<PAGE> 1
PROSPECTUS SUPPLEMENT This filing is made pursuant
- --------------------- to Rule 424(b)(5) under
(To Prospectus dated May 15, 1997) the Securities Act of
1933 in connection with
Registration No. 333-16799
800,000 SHARES
[THORNBURG LOGO]
THORNBURG MORTGAGE ASSET CORPORATION
COMMON STOCK
----------
All of the shares of Common Stock offered hereby are being sold by
Thornburg Mortgage Asset Corporation (the "Company").
The Common Stock is quoted on the New York Stock Exchange (the "NYSE")
under the symbol "TMA." On May 14, 1997, the last reported sales price of the
Common Stock as reported by the NYSE was $19.75 per share. See "Price Range of
Common Stock and Dividends."
SEE "RISK FACTORS" STARTING ON PAGE S-12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF
COMMON STOCK OFFERED HEREBY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ..................... $ 19.50 $ 0.6338 $ 18.8662
- -------------------------------------------------------------------------------------
Total ......................... $15,600,000 $507,040 $15,092,960
- -------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option (3) ... $17,940,000 $583,096 $17,356,904
=====================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $63,000, which are payable by the
Company.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
120,000 additional shares of the Common Stock on the same terms and
conditions as set forth above to cover over-allotments, if any. See
"Underwriting."
----------
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter, and
subject to its right to reject any orders in whole or in part. It is expected
that delivery of the Common Stock will be made in New York City on or about May
20, 1997.
----------
Sutro & Co. Incorporated
The date of this Prospectus Supplement is May 15, 1997
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
NASDAQ MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
-------------------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT, THE
RELATED PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN AND
THEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
SECTION 21E OF THE EXCHANGE ACT, WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS
SUPPLEMENT CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
S-2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including notes thereto) appearing
elsewhere in this Prospectus Supplement and the accompanying Prospectus or
incorporated herein or therein by reference. Unless otherwise indicated, the
information contained in this Prospectus Supplement assumes that the
Underwriters' over-allotment will not be exercised.
THE COMPANY
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
utilizes its equity capital and borrowed funds to invest in ARM securities and
seeks to generate income based on the difference between the yield on its ARM
securities portfolio and the 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 or state income tax at the corporate level.
INVESTMENT STRATEGY
Since beginning operations, the Company has acquired its ARM securities
in the secondary market from investment banking firms, mortgage originators and
mortgage conduits. The Company believes that acquiring already-existing ARM
securities (or at some future date, ARM loans) through multiple sources in the
secondary market is more cost-effective than investing the capital and resources
necessary to compete in the cyclical business of originating new ARM loans. By
acquiring ARM securities (or ARM loans) in the secondary market, the Company is
able to operate profitably on narrower net interest margins and with less risk
than would generally be true for traditional lending institutions with higher
levels of operating expense. The Company believes that its business strategies
offer several advantages over traditional lending institutions, including:
o reduced risk of credit loss due to 99.7% of the Company's entire ARM
securities portfolio being at least Investment Grade (as defined
below) as of March 31, 1997;
o reduced overhead expense because the Company does not operate a
deposit gathering network and new loan origination system;
o prudent utilization of leverage through the maintenance of an
equity-to-assets ratio of between 8% and 10%, when measured on a
historical cost basis; and
o as a result of its REIT status, the general elimination of income
taxes at the corporate level.
The Company has had discussions with mortgage originators who have
expressed interest in originating and securitizing loans for the Company's
investment portfolio, and has established a program to expand its ARM securities
acquisition program to include the purchase of newly-created ARM securities from
a network of correspondent lenders who will originate and securitize mortgage
loans for sale to the Company, based on the Company's specific pricing and
underwriting criteria. Eventually, the Company expects to expand this program to
include the direct acquisition of ARM loans for securitization by the Company.
Acquiring ARM securities or ARM loans for future securitization is expected to
benefit shareholders because the Company would have: (i) additional sources of
new whole-pool ARM assets; (ii) greater control over the types of ARM loans
originated, which are expected to include loans at reduced interest rates to
borrowers, thereby reducing the likelihood of prepayment; (iii) the ability to
acquire such ARM loans at lower prices, so that the amount of premium to be
amortized will be reduced in the event of prepayment; and (iv) potentially
higher yielding investments in its portfolio. See "Investment Guidelines."
The Company does not invest in collateralized mortgage obligation
("CMO") residuals or REMIC residuals and therefore, the income distributed by
the Company does not create unrelated business taxable income or excess
inclusion income for tax exempt investors. Accordingly, the Company is designed
to be a mortgage REIT whose shares are eligible for purchase by tax exempt
investors, such as pension plans, profit sharing plans, 401(k) plans, Keogh
plans and Individual Retirement Accounts ("IRAs"). This
S-3
<PAGE> 4
will continue to be true should the Company begin acquiring ARM loans for
securitization.
INVESTMENT GUIDELINES
The Company's strategy is to invest at least 70% of its assets in ARM
securities that are either issued or guaranteed by an agency of the U.S.
Government or are rated within one of the two highest ratings categories by
either Standard and Poor's Corporation ("S&P") or Moody's Investor Services,
Inc. ("Moody's") (collectively the "Rating Agencies"), or are of equivalent
credit quality as determined by the Manager (as defined below) and approved by
the Company's Board of Directors ("High Quality" assets). The Company's ARM
securities portfolio can consist of pass-through certificates, multi-class
pass-through certificates, CMOs or other short-term investments that either
mature within one year or have an interest rate that reprices within one year.
As of March 31, 1997, approximately 95.3% of the Company's ARM securities were
High Quality assets.
The remainder of the Company's ARM portfolio can consist of assets that
include single-family ARM loans (which are unrated and acquired for purposes of
creating ARM securities consistent with the Company's objective of minimizing
credit risk), or pass-through certificates and CMOs backed by loans on
single-family, multi-family, commercial or other real estate related properties
that are rated at the time of purchase at least Investment Grade by one of the
Rating Agencies or are determined to be of equivalent credit quality as
determined by the Manager and approved by the Company's Board of Directors
("Other Investment" assets). Investment Grade generally means a security rating
of BBB or Baa or better by S&P or Moody's, respectively. In order to minimize
the higher level of credit and liquidity risk of Other Investment assets, the
Company limits its investments in these securities and attempts to diversify its
portfolio of Other Investment assets. As of March 31, 1997, approximately 4.7%
of the Company's total ARM securities were Other Investment assets.
While Other Investment assets have a greater degree of credit and
liquidity risk, the Company believes that, on balance, there are several
benefits to be derived from investments in Other Investment assets. First, the
Company believes that the Other Investment assets it acquires will have higher
total returns than other investment opportunities at the time of the
acquisition. Second, the Company seeks to benefit from potential future credit
rating upgrades on its Other Investment assets as the more senior classes of
these securities pay off, or as a result of the appreciation of underlying real
estate values. As the mortgages prepay, the underlying credit enhancement
obtained with respect to the more junior classes of ARM securities may increase
as a percentage of the remaining balance. As the credit enhancement grows, the
more junior classes of ARM securities may become eligible for upgrade. Also,
appreciating real estate values typically help minimize losses on the ARM
securities so that over time the delinquency and loss experience can be better
than had been assumed initially by the Rating Agencies. Since inception, the
Company has benefited from credit upgrades, as approximately $178 million of its
investments have been upgraded while approximately $16 million have been
downgraded. After a security has been upgraded, particularly if the upgrade is
from an Other Investment asset to a High Quality asset, the Company benefits in
several ways: (i) the proceeds received from borrowing against such security is
increased; (ii) the financing rate declines; (iii) the value of the security
increases; (iv) the net interest margin increases; and (v) the return on equity
improves.
Another potential benefit to shareholders arising out of investments in
Other Investment assets is related to the Company's ability to purchase ARM
loans for investment, with the intention of using a portion of the Company's
capital to facilitate securitizing them into rated securities that meet the
Company's investment guidelines. The Company intends to acquire and securitize
these ARM loans for its own investment portfolio as opposed to acquiring ARM
loans for resale. While the Company has yet to undertake any securitization
activities of this type, it continues to evaluate opportunities in this sector
of the market. In order to facilitate its securitization efforts, in certain
instances the Company may pledge collateral and assume the credit risk for up to
approximately 3% of the original principal balance of the securitized ARM loans.
DESCRIPTION OF ASSETS
As of March 31, 1997, the Company held total assets of $3.274 billion,
$3.218 billion of which consisted of ARM securities. The following table
presents a schedule of ARM securities owned by the Company at March 31, 1997 and
December 31, 1996, and classified as either High Quality or Other Investment
assets and further classified as: (i) either assets issued by an agency of the
U.S. Government or privately issued (generally publicly registered ARM
securities); and (ii) assets classified according to the applicable rating
categories as determined by the Rating Agencies.
S-4
<PAGE> 5
ARM SECURITIES BY ISSUER AND CREDIT RATING
(dollars in thousands)
<TABLE>
<CAPTION>
Assets Held as of Assets Held as of
March 31, 1997 December 31, 1996
---------------------------- -----------------------------
Carrying Percentage of Carrying Percentage of
Value Portfolio Value Portfolio
----- --------- ----- ---------
<S> <C> <C> <C> <C>
HIGH QUALITY:
FHLMC/FNMA ............................ $1,956,986 60.8% $1,474,842 54.1%
Privately Issued:
AAA/Aaa Rating ................... 262,962 8.2 260,031 9.5
AA/Aa Rating ..................... 847,394 26.3 862,727 31.6
---------- ------ --------- -----
Total Privately Issued ....... 1,110,356 34.5 1,122,758 41.1
---------- ----- ---------- -----
Total High Quality ........... 3,067,342 95.3 2,597,600 95.2
---------- ----- ---------- -----
OTHER INVESTMENT:
Privately Issued:
A Rating ......................... 127,051 4.0 106,531 3.9
BBB/Baa Rating ................... 13,808 0.4 14,017 0.5
BB/Ba Rating ..................... 9,420 0.3 9,727 0.4
---------- ----- ---------- -----
Total Other Investment ....... 150,279 4.7 130,275 4.8
---------- ----- ---------- -----
Total ARM Securities ......... $3,217,621 100.0% $2,727,875 100.0%
========== ===== ========== =====
</TABLE>
As of March 31, 1997, the Company had reduced the cost basis of its ARM
securities due to potential future credit losses in the amount of $1,162,000,
including a provision for credit losses of $190,000 recorded during the quarter
ended March 31, 1997. During the first quarter of 1997, the Company incurred
actual credit losses of $18,000 on one senior class of a multi-class
pass-through security that is secured by single family loans. However, it is
possible that these losses will be reimbursed at some future date if future
deposits to a reserve fund credit enhancement account exceed future loss
experience. Although the Company limits its exposure to credit losses by
acquiring primarily securities that are rated AA or better, the Company also
invests in Other Investments that generally have a higher yield than securities
rated AA or better, currently less than 5% of the Company's total assets, which
are more likely to experience credit losses from time to time. The Company
believes that the total return on the Other Investments purchased by the Company
provide a yield that is commensurate with the added credit exposure. The
Company's analysis of losses on loans underlying certain ARM securities owned by
the Company relative to the remaining credit support protecting the Company from
credit losses indicates that there is the possibility of future losses. At this
time, the Company is providing for potential future losses on three securities
that have an aggregate carrying value of $17.9 million, which is less than 0.6%
of the Company's total portfolio of ARM securities. All three of these
securities are performing and have varying degrees of remaining credit support
that mitigate the Company's exposure to potential future credit losses.
S-5
<PAGE> 6
The following table classifies the Company's portfolio of ARM
securities by type of interest rate index.
ARM SECURITIES BY INDEX
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
------------------------- --------------------------
Carrying Portfolio Carrying Portfolio
Value Mix Value Mix
----------- -------- ---------- ---------
<S> <C> <C> <C> <C>
INDEX:
One-month LIBOR . . . . . . . . . . . . . . . . $ 10,902 0.3% $ 10,646 0.4%
Six-month LIBOR . . . . . . . . . . . . . . . . 1,219,121 37.9 1,252,884 45.9
Six-month Certificate of Deposit .... . . . . . 70,027 2.2 69,348 2.6
Six-month Constant Maturity Treasury. . . . . . 44,840 1.4 8,841 0.3
One-year Constant Maturity Treasury . . . . . . 1,645,794 51.1 1,238,892 45.4
11th District Cost of Funds . . . . . . . . . . 226,937 7.1 147,264 5.4
----------- ----- ---------- -----
$ 3,217,621 100.0% $2,727,875 100.0%
=========== ===== ========== =====
</TABLE>
FUNDING
The Company finances its portfolio of ARM securities primarily through
a form of borrowings known as reverse repurchase agreements. In a reverse
repurchase agreement transaction, the Company agrees to sell an ARM security and
simultaneously agrees to repurchase the same ARM security one to six months
later at a higher price with the price differential representing the interest
expense. These transactions constitute collateralized borrowings for the
Company, based on the market value of the Company's assets. The Company's
reverse repurchase borrowing rate approximates the LIBOR, with maturities
generally ranging from one to six months. As of March 31, 1997, the Company had
incurred total reverse repurchase borrowings of $2.936 billion with an average
term to repricing of 99 days (which includes the effect of interest rate swaps).
As of March 31, 1997, the Company had incurred total borrowings of $2.949
billion, with an average term to repricing of 103 days (which includes the
effect of interest rate swaps) and a weighted average remaining term to maturity
of 3.8 months.
As of March 31, 1997, $1.261 billion of the Company's borrowings were
variable-rate term reverse repurchase agreements, representing 43% of total
reverse repurchase agreements. Variable-rate term repurchase agreements are
borrowing agreements that are contractually committed for periods of three
months to two years and have at least one repricing during the term. The
interest rates of these term reverse repurchase agreements are indexed to either
the one, three or six-month LIBOR and reprice accordingly.
By utilizing the Company's ARM securities as collateral to borrow
funds, the Company is able to purchase additional ARM securities or ARM loans
such that its equity-to-assets ratio, when measured on a historical cost basis,
is approximately 9%, and as an operating policy shall in no event be less than
8%, when measured on a historical cost basis. This ratio of equity-to-assets is
greater than the levels of most other financial institutions who are engaged in
mortgage lending, including most commercial banks, savings and loans, FNMA and
FHLMC.
The Company has borrowing arrangements with twenty-two different
financial institutions consisting primarily of large investment banking firms
and commercial banks. At March 31, 1997, the Company had borrowed funds under
reverse repurchase agreements with fourteen of these firms. Because the Company
borrows money based on the fair value of its ARM securities (as determined by
the Company and its lenders) and because increases in short-term interest rates
can negatively impact the valuation of ARM securities, the Company's borrowing
ability could be limited, and lenders may initiate margin calls in the event of
increases in short-term interest rates. Additionally, certain of the Company's
ARM securities are rated less than AA or Aa by the Rating Agencies, have less
liquidity and are more difficult to value than ARM securities that are rated AA,
Aa, or higher. Certain other ARM securities which are rated AA or Aa, or higher
by the Rating Agencies derive their credit rating based on a mortgage pool
insurer's rating. As a result of (i) changes in interest rates, (ii) a downgrade
of an ARM security due to poor credit performance, or (iii) a downgrade of a
mortgage pool insurer, the Company may find it difficult to borrow against
certain assets and, therefore, in difficult market environments, may be required
to sell certain ARM securities in order to maintain liquidity. If required,
these sales could be made
S-6
<PAGE> 7
at prices lower than the carrying value of the assets, which would result in
losses to the Company. Since the Company's inception, which includes a period in
1994 in which the value of the Company's ARM securities declined dramatically,
the Company has never been required to sell assets to meet its borrowing
obligations.
HEDGING STRATEGY
The Company makes use of hedging strategies to protect its borrowing
costs from exceeding the maximum lifetime rate cap on its ARM securities. ARM
securities are generally subject to periodic and lifetime or maximum interest
rate caps. Generally, the Company hedges risks associated with the lifetime or
maximum interest rate caps, but not the risks associated with periodic caps
because the Company believes that the cost of hedging periodic caps is expensive
relative to the potential benefits, and because, over time, the interest rate on
its ARM securities will adjust to a spread over the then current financing
rates. However, when borrowing costs reach a point where they exceed a
mortgage's lifetime rate cap, the only way to re-establish a spread over
financing rates would be for borrowing costs to decline. The Company reduces the
risk associated with the lifetime caps by purchasing interest rate cap
agreements, which function like insurance policies that pay the Company when
market interest rates exceed a contractually specified interest rate level. For
example, at March 31, 1997, the Company had purchased interest rate cap
agreements with a notional balance of $2.538 billion and a weighted average
remaining maturity of 2.9 years. Pursuant to the terms of these 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 13.00% and
average 10.17%. This compares to a range of lifetime interest rate caps on the
Company's ARM securities from 9.28% to 16.34% with an average of approximately
11.60%. The fair market value of these interest rate cap agreements also tends
to increase when general market interest rates increase, and decrease when
market interest rates decrease, thereby helping to partially offset changes in
the market value of the Company's ARM securities resulting from changes in
interest rates.
As of March 31, 1997, the Company had entered into eight interest rate
swap agreements having an aggregate notional balance of $1.040 billion and a
weighted average remaining term of 6.0 months. In accordance with these
agreements, the Company will pay a fixed rate of interest during the term of
these agreements and receive a payment that varies monthly with the one-month
LIBOR rate. As a result of entering into these agreements, the Company has
reduced the interest rate variability of its cost to finance its ARM securities
portfolio by increasing the average period until the next repricing of its
borrowings from 44 days to 103 days.
EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates impact the Company's earnings in various
ways. While the Company only invests in ARM assets, 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. The periodic cap only affects the Company's earnings
when the interest rate indices move by more than 1% per six-month period or 2%
per year. 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 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 reduce its amortization of the premiums paid for its mortgage
securities, resulting in an increased yield on its mortgage securities.
Therefore, in rising interest rate environments when prepayments are generally
declining, not only would the interest rate on the ARM securities portfolio
increase to re-establish a spread over the higher interest rate 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 ARM 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 ARM securities faster than
otherwise, resulting in a reduced yield on its mortgage securities.
Additionally, to the extent proceeds of prepayments cannot be reinvested at an
interest rate spread at least equal to the spread previously earned on such ARM
securities, the Company's earnings may be adversely affected.
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<PAGE> 8
Lastly, because the Company only invests in ARM assets and
approximately 9% 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.
Changes in interest rates also affect the fair value of the Company's
ARM securities and certain liabilities. In general, when interest rates rise the
Company's ARM securities will likely decrease in value initially, and then
recover a portion of their value as their interest rate coupons adjust to market
interest rates, but may not recover all of the decline in value because the
adjusted interest rate coupons will be closer to the life time caps on the ARM
securities. 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 a significant increase in short-term interest rates. A substantial
decrease in the fair value of the Company's ARM securities could require the
Company to sell assets in order to maintain liquidity. Additionally, when
interest rates rise, the Company's hedging instruments and other borrowings will
likely increase in value. When interest rates decline, the Company will likely
experience a converse impact on the fair market of its ARM securities and
certain liabilities. Changes in interest rates have little if any effect on the
fair value of the Company's cash, cash equivalents or reverse repurchase
agreement due to the short term nature of these financial instruments.
REIT STATUS
As of March 31, 1997, the Company calculates its Qualified REIT Assets,
as defined in the Code, to be 99.3% 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 99.6% of its 1997 first quarter
revenue qualifies for the 75% source of income test and 100% qualifies for the
95% source of income test under the REIT rules. Furthermore, the Company's
revenues for the first quarter of 1997, subject to the 30% income limitation
under the REIT rules amounted to 0.01% 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 March 31, 1997, 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.
MANAGEMENT
The day-to-day operations of the Company are managed by Thornburg
Mortgage Advisory Corporation (the "Manager"), subject to the supervision of the
Board of Directors. The Company's Board of Directors consists of seven
directors, five of whom are not affiliated with the Manager, who meet on a
quarterly basis and oversee the operations of the Company. Mr. H. Garrett
Thornburg, Jr., has been the Chairman of the Board and a director of the Company
since the Company commenced operations in June 1993. Mr. Thornburg is also
Chairman of the Board, Chief Executive Officer and a director of the Manager.
Mr. Thornburg owns 236,305 shares of Common Stock of the Company and holds stock
options for 206,408 shares at an average exercise price of $16.11 per share,
which together represent approximately 2.6% of the outstanding shares of Common
Stock.
The Manager is also affiliated with Thornburg Management Company
("TMC"), an investment advisory firm organized in 1982 and Thornburg Securities
Corporation ("TSC"), a registered broker dealer that acts as a distributor of
mutual funds managed by TMC. Mr. Thornburg is Chairman of the Board, Chief
Executive Officer and a director of TMC and TSC. TSC has participated as an
underwriter in previous public offerings of the Company's Common Stock and is
participating in this offering. Mr. Thornburg owns a majority of the voting
shares of TMC, TSC, and the Manager. TMC is advisor to eight Thornburg mutual
funds. The seven Thornburg bond funds and one equity fund currently have assets
in excess of $1.6 billion. TMC also acts as a sub-advisor to the New England
Investment Company's Daily Tax-Free Income Fund with assets of approximately
$587 million and as placement agent to six of their Tax-Free Money Funds with
assets of approximately $1.1 billion.
Mr. Larry Goldstone has been the President and a director of the
Company since the Company commenced operations in June of 1993, and is
responsible for the day-to-day management of the Company. Mr. Goldstone is also
a Managing Director of the Manager. For the eight years prior to his association
with the Company and the Manager, Mr. Goldstone held increasingly senior level
positions with financial institutions, where he was primarily responsible for
their mortgage portfolio management. Mr. Goldstone owns 5,165 shares of Common
Stock of the Company and holds stock options for 206,480 shares at an average
exercise price of $16.11
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<PAGE> 9
per share, which together represent approximately 1.2% of the outstanding shares
of Common Stock.
Under the terms of the Management Agreement, the Manager is responsible
for the day-to-day operations of the Company and provides personnel and office
space. As amended, effective October 1, 1996, the Company pays the Manager an
annual base management fee based on average shareholders' equity adjusted for
liabilities that are not incurred to finance assets ("average net invested
assets" as defined in the Management Agreement), in the amount of 1.10% on the
first $300 million of average shareholders' equity and 0.80% on average
shareholders' equity above $300 million, payable monthly in arrears. The Manager
is also entitled to earn quarterly performance-based Incentive Compensation in
an amount equal to 20% of the Company's annualized taxable income, before
performance-based Incentive Compensation, above an annualized return on equity
equal to the ten-year U.S. Treasury Rate plus 1%. For purposes of the
performance fee calculation, equity is generally defined as proceeds from
issuance of common stock, before underwriter's discount and other costs of
issuance, plus retained earnings. The Company believes that this organizational
structure and compensation arrangement benefits shareholders because it ties
management compensation to return on equity and, in periods of low earnings, the
Manager's compensation is reduced, thereby lowering the Company's operating
expenses.
RECENT DEVELOPMENTS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
In January 1997, the Company issued 2,760,000 shares of Series A 9.68%
Cumulative Convertible Preferred Stock at a price of $25 per share pursuant to
its Registration Statement on Form S-3 declared effective in December 1996. Net
proceeds from this issuance totaled $65.8 million. Primarily as a result of the
issuance of the preferred stock, the Company's shareholders' equity, excluding
the fair value adjustment for assets held as available-for sale, has grown to
$305.7 million from $238.0 million as of December 31, 1996. As of March 31,
1997, the Company's ratio of shareholders' equity to assets, excluding the fair
value adjustment for assets held as available-for-sale, was 9.30% as compared to
8.59% as of December 31, 1996.
For the quarter ended March 31, 1997, the Company's net income was
$9,294,000 as compared to $5,131,000 for the quarter ended March 31, 1996. Net
income available to common shareholders, after the 9.68% dividend to preferred
shareholders, increased to $8,052,000 or $0.49 per common share based on
weighted average common shares of 16,311,344 from $5,131,000 or $0.42 per common
share based on weighted average common shares of 12,334,847 for the quarter
ended March 31, 1996. This is an increase in net income available to common
shareholders of 57% despite an increase in the weighted average common shares
outstanding of 32%. Net interest income for the quarter totaled $11,332,000 as
compared to $6,190,000 for the same period in 1995, an increase of 83%. Net
interest income is comprised of the interest income earned on mortgage
investments and cash less interest expense from borrowings. During the first
quarter of 1997, the Company recorded a gain on the sale of ARM securities of
$4,000 as compared to $13,000 during the first quarter of 1996. Additionally,
during the first quarter of 1997, the Company reduced earnings and the carrying
value of its ARM securities by $190,000 for projected credit losses. For the
quarter ended March 31, 1997, the Company incurred operating expenses of
$1,852,000 consisting of a base management fee of $811,000, a performance based
fee of $857,000 and other operating expenses of $184,000. During the same period
of 1996, the Company incurred operating expenses of $1,072,000 consisting of a
base management fee of $359,000, a performance based fee of $588,000 and other
operating expenses of $125,000. Total operating expenses decreased to 16.3% of
net interest income for the first quarter of 1997 as compared to 17.3% for the
same period of 1996, also contributing to the Company's improved net earnings.
Additionally, for the quarter ended March 31, 1997, the Company
declared a dividend of $7,834,357 or $0.48 per share on the Common Stock, and a
dividend of $1,242,000 or $0.45 per share to the shareholders of the Series A
9.68% Cumulative Convertible Preferred Stock for the partial period of January
24, 1997 (date of issuance) through March 31, 1997.
OTHER MATTERS
At the 1997 Annual Meeting of Shareholders on April 24, 1997, the
Company's shareholders elected Mr. Owen M. Lopez as a Class II director; and
re-elected Messrs. H. Garrett Thornburg, Jr., Joseph H. Badal and Stuart C.
Sherman as Class III directors. The shareholders also approved the Company's
Amended and Restated 1992 Stock Option and Incentive Plan.
S-9
<PAGE> 10
The following summary of unaudited quarterly financial data illustrates
the Company's operating trends at and for the six quarters identified below.
SUMMARY OF QUARTERLY FINANCIAL DATA
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31, December 31,
1997 1996 1996 1996 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income ........ $ 11,332 $ 8,977 $ 7,952 $ 7,225 $ 6,190 $ 5,460
Net income ................. 9,294 7,409 7,028 6,169 5,131 4,584
Earnings per common share .. $ 0.49 $ 0.46 $ 0.44 $ 0.42 $ 0.42 $ 0.38
Dividends declared
per common share (1) ...... 0.48 0.45 0.40 0.40 0.40 0.38
Dividends declared per
Series A preferred share(1) 0.45 -- -- -- -- --
BALANCE SHEET DATA:
ARM securities ............. $3,217,621 $2,727,875 $2,557,903 $2,140,280 $2,012,151 $1,995,287
Reverse repurchase
agreements ............... 2,936,179 2,459,132 2,327,773 2,190,096 1,827,284 1,780,854
Term reverse repurchase
agreements (2)............ 1,260,525 1,103,878 1,147,186 1,159,461 845,221 829,127
Shareholders' equity (3) ... 305,657 238,005 236,371 233,805 185,238 182,312
Equity-to-assets ratio (3) . 9.30% 8.59% 9.09% 9.51% 9.02% 8.94%
Book value per share (3)(4) $ 16.02 $ 14.67 $ 14.68 $ 14.67 $ 14.90 $ 14.95
SELECTED RATIOS:
Net interest margin (5) .... 1.54% 1.37% 1.27% 1.29% 1.22% 1.11%
Return on average
assets (3) ............... 1.08% 1.12% 1.11% 1.09% 1.00% 0.92%
Return on average common
shareholders' equity (3) . 13.40% 12.37% 11.86% 11.22% 11.08% 10.03%
Operating expense as
% of average assets (6) .. 0.25% 0.24% 0.20% 0.19% 0.21% 0.19%
SELECTED AVERAGE PORTFOLIO DATA:
Current coupon ............. 7.53% 7.57% 7.31% 7.28% 7.48% 7.42%
Fully indexed coupon (7) ... 7.93% 7.61% 7.80% 7.83% 7.56% 7.51%
Quarter-end yield (8) ...... 6.64% 6.64% 6.51% 6.43% 6.49% 6.73%
Prepayment rate (CPR) ...... 22% 21% 23% 31% 32% 26%
Life cap ................... 11.60% 11.42% 11.36% 11.24% 10.91% 10.73%
Days to repricing .......... 109 105 122 117 93 90
SELECTED AVERAGE BORROWING DATA:
Reverse repurchase rate .... 5.61% 5.68% 5.65% 5.57% 5.57% 5.90%
Reverse repurchase - days
to repricing (9) ......... 99 56 74 52 37 47
Total borrowings - days
to repricing (9) ......... 103 62 81 61 49 61
Overcollateralization
required by lenders ...... 5.11% 4.96% 4.58% 5.06% 5.38% 7.57%
Ratio of term reverses to
total reverses (2) ....... 43% 45% 49% 53% 46% 47%
SELECTED CAP AGREEMENT DATA:
Cap notional amount ........ $2,538,015 $2,265,510 $1,887,800 $1,935,500 $1,773,700 $1,461,800
Average strike price ....... 10.17% 9.93% 9.66% 9.65% 9.44% 9.09%
Average term to maturity
(in years) ............... 2.9 3.0 3.3 3.6 3.9 4.3
</TABLE>
- ----------
(1) On March 14, 1997, the Company declared a dividend of $0.48 per share to
common stock shareholders of record and $0.45 per share to preferred stock
shareholders of record, both payable on April 10, 1997 to shareholders of
record on March 31, 1997.
(2) Term reverse repurchase agreements are a category of reverse repurchase
agreements that are contractually committed for periods of three months to
two years and have at least one repricing during the term.
(3) Excludes unrealized loss on available-for-sale securities of $13,564,
$15,807, $18,091, $19,496, $19,825, and $21,835 at March 31, 1997, December
31, 1996, September 30, 1996, June 30, 1996, March 31, 1996, and December
31, 1995, respectively.
(4) Includes both common and preferred shares.
(5) The net interest margin is computed by dividing the respective quarter's
annualized net interest income by the average daily balance of interest
earning assets.
(6) Operating expense as a percent of average assets increases during periods in
which the Manager qualifies for performance-based Incentive Compensation
payments. See "Management."
(7) Based on index values at the end of each quarter.
(8) Includes the impact of amortization of premiums and discount, cost of
hedging and deferred gains from hedging.
(9) Includes the effect of interest rate swaps.
S-10
<PAGE> 11
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company (1).......... 800,000 Shares
Common Stock Outstanding after the
Offering (1)(2)(3)........................... 17,235,079 Shares
Use of Proceeds.................................. The net proceeds of this
offering will be used for
the general corporate
purposes of the Company.
These general corporate
purposes may include,
without limitation,
acquisitions of ARM
securities, acquisition of
ARM loans, acquisition of
other mortgage related
assets, repayment of
maturing obligations,
redemption of outstanding
indebtedness and working
capital.
New York Stock Exchange Symbol.................. TMA
</TABLE>
- ----------
(1) Assumes that the Underwriter's option to purchase up to an additional
120,000 shares of Common Stock to cover over-allotments is not exercised.
(2) As of May 15, 1997, and does not include options to purchase 742,666 shares
of Common Stock granted under the Company's Amended and Restated 1992 Stock
Option and Incentive Plan or options to purchase 33,600 shares to be granted
upon the closing of this offering.
(3) Includes 113,501 shares issued pursuant to the Company's Dividend
Reinvestment and Stock Purchase Plan on April 10, 1997.
S-11
<PAGE> 12
RISK FACTORS
In addition to the other information contained in this Prospectus
Supplement and the accompanying Prospectus, the following risk factors should be
carefully considered in the evaluating the Company and its business before
purchasing any of the shares of Common Stock offered hereby.
RISK OF DRAMATIC INCREASES IN SHORT-TERM INTEREST RATES
The results of the Company's operations depend on, among other things,
the level of net interest income generated by the Company's ARM securities
portfolio. The Company's net interest income will vary primarily as a result of
changes in short-term interest rates, borrowing costs and prepayment rates. Such
changes are affected by various factors, many of which are beyond the control of
the Company. Although the Company only acquires ARM securities with borrowed
funds that have interest rates based on indexes and repricing terms similar to
the interest rate indexes and repricing terms of the ARM securities, the
interest rate indexes and repricing terms will not be identical. During periods
of rising short-term interest rates, particularly during periods when short-term
interest rates increase by more than 1% per six month period of time, the
interest rate mismatch or periodic caps that limit the increase in the interest
rate on the ARM securities portfolio to a maximum of 1% per six month period or
2% per year, could negatively impact the Company's net interest income, net
income and the payment of the dividend on the Preferred Stock.
PREPAYMENT RISKS ON ARM SECURITIES; REINVESTMENT RISK
Mortgage prepayment rates vary from time to time and may cause the
yield on the Company's ARM securities to change, which would affect the
Company's net cash flow. Mortgage prepayments generally increase when current
fixed mortgage interest rates fall relative to the interest rates on ARM loans.
Currently, a significant amount of the Company's ARM securities portfolio was
purchased at a price greater than par. The Company is amortizing the premium
paid for such ARM securities over the expected remaining life of such
securities, using the level yield method of accounting. To the extent that there
is an increase in prepayment rates resulting in a shortening of the expected
life of the ARM securities, the Company's net interest income and the payment of
the dividend on the Preferred Stock could be adversely affected.
The Company competes with other mortgage REITs, investment banking
firms, savings and loans, banks, mortgage bankers, insurance companies, mutual
funds, other lenders, FNMA, FHLMC and other entities who also purchase ARM
securities, many of which have greater financial resources than the Company.
During periods of rising prepayments on ARM securities, the Company will need to
increase its purchases of ARM securities in order to maintain the current level
of its ARM securities portfolio. Increased prepayment activity typically occurs
in interest rate environments where the interest rate of fixed rate mortgages
are comparable to or are below fully margined ARMs or during periods of falling
interest rates. During such periods, the origination of ARMs also tends to
decline, making it more difficult for the Company to find attractive
reinvestment opportunities. If the Company were not successful in acquiring new
ARM securities for its portfolio on suitable terms, there could be an adverse
affect on the Company's interest income, net income and the payment of the
dividend on the Preferred Stock.
RISK OF DECLINE IN MARKET VALUE OF ARM SECURITIES; MARGIN CALLS
The Company employs a "leveraging" strategy of increasing the size of
its ARM securities portfolio by borrowing against its existing ARM securities to
acquire additional ARM securities. By leveraging its ARM securities, the Company
expects that its equity-to-assets ratio, when measured on a historical cost
basis, will be between 8% and 10% and as an operating policy shall in no event
be less than 8% on a historical cost basis. Since the borrowings incurred by the
Company are primarily collateralized borrowings based on the current market
value of the Company's ARM securities, a decline in the market value of such ARM
securities due to rising interest rates, a Rating Agency downgrade or other
factors could limit the Company's ability to borrow or require the Company to
sell assets, possibly at losses under adverse market conditions, in order to
maintain liquidity.
CERTAIN RISKS IN ACQUIRING, ACCUMULATING AND SECURITIZING ARM LOANS
The Company bears the risk of loss on any ARM loans it purchases in the
secondary market or otherwise. In the future, the Company may acquire ARM loans
which are not credit enhanced or which do not have the backing of FNMA or FHMLC
with the
S-12
<PAGE> 13
intention of securitizing such loans into High Quality assets. Accordingly,
during the time it accumulates such ARM loans, the Company will be subject to
risks of borrower default, bankruptcy and special hazard losses (such as those
occurring from earthquakes). In the event of a default on any such loans held by
the Company, the Company would bear the loss of principal between the value of
the mortgaged property and the outstanding indebtedness, as well as the loss of
interest.
The Company intends to securitize the ARM loans it acquires to achieve
better financing rates and increase its portfolio yield. The Company expects to
retain a limited amount of credit risk, up to approximately 3% of the original
principal balance of any loans securitized, in order to facilitate the creation
of High Quality ARM securities for its portfolio.
RISK OF FLUCTUATION IN MARKET PRICE OF COMMON STOCK
The market price of the Company's shares of Common Stock will likely be
affected by any change in the relationship between the dividend yield on the
Company's Common Stock and prevailing market interest rates. In periods of high
interest rates, the net interest income of the Company, and therefore the
dividend yield on the Common Stock, may be less attractive compared with
alternative investments, which could negatively impact the price of the Common
Stock.
DEPENDENCE ON THE MANAGER
The Company is wholly dependent for the selection, structuring and
monitoring of its mortgage assets and associated borrowings on the diligence and
skill of the officers and employees of the Manager. The Manager is in turn
dependent upon the contribution of its executive officers, many of whom would be
difficult to replace.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The following table sets forth, for the periods indicated, the high and
low sales prices per share of the Common Stock as reported on the New York Stock
Exchange composite tape and the cash dividends declared per share of Common
Stock:
<TABLE>
<CAPTION>
Cash
Price Per Share Dividends
-------------------- Declared
High Low Per Common Share
------- -------- ----------------
<S> <C> <C> <C>
1997
Second Quarter (through May 6, 1997)..... $20 7/8 $17 3/4 --(1)
First Quarter............................ 22 7/8 18 3/4 $0.48
1996
Fourth Quarter........................... $21 1/2 $16 1/8 $0.45
Third Quarter............................ 17 5/8 14 7/8 0.40
Second Quarter........................... 17 14 1/8 0.40
First Quarter ........................... 16 5/8 14 1/8 0.40
1995
Fourth Quarter........................... $15 7/8 $14 1/8 $0.38
Third Quarter............................ 15 1/2 13 0.25
Second Quarter........................... 14 7/8 8 1/4 0.15
First Quarter............................ 10 7 3/8 0.15
</TABLE>
- ----------
(1) As of the date of this Prospectus Supplement, the Company has not yet
declared a dividend for the second quarter.
S-13
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997, and as adjusted to give effect to the issuance of the shares of Common
Stock and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
<TABLE>
<CAPTION>
March 31, 1997
------------------------------
Actual As Adjusted (1)
----------- ---------------
(dollars in thousands)
<S> <C> <C>
TOTAL DEBT:
Reverse repurchase agreements ............................ $ 2,936,179 $ 2,936,179
Other borrowings ......................................... 13,394 13,394
----------- -----------
Total debt ........................................ 2,949,573 2,949,573
SHAREHOLDERS' EQUITY:
Preferred Stock: par value $ 0.01 per share, 2,300,000
shares authorized; Series A 9.68% Cumulative Convertible
Preferred Stock $25.00 per share liquidation value,
2,760,000 shares issued and outstanding as adjusted .... $ 65,809 $ 65,809
Common Stock: par value $0.01 per share,
47,240,000 shares authorized; 16,321,578 issued and
outstanding, 17,121,578 as adjusted .................... 163 171
Additional paid-in-capital ............................... 235,205 250,227
Available-for-sale securities:
Unrealized gain (loss) ................................. (13,564) (13,564)
Realized deferred hedging gain ......................... 4,137 4,137
Retained earnings ........................................ 343 343
----------- -----------
Total shareholders' equity ........................ 292,093 307,123
----------- -----------
Total capitalization ......................... $ 3,241,666 $ 3,256,696
=========== ===========
</TABLE>
- --------------------------
(1) Assumes estimated net proceeds from the sale of Common Stock of
approximately $15,029,960 (after deducting expenses estimated at
$63,000). Does not include up to 120,000 shares subject to the
Underwriter's over-allotment option for the Common Stock or the
application of the proceeds from the sale thereof. See "Underwriting."
S-14
<PAGE> 15
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
financial statements of the Company at and for the years ended December 31,
1996, 1995, 1994 and 1993 and from the unaudited financial information at and
for the three months ended March 31, 1997 and 1996. The data should be read in
conjunction with, and is qualified by reference to, the more detailed
information contained in the Financial Statements and Notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
and the Quarterly Report on Form 10-Q for the three months ended March 31, 1997,
which are incorporated herein by reference. The results for the three months
ended March 31, 1997, as reported, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993(1)
------------ ------------ ------------ ------------ ------------- ------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income ................. $ 49,000 $ 32,702 $ 151,511 $ 116,617 $ 84,798 $ 12,168
Interest expense ................ (37,668) (26,512) (121,166) (103,121) (71,743) (9,011)
------------ ------------ ------------ ------------ ------------ ------------
Net interest income ............. 11,332 6,190 30,345 13,496 13,055 3,157
Gain (loss) on ARM securities ... (186) 13 372 (568) 863 --
General and administrative
expenses ...................... (1,852) (1,072) (4,980) (2,476) (1,972) (585)
------------ ------------ ------------ ------------ ------------ ------------
Net income ................. $ 9,294 $ 5,131 $ 25,737 $ 10,452 $ 11,946 $ 2,572
============ ============ ============ ============ ============ ============
PER SHARE DATA:
Net income per common share ..... $ 0.49 $ 0.42 $ 1.73 $ 0.88 $ 1.02 $ 0.36
Net distributable income
per common share .............. 0.50 0.42 1.76 0.92 1.02 0.36
Dividends declared per
common share (2)............... 0.48 0.40 1.65 0.93 1.00 0.29
Dividends declared per
preferred share (2)............ 0.45 -- -- -- -- --
Average number of common
shares outstanding ........... 16,311,344 12,334,841 14,873,700 11,926,996 11,758,810 7,173,745
Book value per share (3)(4) ..... $ 16.02 $ 14.90 $ 14.67 $ 14.95 $ 15.29 $ 14.50
Number of common shares
outstanding .................... 16,321,578 12,430,066 16,219,241 12,190,712 11,772,951 11,748,331
Number of preferred shares
outstanding .................... 2,760,000 -- -- -- -- --
BALANCE SHEET DATA:
ARM securities .................. $ 3,217,621 $ 2,012,151 $ 2,727,875 $ 1,995,287 $ 1,727,469 $ 1,320,169
Other assets .................... 56,224 21,561 27,483 22,698 24,363 44,260
------------ ------------ ------------ ------------ ------------ ------------
Total assets ............... $ 3,273,845 $ 2,033,712 $ 2,755,358 $ 2,017,985 $ 1,751,832 $ 1,364,429
============ ============ ============ ============ ============ ============
Reverse repurchase agreements ... $ 2,936,179 $ 1,827,284 $ 2,459,132 $ 1,780,854 $ 1,601,934 $ 1,186,140
Other liabilities ............... 45,573 41,015 74,028 76,654 29,915 7,963
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities .......... $ 2,981,752 $ 1,868,299 $ 2,533,160 $ 1,857,508 $ 1,631,849 $ 1,194,103
============ ============ ============ ============ ============ ============
Shareholders' equity (3) . $ 305,657 $ 185,238 $ 238,005 $ 182,312 $ 180,035 $ 170,326
============ ============ ============ ============ ============ ============
Equity-to-assets ratio (3) ...... 9.30% 9.02% 8.59% 8.94% 9.94% 12.48%
SELECTED RATIOS AND DATA:
Net interest margin (5) ......... 1.54% 1.22% 1.29% 0.73% 0.73% 1.00%
Return on average assets (3) .... 1.08% 1.00% 1.09% 0.56% 0.66% 0.82%
Return on average common
shareholders' equity (3) ...... 13.40% 11.08% 1.68% 5.81% 6.94% 5.04%
Operating expense as % of average
assets (6) .................... 0.25% 0.21% 0.21% 0.13% 0.11% 0.18%
</TABLE>
- ---------------------
(1) The Company commenced operations on June 25, 1993.
(2) On March 14, 1997, the Company declared a dividend of $0.48 per share to
common stock shareholders of record and $0.45 per share to preferred stock
shareholders of record, both payable on April 10, 1997 to shareholders of
record on March 31, 1997.
(3) Excludes the unrealized loss on available-for-sale securities of $13,564
and $19,825 at March 31, 1997 and 1996 and $15,807, $21,835 and $60,052 at
December 31, 1996, 1995 and 1994, respectively.
(4) Includes both common and preferred shares.
(5) The net interest margin is computed by dividing the respective quarter's
annualized net interest income by the average daily balance of interest
earning assets.
(6) Operating expense as a percent of average assets increases during periods
in which the Manager qualifies for performance-based Incentive
Compensation payments. See "Management."
S-15
<PAGE> 16
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has established a Dividend Reinvestment and Stock Purchase
Plan pursuant to which each holder of Common Stock and Preferred Stock whose
shares are registered in his own name or beneficial holders whose shares are
registered in the name of a trustee or nominee, may elect to have dividends
reinvested automatically in shares of the Common Stock of the Company generally
at a 3% discount to the market price and to make optional purchases of Common
Stock of the Company at the same time and price.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
With certain exceptions, no person may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 9.8% of the
Company's Capital Stock.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Code provides special tax treatment for organizations that qualify
and elect to be taxed as REITs. The discussions below and in the Prospectus
under the heading "Federal Income Tax Considerations" summarize the material
provisions applicable to the Company as a REIT for federal income tax purposes
and to investors in connection with their ownership of the Company's Common
Stock. However, it is impractical to set forth in this Prospectus Supplement all
aspects of federal, state, local and foreign tax law that may have tax
consequences with respect to an investor's purchase of the Company's Common
Stock. The discussions of various aspects of federal income taxation contained
herein and in the Prospectus are based on the Code, Treasury regulations,
judicial decisions, administrative rulings and practice, all of which are
subject to change. In brief, if certain detailed conditions imposed by the Code
are met, entities that invest primarily in real estate investments and mortgage
loans, and that otherwise would be taxed as corporations are, with certain
limited exceptions, not taxed at the corporate level on their taxable income
that is currently distributed to their Shareholders. This treatment eliminates
most of the "double taxation" (at the corporate level and then again at the
shareholder level when the income is distributed) that typically results from
investment in corporations. If the Company fails to meet the requirements of the
Code for REIT qualification in any taxable year, it would become subject to
federal and state income taxation on its taxable income at regular corporate
rates. In such an event, the after tax earnings available for distribution to
the shareholders would be reduced.
The Company believes that it has complied, and intends to comply in the
future, with the requirements for qualification as a REIT under the Code.
Counsel has rendered an opinion to the Company that, as of the date hereof and
based on the various representations that the Company made to counsel with
respect to the Company's income, assets and activities since its inception, and
subject to certain assumptions and qualifications stated in such opinion, (a)
the Company operated in a manner which qualified it as a REIT under the Code
since its taxable year ended December 31, 1993, and (b) the organization and
contemplated method of operation of the Company are such as to enable it to
continue to so qualify in this and subsequent years, provided the various
operational requirements for REIT status are satisfied in those years. Such
opinion is not binding on the Internal Revenue Service (the "Service") or the
courts and there can be no assurance that the Company will in fact maintain
compliance with those requirements at all times.
TAXATION OF THE HOLDERS OF THE COMPANY'S COMMON STOCK
The Company will notify shareholders after the close of the Company's
taxable year as to the portions of the distributions that constitute ordinary
income, return of capital and capital gain. Dividends and distributions declared
in the last quarter of any year payable to shareholders of record on a specified
date in such quarter will be deemed to have been received by the shareholders
and paid by the Company on December 31 of the record year, provided that such
dividends are paid before February 1 of the following year. Distributions of the
Company will not be eligible for the dividends received deduction for
corporations who are shareholders. Shareholders may not deduct any net operating
losses or capital losses of the Company.
The Company's investment guidelines do not permit investments in CMO
residuals or REMIC residuals, and, therefore, the income distributed by the
Company should not create unrelated business taxable income or excess inclusion
income for tax exempt entities.
S-16
<PAGE> 17
SALE OR DISPOSITION OF COMMON STOCK
Upon any sale or other disposition of shares of the Common Stock, a
domestic shareholder will recognize gain or loss for federal income tax purposes
in an amount equal to the difference between (a) the amount of cash and the fair
market value of any property received on such sale or other disposition (less
any portion thereof attributable to accumulated and declared but unpaid
dividends, which will be taxable as a dividend to the extent of the Company's
current and accumulated earnings and profits), and (b) the shareholder's
adjusted tax basis in such shares. Such gain or loss will be capital gain or
loss if the shares have been held by the domestic shareholder as a capital
asset, and will be long-term capital gain or loss if such shares have been held
for more than one year. In general, any loss upon a sale or exchange of shares
by a shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of any capital gain distributions to such shareholder.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the Service
the amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless the holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder that does not provide the Company with
his correct taxpayer identification number may also be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of the gross proceeds of a redemption of the
Common Stock with respect to any shareholders who fail to comply with the backup
withholding rules.
RECORDKEEPING AND INFORMATION REQUEST REQUIREMENT
The Company as a REIT, is required to maintain records regarding the
actual and constructive ownership of its shares, and within 30 days after the
end of each calendar year, to demand statements of information from persons
owning above a specified level of the Company's shares (5 percent or more in the
case of a REIT that has more than 2,000 record shareholders; 1 percent or more
in the case of a REIT that has fewer than 2,000 and more than 200 record
shareholders; and 1/2 percent or more in the case of a REIT having 200 or fewer
record shareholders). The Company must maintain a record of those shareholders
failing or refusing to comply with such an information demand. Shareholders who
fail or refuse to comply with the demand must submit a statement setting forth
the requested information with their own income tax returns.
OTHER TAX CONSEQUENCES
The Company's shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which they transact
business or reside. The state and local tax treatment of the Company's
shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Company.
UNDERWRITING
Sutro & Co. Incorporated (the "Underwriter") has agreed, subject to the
terms and conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company 800,000 shares of Common Stock at the
Price to Public, less the underwriting discount set forth on the cover page of
this Prospectus Supplement. The Underwriting Agreement provides that the
obligations of the Underwriter are subject to certain conditions precedent and
that the Underwriter is committed to purchase all of such shares of Common Stock
if any are purchased.
The Underwriter has advised the Company that it proposes initially to
offer the Common Stock to the public on the terms set forth on the cover page of
this Prospectus Supplement.
The Company has granted an option to the Underwriter, exercisable
during the 30-day period after the date of this Prospectus Supplement, to
purchase, at the public offering price less the underwriting discount set forth
on the cover page of this Prospectus Supplement, 120,000 additional shares of
Common stock. The Underwriter may exercise such option only to cover
over-allotments,
S-17
<PAGE> 18
if any, made in connection with the offering of the shares of Common Stock
offered hereby.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain civil liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriter may be
required to make in respect thereof.
The Company and the executive officers of the Company have also agreed
with the Underwriter that, for a period of 90 days following the commencement of
this offering, they will not, without the consent of Sutro & Co. Incorporated,
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or rights to acquire such shares of Common Stock (other than pursuant to the
Amended and Restated 1992 Stock Option and Incentive Plan (or any successor
plan), or the Dividend Reinvestment and Stock Purchase Plan).
The Underwriter has in the past performed, and may continue to perform,
investment banking services, broker-dealer and financial advisory services for
the Company and has received customary compensation therefor. The Underwriter
also has in the past entered and may continue to enter into reverse repurchase
agreements or other financing arrangements with the Company to finance the
purchase of ARM assets or loans.
Until the distribution of Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriter is permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock. If the Underwriter creates a short position in
the Common Stock in connection with the Offering, i.e., if it sells more shares
of Common Stock than are set forth on the cover page of this Prospectus
Supplement, then the Underwriter may reduce that short position by purchasing
Common Stock in the open market. The Underwriter may also elect to reduce any
short position by exercising all or a part of the over-allotment option
described above. The Underwriter may also impose a penalty bid on any selling
group members. This means that if the Underwriter purchases shares of Common
Stock in the open market to reduce the Underwriter's short position or to
stabilize the price of the Common Stock, it may reclaim the amount of the
selling concession from the selling group members who sold those shares as part
of the Offering. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases. The
imposition of a penalty bid might also have an effect on the price of a security
to the extent that it were to discourage resales of the security. Neither the
Company nor the Underwriter makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Common Stock. In addition, neither the Company nor the
Underwriter makes any representation that the Underwriter will engage in such
transactions, or that such transactions once commenced, will not be discontinued
without notice.
LEGAL MATTERS
Certain legal matters relating to the Common Stock and the tax status
of the Company as a REIT will be passed upon for the Company by Jeffers, Wilson,
Shaff & Falk, LLP, Irvine, California, counsel to the Company. Michael B.
Jeffers, Secretary of the Company, a member of that firm, owns 672 shares of
Common Stock, holds options to purchase 37,217 shares of Common Stock, and owns
1% of the shares of the Manager. Certain legal matters will be passed upon for
the Underwriters by O'Melveny & Myers LLP, San Francisco, California, in
reliance, as to matters of Maryland law, on the opinion of Jeffers, Wilson,
Shaff & Falk, LLP.
EXPERTS
The financial statements of the Company appearing in the Company's
Annual Report on Form 10-K for the periods ending December 31, 1996, December
31, 1995 and December 31, 1994, which are incorporated herein by reference, have
been audited by McGladrey & Pullen, LLP, independent certified public
accountants, and are included herein in reliance on their report upon their
authority as experts in auditing and accounting.
S-18
<PAGE> 19
PROSPECTUS
THORNBURG MORTGAGE ASSET CORPORATION
$173,776,125
COMMON STOCK, PREFERRED STOCK, AND WARRANTS
AND SHAREHOLDER RIGHTS TO PURCHASE COMMON STOCK AND
PREFERRED STOCK
Thornburg Mortgage Asset Corporation, a Maryland corporation (the
"Company"), directly or through agents, dealers or underwriters designated from
time to time, may issue and sell from time to time one or more of the following
types of its securities (the "Securities"): (i) shares of its common stock, par
value $0.01 per share ("Common Stock"); (ii) shares of its preferred stock, in
one or more series ("Preferred Stock"), (iii) warrants to purchase shares of
Common Stock ("Common Stock Warrants"); (iv) warrants to purchase Preferred
Stock ("Preferred Stock Warrants"); (v) rights to purchase shares of Common
Stock or Preferred Stock issued to shareholders ("Shareholder Rights"); and (vi)
any combination of the foregoing, either individually or as units consisting of
one or more of the foregoing types of securities. The Securities offered
pursuant to this Prospectus may be issued in one or more series, in amounts, at
prices and on terms to be determined at the time of the offering of each such
series and set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). The Securities offered by the Company pursuant to this Prospectus
will be limited to $173,776,125 aggregate initial public offering price,
including the exercise price of any Common Stock Warrants, Preferred Stock
Warrants (collectively, "Securities Warrants") or Shareholder Rights.
The specific terms of each offering of Securities in respect of which
this Prospectus is being delivered will be set forth in an accompanying
Prospectus Supplement relating to such offering of Securities. Such specific
terms include, without limitation, to the extent applicable (1) in the case of
any series of Preferred Stock, the specific designations, rights, preferences,
privileges and restrictions of such series of Preferred Stock, including the
dividend rate or rates or the method for calculating same, dividend payment
dates, voting rights, liquidation preferences, and any conversion, exchange,
redemption or sinking fund provisions; (2) in the case of the Securities
Warrants, Preferred Stock or Common Stock, as applicable, for which each such
warrant is exercisable, the exercise price, duration, detachability and call
provisions of each such warrant; (3) in the case of Shareholder Rights, which
entitles the shareholder to purchase Preferred Stock or Common Stock, as
applicable, the subscription price, duration, transferabilities and the over
subscription privilege of each of the Shareholder Rights; and (4) in the case of
any offering of Securities, to the extent applicable, the initial public
offering price or prices, listing on any securities exchange, certain federal
income tax consequences and the agents, dealers or underwriters, if any,
participating in the offering and sale of the Securities.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
This Prospectus may not be used to consummate sales of Securities
unless accompanied by a Prospectus Supplement. The delivery in any jurisdiction
of this Prospectus together with a Prospectus Supplement relating to specific
Securities shall not constitute an offer in such jurisdiction of any other
Securities covered by this Prospectus but not described in such Prospectus
Supplement.
THE DATE OF THIS PROSPECTUS IS MAY 15, 1997
<PAGE> 20
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT
TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
--------------------------
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). The
reports, proxy and information statements, the Registration Statement and
exhibits thereto, and other information filed by the Company with the Commission
may be inspected and copied at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at 13th Floor, Seven World
Trade Center, New York, New York 10048, and at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the
material may be obtained form Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Common Stock is traded on the New York Stock Exchange,
Inc. ("NYSE"). The reports, proxy and information statements and other
information may also be inspected at the offices of the NYSE, 20 Broad Street,
New York, NY 10005.
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part) on Form S-3 under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of the
contract or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by that reference and the
exhibits to Registration Statement. For further information regarding the
Company and the Shares offered hereby, reference is hereby made to the
Registration Statement and the exhibits to the Registration Statement which may
be obtained from the Commission at its principal office in Washington, D.C.,
upon payment of fees prescribed by the Commission.
The Company currently furnishes its shareholders with annual reports
containing financial statements audited by its independent auditors and with
quarterly reports containing unaudited summary financial information for each of
the first three quarters of each fiscal year.
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<PAGE> 21
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company with the Commission:
(a) The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996; and
(b) The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Shares made hereby shall be
deemed to be incorporated by reference into this Prospectus.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement and this Prospectus to the
extent that a statement contained in the Registration Statement, this
Prospectus, or any other subsequently filed document that is also incorporated
by reference herein modified or supersedes that statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of that person, a copy of any document incorporated herein by
reference (other than exhibits to those documents unless the exhibits are
specifically incorporated by reference into the documents that this Prospectus
incorporates by reference). Requests should be directed to Mr. Richard P. Story,
Thornburg Mortgage Asset Corporation, 119 East Marcy Street, Santa Fe, New
Mexico, 87501, telephone number (505) 989-1900.
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<PAGE> 22
THE COMPANY
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, invests 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 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 or state income tax at the corporate level. The Company
commenced operations in June 1993, and as of March 31, 1997 had assets of
approximately $3.3 billion.
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) ARM 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").
To the extent the Company acquires ARM loans, the Company may create
ARM pass-through securities and CMOs through securitization. The Company intends
to purchase ARM loans for securitization when it believes that it can earn a
higher yield on the mortgage securities created through securitization than on
comparable mortgage securities purchased in the market. In order to facilitate
the securitization process, the Company may retain a limited amount of the
credit risk inherent in the mortgage loan. Following the securitization process,
the Company expects to hold the newly created ARM securities in its investment
portfolio. If the Company were to sell the newly-created ARM securities on a
regular basis, there would be a substantial risk that they would be deemed
"dealer property" and that all of the profits from such sales would be subject
to tax at the rate of 100%.
4
<PAGE> 23
The Company purchases its ARM securities from broker-dealers and
financial institutions that regularly originate or make markets in these
securities. The Company may also purchase ARM securities from a variety of
mortgage suppliers (including mortgage bankers, banks, savings and loans,
investment banking firms, home builders and other firms involved in originating
and packaging mortgage loans). The Company does not purchase any ARM securities
from or enter into any servicing or administrative agreements (other than the
management agreement with Thornburg Mortgage Advisory Corporation the "Manager")
or with any entities affiliated with the Company.
The Company's executive offices are located at Thornburg Mortgage Asset
Corporation, 119 East Marcy Street, Santa Fe, New Mexico 87501. The Company was
incorporated in Maryland on July 28, 1992.
OPERATING POLICIES AND STRATEGIES
The Company employs a leveraging strategy to increase its assets by
borrowing money on a short-term collateralized basis, generally with maturities
of one year or less, in an amount up to 92% of the historical cost of its total
assets. The Company then uses the proceeds to acquire additional ARM securities.
By borrowing against its ARM securities in this manner, the Company expects that
up to 90% (but not more than 92%) of the Company's total assets may be financed
with borrowed funds. The Company believes that this strategy allows the Company
to maximize return on equity while the borrowing limitation leaves an adequate
capital base sufficient to protect the Company against interest rate
environments that may cause the value of its assets to decline or in which the
Company's borrowing costs might exceed its interest income from ARM securities.
These conditions could occur when the interest rate adjustments on ARM
securities lag behind interest rate increases on the Company's variable-rate
borrowings or when the interest rate indices of the borrowings are mismatched
with the interest rate indices of the Company's ARM securities. If the ratio of
the Company's borrowings to total assets exceeds 92%, then, except as limited by
the sources of income tests applicable to the Company as a REIT, the Company
will reduce its assets or take other steps as necessary to reduce its borrowing
ratio to below 92% of total assets.
The Company mitigates its interest-rate risk from borrowings generally
by selecting interest-rate indices and maturities on its indebtedness that
approximately match interest-rate adjustment indices and the interest-rate
adjustment periods on its ARM securities. Accordingly, borrowings bear variable
or short-term fixed (one year or less) interest rates. Generally, the borrowing
agreements require the Company to deposit additional collateral in the event the
market value of existing collateral declines, which could require the Company to
sell assets during periods when the net value of its assets are declining in
order to reduce the borrowings.
The Company's ARM securities portfolio is financed primarily at
short-term borrowing rates utilizing reverse repurchase agreements, dollar-roll
agreements, borrowings under lines of credit and other collateralized financing
which the Company has established with approved institutional lenders. To date,
reverse repurchase agreements have been the primary financing device utilized by
the Company to finance its ARM securities portfolio. Generally, upon repayment
of each reverse repurchase agreement the ARM securities will immediately be
pledged to secure a new reverse repurchase agreement. As of the date of this
prospectus the Company has established lines of credit and collateralized
financing agreements with 22 investment banking firms and commercial banks.
The Company makes use of hedging transactions to mitigate the impact of
certain adverse changes in interest rates or prepayment rates on its net
interest income. ARM securities are generally subject to periodic and lifetime
interest rate caps. Periodic caps generally limit the maximum mortgage interest
rate change on any interest adjustment date to either a maximum of 1% per
semiannual adjustment or 2% per annual adjustment. The Company generally does
not hedge against periodic cap limitations. In addition, ARM securities have a
maximum lifetime interest rate limitation, meaning that each ARM security
contains a contractual maximum rate. The borrowings incurred by the Company to
finance its ARM securities portfolio are not subject to equivalent interest rate
caps.
The Company has purchased interest rate cap agreements to prevent the
Company's borrowing costs from exceeding the lifetime maximum rate on its ARM
securities. These agreements would have the effect of offsetting a portion of
the Company's borrowing costs if prevailing interest rates exceed the rate
specified in the cap agreement. An interest rate cap agreement is a contractual
agreement, whereby the Company pays a fee, which may at times be financed by the
counterparty to the agreement with the Company, typically to either a commercial
bank or investment banking firm, in exchange for the right to receive payments
equal to the difference between a cap rate level specified in the contract and a
periodically determined future interest rate times a contractually specified
principal, or notional, amount. These agreements also would be expected to
appreciate in value as interest rates rise, thus helping to partially offset
possible market value declines of the Company's ARM securities portfolio.
5
<PAGE> 24
The ARM securities held by the Company were, generally, purchased at
prices greater than par. The Company is amortizing their respective premiums
over their expected lives using the level yield method of accounting. To the
extent that the prepayment rate on the Company's ARM securities differs from
expectations, the Company's net interest income will be affected. Mortgage
prepayments generally increase when current mortgage interest rates fall below
the interest rates on such ARM loans. To the extent there is an increase in
prepayment rates, resulting in a shortening of the expected lives of the ARM
securities, the Company's net income and the dividend yield on its common stock
could be adversely affected. In an attempt to mitigate the adverse effect of an
increase in prepayments on ARM securities acquired above par, the Company has
also entered into transactions where it purchases ARM securities at prices below
par, purchases seasoned ARM securities that have been outstanding for more than
5 years with a below-average prepayment history, and purchases ARM securities
that provide only for scheduled principal payments. The Company may also
purchase limited amounts of "principal only" mortgage derivative securities
backed by either fixed-rate mortgages or ARM loans as a hedge against the
adverse effect of increased prepayments.
The Company may enter into other hedging-type transactions designed to
protect its net interest income and assets from adverse changes in interest
rates or prepayment rates. Such transactions may include the purchase or sale of
interest rate future contracts, options on interest rate future contracts or
interest rate swaps. The Company may also purchase "interest only" mortgage
derivative securities or other derivative products for purposes of mitigating
risk from interest rate changes. The Company will not invest in financial
futures contracts unless the Company and the Manager are exempt from the
registration requirements of the Commodities Exchange Act or otherwise comply
with the provisions of that Act.
The Company does not intend to hedge for speculative purposes. No
hedging strategy can completely insulate the Company from risk, and certain of
the federal income tax requirements that the Company must satisfy to qualify as
a REIT limit the Company's ability to hedge, particularly with respect to
hedging against periodic cap risk. The Company monitors and may have to limit
its hedging strategies to ensure that it does not realize excessive hedging
income, or hold hedging assets having excess value in relation to total assets.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for
any offering of Securities, the net proceeds from the sale of Securities offered
by the Company will be available for the general corporate purposes of the
Company. These general corporate purposes may include, without limitation,
repayment of maturing obligations, redemption of outstanding indebtedness,
financing future acquisitions (including, but not limited to, acquisitions of
ARM securities and other mortgage related products), capital expenditures and
working capital. Pending any such uses, the Company may invest the net proceeds
from the sale of any Securities or may use them to reduce short-term
indebtedness. If the Company intends to use the net proceeds from a sale of
Securities to finance a significant acquisition, the related Prospectus
Supplements will describe the material terms of such acquisition.
DESCRIPTION OF SECURITIES
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete and is
subject in all respects to applicable Maryland law and to the provisions of the
Company's Articles of Incorporation and Bylaws, copies of which are on file with
the Commission as described under "Available Information" and are incorporated
by reference herein.
GENERAL
The Company may offer under this Prospectus one or more of the
following categories of its Securities: (i) shares of its Common Stock, par
value $0.01 per share; (ii) shares of its Preferred Stock, in one or more
series, (iii) Common Stock Warrants; (iv) Preferred Stock Warrants, (v)
Shareholder Rights, and (vi) any combination of the foregoing, either
individually or as units consisting of one or more of the types of Securities
described in clauses (i) through (vi). The terms of any specific offering of
Securities, including the terms of any units offered, will be set forth in a
Prospectus Supplement relating to such offering.
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<PAGE> 25
The Company's authorized equity capitalization consists of 50 million
shares which may be comprised of Common Stock and Preferred Stock. The Common
Stock is listed on the New York Stock Exchange and the Company intends to list
any additional shares of its Common Stock which are issued and sold hereunder.
The Company may list any series of its Preferred Stock which are offered and
sold hereunder, as described in the Prospectus Supplement relating to such
series of Preferred Stock.
COMMON STOCK
As of May 6, 1997, there were 16,435,079 outstanding shares of Common
Stock held by approximately 1,260 holders of record. Holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor. In the event any Preferred
Stock is issued, dividends on any outstanding shares of Preferred Stock may be
required to be paid in full before payment of any dividends on the Common Stock.
Upon liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in assets available for distribution after
payment of all debts and other liabilities and subject to the prior rights of
any holders of any Preferred Stock then outstanding.
Holders of Common Stock are entitled to one vote per share with respect
to all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the Common Stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of Preferred Stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the Common Stock. All the outstanding shares of Common
Stock are, and additional shares of Common Stock will be, validly issued, fully
paid and nonassessable.
Holders of Common Stock are eligible to participate in the Company's
dividend reinvestment and stock purchase plan (the "DRP") which provides
shareholders of the Company with a convenient and cost-effective method of
increasing their investment in shares of the Company's Common Stock. A
participant in the DRP may purchase additional shares of Common Stock by
reinvesting some or all cash dividends paid on the Common Stock and by making
optional cash purchases which are subject to a minimum purchase limit of $50 and
a maximum purchase limit of $15,000 for each dividend payment date. The price to
be paid for each share of Common Stock purchased directly from the Company under
the DRP will be a price equal to the market price of the Common Stock less a 3%
discount. The price of the shares of Common Stock purchased on the open market
will be the average price of all shares of Common Stock purchased for all
Participant's in the DRP without any discount. The same purchase price will
apply to the reinvestment of cash dividends and to any optional cash purchases.
PREFERRED STOCK
As of May 6, 1997, there were 2,760,000 outstanding shares of Preferred
Stock held by approximately 160 holders of record. The Board of Directors is
authorized to designate with respect to each series of Preferred Stock the
number of shares in each such series, the dividend rates and dates of payment,
voluntary and involuntary liquidation preferences, redemption prices, if any,
whether or not dividends shall be cumulative and, if cumulative, the date or
dates from which the same shall be cumulative, the sinking fund provisions if
any, and the terms and conditions on which shares can be converted into or
exchanged for shares of another class or series, and the voting rights, if any.
As of the date hereof, there were no shares of Preferred Stock issued and
outstanding.
Any Preferred Stock issued will rank prior to the Common Stock as to
dividends and as to distributions in the event or liquidation, dissolution or
winding up of the Company. The ability of the Board of Directors to issue
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting powers of holders of Common Stock. The Preferred Stock will,
when issued, be fully paid and nonassessable.
SECURITIES WARRANTS
General. The Company may issue Securities Warrants for the purchase of
Common Stock or Preferred Stock. Such warrants are referred to herein as Common
Stock Warrants and Preferred Stock Warrants, as appropriate. Securities Warrants
may be issued independently or together with any other Securities covered by the
Registration Statement offered by this Prospectus and any accompanying
Prospectus Supplement and may be attached to or separate from such other
Securities. Each issuance of Securities Warrants will be issued under a separate
agreement ("Securities Warrant Agreement") to be entered into between the
Company and
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<PAGE> 26
a bank or trust company, as agent ("Securities Warrant Agent"), all as set forth
in the Prospectus Supplement relating to the particular issue of offered
Securities Warrants. Each issue of Securities Warrants will be evidenced by
warrant certificates (the "Securities Warrant Certificates"). The Securities
Warrant Agent will act solely as an agent of the Company in connection with the
Securities Warrant Certificates and will not assume any obligation or
relationship of agency or trust for or with any holders of Securities Warrant
Certificates or beneficial owners of Securities Warrants.
If Securities Warrants are offered, the applicable Prospectus
Supplement will describe the terms of such Securities Warrants, including the
following where applicable: (i) the offering price; (ii) the aggregate number of
shares purchasable upon exercise of such Securities Warrants, and in the case of
Securities Warrants for Preferred Stock, the designation, aggregate number and
terms of the series of Preferred Stock purchasable upon exercise of such
Securities Warrants; (iii) the designation and terms of the Securities with
which such Securities Warrants are being offered and the number of such
Securities Warrants being offered with each such Security; (iv) the date on and
after which such Securities Warrants and the related Securities will be
transferable separately; (v) the number of shares of Preferred Stock or shares
of Common Stock purchasable upon exercise of each such Securities Warrant and
the price at which such number of shares of Preferred Stock of such series or
shares of Common Stock may be purchased upon such exercise; (vi) the date on
which the right to exercise such Securities Warrants shall commence and the
Expiration Date on which such right shall expire, (vii) certain federal income
tax consequences; and (viii) any other material terms of such Securities
Warrants.
Securities Warrant Certificates may be exchanged for new Securities
Warrant Certificates of different denominations, may (if in registered form) be
presented for registration or transfer, and may be exercised at the corporate
trust office of the appropriate Securities Warrant Agent or other office
indicated in the applicable Prospectus Supplement. Prior to the exercise of any
Securities Warrants to purchase Preferred Stock or Common Stock, holders of such
Preferred Stock Warrants or Common Stock Warrants will not have any rights of
holders of the respective Preferred Stock or Common Stock purchasable upon such
exercise, including the right to receive payments of dividends, if any, on the
Preferred Stock or Common Stock purchasable upon such exercise or to exercise
any applicable right to vote.
No Rights as Shareholders. Holders of Securities Warrants will not be
entitled by virtue of being such holders, to vote, to consent, to receive
dividends, to receive notice as shareholders with respect to any meeting of
shareholders for the election of directors of the Company or any other matter,
or to exercise any rights whatsoever as shareholders of the Company.
SHAREHOLDER RIGHTS
General. The Company may issue, as a dividend at no cost, Shareholder
Rights to holders of record of the Company's Securities or any class thereof on
the applicable record date. If Shareholder Rights are so issued to existing
holders of Securities each Shareholder Right will entitle the registered holder
thereof to purchase the Securities pursuant to the terms set forth in the
applicable Prospectus Supplement.
If Shareholder Rights are issued, the applicable Prospectus Supplement
will describe the terms of such Shareholder Rights including the following where
applicable: (i) record date; (ii) the subscription price; (iii) Subscription
Agent, (iv) the aggregate number of shares of Preferred Stock or shares of
Common Stock purchasable upon exercise of such Shareholder Rights and in the
case of Shareholder Rights for Preferred Stock, the designation, aggregate
number and terms of the series of Preferred Stock purchasable upon exercise of
such Shareholder Rights; (v) the date on and after which such Shareholder Rights
and the related Securities will be transferable separately; (vi) the date on
which the right to exercise such Shareholder Rights shall commence and the
expiration date on which such right shall expire; (vii) certain federal income
tax consequences; and (viii) any other material terms of such Shareholder
Rights.
In addition to the terms of the Shareholder Rights and the Securities
issuable upon exercise thereof, the Prospectus Supplement will describe, for a
holder of such Shareholder Rights who validly exercises all Shareholder Rights
issued to such holder, how to subscribe for unsubscribed Securities (issuable
pursuant to unexercised Shareholder Rights issued to other holders) to the
extent such Shareholder Rights have not been exercised.
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<PAGE> 27
No Rights as Shareholders. Holders of Shareholder Rights will not be
entitled by virtue of being such holders, to vote, to consent, to receive
dividends, to receive notice as shareholders with respect to any meeting of
shareholders for the election of directors of the Company or any other matter,
or to exercise any rights whatsoever as shareholders of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and the registrar for the Company's Common Stock and
Preferred Stock is State Street Bank & Trust Company, 2 Heritage Drive, North
Quincy, Massachusetts, 02171. Effective June 2, 1997, the new transfer agent and
registrar for the Company's Common Stock and Preferred Stock will be Continental
Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements for qualification for the tax benefits accorded
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), are
that (i) during the last half of each taxable year not more than 50% in value of
the outstanding shares may be owned directly or indirectly by five or fewer
individuals and (ii) there must be at least 100 shareholders for at least 335
days in each taxable year. Those requirements apply for all taxable years after
the year in which a REIT elects REIT status.
The Articles of Incorporation generally prohibits, subject to the
settlement rules of the NYSE, any person or group of persons from acquiring or
holding, directly or indirectly, ownership of a number of shares of capital
stock in excess of 9.8% of the outstanding shares. Shares of capital stock owned
by a person or group of persons in excess of such amounts are referred to as
"Excess Shares." For this purpose the term "ownership" is defined in accordance
with the Code, the constructive ownership provisions of Section 544 of the Code
and Rule 13d-3 promulgated under the Exchange Act, and the term "group" is
defined to have the same meaning as that term has for purposes of Section
13(d)(3) of the Exchange Act. Accordingly, shares of stock owned or deemed to be
owned by a person who individually owns less than 9.8% of the shares outstanding
may nevertheless be Excess Shares.
For purposes of determining whether a person holds Excess Shares, a
person or group will be treated as owning not only shares of capital stock
actually or beneficially owned, but also any shares of capital stock attributed
to such person or group under constructive ownership provisions contained in
Section 544 of the Code.
The Articles of Incorporation provide that in the event any person
acquires Excess Shares, each Excess Share may be redeemed at any time by the
Company at the closing price of a share of stock of such class on the NYSE on
the last business day prior to the redemption date. From and after the date
fixed for redemption of Excess Shares, such shares shall cease to be entitled to
any distribution and other benefits, except only the right to payment of the
redemption price for such shares.
Under the Articles of Incorporation any acquisition of shares that
would result in failure to qualify as a REIT under the Code is void to the
fullest extent permitted by law, and, subject to the settlement requirements of
the NYSE, the Board of Directors is authorized to refuse to transfer shares to a
person if, as a result of the transfer, that person would own Excess Shares.
Prior to any transfer or transaction which, if consummated, would cause a
shareholder to own Excess Shares, and in any event upon demand by the Board of
Directors, a shareholder is required to file with the Company an affidavit
setting forth, as to that shareholder, the information required to be reported
in returns filed by shareholders under Treasury Regulation Section 1.857-9 and
in reports filed under Section 13(d) of the Exchange Act. Additionally, each
proposed transferee of shares of capital stock, upon demand of the Board of
Directors, also may be required to file a statement or affidavit with the
Company setting forth the number of shares already owned by the transferee and
any related person.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through one or more underwriters
or dealers for public offering and sale, to one or more investors directly or
through agents, to existing holders of its Common Stock directly through the
issuance of Shareholders Rights as a dividend, or through any combination of
these methods of sale. Any such underwriter or agent involved in the offer and
sale of the Securities will be named in the applicable Prospectus Supplement.
The distribution of the Securities may be effected from time to time in
one or more transactions at a fixed price or prices,
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<PAGE> 28
which may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, or at negotiated prices (any of which
may represent a discount from the prevailing market prices). The Company may
also sell shares of its Common Stock from time to time through one or more
agents in ordinary brokers' transaction on the NYSE. Such sales may be effected
during a series of one or more pricing periods at prices related to the
prevailing market prices reported on the NYSE, as shall be set forth in the
applicable Prospectus Supplement.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities, for whom
they may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concession or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
Securities may be deemed to be underwriters under the Securities Act, and any
discounts or commissions they receive from the Company and any profit on the
resale of Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on the NYSE. Any shares of Common
Stock sold pursuant to a Prospectus Supplement will also be listed on the NYSE,
subject to official notice of issuance. The Company may elect to list any series
of Preferred Stock on an exchange, but is not obligated to do so. It is possible
that one or more underwriters may make a market in a series of Securities, but
will not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of, or
the trading market for, the Securities.
Under agreements into which the Company may enter, underwriters,
dealers and agents who participate in the distribution of Securities may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act. Underwriters, dealers and agents
may engage in transactions with or perform services for the Company in the
ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company
may authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at regular intervals over a fixed period of time pursuant to negotiated
subscription commitments. Institutions with which such subscription commitments
may be made to include commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable institutions and
others, but in all cases such institutions must be approved by the Company. The
obligations of any purchaser under any such subscription commitments will be
subject to certain conditions, including that the purchase of the Securities
shall not be prohibited under the laws of the jurisdiction to which such
purchaser is subject, as well as to the specific terms and conditions negotiated
that will be set forth in the applicable Prospectus Supplement. The underwriters
and such other agents will not have any responsibility in respect of the
validity or performance of such subscription commitments.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Subject to the applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the Securities offered hereby may not
be able to simultaneously engage in market making activities with respect to the
Securities for a period of two business days prior to the commencement of such
distribution.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Code provides special tax treatment for organizations that qualify
and elect to be taxed as REITs. This treatment eliminates most of the "double
taxation" (at the corporate level and then again at the shareholder level when
the income is distributed) that typically results from investment in
corporations. To qualify for tax treatment as a REIT under the Code, the Company
must meet certain tests. The Company elected to be taxed as a REIT under the
Code commencing with its taxable year ending December 31, 1993. That election
continues in effect until revoked or terminated.
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<PAGE> 29
Based on existing law and certain representations made to Counsel by
the Company, Counsel is of the opinion that the Company operated in a manner
consistent with its qualifying as a REIT under the Code since the beginning of
its 1993 taxable year through March 31, 1997, the date of the Company's last
unaudited balance sheet and income statement made available to Counsel, and the
organization and contemplated method of operation of the Company are such as to
enable it to continue to so qualify throughout the balance of 1997 and in
subsequent years. However, whether the Company will in fact so qualify will
depend on actual operating results and compliance with the various tests for
qualification as a REIT relating to its income, assets, distributions, ownership
and certain administrative matters, the results of which may not be reviewed by
Counsel. Moreover, certain aspects of the Company's method of operations have
not been considered by the courts or the Service. There can be no assurance that
the courts or the Service will agree with this opinion. In addition,
qualification as a REIT depends on future transactions and events that cannot be
known at this time. Accordingly, Counsel is unable to opine whether in the
future the Company will actually operate in a manner that will enable it to
qualify as a REIT under the Code.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it generally will
not be subject to federal income tax on that portion of its taxable income or
net capital gain which is distributed to its shareholders. The Company will,
however, be subject to tax at normal corporate rates upon any net income or net
capital gain not distributed. The Company intends to distribute substantially
all of its taxable income to its shareholders on a pro rata basis in each year.
TAXATION OF THE HOLDERS OF THE COMPANY'S SECURITIES
General. Payments to holders of the Company's bonds or debentures will
be taxable interest income to the extent properly designated as interest or
original issue discount. The Company will report such income to individual
holders of bonds or debentures by January of the following year. The Company
will notify shareholders after the close of the Company's taxable year as to the
portions of the distributions which constitute ordinary income, return of
capital and capital gain. Dividends and distributions declared in the last
quarter of any year payable to shareholders of record on a specified date in
such month will be deemed to have been received by the shareholders and paid by
the Company on December 31 of the record year, provided that such dividends are
paid before February 1 of the following year. Distributions of the Company will
not be eligible for the dividends received deduction for corporations.
Shareholders may not deduct any net operating losses or capital losses of the
Company.
Taxation of Tax-Exempt Entities. The Company does not expect to incur
excess inclusion income and therefore does not prohibit Tax-Exempt Entities or
"disqualified organizations" from investing in its Securities. In general, a
Tax-Exempt Entity that is a holder of the Company's Securities will not be
subject to tax on distributions.
Taxation of Shareholder Rights. If the Company makes a distribution of
Shareholder Rights, in general a Shareholder's basis in the Rights received in
such distribution will be zero. If the fair market value of the Rights on the
date of issuance is 15% or more of the value of the Common Stock or if the
Shareholder so elects regardless of the value of the Rights, the Shareholder
will make an allocation between the relative fair market values of the Rights
and the Common Stock on the date of issuance of the Rights. On exercise of the
Rights, the Shareholder will generally not recognize gain or loss. The
Shareholder's basis in the Shares received from the exercise of the Rights will
be the amount paid for the Shares plus the basis, if any, of the Rights
exercised.
Foreign Investors. In general, foreign investors will be subject to
special withholding tax requirements on income and capital gains distributions
attributable to their ownership of the Company's Securities subject to reduction
pursuant to an applicable income tax treaty.
Dividend Reinvestment Plan. For income tax purposes, shareholders
participating in the DRP will be deemed to have received the full amount of any
cash distributions that the Company would have paid to them had they not elected
to participate in the DRP. Shares of Common Stock received under the program
will have a holding period beginning with the day after purchase through the DRP
and a tax basis equal to the gross amount of the distribution.
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<PAGE> 30
ERISA INVESTORS
Because the Common Stock will qualify as a "publicly offered security",
employee benefit plans and Individual Retirement Accounts may purchase shares of
Common Stock and treat such shares, and not the Company's assets, as plan
assets. Fiduciaries of ERISA plans should consider (i) whether an investment in
the Common Stock satisfies ERISA diversification requirements, (ii) whether the
investment is in accordance with the plans' governing instruments, and (iii)
whether the investment is prudent.
LEGAL MATTERS
Jeffers, Wilson, Shaff & Falk, LLP, as counsel to the Company, has
rendered an opinion to the Company to the effect that the shares of Capital
Stock offered hereby have been legally issued, and are fully-paid and
nonassessable. Certain tax matters discussed under "Federal Income Tax
Consequences" and "ERISA Investors" have also been included herein in reliance
on the opinion of Jeffers, Wilson, Shaff & Falk, LLP. Michael B. Jeffers, Esq.,
Secretary of the Company, is a member of that firm and owns 1% of the shares of
the Manager.
EXPERTS
The financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, which is incorporated by
reference in this Prospectus or elsewhere in the Registration Statement of which
this Prospectus is a part, to the extent and for the periods indicated in the
reports, have been audited by McGladrey & Pullen, LLP, independent certified
public accountants, and are included herein in reliance on their report upon
their authority as experts in auditing and accounting.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER
THAN THE REGISTERED SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.
--------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...............................S-3
Risk Factors.....................................S-12
Price Range of Common Stock and Dividends........S-13
Capitalization...................................S-14
Selected Financial Data..........................S-15
Federal Income Tax Considerations................S-16
Underwriting.....................................S-17
Legal Matters....................................S-18
Experts ........................................S-18
PROSPECTUS
Available Information............................ 2
Incorporation of Certain Documents by Reference.. 3
The Company...................................... 4
Use of Proceeds.................................. 6
Description of Securities........................ 6
Repurchase of Shares and Restrictions on Transfer 9
Plan of Distribution............................. 9
Federal Income Tax Considerations................ 10
ERISA Investors.................................. 12
Legal Matters.................................... 12
Experts ........................................ 12
</TABLE>
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- ----------------------------------------------------
800,000 SHARES
THORNBURG MORTGAGE
ASSET CORPORATION
COMMON STOCK
---------------------
PROSPECTUS SUPPLEMENT
---------------------
SUTRO & CO. INCORPORATED
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MAY 15, 1997
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