FILED PURSUANT TO RULE 424(b)(3)
SUBJECT TO COMPLETION, DATED OCTOBER 2, 1995
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 2, 1995)
[RESOURCE LOGO]
2,100,000 SHARES
RESOURCE MORTGAGE CAPITAL, INC.
SERIES B % CUMULATIVE CONVERTIBLE PREFERRED STOCK
Dividends on the shares of the Series B % Cumulative Convertible
Preferred Stock (the "Preferred Stock") of Resource Mortgage Capital, Inc. (the
"Company") are cumulative from the date of issue and are payable quarterly in
arrears on January 31, April 30, July 31, and October 31 (or the next succeeding
business day) of each year, commencing January 31, 1996 in an amount per share
equal to the greater of (i) the Base Rate of $ per quarter (equal to a %
annual dividend rate), or (ii) the quarterly dividend declared on the number of
shares of Common Stock (or portion thereof) into which the Preferred Stock is
convertible. The record date for determination of shareholders entitled to
receive dividends on the Preferred Stock for the period from the date of
issuance through December 31, 1995 is expected to be December 31, 1995. The
dividend for the partial period ending December 31, 1995 will be prorated from
the date of issuance and will be determined by reference to the Base Rate. See
"The Offering."
Each share of Preferred Stock is convertible at any time at the option of
the holder thereof into one share (subject to possible future adjustment in
certain circumstances) of Common Stock. See "The Offering." On September 29,
1995, the last reported sale price of the Common Stock (RMR) on the New York
Stock Exchange (the "NYSE") was 20 1/4 per share.
The Preferred Stock will not be redeemable by the Company prior to October
31, 1998. On and after October 31, 1998, the Preferred Stock will be redeemable
by the Company, in whole or in part, at the option of the Company (i) for one
share (subject to possible future adjustment in certain circumstances) of Common
Stock (plus accumulated, accrued and unpaid dividends through the end of the
prior dividend period, which are to be paid in cash), provided that for 20
trading days within any period of 30 consecutive trading days, including the
last trading day of such period, the closing price of the Common Stock on the
NYSE equals or exceeds the Conversion Price then in effect (initially equal to
the issue price of $ per share (the "Issue Price")), or (ii) for cash at a
redemption price equal to the Issue Price, plus any accumulated, accrued and
unpaid dividends.
The Preferred Stock represents preferred stock in a real estate investment
trust ("REIT"), and as such, the dividends on the Preferred Stock are not
eligible for the dividends received deduction for federal income tax purposes.
With certain exceptions, no person may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), more than 9.8% of the Company's capital stock. The Preferred Stock of
the Company may not be purchased or held by tax-exempt entities that are not
subject to tax on unrelated business taxable income or by nonresident aliens or
foreign entities. See "Description of Securities."
The Company intends to apply to have the Preferred Stock approved for
listing on the National Association of Securities Dealers Automated Quotation
National Market System (the "Nasdaq National Market") under the symbol "RMRPO."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share........................................... $ $ $
Total (3)........................................... $ $ $
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $ , which are payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 additional shares of the Preferred Stock on the same terms and
conditions as set forth above to cover over-allotments, if any. If all such
shares are purchased, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , and $ and $ ,
respectively. See "Underwriting."
THE SHARES OF PREFERRED STOCK ARE OFFERED BY THE UNDERWRITERS SUBJECT TO
RECEIPT AND ACCEPTANCE BY THEM, PRIOR TO SALE AND THE UNDERWRITERS' RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART AND TO WITHDRAW, CANCEL OR MODIFY THE OFFER
WITHOUT NOTICE. IT IS EXPECTED THAT DELIVERY OF THE PREFERRED STOCK WILL BE MADE
IN NEW YORK, NEW YORK THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY ON
OR ABOUT OCTOBER , 1995.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
SCOTT & STRINGFELLOW, INC.
STEPHENS INC.
The date of this Prospectus Supplement is , 1995
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE
BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALES 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.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference.
The Company
Resource Mortgage Capital, Inc. ("the Company") is a real estate
investment trust whose primary objective is to maximize long-term return on
equity through investment in a portfolio of residential mortgage
securities. The Company's primary strategy is to use its mortgage
operations to create investments for its portfolio that generally have
higher yields than could be obtained through purchase in the market. The
Company's mortgage operations consist of the origination, purchase,
securitization and servicing of residential mortgage loans.
Business Focus
The Company strives to create a diversified portfolio of mortgage
securities that in the aggregate generates stable income for the Company in
a variety of interest rate environments and preserves the capital base of
the Company. The Company creates the majority of the investments for its
portfolio by retaining a portion of the mortgage securities or other assets
that are generated from its mortgage operations. The Company employs
leverage to increase potential returns to shareholders by using
collateralized borrowings, repurchase agreements and its capital base, to
fund its mortgage investments. By pursuing these strategies, the Company
believes it can structure the portfolio to have more favorable net yields
in a variety of interest rate environments than if it purchased mortgage
investments in the market, although there can be no assurance that the
Company will be successful in accomplishing this strategy.
A substantial portion of the mortgages originated by the Company through
its mortgage operations are to borrowers with a non-conforming credit
profile, primarily with respect to borrower income, credit history and or
required documentation (i.e. "non-conforming credit profile"). Conforming
mortgage loans qualify for guarantees from government agencies, whereas
non-conforming loans do not qualify for such guarantees. The Company's
strategy of originating and securitizing mortgage loans to borrowers with
such non-conforming credit profiles involves three primary components (i)
geographic diversification of mortgage assets provided by a growing network
of mortgage loan brokers throughout the country who source these mortgage
loans for the Company, (ii) prudent loan selection through the use of the
Company's internally-developed non-conforming credit underwriting standards
and procedures executed by the underwriting and risk management
departments, and (iii) aggressive loan monitoring and default management
through the Company's servicing operation which services substantially all
loans for which the Company retains credit risk upon securitization. The
Company believes it can achieve a greater return for its shareholders by
focusing on mortgage loans to borrowers with a non-conforming credit
profile.
Strategy
The Company's portfolio investments and mortgage operations, in
conjunction with its REIT tax status, have contributed to the Company's
four year average return on equity in excess of 20%. The Company has
recently implemented three key strategies in order to continue to meet its
goal of maximizing long-term return on equity in response to an
increasingly competitive mortgage market.
(bullet) The Company expects that in future periods, a greater
percentage of its mortgage loan funding volume will be
wholesale originations (direct originations by the Company
through a network of mortgage loan brokers) and a lower
percentage will be correspondent purchases (the purchase of
closed loans from Company approved mortgage loan originators)
relative to recent periods. During the six months ended June
30, 1995, $309.0 million of mortgage loans, representing 71% of
total loan fundings, were purchased from correspondents, with
the remainder being originated through wholesale broker
relationships. The Company believes that the funding of
mortgage loans through its wholesale operations will be at a
lower all-in cost than if such mortgage loans were purchased
from correspondents. Additionally, the Company believes that
by originating loans directly through brokers, it can (i) be
more responsive to the market place by more quickly developing
and introducing new loan products and adjusting mortgage loan
terms and pricing, and (ii) maintain a higher level of control
over the credit quality of the mortgage loans.
(bullet) The Company expects that a significant portion of the future
growth in its portfolio of mortgage assets will be from the
issuance of collateralized mortgage obligations ("CMOs"), which
is the issuance of a debt security collateralized by a pool of
mortgage loans. These CMOs will be collateralized primarily by
mortgage loans to borrowers with a non- conforming credit
profile. As such, the mortgage loans which collateralize the
CMOs are treated as assets of the Company and the CMOs are
treated as liabilities of the Company. The Company earns the
difference between the interest income on the mortgage loans
which collateralize the CMOs and the interest and other
expenses associated with the CMO financing. The net interest
spread will be directly impacted by the levels of prepayment of
and credit losses on the underlying mortgage loans. The
Company may issue CMOs from time to time based on the Company's
portfolio management strategy, loan funding volume, market
conditions and other factors.
The Company's CMO securitization strategy differs from its
securitization strategy in recent years. As a debt issuance, a
CMO securitization does not result in the immediate recognition
of a gain or loss on sale of mortgage loans as would have
resulted using the securitization strategies of recent years.
Rather, income from these security structures will be
recognized over the life of the security as net interest margin
on portfolio investments which is generally not taxable to the
Company as a REIT. Conversely, income recognized as gain on
sale of mortgage loans are generated primarily by a taxable
affiliated entity and as such are fully taxable. Recognizing
income over time as a result of utilizing the CMO
securitization strategy may reduce the earnings volatility that
could have been experienced by utilizing former securitization
strategies. As of August 31, 1995, the Company had securitized
$527.4 million principal amount of mortgage loans to borrowers
with a non-conforming credit profile using a CMO security
structure.
(bullet) The Company generally will assume a portion of the credit risk
for the mortgage loans which it originates and securitizes
through the issuance of CMOs. Such loans are originated at a
higher yield relative to the loan to value ratio than
conforming mortgage loans to compensate for the higher credit
risk. The Company's loss exposure is limited to its net
investment in these CMOs, primarily related to
over-collateralization. Additionally, the Company attempts to
manage this risk through its underwriting process and strategy
of servicing substantially all loans for which the Company
assumes any credit risk.
Non-conforming Mortgage Loans
Substantially all of the mortgage loans funded through the mortgage
operations are "non-conforming" mortgage loans secured by residential
properties throughout the United States. Non-conforming mortgage loans
will not qualify for purchase by Federal Home Loan Mortgage Association
("FHLMC") or Federal National Mortgage Association ("FNMA") or for
inclusion in a loan guarantee program sponsored by Government National
Mortgage Association ("GNMA"). Non-conforming mortgage loans generally are
originated based upon different underwriting criteria than are required by
the federal agencies' programs (i.e. "non-conforming credit profile") or
have outstanding principal balances in excess of the program guidelines of
these federal agencies ($203,150 as of August 31, 1995). A borrower with
a non-conforming credit profile cannot easily qualify for a loan from the
federal agencies for reasons other than loan size. Such qualification
criteria includes borrower income, credit history and/ or required
documentation. Non-conforming loans may have higher risks than conforming
mortgage loans due to their lower liquidity, different underwriting or
qualification criteria, or higher loan balances.
Mortgage loans funded by the Company in its mortgage operations are
secured by single (one-to-four) family residential properties and have
either fixed or adjustable interest rates. Adjustable-rate mortgage
("ARM") loans provide for the periodic adjustment to the rate of interest
equal to the sum of a fixed margin and an index, generally subject to
certain periodic and lifetime interest rate caps ("caps"). Fixed-rate
mortgage loans generally have a constant interest rate over the life of the
loan, primarily 15 or 30 years. In addition, fixed-rate mortgage loans
funded by the Company may also have a fixed interest rate for the first 3,
5, or 7 years and an interest rate which adjusts at six or twelve month
intervals thereafter, subject to periodic and lifetime interest rate caps.
Mortgage Loan Funding
The Company has two primary methods for sourcing mortgage loans funded
through its mortgage operations. Mortgage loans funded through the
Company's wholesale operations are originated directly by the Company
through brokers. Mortgage loans funded through the Company's correspondent
operations are purchased from various Company approved mortgage loan
originators. The Company purchases mortgage loans for immediate delivery
or for a specific period of time at an established price and yield, in a
specified principal amount.
Wholesale operations. Mortgage loans originated by the Company through
its wholesale operations are sourced by independent brokers and
underwritten and closed by the Company. The wholesale operation provides
geographic diversification of mortgage assets and allows the Company to be
more directly involved in the origination process of the loan, but without
the direct cost and overhead of a retail branch operation. The Company's
mortgage loan wholesale operation targets borrowers with a non-conforming
credit profile. The Company's wholesale origination capability was
established during 1994 and $125.6 million or 29% of the total mortgage
loans funded by the Company during the six months ended June 30, 1995 were
funded through its wholesale operations. The Company expects that
wholesale originations will represent a greater percentage of total
mortgage loans funded during 1995 relative to 1994 as the Company continues
to grow its wholesale origination capability.
Correspondent operations. The mortgage loans funded through the
Company's correspondent operations are originated by various sellers that
meet the Company's qualification criteria. These sellers include savings
and loan associations, banks, mortgage bankers and other mortgage lenders.
During the six months ended June 30 1995, $309.0 million or 71% of the
total mortgage loans funded by the Company were funded through its
correspondent operations.
Mortgage Loan Underwriting
Each mortgage loan funded by the Company must meet the Company's
underwriting standards. Underwriting standards vary dependent upon the
specific loan program under which the loan is being funded. The Company's
in-house underwriting process improves quality control and allows the
Company to quickly respond to changes in the market. The Company now
underwrites principally all mortgage loans that it funds. Additionally,
the Company may allow certain correspondent sellers to underwrite mortgage
loans according to the Company's underwriting guidelines.
Mortgage Loans in Warehouse
During the mortgage loan accumulation period prior to sale or
securitization, which is typically 60 to 90 days, the Company is exposed to
risks of interest rate fluctuations and may enter into hedging transactions
to reduce the change in value of such mortgage loans caused by changes in
interest rates. Gains and losses on these hedging transactions are
deferred as an adjustment to the carrying value of the related mortgage
loans until the mortgage loans are sold. The Company is also at risk for
credit losses on mortgage loans in inventory during the accumulation
period. The Company manages this risk through application of its mortgage
loan underwriting and risk management standards and procedures, and the
establishment of reserves.
Mortgage Loan Securitization and Sales Strategy
When a sufficient volume of mortgage loans is accumulated, typically a
minimum of $100 million, the Company generally securitizes a pool of
mortgage loans through the issuance of mortgage securities or may sell such
pool of mortgage loans directly to an investment banking firm or an
institutional investor. The Company may securitize mortgage loans funded
through its mortgage operations by issuing CMOs or pass-through securities.
The mortgage-backed securities are structured so that a substantial portion
of the securities are rated in one of the two highest rating categories
(i.e. AA or AAA) by at least one of the nationally recognized rating
agencies. Credit enhancement for these mortgage securities may take the
form of over-collateralization, subordination, reserve funds, mortgage pool
insurance, bond insurance, or any combination of the foregoing. The
Company strives to use the most cost effective security structure and form
of credit enhancement available at the time of securitization. Mortgage-
backed securities issued by the Company are not generally guaranteed by the
federal agencies. Each series of mortgage securities is expected to be
fully payable from the collateral pledged to secure the series. It is
expected that the recourse of investors in the series generally will be
limited to the collateral underlying the securities. Except in the case of
a breach of the standard representations and warranties made by the Company
when loans are sold or securitized, the securities are non-recourse to the
Company.
Credit Enhancement and Risk Retention
Regardless of the form of credit enhancement, the Company may retain a
limited portion of the direct credit risk after securitization, including
the risk of loss related to hazards not covered under standard hazard
insurance policies. Such credit loss exposure is generally limited to an
amount equal to a fixed percentage of the principal balance of the pool of
mortgage loans at the time of securitization. Additionally, the Company
may be contingently exposed to losses due to fraud during the origination
of a mortgage loan if the originator of such mortgage loan defaults on its
repurchase obligation. The Company has established discounts and reserves
for estimated expected losses related to these various risks. The
Company's results will be negatively impacted in future periods to the
extent actual losses exceed the amount of such discounts and reserves.
Over-collateralization. Over-collateralization is generally used in
conjunction with bond insurance in the issuance of CMOs. Losses are first
applied to the over-collateralization amount, and any losses in addition to
that amount would be borne by the bond insurer or holders of the CMOs. The
Company generally receives an excess yield on the mortgage loans relative
to the yield on the CMOs to compensate the Company for retaining such loss
exposure.
Subordination. Subordination is generally used in conjunction with the
issuance of pass-through securities, and may also be used in conjunction
with reserve funds, mortgage pool insurance and bond insurance. The credit
risk is concentrated in the subordinated classes (which may partially be
credit enhanced with reserve funds or pool insurance) of the securities,
thus allowing the senior classes of the securities to receive the higher
credit ratings. To the extent credit losses are greater than expected (or
exceed the protection provided by any reserve funds or pool insurance), the
holders of the subordinated securities will experience a lower yield (which
may be negative) than expected on their investments.
Insurance. As mentioned above, the Company may use mortgage pool
insurance and reserve funds for credit enhancement. Mortgage pool
insurance is currently less available as a form of credit enhancement than
it had been in the past. Credit losses covered by the mortgage pool
insurance policies are borne by the pool insurers to the limits of their
policies and by the security holders (or a bond insurer, if any) if losses
exceed those limits. To the extent a loan is to be covered by mortgage
pool insurance, the Company may rely upon the credit review and analysis of
each loan, which is performed by the mortgage insurer, in deciding to fund
the mortgage loan.
Mortgage Loan Servicing
During 1994, the Company established, through an acquisition, the
capability to service mortgage loans funded through its mortgage
operations. Servicing functions include collection and remittance of
principal and interest payments, administration of mortgage escrow
accounts, collection of certain insurance claims and, if necessary,
foreclosure and sale of the property. The Company plans to enhance its
servicing capability with an emphasis on technology to minimize credit risk
and maximize credit recovery. The Company has recently implemented a
computerized default management system to track and manage foreclosures and
liquidations, and is in the process of prototyping an imaging system which
will provide instantaneous access to documents, and enhance collection
capabilities. If the Company retains a portion of the credit risk on a
pool of mortgage loans after securitization, the Company will generally
utilize its servicing capabilities in an effort to better manage its credit
exposure.
Portfolio Investment Strategy
The Company's investment strategy is to create a diversified portfolio
of mortgage securities that in the aggregate generates stable income for
the Company in a variety of interest rate environments and preserves the
capital base of the Company. The Company creates the majority of the
investments for its portfolio by retaining a portion of the mortgage
securities or other assets that are generated from its mortgage operations.
The Company employs leverage to increase potential returns to shareholders
by using collateralized borrowings, repurchase agreements and its capital
base, to fund its mortgage investments. By pursuing these strategies, the
Company believes it can structure the portfolio to have more favorable
yields in a variety of interest rate environments than if it purchased
mortgage investments in the market, although there can be no assurance that
the Company will be successful in accomplishing this strategy.
At June 30, 1995, the Company's mortgage investments included the
following (amounts in thousands):
Collateral for CMOs $ 882,825 29%
Adjustable-rate mortgage securities 2,058,661 67
Fixed-rate mortgage securities 69,007 2
Other mortgage securities 66,814 2
Mortgage warehouse lines of credit 4,233 -
Total mortgage investments $3,081,540 100%
The Company continuously monitors the aggregate projected net yield of
its investment portfolio under various interest rate environments. While
certain investments may perform very poorly in an increasing interest rate
environment, certain investments may perform very well, and others may not
be impacted at all. Generally, the Company adds investments to its
portfolio which are designed to increase the diversification and reduce the
variability of the yield produced by the portfolio in different interest
rate environments. The Company may add new types of mortgage investments
to its portfolio in the future.
Investment in CMOs. A segment of the portfolio which the Company
intends to grow significantly consists of its net investment in CMOs. The
net margin on CMOs is derived primarily from the difference between the
cash flow generated from the mortgage collateral pledged to secure the
CMOs, and the amounts required for payment on the CMOs and administrative
expenses. The CMOs are generally non-recourse to the Company. The
Company's yield on its investment in CMOs is affected primarily by changes
in prepayment rates (the yield will decline with an increase in prepayment
rates, and the yield will increase with a decrease in prepayment rates) and
secondarily by credit losses (the yield will decline with higher than
expected credit losses, and the yield will increase with lower than
expected credit losses).
The Company's CMO securitization strategy differs from the Company's
securitization strategy in recent years. As a debt issuance, a CMO
securitization does not result in the immediate recognition of a gain or
loss on sale of mortgage loans. Rather, income from these security
structures will be recognized over the life of the security as net interest
margin on portfolio investments which is generally not taxable to the
Company, as a REIT. Conversely, income recognized as gain on sale of
mortgage loans are generated primarily by a taxable affiliated entity and
as such are fully taxable. Recognizing income over time as a result of
utilizing the CMO securitization strategy may reduce the earnings
volatility that could have been experienced by utilizing former
securitization strategies.
Adjustable-rate mortgage securities. The majority of the Company's
portfolio is comprised of investments in ARM securities. The Company may
increase its return on equity by pledging the ARM securities as collateral
for repurchase agreements. The interest rates on the majority of the
Company's ARM securities reset every six months, and the rates are subject
to both periodic and lifetime limitations ("caps"). Generally, the
repurchase agreements have a fixed rate of interest over a term that ranges
from 30 to 180 days. As a result, the interest rates on repurchase
agreements are not subject to repricing limitations. Thus, the net
interest on the ARM investments could decline if the spread between the
yield on the ARM security versus the interest rate on the repurchase
agreement was to be reduced.
In the event of a rapidly rising interest rate environment, as was
experienced during 1994, the interest rate on certain repurchase
borrowings, which are not subject to caps, will increase at a faster rate
than the interest rate earned on the ARM securities which collateralize
these borrowings, decreasing the net interest spread on these securities.
Similarly, a rapidly rising interest rate environment may cause the value
of the Company's ARM securities to decline. Such a decline in value may
reduce the amount of funds available to be borrowed against these assets.
As a result of such a decline in market value, the Company may be required
to sell certain mortgage assets in order to maintain liquidity. If
required, these sales could be made at prices lower than the carrying value
of the assets, which could result in losses. To mitigate this risk, the
Company (i) may establish a reserve to hedge against the impact on earnings
when the spread is reduced, (ii) has purchased interest rate cap agreements
to reduce the risk of the lifetime interest rate limitation on the ARM
securities and (iii) strives to maintain excess equity in the event of
significant declines in market value.
Fixed-rate mortgage securities. Fixed-rate mortgage securities consist
of securities that have a fixed-rate of interest for specified periods of
time. Certain fixed-rate mortgage securities have a fixed interest rate
for the first 3, 5, or 7 years and an interest rate that adjusts at six or
twelve month intervals thereafter, subject to periodic and lifetime
interest rate caps. At June 30, 1995, $29 million or approximately 42% of
fixed-rate mortgage securities had a fixed rate of interest for the first
three years and an interest rate that adjusts at six month intervals
thereafter, subject to periodic and lifetime interest rate caps. The
Company's yields on these securities are primarily affected by changes in
prepayment rates; such yield will decline with an increase in prepayment
rates, and the yield will increase with a decrease in prepayment rates.
The Company generally borrows against its fixed-rate mortgage securities,
through the use of repurchase agreements. The spread between the interest
rate on a repurchase agreement and the interest rate on any fixed-rate
security that the Company plans to hold is generally fixed by using an
interest rate swap.
Other mortgage securities. Other mortgage securities consist primarily
of interest-only securities ("I/O"s), principal-only securities ("P/O"s)
and residual interests which were either purchased or created through the
Company's mortgage operations. An I/O is a class of a CMO or a mortgage
pass-through security that pays to the holder substantially all interest.
A P/O is a class of a CMO or a mortgage pass-through security that pays to
the holder substantially all principal. Residual interests represent the
excess cash flows on a pool of mortgage collateral after payment of
principal, interest, and expenses of the related mortgage-backed security
or repurchase arrangement. Residual interests may have little or no
principal amount and may not receive scheduled interest payments. The
Company may borrow against its other mortgage securities for working
capital purposes. The yields on these securities are affected primarily by
changes in prepayment rates, and to a lesser extent, by changes in short-
term interest rates.
Hedging and other portfolio transactions. The Company may enter into
transactions to protect its portfolio of mortgage investments and related
debt from interest rate fluctuations. Such transactions may include the
purchase or sale of interest rate futures, options on interest rate futures
and interest rate caps. These transactions are designed to stabilize the
portfolio yield profile in a variety of interest rate environments. The
Company may also enter into such type of transactions to enhance the yield
on its portfolio, although there can be no assurance that such transactions
will provide additional income, and could result in losses.
REIT Status
The Company, and its qualified real estate investment trust
subsidiaries, have elected to be treated as a REIT for federal income tax
purposes. A REIT must distribute annually substantially all of its taxable
income to shareholders. The Company and its qualified REIT subsidiaries
(collectively, "Resource REIT") generally will not be subject to federal
income tax to the extent that certain REIT qualifications are met. Certain
other affiliated entities which are consolidated with the Company for
financial reporting purposes, are not consolidated for federal income tax
purposes because such entities are not qualified REIT subsidiaries. All
taxable income of these affiliated entities is subject to federal and state
income taxes, where applicable. The Preferred Stock represents preferred
stock in a REIT, and as such, the dividends on the Preferred Stock are not
eligible for the dividends received deduction for federal income tax
purposes. See "Federal Income Tax Considerations.''
Recent Developments
The Company's results were negatively impacted during 1994 by the rapid
increase in interest rates and the resulting decline in overall mortgage
loan originations in the market. Industry-wide mortgage loan originations
declined from $1 trillion during 1993 to $773 billion during 1994. Lower
mortgage loan funding levels during 1994 relative to 1993 resulted in lower
gain on sale relating to loans securitized or sold. Industry-wide loan
origination volume declined further during the first six months of 1995
relative to prior year levels. Lower anticipated mortgage loan origination
volume and increased price competition for mortgage loans is expected to
substantially reduce the gain on securitization or sale of mortgage assets
during the remainder of 1995.
ARM securities, which constitute a significant portion of the portfolio
of mortgage investments, pay an interest rate that is based on the
underlying ARM loans, have interest rates that reset generally on a
semiannual basis. These interest rates are subject to certain periodic and
lifetime interest rate caps. Due to the nature of the periodic caps,
semiannual rate increases are generally limited to 1.00%. As a result of
rapidly increasing short-term interest rates since February 1994, the
interest rate on certain repurchase borrowings, which are not subject to
caps, increased at a faster rate than the interest rate earned on the ARM
securities which collateralize these borrowings, decreasing the net
interest spread on these securities. This trend continued until March
1995, when borrowing costs reached their peak. Due to the effect of
periodic interest rate caps during 1994, ARM securities are expected to
continue to reset upwards until the fourth quarter of 1995 when these
securities are anticipated to be fully indexed (i.e., a pass-through rate
based on spread to a specified interest rate index, without any current
limitation due to periodic or lifetime interest rate caps). A separate
factor contributing to the decline in the net interest spread during 1994
and early 1995 was the increase in securities retained in the portfolio
during late 1993 and early 1994 with low initial pass-through rates (i.e.,
a teaser rate). As of June 30, 1995, the pass-through rates on ARM
securities in the Company's portfolio were approximately 1.15% lower on a
weighted average basis than the related fully indexed rate compared to
1.90% as of March 31, 1995, 1.45% as of December 31, 1994, 1.50% as of
September 30, 1994 and 0.85% as of June 30, 1994.
Primarily as a result of the decreased spread on ARM securities, the
Company's net interest yield on portfolio assets decreased to 1.15% for
1994 from 1.55% for 1993. Similarly, the net yield on portfolio assets
declined to 0.77% for the six months ended June 30, 1995 from 1.29% for the
six months ended June 30, 1994. As the Company's ARM securities become
fully-indexed, the related net yield may improve to historical levels. The
spread on ARM securities may change to the extent the rates on the related
repurchase borrowings reset differently than these securities.
The Offering
Securities Offered . . . . 2,100,000 shares of Series B % Cumulative
Convertible Preferred Stock ("Series B Preferred
Stock").
Dividends . . . . . . . . . Cumulative commencing on the date of issue in an
amount per share equal to the greater of (i) the
Base Rate of $ per quarter, or (ii) an amount
equal to the quarterly dividend declared on the
number of shares of the Company's Common Stock (or
portion thereof) into which the Series B Preferred
Stock is convertible. Dividends are payable in
arrears on January 31, April 30, July 31 and
October 31 (or the next succeeding business day)
of each year, commencing January 31, 1996. The
dividend for the partial period ending December
31, 1995 will be prorated from the date of
issuance and will be determined by reference to
the Base Rate. Dividends on the Series B
Preferred Stock are determined on each of the
quarterly dividend declaration dates. Dividends
on the Series B Preferred Stock are cumulative
from the date of original issuance. No dividends
will be paid or set apart for payment on shares of
Common Stock unless full cumulative dividends have
been paid on the Series B Preferred Stock.
Conversion Rights . . . . . Each share of the Series B Preferred Stock will be
convertible at the option of the holder at any
time, unless previously redeemed, into one share
of Common Stock, subject to possible future
adjustment in certain circumstances. See
"Description of Preferred Stock."
Liquidation Preference . . The holders of the Series B Preferred Stock will
be entitled to receive out of the assets of the
Company or the proceeds thereof available for
distribution to shareholders, before any
distribution is made on the Common Stock, the
Issue Price per share in cash plus accumulated,
accrued but unpaid dividends.
Redemption at Option
of the Company . . . . . The Series B Preferred Stock will not be
redeemable by the Company prior to October 31,
1998. On and after October 31, 1998, the Series B
Preferred Stock will be redeemable by the Company,
in whole or in part, at the option of the Company
as follows:
(i) for one share of Common Stock, subject to
adjustment in certain circumstances (plus
accumulated, accrued and unpaid dividends, which
are to be paid in cash through the end of the
prior dividend period), provided that for 20
trading days within any period of 30 consecutive
trading days, including the last trading day of
such period, the closing price of the Common Stock
on the NYSE equals or exceeds the Conversion
Price, or;
(ii) for cash at the Issue Price per
share, plus any accumulated, accrued and unpaid
dividends.
Voting Rights . . . . . . . Except as otherwise expressly required by
applicable law or as described below, the holders
of the Series B Preferred Stock will not be
entitled to vote on any matter and will not be
entitled to notice of any meeting of shareholders
of the Company. If at any time the Company falls
in arrears in the payment of dividends on the
Series B Preferred Stock in an aggregate amount
equal to the full accrued dividends for six
quarterly dividend periods, or upon failure of the
Company to maintain consolidated shareholders'
equity (determined in accordance with generally
accepted accounting principles and giving effect
to any adjustment for the net unrealized gain or
loss on available-for-sale mortgage securities) of
at least 150% of the aggregate Issue Price of the
then outstanding Series B Preferred Stock, the
number of the Company's directors will be
increased by two and the holders of the Series B
Preferred Stock with all classes of stock ranking
on a parity with the Series B Preferred Stock,
voting separately as a single class, will have the
right to elect two directors to fill the positions
created, and such right will continue until all
dividends in arrears shall have been paid, and
such shareholders' equity has been restored to at
least 150% of the aggregate Issue Price of the
then outstanding Series B Preferred Stock. If any
other class of Parity Stock with which the
Preferred Stock is entitled to vote is entitled to
elect two directors as a result of a decline in
consolidated shareholders' equity below a number
less than 150% of the aggregate Issue Price of the
then outstanding Preferred Stock, then, when such
entitlement to vote is triggered, the separate
entitlement of the Preferred Stock to vote for
directors described in this paragraph shall be
suspended. As a result, in no event shall the
holders of Preferred Stock be entitled to elect
more than two directors in the case of the
Company's consolidated shareholder equity falling
below 150% of the aggregate Issue Price of the
then outstanding Preferred Stock.
Ranking . . . . . . . . . . The Series B Preferred Stock will rank senior to
the Common Stock with respect to the payment of
dividends and amounts payable upon liquidation,
dissolution or winding up of the Company. The
Series B Preferred Stock will rank pari passu
with the Series A Preferred Stock. The Company is
not permitted to issue any stock ranking senior to
the Series B Preferred Stock as to the payment of
dividends or amounts upon liquidation without the
approval of the holders of two-thirds of Preferred
Stock.
Nasdaq National Market
Listing . . . . . . . . . The Company intends to apply to have the Series B
Preferred Stock approved for listing on the Nasdaq
National Market under the symbol "RMRPO."
Use of Proceeds . . . . . . The net proceeds from the Offering will be used
primarily to pay down short-term debt and for
general corporate purposes. See "Use of
Proceeds."
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
consolidated financial statements of the Company at and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 and from the unaudited financial
information at and for the six months ended June 30, 1995 and 1994. The data
should be read in conjunction with, and is qualified by reference to, the more
detailed information contained in the Consolidated Financial Statements and
Notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, and the Quarterly Report on Form 10-Q for the six
months ended June 30, 1995, which are incorporated herein by reference. The
results for the six months ended June 30, 1995, as reported, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. Per common share data does not include the Series A Preferred Stock.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1995 1994 1994 1993 1992
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA
Net margin on mortgage assets............... $ 17,081 $ 24,823 $ 46,488 $ 45,019 $ 32,655
Gain on sale of mortgage assets, net
of associated costs....................... $ 4,388 $ 16,559 $ 25,599 $ 25,985 $ 26,991
Total revenue............................... $ 128,447 $ 120,206 $ 254,359 $ 198,975 $ 177,505
Total expenses.............................. 113,810 89,337 202,102 144,848 139,336
Net income.................................. $ 14,637 $ 30,869 $ 52,257 $ 54,127 $ 38,169
PER COMMON SHARE DATA
Net income per common share................. $ 0.73 $ 1.58 $ 2.64 $ 3.12 $ 2.73
Dividends declared per common share......... 0.76 1.30 2.76 3.06 2.60
Average number of common shares
outstanding............................... 20,091,686 19,599,758 19,829,609 17,364,309 13,999,047
Book value per common share (1)............. $ 13.43 $ 13.34 $ 13.45 $ 13.09 $ 10.75
Number of common shares outstanding......... 20,117,936 20,040,552 20,078,013 19,331,932 16,507,100
BALANCE SHEET DATA (AT PERIOD END)
Mortgage Investments:(2)
Collateral for CMOs....................... $ 882,825 $ 388,610 $ 441,222 $ 434,698 $ 571,567
Adjustable-rate mortgage securities....... 2,058,661 2,381,504 2,321,388 2,021,196 1,199,911
Fixed-rate mortgage securities............ 69,007 203,925 194,078 214,128 165,206
Other mortgage securities................. 66,814 63,507 64,293 65,625 36,461
Mortgage warehouse lines of credit........ 4,233 61,677 7,938 156,688 121,624
Mortgage loans in warehouse................. 199,418 286,342 518,131 777,769 123,627
Other assets................................ 55,025 41,730 53,546 56,658 21,260
Total assets.............................. $ 3,335,983 $ 3,427,295 $ 3,600,596 $ 3,726,762 $ 2,239,656
CMO bonds payable, net (3).................. $ 821,978 $ 377,699 $ 424,800 $ 432,677 $ 561,441
Repurchase agreements....................... 2,039,383 2,622,359 2,804,946 2,754,166 1,315,334
Notes payable............................... 151,488 61,909 135,110 87,451 32,878
Other liabilities........................... 35,251 98,045 38,269 199,436 152,566
Total liabilities........................... $ 3,048,100 $ 3,160,012 $ 3,403,125 $ 3,473,730 $ 2,062,219
Shareholders' equity (1).................... $ 301,179 $ 277,343 $ 270,149 $ 253,032 $ 177,437
SELECTED RATIOS AND DATA
Net interest spread....................... 0.78% 1.27% 1.12% 1.55% 1.47%
Return on average shareholders' equity
(1)..................................... 10.7% 22.9% 19.2% 25.8% 27.7%
Ratio of available earnings to fixed
charges (4)............................. 1.19x 1.51x 1.35x 1.69x 1.80x
Principal balance of mortgage loans
funded.................................. $ 434,636 $ 1,839,864 $ 2,861,443 $ 4,093,714 $ 5,334,174
</TABLE>
<TABLE>
<CAPTION>
1991 1990
<S> <C> <C>
OPERATING DATA
Net margin on mortgage assets............... $ 22,923 $ 14,975
Gain on sale of mortgage assets, net
of associated costs....................... $ 10,218 $ 1,371
Total revenue............................... $ 161,229 $ 140,038
Total expenses.............................. 139,593 127,245
Net income.................................. $ 21,636 $ 12,793
PER COMMON SHARE DATA
Net income per common share................. $ 1.60 $ 0.91
Dividends declared per common share......... 1.53 0.74
Average number of common shares
outstanding............................... 13,531,290 14,091,783
Book value per common share (1)............. $ 8.97 $ 8.90
Number of common shares outstanding......... 13,542,137 13,529,700
BALANCE SHEET DATA (AT PERIOD END)
Mortgage Investments:(2)
Collateral for CMOs....................... $ 820,517 $ 987,856
Adjustable-rate mortgage securities....... 658,311 223,894
Fixed-rate mortgage securities............ 22,062 14,741
Other mortgage securities................. 53,176 87,825
Mortgage warehouse lines of credit........ 88,312 --
Mortgage loans in warehouse................. 169,626 87,079
Other assets................................ 17,628 10,862
Total assets.............................. $ 1,829,632 $ 1,412,257
CMO bonds payable, net (3).................. $ 805,493 $ 971,356
Repurchase agreements....................... 637,599 235,553
Notes payable............................... 147,601 75,534
Other liabilities........................... 117,504 9,450
Total liabilities........................... $ 1,708,197 $ 1,291,893
Shareholders' equity (1).................... $ 121,435 $ 120,364
SELECTED RATIOS AND DATA
Net interest spread....................... 1.22% 0.65%
Return on average shareholders' equity
(1)..................................... 17.9% 10.6%
Ratio of available earnings to fixed
charges (4)............................. 1.69x 1.67x
Principal balance of mortgage loans
funded.................................. $ 2,491,434 $ 605,752
</TABLE>
(1) Excludes the unrealized loss on available for sale mortgage securities of
$13,296, $10,060 and $72,678 at June 30, 1995, June 30, 1994 and December
31, 1994, respectively.
(2) Mortgage investments are shown at fair value at June 30, 1995, December 31,
1994 and June 30, 1994 and at amortized cost at December 31, 1993 and prior
periods.
(3) This debt is non-recourse to the Company except for $302,060 and $70,922 at
June 30, 1995 and December 31, 1994, respectively.
(4) For purposes of computing the ratios, "available earnings" consist of net
earnings plus interest and debt expense and excludes fixed charges related
to CMOs issued by the Company which are non-recourse to the Company. This
sum is divided by the total interest and debt expense to determine the ratio
of available earnings to fixed charges.
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The following table sets forth the high and low closing sales prices per
share of the Common Stock on the NYSE during the respective periods
indicated according to published financial sources and the cash dividends
declared per share of Common Stock:
Cash
Dividends
Price Per Share Declared
High Low Per Share
1995
First Quarter . . . . . . $17 3/4 $10 3/8 $0.36
Second Quarter . . . . . $20 3/4 $15 $0.40
Third Quarter . . . . . . $21 1/2 $16 5/8 $0.44
1994
First Quarter . . . . . . $30 $25 1/8 $0.52(1)
Second Quarter . . . . . 27 1/2 22 1/8 0.78
Third Quarter . . . . . . 25 3/4 20 3/8 0.78
Fourth Quarter . . . . . 22 3/4 9 1/2 0.68
1993
First Quarter . . . . . . $29 7/8 $20 $0.50
Second Quarter . . . . . 28 1/8 26 1/2 0.75
Third Quarter . . . . . . 30 7/8 27 3/4 0.77
Fourth Quarter . . . . . 32 1/4 28 5/8 1.04(1)
(1) The $0.26 January 1994 dividend which was declared in December 1993 is
included in the dividends for the fourth quarter of 1993.
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1995, and as adjusted to give effect to the issuance of
the shares of Preferred Stock and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION> June 30, 1995
Actual As Adjusted (1)
(dollars in thousands)
<S> <C> <C>
Total Debt:
Collateralized mortgage obligations (2) . . . . . . . . . $ 821,978 $ 821,978
Repurchase agreements . . . . . . . . . . . . . . . . . . 2,039,383 2,039,383
Notes payable . . . . . . . . . . . . . . . . . . . . . . 151,488
Total debt . . . . . . . . . . . . . . . . . . . . . . 3,012,849
Shareholders' Equity:
Preferred Stock, par value $.01 per share,
50,000,000 shares authorized;
Series A Cumulative Convertible Preferred Stock, $24 per
share liquidation value, 1,350,000 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . $ 31,003 $ 35,514
Series B Cumulative Convertible Preferred Stock, $ per
share liquidation value, 2,100,000 shares issued and
outstanding as adjusted . . . . . . . . . . . . . . . . .
Common stock, par value $.01 per share,
50,000,000 shares authorized; 20,117,936 issued
and outstanding . . . . . . . . . . . . . . . . . . . . 201 201
Additional paid in capital . . . . . . . . . . . . . . . 279,962
Net unrealized loss on available-for-sale mortgage
securities. . . . . . . . . . . . . . . . . . . . . . . . (13,296) (13,296)
Retained deficit (3) . . . . . . . . . . . . . . . . . . (9,987) (9,987)
Total shareholders' equity . . . . . . . . . . . . . . $ 287,883 $
Total capitalization . . . . . . . . . . . . . . . . $ 3,300,732 $
</TABLE>
(1) Assumes estimated net proceeds of approximately $ million. Amount does
not include up to 315,000 shares subject to the Underwriters' over-
allotment option for Series B Preferred Stock or the application of the
proceeds from the sale thereof. See "Underwriting." Amount includes net
proceeds of $4.5 million from 202,500 shares of underwriters' over-
allotment option for Series A Preferred Stock.
(2) This debt is non-recourse to the Company except for $302,060.
(3) The retained deficit results from dividends declared exceeding net income
determined in accordance with generally accepted accounting principles
("GAAP"). Because the Company is a REIT, the dividend amount is based on
taxable income which differs from GAAP net income as reported.
DESCRIPTION OF PREFERRED STOCK
The summary of certain terms and provisions of the Preferred Stock
contained in this Prospectus Supplement does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the terms and
provisions of the Company's Articles of Incorporation, as amended (the
"Articles of Incorporation"), Bylaws, as amended, and the amendment to the
Articles of Incorporation setting forth the particular terms of the
Preferred Stock (the "Amendment"). The Articles of Incorporation authorize
the issuance of 50,000,000 shares of preferred stock, $.01 par value per
share, of which no shares are currently outstanding.
General
When issued and delivered against payment pursuant to the Underwriting
Agreement between the Company and the Underwriters, the Preferred Stock
will be validly issued, fully paid and non assessable. The holders of the
Preferred Stock will have no preemptive rights with respect to any shares
of capital stock of the Company or any other securities of the Company
convertible into or carrying rights or options to purchase any such shares.
The Preferred Stock will not be subject to any sinking fund or other
obligation of the Company to redeem or retire the Preferred Stock. Unless
converted into shares of Common Stock or redeemed by the Company, the
Preferred Stock will have a perpetual term, with no maturity. The Company
intends to apply to have the Preferred Stock approved for listing on the
Nasdaq National Market under the symbol "RMRPO"
Ranking
The Preferred Stock will rank senior to the Common Stock and pari passu
with the Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") with respect to payment of dividends and amounts upon
liquidation, dissolution or winding up of the Company.
While any shares of Preferred Stock are outstanding, the Company may not
authorize, create or increase the authorized amount of any class or series
of stock that ranks prior or senior to the Preferred Stock with respect to
the payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of two-thirds of the
outstanding shares of Preferred Stock. However, the Company may create
additional classes of stock, increase the authorized number of shares of
Preferred Stock or issue series of preferred stock which rank on a parity
with the Preferred Stock with respect, in each case, to the payment of
dividends and amounts upon liquidation, dissolution or winding up of the
Company ("Parity Stock") without the consent of any holder of Preferred
Stock. Series A Preferred Stock is Parity Stock. See "Voting Rights"
below.
Dividends
Holders of shares of Preferred Stock will be entitled to receive, when
and as declared by the Board of Directors of the Company, out of funds of
the Company legally available for payment thereof, cumulative cash
dividends payable in an amount per share equal to the greater of (i) $
per quarter ("Base Rate") or (ii) the cash dividends for such quarter
declared on a number of shares of the Company's Common Stock equal to the
number of shares of Common Stock (or portion thereof) into which a share of
Preferred Stock is convertible (determined on each of the quarterly
dividend record dates referred to below). The dividend for the partial
period ending December 31, 1995 will be prorated from the date of issuance
and will be determined by reference to the Base Rate. Dividends on the
Preferred Stock will be payable quarterly in arrears on the last day (or
the next succeeding business day) of January, April, July, and October,
commencing January 31, 1996 with respect to the period commencing on the
date of issue and ending December 31, 1995. Each such dividend will be
payable to holders of record as they appear on the stock records of the
Company at the close of business on such record dates not exceeding 60 days
preceding the payment dates thereof, as shall be fixed by the Board of
Directors of the Company. Such record dates shall coincide with the record
date for the regular quarterly dividends, if any, payable with respect to
the Common Stock; provided, however, that the record dates may be separated
to fall on December 31 and January 1. Dividends will accrue from the date
of original issuance of the Preferred Stock. Dividends will be cumulative
from such date, whether or not in any dividend period or periods such
dividends shall be declared or there shall be funds of the Company legally
available for the payment of such dividends. Accumulated dividends on
shares of Preferred Stock will not bear interest. Dividends payable on the
Preferred Stock for any period shorter than a full dividend period will be
computed on the basis of twelve 30-day months and a 360-day year.
Upon a final administrative determination by the Internal Revenue Service
that the Company does not qualify as a real estate investment trust in
accordance with Section 856 of the Code, the Base Rate will be increased by
50 basis points until such time as the Company regains its status as a real
estate investment trust; provided, however, that if the Company contests
its loss of real estate investment trust status in Federal Court, following
its receipt of an opinion of nationally recognized tax counsel to the
effect that there is a reasonable basis to contest such loss of status, the
Base Rate shall not be increased during the pendency of such judicial
proceeding; provided further, however, that upon a final judicial
determination in Federal Tax Court, Federal District Court, or the Federal
Claims Court that the Company does not qualify as a real estate investment
trust, the Base Rate as stated above will be increased.
Except as provided in the next sentence, no dividend will be declared or
paid or other distribution of cash or other property declared or made
directly by the Company on any Parity Stock unless full cumulative
dividends have been declared and paid or are contemporaneously declared and
funds sufficient for payment set aside on the Preferred Stock for all prior
and contemporaneous dividend periods. If accumulated and accrued dividends
on the Preferred Stock for all prior and contemporaneous dividend periods
have not been paid in full, then any dividend declared on the Preferred
Stock for any dividend period and on any Parity Stock will be declared
ratably in proportion to accumulated, accrued and unpaid dividends on the
Preferred Stock and the Parity Stock.
The Company will not (i) declare, pay or set apart funds for the payment
of any dividend or other distribution of cash or other property with
respect to any Junior Stock (as defined below) or (ii) redeem, purchase or
otherwise acquire for consideration any Junior Stock through a sinking fund
or otherwise (other than a redemption or purchase or other acquisition of
shares of Common Stock made for purposes of an employee incentive or
benefit plan of the Company or any subsidiary) or (iii) pay or distribute
any cash or other property for the benefit of any holder of Junior Stock in
respect thereof, directly or indirectly, unless (A) all cumulative
dividends with respect to the Preferred Stock and any Parity Stock at the
time such dividends are payable have been paid or such dividends have been
declared and funds have been set apart for payment of such dividends and
(B) sufficient funds have been paid or set apart for the payment of the
dividend for the current dividend period with respect to the Preferred
Stock and any Parity Stock. The foregoing limitations do not restrict the
Company's ability to take the foregoing actions with respect to any Parity
Stock.
As used herein, (i) the term "dividend" does not include dividends
payable solely in shares of Junior Stock on Junior Stock, or in options,
warrants or rights to holders of Junior Stock to subscribe for or purchase
any Junior Stock, and (ii) the term "Junior Stock" means the Common Stock,
and any other class of capital stock of the Company now or hereafter issued
and outstanding that ranks junior to the Preferred Stock as to the payment
of dividends or amounts upon liquidation, dissolution or winding up of the
Company.
Redemption
Shares of Preferred Stock will not be redeemable by the Company prior to
October 31, 1998. On and after October 31, 1998, the shares of Preferred
Stock will be redeemable at the option of the Company, in whole or in part,
either (i) for such number of authorized but previously unissued shares of
Common Stock as equals the per share Issue Price of the Preferred Stock
to be redeemed divided by the Conversion Price (as defined below under
"Conversion Rights") as of the opening of business on the date set for such
redemption (initially equivalent to a conversion rate of one share of
Common Stock for each share of Preferred Stock, subject to adjustment as
described below), or (ii) for cash at a redemption price equal to the Issue
Price. In the event of a redemption for cash, the Company must also pay in
cash all cumulative, accrued and unpaid dividends for all dividend periods
prior to the dividend period in which the redemption occurs, plus the
dividend accrued from the beginning of the current dividend period to the
date of redemption determined by reference solely to the Base Rate. In the
event of a redemption for Common Stock, the Company must also pay in cash
all cumulative, accrued and unpaid dividends for all dividend periods prior
to the period in which the redemption occurs; however, no dividend will be
payable with respect to the Preferred Stock for the dividend period in
which such a redemption occurs unless such redemption occurs after the
record date for the dividend on Common Stock in which event the dividend on
the Preferred Stock will be payable through the redemption date. In the
case of a redemption date falling after a dividend record date and prior to
the related dividend payment date, the holders of the Preferred Stock at
the close of business on such record date will be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date,
notwithstanding the redemption of such shares following such dividend
record date. Except as provided for in the preceding sentences, no payment
or allowance will be made for accumulated or accrued dividends on any
shares of Preferred Stock called for redemption or on the shares of Common
Stock issuable upon such redemption.
The Company may exercise the option to deliver Common Stock upon
redemption only if for 20 trading days, within any period of 30 consecutive
trading days, including the last trading day of such period, the closing
price of the Common Stock on the NYSE (or such other exchange or quotation
system as the Common Stock is listed or quoted on) equals or exceeds the
Conversion Price, (initially, the Issue Price), in effect on such trading
days, subject to adjustments as described below. In order to exercise this
redemption option, the Company must issue a press release announcing the
redemption prior to the opening of business on the second trading day after
the conditions in the preceding sentences have, from time to time, been
met.
Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) to the holders of record of the Preferred
Stock not more than ten business days after the Company issues the press
release, in the case of a redemption for Common Stock, or not less than 30
nor more than 60 days prior to the date of redemption, in the case of a
redemption for cash. The redemption date will be a date selected by the
Company not less than 30 nor more than 60 days after the date on which the
Company gives the notice of redemption or issues the press release
announcing its intention to redeem the Preferred Stock, as the case may be.
If fewer than all of the shares of Preferred Stock are to be redeemed, the
shares to be redeemed shall be selected by lot or pro rata or in some other
equitable manner determined by the Company.
In the event that full cumulative dividends on the Preferred Stock and
any Parity Stock have not been paid or declared and set apart for payment,
the Preferred Stock may not be redeemed in part and the Company may not
purchase or acquire shares of Preferred Stock otherwise than pursuant to a
purchase or exchange offer made on the same terms to all holders of shares
of Preferred Stock.
On and after the date fixed for redemption, provided that the Company
has made available at the office of the Registrar and Transfer Agent a
sufficient number of shares of Common Stock and/or an amount of cash to
effect the redemption, dividends will cease to accumulate or accrue on the
Preferred Stock called for redemption, such shares shall no longer be
deemed to be outstanding and all rights of the holders of such shares of
Preferred Stock shall cease except the right to receive the shares of
Common Stock upon such redemption and/or any cash payable upon such
redemption, without interest from the date of such redemption. At the
close of business on the redemption date, each holder of Preferred Stock to
be redeemed (unless the Company defaults in the delivery of the Common
Stock or cash) will be, without any further action, deemed a holder of the
number of shares of Common Stock and/or the amount of cash for which such
Preferred Stock is redeemable.
Fractional shares of Common Stock will not be issued upon redemption of
the Preferred Stock, but, in lieu thereof, the Company will pay an amount
in cash based on the current market price of the Common Stock on the day
prior to the redemption date.
Liquidation Preference
The holders of shares of Preferred Stock will be entitled to receive in
the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the Issue Price plus an amount per share
of Preferred Stock equal to all dividends (whether or not earned or
declared) accumulated, accrued and unpaid thereon to the date of final
distribution to such holders (the "Liquidation Preference"), and no more.
Until the holders of the Preferred Stock have been paid the Liquidation
Preference in full, no payment will be made to any holder of Junior Stock
upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of
the Company, or proceeds thereof, distributable among the holders of the
shares of Preferred Stock are insufficient to pay in full the Liquidation
Preference and the liquidation preference with respect to any other shares
of Parity Stock, then such assets, or the proceeds thereof, will be
distributed among the holders of shares of Preferred Stock and such Parity
Stock ratably in accordance with the respective amounts which would be
payable on such shares of Preferred Stock and such Parity Stock if all
amounts payable thereon were paid in full. Neither a consolidation or
merger of the Company with another corporation, a statutory share exchange
by the Company nor a sale or transfer of all or substantially all of the
Company's assets will be considered a liquidation, dissolution or winding
up, voluntary or involuntary, of the Company.
Voting Rights
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of shares of Preferred Stock will
have no voting rights.
If (i) six quarterly dividends payable on the Preferred Stock or any
other Parity Stock are in arrears, whether or not earned or declared or
(ii) the consolidated shareholders' equity of the Company (determined in
accordance with generally accepted accounting principles and giving effect
to any adjustment for the net unrealized gain or loss on available-for-sale
mortgage securities) at the end of any calendar quarter is less than 150%
of the aggregate Issue Price of the then outstanding Preferred Stock, the
number of directors then constituting the Board of Directors of the Company
will be increased by two and the holders of shares of Preferred Stock,
voting together as a class with the holders of any other series of Parity
Stock (any such other series, the "Voting Preferred Stock"), will have the
right to elect two additional directors to serve on the Company's Board of
Directors at an annual meeting of stockholders or special meeting held in
place thereof, or at a properly called special meeting of the holders of
the Preferred Stock and such Voting Preferred Stock and at each subsequent
annual meeting of stockholders or special meeting held in place thereof,
until, in the case of arrearage in dividends in clause (i) all such
dividends in arrears and dividends for the current quarterly period on the
Preferred Stock and such Voting Preferred Stock have been paid or declared
and set aside for payment and until, in the case of a shortfall in
consolidated shareholders' equity described in clause (ii), such
consolidated shareholders' equity of the Corporation at the end of any
subsequent calendar quarter equals or exceeds 150% of the aggregate Issue
Price of the then outstanding Preferred Stock. If any other class of
Parity Stock with which the Preferred Stock is entitled to vote is entitled
to elect two directors as a result of a decline in consolidated
shareholders' equity below a number less than 150% of the aggregate Issue
Price of the then outstanding Preferred Stock, then, when such entitlement
to vote is triggered, the separate entitlement of the Preferred Stock to
vote for directors described in this paragraph shall be suspended. As a
result, in no event shall the holders of Preferred Stock be entitled to
elect more than two directors in the case of the Company's consolidated
shareholder equity falling below 150% of the aggregate Issue Price of the
then outstanding Preferred Stock.
The approval of the holders of two-thirds of the outstanding shares of
Preferred Stock will be required in order to amend the Articles of
Incorporation to affect materially and adversely the rights, preferences or
voting power of the holders of the Preferred Stock or to authorize, create,
or increase the authorized amount of, any class of stock having rights
prior or senior to the Preferred Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up. However,
the Company may create additional classes of Parity or Junior Stock,
increase the authorized number of shares of Parity or Junior Stock and
issue additional series of Parity or Junior Stock without the consent of
any holder of Preferred Stock.
Except as required by law, the holders of Preferred Stock will not be
entitled to vote on any merger or consolidation involving the Company or a
sale of all or substantially all of the assets of the Company. See
"Conversion Price Adjustments" below.
Conversion Rights
Shares of Preferred Stock will be convertible, in whole or in part, at
any time, at the option of the holder thereof, into authorized but
previously unissued shares of Common Stock at a conversion price equal to
the Issue Price per share of Common Stock (initially equivalent to a
conversion rate of one share of Common Stock for each share of Preferred
Stock), subject to adjustment as described below (the "Conversion Price").
The right to convert shares of Preferred Stock called for redemption will
terminate at the close of business on the redemption date for such shares.
For information as to notices of redemption, see "Redemption" above.
Conversion of shares of Preferred Stock, or a specified portion thereof,
may be effected by delivering certificates evidencing such shares, together
with written notice of conversion and a proper assignment of such
certificates to the Company or in blank, to the office or agency to be
maintained by the Company for that purpose. Initially such office will be
at the corporate trust office of First Union National Bank of North
Carolina, Charlotte, North Carolina.
Each conversion will be deemed to have been effected immediately prior
to the close of business on the date on which the certificates for shares
of Preferred Stock shall have been surrendered and notice shall have been
received by the Company as aforesaid and the conversion shall be at the
Conversion Price in effect at such time and on such date. If the record
dates for the payment of dividends on the Common Stock and the Preferred
Stock do not coincide, no conversion after the earlier of such record dates
will be accepted until after the latter of such record dates.
Holders of shares of Preferred Stock at the close of business on a
dividend record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date notwithstanding the
conversion of such shares following such dividend record date and prior to
such dividend payment date. Except as provided above, the Company will
make no payment or allowance for unpaid dividends, whether or not in
arrears, on converted shares or for dividends on the shares of Common Stock
issued upon such conversion.
Fractional shares of Common Stock will not be issued upon conversion
but, in lieu thereof, the Company will pay an amount in cash based on the
current market price of the Common Stock on the day prior to the conversion
date.
Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain events,
including (i) dividends (and other distributions) payable in Common Stock
or any class of capital stock of the Company, (ii) the issuance to all
holders of Common Stock of certain rights or warrants entitling them to
subscribe for or purchase Common Stock at a price per share less than the
fair market value per share of Common Stock, and (iii) subdivisions,
combinations and reclassifications of Common Stock. In addition to the
foregoing adjustments, the Company will be permitted to make such
reductions in the Conversion Price as it considers to be advisable in order
that any event treated for federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common
Stock or, if that is not possible, to diminish any income taxes that are
otherwise payable because of such event.
In case the Company shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange,
tender offer for all or substantially all of the shares of Common Stock or
sale of all or substantially all of the Company's assets), in each case as
a result of which shares of Common Stock will be converted into the right
to receive stock, securities or other property (including cash or any
combination thereof), each share of Preferred Stock, if convertible after
the consummation of the transaction, will thereafter be convertible into
the kind and amount of shares of stock, securities and other property
receivable (including cash or any combination thereof) upon the
consummation of such transaction by a holder of that number of shares or
fraction thereof of Common Stock into which one share of Preferred Stock
was convertible immediately prior to such transaction. The Company may not
become a party to any such transaction unless the terms thereof are
consistent with the foregoing.
No adjustment of the Conversion Price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion
Price. Any adjustments not so required to be made will be carried forward
and taken into account in subsequent adjustments.
Dividend Reinvestment Plan
The Company may establish a Dividend Reinvestment Plan (the "Plan")
pursuant to which each holder of the Preferred Stock whose shares are
registered in his own name may elect to have dividends reinvested
automatically in shares of the Preferred Stock of the Company.
Restrictions on Ownership and Transfer
With certain exceptions, no person may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% of the
Company's capital stock. See "Restrictions on Transfers of Capital Stock"
in the accompanying Prospectus.
Transfer Agent, Registrar, Dividend Disbursing Agent and Redemption Agent
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Preferred Stock will be First Union National Bank
of North Carolina, Charlotte, North Carolina.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations to
the stockholders, is for general information only and is not tax advice.
This discussion does not purport to deal with all aspects of taxation that
may be relevant to particular stockholders in light of their personal
investment or tax circumstances, or except to the extent discussed under
the heading "Taxation of Tax-Exempt Stockholders" to certain types of
stockholders (including insurance companies, financial institutions or
broker-dealers) subject to special treatment under the federal income tax
law.
The Company and its qualified REIT subsidiaries (collectively "Resource
REIT") believes it has complied, and intends to comply in the future, with
the requirements for qualification as a REIT under the Code. The federal
income tax provisions governing REITs and their shareholders are extremely
complicated, and what follows is only a very brief and general summary of
the most important considerations for shareholders.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE,
OWNERSHIP AND SALE OF THE PREFERRED STOCK, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND
SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
General Considerations
Resource REIT believes it has complied, and intends to comply in the
future, with the requirements for qualification as a REIT under the Code.
Venable, Baetjer and Howard, LLP, counsel to the Resource REIT, has given
the Resource REIT its opinion to the effect that, as of the date hereof and
based on the various representations made to it by the Resource REIT with
respect to its income, assets, and activities since its inception, and
subject to certain assumptions and qualifications stated in such opinion,
(i) Resource REIT qualifies for treatment as a REIT under the Code and (ii)
the organization and contemplated method of operation of Resource REIT are
such as to enable it to continue so to qualify in subsequent years,
provided the various operational requirements of REIT status are satisfied
in those years. However, investors should be aware that opinions of
counsel are not binding on the courts or the Internal Revenue Service. To
the extent that Resource REIT qualifies as a REIT for federal income tax
purposes, it generally will not be subject to federal income tax on the
amount of its income or gain that is distributed to shareholders. However,
a nonqualified REIT subsidiary of the Resource REIT, which conducts the
mortgage operations and is included in the Resource REIT's consolidated
GAAP financial statements, is not a qualified REIT subsidiary.
Consequently, all of the nonqualified REIT subsidiary's taxable income is
subject to federal and state corporate income taxes.
The REIT rules generally require that a REIT invest primarily in real
estate related assets, its activities be passive rather than active, and it
distribute annually to its shareholders a high percentage of its taxable
income. Resource REIT could be subject to a number of taxes if it failed to
satisfy those rules or if it acquired certain types of income-producing
real property through foreclosure. Although no complete assurances can be
given, Resource REIT does not expect that it will be subject to material
amounts of such taxes.
Resources REIT's failure to satisfy certain requirements of the Code
could cause the Resource REIT to lose its status as a REIT. If Resource
REIT failed to qualify as a REIT for any taxable year, it would be subject
to federal income tax (including any applicable minimum tax) at regular
corporate rates and would not receive deductions for dividends paid to
shareholders. As a result, the amount of after-tax earnings available for
distribution to shareholders would decrease substantially. While the Board
of Directors intends to cause Resource REIT to operate in a manner that
will enable it to qualify as a REIT in all future taxable years, there can
be no certainty that such intention will be realized because, among other
things, qualification hinges on the conduct of the business of Resource
REIT.
Taxation of Taxable Domestic Stockholders
As long as Resource REIT qualifies as a REIT, distributions made to the
Resource REIT's taxable domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for
the dividends received deduction for corporations. (Under the Code and IRS
rulings, Resource REIT's earnings and profits will first be allocable to
distributions made on the Preferred Stock and then (the balance, if any) to
distributions made on the Common Stock.) Distributions that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed Resource REIT's actual net capital gain for the
taxable year) without regard to the period for which the stockholder has
held its stock. Distributions in excess of current and accumulated earnings
and profits will not be taxable to a stockholder to the extent that they do
not exceed the adjusted basis of the stockholder's shares, but rather will
be a non-taxable return of capital and will reduce the adjusted basis of
such shares. To the extent that such distributions exceed the adjusted
basis of a stockholder's shares they will be included in income as long-
term gain (or short-term capital gain if the shares have been held for one
year or less) assuming the shares are a capital asset in the hands of the
stockholder. In addition, any dividend declared by Resource REIT in
October, November or December of any year payable to a stockholder of
record on a specified date in any such month shall be treated as both paid
by Resource REIT and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by Resource REIT during
January of the following calendar year. Stockholders may not include in
their individual income tax return any net operating losses or capital
losses of Resource REIT.
Distributions to shareholders attributable to "excess inclusion income"
of Resource REIT will be characterized as excess inclusion income in the
hands of the shareholders. Excess inclusion income can arise from Resource
REIT's holdings of residual interests in real estate mortgage investment
conduits and in certain other types of mortgage-backed security structures
created after 1991. Excess inclusion income constitutes unrelated business
taxable income ("UBTI") for tax-exempt entities (including employee benefit
plans and individual retirement accounts), and it may not be offset by
current deductions or net operating loss carryovers. In the unlikely event
that the Resource REIT's excess inclusion income is greater than its
taxable income, Resource REIT's distribution would be based on its excess
inclusion income. Although Resource REIT itself would be subject to a tax
on any excess inclusion income that would be allocable to a "disqualified
organization" holding its shares, Resource REIT's by-laws provide that
disqualified organizations are ineligible to hold Resource REIT's shares.
Upon any sale or other disposition of shares of the Preferred Stock, a
domestic stockholder will recognize gain or loss for federal income tax
purposes in an amount equal to the difference between (a) the amount of
cash and the fair market value of any property received on such sale or
other disposition (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the
extent of Resource REIT's current and accumulated earnings and profits),
and (b) the stockholder's adjusted tax basis in such shares. Such gain or
loss will be capital gain or loss if the shares have been held by the
domestic stockholder as a capital asset, and will be long-term capital gain
or loss if such shares have been held for more than one year. In general,
any loss upon a sale or exchange of shares by a stockholder who has held
such shares for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss to the extent of
distributions from Resource REIT required to be treated by such stockholder
as long-term capital gain.
Redemption and Conversion
Cash Redemption of Preferred Stock
A cash redemption of shares of the Preferred Stock will be treated under
Section 302 of the Code as a distribution taxable as a dividend (to the
extent of Resource REIT's current and accumulated earnings and profits) at
ordinary income rates unless the redemption satisfies one of the tests set
forth in Section 302(b) of the Code and is therefore treated as a sale or
exchange of the redeemed shares. The cash redemption will be treated as a
sale or exchange if it (i) is "substantially disproportionate" with respect
to the holder, (ii) results in a "complete termination" of the holder's
stock interest in Resource REIT, or (iii) is "not essentially equivalent to
a dividend" with respect to the holder, all within the meaning of Section
302(b) of the Code. In determining whether any of these tests have been
met, shares of capital stock (including Common Stock and other equity
interests in Resource REIT) considered to be owned by the holder by reason
of certain constructive ownership rules set forth in the Code, as well as
shares of capital stock actually owned by the holder, must generally be
taken into account. Because the determination as to whether any of the
alternative tests of Section 302(b) of the Code will be satisfied with
respect to any particular holder of the Preferred Stock depends upon the
facts and circumstances at the time that the determination must be made,
prospective holders of the Preferred Stock are advised to consult their own
tax advisors to determine such tax treatment.
If a cash redemption of shares of the Preferred Stock is not treated as
a distribution taxable as a dividend to a particular holder, it will be
treated, as to that holder, as a taxable sale or exchange. As a result,
such holder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the
fair market value of any property received (less any portion thereof
attributable to accumulated and declared but unpaid dividends, which will
be taxable as a dividend to the extent of the Resource REIT's current and
accumulated earnings and profits), and (ii) the holder's adjusted basis in
the shares of the Preferred Stock for tax purposes. Such gain or loss will
be capital gain or loss if the shares of the Preferred Stock have been held
as a capital asset, and will be long-term gain or loss if such shares have
been held for more than one year.
If a cash redemption of shares of the Preferred Stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares
of the Preferred Stock for tax purposes will be transferred to the holder's
remaining shares of capital stock in Resource REIT, if any.
A redemption of shares of the Preferred Stock for shares of Common Stock
will be treated as a conversion of the Preferred Stock into Common Stock.
See "-Conversion of Preferred Stock into Common Stock."
Conversion of Preferred Stock into Common Stock
In general, no gain or loss will be recognized for federal income tax
purposes upon conversion of the Preferred Stock solely into shares of
Common Stock. The basis that a holder will have for tax purposes in the
shares of Common Stock received upon conversion will be equal to the
adjusted basis for the holder in the shares of Preferred Stock so
converted, and, provided that the shares of Preferred Stock were held as a
capital asset, the holding period for the shares of Common Stock received
would include the holding period for the shares of Preferred Stock
converted. A holder will, however, generally recognize gain or loss on the
receipt of cash in lieu of fractional shares of Common Stock in an amount
equal to the difference between the amount of cash received and the
holder's adjusted basis for tax purposes in the Preferred Stock for which
cash was received. Furthermore, under certain circumstances, a holder of
shares of Preferred Stock may recognize gain or dividend income to the
extent that there are dividends in arrears on the shares at the time of
conversion into Common Stock.
Adjustments to Conversion Price
Adjustments in the Conversion Price (or the failure to make such
adjustments) pursuant to the antidilution provisions of the Preferred Stock
or otherwise may result in constructive distributions to the holders of
Preferred Stock that could, under certain circumstances, be taxable to them
as dividends pursuant to Section 305 of the Code. If such a constructive
distribution were to occur, a holder of Preferred Stock could be required
to recognize ordinary income for tax purposes without receiving a
corresponding distribution of cash.
Backup Withholding
Resource REIT will report to its domestic stockholders and the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to dividends
paid unless the holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (b)
provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the
applicable requirements of the backup withholding rules. A stockholder
that does not provide Resource REIT with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, Resource REIT may be
required to withhold a portion of the gross proceeds of a redemption of the
Preferred Stock with respect to any stockholders who fail to comply with
the backup withholding rules.
Taxation of Tax-Exempt Stockholders
In Revenue Ruling 66-106, 1966-I C.B. 151, the IRS ruled that an amount
distributed by a REIT to a tax-exempt employees' pension trust did not
constitute "unrelated business taxable income" ("UBTI"). Revenue rulings
are interpretive in nature and subject to revocation or modification by the
IRS. However, based upon Revenue Ruling 66-106 and the analysis therein,
distributions by Resource REIT to a stockholder that is a tax-exempt entity
will not constitute UBTI, provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness"
within the meaning of the Code and the shares are not otherwise used in an
unrelated trade or business of the tax-exempt entity.
For taxable years beginning after December 31, 1993, qualified trusts
which are described in Section 401 of the Code and exempt from tax under
Section 501(a) of the Code that hold more than 10% of the shares of certain
REITs may be required to treat a certain percentage of REIT dividends as
UBTI. The requirement only applies if (i) the qualification of the REIT
were to depend upon the application of a proposed "look-through" exception
to the five or fewer requirements applicable to shares held by qualified
trust and (ii) the REIT were "predominantly held" by qualified trusts. A
REIT would be predominantly held if either (i) a single qualified trust
were to hold more than 25% by value of the REIT's interests or (ii) one or
more qualified trusts, each owning more than 10% by value, were to hold
more than 50% of the REIT's interests in the aggregate. The percentage of
any dividend treated as UBTI would be determined by the amount of gross
income (less direct expenses related thereto) of the REIT from unrelated
trades or businesses (treating the REIT as if it were a qualified trust,
and thereby subject to tax on UBTI) as a percentage of the gross income
(less direct expenses related thereto) of the REIT. A de minimis exception
would apply where the percentage was less than 5% for any year.
Other Tax Consequences
Resource REIT's stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which they
transact business or reside. The state and local tax treatment of Resource
REIT's stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult
their own tax advisors regarding the effect of state and local tax laws on
an investment in Resource REIT.
UNDERWRITING
The Underwriters named below have severally agreed to purchase from the
Company the following respective numbers of shares of Series B %
Cumulative Convertible Preferred Stock offered hereby:
Underwriter Number of Shares
Stifel, Nicolaus & Company, Incorporated . . . . . . . . .
Robert W. Baird & Co. Incorporated. . . . . . . . . . . .
Scott & Stringfellow, Inc. . . . . . . . . . . . . . . .
Stephens Inc. . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000
The Company has granted to the Underwriters an option, expiring on the
thirtieth day after the date of the initial public offering of the
Preferred Stock offered hereby, to purchase up to 315,000 additional shares
of Preferred Stock at the public offering price less the underwriting
discount, all as set forth on the cover page of this Prospectus Supplement.
The Underwriters may exercise such option only to cover over-allotments in
the sale of the shares of Preferred Stock.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters
will be obligated to purchase all of the shares of Preferred Stock offered
hereby if any are purchased.
The Company has been advised by the Underwriters that the several
Underwriters propose initially to offer the Preferred Stock to the public
at the public offering price set forth on the cover page of this Prospectus
Supplement, and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to other dealers.
After the initial public offering, the public offering price and such
concession may be changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1993, and to
contribute to payments that the Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
Certain legal matters in connection with the offering of Preferred Stock
are being passed upon for the Company by Venable, Baetjer and Howard, LLP,
Baltimore, Maryland. Certain legal matters have been passed upon for the
Underwriters by Thompson & Mitchell, St. Louis Missouri.
<PAGE>
PROSPECTUS
Resource Mortgage Capital, Inc.
[LOGO] Common Stock, Preferred Stock, Debt Securities
Warrants to Purchase Common Stock, Warrants
to Purchase Preferred Stock and Warrants to
Purchase Debt Securities
Resource Mortgage Capital, a Virginia corporation (the "Company"),
directly or through agents, dealers or underwriters designated from time to
time, may issue and sell from time to time one or more of the following
types of its securities (the "Securities"): (i) shares of its common stock,
par value $0.01 per share ("Common Stock"); (ii) shares of its preferred
stock, no par value, in one or more series ("Preferred Stock"), (iii) debt
securities, in one or more series, any series of which may be either senior
debt securities or subordinated debt securities (collectively, "Debt
Securities" and, as appropriate, "Senior Debt Securities" or "Subordinated
Debt Securities"), (iv) warrants to purchase shares of Common Stock
("Common Stock Warrants"); (v) warrants to purchase Preferred Stock
("Preferred Stock Warrants"); (vi) warrants to purchase debt securities
("Debt Warrants) and (vii) any combination of the foregoing, either
individually or as units consisting of one or more of the foregoing types
of Securities. The Securities offered pursuant to this Prospectus may be
issued in one or more series, in amounts, at prices and on terms to be
determined at the time of the offering of each such series. The Securities
offered by the Company pursuant to this Prospectus will be limited to
$200,000,000 aggregate initial public offering price, including the
exercise price of any Common Stock Warrants, Preferred Stock Warrants and
Debt Warrants (collectively, "Securities Warrants"). As of the date of
this Prospectus, the Company has issued 1,552,500 shares of its Series A
Cumulative Convertible Preferred Stock.
The specific terms of each offering of Securities in respect of which
this Prospectus is being delivered are set forth in an accompanying
Prospectus Supplement (each, a "Prospectus Supplement") relating to such
offering of Securities. Such specific terms include, without limitation,
to the extent applicable (1) in the case of any series of Preferred Stock,
the specific designations, rights, preferences, privileges and restrictions
of such series of Preferred Stock, including the dividend rate or rates or
the method for calculating same, dividend payment dates, voting rights,
liquidation preferences, and any conversion, exchange, redemption or
sinking fund provisions; (2) in the case of any series of Debt Securities,
the specific designations, rights and restrictions of such series of Debt
Securities, including without limitation whether the Debt Securities are
Senior Debt Securities or Subordinated Debt Securities, the currency in
which such Debt Securities are denominated and payable, the aggregate
principal amount, stated maturity, method of calculating and dates for
payment of interest and premium, if any, and any conversion, exchange,
redemption or sinking fund provisions; (3) in the case of the Securities
Warrants, the Debt Securities, Preferred Stock or Common Stock, as
applicable, for which each such warrant is exercisable, and the exercise
price, duration, detachability and call provisions of each such warrant;
and (4) in the case of any offering of Securities, to the extent
applicable, the initial public offering price or prices, listing on any
securities exchange, certain federal income tax consequences and the
agents, dealers or underwriters, if any, participating in the offering and
sale of the Securities. If so specified in the applicable Prospectus
Supplement, any series of Securities may be issued in whole or in part in
the form of one or more temporary or permanent Global Securities, as
defined herein.
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
The Company may sell all or a portion of any offering of its Securities
through agents, to or through underwriters or dealers, or directly to other
purchasers. See "Plan Distribution." The related Prospectus Supplement
for each offering of Securities sets forth the name of any agents,
underwriters or dealers involved in the sale of such Securities and any
applicable fee, commission, discount or indemnification arrangement with
any such party. See "Use of Proceeds."
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction
of this Prospectus together with a Prospectus Supplement relating to
specific Securities shall not constitute an offer in such jurisdiction of
any other Securities covered by this Prospectus but not described in such
Prospectus Supplement.
The date of this Prospectus is October 2, 1995
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER, AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR
THE ACCOMPANYING PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES
BEING OFFERED PURSUANT TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS
SUPPLEMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THEREOF OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AT
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF. THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE SECURITIES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's following regional offices:
Chicago Regional Office, Room 3190, 230 South Dearborn Street, Chicago,
Illinois 60604; and New York Regional Office, Room 1400, 75 Park Place, New
York, New York 10007. Copies of such material can also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Common
Stock of the Company is listed on the New York Stock Exchange ("NYSE") and
such reports, proxy statements and other information concerning the Company
may also be inspected at the offices of such Exchange at 20 Broad Street,
New York, New York 10005.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Securities offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete, and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
are incorporated in this Prospectus by reference: Report on Form 8-K filed
July 18, 1995 regarding a public offering and the settlement of the
Commission's investigation, Annual Report on Form 10-K for the year ended
December 31, 1994; Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 and the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A under the Exchange Act,
including any amendment or report filed to update the description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering of all Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
accompanying Prospectus Supplement relating to a specific offering of
Securities or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement. Subject to the
foregoing, all information appearing in this Prospectus is qualified in its
entirety by the information appearing in the documents incorporated herein
by reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person,
a copy of any and all of the documents described above under "Incorporation
of Certain Documents by Reference", other than exhibits to such documents,
unless such exhibits are specifically incorporated by reference therein.
Written requests should be directed to: Resource Mortgage Capital, Inc.,
4880 Cox Road, Glen Allen, Virginia 23060, Attention: Investor Relations,
Telephone: (804) 967-5800.
THE COMPANY
Resource Mortgage Capital, Inc. ("the Company"), incorporated in
Virginia in 1987, originates, purchases, securitizes and services
residential mortgage loans (collectively "mortgage operations") and invests
in a portfolio of residential mortgage securities. The Company's primary
strategy is to use its mortgage operations to create investments for its
portfolio. The Company's principal sources of income are net interest
income on its investment portfolio, gains on the securitization and sale of
mortgage loans and the interest spread realized while the mortgage loans
are being accumulated for sale or securitization. The Company and its
wholly-owned subsidiaries elect to be taxed as a real estate investment
trust.
Mortgage Operations
The mortgage loans funded through the Company's mortgage operations are
originated by the Company or by various sellers that meet the Company's
qualification criteria. These sellers include savings and loan
associations, banks, mortgage bankers and other mortgage lenders. The
Company funds mortgage loans secured by residential properties throughout
the United States.
Substantially all of the mortgage loans funded through the mortgage
operations are "nonconforming" mortgage loans. Nonconforming mortgage
loans will not qualify for purchase by Federal Home Loan Mortgage
Association ("FHLMC") or Federal National Mortgage Association ("FNMA") or
for inclusion in a loan guarantee program sponsored by Government National
Mortgage Association ("GNMA"). Nonconforming mortgage loans generally are
originated based upon different underwriting criteria than are required by
the federal agencies' programs (i.e. "non-conforming credit profile") or
have outstanding principal balances in excess of the program guidelines of
these federal agencies. A borrower with a non-conforming credit profile
cannot easily qualify for a loan from the federal agencies for reasons
other than loan size. The maximum principal balance of a conforming loan
as of August 31, 1995 is $203,150 for FHLMC and FNMA. Such non-conforming
loans may have higher risks than conforming mortgage loans due to their
lower liquidity, different underwriting or qualification criteria, and
higher loan balances.
Mortgage loans funded by the Company in its mortgage operations are
secured by single (one-to-four) family residential properties and have
either fixed or adjustable interest rates. Fixed-rate mortgage loans
generally have a constant interest rate over the life of the loan,
primarily 15 or 30 years. In addition, fixed-rate mortgage loans funded by
the Company may also have a fixed interest rate for the first 3, 5, or 7
years and an interest rate which adjusts at six or twelve month intervals
thereafter, subject to periodic and lifetime interest rate caps.
Adjustable-rate mortgage ("ARM") loans provide for the periodic adjustment
to the rate of interest equal to the sum of a fixed margin and an index,
generally subject to certain periodic and lifetime interest rate caps.
The Company has two primary methods for sourcing mortgage loans funded
through its mortgage operations. Mortgage loans funded through the
Company's wholesale operations are originated through a network of mortgage
loan brokers. Mortgage loans funded through the Company's correspondent
operations are purchased from a network of approved sellers, including
mortgage companies, banks, thrifts and other lending institutions.
The Company established its mortgage loan wholesale origination
capability in 1994. Mortgage loans originated by the Company through its
wholesale operations are sourced by independent brokers and underwritten
and closed by the Company. This method allows the Company to be directly
involved in the origination process of the loan, but without the direct
cost and overhead of a retail branch operation. The Company's mortgage
loan wholesale operation targets borrowers with a non-conforming credit
profile. As an approved mortgage loan originator, the Company is subject
to various federal and state regulations. A violation of such regulations
may result in the Company losing its ability to originate mortgage loans in
the respective jurisdiction.
The Company sets prices at least once every business day for loans
either originated through the wholesale operations or purchased through the
correspondent operations. The prices posted may be for immediate delivery
of the mortgage loans or for subsequent delivery (such as within 30, 60 or
90 days). Prices vary depending upon the loans' features and
characteristics, such as loan-to-value ratio and insurance coverage. The
Company generally issues a commitment to fund one or more mortgage loans
for a specific period of time at an established price and yield, in a
specified principal amount.
During the mortgage loan accumulation period prior to sale or
securitization, which is typically 60 to 90 days, the Company is exposed to
risks of interest rate fluctuations and may enter into hedging transactions
to reduce the change in value of such mortgage loans caused by changes in
interest rates. Gains and losses on these hedging transactions are
deferred as an adjustment to the carrying value of the related mortgage
loans until the mortgage loans are sold. This strategy is designed to
reduce the decline in value of the commitments, as well as loans in
inventory, when interest rates increase, and will reduce the increase in
value of the commitments, as well as loans in inventory, when interest
rates decrease. The Company is also at risk for credit losses on mortgage
loans in inventory during the accumulation period.
When a sufficient volume of mortgage loans is accumulated, the Company
may elect to sell a pool of mortgage loans directly to an investment
banking firm or to securitize such pool of mortgage loans through the
issuance of mortgage securities. The mortgage-backed securities are
structured so that substantially all of the securities are rated in one of
the two highest rating categories (i.e. AA or AAA) by at least one of the
nationally recognized rating agencies. Mortgage-backed securities issued
by the Company are not generally guaranteed by the federal agencies. Each
series of mortgage securities is expected to be fully payable from the
collateral pledged to secure the series. It is expected that the recourse
of investors in the series generally will be limited to the collateral
underlying the securities. Except in the case of a breach of the standard
representations and warranties made by the Company when loans are sold or
securitized, the securities are non-recourse to the Company.
The Company may securitize mortgage loans funded through its mortgage
operations by issuing collateralized mortgage obligations ("CMOs") or pass-
through securities. The Company recognizes a gain or loss on the issuance
and sale of a pass-through security, while no gain or loss is recognized on
the issuance of CMOs, as CMOs represent the issuance of a debt security.
Credit enhancement for these securities may take the form of over-
collateralization, subordination, reserve funds, pool insurance, bond
insurance, or any combination of the foregoing. The Company strives to use
the most cost effective security structure and form of credit enhancement
available at the time of securitization.
Regardless of the form of credit enhancement, the Company may retain a
limited portion of the direct credit risk after securitization, including
the risk of loss related to hazards not covered under standard hazard
insurance policies. Such credit loss exposure is generally limited to an
amount equal to a fixed percentage of the principal balance of the pool of
mortgage loans at the time of securitization. Additionally, the Company
may be contingently exposed to losses due to fraud during the origination
of a mortgage loan if the originator of such mortgage loan defaults on its
repurchase obligation. The Company has established discounts and reserves
for estimated expected losses related to these various risks. The
Company's results will be negatively impacted in future periods to the
extent actual losses exceed the amount of such discounts and reserves.
Over-collateralization is generally used in conjunction with bond
insurance in the issuance of CMOs. Losses are first applied to the over-
collateralization amount, and any losses in addition to that amount would
be borne by the bond insurer or holders of the CMOs. The Company may retain
over-collateralization and generally receives an excess yield on the
mortgage loans relative to the yield on the CMOs to compensate the Company
for retaining such loss exposure.
Subordination is generally used in conjunction with the issuance of
pass-through securities, and may also be used in conjunction with reserve
funds, pool insurance and bond insurance. The credit risk is concentrated
in the subordinated classes (which may partially be credit enhanced with
reserve funds or pool insurance) of the securities, thus allowing the
senior classes of the securities to receive the higher credit ratings. To
the extent credit losses are greater than expected (or exceed the
protection provided by any reserve funds or pool insurance), the holders of
the subordinated securities will experience a lower yield (which may be
negative) than expected on their investments. The Company may retain
certain subordinated securities and records discounts at the date of
issuance on these securities representing the expected exposure to credit
losses.
As mentioned above, the Company may use mortgage pool insurance and
reserve funds for credit enhancement. Mortgage pool insurance is currently
less available as a form of credit enhancement than it had been in the
past. Credit losses covered by the pool insurance policies are borne by
the pool insurers to the limits of their policies and by the security
holders if losses exceed those limits. To the extent a loan is to be
covered by mortgage pool insurance, the Company may rely upon the credit
review and analysis of each loan, which is performed by the mortgage
insurer, in deciding to fund the mortgage loan. After these loans are
securitized, the Company has only limited exposure to losses not covered by
pool insurance, resulting primarily from special hazard risks and fraud
during the origination of a mortgage loan. The Company has established
reserve funds to cover risks not covered by the pool insurance policies, or
to cover credit risks on loans not covered by pool insurance. The Company
has established discounts and reserves for these potential losses.
During 1994, the Company established, through an acquisition, the
capability to service mortgage loans funded through its mortgage
operations. If the Company retains a portion of the credit risk on a pool
of mortgage loans after securitization, it will generally directly service
these loans in an effort to better manage its credit exposure.
PORTFOLIO OF MORTGAGE INVESTMENTS
The Company's investment strategy is to create a diversified portfolio
of mortgage securities that in the aggregate generates stable income for
the Company in a variety of interest rate environments and preserves the
capital base of the Company. The Company creates the majority of the
investments for its portfolio by retaining a portion of the mortgage
securities or other assets that are generated from its mortgage operations.
By pursuing these strategies, the Company believes it can structure the
portfolio to have more favorable yields in a variety of interest rate
environments than if it purchased mortgage investments in the market,
although there can be no assurance that the Company will be successful in
accomplishing this strategy. Included in the Company's portfolio of
mortgage investments are ARM securities, collateral for CMOs, fixed-rate
securities, other mortgage securities and mortgage warehouse lines of
credit. To the extent the Company retains a portion of the credit risk on
securities in the portfolio, the Company generally will service the
underlying mortgage loans to better manage this risk.
OTHER INFORMATION
The Company, and its qualified real estate investment trust ("REIT")
subsidiaries, have elected to be treated as a REIT for federal income tax
purposes. A REIT must distribute annually substantially all of its income
to shareholders. The Company and its qualified REIT subsidiaries
(collectively, "Resource REIT") generally will not be subject to federal
income tax to the extent that certain REIT qualifications are met. Certain
other affiliated entities which are consolidated with the Company for
financial reporting purposes, are not consolidated for federal income tax
purposes because such entities are not qualified REIT subsidiaries. All
taxable income of these affiliated entities are subject to federal and
state income taxes, where applicable. See "Federal Income Tax
Considerations.''
The principal executive office of the Company is located at 4880 Cox
Road, Glen Allen, Virginia 23060, telephone number: (804) 967-5800.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for
any offering of Securities, the net proceeds from the sale of Securities
offered by the Company will be available for the general corporate purposes
of the Company. These general corporate purposes may include, without
limitation, repayment of maturing obligations, redemption of outstanding
indebtedness, financing future acquisitions (including acquisitions of
mortgage loans and other mortgage-related products), capital expenditures
and working capital. Pending any such uses, the Company may invest the net
proceeds from the sale of any Securities or may use them to reduce short-
term indebtedness. If the Company intends to use the net proceeds from a
sale of Securities to finance a significant acquisition, the related
Prospectus Supplements will describe the material terms of such
acquisition.
If Debt Securities are issued to one or more persons in exchange for the
Company's outstanding debt securities, the accompanying Prospectus
Supplement related to such offering of Debt Securities will set forth the
aggregate principal amount of the outstanding debt securities which the
Company will receive in such exchange and which will cease to be
outstanding, the residual cash payment, if any, which the Company may
receive from such persons or which such persons may receive from the
Company, as appropriate, the dates from which the Company will pay interest
accrued on the outstanding debt securities to be exchanged for the offered
Debt Securities and an estimate of the Company's expenses in respect of
such offering of the Debt Securities.
RATIO OF AVAILABLE EARNINGS TO FIXED CHARGES
The Company's ratio of available earnings to fixed charges was 1:1 or
greater in each of the last five fiscal years and the six months ended June
30, 1995. The ratios were as follows:
Six
months
ended
June 30, Year ended December 31,
1995 1994 1993 1992 1991 1990
Ratio of earnings to 1.19:1 1.35:1 1.69:1 1.80:1 1.69:1 1.67:1
fixed charges (1)
(1) For purposes of computing the ratios, "available earnings" consist of
net earnings plus interest and debt expense and excludes fixed charges
related to CMOs issued by the Company which are nonrecourse to the Company.
This sum is divided by the total interest and debt expense to determine the
ratio of available earnings to fixed charges. No Series A Preferred Stock
dividends have as yet been declared and paid.
These ratios represent a measure of the ability to meet debt service
obligations from funds generated from operations.
DESCRIPTION OF SECURITIES
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete
and is subject in all respects to applicable Virginia law and to the
provisions of the Company's Articles of Incorporation and Bylaws, copies of
which are on file with the Commission as described under "Available
Information" and are incorporated by reference herein.
General
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Common Stock, par value
$0.01 per share; (ii) shares of its Preferred Stock, no par value, in one
or more series; (iii) Debt Securities, in one or more series, any series
of which may be either Senior Debt Securities or Subordinated Debt
Securities; (iv) Common Stock Warrants; (v) Preferred Stock Warrants; (vi)
Debt Warrants; and (vii) any combination of the foregoing, either
individually or as units consisting of one or more of the types of
Securities described in clauses (i) through (vi). The terms of any
specific offering of Securities, including the terms of any units offered,
will be set forth in a Prospectus Supplement relating to such offering.
The Company's authorized equity capitalization consists of 50 million
shares of Common Stock, par value $0.01 per share and 50 million shares of
preferred stock, no par amount. Neither the holders of the Common Stock
nor of any preferred stock, now or hereafter authorized, will be entitled
to any preemptive or other subscription rights. The Common Stock is listed
on the New York Stock Exchange. The Company intends to list any additional
shares of its Common Stock which are issued and sold hereunder. The
Company may list any series of its Preferred Stock which are offered and
sold hereunder, as described in the Prospectus Supplement relating to such
series of Preferred Stock.
Common Stock
As of August 31, 1995, there were 20,134,370 outstanding shares of
Common Stock held by 3,735 holders of record. Holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor. Dividends on any
outstanding shares of preferred stock must be paid in full before payment
of any dividends on the Common Stock. Upon liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share
ratably in assets available for distribution after payment of all debts and
other liabilities and subject to the prior rights of any holders of any
preferred stock then outstanding.
Holders of Common Stock are entitled to one vote per share with respect
to all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election, subject to the voting rights (if any) of
any series of preferred stock that may be outstanding from time to time.
The Company's Articles of Incorporation and Bylaws contain no restrictions
on the repurchase by the Company of shares of the Common Stock. All the
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable.
Preferred Stock
The Board of Directors is authorized to designate with respect to each
series of preferred stock the number of shares in each such series, the
dividend rates and dates of payment, voluntary and involuntary liquidation
preferences, redemption prices, whether or not dividends shall be
cumulative and, if cumulative, the date or dates from which the same shall
be cumulative, the sinking fund provisions, if any, for redemption or
purchase of shares, the rights, if any, and the terms and conditions on
which shares can be converted into or exchanged for shares of another class
or series, and the voting rights, if any. As of the date hereof, there
were 1,552,500 shares of Series A 9.75% Cumulative Convertible Preferred
Stock issued and outstanding.
Any preferred shares issued will rank prior to the Common Stock as to
dividends and as to distributions in the event of liquidation, dissolution
or winding up of the Company. The ability of the Board of Directors to
issue preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other
things, adversely affect the voting powers of holders of Common Stock.
Securities Warrants
General
The Company may issue Securities Warrants for the Purchase of Common
Stock, Preferred Stock or Debt Securities. Such warrants are referred to
herein as Common Stock Warrants, Preferred Stock Warrants or Debt Warrants,
as appropriate. Securities Warrants may be issued independently or
together with any other Securities covered by the Registration Statement
and offered by this Prospectus and any accompanying Prospectus Supplement
and may be attached to or separate from such other Securities. Each series
of Securities Warrants will be issued under a separate agreement (each, a
"Securities Warrant Agreement") to be entered into between the Company and
a bank or trust company, as agent (each, a "Securities Warrant Agent"), all
as set forth in the Prospectus Supplement relating to the particular issue
of offered Securities Warrants. Each issue of Securities Warrants will be
evidenced by warrant certificates (the "Securities Warrant Certificates").
The Securities Warrant Agent will act solely as an agent of the Company in
connection with the Securities Warrant Certificates and will not assume any
obligation or relationship of agency or trust for or with any holders of
Securities Warrant Certificates or beneficial owners of Securities
Warrants. Copies of the definitive Securities Warrant Agreements and
Securities Warrant Certificates will be filed with the Commission by means
of a Current Report on Form 8-K in connection with the offering of such
series of Securities Warrants.
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including in the case
of Securities Warrants for the purchase of Debt Securities, the following
where applicable: (i) the offering price; (ii) the currencies in which such
Debt Warrants are being offered; (iii) the designation, aggregate principal
amount, currencies, denominations and terms of the series of Debt
Securities purchasable upon exercise of such Debt Warrants; (iv) the
designation and terms of any Securities with which such Debt Warrants are
being offered and the number of such Debt Warrants being offered with each
such Security; (v) the date on and after which such Debt Warrants and the
related Securities will be transferable separately; (vi) the principal
amount of the series of Debt Securities purchasable upon exercise of each
such Debt Warrant and the price at which the currencies in which such
principal amount of Debt Securities of such series may be purchased upon
such exercise; (vii) the date on which the right to exercise such Debt
Warrants shall commence and the date on which such right shall expire (the
"Expiration Date"); (viii) whether the Debt Warrant will be issued in
registered or bearer form; (ix) certain federal income tax consequences;
and (x) any other material terms of such Debt Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock
or Common Stock, the applicable Prospectus Supplement will describe the
terms of such Securities Warrants, including the following where
applicable: (i) the offering price; (ii) the aggregate number of shares
purchasable upon exercise of such Securities Warrants, and in the case of
Securities Warrants for Preferred Stock, the designation, aggregate number
and terms of the series of Preferred Stock purchasable upon exercise of
such Securities Warrants; (iii) the designation and terms of the Securities
with which such Securities Warrants are being offered and the number of
such Securities Warrants being offered with each such Security; (iv) the
date on and after which such Securities Warrants and the related Securities
will be transferable separately; (v) the number of shares of Preferred
Stock or shares of Common Stock purchasable upon exercise of each such
Securities Warrant and the price at which such number of shares of
Preferred Stock of such series or shares of Common Stock may be purchased
upon such exercise; (vi) the date on which the right to exercise such
Securities Warrants shall commence and the Expiration Date on which such
right shall expire; (vii) certain federal income tax consequences; and
(viii) any other material terms of such Securities Warrants.
Securities Warrant Certificates may be exchanged for new Securities
Warrant Certificates of different denominations, may (if in registered
form) be presented for registration of transfer, and may be exercised at
the corporate trust office of the appropriate Securities Warrant Agent or
other office indicated in the applicable Prospectus Supplement. Prior to
the exercise of any Securities Warrant to purchase Debt Securities, holders
of such Debt Warrants will not have any of the rights of Holders of the
Debt Securities purchasable upon such exercise, including the right to
receive payments of principal, premium, if any, or interest, if any, on the
Debt Securities purchasable upon such exercise or to enforce covenants in
the applicable Indenture. Prior to the exercise of any Securities Warrants
to purchase Preferred Stock or Common Stock, holders of such Preferred
Stock Warrants or Common Stock Warrants will not have any rights of holders
of the respective Preferred Stock or Common Stock purchasable upon such
exercise, including the right to receive payments of dividends, if any, on
the Preferred Stock or Common Stock purchasable upon such exercise or to
exercise any applicable right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Stock
or shares of Common Stock, as the case may be, at such exercise price as
shall in each case be set forth in, or calculable from, the Prospectus
Supplement relating to the offered Securities Warrants. After the close of
business on the Expiration Date (or such later date to which such
Expiration Date may be extended by the Company), unexercised Securities
Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant Agent payment, as provided in the applicable Prospectus Supplement,
of the amount required to purchase the applicable Debt Securities,
Preferred Stock or Common Stock purchasable upon such exercise together
with certain information set forth on the reverse side of the Securities
Warrant Certificate. Upon receipt of such payment and the definitive
Securities Warrant Certificates properly completed and duly executed at the
corporate trust office of the Securities Warrant Agent or any other office
indicated in the applicable Prospectus Supplement, the Company will, as
soon as practicable, issue and deliver the applicable Debt Securities,
Preferred Stock or Common Stock purchasable upon such exercise. If fewer
than all of the Securities Warrants represented by such Securities Warrant
Certificate are exercised, a new Securities Warrant Certificate will be
issued for the remaining amount of Securities Warrants.
Amendments and Supplements to Securities Warrant Agreements
Each Securities Warrant Agreement may be amended or supplemented without
the consent of the holders of the Securities Warrants issued thereunder to
effect changes that are not inconsistent with the provisions of the
Securities Warrants and that do not adversely affect the interests of the
holders of the Securities Warrants.
Common Stock Warrant Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement,
the exercise price of, and the number of shares of Common Stock covered by,
a Common Stock Warrant are subject to adjustment in certain events,
including: (i) the issuance of Common Stock as a dividend or distribution
on the Common Stock; (ii) subdivisions and combinations of the Common
Stock; (iii) the issuance to all holders of Common Stock of certain rights
or warrants entitling them to subscribe for or purchase Common Stock within
the number of days, specified in the applicable Prospectus Supplement,
after the date fixed for the determination of the stockholders entitled to
receive such rights or warrants, at less than the current market price (as
defined in the Securities Warrant Agreement governing such series of Common
Stock Warrants); and (iv) the distribution to all holders of Common Stock
of evidences of indebtedness or assets of the Company (excluding certain
cash dividends and distributions described below). The terms of any such
adjustment will be specified in the related Prospectus Supplement for such
Common Stock Warrants.
No Rights as Stockholders
Holders of Common Stock Warrants will not be entitled by virtue of being
such holders, to vote, to consent, to receive dividends, to receive notice
as stockholders with respect to any meeting of stockholders for the
election of directors of the Company of any other matter, or to exercise
any rights whatsoever as stockholders of the Company.
Existing Securities Holders
The Company may issue, as a dividend at no cost, such Securities
Warrants to holders of record of the Company's Securities or any class
thereof on the applicable record date. If Securities Warrants are so
issued to existing holders of Securities, the applicable Prospectus
Supplement will describe, in addition to the terms of the Securities
Warrants and the Securities issuable upon exercise thereof, the provisions,
if any, for a holder of such Securities Warrants who validly exercises all
Securities Warrants issued to such holder to subscribe for unsubscribed
Securities (issuable pursuant to unexercised Securities Warrants issued to
other holders) to the extent such Securities Warrants have not been
exercised.
Debt Securities
General
The Company may offer one or more series of its Debt Securities
representing general, unsecured obligations of the Company. Any series of
Debt Securities may either (1) rank prior to all subordinated indebtedness
of the Company and pari passu with all other unsecured indebtedness of the
Company outstanding on the date of the issuance of such Debt Securities
("Senior Debt Securities") or (2) be subordinated in light of payments to
certain other obligations of the Company outstanding on the date of
issuance ("Subordinated Debt Securities"). In this Prospectus, any
indenture relating to Subordinated Debt Securities is referred to as a
"Subordinated Indenture" and the term "Indenture" refers to Senior and
Subordinated Indentures, collectively.
The aggregate principal amount of Debt Securities which may be issued by
the Company will be set from time to time by the Board of Directors.
Further, the amount of Debt Securities which may be offered by this
Prospectus will be subject to the aggregate initial offering price of
Securities specified in the Registration Statement. Each Indenture will
permit the issuance of an unlimited amount of Debt Securities thereunder
from time to time in one or more series. Additional debt securities may be
issued pursuant to another registration statement for issuance under any
Indenture. Any offering of Debt Securities may be denominated in any
currency composite designated by the Company.
The following description of the Debt Securities which may be offered by
the Company hereunder describes certain general terms and provisions of the
Debt Securities to which any Prospectus Supplement may relate. The
particular terms and provisions of the Debt Securities and the extent to
which the following general provisions may apply to such offering of Debt
Securities will be described in the accompanying Prospectus Supplement
relating to such offering of Debt Securities. The following descriptions
of certain provisions of the Indentures do not purport to be complete and
are qualified in their entirety by reference to the form of Senior
Indenture or Subordinated Indenture, as appropriate. The definitive
Indenture relating to each offering of Debt Securities will be filed with
the Commission by means of a Current Report on Form 8-K in connection with
the offering of such Debt Securities. All article and section references
appearing herein are references to the articles and sections of the
appropriate Indenture and, unless defined herein, all capitalized terms
have the respective meanings specified in the appropriate Indenture.
The Prospectus Supplement relating to any offering of Debt Securities
will set forth the following terms and other information to the extent
applicable with respect to the Debt Securities being offered thereby; (1)
the designation, aggregate principal amount, authorized denominations and
priority of such Debt Securities; (2) the price (expressed as a percentage
of the aggregate principal amount of such Debt Securities) at which such
Debt Securities will be issued; (3) the currency or currency units for
which the Debt Securities may be purchased and in which the principal of ,
and any interest on such Debt Securities may be payable; (4) the stated
maturity of such Debt Securities or means by which a maturity date may be
determined; (5) the rate at which such Debt Securities will bear interest
or the method by which such rate of interest is to be calculated (which
rate may be zero in the case of certain Debt Securities issued at a price
representing a discount from the principal amount payable at maturity); (6)
the periods during which such interest will accrue, the dates on which such
interest will be payable (or the method by which such dates may be
determined; including without limitation that such rate of interest may
bear an inverse relationship to some index or standard) and the
circumstances under which the Company may defer payment of interest; (7)
redemption provisions, including any optional redemption, required
repayment or mandatory sinking fund provisions; (8) any terms by which such
Debt Securities may be convertible into shares of the Company's Common
Stock, Preferred Stock or any other Securities of the Company, including a
description of the Securities into which any such Debt Securities are
convertible; (9) any terms by which the principal of such Debt Securities
will be exchangeable for any other Securities of the Company; (10) whether
such Debt Securities are issuable as definitive Fully-Registered Securities
(as defined below) or Global Securities and, if Global Securities are to be
issued, the terms thereof, including the manner in which interest thereon
will be payable to the beneficial owners thereof and other book-entry
procedures, any terms for exchange of such Global Securities into
definitive Fully-Registered Securities (as defined below) and any
provisions relating to the issuance of a temporary Global Security; (11)
any additional restrictive covenants included for the benefit of the
holders of such Debt Securities; (12) any additional events of default
provided with respect to such Debt Securities; (13) the terms of any
Securities being offered together with such Debt Securities, (14) whether
such Debt Securities represent general, unsecured obligations of the
Company and (15) any other material terms of such Debt Securities.
If any of the Debt Securities are sold for foreign currency units, the
restrictions, elections, tax consequences, specific terms, and other
information with respect to such issue of Debt Securities and such
currencies or currency units will be set forth in the Prospectus Supplement
relating to thereto.
Indenture Provisions
The Debt Securities may be issued in definitive, fully registered form
without coupons ("Fully Registered Securities"), or in a form registered as
to principal only with coupons or in bearer form with coupons. Unless
otherwise specified in the Prospectus Supplement, the Debt Securities will
only be Fully Registered Securities. In addition, Debt Securities of a
series may be issuable in the form of one or more Global Securities, which
will be denominated in an amount equal to all or a portion of the aggregate
principal amount of such Debt Securities. See "Global Securities" below.
One or more series of Debt Securities may be sold at a substantial
discount below their stated principal amount, bearing no interest or
interest at a rate that at the time of issuance is below market rates.
Federal income tax consequences and special considerations applicable to
any such series will be described in the Prospectus Supplement relating
thereto.
Unless otherwise indicated in the related Prospectus Supplement for a
series of Debt Securities, there are no provisions contained in the
Indentures that would afford holders of Debt Securities protection in the
event of a highly leveraged transaction involving the Company.
Global Securities. Any series of Debt Securities may be issued in whole
or in part in the form of one or more Global Securities that will be
deposited with, or on behalf of, the Depositary identified in the
Prospectus Supplement relating to such series. Unless and until it is
exchanged in whole or in part for Debt Securities in individually
certificated form, a Global Security may not be transferred except as a
whole to a nominee of the Depositary for such Global Security, or by a
nominee for the Depositary to the Depositary, or to a successor of the
Depositary or a nominee of such successor.
The specific terms of the Depositary arrangement with respect to any
series of Debt Securities and the rights of, and limitations on, owners of
beneficial interests in a Global Security representing all or a portion of
a series of Debt Securities will be described in the Prospectus Supplement
relating to such series.
Modification of Indentures. Unless otherwise specified in the related
Prospectus Supplement, each Indenture, the rights and obligations of the
Company, and the rights of the Holders may be modified with respect to one
or more series of Debt Securities issued under such Indenture with the
consent of the Holders of not less than a majority in principal amount of
the outstanding Debt Securities of each such series affected by the
modification or amendment. No modification of the terms of payment of
principal or interest, and no modification reducing the percentage required
for modification, is effective against any Holder without his consent.
Events of Default. Unless otherwise specified in the related
Prospectus Supplement, each Indenture, will provide that the following are
Events of Default with respect to any series of Debt Securities issued
thereunder: (1) default in the payment of the principal of any Debt
Security of such series when and as the same shall be due and payable; (2)
default in making a sinking fund payment, if any, when and as the same
shall be due and payable by the terms of the Debt Securities of such
series; (3) default for 30 days in payment of any installment of interest
on any Debt Securities of such series; (4) default for a specified number
of days after notice in the performance of any other covenants in respect
of the Debt Securities of such series contained in the Indenture; (5)
certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator, or trustee of the Company or its
property; and (6) any other Event of Default provided in the applicable
supplemental indenture under which such series of Debt Securities is
issued. An Event of Default with respect to a particular series of Debt
Securities issued under an Indenture will not necessarily constitute an
Event of Default with respect to any other series of Debt Securities issued
under such Indenture. The trustee under an Indenture may withhold notice
to the Holders of any series of Debt Securities of any default with respect
to such series (except in the payment of principal or interest) if it
considers such withholding in the interests of such Holders.
If an Event of Default with respect to any series of Debt Securities
shall have occurred and be continuing, the appropriate trustee under the
Indenture or the Holders of not less than 25% in the aggregate principal
amount of the Debt Securities of such series may declare the principal, or
in the case of discounted Debt Securities, such portion thereof as may be
described in the Prospectus Supplement, of all the Debt Securities of such
series to be due and payable immediately.
Within four months after the close of each fiscal year, the Company will
file with each trustee under the indentures a certificate, signed by
specified officers, stating whether or not such officers have knowledge of
any default, and, if so, specifying each such default and the nature
thereof.
Subject to provisions relating to its duties in case of default, a
trustee under the Indentures shall be under no obligation to exercise any
of its rights or powers under the applicable Indenture at the request,
order, or direction of any Holder, unless such Holders shall have offered
to such trustee reasonable indemnity. Subject to such provisions for
indemnification, the Holders of a majority in principal amount of the Debt
Securities of any series may direct the time, method, and place of
conducting any proceeding for any remedy available to the appropriate
trustee, or exercising any trust or power conferred upon such trustee, with
respect to the Debt Securities of such series.
Payment and Transfer. Principal of, and premium and interest, if any,
on, fully Registered Securities will be payable at the Place of Payment as
specified in the applicable Prospectus Supplement, provided that payment of
interest, if any, may be made, unless otherwise provided in the applicable
Prospectus Supplement, by check mailed to the person in whose names such
Debt Securities are registered at the close of business on the day or days
specified in the Prospectus Supplement or transfer to an account maintained
by the payee located inside the United States. The principal of, and
premium and interest, if any, on, Debt Securities in other forms will be
payable in the manner and at the place or places as designated by the
Company and specified in the applicable Prospectus Supplement. Unless
otherwise provided in the Prospectus Supplement, payment of interest may be
made, in the case of Bearer Security by transfer to an account maintained
by the payee with a bank outside the United States.
Fully Registered Securities may be transferred or exchanged at the
corporate trust office of the trustee or any other office or agency
maintained by the Company for such purposes, subject to the limitations in
the applicable Indenture, without the payment of any service charge except
for any tax or governmental charge incidental thereto. Provisions with
respect to the transfer and exchange of Debt Securities in other forms will
be set forth in the applicable Prospectus Supplement.
Defeasance. The Indentures provide that each will cease to be of
further effect with respect to a certain series of Debt Securities (except
for certain obligations to register the transfer or exchange of Securities)
if (a) the Company delivers to the Trustee for the Securities of such
series for cancellation of all Securities of all series and the coupons, if
any, appertaining thereto, or (b) if the Company deposits into trust with
the Trustee money or United States government obligations, that, through
the payment of interest thereon and principal thereof in accordance with
their terms, will provide money in an amount sufficient to pay all of the
principal of, and interest on, the Securities of such series on the dates
such payments are due or redeemable in accordance with the terms of such
Securities.
Certain Charter and Virginia Law Provisions
Unless the amendment effects an extraordinary transaction, the Articles
of Incorporation of the Company may be amended with the approval of the
holders of a majority of the outstanding shares of Common Stock, subject to
the voting rights (if any) of any series of preferred stock that may be
outstanding from time to time. Amendments that effect extraordinary
transactions, which include mergers, share exchanges, a sale of
substantially all the assets of the Company, the dissolution of the Company
or the share ownership restrictions described below, require the approval
of the holders of more than two-thirds of the outstanding shares of Common
Stock (subject to any voting rights of any series of preferred stock
outstanding).
Special meetings of the shareholders of the Company may be called by a
majority of the Board of Directors, a majority of the unaffiliated
directors, the Chairman of the Board, the President or generally by
shareholders holding at least 25% of the outstanding shares of Common Stock
entitled to be voted at the meeting.
Virginia law and the Articles of Incorporation of the Company provide
that the directors and officers of the Company shall have no liability to
the Company or its shareholders in certain actions brought by or on behalf
of shareholders of the Company unless such officer or director has engaged
in willful misconduct or violations of federal or state securities laws and
certain other activities.
Repurchase of Shares and Restrictions on Transfer
Two of the requirements for qualification for the tax benefits accorded
a REIT under the Internal Revenue Code of 1986, as amended ("the Code"),
are that (i) during the last half of each taxable year not more than 50% of
the outstanding shares may be owned directly or indirectly by five or fewer
individuals and (ii) there must be at least 100 shareholders for at least
335 days in each taxable year. Those requirements apply for all taxable
years after the year in which a REIT elects REIT status.
The Articles of Incorporation prohibit any person or group of persons
from acquiring or holding, directly or indirectly, ownership of a number of
shares of capital stock in excess of 9.8% of the outstanding shares.
Shares of capital stock owned by a person or group of persons in excess of
such amounts are referred to as "Excess Shares.'' For this purpose the
term "ownership'' is defined in accordance with the Code, the constructive
ownership provisions of Section 544 of the Code and Rule 13d-3 promulgated
under the Exchange Act, and the term "group'' is defined to have the same
meaning as that term has for purposes of Section 13(d)(3) of the Exchange
Act. Accordingly, shares of capital stock owned or deemed to be owned by a
person who individually owns less than 9.8% of the shares outstanding may
nevertheless be Excess Shares.
For purposes of determining whether a person holds Excess Shares, a
person or group will be treated as owning not only shares of capital stock
actually or beneficially owned, but also any shares of capital stock
attributed to such person or group under the constructive ownership
provisions contained in Section 544 of the Code.
The Articles of Incorporation provide that in the event any person
acquires Excess Shares, each Excess Share may be redeemed at any time by
the Company at the closing price of a share of capital stock on the New
York Stock Exchange on the last business day prior to the redemption date.
From and after the date fixed for redemption of Excess Shares, such shares
shall cease to be entitled to any distribution and other benefits, except
only the right to payment of the redemption price for such shares.
Under the Articles of Incorporation any acquisition of shares that would
result in failure to qualify as a REIT under the Code is void to the
fullest extent permitted by law, and the Board of Directors is authorized
to refuse to transfer shares to a person if, as a result of the transfer,
that person would own Excess Shares. Prior to any transfer or transaction
which, if consummated, would cause a shareholder to own Excess Shares, and
in any event upon demand by the Board of Directors, a shareholder is
required to file with the Company an affidavit setting forth, as to that
shareholder, the information required to be reported in returns filed by
shareholders under Treasury Regulation Section 1.857-9 under the Code and
in reports filed under Section 13(d) of the Exchange Act. Additionally,
each proposed transferee of shares of capital stock, upon demand of the
Board of Directors, also may be required to file a statement or affidavit
with the Company setting forth the number of shares already owned by the
transferee and any related person.
The Common Stock may not be purchased by nonresident aliens or foreign
entities. In addition, the Common Stock may not be held by "disqualified
organizations'' within the meaning of Section 860E(e)(5) of the Code, which
generally includes governmental entities and other tax-exempt persons not
subject to the tax on unrelated business taxable income.
Transfer Agent and Registrar
The transfer agent and the registrar for the Company's Common Stock is
First Union National Bank of North Carolina, Charlotte, North Carolina.
PLAN OF DISTRIBUTION
The Company may sell Securities (1) through underwriters or dealers,
(2) directly to one or more purchasers, or (3) through agents. A
Prospectus Supplement will set forth the terms of the offering of the
Securities offered thereby, including the name or names of any
underwriters, the purchase price of the Securities, and the proceeds to the
Company from the sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price,
any discounts or concessions allowed or reallowed or paid to dealers, and
any securities exchange on which the Securities may be listed. Only
underwriters so named in the Prospectus Supplement are deemed to be
underwriters in connection with the Securities offered thereby.
If underwriters are used in the sale in a firm commitment underwriting,
the Securities will be acquired by the underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying
prices determined at the time of sale. The obligations of the underwriters
to purchase the Securities will be subject to certain conditions precedent,
and the underwriters will be obligated to purchase all the Securities of
the series offered by the Company's Prospectus Supplement if any of the
Securities are purchased. Any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers may be
changed from time to time.
Securities may also be sold directly by the Company or through agents
designated by the Company from time to time. The Securities offered hereby
may also be sold from time to time through agents for the Company by means
of (i) ordinary broker's transactions, (ii) block transactions (which may
involve crosses) in accordance with the rules of the Exchanges, in which
such agents may attempt to sell Securities as agent but may purchase and
resell all or a portion of the blocks as principal, (iii) "fixed price
offerings" in accordance with the rules of the Exchanges, or (iv) a
combination of any such methods of sale. In connection therewith,
distributors' or sellers' commissions may be paid or allowed which will not
exceed those customary in the types of transactions involved. A Prospectus
Supplement sets forth the terms of any such "fixed price offering,"
"exchange distributions" and "special offerings." If the agent purchases
Securities as principal, it may sell such Securities by any of the methods
described above. Any agent involved in the offering and sale of Securities
in respect of which this Prospectus is delivered is named, and any
commissions payable by the Company to such agent are set forth, in the
Prospectus Supplement. Unless otherwise indicated herein or in the
Prospectus Supplement, any such agent is acting on a best-efforts basis
for the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers by certain institutional
investors to purchase Securities providing for payment and delivery on a
future date specified in the Prospectus Supplement. There may be
limitations on the minimum amount which may be purchased by any such
institutional investor or on the portion of the aggregate principal amount
of the particular Securities which may be sold pursuant to such
arrangements. Institutional investors to which such offers may be made,
when authorized, include commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable
institutions, and such other institutions as may be approved by the
Company. The obligations of any such purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions
except (1) the purchase by an institution of the particular Securities
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and
(2) if the particular Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of
such Securities less the principal amount thereof covered by such
arrangements. Underwriters will not have any responsibility in respect of
the validity of such arrangements or the performance of the Company or such
institutional investors thereunder.
Agents and underwriters may be entitled under agreements entered into
with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribution with respect to payments which the agents or underwriters may
be required to make in respect thereof. Agents and underwriters may engage
in transactions with, or perform services for, the Company in the ordinary
course of business.
FEDERAL INCOME TAX CONSIDERATIONS
Federal Income Taxation of Shareholders
The following section is a general summary of certain federal income tax
aspects of an investment in the Company that should be considered by
prospective shareholders. The discussion in this section is based on
existing provisions of the Code, existing and proposed Treasury
regulations, existing court decisions, and existing rulings and other
administrative interpretations. There can be no assurance that future Code
provisions or other legal authorities will not alter significantly the tax
consequences described below. No rulings have been obtained from the
Internal Revenue Service concerning any of the matters discussed in this
section.
The Company and its qualified REIT subsidiaries (collectively "Resource
REIT") believes it has complied, and intends to comply in the future, with
the requirements for qualification as a REIT under the Code. The federal
income tax provisions governing REITs and their shareholders are extremely
complicated, and what follows is only a very brief and general summary of
the most important considerations for shareholders. ACCORDINGLY,
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF SHARES OF THE COMPANY.
General Considerations
Resource REIT believes it has complied, and intends to comply in the
future, with the requirements for qualification as a REIT under the Code.
Venable, Baetjer and Howard, LLP, counsel to the Company, has given the
Company its opinion to the effect that, as of the date hereof and based on
the various representations made to it by the Company with respect to its
income, assets, and activities since its inception, and subject to certain
assumptions and qualifications stated in such opinion, (i) Resource REIT
qualifies for treatment as a REIT under the Code and (ii) the organization
and contemplated method of operation of Resource REIT are such as to enable
it to continue so to qualify in subsequent years, provided the various
operational requirements of REIT status are satisfied in those years.
However, investors should be aware that opinions of counsel are not binding
on the courts or the Internal Revenue Service. To the extent that Resource
REIT qualifies as a REIT for federal income tax purposes, it generally will
not be subject to federal income tax on the amount of its income or gain
that is distributed to shareholders. However, a nonqualified REIT
subsidiary of the Company , which operates the MPP and is included in the
Company's consolidated GAAP financial statements, is not a qualified REIT
subsidiary. Consequently, all of the nonqualified REIT subsidiary's
taxable income is subject to federal and state income taxes.
The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active, and it
distribute annually to its shareholders a high percentage of its taxable
income. The Company could be subject to a number of taxes if it failed to
satisfy those rules or if it acquired certain types of income-producing
real property through foreclosure. Although no complete assurances can be
given, the Company does not expect that it will be subject to material
amounts of such taxes.
Resource REIT's failure to satisfy certain Code requirements could cause
the Company to lose its status as a REIT. If Resource REIT failed to
qualify as a REIT for any taxable year, it would be subject to federal
income tax (including any applicable minimum tax) at regular corporate
rates and would not receive deductions for dividends paid to shareholders.
As a result, the amount of after-tax earnings available for distribution to
shareholders would decrease substantially. While the Board of Directors
intends to cause Resource REIT to operate in a manner that will enable it
to qualify as a REIT in all future taxable years, there can be no certainty
that such intention will be realized because, among other things,
qualification hinges on the conduct of the business of Resource REIT.
Taxation of Distributions by the Company
Assuming that Resource REIT maintains its status as a REIT, any
distributions that are properly designated as "capital gain dividends''
generally will be taxed to shareholders as long-term capital gains,
regardless of how long a shareholder has owned his shares. Any other
distributions out of Resource REIT current or accumulated earnings and
profits will be dividends taxable as ordinary income. Shareholders will
not be entitled to dividends-received deductions with respect to any
dividends paid by Resource REIT. Distributions in excess of Resource
REIT's current or accumulated earnings and profits will be treated as
tax-free returns of capital, to the extent of the shareholder's basis in
his shares of capital stock, and as gain from the disposition of shares, to
the extent they exceed such basis. Shareholders may not include on their
own returns any of Resource REIT ordinary or capital losses. Distributions
to shareholders attributable to "excess inclusion income'' of Resource REIT
will be characterized as excess inclusion income in the hands of the
shareholders. Excess inclusion income can arise from Resource REIT's
holdings of residual interests in real estate mortgage investment conduits
and in certain other types of mortgage-backed security structures created
after 1991. Excess inclusion income constitutes unrelated business taxable
income ("UBTI'') for tax-exempt entities (including employee benefit plans
and individual retirement accounts), and it may not be offset by current
deductions or net operating loss carryovers. In the unlikely event that
the Company's excess inclusion income is greater than its taxable income,
the Company's distribution would be based on the Company's excess inclusion
income. Although Resource REIT itself would be subject to a tax on any
excess inclusion income that would be allocable to a "disqualified
organization'' holding its shares, Resource REIT's by-laws provide that
disqualified organizations are ineligible to hold Resource REIT's shares.
Dividends paid by Resource REIT to organizations that generally are
exempt from federal income tax under Section 501(a) of the Code should not
be taxable to them as UBTI except to the extent that (i) purchase of shares
of Resource REIT was financed by "acquisition indebtedness,'' (ii) such
dividends constitute excess inclusion income or (iii) with respect to the
trusts owning more than 10% of the shares of Resource REIT, under certain
circumstances a portion of such dividend is attributable to UBTI. Because
an investment in Resource REIT may give rise to UBTI or trigger the filing
of an income tax return that otherwise would not be required, tax-exempt
organizations should give careful consideration to whether an investment in
Resource REIT is prudent.
Taxation of Dispositions of Shares of the Common Stock
In general, any gain or loss realized upon a taxable disposition of
shares will be treated as long-term capital gain or loss if the shares have
been held for more than twelve months and otherwise as short-term capital
gain or loss. However, any loss realized upon a taxable disposition of
shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received with respect to
such shares. All or a portion of any loss realized upon a taxable
disposition of Shares of Resource REIT may be disallowed if other shares of
Resource REIT are purchased (under a dividend reinvestment plan or
otherwise) within 30 days before or after the disposition.
Backup Withholding
Resource REIT generally is required to withhold and remit to the United
States Treasury 31% of the dividends or certain gross proceeds paid to any
shareholder who (i) fails to furnish Resource REIT with a correct taxpayer
identification number, (ii) is the subject of a notification received by
Resource REIT that such shareholder has underreported dividend or interest
income to the Internal Revenue Service, or (iii) under certain
circumstances, fails to certify to Resource REIT that he is not subject to
backup withholding. An individual's taxpayer identification number is his
social security number.
Debt Securities
The Debt Securities will be taxable as indebtedness. Interest and
original issue discount, if any, on a Debt Security will be treated as
ordinary income to a holder. Any special tax considerations applicable to
a Debt Security will be described in the related Prospectus Supplement.
Exercise of Securities Warrants
Upon a holder's exercise of a Securities Warrant, the holder will, in
general, (i) not recognize any income, gain or loss for federal income tax
purposes, (ii) receive an initial tax basis in the Security received equal
to the sum of the holder's tax basis in the exercised Securities Warrant
and the exercise price paid for such Security and (iii) have a holding
period for the Security received beginning on the date of exercise.
Sale or Expiration of Securities Warrants
If a holder of a Securities Warrant sells or otherwise disposes of such
Securities Warrant (other than by its exercise), the holder generally will
recognize capital gain or loss (long term capital gain or loss if the
holder's holding period for the Securities Warrant exceeds twelve months on
the date of disposition; otherwise, short term capital gain or loss) equal
to the difference between (i) the cash and fair market value of other
property received and (ii) the holder's tax basis (on the date of
disposition) in the Securities Warrant sold. Such a holder generally will
recognize a capital loss upon the expiration of an unexercised Securities
Warrant equal to the holder's tax basis in the Securities Warrant on the
expiration date.
State and Local Tax Considerations
State and local tax laws may not correspond to the federal income tax
principles discussed in this section. Accordingly, prospective investors
should consult their tax advisers concerning the state and local tax
consequences of an investment in Resource REIT.
LEGAL OPINIONS
Certain matters will be passed upon for the Company by Venable, Baetjer
and Howard, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements and schedules of the Company
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, which is incorporated in this Prospectus and
Registration Statement by reference, have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. Such financial statements
and schedules have been incorporated by reference herein in reliance upon
the reports of that firm and upon the authority of that firm as experts in
auditing and accounting.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................................ S- 2
Price Range of Common Stock and Dividends......... S-12
Capitalization.................................... S-13
Description of Preferred Stock.................... S-14
Federal Income Tax Considerations................. S-18
Underwriting...................................... S-22
Legal Matters..................................... S-22
</TABLE>
Prospectus
<TABLE>
<S> <C>
Available Information............................. 2
Incorporation of Certain Documents by Reference... 2
The Company....................................... 4
Use of Proceeds................................... 7
Ratio of Available Earnings to Fixed Charges...... 7
Description of Securities......................... 8
Plan of Distribution.............................. 15
Federal Income Tax Considerations................. 16
Legal Opinions.................................... 19
Experts........................................... 19
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT TOGETHER WITH THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS SUPPLEMENT TOGETHER WITH THE PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS SUPPLEMENT
TOGETHER WITH THE PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL.
2,100,000 SHARES
[RESOURCE LOGO]
RESOURCE MORTGAGE
CAPITAL, INC.
SERIES B % CUMULATIVE
CONVERTIBLE PREFERRED STOCK
Prospectus Supplement
, 1995
STIFEL, NICOLAUS & COMPANY
INCORPORATED
ROBERT W. BAIRD & CO.
INCORPORATED
SCOTT & STRINGFELLOW, INC.
STEPHENS INC.
