, 1998 to
October 7, 1998.
(J) Represents pro forma adjustments for escalations and other income for
the properties described in (C) above, including property tax and operating
expense reimbursements.
(K) Represents pro forma adjustments for property operating expenses for
the properties described in (C) above, including repairs and maintenance,
real estate taxes, parking, utilities and management fees.
(L) Represents pro forma adjustments for depreciation and amortization for
the properties described in (C) above. Building cost is amortized over a 40
year life with a half month amortization of acquisition.
(M) Reflects pro forma effects of the purchase of the San Diego GSA
Property purchased in March 1999 for a purchase price of $26,796,000. The
purchase price was partially financed with an $18,620,000 interest only
mortgage with an interest rate of the 1 month LIBOR + 140 bp. The interest
rate on this facility at December 31, 1998 was 6.42%. Financing costs
associated with obtaining the debt were approximately $169,000.
(N) For the period May 11, 1998 to December 31, 1998, the Company's
historical dividends declared totaled $11,504,000 or approximately $0.55
per share. In addition, in order to distribute 100% of estimated taxable
income for 1998, the Company declared a special dividend of approximately
$875,000 ($0.04 per share) in 1999 related to its 1998 taxable year. Based
upon the 1998 pro forma net income for the entire calendar year of
$16,055,000, the estimated cash distribution per unit required to
distribute 100% of taxable income for the period would be $0.81 per share.
For purposes of calculating pro forma net income per share and estimated
pro forma distribution per share, it was assumed that all of the Company's
shares of common stock had been outstanding since January 1, 1998.
(O) The Bell Canada properties were not financed upon their acquisition in
1998. In March 1999, a loan in the amount of $35.1 million was obtained
which was secured by the properties leased to Bell Canada. No adjustment
has been made to either the pro forma balance sheet or pro forma statement
of operations for this subsequent financing.
(P) The fair value of the option to be granted to the Manager is
approximately $3,600,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following should be read in conjunction with the
Historical Consolidated Financial Statements and Notes thereto of Fortress
and the Unaudited Consolidated Pro Forma Financial Statements of Fortress,
each contained elsewhere herein. The Consolidated Financial Statements of
the Company include Fortress and its majority-owned subsidiaries, which
include the Operating Partnership, its primary investment subsidiary. Due
to its recent formation and the relatively short period of operations
presented in the Consolidated Financial Statements, Management does not
believe that the information presented herein is necessarily indicative of
expected future financial performance.
General
On June 10, 1998 and July 1, 1998, Fortress consummated
the Original Offering by issuing an aggregate of 18, 231,441 shares of
Common Stock. The proceeds of the Original Offering, net of expenses, were
approximately $340 million. In addition, Fortress Principal Investment
Holdings LLC, an affiliate of the Manager, paid approximately $50 million
to Fortress and the Operating Partnership in exchange for 2,681,010 shares
of Common Stock of Fortress and Fortress Principal Investment Group LLC, an
affiliate of the Manager, contributed a nominal amount in exchange for 5
Units in the Operating Partnership. In addition, Fortress issued 4,288
shares to certain employees of the Manager for an aggregate purchase price
of $80,000.
Results of Operations
The Company was formed on May 11, 1998. Net income for the period
May 11, 1998 through December 31, 1998 was $10,640,000, or $0.51 per share.
The Company's primary sources of revenue, totaling $45,888,000, were as
follows:
o $18,819,000 of rental revenue was attributable to the GSA
Properties for the period July 7, 1998 (primary date of
acquisition) to December 31, 1998 and $1,478,000 of rental
revenue was attributable to the Bell Canada Portfolio for the
period October 7, 1998 (primary date of acquisition) to
December 31, 1998
o $2,584,000 of gain on resolution of loans which were acquired
or originated during such time period
o $18,962,000 of interest income, including (among other items):
o $6,263,000 interest income from Loan Portfolios
o $8,340,000 interest income from Financings
o $4,359,000 interest income generated primarily from
temporary investments of proceeds from
the Original Offering
o $2,341,000 of rental escalation (expense recovery) income
The Company incurred expenses of $34,678,000 during the period from May 11,
1998 through December 31, 1998 consisting primarily of the following:
o $6,000,000 of base management fee payable to the Manager
pursuant to the Management Agreement. No incentive fees were
incurred during the period
o $6,153,000 of interest expense on the Repo Financing and the
Second Repo Financing and $548,000 of interest on interest
rate swaps
o $5,992,000 of interest expense on the loan related to the GSA
Properties
o $4,540,000 of property operating expenses
o $4,165,000 of depreciation and amortization expense
o $2,396,000 of general and administrative expenses,
principally accounting fees, manager cost reimbursement and
shareholder related expenses.
o $1,662,000 of real estate taxes attributable to the GSA
Properties and $825,000 of real estate taxes attributable to
the Bell Canada Portfolio
o $1,291,000 of loan servicing fees relating to the Loan
Portfolios
o $1,106,000 of other expenses, principally legal fees
An analysis of the various operating revenue and expense amounts
(excluding depreciation, interest expense and general and administrative
expenses) for the properties leased to GSA and Bell Canada for the period
May 11, 1998 to December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
GSA Bell Canada Total
------------------- --------------- ---------------
<S> <C> <C> <C>
Rental revenue $ 18,819 $ 1,478 $ 20,297
Escalation income 553 1,788 2,341
------------------- --------------- ---------------
Total revenue 19,372 3,266 22,638
------------------- --------------- ---------------
Property operating expenses 3,799 741 4,540
Real estate taxes 1,662 825 2,487
------------------- --------------- ---------------
Direct operating expenses 5,461 1,566 7,027
------------------- --------------- ---------------
Income from operations $ 13,911 $ 1,700 $ 15,611
=================== =============== ===============
</TABLE>
An analysis of the components of interest income and related
amounts for the period May 11, 1998 to December 31, 1998 is shown below
(dollar amounts in thousands). Substantially all investments in loan pools
and individual loans were made on August 14, 1998. The other interest
income relates principally to temporary investments
of offering proceeds.
<TABLE>
<CAPTION>
Balance Out
standing De Gain (Loss)
Initial Invest cember 31, Interest In on Resolu
ment 1998 come tion
-------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Loan Pools $ 169,322 $ 80,373 $ 6,263 $ 3,344
Individual Loans 255,118 136,344 8,340 (746)
Other -- -- 4,359 (14)
-------------------- ----------------- --------------- ---------------
Total $ 424,440 $ 216,717 $ 18,962 $ 2,584
==================== ================= =============== ===============
</TABLE>
Based upon simple average of invested balances, the combined
income (interest plus gain on loan resolutions) represented an annualized
19% return for the period on loan pools (12.8% excluding gains on
resolutions) and a 11% return on individual loans (before deduction of
related financing costs and general and administrative expenses).
For a further analysis of revenue and expense amounts by business
segment refer to Note 5 of the Company's Consolidated Financial Statements.
For the period May 11, 1998 to December 31, 1998 the Company
realized net gains of approximately $2.6 million on resolution of loans and
$2.7 million in accretion of loan discounts (interest income). These items
are significantly affected by changes in underlying collateral values and
the ability of borrowers to service the indebtedness. Future amounts are
subject to market conditions and revisions as part of the ongoing
estimation process.
The Company had approximately $513,000 of deferred organizational
expenses at December 31, 1998 which will be written off in the first
quarter of 1999 (as the cumulative effect of a change in accounting
principle) in accordance with a new accounting pronouncement (SOP 98-5).
Generally, the income derived from an investment is affected by
the amount and cost of financing that is available with respect to such
investment. The third quarter of 1998 saw an extreme tightening of debt
liquidity. In cases of such tightening, the Company may encounter
difficulty obtaining financing for its investments and, even when such
financing is available, the rates charged by lenders may be unattractive to
the Company. Subsequent to the third quarter of 1998, financing has become
significantly more available but the cost of debt and the amounts of
leverage available have not returned to the levels seen prior to that time.
This fact may impact the Company's revenues in the future as it explores
financing alternatives. The Company currently has no available credit line
and no indebtedness other than the indebtedness discussed below under "--
Acquisition Indebtedness."
Acquisition Indebtedness
GSA Properties. In July 1998, the Company (and certain of its
subsidiaries) entered into a $234.2 million loan agreement with a large
insurance company. This loan financed the GSA Properties and was funded by
medium term notes issued by an affiliate of the lender. The loan bears
interest at a rate equal to three-month LIBOR plus 0.68% and is recourse
only to the GSA Properties. In August 2002, the interest rate increases to
LIBOR plus 400 basis points. After three years, all excess cash generated
by the collateral will be applied to reduce the principal amount of the
loan. The loan matures in February 2008. Pursuant to the related loan
agreement, the Fortress borrower covenanted to maintain a tangible net
worth equal to or greater than the greater of (i) 15% of the aggregate
all-in cost of the GSA Properties and (ii) $20 million. As the loan does
not amortize prior to its fourth year, the principal balance as of December
31, 1998 remained approximately $234.2 million.
Bell Canada Portfolio. In March 1999, the Company (and certain of
its subsidiaries) entered into a $35.1 million loan agreement with three
Canadian institutions. This loan provided leverage for the Company's
investment in the Bell Canada Portfolio and bears interest at a fixed rate
equal to 7.25%. The loan is secured primarily by the
properties in the Bell Canada Portfolio and matures in April 2002.
Canadian Loan Portfolio. This portfolio was financed by a loan
from the Canadian affiliate of a large U.S. investment bank. The loan bears
interest at a rate equal to one month Can BA plus 1.5% and had a balance of
$29,957,000 at December 31, 1998. Fortress prepaid the loan in January
1999.
Building Materials Retailer Loan and U.S. Commercial Loan
Portfolio: The Company (and certain of its subsidiaries) entered into a
$105.2 million repurchase agreement (the "Repo Financing") with a large
investment bank effective as of August 14, 1998. A $57.5 million portion of
the Repo Financing related to the Building Materials Retailer Loan and the
remaining $47.7 million related to the U.S. Commercial Loan Portfolio. The
Repo Financing is recourse to the specific assets with an ultimate
guarantee from the Company. Borrowings under the Repo Financing bear
interest at an interest rate equal to one-month LIBOR plus 1.25% per annum.
The Repo Financing matures on August 14, 1999. In December 1998, Fortress
paid off the portion of the Repo Financing relating to the U.S. Commercial
Loan Portfolio from the proceeds of the auction described above under " --
Loan Portfolios - U.S. Commercial Loan Portfolio". As of December 31, 1998,
the balance of the Repo Financing was approximately $53.3 million. The Repo
Financing requires that the Company's indebtedness never exceed six times
the consolidated net worth of the Company and its subsidiaries. It also
requires that such consolidated net worth shall never fall below $300
million.
Residential Loan Portfolio, Residential Servicer Loan and Second
Residential Servicer Loan: The Company (and certain of its subsidiaries)
also entered into a repurchase agreement (the "Second Repo Financing") with
another large investment bank effective as of August 14, 1998. The balance
at the close of this repo was approximately $76.2 million, with
approximately $33.3 million relating to the Residential Loan Portfolio,
approximately $31.1 million relating to the Residential Servicer Loan and
approximately $11.9 million relating to the Second Residential Servicer
Loan. The Second Repo Financing is recourse to the specific assets with an
ultimate guarantee from the Company. Borrowings under the Second Repo
Financing bear interest at an interest rate equal to one-month LIBOR plus
3.00% per annum. The Second Repo Financing had different maturities for the
different assets financed thereby. Fortress paid off the portions of the
Second Repo Financing relating to the Residential Servicer Loan and the
Second Residential Servicer Loan in December 1998. The maturity date for
the portion of the Second Repo Financing relating to the Residential Loan
Portfolio is August 14, 1999. The outstanding balance of the Second Repo
Financing on December 31, 1998 was $19.4 million. The Second Repurchase
Agreement requires that the consolidated net worth of the Company and its
subsidiaries never fall below $325 million.
When the Company sold a fifty percent participation in its
Residential Loan Portfolio in October 1998, the purchaser of the
participation agreed to assume one-half of the obligations under the
portion of the Second Repo Financing related to the Residential Loan
Portfolio.
French Commercial Mortgage Loan: This asset was financed by a
$53.4 million repurchase agreement from a large U.S. investment bank and
the loan was paid off in December 1998, simultaneously with the payoff on
the asset.
<TABLE>
<CAPTION>
Balance at
Borrowings at December 31, 1998 December 31, 1998 Terms Maturity
- -------------------------------------------- -------------------- ---------------------------- ------------------
<S> <C> <C> <C>
GSA Properties $ 234,156,000 3 month Libor plus 0.68% February 2008
Canadian Loan Portfolio 29,957,000 One month Can BA plus 1.5% February 1999
Building Materials Retailer Loan and
U.S. Commercial Loan Portfolio 53,348,000 1 month Libor plus 1.25% August 1999
Residential Loan Portfolio, Residential
Servicer Loan and Second Residen
tial Servicer Loan 19,384,000 1 month Libor plus 3.00% August 1999
--------------------
$ 336,845,000
====================
</TABLE>
Liquidity and Capital Resources
Liquidity is a measurement of the Company's ability to meet
potential cash requirements, including ongoing commitments to repay
borrowings, fund investments, engage in loan acquisition and lending
activities and for other general business purposes. Additionally, to
maintain its status as a REIT under the Code, the Company must distribute
annually at least 95% of its taxable income. The primary sources of funds
for liquidity for 1998 consisted of net cash provided by operating
activities, borrowings under loans and repurchase agreements and proceeds
from the Original Offering and the Private Placement and sales of certain
investments.
The Company's operating activities for the period May 11, 1998 to
December 31, 1998 provided cash flows of $14.5 million. The Company's
investing activities used cash flows of $638.6 million. Cash flows for
investing activities were used primarily to originate or purchase loans and
purchase revenue producing real estate. The Company's financing activities
provided cash flows of $721.7 million, and primarily consisted of proceeds
from issuance of common stock of $388 million and net borrowings under
loans payable and repurchase agreements of $337 million.
The Company's ability to execute its business strategy,
particularly the growth of its investment portfolio, depends to a
significant degree on its ability to obtain additional capital. The
Company's principal demands for liquidity are cash for operations,
including funds for its investments, interest expense associated with its
indebtedness, debt repayments and distributions to its shareholders. In the
short term (twelve months), the Company's principal sources of liquidity
are its existing cash balances and cash flows from operations along with
investment specific borrowings.
The Company has committed to purchase two build-to-suit office
buildings which will be leased primarily to the GSA. These buildings are
located in Kansas City, Kansas and Kansas City, Missouri and have a
combined purchase price of approximately $68.1 million. The Company intends
to finance a portion of the purchases but, even if such financing is
unavailable, the Company has committed to purchase the properties.
Short-term liquidity requirements also include the maturity of the
$72.7 million of repurchase agreement financing in August 1999 which the
Company expects to repay in part from repayments received on the underlying
collateral and refinancing of remaining balances. The Company's significant
long-term requirements include (a) the maturity of the loan relating to the
GSA Properties in February 2008 and (b) the maturity of the loan relating
to the Bell Canada Portfolio and GSA property in 2002. Because of the
amortization feature contained in the loan relating to GSA Properties,
though, the balloon payment will be significantly less than the current
principal balance of the loan. The refinancing risk related to the Bell
Canada Portfolio loan is mitigated somewhat by the fact that the leases to
Bell Canada extend beyond the loan term and provide for large termination
fees upon Bell Canada's termination of the leases. The sources of long-term
liquidity are expected to include refinancing along with cash flow from
operations and possible additional equity.
To the extent that the Company accelerates or expands its
contemplated investment activity, additional capital may be required. The
Company expects that a portion of such additional capital requirements will
be funded through acquisition indebtedness and/or secured or unsecured
lines of credit. Thereafter, the Company expects that capital needs will be
met through a combination of net cash provided by operations (after
distributions), borrowings and additional debt and equity issuances.
Inflation
The Company's revenue-producing real estate properties at December
31, 1998 are leased to GSA and Bell Canada. The GSA leases provide for base
rental amounts which do not increase during the initial lease terms. The
Bell Canada leases provide for annual increases in base rents as well as
significant amounts due upon lease termination. With respect to the Bell
Canada leases, the lessee reimburses the Company for substantially all
operating expenses and property taxes plus an administrative fee. With
respect to the GSA leases, the lessee reimburses the Company for the
increase in the Consumer Price Index applied to the portion of the base
rent attributable to operating expenses as well as all increases in
property taxes over the base year. The Company has exposure to increasing
costs to the extent that the lessees do not reimburse the Company for
operating costs.
For the period May 11, 1998 (date of formation) to December 31,
1998, the Company's real estate operating expenses and related expense
recoveries (escalation income) were as follows (thousands of dollars):
Escalation income $ 2,341
=======================
Property operating expenses $ 4,540
Real estate taxes 2,487
-----------------------
Total $ 7,027
=======================
Funds From Operations
The White Paper on Funds From Operations approved by the Board of
Governors of NAREIT in March 1995 defines Funds From Operations as net
income (loss) (computed in accordance with GAAP), excluding items of an
unusual or nonrecurring nature such as gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation
and amortization. The Company computes Funds From Operations in accordance
with the standards established by the White Paper, which may differ from
the methodology for calculating Funds From Operations utilized
by other REITs, and, accordingly, may not be comparable to such other
REITs. In connection with the Company's investments in loans and pools of
loans, the Company considers gains and losses on resolution of such loans
to be a normal part of its recurring operations and as such, does not
exclude such gains and losses in arriving at Funds From Operations. Funds
From Operations does not represent amounts available for management's
discretionary use because of needed capital expenditures, debt service
obligations, property or loan acquisitions, dividends and distributions or
other commitments and uncertainties. Funds From Operations should not be
considered as alternatives to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make
dividends/distributions. The Company believes Funds From Operations is
helpful to investors as a measure of the performance of the Company
because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and
make capital expenditures.
Funds From Operations is calculated as follows for the period from
May 11, 1998 (date of formation) to December 31, 1998 (dollars in
thousands):
Net income $ 10,640
Real estate depreciation and amortization 3,697
-----------------
Funds From Operations $ 14,337
=================
Cash Flow Provided By (Used In):
Operating Activities $ 14,507
Investing Activities (638,613)
Financing Activities 721,670
Weighted average shares outstanding, basic and 20,862,000
diluted
=================
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to loss resulting from changes in
interest rates, foreign currency exchange rates, commodity prices and
equity prices. The primary market risks to which the Company is exposed are
interest rate risk, foreign currency exchange rate risk and equity price
risk. Interest rate risk and foreign currency exchange rate risk are highly
sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations
and other factors beyond the control of the Company. The Company's equity
holdings do not expose the Company to material market risk and thus has
been excluded from this analysis and not reported separately. All the
Company's market risk sensitive assets, liabilities and related derivative
positions are for non-trading purposes only.
Market Risk Exposure
Interest Rate Exposure
The Company's primary interest rate exposures relate to its
mortgage-related loans, cash and short term investments, real estate
leases, repurchase agreements, variable rate debt and interest rate swaps,
utilized for hedging purposes. Changes in the general level of interest
rates can affect the Company's net interest income, which is the difference
between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing
liabilities, by affecting the spread between the Company's interest-earning
assets and interest-bearing liabilities. Changes in the level of interest
rates also can affect, among other things, the ability of the Company to
originate and acquire loans, the value of the Company's mortgage-related
loans and real estate leases and other interest-bearing assets, and its
ability to realize gains from the sale of such assets. The Company utilizes
interest rate swaps in order to limit the effects of interest rates on its
operations.
Currency Rate Exposure
The Company's primary foreign currency exchange rate exposures
relate to its mortgage-related loans, cash and short term investments, real
estate leases, interest rate swaps and foreign currency forward contracts,
utilized for hedging purposes. The Company's principal currency exposure is
to the Canadian dollar. Changes in the currency rates can adversely impact
the fair values and earnings streams of the Company's international
holdings. The Company has attempted to mitigate this impact by utilizing
foreign currency forward contracts to hedge its net investment in its
foreign operations.
Risk Measurement: Sensitivity Analysis
The profitability of the Company may be adversely affected during
any period as a result of changing interest and foreign currency exchange
rates. It is the objective of the Company to attempt to control these
risks. As part of its control process, the Company measures its market
risk, related to its holdings of market risk sensitive assets, liabilities
and derivative contracts as discussed above, based on changes in interest
rates and foreign currency exchange rates utilizing a sensitivity analysis
methodology. The sensitivity analysis estimates the potential change in
fair values, cash flows and earnings based on a hypothetical 200 basis
point change (increase and decrease) in interest rates, a 10% change in
currency exchange rates, and equity prices. The Company used end of period
(December 31, 1998) market rates and re-priced its market risk sensitive
assets, liabilities and related derivatives in order to perform the
sensitivity analysis. The sensitivity analysis was separately calculated
for each of the Company's market risk exposures (interest rate and currency
rate).
The sensitivity analysis performed by the Company includes the
market risk sensitive portfolios described above in the Market Risk
Exposures section. The Company modeled the impact of changes in market
rates and prices on its fair values, cash flows and earnings as follows:
Fair Values
The potential loss in fair values is based on an immediate change
in:
o the net present values of the Company's interest rate
sensitive exposures resulting from a 200 basis point
change in interest rates; and
o the U.S. dollar equivalent balances of the Company's
currency exposures due to a 10% shift in currency
exchange rates.
Cash Flows and Earnings
The potential loss in cash flows and earnings is based on the
change in the Company's expected cash flows and earnings over a one-year
time horizon based on an immediate 100 and 200 basis point change in interest
rates and a 10% change in foreign currency exchange rates.
The sensitivity analysis is an estimate and should not be viewed
as predictive of the Company's future financial performance. There can be
no assurance that the Company's actual losses in a particular year will not
exceed the amounts indicated in the table below. Limitations in the
sensitivity analysis include:
o the market risk information is limited by the assumptions
and parameters established in creating the related
sensitivity analysis, including the impact of prepayment
speeds on the mortgage portfolio;
o non-performing discount loans reflect the estimated timing
of resolutions which result in repayment to the Company
o the model assumes that the composition of the Company's
assets and liabilities remain unchanged throughout the year.
As a result, such models are tools and do not substitute for the
experience and judgment of management, and the Company's corporate risk
management, asset-liability management, and hedging activities.
The tables below show the potential effect upon cash flows as a
percentage of annualized cash flow from operations of the Company's
interest rate and foreign currency exchange rate sensitive positions as of
December 31, 1998. The Company has selected cash flow as the most
appropriate measure to report from among the three alternatives (earnings,
cash flow and fair value) because of its importance in determining the
Company's ability to support operations, pay dividends and fund new
investments. Based upon the Company's positions at December 31, 1998,
interest rate sensitivity impacts cash flows primarily for the Company's
floating rate investments and borrowings and interest rate swaps. The swap
positions have the greatest impact on the analysis and, as the Company
modifies its positions going forward, the effects upon cash flows could
change significantly. It should also be noted that the effect upon earnings
will not necessarily follow the effect upon cash flows largely due to the
accounting treatment of hedge transactions.
Change in Interest Projected Percentage
Rate Change in Cash Flow
- ------------------------ -------------------------
- -200 Basis Points (26.0%)
- -100 Basis Points 13.0%
Base Interest Rate -
+100 Basis Points 13.0%
+200 Basis Points 26.0%
Change in Currency Projected Percentage
Exchange Rate Change in Cash Flow
- ------------------------ -------------------------
10% decrease in (28.0%)
Rate -
Base Interest Rate
10% increase in 28.0%
Rate
Year 2000 Compliance
Year 2000 Information and Readiness Disclosure Act
The Company supports the exchange of information relating to the
Year 2000 issue and designates the following information as the Year 2000
Readiness Disclosure within the meaning of the Year 2000 Information and
Readiness Disclosure Act. Information set forth herein regarding the Year
2000 compliance of non-Company products and services are "republications"
under the Year 2000 Information and Readiness Disclosure Act and are based
on information supplied by other companies about the products and services
they offer. The Company has not independently verified the contents of
these republications and takes no responsibility for the accuracy or
completeness of information contained in such republications.
Introduction
The term "Year 2000 issue" is a general term used to describe
various problems that may result from the improper processing by computer
systems of dates after 1999. These problems arise from the inability of
some hardware and software to distinguish dates before the year 2000 from
dates in and after the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. The Year 2000 issue
affects virtually all companies and all organizations.
The Company's efforts to address its Year 2000 issues focused on
the following three areas: (i) reviewing and taking any necessary steps to
attempt to correct the Company's computer information systems (i.e.
software applications and hardware platforms), (ii) evaluating and making
any necessary modifications to other computer systems that do not relate to
information technology but include embedded technology, such as
telecommunications, security, HVAC, elevator, fire and safety systems, and
(iii) communicating with certain significant third-party service providers
to determine whether there will be any interruption in their systems that
could affect the Company.
Computer Information Systems
The Company believes that it is Year 2000 compliant in regard to
its computer information systems, and therefore does not have a formal Year
2000 remediation plan. The Company was formed and commenced operations in
May of 1998. At that time Erik Nygaard, Chief Information Officer, was
designated as the individual who is responsible for the Company's Year 2000
compliance. Since the Company designed and purchased all critical systems
during the summer of 1998, they only made purchases from vendors who
assured them that the products were already Year 2000 compliant, or would
be year 2000 compliant by the end of 1998. As a result, Management feels
that a "remediation" plan is not necessary since there are no systems that
require modification.
The one exception to the above is the Company's corporate
accounting system. The accounting system is widely used in the real estate
industry, and was integrated into the Company's system despite not being
Year 2000 compliant. This non-compliance was rectified in March 1999
through the installation of a standard module that rectified the date
recognition problem in the accounting software. A letter of compliance from
the vendor was distributed with the correction module. In addition, the
Company and independent systems consultants performed tests to confirm
correct functionality. Thus, as of March 10, 1999 the Company believes that
all its computer systems are compliant.
Physical Plant
In December 1998, the Company began evaluating and assessing its
other systems that do not relate to information technology but include
embedded technology, such as telecommunications, security, HVAC, elevator
and fire and safety systems. The Company is aware that such systems contain
embedded chips that are difficult to identify and test and may require
complete replacement because they cannot be repaired. Failure of the
Company to identify or remediate any embedded chips (either on an
individual or aggregate basis) on which significant business operations
depend, such as phone systems, could have a material adverse impact on the
Company's business, financial condition and results of operations. Letters
of Compliance were received and are on file from providers of services that
include power and gas, HVAC, building access, life safety systems, and
mailing and shipping. The Company's telephone service provider declined to
furnish the requested letter of compliance.
Third Party Providers
The Company has contacted all key vendors and subsidiaries in
order to determine if they are Year 2000 compliant. The key vendors are
maintained on a vendor list that is updated periodically for additions and
includes all resources the Company uses which they deem critical in
conducting day to day business. Of the third party providers used by the
Company, the largest potential Year 2000 problems would be related to
failures of the Company's loan servicers. Failures in this area are
unlikely because the loans being serviced are typically 30 year mortgages,
and therefore, the initial computer systems designed to track these loans
(before any Year 2000 remediation plans) needed to include four fields in
the year column to allow for all loans originated after 1970. All loan
servicers have also completed Year 2000 testing of their systems and have
informed the Company that no significant problems related to Year 2000 are
expected. The Company's third-party property Managers have represented Year
2000 compliance of their systems.
The primary bank and payroll processor have been asked to provide
written verification to the Company that they will be Year 2000 compliant
by July 1, 1999. For the foregoing reasons, the Company does not believe
that there is a significant risk related to the failure of residents,
vendors or third-party goods or service providers related to Year 2000;
however, the costs and timing of third-party Year 2000 compliance is not
within the Company's control and no assurances can be given with respect to
the cost or timing of such efforts or the potential effects of any failure
to comply.
Remediation and Implementation
The Company's primary uses of software systems are its corporate
accounting and property management software. The Company's corporate
accounting system is widely used in the real estate industry. A version
upgrade, installed in the first quarter of 1999, is designed to be Year
2000 compliant. The Company's property management system is also designed
to be Year 2000 compliant. The Company has received written verification
from the vendor of the corporate accounting system that the relevant
software is Year 2000 complaint. Accordingly, the Company has not deferred
any planned information or software projects due to such Year 2000
projects, and the Company is not treating the costs of the above-referenced
changes as Year 2000-related expenses.
Testing
To attempt to confirm that its computer systems are Year 2000
compliant, the Company performed limited testing of its computer
information systems and its other computer systems that do not relate to
information technology but include embedded technology; however, unless
Year 2000 issues arise in the course of its limited testing, the Company
will rely on the written verification received from each vendor of its
computer systems that the relevant system is Year 2000 compliant.
Nevertheless, there can be no assurance that the computer systems on which
the Company's business relies will correctly distinguish dates before the
year 2000 from dates in and after the year 2000. Any such failures could
have a material adverse effect on the Company's business, financial
condition and results of operations. The Company began testing in November
1998 and completed testing in March 1999.
Costs to Address the Company's Year 2000 Issues
The Company believes that it is currently Year 2000 compliant, yet
acknowledges that the Year 2000 issue could have a material adverse effect
on the Company's business, financial condition and results of operations. A
remediation budget was not established since no expenditures are
anticipated.
Risks Presented by Year 2000 Issues
The Company has not identified any specific business functions
that are likely to suffer material disruption as a result of Year-2000
related events. It is possible, however, that the Company may identify
business functions in the future that are specifically at risk of Year 2000
disruption. The absence of any such determination as of the date of this
report represents only the Company's current status of evaluating potential
Year-2000 related problems and facts presently known to the Company, and
should not be construed to mean that there is no risk of Year-2000 related
disruption. Moreover, due to the unique and pervasive nature of the Year
2000 issue, it is not possible to anticipate each of the wide variety of
Year 2000 events, particularly outside of the Company, that might arise in
a worst case scenario which might have a material adverse impact on the
Company's business, financial condition and results of operations.
The Company's Contingency Plans
Because the Company has not yet identified any specific business
function that will be materially at risk of significant Year-2000 related
disruptions, a detailed contingency plan specific to Year 2000 problems has
not been developed. In the event that the Company concludes that one or
more contingency plans are required, development of such contingency plans
is currently scheduled to occur no later than July 1, 1999 or as otherwise
appropriate.
DESCRIPTION OF SECURITIES
The following summary of the terms of the stock of Fortress does
not purport to be complete and is subject to and qualified in its entirety
by reference to the Charter and the Bylaws, copies of which have been filed
as exhibits to the Registration Statement of which this Prospectus forms a
part.
General
The Charter provides that Fortress may issue up to 500,000,000
shares of Common Stock, $.01 par value per share, and 100,000,000 shares of
preferred stock, $.01 par value per share ("Preferred Stock"). Currently,
20,916,739 shares of Common Stock are issued and outstanding and no shares
of Preferred Stock are issued and outstanding. Under Maryland law,
stockholders generally are not liable for the corporation's debts or
obligations.
Common Stock
All issued and outstanding shares of Common Stock are duly
authorized, fully paid and nonassessable. Subject to the preferential
rights of any other class or series of stock and to the provisions of the
Charter regarding the restrictions on transfer of stock, holders of shares
of Common Stock are entitled to receive dividends on such stock if, as and
when authorized and declared by the Board of Directors of Fortress out of
assets legally available therefor and to share ratably in the assets of
Fortress legally available for distribution to its stockholders in the
event of its liquidation, dissolution or winding up after payment of or
adequate provision for all known debts and liabilities of Fortress.
Subject to the provisions of the Charter regarding the
restrictions on transfer of stock, each outstanding share of Common Stock
entitles the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors and, except as provided
with respect to any other class or series of stock the holders of such
shares of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect
all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion,
exchange, sinking fund, or redemption and have no preemptive rights to
subscribe for any securities of the Company. Subject to the provisions of
the Charter regarding the restrictions on transfer of stock, shares of
Common Stock will have equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve,
amend its charter, merge, sell all or substantially all of its assets,
engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two thirds of the shares entitled to vote on
the matter unless a lesser percentage (but not less than a majority of all
of the votes entitled to be cast on the matter) is set forth in the
corporation's charter. The Charter provides that any such action shall be
effective and valid if taken or authorized by the affirmative vote of
holders of shares entitled to cast a majority of all the votes entitled to
be cast on the matter, except that amendments to the provisions of the
Charter relating to the Independent Directors must be approved by either
the affirmative vote of stockholders holding at least 2/3 of the shares
entitled to vote on the matter or 85% of the members of the Board of
Directors and the affirmative vote of two-thirds of the stockholders, in
addition to cause, is required for removal of directors.
The Charter authorizes the Board of Directors to reclassify any
unissued shares of Common Stock into other classes or series of classes of
stock and to establish the number of shares in each class or series and to
set the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption for each such class or
series.
Preferred Stock
The Charter authorizes the Board of Directors to classify any
unissued shares of Preferred Stock and to reclassify any previously
classified but unissued shares of any series, as authorized by the Board of
Directors. Prior to issuance of shares of each class or series, the Board
is required by the MGCL and the Charter to fix, subject to the provisions
of the Charter regarding the restrictions on transfer of stock, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and
terms or conditions of redemption for each such class or series. Thus, the
Board could authorize the issuance of shares of Preferred Stock with terms
and conditions which could have the effect of delaying, deferring or
preventing a transaction or a change of control of Fortress that might
involve a premium price for holders of Common Stock or otherwise be in
their best interest. As of the Closing of the Original Offering, no shares
of Preferred Stock are outstanding.
Power to Issue Additional Shares of Common Stock and Preferred Stock
Fortress believes that the power of the Board of Directors to
issue additional authorized but unissued shares of Common Stock or
Preferred Stock and to classify or reclassify unissued shares of Common or
Preferred Stock and thereafter to cause Fortress to issue such classified
or reclassified shares of stock will provide Fortress with increased
flexibility in structuring possible future financings and acquisitions and
in meeting other needs which might arise. The additional classes or series,
as well as the Common Stock, will be available for issuance without further
action by Fortress' stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which Fortress' securities may be listed or traded. Although the
Board of Directors has no intention at the present time of doing so, it
could authorize Fortress to issue a class or series that could, depending
upon the terms of such class or series, delay, defer or prevent a
transaction or a change in control of Fortress that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.
Stockholder Rights Plan
The Board of Directors of Fortress has adopted a Stockholder
Rights Agreement (the "Rights Agreement"). The adoption of the Rights
Agreement could make it more difficult for a third party to acquire, or
could discourage a third party from acquiring, Fortress or a large block of
the Fortress Common Stock.
Pursuant to the terms of the Rights Agreement, the Board of
Directors has declared a dividend distribution of one Preferred Stock
Purchase Right (a "Right") for each outstanding share of Common Stock to
stockholders of record at the close of business on the First Closing Date
of the Original Offering (the "Record Date"). In addition, one Right will
automatically attach to each share of Common Stock issued between the
record Date and the Distribution Date (as hereinafter defined). Each Right
entitles the registered holder to purchase from Fortress a unit consisting
of one one-hundredth of a share (a "Rights Unit") of Series A Junior
Participating Preferred Stock, par value $0.01 per share (the "Series A
Preferred Stock") at a purchase price of $80 per Rights Unit (the "Purchase
Price"), subject to adjustment. Each share offered hereby will be entitled
to a Right when distributed.
Initially, the Rights are not exercisable and are attached to and
transfer and trade with, the outstanding shares of Common Stock. The Rights
will separate from the Common Stock and will become exercisable upon the
earliest of (i) the close of business on the tenth business day following
the first public announcement that an Acquiring Person has acquired
beneficial ownership of 15% or more of the sum of the outstanding shares of
Common Stock, subject to certain exceptions (the date of said announcement
being referred to as the "Stock Acquisition Date"), or (ii) the close of
business on the tenth business day (or such later date as the Board of
Directors may determine) following the commencement of a tender offer or
exchange offer that would result upon its consummation in a person or group
becoming an Acquiring Person (the earlier of such dates being herein
referred to as the "Distribution Date"). For these purposes, a person will
not be deemed to beneficially own shares of Common Stock which may be
issued in exchange for Rights Units. The Rights Agreement contains
provisions that are designed to ensure that the Manager and its affiliates
will never, alone, be considered a group that is an Acquiring Person.
Until the Distribution Date (or earlier redemption, exchange or
expiration of Rights), (a) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock
certificates, (b) new Common Stock certificates issued after the Record
Date will contain a notation incorporating the Stockholder Rights Agreement
by reference, and (c) the surrender for transfer of any certificates for
Common Stock outstanding will also constitute the transfer of the Rights
associated with Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and
will expire ten years after the issuance thereof, unless such date is
extended or the rights are earlier redeemed or exchanged by Fortress as
described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of Common Stock as of the
close of business on the Distribution Date and, thereafter, the separate
Rights Certificates alone will represent the Rights. Except as otherwise
determined by the Board of Directors, only shares of Common Stock
issued prior to the Distribution Date will be issued with Rights.
In the event that a person becomes an Acquiring Person, except
pursuant to an offer for all outstanding shares of Common Stock which the
Independent Directors determine to be fair to and to otherwise be in the
best interests of Fortress and Fortress' stockholders, after receiving
advice from one or more investment banking firms (a "Qualified Offer"),
each holder of a Right will thereafter have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash, property or
other securities of Fortress) having a value equal to two times the
exercise price of the Right. The exercise price is the Purchase Price times
the number of shares of Common Stock associated with each Right.
Notwithstanding any of the foregoing, following the occurrence of the event
set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned
by any Acquiring Person will be null and void. However, Rights are not
exercisable following the occurrence of the event set forth above until
such time as the Rights are no longer redeemable by Fortress as set forth
below.
In the event that, at any time following the Stock Acquisition
Date, (i) Fortress engages in a merger or other business combination
transaction in which Fortress is not the surviving corporation (other than
with an entity which acquired the shares pursuant to a Qualified Offer),
(ii) Fortress engages in a merger or other business combination transaction
in which Fortress is the surviving corporation and the Common Stock of
Fortress is changed or exchanged, or (iii) 50% or more of Fortress' assets
or earning power is sold or transferred, each holder of a Right (except
Rights which have previously been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of
the Right. The events set forth in this paragraph and in the preceding
paragraph are referred to as the "Triggering Events."
At any time after a person becomes an Acquiring Person and prior
to the acquisition by such person or group of fifty percent (50%) or more
of the outstanding Common Stock, the Board may exchange the Rights (other
than Rights owned by such person or group which have become void), in whole
or in part, at an exchange ratio of one share of Common Stock, or one
one-hundredth of a share of Preferred Stock (or of a share of a class or
series of the Company's preferred stock having equivalent rights,
preferences and privileges), per Right (subject to adjustment).
The Purchase Price payable, and the number of Rights Units of
Series A Preferred Stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to
prevent dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Series A Preferred Stock, (ii) if
holders of the Series A Preferred Stock are granted certain rights or
warrants to subscribe for Series A Preferred Stock or convertible
securities at less than the current market price of the Series A Preferred
Stock, or (iii) upon the distribution to holders of the Series A Preferred
Stock of evidences of indebtedness or assets (excluding regular quarterly
cash dividends) or of subscription rights or warrants (other than those
referred to above).
With certain exceptions, no adjustment in the Purchase Price will
be required until cumulative adjustments amount to at least 1% of the
Purchase Price, determined on a per Right basis. Fortress is not obligated
to issue fractional Rights Units. If Fortress elects not to issue
fractional Rights Units, in lieu thereof an adjustment in cash will be made
based on the market price of the Series A Preferred Stock on the last
trading date prior to the date of exercise.
Fortress may redeem the Rights in whole, but not in part, at a
price of $0.01 per Right (payable in cash, Common Stock or other
consideration deemed appropriate by the Board of Directors) at any time
until the earlier of (i) the close of business on the tenth business day
after the Stock Acquisition Date, or (ii) the expiration date of the Rights
Agreement. Immediately upon the action of the Board of Directors ordering
redemption of the Rights, the Rights will terminate and thereafter the only
right of the holders of Rights will be to receive the redemption price.
The Rights Agreement may be amended by the Board of Directors in
its sole discretion at any time prior to the Distribution Date. After the
Distribution Date, subject to certain limitations set forth in the Rights
Agreement, the Board of Directors may amend the Rights Agreement only to
cure any ambiguity, defect or inconsistency, to shorten or lengthen any
time period, or to make changes that do not adversely affect the interests
of Rights holders (excluding the interests of an Acquiring Person or its
associates or affiliates). The foregoing notwithstanding, no amendment may
be made at such time as the rights are not redeemable.
Until a Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of Fortress, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to Fortress, stockholders may,
depending upon the circumstances, recognize taxable income in the event
that the Rights become exercisable for Common Stock, other securities of
Fortress, other consideration or for common stock of an acquiring company
or in the event of the redemption of the Rights as set forth above.
A copy of the Rights Agreement is available from the Company upon
written request. The foregoing description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, which is filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Dividend Reinvestment Plan
Fortress may implement a dividend reinvestment plan whereby
stockholders may automatically reinvest their dividends in the Common
Stock. Details about any such plan would be sent to Fortress' stockholders
following adoption thereof by the Board of Directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American
Stock Transfer & Trust Company, New York, New York (the "Transfer Agent").
Transfer Restrictions
Restrictions Under Charter. For Fortress to qualify as a REIT
under the Code, its shares of stock must be beneficially owned by 100 or
more persons during at least 335 days of a taxable year of twelve months or
during a proportionate part of a shorter taxable year (other than the first
year for which an election to be a REIT has been made). Also, not more than
50% of the value of the outstanding shares of stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities such as qualified pension plans) at any time
during the last half of a taxable year (other than the first year for which
an election to be a REIT has been made).
The Charter, subject to certain exceptions, contains certain
restrictions on the number of shares of stock of Fortress that a person may
own. The Stock Ownership Limit prohibits any person from acquiring or
holding, directly or indirectly, shares of stock in excess of 9.8% of the
aggregate value of outstanding shares of any class or series of stock of
Fortress.
Fortress' Board of Directors, in its sole discretion, may exempt a
person from the Stock Ownership Limit (an "Excepted Holder"). However, the
Board may not grant such an exemption to any person whose ownership, direct
or indirect, of in excess of 9.8% of the aggregate value of the outstanding
shares of any class or series of stock of Fortress would result in Fortress
being "closely held" within the meaning of Section 856(h) of the Code or
otherwise would result in Fortress failing to qualify as a REIT. In order
to be considered by the Board as an Excepted Holder, a person also must not
own, directly or indirectly, an interest in a tenant of Fortress (or a
tenant of any entity owned or controlled by the Company) that would cause
Fortress to own, directly or indirectly, more than a 9.9% interest in such
a tenant (both actually or constructively pursuant to Section 318 of the
Code, as modified by Section 856(d)(s) of the Code). The person seeking an
exemption must represent to the satisfaction of the Board that it will not
violate the two aforementioned restrictions. The person also must agree
that any violation or attempted violation of any of the foregoing
restrictions will result in the automatic transfer of the shares of stock
causing such violation to the Trust (as defined below). The Board of
Directors may require a ruling from the IRS or an opinion of counsel, in
either case in form and substance satisfactory to the Board of Directors in
its sole discretion, in order to determine or ensure Fortress' status as a
REIT.
The Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of Fortress that would result in
Fortress being "closely held" under Section 856(h) of the Code or otherwise
cause Fortress to fail to qualify as a REIT and (b) any person from
transferring shares of stock of Fortress if such transfer would result in
shares of stock of Fortress being owned by fewer than 100 persons. Any
person who acquires or attempts or intends to acquire beneficial or
constructive ownership of shares of stock of Fortress that will or may
violate any of the foregoing restrictions on transferability and ownership,
or any person who would have owned shares of the stock of Fortress that
resulted in a transfer of shares to the Trust (as defined herein), is
required to give notice immediately to Fortress and provide Fortress with
such other information as Fortress may request in order to determine the
effect of such transfer on Fortress' status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board
of Directors determines that it is no longer in the best interests of
Fortress to continue to qualify, as a REIT.
If any transfer of shares of stock of Fortress occurs which, if
effective, would result in any person beneficially or constructively owning
shares of stock of Fortress in excess or in violation of the above transfer
or ownership limitations (a "Prohibited Owner"), then that number of shares
of stock of Fortress the beneficial or constructive ownership of which
otherwise would cause such person to violate such limitations (rounded to
the nearest whole share) shall be automatically transferred to a trust (the
"Trust") for the exclusive benefit of one or more charitable beneficiaries
(the "Charitable Beneficiary"), 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 such violative transfer. Shares of stock
held in the Trust shall be issued and outstanding shares of stock of
Fortress. The Prohibited Owner shall not benefit economically from
ownership of any shares of stock held in the Trust, shall have no rights to
dividends and shall not possess any rights to vote or other rights
attributable to the shares of stock held in the Trust. The trustee of the
Trust (the "Trustee") shall have all voting rights and rights to dividends
or other distributions with respect to shares of stock held in the Trust,
which rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any dividend or other distribution paid prior to the discovery
by Fortress that shares of stock have been transferred to the Trustee shall
be paid by the recipient of such dividend or distribution to the Trustee
upon demand, and any dividend or other distribution authorized but unpaid
shall be paid when due to the Trustee. Any dividend or distribution so paid
to the Trustee shall be held in trust for the Charitable Beneficiary. The
Prohibited Owner shall have no voting rights with respect to shares of
stock held in the Trust and, subject to Maryland law, effective as of the
date that such shares of stock have been transferred to the Trust, the
Trustee shall have the authority (at the Trustee's sole discretion) (i) to
rescind as void any vote cast by a Prohibited Owner prior to the discovery
by Fortress that such shares have been transferred to the Trust and (ii) to
recast such vote in accordance with the desires of the Trustee acting for
the benefit of the Charitable Beneficiary. However, if Fortress has already
taken irreversible corporate action, then the Trustee shall not have the
authority to rescind and recast such vote.
Within 20 days of receiving notice from Fortress that shares of
stock of Fortress have been transferred to the Trust, the Trustee shall
sell the shares of 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, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee
shall distribute the net proceeds of the sale to the Prohibited Owner and
to the Charitable Beneficiary as follows. The Prohibited Owner shall
receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g.,
a gift, devise or other such transaction), the Market Price (as defined in
the Charter) of such shares on the day of the event causing the shares to
be held in the Trust and (ii) the price per share received by the Trustee
from the sale or other disposition of the shares held in the Trust. Any net
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 Fortress that shares of stock have been transferred to the
Trust, such shares are sold by a Prohibited Owner, then (i) such shares
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 shares 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.
In addition, shares of stock of Fortress held in the Trust shall
be deemed to have been offered for sale to Fortress, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Trust (or, in the case of
a devise or gift, the Market Price at the time of such devise or gift) and
(ii) the Market Price on the date Fortress, or its designee, accepts such
offer. Fortress shall have the right to accept such offer until the Trustee
has sold the shares of stock held in the Trust. Upon such a sale to
Fortress, the interest of the Charitable Beneficiary in the shares sold
shall terminate and the Trustee shall distribute the net proceeds of the
sale to the Prohibited Owner.
The Charter further provides that, prior to the date the Common
Stock qualifies as a class of "publicly offered securities" (within the
meaning of Department of Labor Regulation Section 2510.3-101(b)(2)), (a) no
Plan investor may acquire shares of stock of the Company without the
Company's prior written consent; and (b) any transfers to Plan investors
that would increase the aggregate Plan investors, ownership of shares of
stock of the Company to a level that meets or exceeds 25% or more of the
value of any class of stock of the Company will be void ab initio. If any
transfer of shares of stock of the Company to Plan investors occurs which,
if effective, would result in Plan investors beneficially or constructively
owning, in the aggregate, shares of stock of Fortress in excess or in
violation of the above transfer or ownership limitations, then that number
of shares of stock of Fortress the beneficial or constructive ownership of
which otherwise would cause such Plan investors to violate such limitations
shall be automatically transferred to the Trust (as defined above) to be
held, subject to certain adjustments, in accordance with the provisions
detailed above.
All certificates representing shares of Common Stock and Preferred
Stock will bear a legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required
by the Code or the regulations promulgated thereunder) of all classes or
series of Fortress' stock, including shares of Common Stock, within 30 days
after the end of each taxable year, is required to give written notice to
Fortress stating the name and address of such owner, the number of shares
of each class and series of stock of Fortress which the owner beneficially
owns and a description of the manner in which such shares are held. Each
such owner shall provide to Fortress such additional information as
Fortress may request in order to determine the effect, if any, of such
beneficial ownership on Fortress' status as a REIT and to ensure compliance
with the Stock Ownership Limit. In addition, each stockholder shall upon
demand be required to provide to Fortress such information as Fortress may
request, in good faith, in order to determine Fortress' status as a REIT
and to comply with the requirements of any taxing authority or governmental
authority or to determine such compliance.
These ownership limits could delay, defer or prevent a change in
control or other transaction of Fortress that might involve a premium price
for the Common Stock or otherwise be in the best interest of the
stockholders.
Book-Entry Only Issuance -- The Depository Trust Company
The description of book-entry procedures in this Prospectus
includes summaries of certain rules and operating procedures of DTC that
affect transfers of interest in the global certificate or certificates
issued in connection with sales of Common Stock to qualified institutional
buyers pursuant to Rule 144A under the Securities Act. One or more fully
registered global Common Stock certificates (the "Global Certificates")
have been issued, representing, in the aggregate, the Common Stock sold in
reliance on Rule 144A.
Common Stock initially sold to investors other than qualified
institutional buyers was issued in fully registered, certificated form
("Certificated Securities"). Upon the transfer of any such Certificated
Securities initially sold to an institutional or an individual "accredited
investor" to a qualified institutional buyer in reliance on Rule 144A, such
Certificated Securities may, unless the Global Certificates have previously
been exchanged for Certificated Securities, be exchanged for an interest in
the Global Certificates representing the number of shares of Common Stock
being transferred.
DTC is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Participants in DTC include
securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of
its Participants and by the NYSE, the American Stock Exchange, Inc., and
the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on
file with the Commission.
Purchases of Common Stock within the DTC system must be made by or
through Participants, which will receive a credit for the Common Stock on
DTC's records. The ownership interest of each actual purchaser of Common
Stock ("Beneficial Owner") is in turn to be recorded on the Participants'
and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
Participants or Indirect Participants through which the Beneficial Owners
purchased Common Stock. Transfers of ownership interests in the Common
Stock are to be accomplished by entries made on the books of Participants
and Indirect Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests
in Common Stock, except in the event that use of the book-entry system for
the Common Stock is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Common
Stock; DTC's records reflect only the identity of the Participants to whose
accounts such shares of Common Stock are credited, which may or may not be
the Beneficial Owners. The Participants and Indirect Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to
Participants, by Participants to Indirect Participants, and by Participants
and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. If less than all of
the shares of Common Stock are being redeemed, DTC will determine the
amount of the interest of each Participant to be redeemed in accordance
with its procedures.
Although voting with respect to the Common Stock is limited to the
holders of record of the Common Stock, in those cases where a vote is
required, neither DTC nor Cede & Co. will itself consent or vote with
respect to Common Stock. Under its usual procedures, DTC would mail an
omnibus proxy to the registrar as soon as possible after the record date.
The omnibus proxy assigns Cede & Co.'s consenting or voting rights to those
Participants to whose accounts the shares of Common Stock are credited on
the record date (identified in a listing attached to such omnibus proxy).
Distributions on the Common Stock held in a book-entry form will
be made to DTC in immediately available funds. DTC's practice is to credit
Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants and Indirect Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Participants and Indirect Participants and not of
DTC or the Company, subject to any statutory or regulatory requirements as
may be in effect from time to time. Payment of distributions to DTC is the
responsibility of the Company, disbursement of such payments to
Participants is the responsibility of DTC and disbursement of such payments
to the Beneficial Owners is the responsibility of Participants and Indirect
Participants.
Except as provided herein, a Beneficial Owner of an interest in a
Global Certificate will not be entitled to receive physical delivery of
Common Stock. Accordingly, each Beneficial Owner must rely on the
procedures of DTC to exercise any rights under the Common Stock.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Certificates among
Participants of DTC, DTC is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any
time. The Company will not have any responsibility for the performance by
DTC or its Participants or Indirect Participants under the rules and
procedures governing DTC. DTC may discontinue providing its services as
securities depository with respect to the Preferred Securities at any time
by giving notice to the registrar and the Company. Under such
circumstances, in the event that a successor securities depository is not
obtained, Common Stock certificates are required to be printed and
delivered. Additionally, the Company may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depository). In
that event, certificates for the Common Stock will be printed and
delivered. In each of the above circumstances, the Company will appoint a
paying agent with respect to the Common Stock.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in the global
Common Stock as represented by a Global Certificate.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF FORTRESS' CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of
the Charter and Bylaws of Fortress does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and
to the Charter and Bylaws of Fortress.
Classification of the Board of Directors
The Bylaws provide that the number of directors of Fortress may be
established, increased or decreased by the Board of Directors but may not
be fewer than the minimum number required by the MGCL (which currently is
three for corporations with three or more stockholders) nor more than
fifteen. Any vacancy will be filled, at any regular meeting by a majority
of the remaining directors, even if such a majority constitutes less than a
quorum, except that a vacancy resulting from an increase in the number of
directors must be filled by a majority of the entire Board of Directors.
The Charter provides that a majority of the Board of Directors must be
Independent Directors.
Pursuant to the Charter, the Board of Directors is divided into
three classes of directors. Beginning in 1999, directors of each class will
be chosen for three-year terms upon the expiration of their current terms
and each year one class of directors will be elected by the stockholders.
The initial terms of the Class I, Class II and Class III directors will
expire in 1999, 2000 and 2001, respectively. The Company believes that
classification of the Board of Directors will help to assure the continuity
and stability of the Company's business strategies and policies as
determined by the Board of Directors. Holders of shares of Common Stock
will have no right to cumulative voting in the election of directors.
Consequently, at each annual meeting of stockholders, the holders of a
majority of the shares of Common Stock will be able to elect all of the
successors of the class of directors whose terms expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult. At
least two annual meetings of stockholders, instead of one, will generally
be required to effect a change in a majority of the Board of Directors.
Thus, the classified board provision could increase the likelihood that
incumbent directors will retain their positions. The staggered terms of
directors may delay, defer or prevent a tender offer or an attempt to
change control of the Company, even though a tender offer or change in
control might be in the best interest of the stockholders.
Removal of Directors
The Charter provides that a director may be removed only for cause
(as defined in the Charter) and only by the affirmative vote of at least
two-thirds of the votes entitled to be cast generally in the election of
directors. This provision, when coupled with the provision in the Bylaws
authorizing the Board of Directors to fill vacant directorships, precludes
stockholders from removing incumbent directors, except upon the existence
of cause for removal and a substantial affirmative vote, and filling the
vacancies created by such removal with their own nominees.
Business Combinations
Under the MGCL, certain "business combinations" (including a
merger, consolidation, share exchange or, in certain circumstances, an
asset transfer or issuance or reclassification of equity securities)
between a Maryland corporation and any person who beneficially owns ten
percent or more of the voting power of the corporation's shares or an
affiliate of the corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of
the voting power of the then-outstanding voting stock of the corporation
(an "Interested Stockholder") or an affiliate of such an Interested
Stockholder are prohibited for five years after the most recent date on
which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board
of directors of such corporation and approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other
than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received
in cash or in the same form as previously paid by the Interested
Stockholder for its shares. 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. However, pursuant to the
statute and a resolution adopted by the Board of Directors, the Company has
exempted any business combinations (a) between the Company and the Manager
or any affiliate of the Manager or (b) between the Company and any
Interested Stockholder, provided that any such business combination is
first approved by the Board of Directors, including by a majority of the
Independent Directors and, consequently, the five-year prohibition and the
super-majority vote requirements will not apply to business combinations
between any of them and the Company. As a result, such parties may be able
to enter into business combinations with the Company that may not be in the
best interest of its stockholders without compliance by the Company with
the super-majority vote requirements and the other provisions of the
statute.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to
the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of stock owned by the acquiror, by
officers or by directors who are employees of the corporation. "Control
shares" are voting shares of stock which, if aggregated with all other such
shares of stock previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more, but less than one-third,
(ii) one-third or more, but less than a majority, or (iii) a majority or
more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within 50
days of demand to consider the voting rights of the shares. If no request
for a meeting is made, the corporation may itself present the question at
any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement as required
by the statute, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair value
determined, without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by the
acquiror or of any meeting of stockholders at which the voting rights of
such shares are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is
a party to the transaction or (b) to acquisitions approved or exempted by
the charter or bylaws of the corporation.
The Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of Fortress'
shares of stock. There can be no assurance that such provision will not be
amended or eliminated at any time in the future.
Amendment to the Charter
Except as provided below, the Charter, including its provisions on
classification of the Board of Directors and removal of directors, 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. Amendments
to the provisions of the Charter relating to Independent Directors must be
approved either by the affirmative vote of stockholders holding at least
two-thirds of the shares entitled to vote on the matter or 85% of the
members of the Board of Directors.
Dissolution of Fortress
The dissolution of Fortress must be approved 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.
Advance Notice of Director Nominations and New Business
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made
only (i) pursuant to Fortress' notice of the meeting, (ii) or at the
direction of the Board of Directors or (iii) by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws and (b) with respect to special meetings
of stockholders, only the business specified in Fortress' 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 (x)
pursuant to Fortress' notice of the meeting, (y) by or at the direction of
the Board of Directors or (z) 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.
Anti-takeover Effect of Certain Provisions of Maryland Law
and of the Charter and Bylaws
The business combination provisions and, if the applicable
provision in the Bylaws is rescinded, the control share acquisition
provisions of the MGCL, the provisions of the Charter on classification of
the Board of Directors and removal of directors and the advance notice
provisions of the Bylaws could delay, defer or prevent a change in control
of Fortress or other transaction that might involve a premium price for
holders of Common Stock or otherwise be in their best interest.
COMMON STOCK AVAILABLE FOR FUTURE SALE
As of the date of this Prospectus, Fortress has outstanding (or
reserved for issuance upon exercise of options or redemption of Units)
20,916,739 shares of Common Stock, all of which are "restricted" securities
under the meaning of Rule 144 promulgated under the Securities Act ("Rule
144"), but will be freely transferrable if and when sold
pursuant to this Prospectus.
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted shares
from the Company or any "affiliate" of the Company, as defined in Rule 144
(an "Affiliate"), the acquiror or subsequent holder thereof is entitled to
sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company which will require Fortress to file periodic
reports under the Exchange Act. If two years have elapsed since the date of
acquisition of restricted shares from the Company or from any Affiliate of
the Company, and the acquiror or subsequent holder thereof is deemed not to
have been an Affiliate of the Company at any time during the three months
preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
No assurance can be given as to (i) the likelihood that an active
market for the shares will develop, (ii) the liquidity of any such market,
(iii) the ability of the stockholders to sell their Common Stock, or (iv)
the prices that stockholders may obtain for their Common Stock.
OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership has been organized as a Delaware limited
partnership, the General Partner of which is Fortress, and the Initial
Limited Partner of which is an affiliate of the Manager. Fortress organized
the Operating Partnership for a variety of reasons, including in order to
provide future sellers of assets with the opportunity to transfer those
assets to the Company in a tax-deferred exchange of property for Units. The
following summary of certain provisions of the Partnership Agreement of the
Operating Partnership (the "Operating Partnership Agreement") does not
purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Operating Partnership Agreement,
a copy of which has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
General
Pursuant to the Operating Partnership Agreement, the General
Partner, as the sole general partner of the Operating Partnership, has
full, exclusive and complete responsibility and discretion in the
management and control of the Operating Partnership. The limited partners
of the operating partnership (the "Limited Partners") have no authority in
their capacity as Limited Partners to transact business for, or participate
in the management activities or decisions of, the Operating Partnership
except as required by applicable law. Consequently, Fortress, by virtue of
its position as the General Partner, will control the assets and business
of the Operating Partnership. However, any amendment to the Operating
Partnership Agreement that would (i) affect the Redemption Rights (as
defined below), (ii) adversely affect the Limited Partners' rights to
receive cash distributions, (iii) convert a limited partner interest into a
general partner interest, or (iv) modify the limited liability of a limited
partner, will require the consent of each Partner adversely affected (on a
non uniform basis) thereby or else shall be effective against only those
partners who shall have consented thereto.
General Partner Not to Withdraw
The General Partner is not able voluntarily to withdraw from the
Operating Partnership or transfer or assign its interest in the Operating
Partnership unless the transaction in which such withdrawal or transfer
occurs results in the Limited Partners receiving property in an amount
equal to the amount they would have received had they exercised the
Redemption Rights immediately prior to such transaction, or unless the
successor to the General Partner contributes substantially all of its
assets to the Operating Partnership in return for an interest in the
Operating Partnership.
Capital Contributions
Fortress contributed, in its capacity as General Partner, all of
the net proceeds of the Original Offering and the Private Placement to the
Operating Partnership in exchange for an almost 100% general partnership
interest in the Operating Partnership. The Initial Limited Partner
contributed cash in the amount of approximately $100 to the Operating
Partnership in exchange for 5 Units, giving the Initial Limited Partner a
nominal limited partnership interest in the Operating Partnership.
Although the Operating Partnership received the net proceeds of
the Original Offering, the General Partner is deemed to have made a capital
contribution to the Operating Partnership in the aggregate amount of the
gross proceeds of the Offering and the Operating Partnership is deemed
simultaneously to have paid the Initial Purchaser's discount and other
expenses paid or incurred in connection with the Original Offering.
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in
excess of funds available to the Operating Partnership from borrowing or
capital contributions, the General Partner may borrow such funds from a
financial institution or other lender and lend such funds to the Operating
Partnership on the same terms and conditions as are applicable to the
General Partner's borrowing of such funds.
Issuance of Additional Limited Partnership Interests
Fortress is authorized, without the consent of the Limited
Partners, to cause the Operating Partnership to issue additional Units to
Fortress, to the Limited Partners or to other persons for such
consideration and on such terms and conditions as Fortress deems
appropriate. If additional Units are issued to Fortress, then Fortress must
(i) issue additional shares of Common Stock and must contribute to the
Operating Partnership the entire proceeds received by Fortress from such
issuance or (ii) issue additional Units to all partners in proportion to
their respective interests in the Operating Partnership. In addition,
Fortress may cause the Operating Partnership to issue to Fortress
additional partnership interests in different series or classes, which may
be senior to the Units, in conjunction with an offering of securities of
Fortress having substantially similar rights, in which the proceeds thereof
are contributed to the Operating Partnership. Consideration for additional
partnership interests may be cash or other property or assets. No Limited
Partner has preemptive, preferential or similar rights with respect to
additional capital contributions to the Operating Partnership or the
issuance or sale of any partnership interests therein.
Redemption Rights
Pursuant to the Operating Partnership Agreement, the Limited
Partners (including the Initial Limited Partner) will have the right (the
"Redemption Rights") to cause the Operating Partnership to redeem their
Units for cash or, at the election of the General Partner, shares of Common
Stock on a one-for-one basis. The redemption price will be paid in cash in
the discretion of Fortress or in the event that the issuance of shares of
Common Stock to the redeeming Limited Partner would (i) result in any
person owning, directly or indirectly, shares of Common Stock in excess of
the Ownership Limitation, (ii) result in shares of securities of Fortress
being owned by fewer than 100 persons (determined without reference to any
rules of attribution), (iii) result in Fortress being "closely held" within
the meaning of section 856(h) of the Code, (iv) cause Fortress to own,
actually or constructively, 10% or more of the ownership interests in a
tenant of Fortress' or the Operating Partnership's real property, within
the meaning of section 856(d)(2)(B) of the Code, or (v) cause the
acquisition of shares of Common Stock by such redeeming Limited Partner to
be "integrated" with any other distribution of shares of Common Stock for
purposes of complying with the Securities Act. The Manager holds options to
acquire shares of Common Stock (or, at the option of the Company, Units),
none of which is exercisable until the Option Effective Date. Upon an
acquisition of Units pursuant to such options, the Manager may immediately
exercise its Redemption Rights.
Operations
The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable Fortress to satisfy
the requirements for being classified as a REIT for federal tax purposes,
to avoid any federal income or excise tax liability imposed by the Code,
and, unless the Board of Directors determines otherwise, to ensure that the
Operating Partnership will not be classified as a "publicly traded
partnership" taxable as a corporation for purposes of section 7704 of the
Code.
In addition to the administrative and operating costs and expenses
incurred by the Operating Partnership, it is anticipated that the Operating
Partnership will pay all administrative costs and expenses of the Company
(collectively, the "Company Expenses") and the Company Expenses will be
treated as expenses of the Operating Partnership. The Company Expenses
generally will include (i) all expenses relating to the formation and
continuity of existence of the Company, (ii) all expenses relating to this
offering and any registration of securities by the Company, (iii) all
expenses associated with the preparation and filing of any periodic reports
by the Company under federal, state or local laws or regulations, (iv) all
expenses associated with compliance by the Company with laws, rules and
regulations promulgated by any regulatory body, and (v) all other operating
or administrative costs of the Company incurred in the ordinary course of
its business on behalf of the Operating Partnership.
Distributions; Preferred Incentive Return
The Operating Partnership Agreement provides that the Operating
Partnership shall distribute cash from operations (including net sale or
refinancing proceeds, but excluding net proceeds from the sale of the
Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more or less frequent) basis, in amounts determined by the General
Partner in its sole discretion, to the partners in accordance with their
respective percentage interests in the Operating Partnership. In addition,
the Operating Partnership will distribute the Preferred Incentive Return to
the Manager (or an affiliate) in its capacity as the Initial Limited
Partner. See "The Manager and the Management Agreement -- Management
Incentives." Upon liquidation of the Operating Partnership, after payment
of, or adequate provision for, debts and obligations of the Operating
Partnership, including any partner loans, it is anticipated that any
remaining assets of the Operating Partnership will be distributed to all
partners with positive capital accounts in accordance with their respective
positive capital account balances. If the General Partner has a negative
balance in its capital account following a liquidation of the Operating
Partnership, it will be obligated to contribute cash to the Operating
Partnership equal to the negative balance in its capital account.
Allocations
It is anticipated that income, gain and loss of the Operating
Partnership for each fiscal year generally will be allocated among the
partners in accordance with their respective interests in the Operating
Partnership, subject to compliance with the provisions of Code sections
704(b) and 704(c) and Treasury regulations ("Treasury Regulations")
promulgated thereunder and subject to the Manager's quarterly incentive
return described in "The Manager and the Management Agreement -- Management
Incentives."
Term
The Operating Partnership shall continue until December 31, 2051,
or until sooner terminated as provided in the Operating Partnership
Agreement or by operation of law.
Tax Matters
Pursuant to the Operating Partnership Agreement, the General
Partner is the tax matters partner of the Operating Partnership and, as
such, has authority to handle tax audits and to make tax elections under
the Code on behalf of the Operating Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to the Company and to a prospective
purchaser of Common Stock. The discussion contained herein does not address
all aspects of taxation that may be relevant to particular stockholders in
light of their personal investment or tax circumstances, or to certain
types of stockholders (including, without limitation, insurance companies,
financial institutions or broker-dealers, and, except as discussed below,
tax-exempt organizations, foreign corporations and persons who are not
citizens or residents of the U.S.) subject to special treatment under the
federal income tax laws.
This summary is based on current provisions of the Code, existing,
temporary, and currently proposed Treasury Regulations promulgated under
the Code, the legislative history of the Code, existing administrative
rulings and practices of the IRS, and judicial decisions. No assurance can
be given that future legislative, judicial, or administrative actions or
decisions, which may be retroactive in effect, will not affect the accuracy
of any statements in this Prospectus.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP,
AND SALE OF THE COMMON STOCK, INCLUDING THE STATE, LOCAL AND FOREIGN, TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of the Company
Fortress plans to make an election to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its taxable year
ending December 31, 1998.
The sections of the Code relating to qualification and operation
as a REIT are highly technical and complex. The following discussion sets
forth only the material aspects of the Code sections that govern the
federal income tax treatment of a REIT and its stockholders. The discussion
is qualified in its entirety by the applicable Code provisions, Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change prospectively
or retroactively.
Skadden, Arps, Slate, Meagher & Flom LLP acted as counsel to
Fortress in connection with the Original Offering and Fortress' election to
be taxed as a REIT. In the opinion of Skadden, Arps, Slate, Meagher & Flom
LLP (the "Opinion"), provided that the elections and other procedural steps
described in this discussion of "Federal Income Tax Considerations" are
completed by Fortress in a timely fashion, Fortress will be organized in
conformity with the requirements for qualification and taxation as a REIT.
Investors should be aware that opinions of counsel are not binding upon the
IRS or any court. It must be emphasized that the Opinion is based on
factual assumptions (Including the assumption that Fortress will be
operated in accordance with its constituent documents and that parts
contained herein regarding the operation of Fortress are true, correct and
complete) and is conditioned upon certain representations as to factual
matters, including representations regarding the nature of Fortress'
properties, and certain covenants made by Fortress regarding the future
conduct of its business and investment activities. Moreover, qualification
and taxation as a REIT depends upon Fortress' ability to meet on a
continuing basis, through actual annual operating results, distribution
levels, and stock ownership, the various qualification tests imposed under
the Code discussed below. Skadden, Arps, Slate, Meagher & Flom LLP will not
review Fortress' compliance with those tests on a continuing basis and has
no obligation to advise holders of Common Stock of any subsequent change in
the matters stated, represented, covenanted or assumed or any subsequent
change in applicable law. Accordingly, no assurance can be given that the
actual results of Fortress' operations for any particular taxable year will
satisfy any such requirements. For a discussion of the tax consequences of
failure to qualify as a REIT, see "Federal Income Tax Considerations --
Failure to Qualify."
For as long as Fortress qualifies for taxation as a REIT, it will
generally not be subject to federal corporate income tax on its taxable
income that is distributed to its stockholders. That treatment
substantially eliminates the "double taxation" (i.e., taxation at both the
corporate and stockholder levels) that generally results from an investment
in a corporation. However, Fortress will be subject to federal income tax
in the following circumstances. First, Fortress will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances,
Fortress may be subject to the "alternative minimum tax" on its
undistributed items of tax preference, if any. Third, if Fortress has (i)
net income from the sale or other disposition of "foreclosure property" (as
such term is defined in Section 856 of the Code) that is held primarily for
sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property (as such term is defined in
Section 856 of the Code), it will be subject to tax at the highest
corporate rate on such income. Fourth, if Fortress has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will
be subject to a 100% tax. Fifth, if Fortress should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but
has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the gross
income attributable to the greater of the amount by which Fortress fails
the 75% or 95% gross income test, multiplied by a fraction intended to
reflect Fortress' profitability. Sixth, if Fortress should fail to
distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year (other than certain long-term capital gain net income
which Fortress elects to retain and pay tax on), and (iii) any
undistributed taxable income from prior periods, Fortress would be subject
to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Fortress acquires any asset from
a "C" corporation (i.e., a corporation generally subject to a full
corporate-level tax) in a merger or other transaction in which the basis of
the asset in Fortress' hands is determined by reference to the basis of the
asset (or any other asset) in the hands of a "C" corporation and Fortress
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which it acquired such asset, then to the extent
of such asset's "built-in-gain" (i.e., the excess of the fair market value
of such asset at the time of acquisition by Fortress over the adjusted
basis in such asset at such time), Fortress will be subject to tax at the
highest regular corporate rate applicable (as provided in Treasury
Regulations that have not yet been promulgated). The results described
above with respect to the tax on "built-in-gain" assume that Fortress will
elect pursuant to IRS Notice 88-19 to be subject to the rules described in
the preceding sentence if it were to make any such acquisition. Eighth,
Fortress may be subject to foreign taxation on its investments and
activities in foreign countries.
Requirements for Qualification
The Code defines a REIT as a corporation, trust, or association
(i) that is managed by one or more trustees or directors, (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (iii) that would be
taxable as a domestic corporation, but for sections 856 through 860 of the
Code, (iv) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code, (v) the beneficial ownership of
which is held by 100 or more persons, (vi) not more than 50% in value of
the outstanding shares of which is owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of each taxable year (the "5/50 Rule"), (vii) that
makes an election to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other administrative
requirements established by the IRS that must be met in order to elect and
maintain REIT status, (viii) that uses a calendar year for federal income
tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations promulgated thereunder, and (ix) that meets
certain other tests, described below, regarding the nature of its income
and assets. The Code provides that conditions (i) to (iv), inclusive, must
be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v)
and (vi) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT. For purposes of determining stock
ownership under the 5/50 Rule, a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently
set aside or used exclusively for charitable purposes generally is
considered an individual. A trust that is a qualified trust under Code
section 401(a), however, generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the
5/50 Rule. If a REIT complies with all the requirements for ascertaining
the ownership of its outstanding stock in a taxable year and does not know
or have reason to know that it violated the 5/50 Rule, the REIT will be
deemed to have complied with the 5/50 Rule for
such taxable year.
Fortress' Charter provides for restrictions regarding the transfer
of the Common Stock that are intended to assist Fortress in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such transfer restrictions are described in "Description of
Securities -- Transfer Restrictions."
Code section 856(i) provides that a corporation that is a
"qualified REIT subsidiary" shall not be treated as a separate corporation,
and all assets, liabilities, and items of income, deduction, and credit of
a "qualified REIT subsidiary" shall be treated as assets, liabilities, and
items of income, deduction, and credit of the REIT. A "qualified REIT
subsidiary" is a corporation, all of the capital stock of which is held by
the REIT. Fortress does not currently own any qualified REIT subsidiary but
may own one or more of such subsidiaries in the future. If Fortress
acquires a corporation already in existence at the time of acquisition,
such corporation would be treated as liquidating on the date of acquisition
and Fortress would be required to distribute any C corporation earnings and
profits of the corporation before the end of the taxable year. Thus, in
applying the requirements described herein, any "qualified REIT
subsidiaries" of Fortress will be ignored, and all assets, liabilities, and
items of income, deduction, and credit of such subsidiaries will be treated
as assets, liabilities, and items of income, deduction, and credit of
Fortress.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In
addition, the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of section 856 of the
Code, including satisfying the gross income and asset tests described
below. Fortress' proportionate share of the assets and gross income of the
Operating Partnership will be treated as assets and gross income of
Fortress for purposes of applying the requirements described herein.
Income Tests
In order for Fortress to qualify and to maintain its qualification
as a REIT, two requirements relating to Fortress' gross income must be
satisfied annually. First, at least 75% of Fortress' gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of certain types of income derived directly or indirectly from
investments relating to real property or mortgages on real property
(including "rents from real property" and interest on obligations secured
by mortgages on real property or on interests in real property, and
dividends or other distributions on and gain from the sale of stock in
other REITs) or from certain types of temporary investment income. Second,
at least 95% of Fortress' gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such
real property, mortgages on real property, or temporary investments, and
from dividends, other types of interest, and gain from the sale or
disposition of stock or securities, or from any combination of the
foregoing.
The rent received by Fortress from the tenants of real property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales or solely by reason of being based on the income or
profits of a tenant if such tenant derives substantially all of its gross
income from the related property through the sub-leasing of substantially
all of its interest in the property to the extent the amounts received by
such tenant would be characterized as rents from real property by the REIT.
Second, the Code provides that the Rent received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests
if Fortress, or a direct or indirect owner of 10% or more of Fortress, owns
10% or more of such tenant, both actually and constructively (a "Related
Party Tenant"). Third, if Rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total
Rent received under the lease, then the portion of Rent attributable
(taking into account both actual and constructive ownership) to such
personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," Fortress generally
must not furnish or render services (other than certain de minimis
services) to the tenants of such real property, other than through an
"independent contractor" who is adequately compensated by the tenants and
from whom Fortress derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent that the services
provided by Fortress are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant."
Fortress has represented that it will not charge Rent for any
portion of any real property that is based, in whole or in part, on the
income or profits of any person (except by reason of being based on a fixed
percentage or percentages of receipts or sales, as described above) to the
extent that the receipt of such Rent would jeopardize Fortress' status as a
REIT. In addition, Fortress has represented that, to the extent that it
receives Rent from a Related Party Tenant, such Rent will not cause
Fortress to fail to satisfy either the 75% or 95% gross income test.
Fortress also has represented that it will not allow the Rent attributable
to personal property leased in connection with any lease of real property
to exceed 15% of the total Rent received under the lease, if the receipt of
such Rent would cause Fortress to fail to satisfy either the 75% or 95%
gross income test. Finally, Fortress has represented that it will not
furnish or render noncustomary services (other than certain de minimis
services) to the tenants of its real property other than through an
"independent contractor," to the extent that such operation or the
provision of such services would jeopardize Fortress' status as a REIT.
The term "interest," as defined for purposes of the 75% and 95%
gross income tests, generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount
depends in whole or in part on 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. In addition, an amount received or
accrued generally will not be excluded from the term "interest" solely by
reason of being based on the income or profits of a debtor if the debtor
derives substantially all of its gross income from the related property
through the leasing of substantially all of its interests in the property,
to the extent the amounts received by the debtor would be characterized as
rents from real property if received by a REIT. Furthermore, to the extent
that interest from a loan that is based on the cash proceeds from the sale
of the property securing the loan constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and
95% gross income tests.
Interest will qualify as "interest on obligations secured by
mortgages on real property or on interests in real property" if the
obligation is secured by a mortgage on real property having a fair market
value at the time of acquisition of the obligation at least equal to the
principal amount of the loan. However, if Fortress receives interest income
with respect to a mortgage loan that is secured by both real property and
other property and the highest principal amount of the loan outstanding
during a taxable year exceeds the fair market value of the real property on
the date Fortress acquired or originated the mortgage loan, the interest
income will be apportioned between the real property and the other
property, which apportionment may cause Fortress to recognize income that
is not qualifying income for purposes of the 75% gross income test.
Fortress may receive income not described above that is not
qualifying income for purposes of one or both of the 75% and 95% gross
income tests. For example, it is possible that certain fees for services
rendered by the Operating Partnership will not be qualifying income for
purposes of either gross income test. It is not anticipated that the
Operating Partnership will receive a significant amount of such fees. In
addition, dividends received from regular corporations generally will be
qualifying income for purposes of the 95% gross income test, but not the
75% gross income test. Fortress will monitor the amount of nonqualifying
income produced by its assets and has represented that it will manage its
portfolio in order to comply at all times with the two gross income tests.
REITs generally are subject to tax at the maximum corporate rate
on any income from foreclosure property (other than income that would be
qualifying income for purposes of the 75% gross income test), less expenses
directly connected with the production of such income. "Foreclosure
property" is defined as any real property (including interests in real
property) and any personal property incident to such real property (i) that
is acquired by a REIT as the result of such REIT having bid in such
property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness owed to the REIT that such property secured, (ii) for which
the related loan was acquired by the REIT at a time when default was not
imminent or anticipated, and (iii) for which such REIT makes a proper
election to treat such property as foreclosure property. Fortress does not
anticipate that it will receive any income from foreclosure property that
is not qualifying income for purposes of the 75% gross income test, but, if
Fortress does receive any such income, Fortress will make an election to
treat the related property as foreclosure property.
Property acquired by Fortress will not be eligible for the
election to be treated as foreclosure property ("Ineligible Property") if
the related loan was acquired by Fortress at a time when default was
imminent or anticipated. In addition, income received with respect to such
Ineligible Property may not be qualifying income for purposes of the 75% or
95% gross income tests.
Net income derived from a prohibited transaction is subject to a
100% tax. The term "prohibited transaction" generally includes a sale or
other disposition of property (other than foreclosure property) that is
held primarily for sale to customers in the ordinary course of a trade or
business. Fortress intends to conduct its operations so that no asset owned
by Fortress or the Operating Partnership will be held for sale to customers
and that a sale of any such asset will not be in the ordinary course of
Fortress' or the Operating Partnership's business. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or
business" depends, however, on the facts and circumstances in effect from
time to time, including those related to a particular property.
Nevertheless, Fortress will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be
characterized as prohibited transactions. Complete assurance cannot be
given, however, that Fortress can comply with the safe-harbor provisions of
the Code or avoid owning property that may be characterized as property
held "primarily for sale to customers in the ordinary course of a trade or
business."
From time to time, Fortress may enter into hedging transactions
with respect to interest rate exposure on one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including, without limitation, interest rate swap contracts, interest rate
cap or floor contracts, futures or forward contracts, and options. To the
extent that Fortress enters into such a contract to hedge interest rate
risk on indebtedness incurred to acquire or carry real estate assets, any
periodic income thereon or gain from the disposition thereof should be
qualifying income for purposes of the 95% gross income test, but not the
75% gross income test. To the extent that Fortress hedges with other types
of financial instruments or in other situations (for example, hedges
against fluctuations in the value of foreign currencies), it may not be
entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code.
Fortress intends to structure any hedging transactions in a manner that
does not jeopardize its status as a REIT. Accordingly, Fortress may conduct
some or all of its hedging activities (including hedging activities
relating to currency risk) through a corporate subsidiary that is fully
subject to federal corporate income tax.
If Fortress fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT
for such year if it is entitled to relief under certain provisions of the
Code. Those relief provisions generally will be available if Fortress'
failure to meet such tests is due to reasonable cause and not due to
willful neglect, Fortress attaches a schedule of the sources of its income
to its return, and any incorrect information on the schedule was not due to
fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances Fortress would be entitled to the benefit of
those relief provisions. As discussed above in "Federal Income Tax
Considerations -- Taxation of the Company," even if those relief provisions
apply, a 100% tax would be imposed on the net income attributable to the
greater of the amount by which Fortress fails the 75% or 95% gross income
test.
Asset Tests
Fortress, at the close of each quarter of each taxable year, also
must satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of Fortress' total assets must be represented by
cash or cash items (including certain receivables), government securities,
"real estate assets," or, in cases where Fortress raises new capital
through stock or long-term (at least five-year) debt offerings, temporary
investments in stock or debt instruments during the one-year period
following Fortress' receipt of such capital. The term "real estate assets"
includes interests in real property, interests in mortgages on real
property to the extent the principal balance of a mortgage does not exceed
the fair market value of the associated real property, and shares of other
REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in mortgage loans or land or improvements
thereon, such as buildings or other inherently permanent structures
(including items that are structural components of such buildings or
structures), a leasehold of real property, and an option to acquire real
property (or a leasehold of real property). An "interest" in real property
also generally includes an interest in mortgage loans secured by
controlling equity interests in entities treated as partnerships for
federal income tax purposes that own real property, to the extent that the
principal balance of the mortgage does not exceed the fair market value of
the real property that is allocable to the equity interest. Second, not
more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, of the
investments not included in the 75% asset class, the value of any one
issuer's securities owned by Fortress may not exceed 5% of the value of
Fortress' total assets, and Fortress may not own more than 10% of any one
issuer's outstanding voting securities.
Fortress expects that any interests in real property that it
acquires generally will be qualifying assets for purposes of the 75% asset
test. If Fortress acquires any interest in a C corporation, such interest
may not (i) represent more than 5% of the value of Fortress' total assets
or (ii) constitute more than 10% of such corporation's outstanding voting
securities. Fortress will monitor the status of the assets that it acquires
for purposes of the various asset tests and has represented that it will
manage its portfolio in order to comply at all times with such tests.
If Fortress should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status
if (i) it satisfied the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of Fortress' assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by the acquisition of one or
more non-qualifying assets. If the condition described in clause (ii) of
the preceding sentence were not satisfied, Fortress still could avoid
disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
Distribution Requirements
Fortress, in order to avoid corporate income taxation of the
earnings that it distributes, is required to distribute with respect to
each taxable year dividends (other than capital gain dividends) to its
stockholders in an aggregate amount at least equal to (i) the sum of (A)
95% of its "REIT taxable income" (computed without regard to the dividends
paid deduction and its net capital gain) and (B) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before Fortress timely files its federal income tax return for
such year and if paid on or before the first regular dividend payment date
after such declaration. To the extent that Fortress does not distribute all
of its net capital gain or distributes at least 95%, but less than 100%, of
its "REIT taxable income," as adjusted, it will be subject to tax thereon
at regular ordinary and capital gains corporate tax rates. Furthermore, if
Fortress should fail to distribute during each calendar year (or, in the
case of distributions with declaration and record dates falling in the last
three months of the calendar year, by the end of the January immediately
following such year) at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain income for such
year (other than certain long-term capital gains income which Fortress
elects to retain and pay tax on), and (iii) any undistributed taxable
income from prior periods, Fortress would be subject to a 4% nondeductible
excise tax on the excess of such required distribution over the amounts
actually distributed. Pursuant to recently enacted legislation, Fortress
may elect to retain, rather than distribute its net long-term capital
gains. The effect of such an election would be that (i) Fortress would be
required to pay the tax on such gains, (ii) U.S. stockholders, while
required to include their proportionate share of the undistributed
long-term capital gains in income, would receive a credit or refund for
their share of the tax paid by Fortress and (iii) the basis of U.S.
stockholder's Common Stock would be increased by their share of the amount
of the undistributed long-term capital gains (minus the amount of capital
gains tax paid by Fortress).
In certain circumstances, the Company's investments may generate
income for federal income tax purposes without a corresponding receipt of
cash ("Phantom Income"). In order for Fortress to meet REIT qualifications
and/or avoid tax at the REIT level on such Phantom Income, Fortress may be
forced to use cash generated from other sources, including, without
limitation, asset sales and borrowings, to make required distributions.
Under certain circumstances, Fortress may be able to rectify a
failure to meet the distribution requirements for a year by paying
"deficiency dividends" to its stockholders in a later year, which may be
included in Fortress' deduction for dividends paid for the earlier year.
Although Fortress may be able to avoid being taxed on amounts distributed
as deficiency dividends, it will be required to pay to the IRS interest
based upon the amount of any deduction taken for deficiency dividends.
Foreign Investments
The Company may acquire investments and, accordingly pay taxes, in
foreign countries. In general, taxes paid by the Company in foreign
jurisdictions may not be passed-through to, or used by, holders of Common
Stock as a foreign tax credit or otherwise. The Company's foreign
investments may also generate foreign currency gains and losses, the
treatment of which is unclear under the tax laws relating to REITs.
Prospective stockholders should consult their tax advisors regarding the
tax implications of the Company's foreign investments.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, Fortress must
maintain certain records and request on an annual basis certain information
from its stockholders designed to disclose the actual ownership of its
outstanding stock. Failure to comply with such record keeping requirements
could result in monetary penalties to Fortress. Fortress intends to comply
with such requirements.
Impact of Proposed Legislation
Fortress' qualification as a REIT or its ability to utilize the
Sister Co. structure could be affected as a result of proposed or future
legislation. For example, the IRS Restructuring and Reform Bill of 1998
included, among other things, a freeze on the grandfathered status of REITs
that are "paired" or "stapled" with a related operating company. Although
such legislation does not affect "paper clip" structures, there can be no
assurance that future Clinton Administration proposals or similar proposed
legislation affecting the Sister Co. structure will not place legislative
or judicial scrutiny on the "paper clip" structure, or that legislation
adversely affecting such structure will not be proposed and enacted,
possibly on a retroactive basis. Further, on February 1, 1999, President
Clinton announced his Fiscal Year 2000 Budget Proposal. The Budget Proposal
includes a provision that would prohibit a REIT from holding securities
representing more than 10% of the vote or value of all classes of stock of
an issuer, other than a qualified REIT subsidiary or another REIT. The
proposal, however, would provide an exception so that REITs could have
certain types of "taxable REIT subsidiaries." Under the proposal, there
would be two types of taxable REIT subsidiaries, a "qualified independent
contractor subsidiary" and a "qualified business subsidiary." A number of
constrains would be imposed on a taxable REIT subsidiary to ensure that a
REIT could not, through a taxable REIT subsidiary, engage in substantial
non-real estate activities, and also to ensure that the taxable REIT
subsidiary pays a corporate level tax on its earnings. For example, the
value of all taxable REIT subsidiaries owned by a REIT could not represent
more than 15% of the value of the REIT's total assets and a taxable REIT
subsidiary would not be entitled to deduct any interest incurred on debt
funded directly or indirectly by the REIT. This proposal would be effective
after the date of enactment. REITs would be allowed to combine and convert
preferred stock subsidiaries into taxable REIT subsidiaries tax-free prior
to a certain date. There would be a transition period to allow for
conversion of preferred stock subsidiaries before the 10% vote or value
test would become effective.
Because the Company, indirectly through its ownership interest in
the Operating Partnership, owns 100% of the nonvoting preferred stock of
its preferred stock affiliate which represents approximately 95% of the
economic value of all classes of stock of its preferred stock affiliate,
the Company could not satisfy the proposed 10% vote or value test. The
Company's continued ownership of greater than 10% of the value of its
preferred stock affiliate could cause the Company to fail to qualify as a
REIT. Thus, if enacted in its present form, the proposal may limit the
preferred stock affiliate's future activities and growth. The Company does
not know if this proposal will be introduced as a bill in Congress or, if
it were introduced, whether it would be enacted. Any such legislation could
have an adverse impact on Fortress' qualification as a REIT and an
investment in Fortress. See "Risk Factors -- Possible Legislative or Other
Actions Affecting Tax Consequences."
Failure to Qualify
If Fortress fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, Fortress will be subject to
tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to Fortress' stockholders
in any year in which Fortress fails to qualify will not be deductible by
Fortress nor will they be required to be made. In such event, to the extent
of Fortress' current and accumulated earnings and profits, 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, Fortress also will be disqualified from taxation as a
REIT for the four taxable years following the year during which Fortress
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances Fortress would be entitled to statutory relief from its
failure to qualify as a REIT.
Taxation of Taxable U.S. Stockholders
As used herein, the term "U.S. stockholder" means a holder of
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the U.S., (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the U.S. or of any political
subdivision thereof, (iii) an estate whose income from sources without the
U.S. is includible in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or business within
the U.S., or (iv) any trust with respect to which (A) a U.S. court is able
to exercise primary supervision over the administration of such trust and
(B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
Provided Fortress qualifies as a REIT, distributions made to
Fortress' taxable U.S. stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends or retained net
long-term capital gains) will be taken into account by such U.S.
stockholders as ordinary income and will not be eligible for the dividends
received deduction generally available to corporations. Distributions that
are designated as capital gain dividends by Fortress will be taxed as
long-term capital gains (to the extent that they do not exceed Fortress'
actual net capital gain for the taxable year) without regard to the period
for which the stockholder has held his Common Stock. Pursuant to recently
enacted legislation, in the case of a stockholder who is an individual, an
estate or a trust, long-term capital gains and losses are separated into
two tax rate groups: a 20% group and a 25% group and subject to tax at the
rate effective for each group. The Company intends to designate capital
gain dividends, if any, as 20% rate gain distributions or 25% rate gain
distributions and detail such designations in a manner intended to comply
with applicable requirements. If Fortress elects to retain their share of
capital gains rather than distribute them, a stockholder will be deemed to
receive a capital gain dividend equal to the amount of such retained net
long-term capital gains. A stockholder will be allowed a credit against its
federal income tax liability for its proportionate share of tax paid by
Fortress on retained capital gains. See "Federal Income Tax Considerations
- -- Requirements for Qualifications -- Distribution Requirements." Such
gains are subject to apportionment among the two tax rate groups as set
forth above. Corporate stockholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Distributions in excess
of current and accumulated earnings and profits will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's Common Stock, but rather will reduce the adjusted basis of
such stock. To the extent that such distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a
stockholder's Common Stock, such distributions will be included in income
as long-term capital gain (or short-term capital gain if the Common Stock
has been held for one year or less), provided that the Common Stock is a
capital asset in the hands of the stockholder. In addition, any
distribution declared by Fortress in October, November, or December of any
year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by Fortress and received by the
stockholder on December 31 of such year, provided that the distribution is
actually paid by Fortress during January of the following calendar year.
Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of Fortress. Instead,
such losses would be carried over by Fortress for potential offset against
its future income (subject to certain limitations). Taxable distributions
from Fortress and gain from the disposition of the Common Stock will not be
treated as passive activity income and, therefore, stockholders generally
will not be able to apply any "passive activity losses" (such as losses
from certain types of limited partnerships in which a stockholder is a
limited partner) against such income. In addition, taxable distributions
from Fortress generally will be treated as investment income for purposes
of the investment interest limitations. Capital gains from the disposition
of Common Stock (or distributions treated as such), however, will be
treated as investment income only if the stockholder so elects, in which
case such capital gains will be taxed at ordinary income rates. Fortress
will notify stockholders after the close of Fortress' taxable year as to
the portions of the distributions attributable to that year that constitute
ordinary income or capital gain dividends.
It is possible that Fortress may invest in certain types of
mortgage loans that may cause it under certain circumstances to recognize
Phantom Income or to experience an offsetting excess of economic income
over its taxable income in later years. As a result, stockholders may from
time to time be required to pay federal income tax on distributions that
economically represent a return of capital, rather than a dividend. Such
distributions would be offset in later years by distributions representing
economic income that would be treated as returns of capital for federal
income tax purposes. Accordingly, if Fortress receives Phantom Income, its
stockholders may be required to pay federal income tax with respect to such
income on an accelerated basis, i.e., before such income is realized by the
stockholders in an economic sense. If there is taken into account the time
value of money, such an acceleration of federal income tax liabilities
would cause stockholders to receive an after-tax rate of return on an
investment in Fortress that would be less than the after-tax rate of return
on an investment with an identical before-tax rate of return that did not
generate Phantom Income. In general, as the ratio of Fortress' Phantom
Income to its total income increases, the after-tax rate of return received
by a taxable stockholder of Fortress will decrease. Fortress will consider
the potential effects of Phantom Income on its taxable stockholders in
managing its investments.
Taxation of Stockholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable disposition
of the Common Stock by a U.S. stockholder who is not a dealer in securities
will be treated as capital gain or loss. Any such capital gain or loss
generally will (x) in the case of U.S. stockholders which are corporations,
be long-term capital gain or loss if the Common Stock has been held for
more than 12 months, and (y) in the case of U.S. stockholders who are
non-corporate tax payers, be long-term capital gain or loss taxed at a
maximum federal income tax rate of 20% if the U.S. stockholder's holding
period in such Common Stock was more than 12 months at the time of such
disposition.
Taxation of Tax-Exempt Stockholders
Tax exempt entities, including qualified employee pension and
profit sharing trusts and individual retirement accounts ("Exempt
Organizations"), generally are exempt from federal income taxation.
However, they are subject to taxation on their unrelated business taxable
income ("UBTI"). While many investments in real estate generate UBTI, the
IRS has issued a published ruling that dividend distributions from a REIT
to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or
business of the exempt employee pension trust. Based on that ruling,
amounts distributed by Fortress to Exempt Organizations generally should
not constitute UBTI. However, if an Exempt Organization finances its
acquisition of the Common Stock with debt, a portion of its income from
Fortress will constitute UBTI pursuant to the "debt-financed property"
rules. In addition, in certain circumstances, a pension trust that owns
more than 10% of Fortress' stock is required to treat a percentage of the
dividends from Fortress as UBTI. This rule applies to a pension trust
holding more than 10% of Fortress' stock only if (i) the percentage of
income of Fortress that is UBTI (determined as if Fortress were a pension
trust) is at least 5%, (ii) Fortress qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding shares of Fortress in proportion to their
actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of Fortress' stock or (B) a group of
pension trusts individually holding more than 10% of the value of Fortress'
stock collectively owns more than 50% of the value of Fortress' stock. The
restrictions on ownership and transfer should prevent an Exempt
Organization from owning more than 9.8% of the value of Fortress stock.
Taxation of Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, and other
foreign stockholders (collectively, "Non-U.S. Stockholders") are complex
and no attempt will be made herein to provide more than a summary of such
rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX
LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY
REPORTING REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not attributable
to gain from sales or exchanges by Fortress of U.S. real property interests
and are not designated by Fortress as capital gains dividends or returned
capital gains will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of
Fortress. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income
from the investment in the Common Stock is treated as effectively connected
with the Non-U.S. Stockholder's conduct of a U.S. trade or business, the
Non-U.S. Stockholder generally will be subject to federal income tax at
graduated rates, in the same manner as U.S. stockholders are taxed with
respect to such distributions (and also may be subject to the branch
profits tax in the case of a Non-U.S. Stockholder that is a corporation).
Fortress expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any such distributions made to a Non-U.S. Stockholder
unless (i) a lower treaty rate applies and any required form evidencing
eligibility for that reduced rate is filed with Fortress or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with Fortress claiming that the
distribution is effectively connected income. Furthermore, on October 6,
1997, the U.S. Treasury Department issued final Treasury regulations
governing information reporting and the certification procedures regarding
withholding and backup withholding on certain amounts paid to Non-U.S.
Stockholders after December 31, 1999 (the "New Withholding Regulations").
The New Withholding Regulations may alter the procedure for claiming the
benefits of an income tax treaty.
Distributions in excess of current and accumulated earnings and
profits of Fortress will not be taxable to a Non-U.S. Stockholder to the
extent that such distributions do not exceed the adjusted basis of the
stockholder's Common Stock, but rather will reduce the adjusted basis of
such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's Common Stock, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on
any gain from the sale or disposition of his Common Stock, as described
below. Because it generally cannot be determined at the time a distribution
is made whether or not such distribution will be in excess of current and
accumulated earnings and profits, the entire amount of any distribution
normally will be subject to withholding at the same rate as a dividend.
However, amounts so withheld are refundable to the extent it is determined
subsequently that such distribution was, in fact, in excess of current and
accumulated earnings and profits of Fortress. To obtain a refund of
withheld tax, a Non-U.S. Stockholder must generally file a claim with and
provide the required information to the IRS. Fortress is required to
withhold 10% of any distribution in excess of Fortress' current and
accumulated earnings and profits. Consequently, although Fortress intends
to withhold at a rate of 30% on the entire amount of any distribution, to
the extent that Fortress does not do so, any portion of a distribution not
subject to withholding at a rate of 30% will be subject to withholding at a
rate of 10%.
For any year in which Fortress qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Fortress of U.S.
real property interests (i.e., interests in real property located in the
U.S. and interests in U.S. corporations at least 50% or whose assets
consist of U.S. real property interests) will be taxed to a Non-U.S.
Stockholder under the provisions of the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to
gain from sales of U.S. real property interests are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a U.S. trade or
business. Non-U.S. Stockholders thus would be taxed at the normal capital
gain rates applicable to U.S. stockholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case
of nonresident alien individuals). Distributions subject to FIRPTA also may
be subject to the 30% branch profits tax in the hands of a Non-U.S.
Stockholder that is a corporation. Fortress is required to withhold 35% of
any distribution that is designated by Fortress as a capital gain dividend.
The amount withheld is creditable against the Non-U.S. Stockholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his
Common Stock generally will not be taxed under FIRPTA if Fortress is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock
was held directly or indirectly by non-U.S. persons. Although, it is
currently anticipated that Fortress will be a "domestically controlled
REIT" and, therefore, the sale of the Common Stock will not be subject to
taxation under FIRPTA, there can be no assurance that Fortress will be a
"domestically-controlled REIT." Even if such gain is not subject to FIRPTA,
such gain will be taxable to a Non-U.S. Stockholder if (i) investment in
the Common Stock is effectively connected with the Non-U.S. Stockholder's
U.S. trade or business, in which case the Non-U.S. Stockholder will be
subject to the same treatment as U.S. Stockholders with respect to such
gain, or (ii) the Non-U.S. Stockholder is a nonresident alien individual
who was present in the U.S. for 183 days or more during the taxable year
and certain other conditions apply, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains.
If the gain on the sale of the Common Stock were to be subject to taxation
under FIRPTA, the Non-U.S. Stockholder would be subject to the same
treatment as U.S. stockholders with respect to such gain (subject to
applicable alternative minimum tax, a special alternative minimum tax in
the case of nonresident alien individuals, and the possible application of
the 30% branch profits tax in the case of non-U.S. corporations).
Additional issues may arise pertaining to information reporting
and backup withholding with respect to Non-U.S. Stockholders. The New
Withholding Regulations alter the application of the information reporting
and backup withholding rules to Non-U.S. Stockholders. Non-U.S.
Stockholders should consult with a tax advisor with respect to any such
information reporting and backup withholding requirements. Backup
withholding with respect to a Non-U.S. Stockholder is not an additional
tax. Rather, the amount of any backup withholding with respect to a payment
to a Non-U.S. Stockholder will be allowed as a credit against any U.S.
federal income tax liability of such Non-U.S. Stockholder. If withholding
results in an overpayment of taxes, a refund may be obtained, provided that
the required information is furnished to the Internal Revenue IRS.
Possible Legislative or Other Actions Affecting Tax Consequences
The present Federal income tax treatment of an investment in
Fortress may be modified by legislative, judicial or administrative action
at any time. The rules dealing with Federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS
and the U.S. Treasury Department, resulting in revisions of regulations and
revised interpretations of established concepts as well as statutory
changes. Revisions in Federal tax laws and interpretations thereof could
adversely affect an investment in Fortress. It cannot be predicted whether,
when, in what forms, or with what effective dates, the tax laws applicable
to Fortress' Common Stock will be changed.
State, Local and Foreign Tax Consequences
The Company and Fortress' stockholders may be subject to state,
local and foreign tax in various states, localities and foreign
jurisdiction, in which it or they transact business or own property. The
state and local tax treatment of the Company and its stockholders in such
jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their tax
advisors regarding the effect of state, local and foreign tax laws upon an
investment in the Common Stock.
Sister Co.
Each Sister Co. organized as a corporation will pay federal, state
and local income taxes on its taxable income at regular corporate rates.
Any such taxes will reduce amounts available for distribution by each such
Sister Co. to its stockholders.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"),
impose certain restrictions on (a) employee benefit plans (as defined in
Section 3(3) of ERISA), (b) plans described in section 4975(e)(1) of the
Code, including individual retirement accounts or Keogh plans, (c) any
entities whose underlying assets include plan assets by reason of a plan's
investment in such entities (each a "Plan") and (d) persons who have
certain specified relationships to such Plans ("Parties-in-Interest" under
ERISA and "Disqualified Persons" under the Code). Moreover, based on the
reasoning of the U.S. Supreme Court in John Hancock Life Ins. Co. v. Harris
Trust and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general
account may be deemed to include assets of the Plans investing in the
general account (e.g., through the purchase of an annuity contract), and
the insurance company might be treated as a Party-in-Interest or
Disqualified Person with respect to a Plan by virtue of such investment.
ERISA also imposes certain duties on persons who are fiduciaries of Plans
subject to ERISA and prohibits certain transactions between a Plan and
Parties-in-Interest or Disqualified Persons with respect to such Plans.
The Acquisition and Holding of Common Stock
The Initial Purchaser, the Manager, or certain affiliates thereof
may be "Parties-in-Interest" or "Disqualified Persons" with respect to a
number of Plans. Accordingly, investment in the Common Stock by a Plan that
has such a relationship could be deemed to constitute a transaction
prohibited under Title I of ERISA or Section 4975 of the Code (e.g., the
indirect transfer to or use by Party-in-Interest or Disqualified Person of
assets of a Plan). Such transactions may, however, be subject to one or
more statutory or administrative exemptions such as Prohibited Transaction
Class Exemption ("PTCE") 90-1, which exempts certain transactions involving
insurance company pooled separate accounts; PTCE 91-38, which exempts
certain transactions involving bank collective investment funds; and PTCE
84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager;" PTCE 95-60, which exempts certain
transactions involving insurance company general accounts; PTCE 96-23,
which exempts certain transactions effected on behalf of a Plan by an
"in-house asset manager;" or another available exemption. Such exemptions
may not, however, apply to all of the transactions that could be deemed
prohibited transactions in connection with a Plan's investment.
The Treatment of the Company's Underlying Assets Under ERISA
The U.S. Department of Labor (the "DOL") has issued a regulation
(29 C.F.R. 2510.3-101) concerning the definition of what constitutes the
assets of a Plan (the "Plan Asset Regulations"). This regulation provides
that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a
Plan purchases an "equity interest" will be deemed for purposes of ERISA to
be assets of the investing Plan unless certain exceptions apply. The Plan
Asset Regulations define an "equity interest" as any interest in an entity
other than an instrument that is treated as indebtedness under applicable
local law and which has no substantial equity features. The Common Stock
offered hereby should be treated as "equity interests" for purposes of the
Plan Asset Regulations.
One exception under the Plan Asset Regulations provides that an
investing Plan's assets will not include any of the underlying assets of an
entity if at all times less than 25% of each class of "equity" interests in
the entity is held by "benefit plan investors," which is defined to include
Plans that are not subject to ERISA such as governmental pension plans and
individual retirement accounts as well as Plans that are subject to ERISA.
Another exception is provided for an investment in an "operating company,"
which is defined in the Plan Asset Regulations to include a "venture
capital operating company" and a "real estate operating company." To be a
"venture capital operating company," an entity must have at least 50% of
its assets (other than short-term investments pending long-term commitment
or distribution to investors), valued at cost, invested in "venture capital
investments," which are defined as companies in the business of selling
goods or services (other than the investment of capital) with respect to
which the entity has or obtains management rights. To be a "real estate
operating company" an entity must have at least 50% of its assets (other
than short-term investments pending long-term commitment or distribution to
investors), valued at cost, invested in real estate that is managed or
developed and with respect to which such entity has the right to
substantially participate in such management or development activities.
Another exception under the Plan Asset Regulations provides that an
investing Plan's assets will not include any of the underlying assets of an
entity if the class of "equity" interests in question is (i) widely held
(i.e., held by 100 or more investors who are independent of the issuer and
each other), (ii) freely transferable, and (iii) part of a class of
securities registered under Section 12(b) or 12(g) of the Exchange Act (the
"Publicly Offered Securities Exception").
The Board of Directors of Fortress will take such steps as may be
necessary to qualify for one or more of the exceptions available under the
Plan Asset Regulations and thereby prevent the assets of the Company or any
Sister Co. from being treated as assets of any investing Plan.
Specifically, the Company intends to initially limit equity ownership in
the Company by benefit plan investors to less than 25% of the value of any
class of equity securities issued by the Company and to subsequently take
steps to qualify the Common Stock as a class of publicly offered securities
at which time the 25% limitation will cease to be applicable. In addition,
with respect to any Sister Co., the Company will take such steps as may be
necessary to qualify such Sister Co. as a venture capital operating company
or other available exception under the Plan Asset Regulations prior to
distribution of its equity interests.
If, however, none of the exceptions under the Plan Asset
Regulations were applicable and the Company were deemed to hold Plan assets
by reason of a Plan's investment in Common Stock (or other equity security
of the Company), such Plan's assets would include an undivided interest in
the assets held by the Company. In such event, such assets, transactions
involving such assets and the persons with authority or control over and
otherwise providing services with respect to such assets would be subject
to the fiduciary responsibility provisions of Title I of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code and
there is no assurance that any statutory or administrative exemption from
the application of such rules would be available.
Accordingly, prior to the date (i) the Common Stock qualifies as a
class of publicly offered securities, or (ii) the Company complies with
another available exception under the Plan Asset Regulations, the Company
will not approve the sale, transfer or disposition of the Common Stock or
other equity security of the Company unless, following such sale, transfer
or disposition, less than twenty-five percent (25%) of the value of such
Common Stock and any other class of security that is treated as an equity
interests in the Company for purposes of the Plan Asset Regulations is held
by (i) employee benefit plans (as defined in section 3(3) of ERISA, whether
or not it is subject to Title I of ERISA; (ii) Plans described in section
4975 of the Code; (iii) entities whose underlying assets include Plan
assets by reason of a Plan's investment in such entities; or (iv) entities
that otherwise constitute "benefit plan investors" within the meaning of
the Plan Asset Regulations determined without regard to the value of any
such interests held by affiliates of the Manager or other persons with
authority or control with respect to the assets of the Company other than
benefit plan investors.
As noted above, based on the reasoning of the U.S. Supreme Court
in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517
(1993), an insurance company's general account may be deemed to include
assets of the Plans investing in the general account (e.g., through the
purchase of an annuity contract), and the insurance company might be
treated as a Party-in-Interest with respect to a Plan by virtue of such
investment. Any purchaser that is an insurance company using the assets of
an insurance company general account should note that the Small Business
Job Protection Act of 1996 added new Section 401(c) of ERISA relating to
the status of the assets of insurance company general accounts under ERISA
and Section 4975 of the Code. Pursuant to Section 401(c), the Department of
Labor is required to issue final regulations (the "General Account
Regulations") not later than December 31, 1997 with respect to insurance
policies issued on or before December 31, 1998 that are supported by an
insurer's general account. The General Account Regulations are to provide
guidance on which assets held by the insurer constitute "plan assets" for
purposes of the fiduciary responsibility provisions of ERISA and Section
4975 of the Code. Section 401(c) also provides that, except in the case of
avoidance of the General Account Regulation and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that
also constitute breaches of state or federal criminal law, until the date
that is 18 months after the General Account Regulations become final, no
liability under the fiduciary responsibility and prohibited transaction
provisions of ERISA and Section 4975 may result on the basis of a claim
that the assets of the general account of an insurance company constitute
the plan assets of any such plan. The plan asset status of insurance
company separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any
such plan invested in a separate account.
Any Plan fiduciary that proposes to cause a Plan to purchase
Common Stock should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and determine on its
own whether any exceptions or exemptions are applicable and whether all
conditions of any such exceptions or exemptions have been satisfied.
Moreover each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the Common Stock is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
The sale of the Common Stock is in no respect a representation by
the Company or any other person that such an investment meets all relevant
legal requirements with respect to investments by Plans generally or that
such an investment is appropriate for any particular Plan.
SELLING STOCKHOLDERS
Certain shares of the Common Stock were originally issued by
Fortress and sold by NationsBanc Montgomery Securities LLC (the "Initial
Purchaser") in the Original Offering in transactions exempt from the
registration requirements of the Securities Act to persons reasonably
believed by the Initial Purchaser to be "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act), to a limited number of
institutional "accredited investors" (as defined in Rule 501 (a) (1), (2),
(3) or (7) under the Securities Act) and to individual "accredited
investors" (as defined in Rule 501 (a) (4), (5) or (6) under the Securities
Act). Additional shares of the Common Stock were issued and sold by
Fortress directly to an affiliate of the Manager and to certain employees
of the Manager in the Private Placement. The Selling Stockholders may from
time to time offer and sell pursuant to this Prospectus any or all of the
Common Stock. The term Selling Stockholders includes the holders listed
below and the beneficial owners of the Common Stock and their transferees,
pledgees, donees or other successors.
The following table sets forth information with respect to the
Selling Stockholders of the Common Stock and the respective number of
shares of Common Stock beneficially owned by each Selling Stockholder that
may be offered pursuant to this Prospectus.
Selling Stockholder Number of Shares
- --------------------------------------- ---------------------------------
Because the Selling Stockholders may, pursuant to this Prospectus,
offer all or some portion of the Common Stock, no estimate can be given as
to the amount of the Common Stock that will be held by the Selling
Stockholders upon termination of any such sales. In addition, the Selling
Stockholders identified above may have sold, transferred or otherwise
disposed of all or a portion of their Common Stock since the date on which
they provided the information regarding their Common Stock, in transactions
exempt from the registration requirements of the Securities Act.
Notwithstanding the foregoing, the Manager (and its affiliates),
the Principals, each senior officer and director of Fortress and of the
Manager, and each employee of Fortress or the Manager that beneficially
owns greater than 5% of the Common Stock have agreed not to offer, sell,
grant any options to purchase or otherwise dispose of or pledge any shares
of Common Stock until June 10, 1999 (one year following the First Closing
Date of the Original Offering) without the Initial Purchaser's consent. In
addition, the Manager and the Principals have agreed that they will
continue to own at least 50% of the Common Stock or Units purchased by them
in connection or concurrently with the Original Offering and the Private
Placement for an additional one year period (ending June 10, 2000).
PLAN OF DISTRIBUTION
The Offered Securities may be offered and sold from time to time
by the Selling Stockholders directly to purchasers. Alternatively, the
Selling Stockholders may from time to time offer the Offered Securities to
or through underwriters, broker/dealers or agents, who may receive
compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders or the purchasers of such
securities for whom they may act as agents. The Selling Stockholders and
any underwriters, broker/dealers or agents that participate in the
distribution of Offered Securities may be deemed to be "underwriters"
within the meaning of the Securities Act and any profit on the sale of such
securities and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealer or agent may
be deemed to be underwriting discounts and commissions under the Securities
Act. If required, the names of any such agents or underwriters involved in
the sale of the Offered Securities and the applicable agent's commission,
dealer's purchase price or underwriter's discount, if any, will be set
forth in an accompanying supplement to this Prospectus (the "Prospectus
Supplement").
The Offered Securities may be sold from time to time in one or
more transactions at fixed prices, at prevailing market prices at the time
of sale, at varying prices determined at the time of sale or at negotiated
prices. The sale of the Offered Securities may be effected in transactions
(which may involve crosses or block transactions) (i) on any national
securities exchange or quotation service on which the Offered Securities
may be listed or quoted at the time of sale, (ii) in the over-the-counter
market, (iii) in transactions otherwise than on such exchanges or in the
over-the-counter market or (iv) through the writing of options. At the time
a particular offering of the Offered Securities is made, a Prospectus
Supplement, if required, will be distributed which will set forth the
aggregate amount and type of Offered Securities being offered and the terms
of the offering, including the name or names of any underwriters,
broker/dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to broker/dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the Offered Securities will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Offered Securities may not be
offered or sold unless they have been registered or qualified for sale in
such jurisdictions or any exemption from registration or qualification is
available and is complied with.
The Selling Stockholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of the purchases and sales of any of the
Offered Securities by the Selling Stockholders. The foregoing may affect
the marketability of such securities.
The Selling Stockholders will pay all the underwriting discounts
and selling commissions and transfer taxes, if any, applicable to any sale.
Fortress is responsible for payment of all other expenses incident to the
registration of the Offered Securities, including, without limitation,
Commission filing fees and expenses of compliance with state securities or
"blue sky" laws; provided, however, that the Selling Stockholders will be
indemnified by the Company against certain civil liabilities, including
certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith. The Company will be indemnified by
the Selling Stockholders severally against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled
to contribution in connection therewith.
LEGAL MATTERS
Certain legal matters will be passed upon for Fortress by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York, and Ballard Spahr
Andrews & Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Company, as of
December 31, 1998 and for the period from May 11, 1998 (date of formation)
to December 31, 1998, appearing in this Prospectus and Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and are included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
FORTRESS INVESTMENT CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT...............................................F-3
HISTORICAL FINANCIAL STATEMENTS:
Consolidated Balance Sheet at December 31, 1998......................F-4
Consolidated Statement of Operations and Comprehensive Income for
the Period from May 11, 1998 (Date of Formation) to
December 31, 1998..............................................F-5
Consolidated Statement of Stockholders' Equity for the Period
from May 11, 1998 (Date of Formation) to December 31,
1998...........................................................F-6
Consolidated Statement of Cash Flows for the Period from May 11,
1998 (Date of Formation) to December 31, 1998..................F-7
Notes to Consolidated Financial Statements...................F-8 to F-23
STATEMENTS OF REVENUE AND CERTAIN EXPENSES:
Combined Statement of Revenues and Certain Expenses for the
Properties known as the "Initial GSA Properties" For
the Year Ended December 31, 1997:
Independent Auditors' Report..................................F-30
Combined Statement of Revenues and Certain Expenses...........F-31
Notes to Combined Statement of Revenues and Certain
Expenses ..........................................F-32 to F-33
Statement of Revenues and Certain Expenses for the Property
known as the "GSA Houston Property" For the Year
Ended December 31, 1997:
Independent Auditors' Report..................................F-34
Statement of Revenues and Certain Expenses....................F-35
Notes to Statement of Revenues and Certain Expenses...F-36 to F-37
Statement of Revenue and Certain Expenses for the Property
known as the "GSA San Diego Property" For the Period
November 6, 1998 through December 31, 1998:
Independent Auditors' Report..................................F-38
Statement of Revenue and Certain Expenses.....................F-39
Notes to Statement of Revenue and Certain Expenses....F-40 to F-41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Fortress Investment Corp.
New York, NY
We have audited the accompanying consolidated balance sheet of Fortress
Investment Corp. and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of operations and comprehensive
income, stockholders' equity and cash flows for the period from May 11,
1998 (Date of Formation) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December
31, 1998, and the results of its operations and its cash flows for the
period from May 11, 1998 (Date of Formation) through December 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 19, 1999
(April 21, 1999, with respect to Note 16)
FORTRESS INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 97,333
Marketable securities available for sale, at fair value 9,521
Revenue-producing real estate, net 383,073
Loans receivable, net 216,717
Foreclosed real estate 3,813
Accounts receivable 6,122
Accrued interest receivable 2,122
Deferred rent 5,072
Deposits 12,958
Investment in unconsolidated subsidiary 11,973
Deferred hedge of anticipated transaction 13,103
Deferred costs, net 2,760
Prepaid expenses and other assets, net 1,083
--------
TOTAL ASSETS $ 765,650
========
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $ 102,689
Loan payable 234,156
Unearned rental revenue 1,184
Dividends payable 6,275
Due to manager 1,783
Deferred hedging liabilities 17,388
Derivative interest payable 5,293
Other liabilities 7,354
--------
Total liabilities 376,122
--------
COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST 4,604
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share,
authorized 100,000,000 shares; no shares
issued and outstanding --
Common stock, $.01 par value, 500,000,000
shares authorized; 20,916,739 shares issued
and outstanding 209
Additional paid-in capital 388,045
Dividends in excess of earnings (864)
Accumulated other comprehensive income (loss) (2,466)
--------
Total stockholders' equity 384,924
--------
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY $ 765,650
========
See notes to consolidated financial statements.
FORTRESS INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME FOR THE PERIOD FROM MAY 11, 1998
(DATE OF FORMATION) TO DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------
REVENUES:
Rental revenue $ 20,297
Interest income 18,962
Gain on resolution of loans 2,584
Escalation income 2,341
Equity in earnings of unconsolidated subsidiary 117
Dividends on marketable securities, available for sale 713
Other income 874
----------
Total revenues 45,888
----------
EXPENSES:
Interest expense on loan payable 5,992
Interest expense on repurchase agreements and other 6,701
Property operating expenses 4,540
Real estate taxes 2,487
General and administrative expenses 2,396
Management fee 6,000
Depreciation and amortization 4,165
Loan servicing fees 1,291
Other expenses 1,106
----------
Total expenses 34,678
----------
INCOME BEFORE MINORITY INTEREST 11,210
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARIES (570)
----------
NET INCOME 10,640
----------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (231)
Unrealized loss on securities arising during period (2,235)
----------
OTHER COMPREHENSIVE INCOME (LOSS) (2,466)
----------
COMPREHENSIVE INCOME 8,174
==========
NET INCOME PER SHARE BASIC AND DILUTED $ 0.51
==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 20,862,000
==========
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
FORTRESS INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 11, 1998 (DATE OF FORMATION) TO DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Preferred Common
--------------------------------------- Accumulated
Additional Dividends in Other
Paid in Excess of Comprehensive
Shares Stock Shares Stock Capital Earnings Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stockholder's equity -
May 11, 1998 -- -- -- $ -- $ -- $ -- $ -- $ --
(date of formation)
Initial capital
contribution - -- -- 50 -- 1 -- -- 1
June 4, 1998
Net proceeds from
private offering of
common stock -- -- 20,353,400 203 373,944 -- -- 374,147
Value of stock
option granted -- -- -- -- 3,600 -- -- 3,600
to Manager
Additional common -- -- 563,289 6 10,500 -- -- 10,506
stock issued
Dividends declared -- -- -- -- -- (11,504) -- (11,504)
Net income for the
period from May 11, 10,640 10,640
1998 (date of
formation) to
December 31, 1998
Unrealized loss on -- -- -- -- -- -- (2,235) (2,235)
securities
Foreign currency
translation
adjustments -- -- -- -- -- -- (231) (231)
------ ------ ---------- ------ -------- ------- -------- --------
Stockholders' equity -
December 31, 1998 -- -- 20,916,739 209 $388,045 ($864) ($2,466) $384,924
====== ====== ========== ====== ======== ======= ======== ========
See notes to consolidated financial statements
</TABLE>
FORTRESS INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 11,1998 (DATE OF FORMATION)
TO DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,640
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,165
Equity in earnings of unconsolidated subsidiary (117)
Minority interest 570
Deferred rent (787)
Gain on resolution of loans (2,584)
Accretion of loan discount (2,673)
Change in:
Derivative interest payable 5,293
Unearned rental revenue 1,184
Accounts and interest receivable (8,244)
Prepaid expenses, deferred charges and other assets (2,077)
Other liabilities 7,354
Due to manager 1,783
----------
Net cash provided by operating activities: 14,507
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of revenue-producing real estate (386,770)
Purchases of loans (424,440)
Purchase of foreclosed real estate (10,869)
Repayments of loan principal 131,867
Proceeds from sale of loans and foreclosed real estate 40,536
Distribution from unconsolidated subsidiary 35,777
Deposits on acquisition of real estate (12,958)
Purchase of marketable securities (12,422)
Proceeds from sale of marketable securities 666
----------
Net cash used in investing activities: (638,613)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under repurchase agreements 274,328
Repayments of repurchase agreements (171,639)
Borrowings under loan payable 234,156
Issuance of common stock 388,254
Minority interest contribution 4,034
Dividends paid (5,229)
Deferred financing costs (2,234)
----------
Net cash provided by financing activities 721,670
----------
EFFECT OF EXCHANGE RATES ON CASH, NET OF HEDGING (231)
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 97,333
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 97,333
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest expense: $ 10,726
==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of foreclosed real estate and loans to
unconsolidated subsidiary $ (47,633)
==========
Loan foreclosures $ (9,095)
==========
Common stock dividends declared but not paid $ 6,275
==========
Fair value of stock options granted $ 3,600
==========
See Notes to Consolidated Financial Statements
FORTRESS INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 11, 1998 (DATE OF FORMATION) TO DECEMBER 31, 1998
1. ORGANIZATION
Fortress Investment Corp. ("Fortress" or the "Company") is a newly formed
corporation whose primary businesses are (1) investing in commercial
properties leased to third parties, (2) investing in portfolios of
distressed, sub- performing and performing residential and commercial
mortgage loans and related properties acquired in foreclosure or by
deed-in-lieu of foreclosure, and (3) making short-term, secured loans to
third-party owners of real estate or portfolios of mortgage loans.
The consolidated financial statements include the accounts of Fortress and
its majority-owned subsidiaries, which include Fortress Partners, L.P. (the
"Operating Partnership"), its primary investment subsidiary.
Fortress was incorporated under the laws of the State of Maryland on May
11, 1998 and was initially capitalized through the sale of 50 shares of
common stock for $1,000. In June 1998, Fortress increased the number of its
authorized shares to 500,000,000 shares of common stock and 100,000,000
shares of preferred stock. In June 1998, Fortress completed a private
offering for the sale of 20,353,400 shares of common stock (the
"Offering"), subject to an over-allotment option granted to NationsBanc
Montgomery Securities LLC (the "Initial Purchaser"). The proceeds of the
Offering, net of expenses, were approximately $374.1 million. In July 1998,
the Initial Purchaser exercised its over-allotment option and purchased an
additional 559,001 shares of common stock, resulting in additional proceeds
of approximately $10.4 million. The Initial Purchaser was obligated to sell
the common stock only to qualified institutional buyers in accordance with
Rule 144A under the Securities Act and to accredited investors in
accordance with Regulation D under the Securities Act. In addition, in July
1998, certain employees of Fortress Investment Group LLC (together with its
affiliates, the "Manager") purchased 4,288 shares of common stock resulting
in additional proceeds of approximately $80,000. As a result of the above
transactions, Fortress had 20,916,739 shares issued and outstanding at
December 31, 1998.
Fortress has elected to be taxed in 1998 as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986 (the "Code"). As such,
Fortress will generally not be subject to federal income tax on that
portion of its income that is distributed to shareholders if it distributes
at least 95% of its REIT taxable income to its shareholders by the due date
of its federal income tax return and complies with various other
requirements.
Fortress has entered into a management agreement (the "Management
Agreement," further described in Notes12 and 13) with the Manager under
which the Manager advises Fortress on various aspects of its business and
manages its day-to-day operations, subject to the supervision of Fortress's
Board of Directors. For its services, the Manager receives an annual
management fee, as defined in the Management Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING - The accompanying consolidated financial statements
are prepared in accordance with generally accepted accounting principles
and include the accounts of Fortress, the Operating Partnership and their
consolidated subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Fortress has elected a
December 31 fiscal year end. The Company consolidates those entities in
which it has an investment of 50% or more and has control over significant
operating, financial and investing decisions of the entity. For entities in
which the Company has an investment of less than 50%, or over which it does
not exercise significant control, it uses the equity method of accounting.
Minority interest represents the ownership in certain consolidated
subsidiaries held by entities other than the Company.
RISKS AND UNCERTAINTIES - In the normal course of business, the Company
encounters primarily two significant types of economic risk: credit and
market. Credit risk is the risk of default on the Company's loan portfolio
that results from a borrower's or derivative counterparty's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of investments in loans and real estate or in hedging
instruments due to changes in interest rates or other market factors,
including the value of the collateral underlying loans and the valuation of
real estate held by the Company. Concentrations of risks include certain
geographic concentrations of loans receivable (see Note 3) and individual
loans of up to 12% of total assets at December 31, 1998. Management
believes that carrying values of such investments are reasonable taking
into consideration these risks along with estimated collateral values,
payment histories, and other borrower information.
The Company also invests in real estate, or mortgage loans secured by real
estate, located outside of the United States. The Company's international
operations are subject to the same risks associated with its United States
operations as well as additional risks, such as fluctuations in foreign
currency exchange rates, unexpected changes in regulatory requirements,
heightened risk of political and economic instability, potential adverse
tax consequences and the burden of complying with a wide variety of foreign
laws.
Additionally, the Company encounters significant tax risks. If Fortress
were to fail to qualify as a REIT in any taxable year, Fortress would be
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates, and distributions to
shareholders would not be deductible by Fortress in computing its taxable
income. Any such corporate tax liability could be substantial and would
reduce the amount of cash available for distribution to shareholders, which
in turn could have an adverse impact on the value of, and trading prices
for, the Company's common stock. Unless entitled to relief under certain
provisions of the Code, the Company could also be disqualified from
taxation as a REIT for the four taxable years following the year during
which it ceased to qualify as a REIT.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.
FEDERAL INCOME TAXES - The Company expects to qualify as a REIT under
Sections 856 through 860 of the Code. A REIT will generally not be subject
to federal income taxation on that portion of its income that is
distributed to shareholders if it distributes at least 95% of its REIT
taxable income by the due date of its federal income tax return and
complies with certain other requirements. Since the Company plans to
distribute 100% of its 1998 taxable income, no provision has been made for
federal income taxes in the accompanying consolidated financial statements.
All distributions related to 1998 represent ordinary income.
In order to satisfy the 95% requirement and to meet its objective of
distributing 100% of its 1998 taxable income, the Company expects to
declare a special dividend of approximately $875,000 with respect to 1998
prior to declaring dividends with respect to 1999 and prior to the due date
(as extended) of its federal income tax return. This special dividend will
be taxable to shareholders in 1999 but will be included in the calculation
of the Company's dividends-paid deduction on its federal income tax return
for 1998.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash in
banks and investments in money market fund accounts offered by major
financial institutions. The amounts on deposit with these financial
institutions exceed insured limits. The Company considers all highly liquid
short-term investments purchased with a maturity of 90 days or less to be
cash equivalents. The Company's cash balance at December 31, 1998 included
amounts held by third parties in margin accounts of $19,122,000 related to
the interest rate swap agreements and property operating accounts of
$2,615,000 (see Note 10).
INVESTMENT IN MARKETABLE SECURITIES - The Company has classified its
investment in marketable securities as available for sale. Securities
available for sale are carried at market value with the net unrealized
gains or losses reported as a separate component of accumulated other
comprehensive income. At disposition, the net realized gain or loss is
included in earnings. Unrealized losses on securities are charged to
earnings if they reflect a decline in value which is other than temporary.
LOANS RECEIVABLE - The Company invests in performing, sub-performing, and
non-performing individual loans and loan portfolios, for prices generally
at or below face value (i.e., unpaid principal balances plus accrued
interest). Loans purchased at discounts are presented in the consolidated
balance sheet net of unamortized discount and an allowance for loan losses.
For each loan or pool of loans acquired by the Company, discounts are
allocated into (a) valuation allowances for estimated losses against face
value on specific loans ("specific valuation allowances") and (b) amounts
available for accretion to interest income. Discounts are accreted into
interest income based upon a comparison of actual collections and expected
collections. Whenever periodic collections on specific loans are less than
expected, the accretion of income is reduced. To the extent that
collections exceed expected amounts, such excesses are first used to
recover prior non-accretion with any remaining excess recorded as an
increase in discount and recognized ratably over future periods as an
increase in yield. Income is not accrued on non-performing loans. Interest
income with respect to non-discounted loans is recognized on an accrual
basis. Originated loans are carried net of unamortized deferred origination
fees and costs. Deferred fees and costs are recognized in interest income
over the terms of the loans using a method that approximates the interest
method. Upon sale or payoff of loans, the excess (or deficiency) of
proceeds over the net carrying value of the loan (unpaid principal balance
plus accrued interest less unaccreted discount and loan loss allowance) is
recognized as a gain (or loss) on resolution.
ALLOWANCE FOR LOAN LOSSES - The Company periodically evaluates loans
(whether purchased or originated and whether discounted or non-discounted)
for impairment. Commercial and residential real estate loans are considered
to be impaired, for financial reporting purposes, when it is probable that
the Company will be unable to collect all principal or interest when due.
For loans purchased at a discount, impairments are recognized whenever it
becomes probable that the Company will be unable to collect expected
amounts. Specific valuation allowances are established, through provisions
for losses, for impaired loans based on the estimated fair value of the
underlying real estate collateral. The allowance is decreased by the amount
of loans charged off and is increased by the provision for estimated losses
on loans and recoveries of previously charged-off loans. Upon acquisition
of loans purchased at a discount, the initial allowance for loan loss,
sometimes referred to as nonaccretable discount, is equal to the difference
between the unpaid principal balance (plus accrued interest) and the
amounts expected to be collected. The allowance for each loan pool is
maintained at a level believed adequate by management to absorb probable
losses. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, previous loan loss experience,
current economic conditions, composition of the portfolio and other
relevant factors. Actual losses may differ from management's estimates. It
is the Company's policy to establish an allowance for uncollectible
interest on performing loans that are past due more than 90 days or sooner
when, in the judgment of management, the probability of collection of
interest is deemed to be insufficient to warrant further accrual. Upon such
a determination, those loans are placed on non-accrual status and deemed to
be non-performing. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is reversed by a charge to interest income.
RENTAL INCOME - Contractual minimum rental income is recognized on a
straight-line basis over the terms of the related operating leases.
Differences between rental income earned and amounts due in accordance with
the respective lease agreements are applied as increases or decreases, as
applicable, to deferred rent. For the period ended December 31, 1998, the
excess of straight-line rents above contractual amounts was $787,000.
Rental income is also adjusted for the amortization of the deferred charges
related to the hedge of the lease payments on the properties leased to Bell
Canada. Such amortization totaled $76,000 for the period ended December 31,
1998. Expense recoveries are reflected as escalation income.
ORGANIZATIONAL COSTS - Legal and other costs incurred to organize Fortress
were capitalized and are being amortized over five years. (See also "Recent
Accounting Pronouncements," below).
OFFERING COSTS - Costs associated with the Company's private placement of
its common stock and with the subsequent filing of its registration
statement with the Securities and Exchange Commission in relation thereto
have been approximately $25.9 million. Such amount is recorded as a
reduction of stockholders' equity. Such amount includes fees paid to the
placement agent, registration expenses, printing costs, legal and
accounting fees and the fair value of the stock options granted to the
Manager (See Note 11).
IMPAIRMENT OF LONG-LIVED ASSETS - The Company assesses any impairment in
value of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. No impairment adjustments were deemed necessary for
1998.
COMPUTER HARDWARE AND SOFTWARE - Computer hardware and software (including
implementation expenses) are recorded at cost less accumulated
amortization. Repairs and maintenance are expensed when incurred.
Depreciation and amortization are calculated using the straight-line method
over the assets' estimated useful lives, which is 3 years for hardware and
software. At December 31, 1998, Fortress had approximately $948,000 of
hardware and software costs with related accumulated depreciation of
approximately $73,000. (See also "Recent Accounting Pronouncements," below)
DEFERRED RENT - Deferred rent includes the cumulative excess of
straight-line rent above contractual rents ($787,000 at December 31, 1998)
and the deferred hedging charges related to the firm lease commitments on
the properties leased to Bell Canada ($4,285,000 at December 31, 1998).
DEFERRED COSTS - Deferred costs consist of costs incurred in obtaining
financing (amortized over the term of such financing), organization costs
and external costs related to probable acquisitions.
NET INCOME PER SHARE - Net income per share is computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
and is calculated on the basis of the weighted average number of common
shares outstanding plus the additional dilutive effect of common stock
equivalents during each period. The Company did not have any dilutive
common stock equivalents during the period from May 11, 1998 to December
31, 1998.
STOCK OPTIONS - Fortress accounts for stock options granted to
non-employees in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." The fair
value of the options issued as compensation to the Manager for its efforts
in raising capital for the Company has been recorded as an increase in
stockholders' equity with an offsetting reduction of capital proceeds
received.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company is required to disclose
the fair value of financial instruments for which it is practicable to
estimate such fair value. The fair values of financial instruments are
estimates based upon market conditions and perceived risks at December 31,
1998 and require varying degrees of management judgment. The fair values of
financial instruments presented may not always be indicative of amounts
Fortress would realize upon the disposition of the financial instruments.
INVESTMENT IN REAL ESTATE - Investment in real estate is recorded at cost
less accumulated depreciation. Depreciation is computed on a straight-line
basis over the estimated useful lives of the asset. Buildings are
depreciated over 40 years. Major improvements are capitalized and
depreciated over their estimated useful lives. Fees and costs incurred in
the successful negotiation of leases are deferred and amortized on a
straight-line basis over the terms of the respective leases. Expenditures
for repairs and maintenance are charged to operations as incurred.
HEDGING ACTIVITIES - The Company employs interest rate swaps in two ways:
(i) to hedge fluctuations in the fair value of the fixed lease payments
underlying its revenue-producing real estate in Canada and (ii) to hedge an
anticipated refinancing of its revenue-producing real estate in the United
States, which is expected to occur in the summer of 1999.
To qualify for hedge accounting, the interest rate swaps must meet certain
criteria, including (1) the items to be hedged expose the Company to
interest rate risk, (2) the interest rate swaps reduce the Company's
exposure to interest rate risk, and (3) with respect to the anticipated
transaction, such transaction is probable. Correlation and effectiveness
are periodically assessed based upon a comparison of the relative changes
in the fair values of the interest rate swaps and the items being hedged.
With respect to interest rate swaps which have been designated as hedges of
the fair value of lease payments, periodic net payments and any gain or
loss from fluctuations in the fair value (measured based upon dealers'
quotations) of the interest rate swaps are capitalized as adjustments to
deferred rent and are recognized over the term of the leases as adjustments
to rental income. In the event that the interest rate swaps cease to
qualify as a hedge or are terminated, the unamortized hedging gain or loss
deferred through such date would continue to be amortized over the
remaining term of the leases. Unless terminated, subsequent gains and
losses would be recognized in earnings as they occurred.
With respect to interest rate swaps which have been designated as hedges of
the anticipated refinancing, periodic net payments are recognized currently
as adjustments to interest expense ($545,000 in 1998); any gain or loss
from fluctuations in the fair value of the interest rate swaps (measured
based upon dealers' quotations) is capitalized as a deferred hedging gain
or loss and will be recorded as a component of the anticipated transaction
at the time of such transaction. In the event the anticipated refinancing
fails to occur as expected, the deferred hedging credit or charge would be
recognized in income currently. In the event the interest rate swaps cease
to qualify as a hedge for any other reason, hedging gains (losses) would be
deferred as an adjustment to the basis of the anticipated refinancing
transaction only to the extent of offsetting losses (gains) in expected
refinancing proceeds relating to changes in interest rates during the hedge
period. Any excess gains or losses, as well as any subsequent gains or
losses, would be recognized in income currently.
There is market risk associated with changes in rates resulting in a
decline in value of the swap position. There is credit risk to the extent
that a counterparty would fail to pay amounts due when the swap values were
positive. All of the Company's counterparties at December 31, 1998 were
large investment grade financial institutions.
FOREIGN CURRENCY OPERATIONS - Assets and liabilities relating to foreign
operations are translated using exchange rates as of the end of each
reporting period. The results of the Company's foreign operations are
translated at the weighted average exchange rate for each reporting period.
Translation adjustments are included in accumulated other comprehensive
income.
Foreign exchange contracts are used to hedge the Company's net investments
in its foreign operations. Gains and losses on foreign exchange contracts
are treated as translation adjustments under Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." Accordingly,
changes in the market value of these instruments are included in
accumulated other comprehensive income. Upon sale or liquidation of its
investment in a foreign operation, the related amount in accumulated other
comprehensive income is reclassified to transaction gain or loss in the
period of such liquidation.
Changes in the cumulative foreign currency translation adjustment for the
period from May 11, 1998 to December 31, 1998 were as follows:
Balance at beginning of period $ -
Net effect of exchange rate fluctuations, including
hedging (231,000)
----------
Balance at end of year $ (231,000)
==========
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of an identifiable
foreign currency commitment or as a hedge of a foreign currency investment
position, are included in the results of operations as incurred.
FORECLOSED REAL ESTATE - Real estate acquired in settlement of loans is
recorded at the lower of cost or fair value less estimated costs of
disposal. Any subsequent operating expenses or income, reductions in
estimated fair values, as well as gains or losses on disposition of such
properties, are included in earnings.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards No. 130
("SFAS No. 130") "Reporting Comprehensive Income" requires the inclusion of
comprehensive income, either in a separate statement of comprehensive
income, or as part of a combined statement of income and comprehensive
income, in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and
distributions to owners. SFAS No. 130 requires that comprehensive income be
presented beginning with net income, then adding the elements of
comprehensive income not included in the determination of net income, to
arrive at comprehensive income. SFAS No. 130 also requires that an
enterprise display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
COMPUTER SOFTWARE - The American Institute of Certified Public Accountants
("AICPA") recently issued Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which has been cleared by the Financial Accounting Standards Board
("FASB"). SOP 98-1 provides guidance that requires capitalization of
certain costs incurred during an internal-use software development project.
Capitalizable costs consist of (a) certain external direct costs of
materials and services incurred in developing or obtaining internal-use
computer software, (b) payroll and payroll-related costs for employees who
are directly associated with and devote time to the project, and (c)
related interest costs. Costs that are considered to be related to research
and development activities and costs of data conversion activities should
be expensed as incurred. The Company has adopted SOP 98-1 for 1998.
ORGANIZATION COSTS - The AICPA recently issued SOP 98-5, "Reporting on the
Costs of Start-up Activities." This SOP provides guidance on the financial
reporting of start-up and organizational costs. Specifically, it requires
costs of start-up activities and organizational costs to be expensed as
incurred and is effective for financial statements for fiscal years
beginning after December 15, 1998. The initial application of this SOP will
be reported by the Company in 1999 as a cumulative effect of a change in
accounting principle. Fortress carried approximately $513,000 of net
deferred organizational expenses on its books as of December 31, 1998.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June
1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that the Company recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge of the
exposure to variable cash flows of a forecasted transaction. The accounting
for changes in the fair value of a derivative (whether through earnings or
outside earnings, through comprehensive income) depends on the intended use
of the derivative and the resulting designation. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Management has not yet quantified the impact of adopting SFAS 133 on its
financial statements and has not determined the timing or method of its
adoption of SFAS 133. However, application of SFAS 133 could increase
volatility in earnings and other comprehensive income.
3. LOAN PORTFOLIO
Loans receivable consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
LOAN INDIVIDUAL
TOTAL POOLS LOANS
----------------------------------------------
<S> <C> <C> <C>
Residential real estate loans $67,315,000 $54,302,000 $13,013,000
Commercial real estate loans 137,964,000 41,151,000 96,813,000
----------------------------------------------
Total mortgage loans 205,279,000 95,453,000 109,826,000
Loan secured by mortgage loan pool 27,554,000 -- 27,554,000
----------------------------------------------
Total unpaid principal balance 232,833,000 95,453,000 137,380,000
Unaccreted discount (6,107,000) (5,228,000) (879,000)
Deferred origination fee (157,000) -- (157,000)
Allowance for loan losses (9,852,000) (9,852,000) --
----------------------------------------------
Loans receivable, net $216,717,000 $80,373,000 $136,344,000
==============================================
</TABLE>
The following table sets forth certain information regarding individual
mortgage loans with a principal balance exceeding $6 million at December
31,1998:
<TABLE>
<CAPTION>
COLLATERAL LOCATIONS INTEREST FINAL PERIODIC PRIOR FACE CARRYING DELINQUENCY
RATE MATURITY PAYMENT LIENS AMOUNT AMOUNT STATUS
DATE TERMS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential New York 1 mo LIBOR+ August 2000 Interest Only None $13,013,000 $12,372,000 Current
Properties State 410 bp Payable monthly
No Prepayment
Penalty
Retail 19 States 1 mo LIBOR+ December Interest Only None $91,653,000 $91,415,000 Current
Stores 400 bp 2004 Payable monthly
No Prepayment
Penalty
</TABLE>
The following table sets forth the geographic distribution of properties
securing Fortress's mortgage loan pools at December 31, 1998:
<TABLE>
<CAPTION>
COMMERCIAL REAL
ESTATE RESIDENTIAL
------------------ --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL TOTAL
STATE OR PROVINCE OF AMOUNT OF LOANS AMOUNT PRINCIPAL
LOANS AMOUNT
<S> <C> <C> <C> <C> <C>
California 6 $6,484,000 376 $14,349,000 $20,833,000
Ontario 59 13,549,000 87 5,660,000 19,209,000
British Columbia 33 4,888,000 106 9,238,000 14,126,000
Quebec 17 5,537,000 8 943,000 6,480,000
New York 2 6,603,000 68 2,251,000 8,854,000
Florida 1 3,427,000 43 877,000 4,304,000
Alabama -- -- 66 1,808,000 1,808,000
Ohio -- -- 62 1,631,000 1,631,000
Alberta 5 487,000 30 1,116,000 1,603,000
Pennsylvania -- -- 45 1,397,000 1,397,000
Illinois 1 10,000 37 1,374,000 1,384,000
New Jersey -- -- 26 1,399,000 1,399,000
Maryland -- -- 37 1,364,000 1,364,000
Other 2 166,000 361 10,895,000 11,061,000
------------------------------ ------------------------
Grand Total 126 $41,151,00 1,352 $54,302,000 $95,453,000
=======================================================
</TABLE>
The following table sets forth certain additional information regarding
Fortress's mortgage loan pools at December 31, 1998:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
RANGE OF RANGE OF OVER 90
ORIGINAL INTEREST FINAL CARRYING DAYS
TYPE OF COLLATERAL LOAN AMOUNTS RATES MATURITIES AMOUNT PAST DUE
<S> <C> <C> <C> <C> <C>
Residential Properties Under $100,000 1.40%-25.15% 0-28.6 years $27,683,000 $14,202,000
$100,000-$200,000 7.20%-15.90% 0-28.5 years 7,939,000 3,141,000
Over $200,000 7.25%-16.00% 0-20.2 years 6,369,000 2,017,000
Commercial Properties Under $500,000 7.25%-16.99% 0-10.7 years 16,979,000 2,442,000
$500,000-$1,000,000 8.50%-11.75% 0-0.5 years 6,785,000 4,209,000
Over $1,000,000 8.25%-9.75% 0-19.4 years 14,618,000 14,618,000
------------
Total mortgage loan pools $80,373,000
============
</TABLE>
The following table sets forth the activity in loans receivable for the
period from May 11, 1998 to December 31, 1998:
Acquisition of loans made during the period $424,440,000
Contribution to unconsolidated subsidiary (47,633,000)
Collections of principal (131,867,000)
Foreclosures (9,095,000)
Cost of loans sold (32,559,000)
Accretion of income 2,673,000
Reversal of loss allowance on loan resolutions 10,758,000
--------------
Loans receivable at end of period $216,717,000
==============
The following table sets forth the activity in allowance for loan losses
for the period May 11, 1998 to December 31, 1998
INCREASE IN DECREASE IN
LOSS ALLOWANCE LOSS ALLOWANCE
TYPE OF DUE TO ACQUISITION DUE TO RESOLUTION BALANCE
ASSET OF MORTGAGE LOAN OF AT END
POOL MORTGAGE LOANS OF PERIOD
Loan Portfolio $20,610,000 ($10,758,000) $9,852,000
================== ================== ==============
4. REVENUE-PRODUCING REAL ESTATE
Fortress's investments in revenue-producing real estate at December 31,
1998 consisted of the following:
Land $ 38,677,000
Office buildings 239,574,000
Warehouse and industrial properties 108,519,000
-------------
Total 386,770,000
Accumulated depreciation (3,697,000)
-------------
Investment in real estate, net $383,073,000
=============
These properties are primarily leased on a long-term basis to the General
Services Administration of the U.S. Government ("GSA") and Bell Canada, a
wholly owned subsidiary of BCE, Inc., and are accounted for as operating
leases , in accordance with SFAS No. 13, "Accounting for Leases." For the
period May 11, 1998 through December 31, 1998, approximately 88% of rental
revenue was attributed to GSA. The GSA leases expire over various dates
through the year 2018 and Bell Canada leases expire over various dates
through the year 2007. Each Bell Canada lease contains one five year lease
renewal option and provides for a significant payment due upon expiration
of the lease or of the extension. These terminal payments have been
included in the calculation of straight-line rental income assuming that
each lease is renewed once. All of the properties were acquired during the
period July 7, 1998 to December 31, 1998.
In addition to minimum rent, GSA leases generally include an annual rental
escalation based on the increase in the Consumer Price Index applied to the
portion of the base rent attributable to operating expenses, as well as a
provision requiring GSA to pay all increases in taxes over the base year.
The leases to Bell Canada provide for the reimbursement of substantially
all operating expenses and property taxes plus an administrative fee. The
following is a schedule by year of the future minimum rental payments to be
received under the noncancellable operating leases for the period ended
December 31, 1998:
1999 $43,652,000
2000 44,049,000
2001 44,151,000
2002 43,384,000
2003 39,341,000
Thereafter 276,286,000
------------
$490,863,000
============
The following is certain information concerning the revenue producing real
estate portfolio:
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL COSTS CARRIED AT 12/31/98
--------------------- --------------------------
COSTS
CAPITALIZED
BUILDING SUBSEQUENT BUILDING
TYPE OF AND TO AND
PROPERTY LOCATION ENCUMBRANCES LAND IMPROVEMENT ACQUISITION LAND IMPROVEMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Huntsville, $8,872,000 351,000 12,180,000 - 351,000 12,180,000 12,531,000
Building Alabama
Office Sacramento,
Building California 43,991,000 8,125,000 55,687,000 - 8,125,000 55,687,000 63,812,000
Office Hamilton,
Building Ontario - 475,000 3,501,000 475,000 3,501,000 3,976,000
Office Kingston
Building, Ontario - 195,000 1,335,000 195,000 1,335,000 1,530,000
Office London,
Building California - 787,000 14,163,000 - 787,000 14,163,000 14,950,000
Office Toronto,
Building Ontario - 358,000 8,775,000 - 358,000 8,775,000 9,133,000
Office Toronto
Building, Ontario - 7,008,000 19,070,000 - 7,008,000 19,070,000 26,078,000
Office Aurora,
Building Colorado 9,023,000 720,000 12,167,000 15,000 720,000 12,182,000 12,902,000
Office Parfet,
Building Colorado 4,470,000 459,000 5,388,000 - 459,000 5,388,000 5,847,000
Office Washington,
Building D.C. 27,182,000 6,482,000 29,749,000 3,000 6,482,000 29,752,000 36,234,000
Office Concord,
Building Massachusetts 11,528,000 2,100,000 14,175,000 - 2,100,000 14,175,000 16,275,000
Warehouse Burlington,
New Jersey 66,091,000 4,850,000 89,390,000 59,000 4,850,000 89,449,000 94,299,000
Office Callowhill,
Building Pennsylvania 9,442,000 1,095,000 12,977,000 - 1,095,000 12,977,000 14,072,000
Office Providence,
Rhode Island 13,420,000 1,630,000 16,824,000 49,000 1,630,000 16,873,000 18,503,000
Office Houston,
Building Texas 10,366,000 2,800,000 11,092,000 - 2,800,000 11,092,000 13,892,000
Office Norfolk,
Building Virginia 4,046,000 318,000 5,044,000 - 318,000 5,044,000 5,362,000
Office Suffolk,
Building Virginia 25,725,000 924,000 36,450,000 - 924,000 36,450,000 37,374,000
-------------------------- -----------------------------------------------------------------
TOTALS: $234,156,000 $38,677,000 $347,967,000 $126,00 $38,677,000 $348,093,000 $386,770,000
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
TYPE OF ACCUMULATED DATE OF DATE OF DEPRECIATION
PROPERTY LOCATION DEPRECIATION CONSTRUCTION ACQUISTIION LIFE
<S> <C> <C> <C> <C> <C>
Office Huntsville, 140,000 1994 7/7/98 40Years
Building Alabama
Office Sacramento,
Building California 638,000 1989 7/7/98 40Years
Office Hamilton,
Building Ontario 18,000 1974 10/8/98 40Years
Office Kingston
Building, Ontario 7,000 1981 10/8/98 40Years
Office London,
Building California 74,000 1981 10/8/98 40Years
Office Toronto,
Building Ontario 46,000 1971 10/8/98 40Years
Office Toronto
Building, Ontario 99,000 1960/1975 10/8/98 40Years
/1978
Office Aurora,
Building Colorado 139,000 1998 7/7/98 40Years
Office Parfet,
Building Colorado 62,000 1974 7/7/98 40Years
Office Washington,
Building D.C. 341,000 1930 7/31/98 40Years
Office Concord,
Building Massachusetts 163,000 1970 7/27/98 40Years
Warehouse Burlington,
New Jersey 1,025,000 1990 7/7/98 40Years
Office Callowhill,
Building Pennsylvania 149,000 1910 7/7/98 40Years
Office Providence,
Rhode Island 193,000 1983 7/7/98 40Years
Office Houston,
Building Texas 127,000 1972 7/10/98 40Years
Office Norfolk,
Building Virginia 58,000 1994 7/7/98 40Years
Office Suffolk,
Building Virginia 418,000 1994 7/7/98 40Years
------------
TOTALS: $3,697,000
============
</TABLE>
The following is a reconciliation of revenue-producing real estate assets
and accumulated depreciation:
REAL ESTATE, ACCUMULATED REAL ESTATE,
GROSS DEPRECIATION NET
------------ ------------ ------------
Purchases
$386,644,000 $3,695,000 $382,949,000
Improvements
126,000 2,000 124,000
-------------- ------------ ------------
Balance at December 31, 1998 $386,770,000 $3,697,000 $383,073,000
============== ============ ============
5. INFORMATION REGARDING BUSINESS SEGMENTS
Segments were determined based upon the manner in which management analyzes
results of its operations for purposes of assessing performance and
allocating resources. The Company conducts business in three primary
segments: revenue-producing real estate, loan pools and individual loans.
Details of the Company's real estate investments are shown in Note 4.
Details of the Company's loan investments are shown in Note 3. The loan
investments are secured by real estate or by loans which are in turn
secured by real estate. The loan pool segment includes foreclosed property.
The unallocated portion consists primarily of interest income on short-term
investments and expenses for professional and management fees. Revenues
from the GSA properties represent approximately 43% of total revenues and
are included in the real estate segment.
Summary financial data on the Company's segments is given below, together
with a reconciliation to the same data for the Company as a whole as of
December 31, 1998.
<TABLE>
<CAPTION>
Loan Individual
Real Estate Portfolios Loans Unallocated Total
----------- ---------- --------- ----------- -----
Nature of primary revenues Rental income Interest income Interest income Interest income
<S> <C> <C> <C> <C> <C>
Gross revenues $23,759,000 $9,668,000 $7,896,000 $4,448,000 $45,771,000
Operating expense (8,286,000) (1,413,000) (16,000) (8,105,000) (17,820,000)
Operating income 15,473,000 8,255,000 7,880,000 (3,657,000) 27,951,000
Interest expense (6,537,000) (2,598,000) (3,558,000) -- (12,693,000)
Depreciation and
amortization (3,792,000) (241,000) (27,000) (105,000) (4,165,000)
Equity in earnings of
unconsolidated
Subsidiary -- 117,000 -- -- 117,000
Income before
Minority Interest 5,144,000 5,533,000 4,295,000 (3,762,000) 11,210,000
Minority Interest -- (570,000) -- -- (570,000)
Net Income $5,144,000 $4,963,000 $4,295,000 ($3,762,000) $10,640,000
Revenue derived from
non--U.S. sources
(primarily Canada) $3,457,000 $1,261,000 $1,207,000 $12,000 $5,937,000
Expenditures for long
lived assets $386,770,000 -- -- -- $386,770,000
Investment in
nconsolidated subsidiary $ -- $11,973,000 -- -- $11,973,000
Total assets $424,558,000 $99,995,000 $137,327,000 $103,770,000 $765,650,000
Long lived assets
outside the U.S.
(primarily Canada) $55,422,000 $ -- $ -- $ -- $55,422,000
</TABLE>
6. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Summarized financial information related to Fortress's unconsolidated
subsidiary at December 31, 1998, is as follows:
Assets $23,743,000 Revenues $691,000
Liabilities 11,140,000 Expenses $568,000
------------- -------------
Net worth $12,603,000 Net income $123,000
============= =============
Austin Holdings Corporation ("Austin") was Fortress's only unconsolidated
subsidiary at December 31, 1998. At December 31, 1998, Fortress held
approximately $11,973,000 in non-voting preferred stock of Austin
representing a 95% economic ownership interest, which was accounted for
under the equity method. Fortress Principal Investment Group LLC, an
affiliate of the Manager, is the holder of the 5% voting common stock.
Austin's assets consist primarily of interests in entities that own certain
assets, primarily foreclosed real estate intended for sale, which were
originally acquired as part of loan pool acquisitions and which were
determined to have characteristics unfavorable for ownership by a REIT.
Additionally, Austin Holdings has an approximately 43% ownership interest
in Calmco Servicing LP, a mortgage loan servicing company acquired in
December 1998 that currently services approximately 23,000 residential
mortgage loans.
7. SECURITIES AVAILABLE FOR SALE
Fortress held the following investment at December 31, 1998 classified as
securities available for sale:
UNREALIZED
HOLDING
TYPE COST BASIS FAIR VALUE LOSSES
- ---- ---------- ---------- -----------
Equity securities
$11,756,000 $9,521,000 $2,235,000
Unrealized holding gains and losses from securities available for sale are
reflected in other comprehensive income. Any gains or losses realized upon
sale of securities will be reflected in earnings in the period of sale.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
For the majority of the Company's financial instruments, principally loans,
fair values are not readily available since there are no active trading
markets as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated
future cash flows using discount rates commensurate with the risks
involved. However, the determination of estimated future cash flows is
inherently subjective and imprecise. It should be noted that minor changes
in assumptions or estimation methodologies can have a material effect on
these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1998 and do not take into consideration the
effects of subsequent interest rate fluctuations. In different interest
rate environments, fair value results can differ significantly, especially
for certain fixed-rate financial instruments. In addition, the fair values
presented do not attempt to estimate the value of the Company's anticipated
future business activities. In other words, they do not represent the
Company's value as a going concern. Furthermore, the differences between
the carrying amounts and the fair values presented may not be realized.
Reasonable comparability of fair values among companies is difficult due to
the wide range of permitted valuation techniques and numerous estimates
that must be made in the absence of secondary market prices. This lack of
objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated
fair values of financial instruments is required, readers are cautioned in
using this data for purposes of evaluating the financial condition of the
Company.
The carrying amounts and the estimated fair values of the Company's
financial instruments at December 31, 1998 are as follows:
CARRYING FAIR
VALUE VALUE
-------- -----
Assets:
Cash and cash equivalents $97,333,000 $97,333,000
Marketable securities available for sale 9,521,000 9,521,000
Loans receivable, net 216,717,000 220,731,000
Accrued interest receivable 2,122,000 2,122,000
Foreign currency futures contracts 36,000 36,000
Liabilities:
Repurchase agreements 102,689,000 102,689,000
Loan payable 234,156,000 234,156,000
Interest rate swap obligations 17,388,000 17,388,000
Derivative interest payable 5,293,000 5,293,000
The methodologies used and key assumptions made to estimate fair value are
as follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents have been valued at
their carrying amounts as these are reasonable estimates of fair value
given the relatively short period of time between origination of the
instruments and their expected realization.
MARKETABLE SECURITIES AVAILABLE FOR SALE - Fair value of securities is
based upon quoted price, if available. For securities for which a quoted
market price is not available, fair value is estimated using quoted market
prices for similar instruments. At December 31, 1998, these securities
consisted entirely of publicly traded common stock. The related unrealized
holding loss is reflected in accumulated other comprehensive income.
LOANS RECEIVABLE, NET - The fair value of floating-rate loans receivable is
estimated at their face amount. The fair value of fixed-rate loans
receivable is estimated by means of a discounted cash flow method,
utilizing expected cash flows and discount rates estimated by management to
approximate those which a willing buyer and seller might use. Because of
the illiquid nature of the market for fixed-rate loan portfolios similar to
those held by the Company, there can be no assurance that these estimates
would be realized in a market transaction.
ACCRUED INTEREST RECEIVABLE AND DERIVATIVE INTEREST PAYABLE - Accrued
interest receivable and payable are valued at their carrying amounts due to
their short-term maturities which are generally within 30 days.
FOREIGN CURRENCY FUTURES CONTRACTS (OTHER THAN TRADING) - Fortress had
contracts for future sales in place for approximately CAD 123.7 million
(Canadian dollars) at December 31, 1998, hedging its net investment in
Canadian subsidiaries. During 1998, Fortress recorded approximately
$496,000 of gains in its Canadian dollar hedging activities, which are
included in other comprehensive income as a component of foreign currency
translation adjustments.
REPURCHASE AGREEMENTS AND LOAN PAYABLE - Management believes that for
similar financial instruments with comparable credit risks, the stated
interest rates at December 31, 1998 (all of which are floating rates at a
spread over market indexes) approximate market rates. Accordingly, the
carrying amount outstanding is believed to approximate fair value.
INTEREST RATE SWAP OBLIGATIONS (OTHER THAN TRADING) - Valued by reference
to current quotations on similar instruments. Value is stated net of
accrued interest, which is carried separately on the balance sheet. Accrued
interest payable on interest rate swaps was approximately $5,293,000 at
December 31, 1998 (net of $5,388,000 of accrued interest receivable). The
notional amount of these swaps at December 31, 1998 was approximately
$393,000,000.
9. REPURCHASE AGREEMENTS
The following table presents certain information regarding the Company's
loan pools (including foreclosed real estate) sold under agreements to
repurchase as of December 31, 1998:
<TABLE>
<CAPTION>
ASSET
TYPE OF FAIR VALUE CARRYING REPURCHASE INTEREST
MATURITY ASSET OF ASSETS VALUE OBLIGATION RATE MATURITY
<S> <C> <C> <C> <C> <C> <C>
30 to 90 Mortgage One-month
Days loans $41,682,000 $42,720,000 $ 29,957,000 Can BA+150 bp February 1999
Over 90 Mortgage Three-month
Days loans $120,479,000 $119,316,000 $ 72,732,000 LIBOR + 175 bp August 1999
---------------------------------------
$162,161,000 $162,036,000 $102,689,000
=======================================
</TABLE>
The one-month Can BA and three-month LIBOR at December 31, 1998 were 5.070%
and 5.064%, respectively. The weighted average coupon of the Can BA
financing was 6.625% The weighted average coupon of the LIBOR financing was
6.8131%.
At December 31, 1998, Fortress had $39,058,000 at risk with Greenwich
NatWest, a division of National Westminster Bank, Plc. "Amount at risk" is
defined as the excess of fair value over the repurchase liability (both
including accrued interest). The maturity of Fortress' repurchase
agreements with Greenwich NatWest is August 1999.
10. LOAN PAYABLE AND ASSETS SUBJECT TO LIEN
The following table presents certain information regarding the Company's
loan payable as of December 31, 1998:
MATURITY AMOUNT INTEREST RATE
February 2008 $234,156,000 Three month LIBOR + 68 bp (8/7/98 - 8/6/02)
Three month LIBOR + 400 bp (8/7/02 - 02/6/08)
The loan is secured by a first lien on twelve properties leased primarily
to the GSA with an aggregate book value of approximately $331,103,000 at
December 31, 1998. Each of the subject properties is owned by an indirect
subsidiary of the Company which is organized as a legal entity separate and
apart from the Company and any of its other subsidiaries. Substantially all
of the assets (including cash--see Note 2) of these subsidiaries have been
encumbered to secure the loan payable and other obligations.
Interest is payable quarterly and principal is payable in a single payment
at maturity. The Company intends to repay the loan prior to the increase in
interest rate in August 2002. Under the terms of this facilitate, Fortress
is required to maintain certain tangible net worth, liquidity levels and
debt service coverage ratios. The terms also restrict future levels of
debt. Fortress was in compliance with all financial and reporting covenants
at December 31, 1998.
11. STOCK OPTION PLAN
In June 1998, Fortress (with the approval of the board of directors)
adopted a non-qualified stock option plan (the "Option Plan") for
non-employee directors and the Manager. The non-employee directors have
been granted options to acquire 6,000 shares of common stock at a price of
$20 per share which were fully exercisable upon issuance. The fair value of
such options were not material at the date of grant. For the purpose of
compensating the Manager for its successful efforts in raising capital for
the Company, the Manager was granted options representing the right to
acquire 2,091,673 shares of common stock (or, at the election of the
Manager, units in the Operating Partnership) at an exercise price per share
of common stock equal to $20, with such price subject to adjustment as
necessary to preserve the value of such options in connection with the
occurrence of certain events (including capital dividends and capital
distributions made by the Company). The 2,091,673 shares represent an
amount equal to 10% of the shares of common stock and units of the Company
outstanding after the initial purchaser's exercise of the over-allotment
option and the purchase of stock by certain employees of the Manager in
July 1998.
The options granted to the Manager were fully vested upon issuance and are
exercisable beginning on the date (the "Option Effective Date") that is the
earlier to occur of (1) the date that a registration statement filed by
Fortress under the Securities Act, registering the sale of any common stock
of Fortress, is declared effective by the Securities and Exchange
Commission and (2) June 5, 1999 (the first anniversary of the Closing
Date). From and after the Option Effective Date, one thirtieth of the
options will become exercisable on the first day of each of the following
thirty calendar months, or earlier upon the occurrence of certain events,
such as a change in control of the Company or the termination of the
Management Agreement. The options expire on the tenth anniversary of the
closing date.
The fair value of the options Fortress granted to the Manager amounts to
approximately $3,600,000. The Company estimated this value by reference to
the volatility and dividend yields of the Morgan Stanley REIT Index which
were approximately 15.4% and 7.1%, respectively, together with an expected
life assumption of 5 years, and a risk-free rate assumption of 4.88%.
Since Fortress's common stock is not publicly traded and the Option Plan
has characteristics significantly different from those of traded options,
the actual value of the options could vary materially from management's
estimate.
12. MANAGEMENT AGREEMENT
Fortress has entered into the Management Agreement with the Manager, which
provides for an initial term of three years with automatic one-year
extensions, subject to certain termination rights. After the initial three
year term, the Manager's performance will be reviewed annually and the
Management Agreement may be terminated by Fortress by payment of a
termination fee, as defined in the Management Agreement, upon the
affirmative vote of at least two-thirds of the independent directors, or by
a majority vote of the holders of common stock. Pursuant to the Management
Agreement, the Manager, under the supervision of Fortress' board of
directors, will formulate investment strategies, arrange for the
acquisition of assets, arrange for financing, monitor the performance of
Fortress' assets and provide certain advisory, administrative and
managerial services in connection with the operations of Fortress. For
performing these services, Fortress will pay the Manager an annual
Management Fee equal to 1.5% of the gross equity of the Company, as
defined, provided, however, that during the remainder of 1998 following the
First Closing Date, as defined, the Manager will be paid the greater of (1)
$6,000,000 or (2) the product of (a) 1.5% of the Gross Equity of the
Company and (b) a fraction, the numerator of which is the number of days in
1998 following the First Closing Date and the denominator of which is 365.
The management fee earned in 1998 was $6,000,000 of which $5,143,000 was
paid in 1998.
An affiliate of the Manager holds units for a nominal percentage of the
Operating Partnership. To provide an incentive for the Manager to enhance
the value of the common stock, the Manager's affiliate will be entitled to
receive a quarterly incentive return (the "Preferred Incentive Return") on
its units on a cumulative, but not compounding, basis in an amount equal to
the product of (A) 25% of the dollar amount by which (1) (a) the funds from
operations, as defined (before the Preferred Incentive Return) of the
Company per share of common stock and per unit (based on the weighted
average number of shares of common stock and units outstanding) plus (b)
gains (or losses) from debt restructuring and gains (or losses) from sales
of property and other assets per share of common stock and per unit (based
on the weighted average number of shares of common stock and units
outstanding), exceed (2) an amount equal to (a) the weighted average of the
price per share of common stock and units in the initial offering, and in
any subsequent offerings by the Company (adjusted for prior capital
dividends or capital distributions) multiplied by (b) a simple interest
rate of 10% per annum (divided by four to adjust for quarterly
calculations) multiplied by (B) the weighted average number of shares of
common stock and units outstanding. No incentive payments were accrued for
1998.
The Management Agreement provides that Fortress will reimburse the Manager
for various expenses incurred by the Manager or its officers, employees and
agents on Fortress's behalf, including costs of legal, accounting, tax,
auditing, administrative and other similar services rendered for the
Company by providers retained by the Manager or, if provided by the
Manager's employees, in amounts which are no greater than those which would
be payable to outside professionals or consultants engaged to perform such
services pursuant to agreements negotiated on an arm's-length basis.
13. RELATED PARTY TRANSACTIONS
MANAGER SERVICES - The Company incurred $1,249,000 of reimbursement to the
Manager for eligible services provided by the Manager's employees on behalf
of the Company.
HOLDINGS OF FORTRESS SECURITIES BY THE MANAGER - The Manager holds options
to purchase 2,091,673 shares of the common stock of the Company, as more
fully described in Note 11 "Stock Option Plan," above. Additionally, an
affiliate of the Manager owns 2,681,010 shares of the common stock of the
Company. The principal owners and executive officers of the Manager also
serve as Directors and officers of the Company.
14. COMMITMENTS AND CONTINGENCIES
PURCHASE AND SALE COMMITMENTS - In the ordinary course of business,
Fortress enters into various commitments and letters of intent relating to
purchase and sales of loans and real estate. There can be no assurance that
any of these transactions will ultimately be consummated. In addition to
the transactions described in Note 16 "Subsequent Events," Fortress is
committed to purchase two properties subject to GSA net leases for a total
purchase price of approximately $68,100,000.
LITIGATION - Fortress is a defendant in legal actions from transactions
conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's results
of operations or financial position.
STOCKHOLDER RIGHTS AGREEMENT - The Company has adopted a Stockholder Rights
Agreement. Pursuant to the terms of the Rights Agreement, the Company will
attach to each share of Common Stock one Preferred Stock Purchase Right (a
"Right"). Each Right entitles the registered holder to purchase from the
Company a unit consisting of one one-hundredth of a share of Series A
Junior Participation Preferred Stock, par value $0.01 per share at a
purchase price of $80 per unit. Initially, the Rights are not exercisable
and are attached to and transfer and trade with the outstanding shares of
Common Stock. The Rights will separate from the Common Stock and will
become exercisable upon the acquisition or tender offer to acquire a 15%
beneficial ownership interest by an acquiring person. The effect of the
Rights Agreement will be to dilute the acquiring party's beneficial
interest. Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company.
REGISTRATION RIGHTS AGREEMENT - In connection with the Original Offering,
Fortress entered into a Registration Rights Agreement which, among other
things, requires Fortress to (1) file a Registration Statement (the
"Registration Statement") with respect to the resale of Common Stock issued
in the Offering within 90 days following the First Closing Date of the
Original Offering, (2) use its best efforts to cause such Registration
Statement to be declared effective by the Securities and Exchange
Commission (the "Commission"), and (3) use its best efforts to cause such
Registration Statement to remain continuously effective until the second
anniversary of the First Closing Date. Fortress filed a Registration
Statement with the Commission on September 8, 1998, has received comments
from the Commission, and is prepared to file an amended Registration
Statement after preparing its audited 1998 financial statements for
inclusion therein.
15. EARNINGS PER SHARE
Fortress is required to present both basic and diluted earnings per share
("EPS") on the face of its statement of operations. Basic EPS is calculated
by dividing net income by the weighted average number of common shares
outstanding during the year. Diluted EPS is calculated by dividing net
income by the weighted average number of shares of common stock outstanding
and the dilutive potential common shares related to outstanding stock
options. The option exercise price of $20.00 per share equals the initial
issuance price. In the absence of an active trading market, the Company
uses net book value per share ($18.40 at December 31, 1998) to assess
whether options are dilutive. Based upon the Treasury Stock method the
options are not dilutive for the period ended December 31, 1998. The
following presents the calculation of basic EPS to diluted EPS for the
period from May 11, 1998 to December 31, 1998.
Net income $10,640,000
============
BASIC EPS:
Weighted average shares of common stock 20,862,000
============
Basic EPS $ 0.51
============
DILUTED EPS:
Weighted average shares of common stock 20,862,000
Effect of dilutive securities:
Stock options -
------------
20,862,000
============
Diluted EPS $ 0.51
============
16. SUBSEQUENT EVENTS
On January 8, 1999, Fortress paid a dividend of $.30 per share totaling
$6,275,000 to shareholders of record as of December 31, 1998.
On March 4, 1999, Fortress obtained a fixed rate debt financing in the
amount of $35,100,000 with a maturity of April 1, 2002, secured by its
Canadian real estate holdings, and elected to terminate the interest rate
swaps which had been employed as a hedge relating to the underlying leases,
resulting in a realized hedging loss of $2,210,000, which will continue to
be amortized over the remaining term of the leases.
On March 5, 1999, Fortress purchased an office building primarily leased to
the GSA for approximately $27,012,000 and financed the purchase with a
borrowing of $18,620,000 maturing in March 2002, secured by the property.
On April 21, 1999, Fortress purchased approximately $200,700,000 of
commercial mortgage-backed securities and unsecured REIT debt with a
combined unpaid principal balance of $227,900,000. Approximately 63% of
those securities were investment grade securities, and the remaining 37%
were BB-rated. The investment is currently being financed pursuant to a
repurchase agreement with a financial institution in the amount of
$149,684,000. The repurchase agreement provides approximately 75% financing
with an interest rate of one month LIBOR plus a spread ranging from 45 to
300 bps and maturity in October 1999.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Fortress Investment Corp.
New York, NY
We have audited the accompanying combined statement of revenues and certain
expenses (the "Statement") of the properties known as the "Initial GSA
Properties" for the year ended December 31, 1997. This Statement is the
responsibility of the management of Fortress Investment Corp. (the
"Company"). Our responsibility is to express an opinion on this 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 Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined Statement was prepared for the purpose of
complying with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission for inclusion in the Registration Statement on Form S-11 of the
Company as described in Note 1 to the Statement and is not intended to be a
complete presentation of the Initial GSA Properties revenues and expenses.
In our opinion, such financial statement presents fairly, in all material
respects, the combined revenues and certain expenses of the properties
known as the "Initial GSA Properties" as described in Note 1 for the year
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
August 5, 1998
THE PROPERTIES KNOWN AS THE "INITIAL GSA PROPERTIES"
COMBINED STATEMENT OF REVENUES
AND CERTAIN EXPENSES
Year Ended Six Months Ended
December 31, June 30, 1998
1997 (Unaudited)
---------------- ------------------
REVENUES
Rental income $29,793,566 $14,189,140
Other income 814,349 577,337
---------------- ------------------
Total 30,607,915 14,766,477
---------------- ------------------
CERTAIN EXPENSES
Real estate taxes 2,249,896 1,144,791
Management fees 567,741 231,562
Other operating expenses 5,184,016 2,205,732
---------------- ------------------
Total 8,001,653 3,582,085
---------------- ------------------
REVENUES IN EXCESS OF CERTAIN EXPENSES $22,606,262 $11,184,392
---------------- ------------------
See notes to combined statement of revenues and certain expenses.
THE PROPERTIES KNOWN AS THE "INITIAL GSA PROPERTIES"
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying historical combined statement includes the accounts
of the eight operating properties known as the "Initial GSA
Properties" (the "Properties"). The Properties consist of eight
office buildings located throughout the United States, which are
leased primarily to the General Services Administration ("GSA") of
the U.S. Government. The Properties have aggregate net rentable area
of approximately 2.2 million square feet.
The accompanying combined financial statement is presented in
conformity with Rule 3-14 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, the combined financial statement is
not representative of the actual operations of the Properties for the
year ended December 31, 1997. Certain expenses which may not be
comparable to the expenses expected to be incurred in the future
operations of the acquired Properties have been excluded. Expenses
excluded consists of interest, depreciation, amortization and other
costs not directly related to the future operations of the
Properties. Management is not aware of any material factors relating
to the Properties which would cause the reported financial
information not to be necessarily indicative of future operating
results.
The combined statement of revenues and certain expenses for the six
month period ended June 30, 1998 are unaudited, however, in the
opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for the fair presentation of this
combined statement of revenues and certain expenses for the interim
period, on the basis described above, have been included. The results
of such interim periods are not necessarily indicative of the results
for an entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting. The financial statement is prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of revenues and expenses reported during the period. Actual
results could differ from those estimates.
3. OPERATING LEASES
Future minimum rentals to be received by the Properties pursuant to
noncancellable operating leases are as follows:
Year Ending
December 31,
------------------
1998 $ 28,593,253
1999 28,596,053
2000 27,248,539
2001 26,428,342
2002 25,934,528
Thereafter 168,621,526
------------------
Total $ 305,422,241
==================
Major Tenant - The Properties are approximately 85% leased to the GSA.
4. SUBSEQUENT EVENTS
In July of 1998 Fortress Investment Corp. purchased from an unrelated
party the eight properties included in this statement along with the
additional properties which were under construction at December 31,
1997. The Seller of these properties purchased these properties from
9 unrelated parties between November of 1997 and April of 1998.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Fortress Investment Corp.
New York, NY
We have audited the accompanying statement of revenues and certain expenses
(the "Statement") of the property known as the "Houston GSA Property" for
the year ended December 31, 1997. This Statement is the responsibility of
the management of Fortress Investment Corp. (the "Company"). Our
responsibility is to express an opinion on this 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 Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement was prepared for the purpose of complying with
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for
inclusion in the Registration Statement on Form S-11 of the Company as
described in Note 1 to the Statement and is not intended to be a complete
presentation of the Houston GSA Property revenues and expenses.
In our opinion, such financial statement presents fairly, in all material
respects, the revenues and certain expenses of the property known as the
"Houston GSA Property" as described in Note 1 for the year ended December
31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
April 23, 1999
THE PROPERTY KNOWN AS THE "HOUSTON GSA PROPERTY"
STATEMENT OF REVENUES
AND CERTAIN EXPENSES
(amounts in thousands)
Six Months Ended
Year Ended June 30, 1998
December 31, 1997 (Unaudited)
----------------- ------------------
REVENUES
Rental income $1,776 $886
Escalation income 201 95
----------------- ------------------
Total 1,977 981
----------------- ------------------
CERTAIN EXPENSES
Real estate taxes 78 35
Management fees 78 36
Other operating expenses 803 314
----------------- ------------------
Total 959 385
----------------- ------------------
REVENUES IN EXCESS OF CERTAIN EXPENSES $1,018 $596
----------------- ------------------
See notes to statement of revenues and certain expenses.
THE PROPERTY KNOWN AS THE "HOUSTON GSA PROPERTY"
NOTES TO THE STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying historical statement includes the accounts of the
operating property known as the "Houston GSA Property" (the
"Property"). The Property consists of one office building located at
1433 West Loop South Houston, TX, which is leased primarily to the
General Services Administration ("GSA") of the U.S. Government.
The accompanying financial statement is presented in conformity with
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission
("Rule 3-14"). Accordingly, the financial statement is not
representative of the actual operations of the Property for the year
ended December 31, 1997. Certain expenses which may not be comparable
to the expenses expected to be incurred in the future operations of
the acquired Property have been excluded. Expenses excluded consist
of interest, depreciation, amortization and other costs not directly
related to the future operations of the Property. Management is not
aware of any material factors relating to the Property which would
cause the reported financial information not to be necessarily
indicative of future operating results.
The statement of revenues and certain expenses for the six month
period ended June 30, 1998 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring
adjustments) necessary for the fair presentation of this statement of
revenues and certain expenses for the interim period, on the basis
described above, have been included. The results of such interim
period are not necessarily indicative of the results for an entire
year.
In July 1998, Fortress Investment Corp. (the "Company") purchased in
a single transaction ten properties leased primarily to the GSA and
deposits on two additional properties which the Company later
acquired. Eight of the properties were included in a separate
combined statement of revenue and certain expenses under Rule 3-14.
Two of the properties were under construction during fiscal year 1997
and part of 1998. The Property shown herein and the property known as
the "GSA San Diego Property", incorporated in a separate Rule 3-14
statement of revenues and certain expenses, are the remaining two
properties considered to be related acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting. The financial statement is prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of revenues and expenses reported during the period. Actual
results could differ form those estimates.
3. OPERATING LEASES
Future minimum rentals to be received by the Property pursuant to
noncancellable operating leases are as follows:
Year Ending
December 31,
--------------------
1998 1,798,000
1999 1,798,000
2000 1,788,000
2001 1,760,000
2002 1,743,000
Thereafter 16,246,000
--------------
Total $25,133,000
==============
Major Tenant - The Property is approximately 92% leased to GSA.
***
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Fortress Investment Corp.
New York, NY
We have audited the accompanying statement of revenue and certain expenses
(the "Statement") of the property known as the "San Diego GSA Property" for
the period November 6, 1998 through December 31, 1998. This Statement is
the responsibility of the management of Fortress Investment Corp. (the
"Company"). Our responsibility is to express an opinion on this 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 Statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement was prepared for the purpose of complying with
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for
inclusion in the Registration Statement on Form S-11 of the Company as
described in Note 1 to the Statement and is not intended to be a complete
presentation of the San Diego GSA Property revenue and expenses.
In our opinion, such financial statement presents fairly, in all material
respects, the revenue and certain expenses of the property known as the
"San Diego GSA Property" as described in Note 1 for the period November 6,
1998 through December 31, 1998 in conformity with generally accepted
accounting principles.
Deloitte & Touche, LLP
New York, New York
April 23, 1999
THE PROPERTY KNOWN AS THE "SAN DIEGO GSA PROPERTY"
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD NOVEMBER 6, 1998 THROUGH DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
REVENUE:
Rental income $ 498
---------
CERTAIN EXPENSES:
Real estate taxes 8
Management fees 20
Other operating expenses 66
---------
Total 94
---------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 404
=========
See notes to statement of revenue and certain expenses.
THE PROPERTY KNOWN AS THE "SAN DIEGO GSA PROPERTY"
NOTES TO THE STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD NOVEMBER 6, 1998 THROUGH DECEMBER 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying historical statement includes the accounts of the
operating property known as the "San Diego GSA Property" (the
"Property"). The Property consists of two office buildings located at
8808 -- 8810 Rio San Diego Drive, CA which are leased primarily to
the General Services Administration ("GSA") of the U.S. Government.
The Property has a net rentable area of approximately 144,000 square
feet with GSA and North America Mortgage Corporation occupying
132,000 square feet and 12,000 square feet, respectively. As part of
the acquisition, Fortress Investment Corp. (the "Company") obtained
title to an existing property (occupied by North American Mortgage
Corporation) which was in operation throughout 1998. However, the
preexisting property represents less than 10% of the acquisition cost
and rental income and no separate records for the preexisting
property existed prior to November 6, 1998, the date upon which the
property leased to GSA commenced operations. Therefore, the statement
of revenue and certain expenses includes activity for the period
November 6, 1998 through December 31, 1998.
The accompanying financial statement is presented in conformity with
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission
("Rule 3-14"). Accordingly, the financial statement is not
representative of the actual operations of the Property for the
period November 6, 1998 through December 31, 1998. Certain expenses
which may not be comparable to the expenses expected to be incurred
in the future operations of the acquired Property have been excluded.
Expenses excluded consist of interest, depreciation, amortization and
other costs not directly related to the future operations of the
Property. Management is not aware of any material factors relating to
the Property which would cause the reported financial information not
to be necessarily indicative of future operating results.
In July 1998, the Company purchased in a single transaction ten
properties leased primarily to the GSA and deposits on two additional
properties which the Company later acquired. Eight of the properties
were included in a separate combined statement of revenue and certain
expenses under Rule 3-14. Two of the properties were under construction
during fiscal 1997 and part of 1998. The Property shown herein and
the property known as the "Houston GSA Property", incorporated in a
separate Rule 3-14 statement of revenue and certain expenses, are the
remaining two properties considered to be related acquisitions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting. The financial statement is prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of revenues and expenses reported during the period. Actual
results could differ from those estimates.
3. OPERATING LEASES
Future minimum rentals to be received by the Property pursuant to
noncancellable operating leases are as follows:
Year Ending
December 31,
1999 $ 3,034,000
2000 3,042,000
2001 3,049,000
2002 3,056,000
2003 2,813,000
Thereafter 27,486,000
-------------
Total $ 42,480,000
=============
Major Tenant-The Property is approximately 91% leased to the GSA.
***
===================================== ====================================
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFERING COVERED BY
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT 20,916,739 SHARES
CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF
THE SECURITIES IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT FORTRESS INVESTMENT CORP.
THERE HAS NOT BEEN A CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------------- COMMON STOCK
TABLE OF CONTENTS
----------------------
PAGE
Offering Summary....................
Risk Factors........................
The Company......................... -------------
Investment Strategy................. PROSPECTUS
The Manager and the Management
Agreement...........................
Management.......................... -------------
Security Ownership of Certain
BeneficialOwners and Management...
Certain Relationships and Related
Party Transactions...............
Use of Proceeds.....................
Distribution Policy.................
Price Range of Common stock.........
Selected Consolidated Financial
Information......................
Management's Discussion and Analysis __________, 1999
of Financial Condition and
Results of Operations............
Description of Securities...........
Certain Provisions of Maryland Law
and of Fortress' Charter and
Bylaws...........................
Common Stock Available for Future
Sale ............................
Operating Partnership Agreement.....
Federal Income Tax Considerations...
ERISA Considerations................
Selling Stockholders................
Plan of Distribution................
Legal Matters.......................
Experts.............................
Glossary of Terms...................
Financial Statements................
===================================== ====================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses expected to be
incurred in connection with the sale and distribution of the securities
being registered.
Securities and Exchange Commission registration fee..... $123,409
Printing and engraving expenses......................... *
Legal fees and expenses................................. *
Accounting fees and expenses............................ *
Miscellaneous........................................... *
-------
Total................................................. $
*
=======
* To be filed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On May 11, 1998, in connection with the Registrant's incorporation,
the Registrant issued 50 shares of Common stock to Fortress Principal
Investment Holdings LLC, a Delaware limited liability company, for $1,000.
Such issuance was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
On June 1, 1998, the Registrant issued 2,680,960 shares of Common
stock to Fortress Principal Investment Holdings LLC, a Delaware limited
liability company, for approximately $50,000,000. Such issuance was exempt
from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof.
On June 10, 1998, the Registrant issued an aggregate of 17,672,440
shares of Common Stock to Qualified Institutional Buyers (as defined in
Rule 144A under the Securities Act) in reliance on the exemption from the
registration requirements of the Securities Act provided by Rule 144A under
the Securities Act and to a limited number of "accredited investors" (as
defined in Rule 501 under the Securities Act) in reliance on the exemption
from the registration requirements of the Securities Act provided by
Regulation D under the Securities Act. The initial purchaser of such shares
of Common stock was NationsBanc Montgomery Securities LLC. The aggregate
proceeds to the Registrant from such offering and the aggregate initial
purchaser's discount were $329,591,006 and $20,408,992, respectively.
On July 1, 1998, the Registrant issued an aggregate of 559,001 shares
of Common stock pursuant to an option granted to NationsBanc Montgomery
Securities LLC in connection with the Original Offering, to Qualified
Institutional Buyers (as defined in Rule 144A under the Securities Act) in
reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A under the Securities Act and to a
limited number of "accredited investors" (as defined in Rule 501 under the
Securities Act) in reliance on the exemption from the registration
requirements of the Securities Act provided by Regulation D under the
Securities Act. The aggregate proceeds to the Registrant from such offering
and the aggregate initial purchaser's discount were $10,425,368 and
$738,670, respectively.
On July 1, 1998, the Registrant issued an aggregate of 4,288 shares
of Common stock to employees of Fortress Investment Group LLC for
$80,000.00. Such issuance was exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof.
All of the shares issued by Fortress in the unregistered transactions
described above are being registered under this Registration Statement.*
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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 (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action.
The Charter contains such a provision which eliminates such liability to
the maximum extent permitted by the MGCL.
The Charter authorizes Fortress, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a)
any present or former director or officer of Fortress or (b) any individual
who, while a director of Fortress and at the request of Fortress, serves or
has served as a director, officer, partner or trustee of another
corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise from and against any claim
or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of Fortress. The Bylaws obligate Fortress, 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 (a) any present
or former director or officer of Fortress who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director of Fortress and at the request of Fortress, serves or
has served as a director, officer, partner or trustee of another
corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to
the proceeding by reason of his service in that capacity. The Charter and
Bylaws also permit Fortress to indemnify and advance expenses to any person
who served a predecessor of Fortress in any of the capacities described
above and to any employee or agent of Fortress or a predecessor of
Fortress.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does 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, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal
benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. 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 and (b) a written
undertaking 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. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling Fortress pursuant to the foregoing provisions, Fortress has
been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
- --------------
* the sales are not being registered, it is the resale of the
shares that is being registered
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
No portion of the proceeds of the sale of the shares of Common Stock
being registered hereunder will be received by the Registrant.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements are being filed as part of
this Registration Statement:
1. December 31, 1998 Consolidated Financial Statement of
the Company
2. Combined Statements of Revenue and Certain Expenses for the
Properties Known as the Initial GSA Properties for the Year
Ended December 31, 1997
3. Statements of Revenue and Certain Expenses for the Property
known as the Houston GSA Property for the Year Ended
December 31, 1997.
4. Statement of Revenue and Certain Expenses for the Property
known as the San Diego GSA Property for the Period from
November 6, 1998 to December 31, 1998.
(b) The following is a list of exhibits filed as part of this
Registration Statement.
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------
3.1 Amended Articles of Incorporation of the Registrant*
3.2 By-laws of the Registrant* 4.1 Form of Certificate for
Common Stock*
4.2 Registration Rights Agreement, dated as of June 10, 1998, by and
between the Registrant and NationsBanc Montgomery Securities, Inc.*
4.3 Registration Rights Agreement, dated as of June 10, 1998, by and
among the Registrant, Fortress Principal Investment Holdings LLC
and Additional Purchasers (as defined therein)*
4.4 Rights Agreement between the Registrant and American Stock Transfer &
Trust Company, as Rights Agent*
5.1 Opinion of Ballard, Spahr, Andrews & Ingersoll, LLP relating to
the legality of the Common Stock
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP**
10.1 Management and Advisory Agreement, dated as of June 10, 1998, by and
among the Registrant, Fortress Partners, L.P. and Fortress Investment
Group LLC.*
10.2 Agreement of Limited Partnership of Fortress Partners L.P., dated as
of June 10, 1998*
10.3 Limited Liability Company Agreement of Fortress Investment Group LLC*
10.4 Asset Purchase Agreement, dated July 1, 1998, between UBS Securities
(SWAPS) Inc. and Fortress GSA Properties LLC*
10.5 Loan Agreement, dated as of July 31, 1998, by and among the
borrowers listed on Schedule I thereto, Meridian Funding Company,
LLC, as the lender, and Bankers Trust Company as the collateral
agent*
10.6 Investment Guidelines
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ballard, Spahr, Andrews & Ingersoll, LLP (contained in
Exhibit 5.1)
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in
Exhibit 8.1)
24.1 Power of Attorney (included in the signature page)
- -------------
* Previously filed.
** To be filed by amendment.
ITEM 37. UNDERTAKINGS.
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.
(a) The undersigned Registrant hereby undertakes:
(1) 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;
(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. Notwithstanding 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 law 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.
(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;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, 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) 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.
(b) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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."
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) for the purposes determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-11 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, on April
30, 1999.
Fortress Investment Corp.
By: /s/ Wesley R. Edens
-------------------------------------
Name: Wesley R. Edens
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment
No. 1 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
POWER OF ATTORNEY
EACH PERSON IN SO SIGNING, ALSO MAKES, CONSTITUTES AND APPOINTS WESLEY R.
EDENS, AND RANDAL A. NARDONE AND EACH OF THEM ACTING ALONE, HIS TRUE AND
LAWFUL ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, TO EXECUTE AND
CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
THE REQUIREMENTS OF THE SECURITIES ACT, ANY AND ALL AMENDMENTS AND
POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, WITH EXHIBITS
THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, AND ANY RELATED
REGISTRATION STATEMENT AND ITS AMENDMENTS AND POST-EFFECTIVE AMENDMENTS
FILED PURSUANT TO RULE 462(B) UNDER THE ACT, WITH EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND CONFIRMS
ALL THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO OR
CAUSE TO BE DONE BY VIRTUE THEREOF.
SIGNATURE TITLE DATE
/s/ Wesley R. Edens Chief Executive Officer and April 30, 1999
- ----------------------- Chairman of the Board
Wesley R. Edens
/s/ Robert I. Kauffman President and Director April 30, 1999
- ----------------------
Robert I. Kauffman
/s/ Randal A. Nardone Chief Operating Officer and April 30, 1999
- ---------------------- Secretary (Principal
Randal A. Nardone Financial and Accounting Officer)
/s/ Erik P. Nygaard Chief Information Officer and April 30, 1999
- ---------------------- Treasurer
Erik P. Nygaard
/s/ Mark H. Burton Director April 30, 1999
- ----------------------
Mark H. Burton
/s/ Douglas A. Jacobs Director April 30, 1999
- ---------------------
Douglas A. Jacobs
/s/ Stuart A. McFarland Director April 30, 1999
- -----------------------
Stuart A. McFarland
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Fortress Investment
Corp. on Amendment No. 1 to Form S- 11 of our report dated February 19,
1999 (April 21, 1999, with respect to Note 16 relating to the consolidated
financial statements of Fortress Investment Corp. and Subsidiaries),
appearing in the Prospectus, which is part of this Registration Statement,
and of our reports dated April 23, 1999 relating to the financial
statements of "The Property Known as the Houston GSA Property" and "The
Property Known as the San Diego GSA Property" and of our report dated
August 5, 1998 relating to the financial statements of "The Properties
Known as the Initial GSA Properties" appearing elsewhere in this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
New York, New York
April 30, 1999
EXHIBIT 5.1
FILE NUMBER
868418
April 30, 1999
Fortress Investment Corp.
1301 Avenue of the Americas
New York, New York 10019
Re: Registration Statement on Form S-11 (Registration
No. 333-63061)
Ladies and Gentlemen:
We have served as Maryland counsel to Fortress Investment
Corp., a Maryland corporation (the "Company"), in connection with certain
matters of Maryland law arising out of the registration of an aggregate of
20,916,739 shares (the "Shares") of Common Stock, $.01 par value per share,
of the Company ("Common Stock"), covered by the above-referenced
Registration Statement (the "Registration Statement"), filed by the Company
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "1933 Act"). The Shares may be
offered and sold from time to time by the holders thereof named in the
Registration Statement. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings assigned to them in the Registration
Statement.
In connection with our representation of the Company, and as a
basis for the opinion hereinafter set forth, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of the
following documents (collectively, the "Documents"):
1. The Registration Statement and the related form of
prospectus included therein in the form in which it was transmitted to the
Commission under the 1933 Act;
2. The charter of the Company (the "Charter"), certified as of
a recent date by the State Department of Assessments and Taxation of
Maryland (the "SDAT");
3. The Bylaws of the Company, certified as of the date hereof
by its Secretary;
4. Resolutions adopted by the Board of Directors of the Company
relating to the sale, issuance and registration of the Shares, certified as
of the date hereof by the Secretary of the Company;
5. The form of certificate representing a share of Common
Stock, certified as of the date hereof by the Secretary of the Company;
6. A certificate of the SDAT as to the good standing of the
Company, dated as of the date hereof; and
7. A certificate executed by Randal A. Nardone, Chief Operating
Officer and Secretary of the Company, dated as of the date hereof.
In expressing the opinion set forth below, we have assumed the
following:
1. Each individual executing any of the Documents, whether on
behalf of such individual or another person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of
a party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any
of the Documents has duly and validly executed and delivered each of the
Documents to which such party is a signatory, and such party's obligations
set forth therein are legal, valid and binding.
4. All Documents submitted to us as originals are authentic.
All Documents submitted to us as certified or photostatic copies conform to
the original documents. All signatures on all such Documents are genuine.
All public records reviewed or relied upon by us or on our behalf are true
and complete. All statements and information contained in the Documents are
true and complete. There has been no oral or written modification or
amendment to the Documents, or waiver of any provision of the Documents, by
action or omission of the parties or otherwise.
5. The Shares have not been transferred in violation of any
restriction or limitation contained in the Charter.
Based upon the foregoing, and subject to the assumptions,
limitations and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and
existing under and by virtue of the laws of the State of Maryland and is in
good standing with the SDAT.
2. The Shares have been duly authorized and are validly
issued, fully paid and nonassessable.
The foregoing opinion is limited to the substantive laws of the
State of Maryland and we do not express any opinion herein concerning any
other law. We express no opinion as to compliance with the securities (or
"blue sky") laws of the State of Maryland. The opinion expressed herein is
subject to the effect of judicial decisions which may permit the
introduction of parol evidence to modify the terms or the interpretation of
agreements.
We assume no obligation to supplement this opinion if any
applicable law changes after the date hereof or if we become aware of any
fact that might change the opinion expressed herein after the date hereof.
This opinion is being furnished to you for submission to the
Commission as an exhibit to the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of the name of our firm
therein. In giving this consent, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
\s\ Ballard Spahr Andrews
& Ingersoll, LLP
INVESTMENT GUIDELINES OF FORTRESS INVESTMENT CORP.
Capitalization terms used but not defined herein shall have the
meanings ascribed thereto in that certain management and advisory agreement
dated of June , 1998 (the "Management Agreement") by and between the
Fortress Investment Corp. (the "Corporation" or the "REIT"), Fortress
Investment Group LLC (the "Manager") and Fortress Partners, LP (the
"Operating Partnership").
1. No investment of the Corporation or the Operating Partnership
shall be made which would cause the corporation to fail to
qualify as a real estate investment trust under the Internal
Revenue Code of 1986, as amended.
2. No investment of the Corporation or the Operating Partnership
shall be made which would cause the Corporation or the Opening
Partnership to be regulated as an investment company under the
Investment Company Act of 1940.
3. The Corporation shall not invest (and shall not permit the
Operating Partnership to invest) more than 20% of its Gross
Equity, determined as of the date of such investment, in any
single asset.
4. The debt of the Corporation (including the Corporation's pro
rata share of debt of its subsidiaries) shall not exceed 90% of
the sum of such debt and the Gross Equity of the Corporation.
5. The corporation shall not co-invest with the Manager or any of
its affiliates unless (i) Corporation's co-investment is
otherwise in accordance with these Guidelines and (ii) the
terns of such co- investment are at least as favorable to the
Corporation as to the Manager or such affiliate 9as applicable)
making such co-investment with the Manager.
