<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-11914
THORNBURG MORTGAGE ASSET CORPORATION
(Exact name of Registrant as specified in its Charter)
Maryland 85-0404134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
119 E. Marcy Street
Santa Fe, New Mexico 87501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (505) 989-1900
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No
(2) Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock ($.01 par value) 16,088,507 as of July 24, 1996
<PAGE>
THORNBURG MORTGAGE ASSET CORPORATION
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at June 30, 1996 and December 31, 1995 ............... 3
Statements of Operations for the three months and six months ended
June 30, 1996 and June 30, 1995 ..................................... 4
Statement of Stockholders' Equity for the three months and six months
ended June 30, 1996 ................................................. 5
Statements of Cash Flows for the three months and six months ended
June 30, 1996 and June 30, 1995 ..................................... 6
Notes to Financial Statements ....................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 20
Item 2. Changes in Securities ...................................... 20
Item 3. Defaults Upon Senior Securities ............................ 20
Item 4. Submission of Matters to a Vote of Security Holders ........ 20
Item 5. Other Information .......................................... 20
Item 6. Exhibits and Reports on Form 8-K ........................... 20
SIGNATURES ......................................................... 21
Exhibit Index........................................................ 22
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THORNBURG MORTGAGE ASSET CORPORATION
BALANCE SHEETS
(In thousands, except share data)
June 30, 1996 December 31, 1995
ASSETS
Adjustable-rate mortgage securities
(Notes 2, 3 and 4) $2,410,280 $1,995,287
Cash and cash equivalents 8,533 3,660
Accrued interest receivable 19,535 18,778
Prepaid expenses and other 458 260
---------- ----------
$2,438,806 $2,017,985
========== ==========
LIABILITIES
Reverse repurchase agreements
(Note 3 and 4) $2,190,096 $1,780,854
Other borrowings (Note 3 and 4) 16,152 18,446
Payable for securities purchased -- 42,990
Accrued interest payable 11,152 9,907
Dividends payable (Note 7) 6,375 4,632
Accrued expenses and other 722 679
---------- ----------
2,224,497 1,857,508
---------- ----------
STOCKHOLDERS' EQUITY
Common stock: par value $.01 per share;
50,000,000 shares authorized, 15,937,494
and 12,190,712 shares issued and
outstanding (Note 6) 159 122
Additional paid-in-capital 228,774 175,708
Available-for-sale securities:
Unrealized gain (loss) (Note 2) (19,496) (21,835)
Realized deferred hedging gain 5,446 7,009
Retained earnings (deficit) (574) (527)
---------- ----------
214,309 160,477
---------- ----------
$2,438,806 $2,017,985
========== ==========
See Notes to Financial Statements.
<PAGE>
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
Interest income $ 35,680 $ 27,998 $ 68,382 $ 53,878
Interest expense 28,455 25,541 54,967 50,262
------ ------ ------ ------
Net interest income 7,225 2,457 13,415 3,616
------ ------ ------ ------
Gain (loss) on sale of
adjustable-rate
mortgage securities -- -- 13 (659)
General and admin. expenses:
Management fee (Note 5) 405 344 764 689
Performance fee (Note 5) 508 -- 1,096 --
Other 143 120 268 232
----- ----- ----- -----
1,056 464 2,128 921
----- ----- ----- -----
Net income $ 6,169 $ 1,993 $ 11,300 $ 2,036
======== ======== ======== ========
Net income per share $ 0.42 $ 0.17 $ 0.83 $ 0.17
======== ======== ======== ========
Average number of shares
outstanding 14,844 11,873 13,589 11,827
======== ======== ======== ========
See Notes to Financial Statements.
<PAGE>
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months and Six Months Ended June 30, 1996
(In thousands, except share data)
Available-for-Sale Sec.
-----------------------
Realized
Common Additional Deferred Retained
Stock Paid-in Unrealized Gain From Earnings
Par Value Capital Gain(Loss) Hedging (Deficit) Total
--------- ------- ---------- --------- --------- --------
Balance,
December 31, 1995 $ 122 $ 175,708 $ (21,835) $ 7,009 $ (527) $ 160,477
Issuance of common
stock (Note 5) 2 3,595 -- -- -- 3,597
Available-for-Sale
Securities:
Fair value adj.,
net of amortization -- -- 2,010 -- -- 2,010
Deferred gain on
sale of hedges, net
of amortization -- -- -- (830) -- (830)
Net income -- -- -- -- 5,131 5,131
Dividends declared -
$0.40 per share -- -- -- -- (4,972) (4,972)
Balance,
------ --------- ---------- -------- ---------- ---------
March 31, 1996 124 179,303 (19,825) 6,179 (368) 165,413
Issuance of common
stock (Note 5) 35 49,471 -- -- -- 49,506
Available-for-Sale
Securities:
Fair value adj.,
net of amortization -- -- 329 -- -- 329
Deferred gain on
sale of hedges, net
of amortization -- -- -- (733) -- (733)
Net income -- -- -- -- 6,169 6,169
Dividends declared -
$0.40 per share -- -- -- -- (6,375) (6,375)
Balance,
------ --------- ---------- -------- ---------- ---------
June 30, 1996 $ 159 $ 228,774 $ (19,496) $ 5,446 $ (574) $ 214,309
====== ========= ========= ======== ========= =========
See Notes to Financial Statements.
<PAGE>
THORNBURG MORTGAGE ASSET CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- -------- -------- ---------
Operating Activities:
Net Income $ 6,169 $ 1,993 $ 11,300 $ 2,036
Adjustments to reconcile
net income to net cash
provided by oper
activities:
Amortization 3,480 771 6,778 1,025
Net (gain) loss from
investing activities -- -- (13) 659
Change in assets and liab.:
Accrued interest
receivable (2,363) (2,987) (757) (2,808)
Prepaid expenses and
other (6) (37) (73) (131)
Accrued interest
payable 2,329 465 1,245 1,515
Accrued expenses and
other (248) 355 43 322
Net cash provided by
------- ------- ------- -------
operating activities 9,361 560 18,523 2,618
------- ------- ------- -------
Investing Activities:
Available-for-sale assets:
Purchase of adj.-rate
mortgage assets (552,332) (150,144) (758,302) (187,496)
Proceeds on sales of
adj.-rate
mortgage assets -- 4,912 6,539 48,983
Principal payments on
adj.-rate
mortgage assets 113,769 29,931 220,582 57,477
Held-to-maturity assets:
Principal payments on
adj.-rate
mortgage assets 36,664 10,225 67,506 26,063
Purchase of interest rate
cap agreements (189) (218) (423) (218)
Net cash provided by
(used in) investing ------- ------- ------- -------
activities (402,088) (105,294) (464,098) (55,191)
------- ------- ------- -------
Financing Activities:
Net borrowings from
(repayments of) reverse
repurchase agreements 362,812 99,674 409,242 51,992
Net borrowings from
(repayments of) other
borrowings (10,098) (1,168) (2,294) (1,796)
Proceeds from common
stock issued 49,506 873 53,104 941
Dividends paid (4,972) (1,767) (9,604) (3,533)
Net cash provided by
(used in) financing ------- ------- ------- -------
activities 397,248 97,612 450,448 47,604
------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents 4,521 (7,122) 4,873 (4,969)
Cash and cash equivalents
at beginning of period 4,012 13,001 3,660 10,848
Cash and cash equivalents -------- -------- -------- ---------
at end of period $ 8,533 $ 5,879 $ 8,533 $ 5,879
======== ======== ======== =========
Supplemental disclosure of cash flow information
and non-cash activities are included in Note 3.
See Notes to Financial Statements
1
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NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents includes cash on hand and highly liquid
investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates their value.
Adjustable-rate mortgage securities
The Company's policy is to classify each of its assets as
available-for-sale as they are purchased and then monitor each asset
for a period of time, generally six to twelve months, prior to
making a determination whether the asset will be classified as
held-to-maturity. Management has made the determination that certain
securities are available-for-sale in order to be prepared to respond
to potential future opportunities in the market, to sell securities
in order to optimize the portfolio's total return and to retain its
ability to respond to economic conditions that require the Company
to sell assets in order to maintain an appropriate level of
liquidity. Management re-evaluates the classification of the
securities on a quarterly basis. All securities classified as
held-to-maturity are carried at the fair value of the security at
the time the designation is made and any fair value adjustment to
the cost basis as of the date of the classification is amortized
into interest income as a yield adjustment. All securities
designated available-for-sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity.
Premiums and discounts associated with the purchase of the
securities are amortized into interest income over the lives of the
securities using the effective yield method adjusted for the effects
of estimated prepayments.
Securities transactions are recorded on the date the securities are
purchased or sold. Purchases of new issue securities are recorded
when all significant uncertainties regarding the characteristics of
the securities are removed, generally shortly before settlement
date. Realized gains and losses on securities transactions are
determined on the specific identification basis.
Credit Risk
The Company has limited its exposure to credit losses on its
portfolio of adjustable-rate mortgage ("ARM") securities by only
purchasing securities that are either guaranteed by an agency of the
federal government or have an investment grade rating by at least
one of two nationally recognized rating agencies, Moody's or
Standard & Poor's. The Company monitors the delinquencies and losses
on the underlying mortgages and makes a provision for possible
credit losses at a level deemed appropriate by management to provide
for known losses as well as unidentified potential losses in its ARM
securities portfolio if the impairment is deemed to be other than
temporary. The provision is based on management's assessment of
numerous factors affecting its portfolio of ARM securities
including, but not limited to, current and projected economic
conditions, delinquency status, credit losses to date on underlying
mortgages and remaining credit protection. The provision is made by
reducing the cost basis of the individual security and the amount of
such write down reduces earnings. Provisions for credit losses do
not reduce taxable income and therefore do not effect the dividends
paid by the Company to shareholders in the period the provisions are
taken. Actual losses realized by the Company do reduce taxable
income in the period the actual loss is realized and would effect
the dividends paid to shareholders for that tax year.
Interest rate cap agreements
The Company purchases interest rate cap agreements (the "Cap
Agreements") to limit the Company's risks associated with the
lifetime or maximum interest rate caps of its ARM securities should
interest rates rise above specified levels. The Cap Agreements, in
effect, reduce the effect of the lifetime cap feature so that the
yield on the ARM securities will continue to rise in high interest
rate environments as the Company's cost of borrowings also continue
to rise. The Company's borrowings do not have a similar interest
rate cap limitation.
2
<PAGE>
The Cap Agreements classified as a hedge against held-to-maturity
securities are initially carried at their fair value as of the time
the Cap Agreements and the related securities are designated as
held-to-maturity with an adjustment to equity for any unrealized
gains or losses at the time of the designation. Any adjustment to
equity is thereafter amortized into interest income as a yield
adjustment in a manner consistent with the amortization of any
premium or discount. The Cap Agreements that are classified as a
hedge against available-for-sale securities are carried at fair
value with unrealized gains and losses reported as a separate
component of equity, consistent with the reporting of such
securities. The carrying value of the Cap Agreements are included in
ARM securities on the balance sheet. The amortization of the
carrying value of the Cap Agreements is included in interest income
as a contra item (i.e. expense) and, as such, reduces interest
income over the lives of the Cap Agreements.
Realized gains and losses resulting from the termination of the Cap
Agreements that are hedging assets classified as held-to-maturity
are deferred as an adjustment to the carrying value of the related
assets and are amortized into interest income over the terms of the
related assets. Realized gains and losses resulting from the
termination of such agreements that are hedging assets classified as
available-for-sale are initially reported in a separate component of
equity, consistent with the reporting of those assets, and are
thereafter amortized as a yield adjustment.
Interest rate swap agreements
The Company enters into interest rate swap agreements in order to
manage its interest rate exposure when financing its ARM assets.
Revenues and expenses from the interest rate swap agreements are
accounted for on an accrual basis and recognized as a net adjustment
to interest expense.
Income taxes
The Company has elected to be taxed as a Real Estate Investment
Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect
thereto. Accordingly, the Company will not be subject to Federal
income tax to the extent of its distributions to shareholders and as
long as certain asset, income and stock ownership tests are met.
Net income per share
Net income per share is computed by dividing net income by the
weighted average number of common shares and common share
equivalents (e.g., stock options), if dilutive, outstanding during
the period.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3
<PAGE>
Note 2. Adjustable-Rate Mortgage Securities and Interest Rate Cap Agreements
Investments in ARM securities consist of mortgage certificates
secured by ARMs primarily on single-family residential housing.
The following table pertains to the Company's ARM securities
classified as available-for-sale as of June 30, 1996 and December
31, 1995, which are carried at their fair value:
Available-for-Sale
--------------------------------------
(In thousands) June 30, 1996 December 31, 1995
--------------- -----------------
Amortized cost basis $ 1,922,561 $ 1,440,345
Gross unrealized gains 5,526 4,468
Gross unrealized losses (23,761) (24,800)
--------------- -----------------
Fair Value $ 1,904,326 $ 1,420,013
=============== =================
During the quarter ended June 30, 1996, the Company did not sell any
ARM securities. For the six-month period ended June 30, 1996, the
Company realized $61,000 in gains and $48,000 in losses on the sale of
$6.5 million of ARM securities, which were classified as
available-for-sale.
The following table pertains to the Company's ARM securities classified
as held-to-maturity as of June 30, 1996 and December 31, 1995, which
are carried at their amortized cost basis:
Held-To-Maturity
---------------------------------------
(In thousands) June 30, 1996 December 31, 1995
--------------- -----------------
Amortized cost basis $ 505,954 $ 575,274
Gross unrealized gains 5,192 3,746
Gross unrealized losses (4,814) (5,437)
--------------- ---------------
Fair Value $ 506,332 $ 573,583
=============== ===============
As of June 30, 1996, the Company had commitments to purchase $70.0
million of ARM securities.
The average effective yield on the ARM securities owned, including the
amortization of the net premium paid for the ARM securities and the Cap
Agreements as well as the impact of providing for potential credit
losses, was 6.43% as of June 30, 1996 and 6.73% as of December 31,
1995.
As of June 30, 1996 and December 31, 1995, the Company had purchased
Cap Agreements with a remaining notional amount of $1,935,505,000 and
$1,461,814,000, respectively. The notional amount of the Cap Agreements
purchased decline at a rate that is expected to approximate the
amortization of the ARM securities. Under these Cap Agreements, the
Company will receive cash payments should either the three-month or
six-month London InterBank Offer Rate ("LIBOR") increase above the
contract rates of the Cap Agreements which range from 7.50% to 12.50%.
The initial aggregate notional amount of the Cap Agreements declines to
approximately $1,207,457,000 over the period of the agreements, which
expire between 1999 and 2001. The Company purchased these Cap
Agreements by incurring a one-time fee, or premium. The premium is
amortized, or expensed, over the lives of the Cap Agreements and
decreases interest income on the Company's ARM securities during the
period of amortization. The Company has credit risk to the extent that
the counterparties to the Cap Agreements do not perform their
obligations under the Cap Agreements. If one of the counterparties does
not perform, the Company would not receive the cash to which it would
otherwise be entitled under the conditions of the Cap Agreement. In
order to mitigate this risk and achieve competitive pricing, the
Company has entered into Cap Agreements with six different
counterparties, three of which are rated AAA and three of which are
rated AA.
4
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Note 3. Reverse Repurchase Agreements and Other Borrowings
The Company has entered into reverse repurchase agreements to finance
most of its mortgage securities. The reverse repurchase agreements are
secured by the market value of the Company's mortgage securities and
bear interest rates that have historically moved in close relationship
to LIBOR.
As of June 30, 1996, the Company had outstanding $2,190,096,000 of
reverse repurchase agreements with a weighted average borrowing cost of
5.57% and a weighted average remaining maturity of 5.8 months and a
weighted average remaining term to the next repricing of 52 days. As of
June 30, 1996, $1,159,461,000 of the Company's borrowings were
variable-rate term reverse repurchase agreements with original
maturities that range from six months to two years. The interest rates
of these term reverse repurchase agreements are indexed to either the
one, three or six month LIBOR rate and reprice accordingly. The reverse
repurchase agreements at June 30, 1996 were collateralized by mortgage
securities with a carrying value of $2,301,012,000, including accrued
interest.
The Company has a line of credit agreement which provides for
short-term borrowings of up to $25,000,000 collateralized by the
Company's principal and interest receivables. At June 30, 1996, there
was no balance outstanding under this agreement.
As of June 30, 1996, the Company had financed most of its portfolio of
Cap Agreements with $16,152,000 of other borrowings which require
quarterly or semi-annual payments until the year 2000. These borrowings
have a weighted average fixed rate of interest of 7.91% and have a
weighted average remaining maturity of 3.6 years. The Cap Agreements at
June 30, 1996 were collateralized by mortgage securities with a
carrying value of $17,239,000, including accrued interest.
During the three-month and six-month periods ended June 30, 1996, the
total cash paid for interest was $25,483,000 and $53,018,000,
respectively.
Note 4. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 1996 and
December 31, 1995. FASB Statement No. 107, Disclosures About Fair Value
of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced
or liquidation sale.
June 30, 1996 December 31, 1995
------------------------ -------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
Assets: ----------- ----------- ----------- -----------
Adjustable-rate
mortgage securities $ 2,402,087 $ 2,405,454 $ 1,988,127 $ 1,990,217
Cap agreements 8,193 5,204 7,160 3,379
Liabilities:
Other borrowings 16,152 16,739 18,446 19,131
Swap agreements -- -- (33) 580
The above carrying amounts for assets are combined in the balance sheet
under the caption "adjustable-rate mortgage securities". The carrying
amount for assets categorized as available-for-sale is their fair value
whereas the carrying amount for assets held-to-maturity is their
unamortized cost.
<PAGE>
The fair values of the Company's ARM securities and Cap Agreements are
based on market prices provided by nationally recognized third-party
pricing services and certain dealers who make markets in these
financial instruments. The fair value of the Company's long-term debt
and interest rate swap agreements, which are off-balance sheet
financial instruments, are based on market values provided by dealers
who are familiar with the terms of the long-term debt and swap
agreements. The fair values reported reflect estimates and may not
necessarily be indicative of the amounts the Company could realize in a
current market exchange. Cash and cash equivalents, interest
receivable, reverse repurchase agreements and other liabilities are
reflected in the financial statements at their amortized cost, which
approximates their fair value because of the short-term nature of these
instruments.
Note 5. Common Stock and Stock Option Plan
On October 9, 1995, the Company entered into a one-year Sales Agency
Agreement with PaineWebber Incorporated. In accordance with the Sales
Agency Agreement, PaineWebber agreed to sell up to 1,174,969 additional
shares of the Company's common stock, representing 10% of aggregate
market value of the Company's common stock held by non-affiliates.
During the quarter ended June 30, 1996, the Company did not sell any
shares under this Sales Agency Agreement. During the six-month period
ended June 30, 1996, the Company sold 207,500 shares under this Sales
Agency Agreement and received net proceeds of $3,118,000.
During the quarter ended June 30, 1996, the Company issued 43,997
shares of common stock under its dividend reinvestment and stock
purchase plan and received net proceeds of $626,000. During the
six-month period ended June 30, 1996, the Company issued 75,851 shares
under this plan and received net proceeds of $1,105,000.
On April 23, 1996, the Company completed a public offering of 3,000,000
shares of its common stock. The Company received net proceeds of
$42,358,000. The offering was managed by PaineWebber Incorporated,
EVEREN Securities, Inc., Principal Financial Securities, Inc., Stifel
Nicolaus & Company, Incorporated and Thornburg Securities Corporation
(the "Underwriters"). On April 29, 1996, the Underwriters notified the
Company of their intent to exercise their option to purchase an
additional 450,000 shares to cover over-allotments which provided the
Company with additional net proceeds of $6,321,000.
The Company has adopted a Stock Option Plan which authorizes the
granting of options to purchase an aggregate of up to 1,000,000 shares,
but not more than 5% of the outstanding shares of the Company's common
stock. The exercise price for any options granted under the Stock
Option Plan may not be less than 100% of the fair market value of the
shares of the common stock at the time the option is granted. As of
June 30, 1996, the Company had 624,413 options outstanding at exercise
prices of $9.375 to $16.125 per share, 468,647 of which were
exercisable. The weighted average exercise price of the options
outstanding is $15.442 per share. The options become exercisable six
months after the date granted and will expire ten years after the date
granted. On June 25, 1996, Mr. Richard H. Keyes, a former director of
the Company, exercised 13,382 options at an average exercise price of
$14.98 for which the Company received proceeds of $201,000.
In the quarter ended March 31, 1996, the Company was required to adopt
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". This statement applies to transactions in
which an entity grants shares of its common stock, stock options or
other equity instruments to its employees and requires the entity to
compute a compensation cost based on the fair value of the award on the
date of the grant. The entity can either recognize this compensation
expense or continue to account for such awards using the intrinsic
value method of accounting while providing a pro forma disclosure of
net income and earnings per share based on the fair value method. The
Company has elected to continue to account for its stock option plan
using the intrinsic value method and in the quarter and six-month
period ended June 30, 1996, the compensation expense that would have
been recognized under the fair value method was immaterial.
<PAGE>
Note 6. Transactions with Affiliates
The Company has a Management Agreement (the "Agreement") with Thornburg
Mortgage Advisory Corporation ("the Manager"). Under the terms of this
Agreement, the Manager, subject to the supervision of the Company's
Board of Directors, is responsible for the day-to-day operations of the
Company and provides personnel and office space. The Agreement provides
for an annual review by the unaffiliated directors of the Board of
Directors of the Manager's performance under the Agreement.
The Company pays the Manager an annual base management fee based on
Average Net Invested Assets (generally defined as total assets less
total debts incurred to finance assets) payable monthly in arrears as
follows:
1% of the first $50 million of Average Net Invested assets, plus
3/4 of 1% of the portion between $50 million and $100 million, plus
5/8 of 1% of the portion between $100 million and $200 million, plus
1/2 of 1% of the portion between $200 million and $300 million, plus
3/8 of 1% of the portion above $300 million.
For the quarters ended June 30, 1996 and 1995, the Company paid the
Manager $405,000 and $344,000, respectively, in base management fees in
accordance with the terms of the Agreement. For the six-month periods
ended June 30, 1996 and 1995, the Company paid the Manager $764,000 and
$689,000, respectively, in base management fees.
The Manager is also entitled to earn performance based compensation in
an amount equal to 25% of the Company's annualized net income, before
performance based compensation, above an annualized Return on Equity
(generally defined as proceeds from issuance of common stock before
underwriter's discount and other costs of issuance plus retained
earnings), equal to the ten year U.S. Treasury Rate plus 1%. For the
quarter and six-month period ended June 30, 1996, the Manager earned a
performance fee in the amount of $508,000 and $1,096,000, respectively.
The Manager did not earn any performance fee in the quarter or
six-month period ended June 30, 1995.
Note 7. Dividends
On June 19, 1996, the Company declared a second quarter dividend of
$6,374,998 or $0.40 per share to be paid on July 10, 1996 to
shareholders of record as of June 28, 1996. For federal income tax
purposes such dividends are ordinary income to the Company's
shareholders.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Thornburg Mortgage Asset Corporation (the "Company") is a special purpose
financial institution that primarily invests in adjustable-rate mortgage (ARM)
securities, thereby indirectly providing capital to the single-family
residential housing market. ARM securities represent interests in pools of
adjustable-rate mortgage loans, which often include guarantees or other credit
enhancements against losses from loan defaults. While the Company is not a bank
or savings and loan, its business purpose, strategy, method of operation and
risk profile are best understood in comparison to such institutions. The Company
leverages its equity capital using borrowed funds, invest in ARM securities and
seeks to generate income based on the difference between the yield on its ARM
securities portfolio and cost of its borrowings. The corporate structure of the
Company differs from most lending institutions in that the Company is organized
for tax purposes as a real estate investment trust ("REIT") and, therefore,
generally passes through substantially all of its earnings to shareholders
without paying federal income tax at the corporate level.
The Company's mortgage securities portfolio may consist of either agency or
privately issued (generally publicly registered) mortgage pass-through
securities, multiclass pass-through securities, Collateralized Mortgage
Obligations ("CMOs") or short-term investments that either mature within one
year or have an interest rate that reprices within one year.
The Company's investment policy is to invest at least 70% of total assets in
High Quality ARM securities and short-term investments. High Quality means:
(1) securities which are rated within one of the two highest rating
categories by at least one of either Standard & Poor's Corporation or
Moody's Investors Service, Inc. (the "Rating Agencies");
(2) securities that are unrated but are guaranteed by the U.S. Government
or issued or guaranteed by an agency of the U.S. Government; or
(3) securities that are unrated or whose ratings have not been updated but
are determined to be of comparable quality (by the rating standards of
at least one of the Rating Agencies) to a High Quality rated mortgage
security.
The remainder of the Company's investment portfolio, comprising not more than
30% of total assets, may consist of Other Investment assets, which may include:
(1) loans secured by first liens on single-family residential properties
acquired for the purpose of securitization into investment grade
securities; or
(2) pass-through securities or CMOs backed by loans on single-family
residential properties or on multi-family, commercial or other real
estate-related properties if they are rated at least Investment Grade
at the time of purchase. "Investment Grade" generally means a security
rating of BBB or Baa or better by at least one of the Rating Agencies.
The Company does not invest in REMIC residuals or other CMO residuals and,
therefore does not create excess inclusion income or unrelated business taxable
income for tax exempt investors. Therefore, the Company is a mortgage REIT
eligible for purchase by tax exempt investors, such as pension plans, profit
sharing plans, 401(k) plans, Keogh plans and Individual Retirement Accounts
("IRAs").
<PAGE>
Financial Condition
At June 30, 1996, the Company held total assets of $2.439 billion, $2.410
billion of which consisted of ARM securities, as compared to $2.018 billion and
$1.995 billion, respectively, at December 31, 1995. This increase in assets, and
in particular ARM securities, is primarily related to the successful completion
of the Company's public offering of common shares which occurred in April of
1996. The Company received $48.7 million of capital from this latest public
offering, enabling the Company to continue its growth. At June 30, 1996, 94.6%
of the assets held by the Company were High Quality assets as compared with the
Company's investment policy of investing at least 70% of its total assets in
High Quality mortgage securities and cash and cash equivalents. All of the
mortgage securities currently owned by the Company are either in the form of
pass-through certificates or a class of a multi-class pass-through certificate
backed by adjustable-rate mortgages.
The following table presents a schedule of ARM securities owned at June 30, 1996
and December 31, 1995 classified by High Quality and Other Investment assets and
further classified by those issued by an agency of the U.S. Government and those
privately issued, generally publicly registered mortgage securities, and,
lastly, classified according to the rating categories as determined by at least
one of the Rating Agencies.
MORTGAGE SECURITIES BY ISSUER AND CREDIT RATING
(Amounts in thousands)
Assets Held as of Assets Held as of
June 30, 1996 December 31, 1995
--------------------- ---------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
-------- --------- -------- ----------
High Quality:
FHLMC/FNMA $1,232,387 51.1% $ 894,433 44.8%
Privately Issued:
AAA/Aaa Rating 290,921 12.1 165,196 8.3
AA/Aa Rating 756,006 31.4 784,633 39.3
Total Privately ---------- ----- ---------- ------
Issued 1,046,927 43.5 949,829 47.6
---------- ----- ---------- ------
Total High Quality 2,279,314 94.6 1,844,262 92.4
---------- ----- ---------- ------
Other Investment:
Privately Issued:
A Rating 115,929 4.8 134,970 6.8
BBB/Baa Rating 15,037 0.6 16,055 0.8
Total Other ---------- ----- ---------- ------
Investment 130,966 5.4 151,025 7.6
---------- ----- ---------- ------
Total Mortgage
Securities $2,410,280 100.0% $1,995,287 100.0%
========== ====== ========== ======
The following table classifies the Company's portfolio of ARM securities by type
of interest rate index.
MORTGAGE SECURITIES BY INDEX
(Amounts in thousands)
Assets Held as of Assets Held as of
June 30, 1996 December 31, 1995
-------------------- ---------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
Index: ---------- --------- ---------- ---------
One-month LIBOR $ 10,462 0.4 $ 10,229 0.5%
Six-month LIBOR 1,330,826 55.2 1,494,102 74.9
Six-month Certificate
of Deposit 27,635 1.1 32,349 1.6
One-year Constant
Maturity Treasury 888,088 36.9 385,066 19.3
11th District Cost
of Funds 153,269 6.4 73,541 3.7
---------- ------ ---------- ------
$2,410,280 100.0% $1,995,287 100.0%
========== ====== ========== ======
The portfolio had a current weighted average coupon of 7.28% at June 30, 1996.
If the portfolio were "fully indexed" the weighted average coupon would be
7.83%, based upon the current composition of the portfolio and the applicable
indices at June 30, 1996.
For the month of June 1996, the current yield of the ARM securities portfolio
was 6.43%. The current yield includes the impact of the amortization of
applicable premiums and discounts, the cost of credit provisions, the cost of
hedging and the amortization of deferred gains from hedging activity.
<PAGE>
During the quarter and six month period ended June 30, 1996, the Company
purchased $552.3 million and $758.3 million, respectively, of ARM securities,
all of which were High Quality assets. As a result of purchasing only High
Quality ARM securities thus far in 1996, the Company's High Quality assets as a
percent of total assets has reached 94.6%, the highest level reported by the
Company since the Company became fully invested after its initial public
offering in 1993. Although the Company continues to evaluate the merits of Other
Investments and will most likely purchase Other Investments in the future, the
Company has purchased only High Quality investments in 1996 based on its
evaluation of each available asset's expected total return, taking into
consideration price, credit risk, liquidity and other factors deemed appropriate
by the Company for asset selection.
Over the six-month period ending June 30, 1996, the composition of the Company's
ARM securities by index has changed, reflecting an increased percentage of
investments in ARM securities indexed to the one-year constant maturity treasury
index and a decreased percentage of investments in six-month LIBOR indexed ARM
securities. This change is largely a reflection of the types of ARM securities
that have been either produced or available for sale during this six-month
period, with new LIBOR ARM production down markedly from prior years. This
change is also a reflection of the Company's strategy of acquiring a larger
percentage of fully indexed ARM securities with lifetime maximum interest rates
above 11%. Most of the LIBOR based ARM securities production does not meet the
Company's current maximum lifetime interest rate requirement. As a result of the
Company's effort, the average maximum lifetime interest rate cap for the
Company's portfolio has increased to 11.24% at June 30, 1996, as compared to
10.71% at December 31, 1995.
For the quarter ended June 30, 1996, the Company's mortgage securities paid down
at an approximate average annualized constant prepayment rate of 31%, slightly
below the average rate during the first quarter of 1996, but still above
long-term expectations. The Company believes that this was primarily due to the
lag between the decline in short-term and long-term interest rates and the delay
to the next repricing date of the Company's ARM securities which resulted in
higher mortgage rates for ARM borrowers relative to fixed-rate mortgage
alternatives. These conditions generally create attractive opportunities for
consumers to refinance ARMs into fixed-rate mortgages. Toward the end of the
first quarter, long-term interest rates increased and short-term interest rates
remained substantially the same. The Company expects this change in interest
rates will slow down the prepayments of the Company's ARM securities. During May
and June the rate of prepayment on the Company's ARM securities portfolio did
begin to show signs of slowing down, but because of the apparent pipeline of
loans already in the process of being re-financed at the time rates rose late in
the first quarter, the full impact of an expected slow down in the prepayment of
ARM loans was not realized by the Company in the second quarter. Preliminary
prepayment data for July suggests a further slowing of prepayments in the months
ahead. The constant prepayment rate assumption is used to calculate the
estimated yield to maturity on the mortgage securities. In the event that actual
prepayment experience exceeds the assumption due to sustained increased
prepayment activity, the Company would have to amortize its premiums over a
shorter time period, resulting in a reduced yield to maturity on the Company's
ARM securities. Conversely, if actual prepayment experience is less than the
assumed constant prepayment rate, the premium would be amortized over a longer
time period, resulting in a higher yield to maturity. The Company monitors its
prepayment experience on a monthly basis in order to adjust the amortization of
the net premium as appropriate.
The fair value of the Company's portfolio of ARM securities rose during the
quarter ended June 30, 1996. As of June 30, 1996, the Company's portfolio of ARM
securities available-for-sale, including the applicable Cap Agreements, had a
net unrealized loss of $18,235,000. At December 31, 1995, the Company's
portfolio of ARM securities available-for-sale had an unrealized loss of
$20,332,000.
The Company has purchased Cap Agreements in order to limit its exposure to risks
associated with the lifetime interest rate caps of its ARM securities should
interest rates rise above specified levels. The Cap Agreements act to reduce the
effect of the lifetime or maximum interest rate cap limitation. The Cap
Agreements purchased by the Company will, in effect, allow the yield on the ARM
securities to continue to rise in a high interest rate environment just as the
Company's cost of borrowings would continue to rise, since the borrowings do not
have any interest rate cap limitation. At June 30, 1996, the Cap Agreements
owned by the Company had a remaining notional balance of $1.935 billion with an
average final maturity of 3.6 years, as compared to a remaining notional balance
of $1.461 billion with an average final maturity of 4.3 years at December 31,
1995. Pursuant to the terms of the Cap Agreements, the Company will receive cash
payments if the three month or six month LIBOR index increases above certain
specified levels which range from 7.50% to 12.50% and average approximately
9.65%. The fair market value of these Cap Agreements also tends to increase when
general market interest rates increase and decrease when market interest rates
decrease, helping to partially offset changes in the market value of the
Company's ARM securities.
<PAGE>
Results of Operations For the Three Months Ended June 30, 1996
For the quarter ended June 30, 1996, the Company's net income was $6,169,000 or
$0.42 per share based on a weighted average of 14,844,227 shares outstanding as
compared to $1,993,000 or $0.17 per share based on a weighted average of
11,873,557 shares outstanding for the quarter ended June 30, 1995. Net interest
income is comprised of the interest income earned on mortgage investments less
interest expense from borrowings. Net interest income for the quarter totaled
$7,225,000 as compared to $2,457,000 for the same period in 1995. The Company
incurred operating expenses of $1,056,000 for the quarter, consisting
principally of the base management fee of $405,000, a performance fee of
$508,000 and other miscellaneous expenses of $143,000 as compared to operating
expenses of $464,000 for the same period in 1995, consisting principally of the
base management fees of $344,000 and other miscellaneous expenses of $120,000.
There was no performance based fee paid in the comparable period in 1995.
The primary reason for the rise in the Company's net interest income in the
second quarter of 1996 as compared to the same quarter in 1995 was the combined
effect of an increase in the yield on the Company's portfolio of ARM securities
and a decrease in the Company's cost of funds. Net interest income increased by
$4,768,000 in the second quarter of 1996 as compared to the same period of 1995.
Of this increase, $2,621,000 is the result of the lower rate on the Company's
cost of funds and $732,000 is the result of the higher yield on the Company's
ARM securities portfolio and other interest earning assets for a combined
favorable rate variance of $3,352,000. The increased average size of the Company
in the second quarter of 1996 as compared to the same period in 1995 also
contributed to higher net interest income in the amount of $1,415,000.
As presented in the table below, the Company's ARM securities portfolio
generated a yield of 6.36% during the second quarter of 1996 as compared to
6.19% for the second quarter of 1995. This increase of 0.17% is primarily
attributable to the increase in the weighted average coupon on the portfolio
that rose to 7.28% as of June 30, 1996 from 6.77% as of June 30, 1995. The
benefit to net interest income from this 0.51% increase in the weighted average
coupon was partially offset by the acceleration of the amortization of the net
premium paid for the ARM securities as a result of the increased prepayment of
ARM securities experienced by the Company during the second quarter of 1996 as
compared to the same period in 1995.
The Company's cost of funds during the quarter ended June 30, 1996 decreased to
5.60% from 6.24% for the same quarter of 1995, primarily as a result of lower
short-term interest rates available to the Company for financing purposes. The
combined effect of the higher yield on the Company's ARM securities portfolio
and the lower cost of funds increased the Company's net spread to 0.75% for the
second quarter of 1996 from a negative 0.05% for the second quarter of 1995. The
Company's yield on net interest earning assets, which includes the impact of
shareholders' equity, rose to 1.29% for the second quarter of 1996 from 0.54%
for the second quarter of 1995.
The increase in the Company's operating expenses is primarily the result of
achieving sufficient earnings for the Company's shareholders such that a
performance based fee was earned by the Manager. During the second quarter of
1995, the Manager did not earn a performance based fee. In order for the Manager
to earn a performance fee, the rate of return to the shareholders, as defined in
the Management Agreement, must exceed the average ten-year US Treasury rate
during the quarter plus 1%. During the second quarter of 1996, the Manager
earned a performance fee of $508,000. During the three month period ended June
30, 1996, after paying this performance fee, the Company's return on equity was
11.22%.
The following table reflects the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized for
the quarter ended June 30, 1996 and June 30, 1995:
<PAGE>
AVERAGE BALANCE AND RATE TABLE
(Amounts in thousands)
For the Quarter Ended For the Quarter Ended
June 30, 1996 June 30, 1995
----------------------- ----------------------
Average Effective Average Effective
Balance Rate Balance Rate
Interest Earning Assets: ---------- --------- ---------- ---------
Adjustable-rate mortgage
securities $2,232,603 6.36% $1,799,815 6.19 %
Cash and cash equivalents 15,612 4.83% 9,849 5.76
---------- ------ ---------- -------
2,248,215 6.35 1,809,664 6.19
---------- ------ ---------- -------
Interest Bearing Liabilities:
Borrowings 2,034,159 5.60 1,638,529 6.24
---------- ------ ---------- -------
Net Interest Earning Assets
and Spread $ 214,056 0.75% $ 171,135 (0.05)%
========== ====== ========== =======
Yield on Net Interest Earning Assets (1) 1.29% 0.54%
====== =======
(1) Yield on Net Interest Earning Assets is computed by dividing
annualized net interest income by the average daily balance of interest
earning assets.
Results of Operations For the Six Months Ended June 30, 1996
For the six month period ended June 30, 1996, the Company's net income was
$11,300,000 or $0.83 per share based on a weighted average of 13,589,537 shares
outstanding as compared to $2,036,000 or $0.17 per share based on a weighted
average of 11,827,398 shares outstanding for the six month period ended June 30,
1995. Net interest income for the first six months of 1996 totaled $13,415,000
as compared to $3,616,000 for the same period in 1995. The Company incurred
operating expenses of $2,128,000 for the period, consisting principally of the
base management fee of $764,000, a performance fee of $1,096,000 and other
miscellaneous expenses of $268,000 as compared to operating expenses of $921,000
for the same period in 1995, consisting principally of the base management fees
of $689,000 and other miscellaneous expenses of $232,000. There was no
performance based fee paid in the comparable period in 1995.
As discussed above, the primary reason for the rise in the Company's net
interest income in the first half of 1996 as compared to the same period in 1995
was the combined effect of an increase in the yield on the Company's portfolio
of ARM securities and a decrease in the Company's cost of funds. Net interest
income increased by $9,800,000 in the first half of 1996 as compared to the same
period of 1995. Of this increase, $4,786,000 is the result of the lower rate on
the Company's cost of funds and $3,036,000 is the result of the higher yield on
the Company's ARM securities portfolio and other interest earning assets for a
combined favorable rate variance of $7,822,000. The increased average size of
the Company in the first half of 1996 as compared to the same period in 1995
also contributed to higher net interest income in the amount of $1,978,000.
As presented in the table below, the Company's ARM securities portfolio
generated a yield of 6.41% during the first half of 1996 as compared to 6.06%
for the first half of 1995. This increase of 0.35% is primarily attributable to
the increase in the weighted average coupon on the portfolio as discussed
earlier. Again, the benefit to net interest income from this 0.51% increase in
the weighted average coupon was partially offset by the acceleration of the
amortization of the net premium paid for the ARM securities as a result of the
increased prepayment of ARM securities experienced by the Company during the
first half of 1996 as compared to the same period in 1995.
The Company's cost of funds during the six month period ended June 30, 1996
decreased to 5.66% from 6.26% for the same period of 1995, primarily as a result
of lower short-term interest rates available to the Company for financing
purposes. The combined effect of the higher yield on the Company's ARM
securities portfolio and the lower cost of funds increased the Company's net
spread to 0.74% for the first half of 1996 from a negative 0.20% for the first
half of 1995. The Company's yield on net interest earning assets, which includes
the impact of shareholders' equity, rose to 1.26% for the first half of 1996
from 0.41% for the same period of 1995.
<PAGE>
The increase in the Company's operating expenses is primarily the result of
achieving sufficient earnings for the Company's shareholders such that a
performance based fee was earned by the Manager. During the first half of 1995,
the Manager did not earn a performance based fee as a result of the earnings
level of the Company. In order for the Manager to earn a performance fee, the
rate of return to the shareholders, as defined in the Management Agreement, must
exceed the average ten-year US Treasury rate during the quarter plus 1%. During
the first half of 1996, the Manager earned a performance fee of $1,096,000.
During the six month period ended June 30, 1996, after paying this performance
fee, the Company's return on equity was 11.16%.
The following table reflects the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized for
the six month periods ended June 30, 1996 and June 30, 1995:
AVERAGE BALANCE AND RATE TABLE
(Amounts in thousands)
For the Six Month For the Six Month
Period Ended Period Ended
June 30, 1996 June 30, 1995
----------------------- ----------------------
Average Effective Average Effective
Balance Rate Balance Rate
Interest Earning Assets: ---------- --------- ---------- ---------
Adjustable-rate mortgage
securities $2,122,639 6.41% $1,764,675 6.06 %
Cash and cash equivalents 14,349 5.19 14,393 5.83
---------- ------ ---------- -------
2,136,988 6.40 1,779,068 6.06
---------- ------ ---------- -------
Interest Bearing Liabilities:
Borrowings 1,942,333 5.66 1,606,985 6.26
---------- ------ ---------- -------
Net Interest Earning Assets
and Spread $ 194,655 0.74% $ 172,083 (0.20)%
========== ====== ========== =======
Yield on Net Interest Earning Assets (1) 1.26% 0.41 %
====== =======
(1) Yield on Net Interest Earning Assets is computed by dividing annualized net
interest income by the average daily balance of interest earning assets.
Liquidity and Capital Resources
The Company's primary source of funds for the quarters ended June 30, 1996 and
1995 consisted of reverse repurchase agreements, which totaled $2.190 billion
and $1.654 billion at the respective quarter ends. The Company's other
significant sources of funds for the quarters ended June 30, 1996 and 1995
consisted of payments of principal and interest from the ARM securities in the
amounts of $186.4 million and $67.8 million, respectively. In the future, the
Company expects its primary sources of funds will continue to consist of monthly
payments of principal and interest on its ARM securities portfolio and of
borrowed funds under reverse repurchase agreement transactions with one to
twelve month maturities and possibly from asset sales as needed. The Company's
liquid assets generally consist of unpledged ARM securities, cash and cash
equivalents.
The borrowings incurred at June 30, 1996 had a weighted average interest cost of
5.59%, a weighted average original term to maturity of 8.6 months and a weighted
average remaining term to maturity of 6.1 months. As of June 30, 1996, $1.159
billion of the Company's borrowings were variable-rate term reverse repurchase
agreements with original maturities that range from three months to two years.
The interest rates of these term reverse repurchase agreements are indexed to
either the one, three or six-month LIBOR rate and reprice accordingly.
<PAGE>
The Company has borrowing arrangements with twenty-four different investment
banking firms and commercial banks and at June 30, 1996 had borrowed funds under
reverse repurchase agreements with fourteen of these firms. Because the Company
borrows funds based on the fair value of its ARM securities, the Company's
borrowing ability could be adversely affected as a result of either a
significant increase in short-term interest rates or a credit downgrade of a
mortgage pool or a mortgage pool insurer, either of which would reduce the fair
value of the Company's ARM securities. If such a decrease in fair value was
significant enough, it could require the Company to sell assets in order to
maintain liquidity. For the quarter ended June 30, 1996, the Company had
adequate cash flow, liquid assets and unpledged collateral with which to meet
its margin requirements. Further, the Company has always maintained sufficient
liquidity to meet its cash requirements from its primary sources of funds and
believes it will be able to do so in the future.
The Company has a Dividend Reinvestment and Stock Purchase Plan (the "Plan")
designed to provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
to purchase additional shares at a 3% discount to the current market price of
the common stock, as defined in the Plan. As a result of participation in the
Plan, the Company issued 43,997 new shares of common stock and received proceeds
of $626,000 of new equity capital during the second quarter of 1996. During the
six-month period ended June 30, 1996, the Company issued 75,851 shares under
this plan and received net proceeds of $1,105,000.
On October 9, 1995, the Company entered into a one-year Sales Agency Agreement
with PaineWebber Incorporated. In accordance with the Sales Agency Agreement,
PaineWebber agreed to sell up to 1,174,969 additional shares of the Company's
common stock, representing 10% of aggregate market value of the Company's common
stock held by non-affiliates. During the quarter ended June 30, 1996, the
Company did not sell any shares under this Sales Agency Agreement. During the
six-month period ended June 30, 1996, the Company sold 207,500 shares under this
Sales Agency Agreement and received net proceeds of $3,118,000.
On April 23, 1996, the Company completed a public offering of 3,000,000 shares
of its common stock. The Company received net proceeds of $42,358,000. The
offering was managed by PaineWebber Incorporated, EVEREN Securities, Inc.,
Principal Financial Securities, Inc., Stifel Nicolaus & Company, Incorporated
and Thornburg Securities Corporation (the "Underwriters"). On April 29, 1996,
the Underwriters notified the Company of their intent to exercise their option
to purchase an additional 450,000 shares to cover over-allotments which provided
the Company with additional net proceeds of $6,321,000.
Effects of Interest Rate Changes
Changes in interest rates impact the Company's earnings in various ways. While
the Company only invests in ARM securities, rising short-term interest rates may
temporarily negatively affect the Company's earnings and conversely falling
short-term interest rates may temporarily increase the Company's earnings. This
impact can occur for several reasons and may be mitigated by portfolio
prepayment activity as discussed below. First, the Company's borrowings will
react to changes in interest rates sooner than the Company's ARM securities
because the weighted average next re-pricing date of the borrowings is usually a
shorter time period. Second, interest rates on ARM loans are generally limited
to an increase of either 1% or 2% per adjustment period (commonly referred to as
the periodic cap) and the Company's borrowings do not have similar limitations.
Third, the Company's ARM securities lag changes in the indices due to the notice
period provided to ARM borrowers when the interest rate on their loan is
scheduled to change. The periodic cap only effects the Company's earnings when
interest rates move by more than 1% per six-month period or 2% per year.
The rate of prepayment on the Company's mortgage securities may decrease if
interest rates rise, or if the difference between long-term and short-term
interest rates increases. Decreased prepayments would cause the Company to
amortize the premiums paid for its mortgage securities slower than otherwise,
resulting in an increased yield on its mortgage securities. Therefore, in rising
interest rate environments where prepayments are declining, not only would the
interest rate on the ARM securities portfolio increase to re-establish a spread
over the higher interest rates, but the yield would also rise due to slower
prepayments. The combined effect could significantly mitigate other negative
effects that rising short-term interest rates might have on earnings.
Conversely, the rate of prepayment on the Company's mortgage securities may
increase if interest rates decline, or if the difference between long-term and
short-term interest rates diminishes. Increased prepayments would cause the
Company to amortize the premiums paid for its mortgage securities faster than
otherwise, resulting in a reduced yield on its mortgage securities.
Additionally, to the extent proceeds of prepayments cannot be reinvested at a
rate of interest at least equal to the rate previously earned on such mortgage
securities, the Company's earnings may be adversely affected.
<PAGE>
Lastly, because the Company only invests in adjustable-rate mortgage assets and
approximately 10% of such mortgage assets are purchased with shareholders'
equity, the Company's earnings over time will tend to increase following periods
when short-term interest rates have risen and decrease following periods when
short-term interest rates have declined. This is because the financed portion of
the Company's portfolio of ARM securities will, over time, reprice to a spread
over the Company's cost of money while the portion of the Company's portfolio of
ARM securities that are purchased with shareholder's equity will generally have
a higher yield in a higher interest rate environment and a lower yield in a
lower interest rate environment.
Other Matters
The Company calculates its Qualified REIT Assets, as defined in the Code, to be
99.5% of its total assets, as compared to the federal tax requirement that at
least 75% of its total assets must be Qualified REIT Assets. The Company also
calculates that 99.5% of its 1996 revenue qualifies for the 75% source of income
test and 100% of its 1996 revenue qualifies for the 95% source of income test
under the REIT rules. Furthermore, the Company's revenues in 1996, subject to
the 30% income limitation under the REIT rules amounted to 0.09% of total
revenue. The Company also met all REIT requirements regarding the ownership of
its common stock and the distributions of its net income. Therefore, as of June
30, 1996, the Company believed that it was in full compliance with the REIT tax
rules and that it would continue to qualify as a REIT under the provisions of
the Code.
The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. If the
Company were to become regulated as an investment company, then the Company's
use of leverage would be substantially reduced. The Investment Company Act
exempts entities that are "primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretation of the staff of the SEC,
in order to qualify for this exemption, the Company must maintain at least 55%
of its assets directly in Qualifying Interests. In addition, unless certain
Mortgage Securities represent all the certificates issued with respect to an
underlying pool of mortgages, such Mortgage Securities may be treated as
securities separate from the underlying Mortgage Loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. As of June
30, 1996, the Company calculates that it is in compliance with this requirement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
At June 30, 1996, there were no pending legal proceedings to which
the Company was a party or of which any of its property was subject.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on
May 2,1996.
(c) The following matters were voted on at the Annual Meeting:
(1) Election of Directors
Votes
-----------------------
Nominee For Withheld
-------------- ---------- ----------
James H. Lorie 11,411,651 83,272
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
See "Exhibit Index."
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized,
THORNBURG MORTGAGE ASSET CORPORATION
Dated: July 24, 1996 By:/s/ H. Garrett Thornburg, Jr.
--------------------------------------
H. Garrett Thornburg, Jr.,
Chairman of the Board of Directors and
Chief Executive Officer
(authorized officer of registrant)
Dated: July 24, 1996 By:/s/ Richard P. Story
-------------------------------------
Richard P. Story,
Chief Financial Officer and Treasurer
(principal accounting officer)
<PAGE>
Exhibit Index
Sequentially
Numbered
Exhibit Number Exhibit Description Page
-------------- ----------------------------------------- -----------
10 Form of 1992 Stock Option Plan as amended
May 2, 1996 23
THORNBURG MORTGAGE ASSET CORPORATION
AMENDED AND RESTATED
1992 STOCK OPTION PLAN
as Amended September 15, 1995; May 2, 1996
THORNBURG MORTGAGE ASSET CORPORATION
AMENDED AND RESTATED
1992 STOCK OPTION PLAN
(as Amended September 15, 1995 and May 2, 1996)
1. PURPOSE. The Plan is intended to provide incentive to key employees,
officers, directors and others expected to provide significant services to the
Corporation, including the employees, officers and directors of the Manager, to
encourage proprietary interest in the Corporation, to encourage such key
employees to remain in the employ of the Corporation and the Manager, to attract
new employees with outstanding qualifications, and to afford additional
incentive to others to increase their efforts in providing significant services
to the Corporation.
2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Class I Participant" shall mean the any director of the
Corporation who is also appointed to serve on the Committee and who at the time
of his appointment qualifies as a "disinterested person" under Rule
16b-3(c)(2)(i) promulgated under the Securities Exchange Act of 1934, as
amended. This Plan is intended to provide option grants to Class I Participants
pursuant to the formula set forth in Section 7(a) and thereby to permit Class I
Participants to act as disinterested persons with respect to grants to Class II
Participants.
(c) "Class II Participant" shall mean all Eligible Persons, except
the Class I Participants.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the committee appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" shall mean the Common Stock, par value $0.01 per
share, of the Corporation.
(g) "Corporation" shall mean Thornburg Mortgage Asset Corporation,
a Maryland corporation.
(h) "Disability" shall mean the condition of an Employee or member of
the Board who is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months.
(i) "Eligible Persons" shall mean officers, directors and employees of
the Corporation or the Manager and other persons expected to provide significant
services to the Corporation. For purposes of this Plan, a director (other than a
member of the Committee) or a consultant, vendor, customer, or other provider of
significant services to the Corporation shall be deemed to be an Employee, and
will be eligible to receive Non-statutory Stock Options only after finding the
value of the services rendered or to be rendered to the Corporation is at least
equal to the value of the options being granted.
(j) "Employee" shall mean an individual who is employed (within the
meaning of Code Section 3401 and the regulations thereunder) by the Corporation
or the Manager.
(k) "Exercise Price" shall mean the price per Share of Common Stock,
determined by the Board or the Committee, at which an Option may exercised.
(l) "Fair Market Value" shall mean the value of one (1) Share of
Common Stock, determined as follows:
(1) If the Shares are traded on an exchange, the price at
which Shares traded at the close of business on the date of valuation;
(2) If the Shares are traded over-the-counter on the NASDAQ
System, the closing price if one is available, or the mean between thebid and
asked prices on said System at the close of business on the date of
valuation; and
(3) If neither (1) nor (2) applies, the fair market value as
determined by the Board or the Committee in good faith.Such determination
shall be conclusive and binding on all persons.
(m) "Incentive Stock Option" shall mean an option described in Section
422(b) of the Code.
(n) "Manager" shall mean Thornburg Mortgage Advisory Corporation,
a Delaware corporation.
(o) "Non-statutory Stock Option" shall mean an option not described in
Section 422(b) or 423(b) of the Code.
(p) "Option" shall mean any stock granted pursuant to the Plan.
(q) "Optionee" shall mean any Eligible Person who has received an
Option.
(r) "Plan" shall mean the Thornburg Mortgage Asset Corporation 1992
Stock Option Plan, as it may be amended from time to time.
(s) "Purchase Price" shall mean the Exercise Price times the number of
Shares with respect to which an Option is exercised.
(t) "Retirement" shall mean the voluntary termination of employment by
an Employee upon the attainment of age sixty-five (65) and the completion of not
less than twenty (20) years of service with the Corporation, any Subsidiary or
the Manager.
(u) "Share" shall mean one (1) share of Common Stock, adjusted in
accordance with Section 10 of the Plan (if applicable).
(v) "Subsidiary" shall mean any corporation at least fifty percent
(50%) of the total combined voting power of which is owned by the Corporation or
by another Subsidiary.
(w) "Termination of Employment" shall mean the time when the
employee-employer relationship or directorship between the Optionee and the
Corporation is terminated for any reason, with or without cause, including but
not limited to any termination by resignation, discharge, death or retirement;
provided, however, Termination of Employment shall not include a termination
where there is a simultaneous reemployment of the Optionee by the Corporation.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including but not
limited to the question of whether any Termination of Employment was for cause
and all questions of whether particular leaves of absence constitute
Terminations of Employment. With respect to Incentive Stock Options, a leave of
absence shall constitute a Termination of Employment if, and to the extent that,
such leave of absence interrupts employment for the purposes of Section
222(a)(2) of the Code and the then applicable regulations and revenue rulings
thereunder.
3. EFFECTIVE DATE. The Plan was adopted by the Board on September 29,
1992, subject to the approval by the Corporation's shareholders. The Plan was
submitted to shareholders for their approval within twelve months after receipt
of Board approval. The effective date of the Plan shall be deemed to be
September 29, 1993.
4. ADMINISTRATION. The Plan shall be administered by a Committee of the
Board which shall consist of two or more members of the Board each of whom
qualify as a "disinterested person" as defined in Rule 16b-3(c)(2)(i)
promulgated under the Securities and Exchange Act of 1934. The Board shall
appoint one of the members of the Committee as Chairman of the Committee. The
Committee shall hold meetings at such times and places as it may determine. Acts
of a majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. The Committee shall from time to time at its discretion select the
Class II Participants who are to be granted Options, determine the number of
Shares to be optioned to each Class II Participant and designate such Options
such as Incentive Stock Options or Non-statutory Stock Options, except that no
Incentive Stock Option may be granted to a non-Employee of the Corporation. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted thereunder shall be final. No member of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted thereunder.
5. PARTICIPATION.
(a) Eligibility. Only Eligible Persons shall be eligible to receive
grants of Options under the Plan.
(b) Limitation of Ownership. No options shall be granted under the Plan
to any person who would after such grant beneficially own more than 9.8% of the
outstanding shares of Common Stock of the Corporation.
(c) Stock Ownership. For purposes of (b) above, in determining stock
ownership an Employee shall be considered as owning the stock owned, directly or
indirectly, by or for his brothers, sisters, spouses, ancestors and lineal
descendants. Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately
by or for its shareholders, partners or beneficiaries. Stock with respect to
which any person holds an Option shall be considered to be owned by such person.
(d) Outstanding Stock. For purposes of (b) above, "outstanding shares"
shall include all stock actually issued and outstanding immediately after the
grant of the Option to the Optionee. With respect to the stock ownership of any
Optionee, "outstanding shares" shall include shares authorized for issue under
outstanding Options held by such Optionee, but not options held by any other
person.
6. STOCK. The stock subject to Options granted under the Plan shall be
Shares of the Corporation's authorized but unissued or reacquired Common Stock.
The aggregate number of Shares which may be issued upon exercise of Options
under the Plan shall not exceed 1,000,000 shares. The number of Shares subject
to Options outstanding at any time shall not exceed the number of Shares
remaining available for issuance under the Plan and shall not at any time exceed
5% of the total outstanding shares of the Corporation's Common Stock. In the
event that any outstanding Option for any reason expires or is terminated, the
Shares allocable to the unexercised portion of such Option may again be made
subject to any Option. The limitations established by this Section 6 shall be
subject to adjustment in the manner provided in Section 10 hereof upon the
occurrence of an event specified therein.
7. TERMS AND CONDITIONS OF OPTIONS.
(a) Class I Participants.
(i) Initial Awards. Awards under this Section 7(a) shall be
made to Class I Participants only. Each Class I Participant shall automatically
be granted a Non-statutory Stock Option to purchase 13,333 shares of Common
Stock upon the date such person is initially appointed to the Committee.
(ii) Periodic Awards. Subject to the limitations set forth in
Sections 5 and 6, without any further action by the Board of Directors
or the Committee, each Class I Participant shall be granted
Non-statutory Options to purchase:
a) Fixed offering. As of the pricing date of any firm
commitment public offering or direct placement of the Common
Stock, a number of shares of Common Stock equal to the total
number of shares of Common Stock sold under the offering
(including shares sold under the underwriter's overallotment)
multiplied by .002; and
b) Continuous Offering. As of the last business day on which
the New York Stock Exchange is open for trading during each
fiscal quarter of the Corporation, a number of shares of
Common Stock equal to the total number of shares of Common
Stock sold by the Corporation during such fiscal quarter
multiplied by .002, excluding (i) Options granted pursuant to
the sale of Common Stock during the quarter under section a)
above, (ii) any shares of Common Stock issued under the
Corporation's Dividend Reinvestment and Stock Purchase Plan or
(iii) pursuant to the exercise of Options granted under the
Plan.
This amendment shall be applicable to the Common Stock issued under the
Corporation's firm commitment public offering with a pricing date of
April 23, 1996, except that Options granted pursuant to such offering
shall be exercisable at the Fair Market Value of the Common Stock on
the date of this amendment. The provisions of Section 7(a)(i) and (ii)
of the Plan shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employee Retirement
Income Security Act, or the rules thereunder.
(Amd. 5/2/96)
(iii) Exercise Price. Each Option granted to Class I Participants
shall be exercisable at the Fair Market Value of the Common Stock on the date
of grant.
(iv) Option Period and Adjustments. Each Option granted to a
Class I Participant shall become exercisable commencing six (6) months after the
date of grant and shall expire ten (10) years thereafter. Options granted to
Class I Participants shall be subject to adjustment as provided in Section 10
provided that such adjustment and any action by the Board or the Committee with
respect to the Plan and such Options satisfies the requirements of Rule 16b-3
and does not cause any member of the Committee to be disqualified as a
"disinterested person."
(b) Class II Participants.
(i) Stock Option Agreements. Options granted to Class II
Participants shall be evidenced by written stock option agreements in such form
as the Committee shall from time to time determine. Such agreements shall comply
with and be subject to the terms and conditions set forth below.
(ii) Number of Shares. Each Option granted to a Class II
Participant shall state the number of Shares to which it pertains and shall
provide for the adjustment thereof in accordance with the provisions of Section
10 hereof.
(iv) Exercise Price. Each Option granted to a Class II
Participant shall state the Exercise Price. The Exercise Price for any Option
shall not be less than the Fair Market Value on the date of grant.
(v) Medium and Time of Payment. The Purchase Price for each
Option granted to a Class II Participant shall be payable in full in United
States dollars upon the exercise of the Option; provided, however, that if the
applicable Option Agreement so provides the Purchase Price may be paid (i) by
the surrender of Shares in good form for transfer, owned by the person
exercising the Option and having a Fair Market Value on the date of exercise
equal to the Purchase Price, or in any combination of cash and Shares, as long
as the sum of the cash so paid and the Fair Market Value of the Shares so
surrendered equal the Purchase Price, (ii) by cancellation of indebtedness owed
by the Corporation to the Optionee, (iii) with a full recourse promissory note
executed by the Optionee, or (iv) any combination of the foregoing. The interest
rate and other terms and conditions of such note shall be determined by the
Committee. The Committee may require that the Optionee pledge his or her Shares
to the Corporation for the purpose of securing the payment of such note. In no
event shall the stock certificate(s) representing such Shares by released to the
Optionee until such note shall be been paid in full. In the event the
Corporation determines that it is required to withhold state or Federal income
tax as a result of the exercise of an Option, as a condition to the exercise
thereof, an Employee may be required to make arrangements satisfactory to the
Corporation to enable it to satisfy such withholding requirements.
(c) Term and Nontransferability of Options. Each Option shall state the
time or times which all or part thereof becomes exercisable, subject to the
following restrictions. No Option shall be exercisable (i) until at least six
(6) months after the date of grant and (ii) after the expiration of ten (10)
years from the date it was granted. No Option shall be exercisable except by the
Optionee. No Option shall be assignable or transferable, except pursuant to a
qualified domestic relations order as defined in Code Section 414(p) or, in the
event of the Optionee's death, by will or the laws of descent and distribution.
(d) Termination of Employment, Except by Death, Disability or
Retirement. Upon any Termination of Employment for any reason other than his or
her death, Disability or Retirement, such Optionee shall have the right, subject
to the restrictions of (c) above, to exercise the Option at any time within
three (3) months after termination of employment, but only to the extent that,
at the date of termination of employment, the Optionee's right to exercise such
Option had accrued pursuant to the terms of the applicable option agreement and
had not previously been exercised; provided, however, that if the Optionee was
terminated as an Employee or removed as a member of the Board for cause (as
defined in the applicable option agreement or as determined by the Committee)
any Option not exercised in full prior to such termination shall be canceled.
For this purpose, the employment relationship shall be treated as continuing
intact while the Optionee is on military leave, sick leave or other bona fide
leave of absence (to be determined in the sole discretion of the Committee). The
foregoing notwithstanding, in the case of an Incentive Stock Option, employment
shall not be deemed to continue beyond the ninetieth (90th) day after the
Optionee's reemployment rights are guaranteed by statute or by contract.
(e) Death of Optionee. If an Optionee dies while an Employee or within
three (3) months after any Termination of Employment other than for cause, and
has not fully exercised the Option, then the Option may be exercised in full,
subject to the restrictions of (c) above, at any time within twelve (12) months
after the Optionee's death, by the executors or administrators of his or her
estate or by any person or persons who have acquired the Option directly from
the Optionee by bequest or inheritance, but only to the extent that, at the date
of death, the Optionee's right to exercise such Option had accrued and had not
been forfeited pursuant to the terms of the applicable Option Agreement and had
not previously been exercised.
(f) Disability of Optionee. Upon Termination of Employment for reason
of Disability, such Optionee shall have the right, subject to the restrictions
of (c) above, to exercise the Option at any time within twelve (12) months after
termination of employment, but only to the extent that, at the date of
termination of employment, the Optionee's right to exercise such Option had
accrued pursuant to the terms of the applicable Option Agreement and had not
previously been exercised.
(g) Retirement of Optionee. Upon Retirement, an Optionee shall have the
right, subject to the restrictions of (c) above, to exercise the Option at any
time within three (3) months after termination of employment, but only to the
extent that, at the date of termination of employment, the Optionee's right to
exercise such Option had accrued pursuant to the terms of the applicable Option
Agreement and had not previously been exercised.
(h) Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property), distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 10 hereof.
(i) Modification, Extension and Renewal of Option. Within the
limitations of the Plan, and only with respect to Options granted to Class II
Participants, the Committee may modify, extend or renew outstanding Options or
accept the cancellation of outstanding Options (to the extent not previously
exercised) for the granting of new Options in substitution therefor. The
Committee may not modify, extend or renew any Option granted to any Class I
Participant unless such modification, extension or renewal shall satisfy the
requirements of Rule 16b-3. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair any rights or
obligations under any Option previously granted.
(j) Other Provisions. The stock option agreements authorized under the
Plan may contain such other provisions not inconsistent with the terms of the
Plan (including, without limitation, restrictions upon the exercise of the
Option) as the Committee shall deem advisable.
8. LIMITATION ON VALUE OF EXERCISABLE SHARES. In the case of Incentive
Stock Options granted hereunder, the aggregate Fair Market Value (determined as
of the date of the grant thereof) of the Shares with respect to which Incentive
Stock Options become exercisable by any employee of the Company for the first
time during any calendar year (under this Plan and all other plans maintained by
the Corporation, its parent or its Subsidiaries) shall not exceed $100,000.
9. TERM OF PLAN. Options may be granted pursuant to the Plan until
the expiration of ten (10) years from the effective date of the Plan.
10. RECAPITALIZATIONS. Subject to any required action by shareholders,
and provided that all requirements of Rule 16b-3 are satisfied, the number of
Shares covered by the Plan as provided in Section 6 hereof, the number of Shares
covered by each outstanding Option and the Exercise Price thereof shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a subdivision or consolidation of Shares or the payment of
a stock dividend (but only of Common Stock) or any other increase or decrease in
the number of issued Shares effected without receipt of consideration by the
Corporation. Subject to any required action by stockholders, if the Corporation
is the surviving corporation in any merger or consolidation, each outstanding
Option shall pertain and apply to the securities to which a holder of the number
of Shares subject to the Option would have been entitled. In the event of a
merger or consolidation in which the Corporation is not the surviving
corporation, the date of exercisability of each outstanding Option shall be
accelerated to a date prior to such merger or consolidation, unless the
agreement of merger or consolidation provides for the assumption of the Option
by the successor to the Corporation. To the extent that the foregoing
adjustments relate to securities of the Corporation, such adjustments shall be
made by the Committee, whose determination shall be conclusive and binding on
all persons. Except as expressly provided in this Section 10, the Optionee shall
have no rights by reason of subdivision or consolidation of shares of stock of
any class, the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any dissolution,
liquidation, merger or consolidation or spin-off of assets or stock of another
corporation, and any issue by the Corporation of shares of stock of any class,
or securities convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power to the Corporation to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business assets.
11. SECURITIES LAW REQUIREMENTS.
(a) Legality of Issuance. The issuance of any Shares upon the exercise
of any Option and the grant of any Option shall be contingent upon the
following:
(1) the Corporation and the Optionee shall have taken all
actions required to register the Shares under the Securities
Act of 1933, as amended (the "Act"), and to qualify the Option
and the Shares under any and all applicable state securities
or "blue sky" laws or regulations, or to perfect an exemption
from the respective registration and qualification
requirements thereof;
(2) any applicable listing requirement of any stock exchange
on which the Common Stock is listed shall have been satisfied;
and
(3) any other applicable provision of state or federal law
shall have been satisfied.
(b) Restrictions on Transfer. Regardless of whether the offering and
sale of Shares under the plan has been registered under the Act or has been
registered or qualified under the securities laws of any state, the Corporation
may impose restrictions on the sale, pledge or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Corporation and its counsel, such restrictions are necessary
or desirable in order to achieve compliance with the provisions of the Act, the
securities laws of any state or any other law. In the event that the sale of
Shares under the Plan is not registered under the Act but an exemption is
available which required an investment representation or other representation,
each Optionee shall be required to represent that such Shares are being acquired
for investment, and not with a view to the sale or distribution thereof, and to
make such other representations as are deemed necessary or appropriate by the
Corporation and its counsel. Any determination by the Corporation and its
counsel in connection with any of the matters set forth in this Section 11 shall
be conclusive and binding on all persons. Stock certificates evidencing Shares
acquired under the Plan pursuant to an unregistered transaction shall bear the
following restrictive legend and such other restrictive legends as are required
or deemed advisable under the provisions of any applicable law.
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES
WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO
SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT."
(c) Registration or Qualification of Securities. The Corporation may,
but shall not be obligated to, register or qualify the issuance of Options
and/or the sale of Shares under the Act or any other applicable law. The
Corporation shall not be obligated to take any affirmative action in order to
cause the issuance of Options or the sale of Shares under the plan to comply
with any law.
(d) Exchange of Certificates. If, in the opinion of the Corporation and
its counsel, any legend placed on a stock certificate representing shares sold
under the Plan is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
12. AMENDMENT OF THE PLAN. The Board may from time to time, with
respect to any Shares at the time not subject to Options, suspend or discontinue
the plan or revise or amend it in any respect whatsoever except that, without
the approval of the Corporation's stockholders, no such revision or amendment
shall:
(a) Materially increase the benefits accruing to participants under the Plan;
(b) Materially increase the number of Shares subject to the Plan;
(c) Materially modify the requirements as to eligibility for participation in
the Plan; or
(d) Amend this Section 12 to defeat its purpose.
Notwithstanding the foregoing, the Board may revise or amend the Plan
without stockholder approval in order to ensure the Plan's compliance with the
Code, any successor provisions of the Code or any other applicable law.
13. APPLICATION OF FUNDS. The proceeds received by the Corporation
from the sale of Common Stock pursuant to the exercise of an Option will be used
for general corporate purposes.
14. EXECUTION. To record the adoption of the Amended and Restated Plan
in the form set forth above by the Board as of May 2, 1996, the Corporation has
caused this Plan to be executed in the name and on behalf of the Corporation
where provided below by an officer of the Corporation thereunto duly authorized.
THORNBURG MORTGAGE ASSET CORPORATION
By:_____________________________
H. Garrett Thornburg, Jr.,
Chairman
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<LEGEND>
This schedule contains summary financial information extracted from June 30,
1996 Quarterly Report on Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
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<PERIOD-END> JUN-30-1996
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<RECEIVABLES> 19,535
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<TOTAL-LIABILITY-AND-EQUITY> 2,438,806
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<TOTAL-REVENUES> 68,395
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<INTEREST-EXPENSE> 54,967
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