<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-11665
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 4, 1997)
1,100,000 SHARES
RWT
REDWOOD TRUST, INC.
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Redwood
Trust, Inc. (the "Company"). The Company's Common Stock is traded on the
over-the-counter market and is quoted on the Nasdaq National Market under the
symbol "RWTI." On April 3, 1997, the last reported sales price per share of
Common Stock, as reported by Nasdaq, was $42.375. See "Market Prices and
Dividend Data."
------------------------
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.
------------------------
<TABLE>
<CAPTION>
=========================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Per Share................................ $42.375 $0.375 $42.000
Total.................................... $46,612,500 $412,500 $46,200,000
=========================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting expenses payable by the Company estimated at $50,000.
The shares of Common Stock are offered by the Underwriter named herein,
when, as and if delivered to and accepted by the Underwriter, and subject to its
right to reject any order in whole or in part. It is expected that delivery of
the certificates representing the shares of Common Stock will be made against
payment therefor at the offices of Montgomery Securities on or about April 9,
1997.
------------------------
MONTGOMERY SECURITIES
April 4, 1997
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. 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 NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" INCORPORATED BY REFERENCE 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.
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<PAGE> 3
PROSPECTUS SUPPLEMENT 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. Capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Glossary to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
which is incorporated herein by reference.
THE COMPANY
Redwood Trust, Inc. ("Redwood Trust" or the "Company") was incorporated in
Maryland on April 11, 1994 and commenced operations on August 19, 1994. The
Company completed its initial public offering of 3,593,750 shares of common
stock, par value $0.01 per share ("Common Stock") on August 4, 1995 at a price
of $15.50 per share. On April 19, 1996 the Company completed its second public
offering of 2,875,000 shares of Common Stock at a price of $20.25 per share. On
August 8, 1996 the Company completed its public offering of 1,006,250 shares of
Class B 9.74% Cumulative Convertible Preferred Stock (the "Class B Preferred
Stock") at a price of $31.00 per share. On November 19, 1996 the Company
completed its third public offering of 1,250,000 shares of Common Stock at a
price of $31.75 per share. On January 24, 1997 the Company completed its fourth
public offering consisting of 750,000 shares of Common Stock at a price of
$39.50 per share.
The Company specializes in acquiring and managing real estate mortgage
assets ("Mortgage Assets") which may be acquired as whole loans ("Mortgage
Loans") or as mortgage securities representing interests in or obligations
backed by pools of mortgage loans ("Mortgage Securities"). To date, a majority
of the Company's acquisitions have been Mortgage Securities. The Company
acquires Mortgage Assets that are secured by single-family real estate
properties located throughout the United States with a special emphasis on
properties located in the State of California, and may in the future acquire
Mortgage Assets secured by multi-family and commercial real estate properties.
Because the Company has elected to be subject to tax as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"),
it will generally not be subject to tax on its Federal income to the extent that
it distributes its earnings to its stockholders and it maintains its
qualification as a REIT. The Company is self-advised and self-managed.
The goal of the Company is to be an efficient long-term holder of Mortgage
Assets and to seek to benefit from any improvement in the real estate markets in
California and the United States. Currently, substantially all of the Company's
Mortgage Assets are adjustable rate, bearing interest rates that adjust at least
annually based on changes in short-term market interest rates. The Company
intends to acquire additional Mortgage Assets through selected purchases of
Mortgage Securities and acquisitions of Mortgage Loans. The Company also may
create Mortgage Securities by using its Mortgage Assets as collateral. The
Company finances its purchases with the proceeds of equity offerings and
borrowings (primarily under reverse repurchase agreements) whose interest rates
also reflect changes in short-term market interest rates. The Company attempts
to structure its borrowings to have interest rate adjustment indices and
interest rate adjustment periods that, on an aggregate basis, generally
correspond (within a range of one to six months) to the interest rate adjustment
indices and interest rate adjustment periods of the adjustable-rate Mortgage
Assets purchased by the Company. The Company may acquire fixed rate Mortgage
Assets in the future.
The Company was founded in 1994 by George E. Bull (Chairman and Chief
Executive Officer), Douglas B. Hansen (President and Chief Financial Officer)
and Frederick H. Borden (Vice Chairman and Secretary). This management team has
extensive experience in managing portfolios of Mortgage Assets, arranging
collateralized borrowings and utilizing asset/liability management techniques to
hedge balance sheet risks. Additionally, they have served in various capacities
in the banking, insurance, investment banking and investment management
industries and have managed both healthy and troubled financial institutions as
well as both performing and non-performing Mortgage Assets. This management team
founded Redwood Trust with the objective of building a company that could
compete favorably with its competitors by maintaining low operating expenses,
utilizing the team's expertise in managing Mortgage Assets and electing to be
subject to tax on its Federal income as a REIT.
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<PAGE> 4
From the commencement of operations on August 19, 1994 through December 31,
1996, the Company acquired Mortgage Assets that had a carrying value at December
31, 1996 of approximately $2.15 billion. At December 31, 1996 the Company
carried all its Mortgage Assets on its books at market value. See "Recent
Developments" for a discussion regarding certain Mortgage Assets in the future
being carried at historical cost. All Mortgage Assets held at December 31, 1996
were adjustable rate single-family residential Mortgage Loans or securitized
interests in pools of such Mortgage Loans. As of December 31, 1996, 97% of the
Company's Mortgage Assets were investment grade equivalent (i.e., one of the
four highest rating levels by one or more nationally recognized mortgage
security rating agencies or the equivalent as determined by the Company), and
the Mortgage Asset portfolio had an average credit rating equivalent of AA+, as
determined by the Company.
All of these Mortgage Assets were acquired in the secondary market for
mortgage loans or directly from mortgage origination firms.
BUSINESS AND STRATEGY
The Company's principal business objective is to produce net interest
income on its Mortgage Assets while maintaining strict cost controls in order to
generate net income for distribution to stockholders. The Company seeks to
distribute dividends to stockholders at levels that generally adjust, following
a lag period, with changes in short-term market interest rates and that may
increase over time in the event of improvements in real estate markets. To
achieve its business objective and generate dividend yields that provide a
relatively attractive rate of return for stockholders, the Company's strategy
is:
- to purchase Single-Family Mortgage Assets, the majority of which are
currently expected to have adjustable interest rates based on changes in
short-term market interest rates, with an emphasis on mortgage interests
on residential properties located in California;
- to manage the credit risk of its Mortgage Assets through, among other
activities: (i) carefully selecting Mortgage Assets to be acquired,
including an underwriting review of Mortgage Loans and lower-rated
Mortgage Securities, (ii) following the Company's policies with respect
to credit risk concentration which, among other things, require the
Company to maintain a Mortgage Asset portfolio with a weighted average
rating level of A- or better, (iii) actively monitoring the ongoing
credit quality and servicing of its Mortgage Assets, and (iv) maintaining
appropriate capital levels and allowances for possible credit losses;
- to finance such purchases with the proceeds of equity offerings and, to
the extent permitted by the Company's capital and liquidity policies, to
utilize leverage to increase potential returns to stockholders through
borrowings;
- to attempt to structure its borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
generally correspond (within a range of one to six months) to the
interest rate adjustment indices and interest rate adjustment periods of
the adjustable-rate Mortgage Assets purchased by the Company;
- to utilize interest rate caps, swaps and similar instruments to mitigate
the risk of the cost of its variable rate liabilities increasing at a
faster rate than the earnings on its Mortgage Assets during a period of
rising interest rates;
- to seek to minimize prepayment risk by structuring a diversified
portfolio with a variety of prepayment characteristics and through other
means;
- to apply securitization techniques designed to enhance the value and
liquidity of the Company's Mortgage Assets acquired in the form of
Mortgage Loans by securitizing them into Mortgage Securities that are
tailored to the Company's objectives;
- to re-securitize portions of its Mortgage Securities portfolio when the
underlying Mortgage Loans have improved in credit quality through
seasoning or rising underlying property values, or when the credit
quality of a junior class of security improves due to the prepayment of
more senior classes, as such re-
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<PAGE> 5
securitization transactions may result in improved credit ratings, higher
market values and lowered borrowing costs;
- to use Mortgage Assets to collateralize the issuance of long term
collateralized mortgage bonds;
- to broaden the scope of its mortgage acquisitions over time to include
fixed rate single-family mortgages, multifamily mortgages and commercial
mortgages when management deems such purchases to be in the best
interests of shareholders; and
- to strive to become more cost-efficient over time.
The Company believes that the current economic environment is favorable for
the Company's business strategy. The Company is located in California and a
substantial portion of its non-agency Mortgage Assets currently are, and are
expected in the future to be, represented by mortgage interests on real property
located in California. The Company believes that there are attractive Mortgage
Asset acquisition opportunities in Northern and Southern California today due to
the diversity of the economy and the size, depth and liquidity of its real
estate property markets, and that there may be significant potential for
appreciation in real estate values in California in the future. At December 31,
1995 and December 31, 1996, approximately 71% and 53%, respectively, of the
Company's non-agency Mortgage Assets represented interests in mortgages on
residential real property located in California. Management believes that the
economy and the trend of residential housing values in California were generally
stable to improving in 1996.
The Company believes that its principal competition in the business of
acquiring and managing Mortgage Assets are financial institutions such as banks,
savings and loans, life insurance companies, institutional investors such as
mutual funds and pension funds, and certain other mortgage REITs. While many of
these entities have significantly greater resources than the Company, the
Company anticipates that it will be able to compete effectively due to its
relatively low level of operating costs, relative freedom to securitize its
assets, ability to utilize prudent amounts of leverage through accessing the
wholesale market for collateralized borrowings, freedom from certain forms of
regulation and the tax advantages of its REIT status.
The Company believes it is and plans to continue to be a "low cost
producer" compared to most of its competitors in the business of holding
Mortgage Assets. Accordingly, the Company plans to generate relatively
attractive earnings and dividends while holding Mortgage Assets of higher credit
quality and maintaining a lower interest rate risk profile as compared to its
principal competitors. The Company will attempt to be increasingly
cost-efficient by: (i) seeking to raise additional capital from time to time in
order to increase its ability to invest in Mortgage Assets as operating costs
are not anticipated to increase as quickly as Mortgage Assets and because growth
will increase the Company's purchasing influence with suppliers of Mortgage
Assets; (ii) striving to lower its effective borrowing costs over time through
seeking direct funding with collateralized lenders rather than using Wall Street
intermediaries and investigating the possibility of using commercial paper and
medium term note programs; (iii) improving the efficiency of its balance sheet
structure by investigating the issuance of various forms of debt and capital;
and (iv) utilizing information technology to the fullest extent possible in its
business, which technology the Company believes can be developed to improve the
Company's ability to monitor the performance of its Mortgage Assets, improve its
ability to assess credit risk, improve hedge efficiency and lower operating
costs.
MORTGAGE ASSETS
The Mortgage Assets purchased by the Company will consist primarily of
Single-family, Multifamily and Commercial Mortgage Assets. Although all of the
Company's Mortgage Assets purchased through December 31, 1996 were Single-Family
Mortgage Assets, the Company may acquire Multifamily Mortgage Assets and
Commercial Mortgage Assets from time to time in the future when this strategy is
consistent with its Asset Acquisition/Capital Allocation Policies. At the
present time, the Company expects a majority of its Mortgage Assets to continue
to be comprised of assets bearing adjustable interest rates. However, fixed rate
Mortgage Assets may be acquired when they satisfy the Company's Asset
Acquisition/Capital Allocation Policies and management believes they will
contribute to the Company's business objectives with respect to desired levels
of income and dividend distributions. From time to time, the Company may also
acquire
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common stock in other REITs that invest primarily in Mortgage Assets if the
Company believes the returns on such common stock are good and such
opportunities are as favorable or more favorable than investing in Mortgage
Assets directly. The Company may also acquire its own stock, when permitted by
applicable securities and state corporation laws.
The Company expects that a majority of its Mortgage Assets will have
investment grade ratings (the four highest rating levels) from one or more
nationally recognized mortgage security rating agencies or be deemed by the
Company to be of comparable credit quality. Based upon the Company's investment
strategy and the guidelines under the Company's Asset Acquisition/Capital
Allocation Policies, the Company expects that the weighted average rating of its
Mortgage Assets (including the Company's deemed equivalent ratings for unrated
Mortgage Assets) will be at least an "A-" rating level under the Standard &
Poor's Corporation ("S&P") rating system or at a comparable level under other
rating systems.
In no event will the Company acquire or retain any real estate mortgage
investment conduit ("REMIC") residual interest that may give rise to "excess
inclusion" income as defined under Section 860E of the Code.
At December 31, 1996, the Company's Mortgage Assets consisted of the
following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996(1)
------------------------------------------------------
PERCENT OF
MORTGAGE ASSETS RATING SCALE(2)
CARRYING VALUE --------------- ---------------
--------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Whole Loans(3)........................... $ 525,475 24.4% 1.5
AAA -- Agency............................ 968,944 45.0% 1.0
AAA...................................... 350,841 16.3% 1.0
AA....................................... 256,809 12.0% 2.0
A........................................ 18,655 0.9% 3.0
BBB...................................... 7,083 0.3% 4.0
BB....................................... 11,179 0.5% 5.0
B........................................ 13,814 0.6% 6.0
Other.................................... 628 0.0% 6.0
---------- ----- ----
Total/Weighted Average................... 2,153,428 100% 1.36
Weighted Average Rating.................. AA+
Percentage Investment Grade.............. 97%
</TABLE>
- ---------------
(1) All Mortgage Assets are rated by one or more of the four nationally
recognized rating agencies or are assigned a rating deemed equivalent by the
Company. When rating agencies have assigned different ratings to the same
Mortgage Asset, management has assigned that Mortgage Asset to the category
it believes is most appropriate.
(2) For purposes of computing a weighted average portfolio rating, management
has assigned a number to each rating level, with AAA being a "1" and B or
below being a "6," as indicated in the foregoing table.
(3) If rated, management believes that 90-95% of these Mortgage Loans would
receive investment grade ratings. For inclusion in the overall averages, 94%
are assumed to be investment grade, producing an average rating of AA+.
Among the Mortgage Asset choices available to the Company, the Company
acquires those Mortgage Assets which the Company believes will generate the
highest returns on capital invested, after considering (i) the amount and nature
of the anticipated cashflows from the Mortgage Asset, (ii) the Company's ability
to pledge the Mortgage Asset to secure collateralized borrowings, (iii) the
increase in the Company's risk-adjusted capital requirement determined by the
Company's Risk-Adjusted Capital Policy resulting from the purchase and financing
of the Mortgage Asset, and (iv) the costs of financing, hedging, managing,
securitizing and reserving for the Mortgage Asset. Prior to acquisition,
potential returns on capital employed are assessed over the life of the Mortgage
Asset and in a variety of interest rate, yield spread, financing cost, credit
loss and prepayment scenarios.
Credit Risk Management Policies
The Company reviews credit risk, interest rate risks and other risk of loss
associated with each investment and determines the appropriate allocation of
capital to apply to such investment under its Risk-Adjusted
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Capital Policy. In addition, the Company attempts to diversify its investment
portfolio to avoid undue geographic and other types of concentrations. The Board
of Directors monitors the overall portfolio risk and determines appropriate
levels of provision for loss.
With respect to its Mortgage Securities, the Company is exposed to various
levels of credit and special hazard risk, depending on the nature of the
underlying Mortgage Assets and the nature and level of credit enhancements
supporting such securities. Most of the Mortgage Assets acquired by the Company
have some degree of protection from normal credit losses. At December 31, 1995
and December 31, 1996, 55.8% and 45.0%, respectively, of the Company's Mortgage
Assets were Mortgage Securities covered by credit protection in the form of a
100% guarantee from a government sponsored entity (GNMA, FNMA and FHLMC)
("Agency Certificates").
An additional 38.1% and 30.6% of the Company's Mortgage Assets at December
31, 1995 and December 31, 1996, respectively, were Privately Issued Certificates
and represented interests in pools of residential mortgage loans with partial
credit enhancement; of these amounts, 85% and 96% were rated investment grade
equivalent, respectively. Credit loss protection for Privately Issued
Certificates is achieved through the subordination of other interests in the
pool to the interests held by the Company, through pool insurance or though
other means. The degree of credit protection varies substantially among the
Privately Issued Certificates held by the Company. While most Privately Issued
Certificates held by the Company have some degree of credit enhancement, some of
such Mortgage Assets are, in turn, subordinated to other interests. Thus, should
such a Privately Issued Certificate experience credit losses, such losses could
be greater than the Company's pro rata share of the remaining mortgage pool, but
in no event could exceed the Company's investment in such Privately Issued
Certificate. At December 31, 1996, the amount of realized credit losses a
particular pool of mortgages represented by Privately Issued Certificates would
have to experience before the Company would bear responsibility for any credit
losses ranged from 0% to 48% of the pool balance. The Company has undertaken an
independent underwriting review of a sample of the loans underlying the
Privately Issued Certificates that are rated below BBB.
All of the Company's Mortgage Assets have received a credit rating from one
or more nationally recognized rating agencies or have been assigned a rating
deemed equivalent by the Company. At December 31, 1996, the average rating of
the Company's Mortgage Assets, as adjusted to a single format and weighted by
carrying value, was AA+. At December 31, 1996, the average rating of the
non-agency Mortgage Assets was AA+.
At December 31, 1996, the Company owned $525.5 million of whole Mortgage
Loans, which comprised 24.4% of the Company's total Mortgage Assets at such
date. In preparation for purchases of Mortgage Assets in the form of Mortgage
Loans, the Company developed a quality control program to monitor the quality of
loan underwriting at the time of acquisition and on an ongoing basis. The
Company conducts a legal document review to verify the general accuracy and
completeness of the information contained in the mortgage notes, security
instruments and other pertinent documents in the file. As a condition of
purchase, the Company selects a sample of Mortgage Loans targeted to be
acquired, focusing on those Mortgage Loans with higher risk characteristics, and
submits them to a third party, nationally recognized underwriting review firm
for a compliance check of underwriting and review of income, asset and appraisal
information. In addition, the Company or its agents will underwrite all
Multifamily and Commercial Mortgage Loans acquired. During the time it holds
Mortgage Loans, the Company will be subject to risks of borrower defaults and
bankruptcies and special hazard losses (such as those occurring from earthquakes
or floods) that are not covered by standard hazard insurance. The Company will
generally not obtain credit enhancements such as mortgage pool or special hazard
insurance for its Mortgage Loans, although individual loans may be covered by
FHA insurance, VA guarantees or private mortgage insurance and, to the extent
securitized into Agency Certificates, by such government sponsored entity
obligations or guarantees.
Capital and Leverage Policies
The Company's goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the
over-utilization of leverage, which could reduce the Company's
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<PAGE> 8
ability to meet its obligations during adverse market conditions. The Company
has established a "Risk-Adjusted Capital Policy" which limits management's
ability to acquire additional Mortgage Assets during times when the actual
capital base of the Company is less than a required amount defined in the
policy. In this way, the use of balance sheet leverage is controlled. The actual
capital base as defined for the purpose of the Risk-Adjusted Capital Policy is
equal to the market value of total assets less the book value of total
collateralized borrowings. The actual capital base, as so defined, represents
the approximate liquidation value of the Company and approximates the market
value of assets that can be pledged or sold to meet over-collateralization
requirements for the Company's borrowings. The unpledged portion of the
Company's actual capital base is available to be pledged or sold as necessary to
maintain over-collateralization levels for the Company's borrowings.
Prior to the fourth quarter of 1996, under its Risk-Adjusted Capital
Policy, management was prohibited from acquiring additional Mortgage Assets
during periods when the actual capital base of the Company was less than the
minimum amount required under such Risk-Adjusted Capital Policy (except when
such Mortgage Asset acquisitions may have been necessary to maintain REIT status
or the Company's exemption from the Investment Company Act of 1940). As a
result, the Company had generally grown in the past by issuing equity and then
seeking to acquire Mortgage Assets over time in order to fully employ the
capital raised. In order to employ new capital more efficiently, the Board of
Directors approved a permanent modification to the Company's Risk-Adjusted
Capital Policy on October 31, 1996. Management is now able to acquire Mortgage
Assets when attractive opportunities present themselves in excess of the level
at which the Company's capital base would have been fully employed under the
pre-modified Risk-Adjusted Capital Policy within certain limitations and in
certain circumstances. As a result, when additional equity is raised, some or
all of the assets necessary to fully employ this capital will have been
previously acquired. Such excess asset acquisitions are subject to a variety of
limitations, including (i) that additional asset growth not increase the balance
sheet size by more than 10% beyond the point at which capital would have been
fully employed under the pre-modified Risk-Adjusted Capital Policy guidelines,
and (ii) that the Company seek to issue additional equity to bring the Company
into compliance with the pre-modified Risk-Adjusted Capital Policy guidelines.
The Board of Directors reviews on a periodic basis various analyses
prepared by management of the risks inherent in the Company's balance sheet,
including an analysis of the effects of various scenarios on the Company's net
cash flow, earnings, dividends, liquidity and net market value. Should the Board
of Directors determine that the minimum required capital base set by the
Company's Risk-Adjusted Capital Policy is either too low or too high, the Board
of Directors will raise or lower the capital requirement accordingly.
The Company expects that its aggregate minimum capital requirement under
the Risk-Adjusted Capital Policy will approximate 5% to 15% of the market value
of the Company's Mortgage Assets. This percentage will fluctuate over time, and
may fluctuate out of the expected range, as the composition of the balance sheet
changes, haircut levels required by lenders change, the market value of the
Mortgage Assets changes and as liquidity capital cushion percentages set by the
Board of Directors are adjusted over time. As of December 31, 1996 the aggregate
Risk-Adjusted Capital Policy requirement was 10.0% of Mortgage Assets, and the
Company's actual capital base was 9.7% of Mortgage Assets. At December 31, 1996,
the Company had acquired excess assets in anticipation of its January 1997 stock
offering. See "Recent Developments" for a discussion of the impact on the
Risk-Adjusted Capital Policy guidelines of the issuance of collateralized
mortgage bonds.
The Risk-Adjusted Capital Policy also stipulates that at least 50% of the
capital base maintained to satisfy the liquidity capital cushion shall be
invested in Agency Certificates, AAA-rated adjustable-rate Mortgage Securities
or Mortgage Assets with similar or better liquidity characteristics. The Company
is currently in compliance with this requirement.
Pursuant to the Company's overall business strategy, a substantial portion
of the Company's borrowings are short-term or adjustable-rate. The Company's
borrowings currently consist of collateralized borrowing arrangements of various
types (reverse repurchase agreements, notes payable and one revolving line of
credit). In the future, however, the Company's borrowings may also be obtained
through loan agreements, Dollar-Roll Agreements (an agreement to sell a security
for delivery on a specified future date and a simultaneous
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<PAGE> 9
agreement to repurchase the same or a substantially similar security on a
specified future date) and other credit facilities with institutional lenders
and issuance of debt securities such as commercial paper, medium-term notes,
collateralized mortgage bonds and senior or subordinated notes.
ASSET/LIABILITY MANAGEMENT PROGRAMS
Interest Rate Risk Management Program
To the extent consistent with its election to qualify as a REIT, the
Company follows an interest rate risk management program intended to protect
against the effects of major interest rate changes. Specifically, the Company's
interest rate risk management program is formulated with the intent to offset
the potential adverse effects resulting from rate adjustment limitations on its
Mortgage Assets and the differences between interest rate adjustment indices and
interest rate adjustment periods of its adjustable-rate Mortgage Assets and
related borrowings. The Company's interest rate risk management program
encompasses a number of procedures, including: (i) the Company attempts to
structure its borrowings to have interest rate adjustment indices and interest
rate adjustment periods that, on an aggregate basis, generally correspond to the
interest rate adjustment indices and interest rate adjustment periods of the
adjustable-rate Mortgage Assets purchased by the Company, so as to limit
mis-matching of such aggregates to a range of one to six months, and (ii) the
Company attempts to structure its borrowing agreements relating to
adjustable-rate Mortgage Assets to have a range of different maturities and
interest rate adjustment periods (although substantially all reverse repurchase
agreements will be less than one year). As a result, the Company expects to be
able to adjust the average maturity/adjustment period of such borrowings on an
ongoing basis by changing the mix of maturities and interest rate adjustment
periods as borrowings come due and are renewed. Through use of these procedures,
the Company intends to minimize differences between interest rate adjustment
periods of adjustable-rate Mortgage Assets and related borrowings that may
occur.
The Company purchases interest rate caps, interest rate swaps and similar
instruments to attempt to mitigate the risk of the cost of its variable rate
liabilities increasing at a faster rate than the earnings on its Mortgage Assets
during a period of rising rates. In this way, the Company intends generally to
hedge as much of the interest rate risk as management determines is in the best
interests of the Company, given the cost of such hedging transactions and the
need to maintain the Company's status as a REIT, among other factors. This
determination may result in management electing to have the Company bear a level
of interest rate risk that could otherwise be hedged when management believes,
based on all relevant facts, that bearing such risk is advisable. The Company
also, to the extent consistent with its compliance with the REIT Gross Income
Tests, Maryland law and the no-action relief discussed below, utilizes financial
futures contracts, options and forward contracts as a hedge against future
interest rate changes. The Company obtained no-action relief from the
Commodities Futures Trading Commission prior to the initial public offering
permitting the Company to invest a small percentage of the Company's Mortgage
Assets in certain financial futures contracts and options thereon without
registering as a commodity pool operator under the Commodity Exchange Act,
provided that the Company uses such instruments solely for bona fide hedging
purposes.
The Company seeks to build a balance sheet and undertake an interest rate
risk management program which is likely, in management's view, to enable the
Company to generate positive earnings and maintain an equity liquidation value
sufficient to maintain operations given a variety of potentially adverse
circumstances. Accordingly, the hedging program addresses both income
preservation, as discussed in the first part of this section, and capital
preservation concerns. With regard to the latter, the Company monitors its
"equity duration." This is the expected percentage change in the Company's
equity (measured as the carrying value of total assets less book value of total
liabilities) that would be caused by a 1% change in short and long term interest
rates. To date, the Company believes that it has met its goal of maintaining an
equity duration of less than 15%. To monitor its equity duration and the related
risks of fluctuations in the liquidation value of the Company's equity, the
Company models the impact of various economic scenarios on the market value of
the Company's Mortgage Assets, liabilities and interest rate agreements. The
Company believes that the existing hedging program will allow the Company to
maintain operations throughout a wide variety of potentially adverse
circumstances without further management action. Nevertheless, in order to
further preserve the Company's capital base (and lower its equity duration)
during periods when management believes a trend of
S-9
<PAGE> 10
rapidly rising interest rates has been established, management may decide to
increase hedging activities and/or sell assets. Each of these types of actions
may lower the earnings and dividends of the Company in the short term in order
to further the objective of maintaining attractive levels of earnings and
dividends over the long term.
In all of its interest rate risk management transactions, the Company
follows certain procedures designed to limit credit exposure to counterparties,
including dealing only with counterparties whose financial strength meets the
Company's requirements.
Although the Company believes it has developed a cost-effective
asset/liability management program to provide a level of protection against
interest rate and prepayment risks, no strategy can completely insulate the
Company from the effects of interest rate changes, prepayments and defaults by
counterparties. Further, certain of the Federal income tax requirements that the
Company must satisfy to qualify as a REIT limit the Company's ability to fully
hedge its interest rate and prepayment risks.
Prepayment Risk Program
The Company seeks to minimize the effects of faster or slower than
anticipated prepayment rates through structuring a diversified portfolio with a
variety of prepayment characteristics, investing in Mortgage Assets with
prepayment prohibitions and penalties, investing in certain Mortgage Securities
structures which have prepayment protections, and balancing Mortgage Assets
purchased at a premium with Mortgage Assets purchased at a discount. In certain
operating environments, however, it may not be possible for the Company to
acquire assets with a net balance of discount and premium. In such
circumstances, the risk of earnings variability resulting from changes in
prepayment rates may rise. In addition, the Company has purchased and may in the
future purchase additional interest-only strips to a limited extent as a hedge
against prepayment risk. Prepayment risk is monitored by management and the
Board of Directors through periodic review of the impact of a variety of
prepayment scenarios on the Company's revenues, net earnings, dividends, cash
flow and net balance sheet market value.
DIVIDEND POLICY AND DISTRIBUTIONS
The Company intends to distribute to stockholders each year substantially
all of its net taxable income (which does not ordinarily equal net income as
calculated in accordance with GAAP) so as to qualify for the tax benefits
accorded to REITs under the Code. The Company intends to make dividend
distributions on the Common Stock at least quarterly; provided, however, that no
dividends will be paid or set apart for payment on shares of Common Stock unless
full cumulative dividends have been paid on the Class B Preferred Stock.
The Company has adopted a Dividend Reinvestment Plan and Stock Purchase
Plan ("DRP") that allows stockholders to have their dividends reinvested
automatically in shares of Common Stock at 97% of the then current market price.
The DRP also allows existing and prospective shareholders the opportunity to
purchase shares of Common Stock directly from the Company at 97% of the then
current market price by making optional cash payments of $500 to $5,000 per
month. Optional cash payments in excess of $5,000 may be made with permission of
the Company. The shares of Common Stock to be acquired for distribution under
the DRP will be purchased on the open market or directly from the Company, at
the option of the Company.
S-10
<PAGE> 11
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE FOR THE AUGUST 19,
YEAR ENDED YEAR ENDED 1994 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ --------------- ------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest Income.................................... $ 67,284 $ 15,726 $ 1,296
Interest and Hedge Expenses........................ 50,349 10,947 768
Net Interest Income................................ 16,935 4,779 528
Net Income Available to Common Stockholders........ 11,537 3,155 382
Primary Earnings per Share......................... $ 1.32 $ 0.85 $ 0.20
Dividends Declared per Class A Preferred
Share(1)......................................... $ -- $ 0.500 $ 0.250
Dividends Declared per Class B Preferred
Share(2)......................................... $ 1.141 $ -- $ --
Dividends Declared per Common Share................ $ 1.670 $ 0.460 $ --
</TABLE>
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 31,
1996 1995
--------------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total Mortgage Assets............................................ $ 2,153,428 $432,244
Total Assets..................................................... 2,184,197 441,557
Short-term Borrowings............................................ 1,953,103 370,316
Stockholders' Equity............................................. 211,005 68,290
</TABLE>
- ---------------
(1) All shares of Class A Preferred Stock were converted into Common Stock in
August 1995.
(2) All shares of Class B Preferred Stock were issued in August 1996.
RECENT DEVELOPMENTS
On March 5, 1997, the Company declared a Common Stock dividend of $0.60 per
share and a Class B Preferred Stock dividend of $0.755 per share. The dividends
are payable on April 21, 1997 to stockholders of record as of March 31, 1997.
From January 1, 1997 through April 3, 1997, a total of 131,240 of the
Company's stock purchase warrants were exercised and a total of 6,612 shares of
Class B Preferred stock were converted to common stock. At April 3, 1997, the
Company had outstanding 11,896,523 shares of Common Stock, 281,734 Stock
Purchase Warrants and 999,638 shares of Class B Preferred Stock.
In 1997 through April 3, 1997, the Company acquired or committed to acquire
$657 million of single-family adjustable-rate Mortgage Assets. These
acquisitions consist of approximately $256 million of "A" quality whole Mortgage
Loans, $269 million of private-label Mortgage Securities rated AAA or AA, and
$132 million of FHLMC- or FNMA-guaranteed Mortgage Securities. These
acquisitions have either closed or are scheduled to close by April 30, 1997. The
Company believes it currently has sufficient liquidity and borrowing capacity to
close all these transactions.
Approximately $62 million of these new Mortgage Assets consist of "hybrid"
adjustable-rate Mortgage Loans. Hybrid adjustable-rate mortgages have a fixed
rate coupon for a period (usually three to ten years from origination) and have
adjustable-rate coupon adjustments thereafter. The hybrid adjustable-rate
mortgages acquired by the Company had an average remaining period to the first
coupon adjustment of 30 months as of March 31, 1997. The Company has adjusted
its hedging strategies to take into account increased interest rate risk caused
by the longer period to first coupon adjustment in these hybrid ARMs.
In addition to the committed transactions described above, the Company
expects, pursuant to a written arrangement with a mortgage origination company,
to be offered at least $200 million of whole mortgage loans
S-11
<PAGE> 12
for settlement no later than June 30, 1997. Based on prior experience with this
originator, management believes that it is likely that final terms can be
negotiated and committed to on this proposed acquisition.
Upon completion of currently committed acquisitions, the total asset size
of the Company will be approximately $2.67 billion. Given these commitments, the
total capital required to meet the Company's Risk-Adjusted Capital Policy
guidelines is currently $266 million. With the addition of the proposed
acquisition of $200 million of whole loans, the Company's asset size will be
$2.87 billion and its internal capital guidelines will be approximately $286
million. The current capital base of the Company is $242 million. Thus the
Company requires approximately one half of the expected $46 million of equity to
be raised in this offering to meet its current commitments and requires the
remainder to complete the proposed transaction.
On March 4, 1997, Sequoia Mortgage Funding Corporation ("Sequoia"), a 100%
owned qualified REIT subsidiary of the Company, filed a debt shelf registration
statement with the Securities and Exchange Commission. The Company expects the
shelf to become effective in May 1997, although there can be no assurance of
such timing. If this shelf becomes effective, Sequoia intends to use it from
time to time to issue non-recourse long-term debt in the form of collateralized
mortgage bonds. This debt will be collateralized by Mortgage Assets which will
have been transferred from the Company to Sequoia. The Company currently
contemplates that a majority of Sequoia's long-term debt issuance will be rated
AAA. The Company, as consolidated, will retain all of its Mortgage Assets (and
will retain the credit risk, mortgage principal repayment risk, and some of the
shorter-term interest rate risks of such assets). As Sequoia does not anticipate
securitizing or selling its assets, no gains or losses from sale will be booked.
If one or more issuances of long-term debt through Sequoia are completed,
the Company expects to use the proceeds from such issuances to pay down a
portion of its short-term borrowings. The Company expects that its cost of funds
for such long-term debt will exceed its current cost of funds and that, as a
result, its interest rate spread will narrow. As a compensating factor, the
Company believes that the issuance of long-term debt will eliminate or
substantially reduce liquidity risk for that portion of its balance sheet and
may reduce some longer-term interest rate risks as well. As a result of this
risk reduction, the Company anticipates it will be able to lower its
Risk-Adjusted Capital Guideline levels for the portion of its assets which have
been transferred to and funded via Sequoia. The Company currently believes that
the combination of a higher cost of funds but a smaller equity allocation may
enable the Company to earn, on average over time, a similar or higher return on
equity from its investments in long-term funded assets than it currently does on
its short-term funded asset portfolio.
Although the Company may be able to reduce balance sheet risk, and possibly
increase average returns on equity, through the Sequoia program, it should be
noted that: (i) Sequoia's debt shelf registration may not become effective, (ii)
the Company may not be able to realize the benefits it anticipates from Sequoia
transactions, (iii) the current market demand for the type of debt Sequoia
anticipates issuing may not continue, (iv) the Company's return on equity may be
decreased for a period when Sequoia issues debt, as the Company's cost of funds
will rise but the capital made available for re-allocation to new mortgages will
not yet have been employed, and (v) due to the increased use of leverage, the
equity invested in assets funded via Sequoia is likely to have an increased
variability of returns with respect to changes in mortgage credit quality,
mortgage principal repayment rates, certain types of shorter-term interest rate
changes and other factors.
The Company's dividends through December 31, 1996 have consisted entirely
of ordinary income. Although future dividends could potentially include a return
of capital or a pass-through of capital gains or losses, the Company has had and
will continue to have a policy of managing its operations so as to not
distribute to shareholders unrelated business taxable income, excess inclusion
income, or other types of income that may cause similar concerns for pension
plans, Individual Retirement Accounts (IRAs) or other types of tax-deferred
investors. The Company intends to structure its issuances of long-term debt
through Sequoia accordingly.
Through December 31, 1996, the Company has classified all of its Mortgage
Assets and interest rate agreements as "available-for-sale" and, as a result,
has carried these assets on its balance sheet at fair market value (estimated
liquidation value). The Company anticipates that it may, in the future, classify
certain assets as "held-to-maturity." Accordingly, such assets will be carried
on the Company's balance sheet at historical
S-12
<PAGE> 13
amortized cost. Neither the use of this different type of balance sheet
classification nor the change from one type of balance sheet classification to
the other will effect in any way the manner in which the Company manages its
business or calculates its net income.
As a result of this change, the stockholders' equity numbers reported by
the Company on its balance sheets will become, in the opinion of management,
more difficult to interpret as they will incorporate mark-to-market adjustments
on some Mortgage Assets and interest rate agreements, but other assets and all
liabilities will be carried on the balance sheet at historical amortized cost.
Since information regarding market values of assets and liabilities is a very
important input into the management of the operations of the Company, and
because management believes that these market values are a source of potentially
valuable information for its shareholders, the Company intends to disclose
mark-to-market figures for all of its earning assets, interest rate agreements
and liabilities in the "Management's Discussion and Analysis" section of its
financial reports.
S-13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,100,000 shares of Common Stock being offered by the Company pursuant to this
Offering are estimated to be approximately $46,150,000 after deducting
underwriting discounts and commissions and estimated expenses. The net proceeds,
together with borrowings, will be used to purchase Mortgage Assets as described
herein and to raise its equity base to a level above the Risk-Adjusted Capital
Policy guidelines. See "Prospectus Supplement Summary -- Recent Developments."
Pending use of the proceeds to purchase such Mortgage Assets, the net proceeds
will be used to reduce borrowings. The Company intends to increase its
investment in Mortgage Assets by borrowing against existing Mortgage Assets and
using the proceeds to acquire additional Mortgage Assets. The Company's
borrowings are secured by the Mortgage Assets owned by the Company. Until the
proceeds are fully utilized along with borrowings in this manner, the Company's
net earnings are expected to be lower than would be the case if this financing
strategy were fully implemented.
RISK FACTORS
See the risk factors beginning on page 26 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, which is incorporated by
reference, for a discussion of certain factors that should be considered by
prospective purchasers of shares of Common Stock offered herein.
MARKET PRICES AND DIVIDEND DATA
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 Nasdaq National
Market composite tape and the cash dividends paid per share of outstanding
Common Stock.
<TABLE>
<CAPTION>
PRICE PER SHARE CASH
OF COMMON STOCK DIVIDENDS
---------------------- DECLARED
HIGH LOW PER SHARE(1)
------- ------- ------------
<S> <C> <C> <C>
1997
Second Quarter (through April 3, 1997)....................... $ 43.56 $ 42.25 $ (1)
First Quarter................................................ 56.75 36.50 0.60
1996
Fourth Quarter............................................... $ 37.50 $ 31.25 $ 0.41
Third Quarter................................................ 32.25 23.25 0.40
Second Quarter............................................... 28.00 19.38 0.40
First Quarter................................................ 21.75 18.75 0.46
1995
Fourth Quarter............................................... $ 22.00 $ 18.00 $ 0.26
Third Quarter(2)............................................. 22.00 16.88 0.20
</TABLE>
- ---------------
(1) As of the date of this Prospectus Supplement, the Company had not yet
declared a dividend for the second quarter.
(2) The Company's Common Stock began trading on August 4, 1995.
On April 3, 1997, the last reported sales price for the Common Stock was
$42.375 per share. As of March 31, 1997 the Company's 11,896,523 shares of
Common Stock were held by approximately 200 holders of record.
The Company intends to pay quarterly dividends. The Company intends to make
distributions to its stock holders of all or substantially all of its taxable
income in each year (subject to certain adjustments) so as to qualify for the
tax benefits accorded to a REIT under the Code. All distributions will be made
by the Company at the discretion of the Board of Directors and will depend on
the earnings of the Company, the financial condition of the Company, maintenance
of REIT status and such other factors as the Board of Directors may deem
relevant from time to time. No dividends will be paid or set apart for payment
on shares of Common Stock unless full cumulative dividends have been paid on the
Class B Preferred Stock.
S-14
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996, as adjusted for the January 1997 offering of 750,000 shares
at a Price to Public of $39.50 and as adjusted to give effect to the sale by the
Company of 1,100,000 shares of Common Stock at the Price to Public set forth on
the cover page of this Prospectus Supplement.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS ADJUSTED FOR
-------------------------
JANUARY 1997 THIS
ACTUAL OFFERING OFFERING
-------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY
Class B Preferred Stock, par value $0.01 per share:
1,006,250 shares authorized; 1,006,250 shares outstanding......... $ 29,579 $ 29,579 $ 29,579
Common Stock, par value $0.01 per share: 48,993,750 shares
authorized, 10,996,572, 11,746,572 and 12,846,572 shares
issued and outstanding........................................ 110 117 128
Additional paid-in capital.......................................... 187,507 216,808 257,947
Net unrealized loss on assets available for sale.................... (3,460) (3,460) (3,460)
Dividends in excess of income (1)................................... (2,731) (2,731) (2,731)
------- -------
Total Stockholders' Equity........................................ $211,005 $240,313 $281,463
</TABLE>
- ---------------
(1) Because the Company is a REIT, dividends are based on taxable income, which
differs from GAAP income as reported in the financial statements.
Cumulatively, total dividends have exceeded total GAAP income.
S-15
<PAGE> 16
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
financial statements of the Company for the years ended December 31, 1996 and
December 31, 1995 and the period from commencement of operations on August 19,
1994 to December 31, 1994. See the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 incorporated by reference herein.
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE FOR THE AUGUST 19,
YEAR ENDED YEAR ENDED 1994 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
OPERATING DATA
Interest income........................................... $ 67,284 $ 15,726 $ 1,296
Interest expense.......................................... 49,191 10,608 760
Interest rate agreement expense........................... 1,158 339 8
--------- --------- ---------
Net interest income....................................... 16,935 4,779 528
Provision for credit losses............................... 1,696 493 0
--------- --------- ---------
Net interest income after provision for credit losses..... 15,239 4,286 528
Operating expenses........................................ 2,554 1,131 146
--------- --------- ---------
Net income................................................ 12,685 3,155 382
Less cash dividends on Class B Preferred Stock............ 1,148 -- --
--------- --------- ---------
Net income available to holders of Common Stock........... $ 11,537 $ 3,155 $ 382
========= ========= =========
Net taxable income........................................ $ 14,020 $ 3,832 $ 353
Primary earnings per share................................ $ 1.32 $ 0.85 $ 0.20
Dividends declared per Class A preferred share............ $ -- $ 0.500 $ 0.250
Dividends declared per Class B preferred share............ $ 1.141 -- --
Dividends declared per Common share....................... $ 1.640 $ 0.460 --
Weighted average shares of Common Stock and Common Stock
equivalents............................................. 8,744,184 3,703,803 1,916,846
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
BALANCE SHEET DATA
Mortgage assets.................................................... $ 2,153,428 $ 432,244
Total assets....................................................... 2,184,197 441,557
Short-term borrowings.............................................. 1,953,103 370,316
Total liabilities.................................................. 1,973,192 373,267
Stockholders' equity............................................... 211,005 68,290
Number of Class B preferred shares outstanding..................... 1,006,250 0
Number of common shares outstanding................................ 10,996,572 5,517,299
</TABLE>
S-16
<PAGE> 17
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 dated
April 4, 1997 under the heading "Federal Income Tax Considerations" summarize
the material federal income tax provisions applicable to the Company as a REIT
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 aspect 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 stockholders. This treatment eliminates most of
the "double taxation" (at the corporate level and then again at the stockholder
level when the income is distributed) that typically results from investment in
public 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
stockholders 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. In the
opinion of Giancarlo & Gnazzo, A Professional Corporation, special tax counsel
to the Company ("Special Tax Counsel"), the Company has been organized and
operated in a manner that qualifies it as a REIT under the Code since the
commencement of its operations on August 19, 1994 through December 31, 1996, the
date of the Company's most recent audited financials reviewed by Special Tax
Counsel, and the Company's current and contemplated methods of operation, as
represented by the Company, will enable it to continue to so qualify. This
opinion is based on various assumptions relating to the organization and
operation of the Company to date and in the future and is conditioned upon
certain representations made by the Company as to certain factual matters. Such
opinion is not binding on the Internal Revenue Service or the courts and there
can be no assurance that the Company will in fact maintain compliance with those
assumptions and requirements at all times.
TAXATION OF HOLDERS OF THE COMPANY'S COMMON STOCK
The Company will notify stockholders 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. Through December 31, 1996 all
distributions have represented ordinary income. Dividends and distributions
declared in the last quarter of any year payable to stockholders of record on a
specified date in such quarter will be deemed to have been received by the
stockholders 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 that are stockholders. Stockholders may not deduct
any net operating losses or capital losses of the Company.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THE UNDERLYING PROSPECTUS AND
THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
SECURITIES.
S-17
<PAGE> 18
UNDERWRITING
Montgomery Securities (the "Underwriter") has agreed, subject to the terms
and conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company 1,100,000 shares of Common Stock at
the Price to Public, less the Underwriting Discounts and Commissions 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 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 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.
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 impose a penalty bid
on certain 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 will be passed on for
the Company by Tobin & Tobin, a professional corporation, San Francisco,
California. Legal matters relating to the tax status of the Company as a REIT
will be passed on by Giancarlo & Gnazzo, A Professional Corporation, San
Francisco, California. Certain legal matters will be passed upon for the
Underwriter by O'Melveny & Myers LLP, San Francisco, California. Tobin & Tobin,
a professional corporation, Giancarlo & Gnazzo, A Professional Corporation and
O'Melveny & Myers LLP will rely as to all matters of Maryland law upon the
opinion of special Maryland counsel to the Company, Piper & Marbury L.L.P.,
Baltimore, Maryland.
S-18
<PAGE> 19
COMMON STOCK, PREFERRED STOCK, WARRANTS,
AND SHAREHOLDER RIGHTS TO PURCHASE COMMON STOCK AND PREFERRED STOCK
$200,000,000
RWT
REDWOOD TRUST, INC.
------------------------
Redwood Trust, Inc., a Maryland corporation ("Redwood Trust" or the
"Company"), specializes in acquiring and managing real estate mortgage loans.
Such loans are originated by others to the Company's specifications or to
specifications approved by the Company. The Company has acquired mortgage loans
secured by single-family real estate properties throughout the United States,
with a special emphasis on properties located in the State of California, and
may in the future acquire mortgage loans secured by multifamily and commercial
real estate properties. The Company's mortgage loans may be acquired as whole
loans or as mortgage securities evidencing interests in pools of mortgage loans
(collectively, "Mortgage Assets"). The Company is self-advised and self-managed
and its principal business objective is to generate net income for distribution
to stockholders. The Company has elected to be subject to tax as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"), and generally will not be subject to tax on its Federal income to
the extent that it distributes its earnings to its stockholders and it maintains
its qualification as a REIT.
The Company, directly or through agents, dealers or underwriters designated
from time to time, may issue and sell from 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 classes or 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 ("Shareholders 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 class or
series, in amounts, at prices and on terms to be determined at the time of the
offering of each such class or 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 $200,000,000.00 aggregate initial
public offering price, including the exercise price of any Common Stock
Warrants, Preferred Stock Warrants (collectively, "Securities Warrants") or
Shareholders 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 class or
series of Preferred Stock, the specific designations, rights, preferences,
privileges and restrictions of such class or series of Preferred Stock,
including the dividend rate or rates or the method for calculating same,
dividend payment dates, voting rights, liquidations 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.
The Company's Common Stock is currently quoted on the Nasdaq National Market
("Nasdaq") under the symbol "RWTI." On April 3, 1997, the last reported sales
price for the Common Stock was $42.375 per share. The Company also currently has
one class of authorized, issued and outstanding Preferred Stock, the Class B
9.74% Cumulative Convertible Preferred Stock (the "Class B Preferred Stock"),
which is quoted on the Nasdaq National Market under the symbol "RWTIP," and an
issue of Stock Purchase Warrants, quoted under the symbol "RWTIW." On April 3,
1997, the last reported sales price for the Class B Preferred Stock and Stock
Purchase Warrants was $41.875 per share and $27.250 per share, respectively. The
shares of Common Stock and Class B Preferred Stock, and the securities offered
herein, are subject to repurchase by the Company under certain conditions and
are subject to certain restrictions on ownership and transferability which
prohibit any person (either alone or with others as a group) from owning a
number of shares in excess of 9.8% of the outstanding shares of the Company's
capital stock, subject to certain exceptions. See "Description of Securities --
Repurchase of Shares and Restrictions on Transfer" and "Plan of Distribution."
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 April 4, 1997.
<PAGE> 20
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 and other information with the Securities and Exchange
Commission (the "Commission" or "SEC"). Reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500 West
Madison Street, Chicago, Illinois 60661. Copies may also be obtained from the
Public Reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Common Stock, Stock Purchase
Warrants and Class B Preferred Stock of the Company are currently quoted on the
Nasdaq National Market. Reports, proxy statements and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. In
addition, holders of the Common Stock and Class B Preferred Stock will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accountants, and quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
The Company files information electronically with the Commission, and the
Commission maintains a Web Site that contains reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission. The address of the Commission's
Web Site is <http://www.sec.gov>.
Copies of the Registration Statement on Form S-3 of which this Prospectus
forms a part and exhibits thereto are on file at the offices of the Commission
pursuant to the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement for
further information with respect to the Company and the Securities offered
hereby. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to a copy of such contract or other document filed as
an exhibit to the Registration Statement or otherwise filed with the SEC and
incorporated by reference herein. Each such statement is qualified in its
entirety by such contract or other document reference.
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.
INCORPORATION OF CERTAIN INFORMATION 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 as amended by Form 10-K/A filed on April 3, 1997;
(b) The Company's Current Report on Form 8-K filed on January 7, 1997;
and
(c) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, as amended (Reg. No.
0-26436), filed July 17, 1996, under the Exchange Act.
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 Securities 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
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<PAGE> 21
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 herein by reference into the documents that this
Prospectus incorporates by reference). Requests should be directed to Ms. Vickie
L. Rath, Vice-President, Treasurer and Controller, Redwood Trust, Inc., 591
Redwood Highway, Suite 3100, Mill Valley, California 94941, telephone (415)
389-7373.
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<PAGE> 22
THE COMPANY
The Company was incorporated in the State of Maryland on April 11, 1994 and
commenced operations on August 19, 1994. It invests in Mortgage Assets financed
by the proceeds of equity offerings and by borrowings. The Company produces net
interest income on Mortgage Assets qualifying as Qualified REIT Real Estate
Assets while maintaining strict cost controls in order to generate net income
for distribution to its stockholders. The Company intends to continue operating
in a manner that will permit it to maintain its qualification as a REIT for
Federal income tax purposes. Assuming it retains such REIT status, the Company
will generally not be subject to tax on its Federal income to the extent that it
distributes that income to stockholders in the form of dividends. The principal
executive offices of the Company are located at 591 Redwood Highway, Suite 3100,
Mill Valley, California 94941, telephone (415) 389-7373.
The Company is self-advised and self-managed. The management of the Company
manages the day-to-day operations of the Company, subject to the supervision of
the Company's Board of Directors. The management team of the Company has
considerable expertise in the acquisition and management of Mortgage Assets,
mortgage finance, asset/liability management and the management of corporations
in the real estate lending business, including banks, savings and loans and life
insurance companies. In addition to working with healthy real estate assets and
healthy real estate lending institutions, the management of the Company also has
experience managing the assets of several failed life insurance companies during
rehabilitation, managing and advising a number of troubled savings and loans and
banks, and overseeing the workout and liquidation process for large portfolios
of troubled commercial real estate mortgages and equity investments. Reference
to the "Company" herein shall include any taxable or Qualified REIT Subsidiaries
through which the Company may conduct its business.
Additional information regarding the Company, including the audited
financial statements of the Company and descriptions of the Company's currently
outstanding common and preferred stock and warrants, is contained in the
documents incorporated by reference herein. See "Incorporation of Certain
Information by Reference," above.
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 Mortgage Assets 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, a related Prospectus Supplement 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
Securities. This description does not purport to be complete and is subject in
all respects to applicable Maryland law and to the provision of the Company's
Articles of Incorporation and Bylaws, including any applicable amendments or
supplements thereto, 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 classes or 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 foregoing
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<PAGE> 23
types of Securities. The terms of any specific offering of Securities, including
the terms of any units offered, will be set forth in a Prospectus Supplement
relating to such offering.
The Company's current authorized equity capitalization consists of 50
million shares which may be comprised of Common Stock and Preferred Stock. The
Common Stock and the only currently issued, authorized and outstanding Preferred
Stock, the Class B Preferred Stock, are listed on the Nasdaq National Market,
and the Company intends to list any additional shares of its Common Stock or
Preferred Stock which are issued and sold hereunder, as described in the
Prospectus Supplement relating to such Common Stock or any class or series of
Preferred Stock. The Company's sole outstanding issue of warrants is the series
of Stock Purchase Warrants issued in connection with the Company's 1994 private
placement. Such warrants are exercisable for Common Stock and are listed on the
Nasdaq National Market. As of March 31, 1997, 281,734 such warrants remained
outstanding.
COMMON STOCK
As of March 31, 1997, there were 11,896,523 outstanding shares of Common
Stock held by 200 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 case of the Class B Preferred Stock and
possibly in the event any future class or series of Preferred Stock is issued,
dividends on any outstanding shares of Preferred Stock are 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. There are no preemptive or other subscription
rights, conversion rights, or redemption or sinking fund provisions with respect
to shares of Common Stock.
Holders of Common Stock are entitled to one vote per share with respect to
all matters submitted to a vote of stockholders 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 class or series of
Preferred Stock that may be outstanding from time to time. The Company's Charter
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.
PREFERRED STOCK
Subject to the terms of the outstanding Class B Preferred Stock, the Board
of Directors is authorized to designate with respect to each class or series of
Preferred Stock the number of shares in each such class or 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 class or series,
and the voting rights, if any. As of March 31, 1997, there are 999,638 shares of
Class B 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 of liquidations, 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 Class B Preferred Stock
is, and any future shares of Preferred Stock will be, validly issued, fully paid
and nonassessable.
SECURITIES WARRANTS
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
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<PAGE> 24
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 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 future Securities Warrants are offered pursuant to this prospectus, 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 class or 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 class or 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.
No Rights as Stockholders. Holders of future Securities Warrants, if any,
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 stockholders for the election of directors of the Company or any other
matter, or to exercise any rights whatsoever as stockholders of the Company.
STOCKHOLDER RIGHTS
General. The Company may issue, as a dividend at no cost, Stockholder
Rights to holders of record of the Company's Securities or any class thereof on
the applicable record date. If Stockholder Rights are so issued to existing
holders of Securities each Stockholder Right will entitle the registered holder
thereof to purchase the Securities pursuant to the terms set forth in the
applicable Prospectus Supplement.
If Stockholder Rights are issued, the applicable Prospectus Supplement will
describe the terms of such Stockholder 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 Stockholder Rights and in the
case of Stockholder Rights for Preferred Stock, the designation, aggregate
number and terms of the class or series of Preferred Stock purchasable upon
exercise of such Stockholder Rights; (v) the date on and after which such
Stockholder Rights and the related Securities will be transferable separately;
(vi) the date on which the right to exercise such Stockholder 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
Stockholder Rights.
In addition to the terms of the Stockholder Rights and the Securities
issuable upon exercise thereof, the Prospectus Supplement will describe, for a
holder of such Stockholder Rights who validly exercises all Stockholder Rights
issued to such holder, how to subscribe for unsubscribed Securities (issuable
pursuant to unexercised Stockholder Rights issued to other holders) to the
extent such Stockholder Rights have not been exercised.
No Rights as Shareholders. Holders of Stockholder Rights will not be
entitled by virtue of being such holders, to vote, to consent, to receive
dividends, to receive notice as stockholders with respect to any meeting of
stockholders for the election of directors of the Company or any other matter,
or to exercise any rights whatsoever as stockholders of the Company.
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<PAGE> 25
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
In order that the Company may meet the requirements for qualification as a
REIT at all times, the Charter prohibits any person from acquiring or holding,
directly or constructively, ownership of a number of shares of Common Stock and
Preferred Stock (collectively, "Capital Stock") in excess of 9.8% (the
"Ownership Limit") of the outstanding shares. For this purpose the term
"ownership" generally means either direct ownership or constructive ownership in
accordance with the constructive ownership provisions of Section 544 of the
Code.
Under the constructive ownership provisions of Section 544 of the Code, a
holder of a Warrant will be treated as owning the number of shares of Capital
Stock into which such Warrant may be converted. In addition, the constructive
ownership rules generally attribute ownership of securities owned by a
corporation, partnership, estate or trust proportionately to its stockholders,
partners or beneficiaries, attribute ownership of securities owned by family
members to other members of the same family, and set forth rules as to when
securities constructively owned by a person are considered to be actually owned
for the application of such attribution provisions (i.e., "reattribution"). For
purposes of determining whether a person holds or would hold Capital Stock in
excess of the Ownership Limit, a person will thus be treated as owning not only
shares of Capital Stock actually owned, but also any shares of Capital Stock
attributed to such person under the attribution rules described above (including
any shares of Capital Stock attributed to such person by reason of such person's
ownership of Warrants). Accordingly, a person who individually owns less than
9.8% of the shares outstanding may nevertheless be in violation of the Ownership
Limit.
Any transfer of shares of Capital Stock or Warrants that would result in
disqualification of the Company as a REIT or that would (a) create a direct or
constructive ownership of shares of stock in excess of the Ownership Limit, (b)
result in the shares of stock being beneficially owned (within the meaning of
Section 856(a) of the Code) by fewer than 100 persons (determined without
reference to any rules of attribution), or (c) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, will be null
and void, and the intended transferee will acquire no rights to such shares or
warrants. The foregoing restrictions on transferability and ownership will not
apply if the Board of Directors determines that it is no longer in the best
interests of the Company to continue to qualify as a REIT. The Company's Board
of Directors, upon receipt of a ruling from the IRS, an opinion of counsel or
other evidence satisfactory to the Board of Directors, may also waive the
Ownership Limit with respect to a purported transferee. As a condition to such
waiver the intended transferee must give written notice to the Company of the
proposed transfer no later than the fifteenth day prior to any transfer which,
if consummated, would result in the intended transferee owning shares in excess
of the Ownership Limit. The Board of Directors may also take such other action
as it deems necessary or advisable to protect the Company's status as a REIT.
Any purported transfer of shares or warrants that would result in a person
owning (directly or constructively) shares in excess of the Ownership Limit
(except as otherwise waived by the Board of Directors as set forth above) due to
the unenforceability of the transfer restrictions set forth above will
constitute "Excess Securities," which will be transferred by operation of law to
the Company as trustee for the exclusive benefit of the person or persons to
whom the Excess Securities are ultimately transferred, until such time as the
purported transferee retransfers the Excess Securities. While the Excess
Securities are held in trust, a holder of such securities will not be entitled
to vote or to share in any dividends or other distributions with respect to such
securities and will not be entitled to exercise or convert such securities into
shares of Capital Stock. Subject to the Ownership Limit, Excess Securities may
be transferred by the purported transferee to any person (if such transfer would
not result in Excess Securities) at a price not to exceed the price paid by the
purported transferee (or, if no consideration was paid by the purported
transferee, the fair market value of the Excess Securities on the date of the
purported transfer), at which point the Excess Securities will automatically be
exchanged for the stock or warrants, as the case may be, to which the Excess
Securities are attributable. If a purported transferee receives a higher price
for designating an ultimate transferee, such purported transferee shall pay, or
cause the ultimate transferee to pay, such excess to the Company. In addition,
such Excess Securities held in trust are subject to purchase by the Company at a
purchase price equal to the lesser of (a) the price per share or per warrant, as
the case may be, in the transaction that created such Excess Securities (or, in
the case of a devise or gift, the market price at the time of such devise or
gift),
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<PAGE> 26
reduced by the amount of any distributions received in violation of the Charter
that have not been repaid to the Company, and (b) the market price as reflected
in the last reported sales price of such shares of stock or warrants on the
trading day immediately preceding the date of the purchase by the Company as
reported on any exchange or quotation system over which such shares of stock or
warrants may be traded, or if not then traded over any exchange or quotation
system, then the market price of such shares of stock or warrants on the date of
the purported transfer as determined in good faith by the Board of Directors of
the Company, reduced by the amount of any distributions received in violation of
the Charter that have not been repaid to the Company.
From and after a purported transfer to the transferee of the Excess
Securities, the purported transferee shall cease to be entitled to
distributions, voting rights and other benefits with respect to such shares of
the stock or warrants except the right to payment of the purchase price for the
shares of stock or warrants or the retransfer of securities as provided above.
Any dividend or distribution paid to a purported transferee on Excess Securities
prior to the discovery by the Company that such shares of stock or warrants have
been transferred in violation of the provisions of the Company's Charter shall
be repaid to the Company upon demand. If the foregoing transfer restrictions are
determined to be void, invalid or unenforceable by a court of competent
jurisdiction, then the purported transferee of any Excess Securities may be
deemed, at the option of the Company, to have acted as an agent on behalf of the
Company in acquiring such Excess Securities and to hold such Excess Securities
on behalf of the Company.
All certificates representing shares of stock and warrants will bear a
legend referring to the restrictions described above.
Any person who acquires shares or warrants in violation of the Charter, or
any person who is a purported transferee such that Excess Securities results,
must immediately give written notice or, in the event of a proposed or attempted
transfer that would be void as set forth above, give at least 15 days prior
written notice to the Company of such event and shall provide to the Company
such other information as the Company may request in order to determine the
effect, if any, of such transfer on the Company's status as a REIT. In addition,
every record owner of more than 5.0% (during any period in which the number of
stockholders of record is 2,000 or more) or 1.0% (during any period in which the
number of stockholders of record is greater than 200 but less than 2,000) or
1/2% (during any period in which the number of stockholders is 200 or less) of
the number or value of the outstanding shares of Capital Stock of the Company
must give an annual written notice to the Company by January 31, stating the
name and address of the record owner, the number of shares held and describing
how such shares are held. Further, each stockholder shall upon demand be
required to disclose to the Company in writing such information with respect to
the direct and constructive ownership of shares of Capital Stock as the Board of
Directors deems reasonably necessary to comply with the REIT Provisions of the
Code, to comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.
Subject to certain limitations, the Board of Directors may increase or
decrease the Ownership Limit. In addition, to the extent consistent with the
REIT Provisions of the Code, the Board of Directors may waive the Ownership
Limit for and at the request of certain purchasers in this Offering.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of the Company's Capital Stock and
Warrants to receive a premium for their shares or warrants that might otherwise
exist in the absence of such provisions. Such provisions also may make the
Company an unsuitable investment vehicle for any person seeking to obtain
ownership of more than 9.8% of the outstanding shares of Capital Stock.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law (the "Maryland GCL") provides that
"control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares of
stock owned by the acquiror or by officers or directors who are employees of the
corporation. "Control shares" are voting shares of stock which, if aggregated
with all other shares of stock previously acquired by such a person, would
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<PAGE> 27
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) onethird or more but less than a majority, or (iii) a majority
or more of all voting power. "Control shares" do not include shares of stock the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means, subject to
certain exceptions, the acquisition of, ownership of, or the power to direct the
exercise of voting power with respect to, control shares.
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders' meeting. If voting rights are not
approved at the meeting or if the acquiring person does not deliver an acquiring
person statement as permitted by the statute, then, subject to certain
conditions and limitations, the corporation may redeem any or all of the
"control shares" (except those for which voting rights have previously been
approved) for fair value determined, without regard to the absence of voting
rights, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for "control shares" are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of "control share acquisitions."
The "control share acquisition" statute does not apply to stock acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by a provision of the
Charter or Bylaws of the corporation adopted prior to the acquisition of the
shares.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, LLC is the transfer agent and registrar
with respect to the Common Stock, the Class B Preferred Stock and the Warrants.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of certain Federal income tax
considerations to the Company and to holders of the Securities. It is based on
existing Federal income tax law, which is subject to change, possibly
retroactively. PROSPECTIVE INVESTORS ARE ADVISED TO REVIEW THE MORE SPECIFIC
DISCLOSURE IN THE APPLICABLE SUPPLEMENT AND TO CONSULT THEIR TAX ADVISORS AS TO
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE SECURITIES, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX
LAWS.
GENERAL
The Company has elected to become subject to tax as a REIT, for Federal
income tax purposes, commencing with the taxable year ending December 31, 1994.
The Board of Directors of the Company currently expects that the Company will
continue to operate in a manner that will permit the Company to maintain its
qualifications as a REIT for the taxable year ending December 31, 1996, and in
each taxable year thereafter. This treatment will permit the Company to deduct
dividend distributions to its stockholders for Federal income tax purposes, thus
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to its stockholders.
In the opinion of Giancarlo & Gnazzo, A Professional Corporation, special
tax counsel to the Company ("Special Tax Counsel"), the Company has been
organized and operated in a manner which qualifies it as a REIT under the Code
since the commencing of its operations on August 19, 1994 through December 31,
1996, the date of the Company's last unaudited financials received by Special
Tax Counsel, and the Company's current and contemplated methods of operation, as
represented by the Company, will enable it to continue to so qualify. This
opinion is based on various assumptions relating to the organization and
operation of the Company to date and in the future and is conditioned upon
certain representations made by the Company as to certain factual matters. The
continued qualification and taxation of the Company as a REIT will depend upon
the Company's ability to meet, on a continuing basis, distribution levels and
diversity of stock ownership, and various other qualification tests imposed by
the Code. This opinion is based on the law existing and in effect on the date
hereof which is subject to change, possibly retroactively.
There can be no assurance that the Company will continue to qualify as a
REIT in any particular taxable year, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual determinations and the
possibility of future changes in the circumstances of the Company. If the
Company were not to qualify as a REIT in any particular year, it would be
subject to Federal income tax as a regular domestic corporation, and its
stockholders would be subject to potentially substantial income tax liability in
respect of each taxable year that it fails to qualify as a REIT, and the amount
of earnings and cash available for distribution to its stockholders could be
significantly reduced or eliminated.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to Federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to Federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain and may
also be subject to tax in certain other circumstances.
If the Company fails to qualify as a REIT in any taxable year and certain
relief provisions of the Code do not apply, the Company would be subject to
Federal income tax (including any applicable alternative minimum tax) on its
taxable income at the regular corporate income tax rates. Distributions to
stockholders in any year in which the Company fails to qualify as a REIT would
not be deductible by the Company, nor would they generally be required to be
made under the Code. Further, unless entitled to relief under certain other
provisions of the Code, the Company would also be disqualified from re-electing
REIT status for the four taxable years following the year during which it became
disqualified.
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TAXATION OF SECURITIES HOLDERS
COMMON STOCK AND PREFERRED STOCK GENERALLY
Distributions (including constructive distributions) made to holders of
Common Stock or Preferred Stock, other than tax-exempt entities, will generally
be subject to tax as ordinary income to the extent of the Company's current and
accumulated earnings and profits as determined for Federal income tax purposes.
If the amount distributed exceeds a stockholder's allocable share of such
earnings and profits, the excess will be treated as a return of capital to the
extent of the stockholder's adjusted basis in its shares, which will not be
subject to tax, and thereafter as a taxable gain from the sale or exchange of a
capital asset.
Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to stockholders, to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year. Distributions by the company, whether characterized
as ordinary income or as capital gain, are not eligible for the corporate
dividends received deduction. In the event that the Company realizes a loss for
the taxable year, stockholders will not be permitted to deduct any share of that
loss. Further, if the Company (or a portion of its assets) were to be treated as
a taxable mortgage pool, any "excess inclusion income" that is allocated to a
stockholder would not be allowed to be offset by a net operating loss of such
stockholder. Future Treasury Department regulations may require that the
stockholders take into account, for purposes of computing their individual
alternative minimum tax liability, certain tax preference items of the Company.
Dividends declared during the last quarter of a taxable year and actually
paid during January of the following taxable year are generally treated as if
received by the stockholder on the record date of the dividend payment and not
on the date actually received. In addition, the Company may elect to treat
certain other dividends distributed after the close of the taxable year as
having been paid during such taxable year, but stockholders still will be
treated as having received such dividend in the taxable year in which the
distribution is made.
Upon a sale or other disposition of either Common Stock or Preferred Stock,
a stockholder will generally recognize a capital gain or loss in an amount equal
to the difference between the amount realized and the stockholder's adjusted
basis in such stock, which gain or loss will be long-term if the stock has been
held for more than one year. Any loss on the sale or exchange of shares held by
a stockholder for six months or less will generally be treated as a long-term
capital loss to the extent of any long-term capital gain dividends received by
such stockholder. If either Common Stock or Preferred Stock is sold after a
record date but before a payment date for declared dividends on such stock, a
stockholder will nonetheless be required to include such dividend in income in
accordance with the rules above for distributions, whether or not such dividend
is required to be paid over to the purchaser.
The Company also maintains a Dividend Reinvestment and Stock Purchase Plan
(the "DRP" or "Plan"). DRP Participants will generally be treated as having
received a dividend distribution equal to the fair market value on the
Investment Date (as defined in the Plan) of the Plan Shares that are purchased
with the Participant's reinvested dividends and/or optional cash payments on
such date, plus the brokerage commissions, if any, allocable to the purchase of
such shares, and participants will have a tax basis in the shares equal to such
value. DRP Participants may not, however, receive any cash with which to pay the
resulting tax liability. Shares received pursuant to the DRP will have a holding
period beginning on the day after their purchase by the Plan Administrator.
The Company is required under Treasury Department regulations to demand
annual written statements from the record holders of designated percentages of
its Capital Stock disclosing the actual and constructive ownership of such stock
and to maintain permanent records showing the information it has received as to
the actual and constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.
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<PAGE> 30
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 distribution.
The Company does not intend to issue debt obligations with different
maturities secured by a single pool of Mortgage Assets and does not expect to
create or acquire taxable mortgage pools that can generate excess inclusion
income. In addition, the Company does not intend to create or acquire REMIC
residual interests that can generate excess inclusion income.
EXERCISE OF SECURITIES WARRANTS
Upon a holder's exercise of a Securities Warrant, the holder will, in
general, (i) not recognize any income, gain or loss for federal income tax
purposes, (ii) receive an initial tax basis in the Security received equal to
the sum of the holder's tax basis in the exercised Securities Warrant and the
exercise price paid for such Security and (iii) have a holding period for the
Security received beginning on the date of exercise.
SALE OR EXPIRATION OF SECURITIES WARRANTS
If a holder of a Securities Warrant sells or otherwise disposes of such
Securities Warrant (other than by its exercise), the holder generally will
recognize capital gain or loss (long-term capital gain or loss if the holder's
holding period for the Securities Warrant exceeds twelve months on the date of
disposition; otherwise, short-term capital gain or loss) equal to the difference
between (i) the cash and fair market value of other property received and (ii)
the holder's tax basis (on the date of disposition) in the Securities Warrant
sold. Such a holder generally will recognize a capital loss upon the expiration
of an unexercised Securities Warrant equal to the holder's tax basis in the
Securities Warrant on the expiration date.
TAXATION OF STOCKHOLDER RIGHTS
If the Company makes a distribution of Stockholder Rights with respect to
its Common Stock, such distribution generally will be tax-free and a
Stockholder'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 Stockholder so elects regardless of the
value of the Rights, the Stockholder 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 Stockholder will
generally not recognize gain or loss. The Stockholder'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. Distribution of Stockholder's
Rights with respect to other classes of Securities holders generally would be
taxable.
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.
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 Securities directly through the
issuance of Stockholders 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, which may be changed, at market
prices prevailing at the time of sale, at prices related to such
12
<PAGE> 31
prevailing market prices, or at negotiated prices (any of which may represent a
discount from the prevailing market prices). The Company may also sell its
Securities from time to time through one or more agents in ordinary brokers'
transactions on Nasdaq. Such sales may be effected during a series of one or
more pricing periods at prices related to the prevailing market prices reported
on Nasdaq, 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 class
or series of Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on Nasdaq. Any shares of Common
Stock sold pursuant to a Prospectus Supplement will also be listed on the Nasdaq
National Market or a national securities exchange, subject to official notice of
issuance. The Company may elect to list any future class or series of Securities
on an exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a future class or 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 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 jurisdiction 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.
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<PAGE> 32
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
The status of Securities offered hereby other than the Common Stock will be
discussed in the relevant Prospectus Supplement. Fiduciaries of ERISA plans
should consider (i) whether an investment in the Common Stock and other
Securities offered hereby satisfies ERISA diversification requirements, (ii)
whether the investment is in accordance with the ERISA plans' governing
instruments and (iii) whether the investment is prudent.
LEGAL MATTERS
The validity of the Securities offered hereby and certain legal matters
will be passed on for the Company by Tobin & Tobin, a professional corporation,
San Francisco, California. Certain tax matters will be passed on by Giancarlo &
Gnazzo, A Professional Corporation, San Francisco, California. Tobin & Tobin and
Giancarlo & Gnazzo, A Professional Corporation, will rely as to all matters of
Maryland law upon Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The Balance Sheets as of December 31, 1996 and 1995 and the Statements of
Operations, Stockholders' Equity and Cash Flows for the years ended December 31,
1996 and 1995 and for the period from August 19, 1994 (Commencement of
Operations) to December 31, 1994 incorporated by reference in this Prospectus
have been included therein in reliance on the report of Coopers & Lybrand,
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
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<PAGE> 33
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus Supplement and the accompanying Prospectus, and, if given or
made, such other information and representations must not be relied upon as
having been authorized by the Company, the Underwriter or any other person.
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 and the accompanying
Prospectus do 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 and the accompanying Prospectus do not constitute an
offer to sell or a solicitation of an offer to buy such securities, nor shall
any sales of the Common Stock be made pursuant to this Prospectus Supplement or
the accompanying Prospectus, in any circumstances in which such offer or
solicitation or sale is unlawful.
----------------------------
TABLE OF CONTENTS
----------------------------
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement Summary......... S-3
Use of Proceeds....................... S-14
Risk Factors.......................... S-14
Market Prices and Dividend Data....... S-14
Capitalization........................ S-15
Selected Financial Data............... S-16
Federal Income Tax Considerations..... S-17
Underwriting.......................... S-18
Legal Matters......................... S-18
PROSPECTUS
Available Information................. 2
Incorporation of Certain Information
by Reference........................ 2
The Company........................... 4
Use of Proceeds....................... 4
Description of Securities............. 4
Certain Federal Income Tax
Considerations...................... 10
Plan of Distribution.................. 12
ERISA Investors....................... 14
Legal Matters......................... 14
Experts............................... 14
</TABLE>
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1,100,000 SHARES
RWT
REDWOOD TRUST, INC.
COMMON STOCK
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
MONTGOMERY SECURITIES
April 4, 1997
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