ANNALY MORTGAGE MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
COPIES TO:
NANCY H. CORBETT, ESQ. CATHERINE S. GALLAGHER, ESQ.
MORGAN, LEWIS & BOCKIUS LLP ANDREWS & KURTH L.L.P.
101 PARK AVENUE 1701 PENNSYLVANIA AVENUE, N.W.
NEW YORK, NY 10178 WASHINGTON, DC 20006
________________
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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X]
CALCULATION OF REGISTRATION FEE
=========================================================================================================================== Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of Registered Registered Offering Price Per Share Aggregate Offering Price Registration Fee ---------------------------------------------------------------------------------------------------------------------------- Common Stock, par value 7,187,500 shares (1) $12.50 (2) 89,843,750 (2) $27,225.38 $.01 per share =========================================================================================================================== |
(1) Includes up to 937,500 shares of Common Stock which the Underwriters have
the option to purchase solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
ANNALY MORTGAGE MANAGEMENT, INC.
CROSS-REFERENCE SHEET
FORM S-11 CAPTION IN PROSPECTUS
ITEM NUMBER AND CAPTION OR PAGE REFERENCE
------------------------ ----------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus............................. Forepart of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus...................................................... Inside Front Cover Page of Prospectus; Outside
Back Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................................... Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; Business
Strategy; Selected Financial Data
4. Determination of Offering Price.................................... Outside Front Cover Page of Prospectus;
Underwriting
5. Dilution........................................................... Dilution
6. Selling Security Holders........................................... Principal and Selling Stockholders
7. Plan of Distribution............................................... Outside Front Cover Page of Prospectus;
Underwriting
8. Use of Proceeds.................................................... Prospectus Summary; Use of Proceeds
9. Selected Financial Data............................................ Selected Financial Data
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ Management's Discussion and Analysis of
Financial Condition and Results of Operations
11. General Information as to Registrant............................... Prospectus Summary; The Company; Business
Strategy
12. Policy with Respect to Certain Activities.......................... Business Strategy; Description of Capital Stock;
Available Information
13. Investment Policies of Registrant.................................. Prospectus Summary; Business Strategy
14. Description of Real Estate......................................... *
15. Operating Data..................................................... *
16. Tax Treatment of Registrant and Its Security Holders............... Prospectus Summary; Risk Factors; Certain Federal
Income Tax Considerations; ERISA Considerations
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17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters..................... Risk Factors; Distribution Policy
18. Description of Registrant's Securities............................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Certain Federal Income Tax
Considerations; ERISA Considerations;
Description of Capital Stock
19. Legal Proceedings................................................. Business Strategy
20. Security Ownership of Certain Beneficial Owners
and Management.................................................... Management; Principal and Selling Stockholders
21. Directors and Executive Officers.................................. Management
22. Executive Compensation............................................ Management
23. Certain Relationships and Related Transactions.................... Risk Factors; Management
24. Selection, Management and Custody of Registrant's
Investments....................................................... Risk Factors; Business Strategy
25. Policies with Respect to Certain Transactions..................... Risk Factors; Management
26. Limitations of Liability.......................................... Management; Description of Capital Stock
27. Financial Statements and Information.............................. Index to Financial Statements
28. Interests of Named Experts and Counsel............................ *
29. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.................... *
30. Quantitative and Qualitative Disclosures
About Market Risk................................................. *
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Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.
Subject To Completion, Dated August 5, 1997
PROSPECTUS
(Symbol)
___________ SHARES
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK
Annaly Mortgage Management, Inc. (the "Company") specializes in investing in mortgage-backed securities, including mortgage pass-through certificates, collateralized mortgage obligations and other securities representing interests in or obligations backed by pools of mortgage loans which can be readily financed. The Company seeks to generate net income for distribution to stockholders from the spread between the interest income on its mortgage-backed securities and the costs of borrowing to finance its acquisition of mortgage-backed securities. The Company will elect to be taxed as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended. The Company is self-advised and self-managed.
Of the __________ shares (the "Shares") of common stock, par value $.01 per share, of the Company (the "Common Stock") being offered hereby to the public, 6,250,000 Shares are being offered by the Company and _____ Shares are being offered by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of Shares by the Selling Stockholders.
Prior to this offering of Common Stock, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $11.50 and $12.50 per Share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application is being made to have the Common Stock quoted on the NASDAQ National Market under the symbol "AMMO".
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY. THESE RISKS INCLUDE, AMONG OTHERS:
. Risks Associated with Differences Between Mortgage-Backed Security and Borrowing Characteristics; Rate Adjustment Caps
. Prepayment Risks of Mortgage-Backed Securities
. Risks Associated with Leverage
. Risk of Decline in Market Value of Mortgage-Backed Securities; Margin Calls and Defaults
. Risks of Increased Borrowing Costs and Failure to Refinance Outstanding Borrowings
. Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations
. Risks Associated with Interest Rate Changes and Hedging
. Credit Risks Associated with Investment Strategy
. Ability to Acquire Mortgage-Backed Securities at Favorable Yields; Competition and Supply
. Dependence on Key Personnel
. Limited Operating History of the Company
. Conflicts of Interest
. Risks of Losing Investment Company Act Exemption and REIT Status
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.
==========================================================================
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount(1) Company(2) Stockholders
--------------------------------------------------------------------------
Per Share $ $ $ $
--------------------------------------------------------------------------
Total $ (3) $ (3) $ (3) $
--------------------------------------------------------------------------
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at
$__________.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 937,500 additional Shares, to cover over-allotments. If
all of such Shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $_____, $_____ and
$_____, respectively. See "Underwriting."
The Shares are offered by the Underwriters, subject to receipt and acceptance by the Underwriters, approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made against payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia, or in book-entry form through the facilities of The Depository Trust Company on or about ____________, 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
THE DATE OF THIS PROSPECTUS IS ____________, 1997.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.................................. 4
RISK FACTORS........................................11
Operations Risks.................................11
General Risks....................................17
Legal and Other Risks............................18
THE COMPANY.........................................23
USE OF PROCEEDS.....................................23
CAPITALIZATION......................................24
DISTRIBUTION POLICY.................................25
DILUTION............................................25
SELECTED FINANCIAL DATA.............................27
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS....................................28
Overview.........................................28
Results of Operations............................28
Financial Condition..............................33
Asset/Liability Management and
Effect of Changes in Interest Rates............37
Inflation........................................37
BUSINESS STRATEGY...................................38
General..........................................38
Mortgage-Backed Securities.......................39
Capital Investment Policy........................46
Future Revisions in Policies and
Strategies.....................................52
Legal Proceedings................................52
MANAGEMENT..........................................52
Directors and Executive Officers.................52
Compensation of Directors and
Executive Officers.............................55
Employment Agreements............................56
Long-Term Stock Incentive Plan...................57
Involvement of Officers in
Certain Legal Proceedings......................58
Page
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Certain Relationships; Conflicts of
Interest.......................................59
PRINCIPAL AND SELLING
STOCKHOLDERS.....................................60
CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS...............................62
General..........................................62
Taxation of the Company..........................65
Taxable Subsidiaries.............................65
Taxation of Stockholders; Common Stock...........66
Taxation of Tax Exempt Entities..................67
State and Local Taxes............................67
Certain United States Federal Income
Tax Considerations Applicable to
Foreign Holders................................67
ERISA CONSIDERATIONS................................69
Employee Benefit Plans, Tax-
Qualified Retirement Plans and IRAs............69
Status of the Company under ERISA................70
DESCRIPTION OF CAPITAL STOCK........................71
General..........................................71
Common Stock.....................................71
Restrictions on Ownership and Transfer...........72
Indemnification..................................74
Limitation of Liability..........................74
Control Share Acquisitions.......................74
Transfer Agent and Registrar.....................75
COMMON STOCK AVAILABLE FOR
FUTURE SALE......................................75
Registration Rights..............................76
UNDERWRITING........................................76
LEGAL MATTERS.......................................78
EXPERTS.............................................78
ADDITIONAL INFORMATION..............................79
GLOSSARY............................................79
INDEX TO FINANCIAL STATEMENTS F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed information appearing throughout the Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that (i) the offering price of the Shares (the "Offering Price") is $12.00 per Share and (ii) the Underwriters' over-allotment option is not exercised. Certain capitalized and other terms used but not defined herein shall have the meanings set forth in the Glossary beginning on page 79.
THE COMPANY
Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"), specializes in investing in mortgage-backed securities, including mortgage pass- through certificates ("Pass-Through Certificates"), collateralized mortgage obligations ("CMOs") and other securities representing interests in or obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed Securities") which can be readily financed. The Company's principal business objective is to generate net income for distribution to stockholders from the spread between the interest income on its Mortgage-Backed Securities and the costs of borrowing to finance its acquisition of Mortgage-Backed Securities. The Company will elect to be taxed as a "real estate investment trust" ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Therefore, substantially all of its assets consist (and will consist) of Qualified REIT Real Estate Assets (of the type described in Section 856(c)(6)(B) of the Code). The Company is self-advised and self-managed.
The Company was organized on November 25, 1996 and commenced operations on February 18, 1997 with its private placement (the "Private Placement") of 3,600,000 shares of Common Stock. The Company has financed its purchases of Mortgage-Backed Securities with (i) net proceeds of approximately $33 million from the Private Placement, (ii) proceeds of $878,000 from the July 31, 1997 sale of 87,800 shares of Common Stock to certain directors, officers and employees of the Company (the "Direct Offering"), and (iii) borrowings under repurchase agreements whose interest rates adjust based on changes in short-term market interest rates. The Company plans to finance additional purchases of Mortgage-Backed Securities with the proceeds of this offering (the "Offering"), future offerings and future borrowings.
Under the Capital Investment Policy adopted by the Company (the "Capital Investment Policy"), at least 75% of the Company's total assets will be comprised of "High Quality" Mortgage-Backed Securities and "High Quality" short- term investments. The term "High Quality" as used herein means securities (i) which are rated within one of the two highest rating categories by at least one of the nationally recognized rating agencies, (ii) that are unrated but are either guaranteed by the United States government or an agency of the United States government, or (iii) that are unrated or whose ratings have not been updated but are determined to be of comparable quality to rated High Quality Mortgage-Backed Securities on the basis of credit enhancement features that meet the High Quality credit criteria approved by the Company's Board of Directors. The remainder of the Company's assets, comprising not more than 25% of total assets, may consist of other Qualified REIT Real Estate Assets which are unrated or rated less than High Quality but which are at least "investment grade" (rated "BBB" or better) or, if not rated, are determined by the Company to be of comparable credit quality to an investment which is rated "BBB" or better. Mortgage-Backed Securities to be acquired by the Company may include, but will not be limited to, Mortgage-Backed Securities backed by single-family residential mortgage loans ("Single-Family Mortgage Loans") and Mortgage-Backed Securities backed by loans on multi-family, commercial or other real estate- related properties.
At June 30, 1997, all of the Mortgage-Backed Securities held by the Company were "Agency Certificates" which, although not rated, carry an implied "AAA" rating. "Agency Certificates" consist of mortgage participation certificates issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Pass-Through Certificates issued by the Federal National Mortgage Association ("FNMA"), and fully modified Pass-Through Certificates guaranteed by the Government
National Mortgage Association ("GNMA"). All such Agency Certificates held by the Company at June 30, 1997 were backed by Single-Family Mortgage Loans, of which at June 30, 1997, approximately 93% had coupon rates which adjust over time (subject to certain limitations and lag periods) in conjunction with changes in short-term interest rates, reflecting the Company's strategy of investing primarily in adjustable-rate Mortgage-Backed Securities. The Company intends to continue to invest primarily in adjustable-rate Mortgage-Backed Securities. The Company may also invest on a limited basis in mortgage derivative securities representing the right to receive interest only or a disproportionately large amount of interest. The Company has not and will not invest in real estate mortgage investment conduit ("REMIC") residuals, other CMO residuals or any Mortgage-Backed Securities, such as inverse floaters, which have imbedded leverage as part of their structural characteristics. At June 30, 1997, the weighted average yield on the Company's portfolio of earning assets was 6.63%, and the weighted average term to next rate adjustment was one month. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Mortgage-Backed Securities."
The Company attempts to structure its borrowings to have interest rate adjustment indices and interest rate adjustment periods that, on an aggregate basis, correspond generally (within a range of one to six months) to the interest rate adjustment indices and periods of the adjustable-rate Mortgage- Backed Securities purchased by the Company. However, the Company is subject to the risk that periodic rate adjustments on borrowings may be less frequent than rate adjustments on its Mortgage-Backed Securities. At June 30, 1997, the weighted average cost of funds for all of the Company's borrowings was 5.64% and the weighted average term to next rate adjustment was 20 days. See "Risk Factors -- Operations Risks -- Risks Associated with Differences Between Mortgage-Backed Security and Borrowing Characteristics; Rate Adjustment Caps" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Borrowings."
The Company generally expects to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from time to time depending upon market conditions and other factors deemed relevant by management of the Company. For purposes of calculating this ratio, the Company's equity is equal to the value of the Company's investment portfolio on a mark-to-market basis, less the book value of the Company's obligations under repurchase agreements and other collateralized borrowings. At June 30, 1997, the ratio of debt-to-equity of the Company was 10:1. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition --Leverage" and "Business Strategy -- Capital Investment Policy -- Capital and Leverage."
To the extent consistent with its election to qualify as a REIT, the Company may enter into hedging transactions to protect its portfolio of Mortgage-Backed Securities and related borrowings against the effects of major interest rate changes. Such hedging would be used to mitigate declines in the market value of the Company's Mortgage-Backed Securities during periods of increasing or decreasing interest rates and to limit or cap the rate on the Company's borrowings. These hedging transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, and the purchase of "interest only" Mortgage-Backed Securities. No hedging strategy can totally eliminate interest rate risk and the Company's ability to enter into such hedging transactions may be limited by provisions of the Code relating to qualifying assets and qualifying income and transaction costs associated with entering into such transactions. To date, the Company has not entered into any hedging transactions. See "Business Strategy --Capital Investment Policy" and "Certain Federal Income Tax Considerations."
The Company regularly monitors its purchases of Mortgage-Backed Securities and the income from such assets and, to the extent the Company enters into hedging transactions in the future, will monitor income from its hedging transactions as well so as to ensure at all times that the Company maintains its qualification as a REIT and its exempt status under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company has engaged Deloitte & Touche L.L.P. to conduct quarterly compliance reviews designed to determine compliance with sections 856 through 860 of the Code (the "REIT Provisions of the Code") and the Company's exempt status under the Investment Company Act. See "Certain Federal Income Tax Considerations" and "Risk Factors -- Legal and Other Risks."
The executive officers of the Company are Michael A.J. Farrell (Director, Chairman of the Board and Chief Executive Officer), Timothy J. Guba (Director, President and Chief Operating Officer), Wellington J. St. Claire (Director and Vice Chairman of the Board) and Kathryn F. Fagan (Chief Financial Officer and Treasurer). Messrs. Farrell and Guba and Ms. St. Claire have an average of 15 years' experience in the investment banking and investment management industries where, in various capacities, they have each managed portfolios of Mortgage- Backed Securities, arranged collateralized borrowings and utilized hedging techniques to mitigate interest rate and other risk within fixed-income portfolios. Ms. Fagan is a certified public accountant and, prior to becoming Chief Financial Officer and Treasurer of the Company, served as Chief Financial Officer and Controller of a publicly owned savings and loan association. Since 1994, Messrs. Farrell and Guba and Ms. St. Claire have managed Fixed Income Discount Advisory Company ("FIDAC"), a registered investment advisor which, at June 30, 1997, managed, assisted in managing or supervised approximately $500 million in gross assets for a wide array of clients, of which, at such date, approximately $250 million was managed on a discretionary basis. See "Risk Factors -- General Risks -- Conflicts of Interest" and "Management -- Directors and Executive Officers" and "-- Certain Relationships; Conflicts of Interest."
DISTRIBUTION POLICY
To maintain its qualification as a REIT, the Company must distribute substantially all of its taxable income to stockholders for each year, which the Company intends to do. The Company also intends to declare regular quarterly dividends. The Company declared dividends of $0.075 per share (or $276,000 in the aggregate) for the period from February 18, 1997 (commencement of operations) to March 31, 1997 and $.255 per share (or $938,400 in the aggregate) for the second quarter of 1997. See "Distribution Policy" and "Certain Federal Income Tax Considerations." The Company is considering the adoption of a Dividend Reinvestment Plan that would allow holders of Common Stock to reinvest dividends automatically in additional shares of Common Stock, although the Company has no plans to institute such a Dividend Reinvestment Plan (if at all) prior to 1998.
RISK FACTORS
The purchase of the Shares offered hereby is subject to certain risks. See "Risk Factors." Among such risks are the following:
. Interest rate fluctuations may affect the Company's earnings as a result of potential changes in the spread between the interest rates on its borrowings and the interest rates on its Mortgage-Backed Securities. Mortgage-Backed Securities held by the Company generally are subject to interest rate caps while the Company's borrowings generally are not similarly restricted.
. Mortgage prepayment rates vary depending on such factors as mortgage interest rates and market conditions. Changes in anticipated prepayment rates may affect the Company's earnings by changing the speed of amortization of purchase discounts and premiums.
. The Company's strategy of borrowing a substantial portion of the market value of the Mortgage-Backed Securities to finance the acquisition of such Mortgage-Backed Securities may result in the Company incurring a decrease in net interest income and incurring net losses if returns on Mortgage- Backed Securities are not sufficient to cover borrowing costs.
. Various factors, including the Company's intent to structure its investment portfolio to continue to qualify for an exemption from regulation as an investment company under the Investment Company Act, may prevent the Company from attaining the level of leverage it deems optimal, which may cause the Company to be less profitable than it otherwise would be.
. A decline in the market value of the Mortgage-Backed Securities may limit the Company's ability to borrow or result in lenders initiating margin calls, which may require the Company to sell Mortgage-Backed Securities under adverse market conditions. A decline in market value and the initiation of margin calls could also result in a default by the Company under its collateralized borrowings and a liquidation of collateral.
. The Company's business strategy relies on short-term borrowings to fund Mortgage-Backed Securities with adjustable-rate coupons and long-term maturities. In the event the Company is not able to renew or replace maturing borrowings, the Company could be required to sell Mortgage-Backed Securities under possibly adverse market conditions and could incur losses as a result.
. The Company's borrowing costs generally correspond to the London Interbank Offered Rate, as defined in the applicable borrowing ("LIBOR"), or another short-term index, plus or minus a margin. Margins vary depending upon the lender, the underlying collateral, interest rates, the availability of financing and other factors. Increased borrowing costs, resulting from increases in such indices or margins, could adversely impact the Company's net income.
. Rising short-term rates will increase the Company's borrowing costs to acquire additional Mortgage-Backed Securities and, to the extent such costs rise more rapidly than the yields, the Company's net income may be reduced or a net loss may result.
. Asset/liability management hedging strategies involve risk and may not be effective in reducing the Company's exposure to interest rate changes. Moreover, compliance with the REIT Provisions of the Code may prevent the Company from effectively implementing the strategies that the Company determines, absent such compliance, would best insulate the Company from the risks associated with changing interest rates.
. The Company's net income depends on the Company's ability to acquire Mortgage-Backed Securities at favorable spreads to borrowing costs. Increased competition for the acquisition of eligible Mortgage-Backed Securities or a diminution in the available supply could result in higher prices and thus lower yields on such Mortgage-Backed Securities which could further narrow the yield spread over borrowing costs.
. The Company's operations depend in significant part upon the contributions of its executive officers. The loss of any key person could have a material adverse effect on the Company's business and results of operations.
. The Company commenced operations on February 18, 1997 and therefore has a limited operating history. Prior to the commencement of operations by the Company on February 18, 1997, none of the Company's officers had any experience in managing a REIT.
. Certain of the Company's officers and employees are actively involved in managing other portfolios of mortgage-backed securities and advising financial institutions. These relationships may create conflicts of interest for the Company and its officers and employees.
. Under the current interpretation of the staff of the Securities and Exchange Commission (the "Commission"), in order to qualify for an exemption from regulation as an investment company under the Investment Company Act, under certain circumstances the Company will be required to maintain at least 55% of its assets in certain qualifying interests in real estate. This restriction may adversely affect the yield to be obtained by the Company on its portfolio of Mortgage-Backed Securities.
. If the Company fails to maintain its qualification as a REIT, the Company will be subject to Federal income tax as a regular corporation which would result in a substantial reduction of income available for dividend payments to stockholders.
. The investment policies and operating policies and strategies of the Company set forth in this Prospectus may be modified or waived by the Board of Directors, subject in certain cases to approval by a majority of the Independent Directors, without stockholder consent. "Independent Directors" means the directors of the Company who are not officers or employees of the Company.
THE OFFERING(1)
Common Stock Offered by:
The Company........................................ 6,250,000 Shares
The Selling Stockholders........................... _________ Shares
Common Stock to be Outstanding
after the Offering................................. 10,017,800 shares of
Common Stock(2)
Use of Proceeds...................................... The net proceeds from
the sale of the Shares
offered by the Company
will be used, together
with borrowings, to
purchase additional
Mortgage-Backed
Securities and, pending
such use, to purchase
High Quality Short-Term
Investments. None of
the proceeds from the
sale of Shares offered
by Selling Stockholders
will be contributed to
the Company.
NASDAQ Symbol........................................ AMMO
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(1) Assumes the Underwriters' over-allotment option to purchase up to an
additional 937,500 Shares from the Company is not exercised. See
"Underwriting."
(2) Excludes 500,000 shares of Common Stock reserved for issuance under the
Company's Long-Term Stock Incentive Plan (the "Incentive Plan"). Options to
acquire 348,500 shares have been granted to directors, officers and
employees of the Company pursuant to the Incentive Plan. See "Management -
- Long-Term Stock Incentive Plan."
SUMMARY FINANCIAL INFORMATION
PERIOD FROM FEBRUARY 18, 1997 TO JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The financial data set forth below should be read in conjunction with the Financial Statements of the Company and related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
STATEMENT OF OPERATIONS DATA:
Days in period 133
Interest income $ 6,509
Interest expense 5,149
----------
Net interest income 1,360
Gain on sale of mortgage-backed securities 230
General and administrative expenses (G&A expense) 250
----------
Net income $ 1,340
==========
Net income per share $ 0.36
Dividends declared per share 0.33
BALANCE SHEET DATA AT JUNE 30, 1997:
Mortgage-Backed Securities 364,367
Total assets 398,236
Repurchase agreements 326,987
Total liabilities 365,418
Stockholders' equity 32,819
Number of common shares outstanding 3,680,000
Interest rate spread 0.99%
OTHER DATA:
Average total assets $ 283,100
Average borrowings 242,027
Average equity 33,115
Yield on interest earning assets at June 30, 1997 6.63%
Cost of funds on interest bearing liabilities at June 30, 1997 5.64%
Efficiency ratio (G&A expense/net interest income) 18.37%
ANNUALIZED FINANCIAL RATIOS(1):
Net interest margin (net interest income/average total assets) 1.32%
G&A expense as a percentage of average assets 0.24%
G&A expense as a percentage of average equity 2.07%
Return on average assets 1.30%
Return on average equity 11.11%
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(1) Each ratio has been computed by annualizing the results for the 133- day period ended June 30, 1997.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act").
Such forward-looking statements include, without limitation, statements
concerning the Company's ability to mitigate interest rate, prepayment and other
risks and the Company's ability to grow and become more efficient over time.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Among those factors which may impact the Company's actual results, performance
and achievements are changes in interest rates, changes in the yield curve,
changes in prepayment rates, the availability of Mortgage-Backed Securities for
purchase, the availability of financing and, if available, the terms of any such
financing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements included herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
results or conditions described in such forward-looking statements or the
objectives and plans of the Company will be achieved. Investors should review
carefully the more detailed descriptions of risks and uncertainties set forth
under the caption "Risk Factors" in this Prospectus.
RISK FACTORS
Before investing in the Common Stock offered hereby, prospective investors should give special consideration, in addition to the information set forth elsewhere in this Prospectus, to the information set forth below. The Company cautions the reader, however, that this list of factors may not be exhaustive. Further, this Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act. Disclosure regarding such forward-looking statements may be found under "Prospectus Summary," "Use of Proceeds", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business Strategy," as well as within the Prospectus generally. Actual results could differ materially from those projected in the forward- looking statements as a result of the risk factors set forth below and the matters set forth in the Prospectus generally.
OPERATIONS RISKS
GENERAL
The results of the Company's operations are affected by various factors, many of which are beyond the control of the Company. The results of the Company's operations depend on, among other things, the level of net interest income generated by the Company's Mortgage-Backed Securities, the market value of such Mortgage-Backed Securities and the supply of and demand for such Mortgage-Backed Securities. The Company's net interest income varies primarily as a result of changes in short-term interest rates, borrowing costs and prepayment rates, the behavior of which involves various risks and uncertainties as set forth below. Prepayment rates, interest rates and borrowing costs depend on the nature and terms of the Mortgage-Backed Securities, conditions in financial markets, the fiscal and monetary policies of the United States government and the Board of Governors of the Federal Reserve System, international economic and financial conditions, competition and other factors, none of which can be predicted with any certainty. Since changes in interest rates may significantly affect the Company's activities, the operating results of the Company depend, in large part, upon the ability of the Company to effectively manage its interest rate and prepayment risks while maintaining its status as a REIT. See "-- Risks Associated with Interest Rate Changes and Hedging," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management and Effect of Changes in Interest Rates," and "Business Strategy -- Capital Investment Policy -- Interest Rate Risk Management."
RISKS ASSOCIATED WITH DIFFERENCES BETWEEN MORTGAGE-BACKED SECURITY
AND BORROWING CHARACTERISTICS; RATE ADJUSTMENT CAPS
At June 30, 1997, all of the Mortgage-Backed Securities held by the Company were Agency Certificates backed by Single-Family Mortgage Loans, of which approximately 93% had coupon rates which adjust over time (subject to certain limitations and lag periods) in conjunction with changes in short-term interest rates, such adjustments being based on an objective index such as LIBOR, the Treasury Index or the CD Rate. It is expected in the future that a substantial portion of the Company's Mortgage-Backed Securities will consist of adjustable- rate Pass-Through Certificates ("ARM Certificates") or floating rate CMOs which are also subject to periodic interest rate adjustments based on such objective indices ("Floaters"). "LIBOR" means the London Interbank Offered Rate as it may be defined, and for a period of time specified, in a Mortgage-Backed Security or borrowing of the Company. "Treasury Index" means the monthly/weekly average yield of the benchmark U.S. Treasury securities, as published by the Board of Governors of the Federal Reserve System. "CD Rate" means the weekly average of secondary market interest rates on six-month negotiable certificates of deposit, as published by the Federal Reserve Board in its Statistical Release H.15(519), Selected Interest Rates.
Interest rates on the Company's borrowings are expected to continue to be based on short-term indices. To the extent any of the Company's Mortgage-Backed Securities are financed with borrowings bearing interest based on or varying with an index different from that used for the related Mortgage-Backed Securities, so-called "basis" interest rate risk arises. In such event, if the index used for the Mortgage-Backed Securities is a "lagging" index that reflects market
interest rate changes on a delayed basis, and the rate borne by the related borrowings reflects market rate changes more rapidly, the Company's net interest income will be adversely affected in periods of increasing market interest rates.
The Company's adjustable-rate Mortgage-Backed Securities are subject to periodic rate adjustments which may not be matched precisely with increases or decreases in rates borne by the borrowings or financings utilized by the Company. Accordingly, in a period of increasing interest rates, the Company could experience a decrease in net interest income or a net loss because the interest rates on borrowings could adjust faster than the interest rates on the Company's adjustable-rate Mortgage-Backed Securities.
Interest rates on the Company's Mortgage-Backed Securities are subject typically to periodic and lifetime interest rate caps which limit the amount an interest rate can change during any given period. The Company's borrowings are not subject to similar restrictions. Hence, in a period of rapidly increasing interest rates, the Company could also experience a decrease in net interest income or a net loss because the interest rates on borrowings could increase without limitation while the interest rates on the Company's Mortgage-Backed Securities (consisting primarily of ARM Certificates and Floaters) would be limited by caps. While the Company may hedge certain risks associated with interest rate increases, the Company has not entered into any interest rate hedging agreements. No hedging strategy can insulate the Company completely from interest rate risk.
The Company expects that the net effect of these factors, all other factors being equal, could be to lower the Company's net interest income or cause a net loss during periods of rapidly rising market interest rates, which could negatively impact the level of dividend distributions and affect the market price of the Common Stock.
PREPAYMENT RISKS OF MORTGAGE-BACKED SECURITIES
Prepayment rates on Mortgage-Backed Securities vary from time to time and may cause changes in the amount of the Company's net interest income. Prepayments of ARM Certificates and Floaters usually can be expected to increase when mortgage interest rates fall below the then-current interest rates on ARMs and decrease when mortgage interest rates exceed the then-current interest rate on ARMs, although such effects are not predictable. Prepayment experience also may be affected by the conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans underlying Mortgage-Backed Securities. Some Mortgage-Backed Securities are structured so that certain classes are provided protection from prepayments for a period of time. However, in a period of extremely rapid prepayments, during which earlier-paying classes may be retired faster than expected, the protected classes may receive unscheduled payments of principal earlier than expected and would have average lives that, while longer than the average lives of the earlier-paying classes, would be shorter than originally expected. The Company seeks to minimize prepayment risk through a variety of means, including structuring a diversified portfolio with a variety of prepayment characteristics, investing in certain Mortgage-Backed Security structures which have prepayment protection, and balancing assets purchased at a premium with assets purchased at a discount. No strategy, however, can completely insulate the Company from prepayment risks arising from the effects of interest rate changes. Prepayment risk may be increased if the Company purchases interest-only strips to protect against interest rate increases. Certain Mortgage-Backed Securities may have underlying mortgage loans which are convertible to fixed-rate loans. Since converted loans are required to be repurchased by the applicable Agency (FHLMC, FNMA or GNMA) or servicer, the conversion of a loan results, in effect, in the prepayment of such loan.
Changes in anticipated prepayment rates of Mortgage-Backed Securities could affect the Company in several adverse ways. A portion of the Mortgage-Backed Securities to be acquired by the Company may be recently originated and bear initial interest rates which are lower than their "fully-indexed" rates (the applicable index plus margin). In the event that such a Mortgage-Backed Security is prepaid faster than anticipated prior to or soon after the time of adjustment to a fully-indexed rate, the Company will experience an adverse effect on its net interest income during the time it holds such Mortgage-Backed Security compared with holding a fully-indexed Mortgage-Backed Security and
will lose the opportunity to receive interest at the fully-indexed rate over the expected life of the Mortgage-Backed Security. These effects may be mitigated to the extent Mortgage-Backed Securities are acquired at a discount. In addition, the faster than anticipated prepayment of any Mortgage-Backed Security that is purchased at a premium by the Company would generally result in a faster than anticipated write-off of any remaining capitalized premium amount and consequent reduction of the Company's net interest income by such amount. At June 30, 1997, a majority of the Company's Mortgage-Backed Securities had been acquired at a premium.
RISKS ASSOCIATED WITH LEVERAGE
The Company's financing strategy is designed to increase the size of its Mortgage-Backed Security investment portfolio by borrowing a substantial portion (which may vary depending upon the mix of the Mortgage-Backed Securities in the Company's portfolio and the application of the Company's Capital Investment Policy requirements to such mix of Mortgage-Backed Securities) of the market value of its Mortgage-Backed Securities. If the coupon income on the Mortgage- Backed Securities purchased with borrowed funds fails to cover the cost of the borrowings, the Company will experience net interest losses and may experience net losses. Such losses could be increased substantially as a result of the Company's substantial leverage.
The Company expects generally to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from time to time depending upon market conditions and other factors deemed relevant by management. However, the Company is not limited under its Bylaws in respect of the amount of its borrowings, whether secured or unsecured, and the debt-to-equity ratio could at times be greater than 12:1. For purposes of calculating the debt-to-equity ratio, the Company's equity equals the value of the Company's investment portfolio on a mark-to-market basis less the book value of the Company's obligations under repurchase agreements and other collateralized borrowings. At June 30, 1997, the debt-to-equity ratio of the Company was 10:1. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Leverage" and "Business Strategy -- Capital Investment Policy -- Capital and Leverage."
The ability of the Company to achieve its investment objectives depends on its ability to borrow money in sufficient amounts and on favorable terms. Through increases in haircuts (i.e., the over-collateralization amount required by a lender), decreases in the market value of the Company's Mortgage-Backed Securities, increases in interest rate volatility, changes in the availability of financing in the market, conditions then applicable in the lending market and other factors, the Company may not be able to achieve the degree of leverage it believes to be optimal, which may cause the Company to be less profitable than it would be otherwise. In addition, as a result of the Company's intention to structure its investment portfolio to qualify for an exemption from regulation as an investment company, the Company may be limited in the types and amounts of Mortgage-Backed Securities it can purchase which, in turn, may affect the ability of the Company to achieve the degree of leverage it believes to be optimal.
RISK OF DECLINE IN MARKET VALUE OF MORTGAGE-BACKED SECURITIES;
MARGIN CALLS AND DEFAULTS
Certain of the Company's Mortgage-Backed Securities are cross-collateralized to secure multiple borrowing obligations of the Company to a single lender. A decline in the market value of such assets may limit the Company's ability to borrow or result in lenders initiating margin calls (i.e., requiring a pledge of cash or additional Mortgage-Backed Securities to re-establish the ratio of the amount of the borrowing to the value of the collateral). The Company's fixed- rate Mortgage-Backed Securities generally are more susceptible to margin calls as increases in interest rates tend to more negatively affect the market value of fixed-rate Mortgage-Backed Securities than adjustable-rate Mortgage-Backed Securities. This remains true despite effective hedging against such fluctuations as the hedging instruments may not be part of the collateral securing the collateralized borrowings. Additionally, it may be difficult to realize the full value of the hedging instrument when desired for liquidity purposes due to the applicable REIT Provisions of the Code.
The Company could be required to sell Mortgage-Backed Securities under adverse market conditions in order to maintain liquidity. Such sales may be effected by the Company when deemed necessary in order to preserve the capital base of the Company. If these sales were made at prices lower than the amortized cost of the Mortgage-Backed Securities, the Company would experience losses. A default by the Company under its collateralized borrowings could also result in a liquidation of the collateral, including any cross-collateralized assets, and a resulting loss of the difference between the value of the collateral and the amount borrowed.
Additionally, in the event of a bankruptcy of the Company, certain repurchase agreements may qualify for special treatment under the Bankruptcy Code, the effect of which is, among other things, to allow the creditors under such agreements to avoid the automatic stay provisions of the Bankruptcy Code and to liquidate the collateral under such agreements without delay. See "-- Legal and Other Risks -- Bankruptcy Code Treatment of Repurchase Agreements."
To the extent the Company is compelled to liquidate Mortgage-Backed Securities qualifying as Qualified REIT Real Estate Assets to repay borrowings, the Company may be unable to comply with the REIT Provisions of the Code regarding assets and sources of income requirements, ultimately jeopardizing the Company's status as a REIT. The Code does not provide for any mitigating provisions with respect to the 30% Gross Income Test. Accordingly, if the Company failed to meet the 30% Gross Income Test, its status as a REIT would terminate automatically. The 30% Gross Income Test means the requirement for each taxable year that less than 30% of the Company's gross income is derived from the sale of Qualified REIT Real Estate Assets held for less than four years, stock or securities held for less than one year (including certain interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire Qualified Real Estate Assets) and certain "dealer" property. Under legislation pending in Congress, the 30% Gross Income Test would be repealed for taxable years beginning after the date of enactment. See "Certain Federal Income Tax Considerations -- General -- Asset Tests", "-- Gross Income Tests" and "-- Pending Legislation."
RISKS OF INCREASED BORROWING COSTS AND FAILURE
TO REFINANCE OUTSTANDING BORROWINGS
Currently, all of the Company's borrowings are collateralized borrowings in the form of repurchase agreements. The ability of the Company to enter into repurchase agreements in the future will depend, among other factors, on the market value of the Mortgage-Backed Securities pledged to secure the specific borrowings, the availability of financing, and other conditions then applicable in the lending market. The Company may effect additional borrowings through using other types of collateralized borrowings, loan agreements, lines of credit, Dollar-Roll Agreements and other credit facilities with institutional lenders or through the issuance of debt securities. A "Dollar-Roll Agreement" is an agreement to sell a security for delivery on a specified future date entered into simultaneously with an agreement to repurchase the same or a substantially similar security (with the same coupon and original maturity periods) on a specified future date. The cost of borrowings under repurchase agreements generally corresponds to LIBOR plus or minus a margin, although such agreements may not expressly incorporate a LIBOR index. The cost of borrowings under other sources of funding which the Company may use may refer or correspond to other short-term indices, plus or minus a margin. The margins on such borrowings over or under LIBOR or such other short-term indices may vary depending on the lender, the nature and liquidity of the underlying collateral, the movement of interest rates, the availability of financing in the market and other factors. Increased borrowing costs could adversely impact the Company's net income.
The Company's business strategy relies primarily on short-term borrowings to fund Mortgage-Backed Securities with adjustable-rate coupons and long-term maturities. Thus, the ability of the Company to achieve its investment objectives depends not only on its ability to borrow money in sufficient amounts and on favorable terms but also on the Company's ability to renew or replace on a continuous basis its maturing short-term borrowings. In the event the Company is not able to renew or replace maturing borrowings, the Company could be required to sell Mortgage-Backed Securities under possibly adverse market conditions and could incur losses as a result. In addition, in such event, the Company may be required to terminate any hedging positions, which could result in further costs to the Company. At the same time, the market value of the assets in which the Company's liquidity capital is invested may have decreased.
A number of such factors in combination could cause difficulties for the Company and might result in a liquidation of a major portion of the Company's Mortgage- Backed Securities at disadvantageous prices with consequent losses, which could have a material adverse effect on the Company and its solvency.
RISK OF DECREASE IN NET INTEREST INCOME DUE TO INTEREST RATE FLUCTUATIONS
At June 30, 1997, approximately 93% of the Company's Mortgage-Backed Securities had adjustable interest or pass-through rates based on short-term interest rates, and substantially all of the Company's borrowings bore interest at short-term rates and had maturities of less than one year. Consequently, changes in short-term interest rates may significantly influence the Company's net interest income. While increases in short-term interest rates will generally increase the yields on the Company's adjustable-rate Mortgage-Backed Securities, rising short-term rates will also increase the costs of borrowings by the Company which will be utilized to fund the Mortgage-Backed Securities and, to the extent such costs rise more rapidly than the yields, the Company's net interest income may be reduced or a net loss may result. Increases in short- term rates relative to long-term rates could adversely impact the Company's net income. In periods of high interest rates, the Company's net income may be less than income generated through alternative investments of equal or lower risk, which could negatively impact the price of the Common Stock. No assurance can be given as to the amount or timing of changes in interest rates or their effect on the Company's Mortgage-Backed Securities or net interest income.
RISKS ASSOCIATED WITH INTEREST RATE CHANGES AND HEDGING
The Company's operating strategy subjects it to interest rate risks as described under "-- Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations" above. The Company has adopted policies as part of its Capital Investment Policy intended to protect against interest rate changes and prepayments. See "Business Strategy -- Capital Investment Policy --Interest Rate Risk Management." The Company may purchase from time to time 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 assets during a period of rising rates. However, it is not expected that such hedging strategies will completely insulate the Company against interest rate risk. To date, the Company has not entered into any hedging transactions.
Developing an effective asset/liability management strategy is complex and no strategy can completely insulate the Company from risks associated with interest rate changes and prepayments. In addition, to the extent the Company engages in hedging, there can be no assurance that the Company's hedging activities will have the desired beneficial impact on the Company's results of operations or financial condition. Hedging typically involves costs, including transaction costs, which increase dramatically as the period covered by the hedge increases and which also increase during periods of rising and volatile interest rates. The Company may increase its hedging activity, and thus increase its hedging costs, during such periods when interest rates are volatile or rising and hedging costs have increased. Such hedging costs may cause the Company to conclude that a particular hedging transaction is not appropriate for the Company, thereby affecting the Company's ability to mitigate interest rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management and Effect of Changes in Interest Rates" and "Business Strategy -- Capital Investment Policy -- Interest Rate Risk Management."
Federal tax laws applicable to REITs may substantially limit the Company's ability to engage in asset/liability management transactions. Such Federal tax laws may prevent the Company from effectively implementing hedging strategies that the Company determines, absent such restrictions, would best insulate the Company from the risks associated with changing interest rates and prepayments. See "Certain Federal Income Tax Considerations -- General" and "-- Taxation of the Company." In this regard, the amount of income the Company may earn from its interest rate caps and other hedging instruments may be subject to substantial limitations under the REIT Provisions of the Code. In particular, income generated by such instruments is non-qualifying income for purposes of the 75% Gross Income Test and is income from the sale of a security subject to the 30% Gross Income Test. Additionally, the Company will
treat such income as non-qualifying income for the 95% Gross Income Test unless it receives advice from its tax advisors that such income constitutes qualifying income for purposes of such test. Under pending legislation, the 30% Gross Income Test would be repealed, but such income would still not qualify for the 75% Gross Income Test or, subject to the preceding sentence, the 95% Gross Income Test. See "Certain Federal Income Tax Considerations -- General --Gross Income Tests" and "-- Pending Legislation." This determination may result in management electing to have the Company bear a level of interest rate risk that might otherwise be hedged. The "75% Gross Income Test" means the requirement for each taxable year that at least 75% of the Company's gross income must be derived from certain specified real estate sources including interest income and gain from the disposition of Qualified REIT Real Estate Assets or "qualified temporary investment income" (i.e., income derived from "new capital" within one year of the receipt of such capital). The "95% Gross Income Test" means the requirement for each taxable year that at least 95% of the Company's gross income for each taxable year must be derived from sources of income qualifying for the 75% Gross Income Test, dividends, interest, and gains from the sale of stock or other securities (including certain interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire Qualified REIT Real Estate Assets) not held for sale in the ordinary course of business.
If the Company purchases interest rate caps or other interest rate agreements to hedge against lifetime and periodic rate or payment caps, and the provider of interest rate agreements becomes financially unsound or insolvent, the Company may be forced to unwind its interest rate agreements with such provider and may take a loss on such interest rate agreements. Although the Company intends to purchase interest rate agreements only from financially sound institutions and to monitor the financial strength of such institutions on a periodic basis, no assurance can be given that the Company can avoid such third party risks.
CREDIT RISKS ASSOCIATED WITH INVESTMENT STRATEGY
The Company's Capital Investment Policy provides that at least 75% of the Company's total assets are to be comprised of High Quality Mortgage-Backed Securities and High Quality Short-Term Investments. "Short-Term Investments" means short-term bank certificates of deposit, short-term United States treasury securities, short-term United States government agency securities, commercial paper, reverse repurchase agreements, short-term CMOs, short-term asset-backed securities and other similar types of short-term investment instruments, all of which will have maturities or average lives of less than one year. The Capital Investment Policy provides that the remainder of the Company's assets, comprising not more than 25% of total assets, may consist of Mortgage-Backed Securities and other Qualified REIT Real Estate Assets which are unrated or rated less than High Quality. The Company's investment strategy seeks to balance the risk and return potential of its investments in a manner that attempts to maximize return while minimizing the risk of losses to the Company through defaults on portfolio obligations. This strategy determines the relative weightings within the Company's portfolio of Mortgage-Backed Securities of different ratings. The Company attempts to structure its portfolio to maintain a minimum weighted average rating (including the Company's deemed comparable ratings for unrated Mortgage-Backed Securities based on a comparison to rated Mortgage-Backed Securities with like characteristics) of its Mortgage-Backed Securities of at least single "A" under the S&P rating system and at the comparable level under the other rating systems. There can be no assurance the Company's deemed comparable ratings will agree with assessments by others as to how such Mortgage-Backed Securities would be rated. In addition, to the extent that the Company invests in High Quality investments, the yield on such assets may be lower than the yield on lower rated securities. To date, the Company has invested solely in Agency Certificates which, although not rated, carry an implied "AAA" rating.
ABILITY TO ACQUIRE MORTGAGE-BACKED SECURITIES AT FAVORABLE YIELDS;
COMPETITION AND SUPPLY
The Company's net income depends, in large part, on the Company's ability to acquire Mortgage-Backed Securities at favorable spreads over the Company's borrowing costs. In acquiring Mortgage-Backed Securities, the Company competes with other REITs, investment banking firms, savings and loan associations, banks, insurance companies,
mutual funds, other lenders, and other entities purchasing Mortgage-Backed Securities, many of which have greater financial resources than the Company. In addition, there are several mortgage REITs similar to the Company, and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of Mortgage-Backed Securities suitable for purchase by the Company. Further, in fluctuating interest rate environments, the spread between interest rates on adjustable-rate mortgage loans and interest rates on fixed-rate mortgage loans may decrease, and may cease to exist or become negative. Under such conditions, mortgagors tend to favor fixed-rate mortgage loans, thereby decreasing the supply of adjustable- rate Mortgage-Backed Securities available to the Company for purchase. The relative availability of adjustable-rate Mortgage-Backed Securities may also be diminished by a number of other market and regulatory considerations.
There can be no assurance that the Company will be able to continue to acquire sufficient Mortgage-Backed Securities from mortgage suppliers at spreads above the Company's cost of funds. The Company will also face competition for financing sources, and the effect of the existence of additional mortgage REITs may be to deny the Company access to sufficient funds to carry out its business strategy and/or to increase the cost of funds to the Company.
GENERAL RISKS
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in significant part upon the contributions of its executive officers. Although Michael Farrell, Chairman of the Board and Chief Executive Officer, Timothy Guba, President and Chief Operating Officer and Wellington St. Claire, Vice Chairman of the Board, currently have employment agreements with the Company, there can be no assurance of the continued employment of all such officers. The loss of any key person could have a material adverse effect on the Company's business and results of operations. See "Management."
LIMITED OPERATING HISTORY OF THE COMPANY
The Company commenced operations on February 18, 1997 upon consummation of the Private Placement and accordingly has not yet developed an earnings history or experienced a wide variety of interest rate or market conditions. Further, prior to such commencement of operations, none of the officers of the Company had any experience in managing a REIT.
CONFLICTS OF INTEREST
Messrs. Farrell and Guba, and Ms. St. Claire and Jennifer A. Stephens, Secretary of the Company, are actively involved in managing fixed income assets for institutional clients through Fixed Income Discount Advisory Company ("FIDAC"). FIDAC is a registered investment adviser which at June 30, 1997 managed, assisted in managing or supervised approximately $500 million in gross assets for a wide array of clients, of which, at such date, approximately $250 million was managed on a discretionary basis. Michael Farrell is a member of the Board of Directors of the U.S. Dollar Floating Rate Fund (the "Floating Rate Fund") and FIDAC is the investment adviser to the Floating Rate Fund. The executive officers of the Company named above have performed and will continue to perform such services for FIDAC, such institutional clients and the Floating Rate Fund; however, such officers devote and intend to continue to devote a majority of their time to the business of the Company. Their several responsibilities may create conflicts of interest if they are presented with corporate opportunities that may benefit both the Company and the Floating Rate Fund and other clients for whom FIDAC acts as an investment adviser. Investment opportunities currently are allocated by determining the entity or account for which such investment is most suitable. In making such determination, management considers the investment strategy and guidelines of each entity or account with respect to acquisition of assets, leverage, liquidity and other factors which management determines appropriate.
The Company shares with FIDAC office space and certain office expenses, such as lease payments, utilities charges and ancillary services performed by office personnel, at cost on a pro rata basis based on the relative use of such facilities and services by the Company and FIDAC.
Generally, under Maryland corporate law, a director of a corporation is required to first offer to the Company corporate opportunities learned of solely as a result of his or her service as a member of the Board of Directors. Maryland law provides further that in order for a contract or other transaction between a corporation and any of its directors or in which a director has a material financial interest not to be void or voidable: (i) the contract or transaction must be fair and reasonable to the corporation; or (ii) the fact of such interest must be disclosed or known to (a) the board or committee that authorizes, approves or ratifies the contract or transaction and such authorization, approval or ratification must be by a vote of a majority of the disinterested directors or (b) the stockholders entitled to vote on such contract or transaction and the contract or transaction is authorized, approved and ratified by a majority of the votes cast by disinterested stockholders entitled to vote. See "Management -- Certain Relationships; Conflicts of Interest."
The Company's policy is that the approval of the Board of Directors (with any interested director abstaining) is required for any director, officer, security holder or affiliate of the Company (a) to engage for his or her own account in realizing upon a corporate opportunity learned of solely as a result of his or her service to or representation of the Company or (b) to have any direct or indirect pecuniary interest in any investment to be acquired or disposed of by the Company or in any transaction to which the Company is a party or has an interest.
LEGAL AND OTHER RISKS
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT THE COMPANY
The Company at all times intends to conduct its business so as not to become regulated as an investment company under the Investment Company Act. Accordingly, the Company does not expect to be subject to the restrictive provisions of the Investment Company Act. The Investment Company Act exempts entities that are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualifying Interests"). Under the current interpretation of the staff of the Commission, in order to qualify for this exemption, the Company must maintain at least 55% of its assets directly in mortgage loans, qualifying Pass-Through Certificates and certain other qualifying interests in real estate. In addition, unless certain Mortgage-Backed Securities represent all the certificates issued with respect to an underlying pool of mortgages, such Mortgage-Backed Securities may be treated as securities separate from the underlying mortgage loans and, thus, may not qualify as Qualifying Interests for purposes of the 55% requirement. Therefore, the Company's ownership of certain Mortgage-Backed Securities may be limited by the provisions of the Investment Company Act. In addition, in meeting the 55% requirement under the Investment Company Act, the Company considers mortgage pass-through certificates issued with respect to an underlying pool as to which the Company holds all issued certificates as Qualifying Interests. If the Securities and Exchange Commission, or its staff, adopts a contrary interpretation with respect to such securities, the Company could be required to restructure its activities to the extent its holdings of such mortgage pass-through certificates did not comply with the interpretation. Such a restructuring could require the sale of a substantial amount of mortgage pass-through certificates held by the Company at a time it would not otherwise do so, which sale could occur under adverse market conditions and the Company could incur losses as a result. Further, in order to insure that the Company at all times continues to qualify for the above exemption from the Investment Company Act, the Company may be required at times to adopt less efficient methods of financing certain of its Mortgage-Backed Securities than would otherwise be the case and may be precluded from acquiring certain types of Mortgage-Backed Securities whose yield is somewhat higher than the yield on Mortgage-Backed Securities that could be purchased in a manner consistent with the exemption. The net effect of these factors may be to lower at times the Company's net interest income. If the Company fails to qualify for exemption from registration as an investment company, its ability to use leverage would be substantially reduced and it would be unable to conduct its business as described herein. Any such failure to qualify for such exemption could have a material adverse effect on the Company.
FAILURE TO MAINTAIN REIT STATUS WOULD SUBJECT THE COMPANY TO ADDITIONAL TAX
In order to maintain its qualification as a REIT for Federal income tax purposes, the Company must comply with the REIT Provisions of the Code, including satisfying certain tests with respect to the sources of its income, the nature and diversification of its assets, the amount of its distributions to stockholders and the ownership of its stock.
The Company intends, at all times, to operate so as to qualify as a REIT for Federal income tax purposes. To qualify as a REIT, the Company must satisfy a series of complicated tests related to the nature of its assets and income and it must also distribute substantially all of its income (as specially defined for these purposes) to its stockholders. 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 as a regular domestic corporation, and its stockholders would be subject to tax in the same manner as stockholders of such corporation. Distributions to stockholders in any year in which the Company fails to qualify as a REIT would not be deductible by the Company in computing its taxable income. As a result, the Company could be subject to income tax liability, thereby significantly reducing or eliminating the amount of cash available for distribution to its stockholders. Further, the Company could also be disqualified from re-electing REIT status for the four taxable years following the year during which it became disqualified.
No assurance can be given that future legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to the Company's qualification as a REIT or the Federal income tax consequences of such qualification, which changes may reduce or eliminate the Company's competitive advantage over non-REIT competitors. See "Certain Federal Income Tax Considerations -- Taxation of the Company."
POTENTIAL CHARACTERIZATION OF DISTRIBUTIONS AS UBTI; TAXATION OF TAX-EXEMPT
INVESTORS
In the event that (i) the Company is subject to the rules relating to taxable
mortgage pools (discussed below) or the Company is a "pension-held REIT," or
(ii) a tax-exempt stockholder has incurred indebtedness to purchase or hold its
Common Stock or is not exempt from Federal income taxation under certain special
sections of the Code, distributions to and, in the case of a stockholder
described in (ii), gains realized on the sale of Common Stock by, such tax-
exempt stockholder may be subject to Federal income tax as UBTI (i.e.,
"unrelated business taxable income" as defined in section 512 of the Code). See
"Certain Federal Income Tax Considerations -- Taxation of Tax-Exempt Entities."
TAXABLE MORTGAGE POOL RISK; INCREASED TAXATION
A REIT that incurs debt obligations with two or more maturities and which are secured by assets such as the Mortgage-Backed Securities may be classified as a "taxable mortgage pool" under the Code if payments required to be made on such debt obligations bear a relationship to the payments received on such assets. If the Company were to be subject to the taxable mortgage pool rules, the Company's status as a REIT would not be impaired but a portion or all of the taxable income (in excess of a specified return to investors) generated by the Company's Mortgage-Backed Securities constituting a taxable mortgage pool may, under regulations to be issued by the Treasury Department, be characterized as "excess inclusion" income and allocated to the stockholders. Any such excess inclusion income (i) would not be allowed to be offset by the net operating losses of a stockholder, and (ii) would be subject to tax as UBTI to a tax- exempt stockholder. See "Certain Federal Income Tax Considerations -- Taxation of Tax-Exempt Entities."
The Company does not intend to issue debt obligations with differing maturities backed by a single pool of Mortgage-Backed Securities, but it does intend to enter into master repurchase agreements pursuant to which the Company may borrow funds with differing maturity dates which are cross-collateralized by specific Mortgage-Backed Securities. The Treasury Department has issued regulations that adopt a broad view of what may constitute a taxable mortgage pool including anti-avoidance rules that authorize the IRS to treat equity interests issued by the Company as debt if such equity interests correspond to maturity of classes of debt such as the Mortgage-Backed Securities. The
Company does not believe that the master repurchase agreements or its other financing arrangements should cause the Mortgage-Backed Securities to be treated as a taxable mortgage pool. No assurances can be given, however, that the IRS might not successfully maintain that the Mortgage-Backed Securities collateralizing such master repurchase agreements constitute a taxable mortgage pool.
BANKRUPTCY CODE TREATMENT OF REPURCHASE AGREEMENTS
In the event of a bankruptcy of the Company, certain repurchase agreements may qualify for special treatment under the Bankruptcy Code, the effect of which is, among other things, to allow the creditors under such agreements to avoid the automatic stay provisions of the Bankruptcy Code and to liquidate the collateral under such agreements without delay. Conversely, in the event of the bankruptcy of a party with whom the Company has a repurchase agreement, the Company might experience difficulty recovering the collateral under such agreement if it were to be repudiated and the Company's claim against the bankrupt lender for damages resulting therefrom were to be treated simply as one of an unsecured creditor. Should this occur, the Company's claims would be subject to significant delay and recoveries, if and when received, may be substantially less than the damages actually suffered by the Company. Although the Company has, and intends to continue to, enter into repurchase agreements with several different parties and has developed policies to reduce its exposure to such risks, no assurance can be given that the Company will be able to avoid such third party risks. See "Business Strategy -- Capital Investment Policy -- Capital and Leverage."
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Board of Directors has established the investment policies and operating policies and strategies set forth in this Prospectus as the investment policies and operating policies and strategies of the Company. However, these policies and strategies may be modified or waived by the Board of Directors, subject in certain cases to approval by a majority of the Independent Directors, without stockholder consent. Although a majority of the Board of Directors will be comprised of Independent Directors, the initial selection of the Independent Directors was made by the initial stockholders of the Company who are also officers or directors of the Company.
LACK OF PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock or any other securities of the Company. Although application has been made to have the Company's Common Stock quoted on the NASDAQ National Market, there can be no assurance that an active trading market will develop or be sustained or that if one does develop and is sustained, that the market price will equal or exceed the public offering price set forth on the cover page of this Prospectus. For discussion of the factors considered in determining the initial public offering price, see "Underwriting."
COMMON STOCK AVAILABLE FOR FUTURE SALE
Following the closing of the Offering (and assuming that the Underwriters'
over-allotment option is not exercised), there will be outstanding (or reserved
for issuance upon exercise of outstanding options) 10,366,300 shares of Common
Stock, which include (i) 6,250,000 Shares being offered by the Company hereby,
(ii) 3,600,000 shares of Common Stock issued by the Company in the Private
Placement (the "Private Placement Shares"), (iii) 87,800 shares of Common Stock
issued to certain directors, officers and employees of the Company in the Direct
Offering (the "Direct Offering Shares"), (iv) 80,000 shares of Common Stock
issued to founders of the Company (the "Founders' Shares") and (v) 348,500
shares of Common Stock reserved for issuance upon the exercise of outstanding
options. The Private Placement Shares not being included in the Offering, the
Direct Offering Shares and the Founders' Shares are "restricted securities"
within the meaning of Rule 144 promulgated under the Securities Act ("Rule 144")
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including exemptions
contained in Rule 144. Such restricted securities will be available for resale
pursuant to Rule 144 following
a holding period ending one year from the date of acquisition by the holder, subject to the volume limitation of Rule 144 and, unless held by "affiliates" of the Company (within the meaning of Rule 144), will become unrestricted two years from the date of acquisition by the holder. Certain Private Placement Shares are also presently available for resale, under certain conditions, to institutional "accredited investors" within the meaning of Regulation D under the Securities Act, "qualified institutional buyers" within the meaning of Rule 144A under the Securities Act, and to persons who are not "U.S. persons" within the meaning of Regulation S under the Securities Act in accordance with Regulation S. In addition, the holders of the Private Placement Shares have certain registration rights with respect to such Private Placement Shares. See "Description of Capital Stock -- Common Stock Available for Future Sale -- Registration Rights." Purchasers in the Direct Offering have agreed not to sell their shares of Common Stock purchased in the Direct Offering for a period of 180 days after the Offering.
As of August 5, 1997, options to purchase 348,500 shares of Common Stock were outstanding, of which options to purchase 7,500 shares are currently exercisable; options to purchase 275,000 shares vest in four equal installments on January 2, 1998, 1999, 2000 and 2001; options to purchase 36,000 shares vest in four equal installments on January 21, 1998, 1999, 2000 and 2001; options to purchase 25,000 shares vest in four equal installments on January 28, 1998, 1999, 2000 and 2001; and an option to purchase 5,000 shares vests in four equal installments on June 26, 1998, 1999, 2000 and 2001. None of the shares of Common Stock underlying the outstanding stock options has been registered under the Securities Act.
No prediction can be made as to the effect, if any, that future sales of shares of Common Stock, or the availability of such shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, may affect adversely the prevailing market price of the Common Stock.
DILUTION; RISK OF POTENTIAL FUTURE OFFERINGS
The initial public offering price per share of Common Stock will exceed the net tangible book value per share of Common Stock. Accordingly, assuming the Underwriters' over-allotment option is not exercised, the purchasers of Common Stock will experience immediate dilution (in the amount of $1.15 per share based upon an assumed initial public offering price of $12.00 per share) in the net tangible book value of their equity investment in the Company. See "Dilution."
The Company may in the future increase its capital resources by making additional offerings of equity and debt securities, including classes and series of preferred stock, additional classes and series of common stock, commercial paper, medium-term notes and senior or subordinated notes. All debt securities and classes of preferred stock will be senior to the Common Stock in a liquidation of the Company. The effect of additional equity offerings may be the dilution of the equity of stockholders of the Company or the reduction of the price of shares of the Company's Common Stock, or both. The Company is unable to estimate the amount, timing or nature of additional offerings as they will depend upon market conditions and other factors.
ILLIQUIDITY OF CERTAIN INVESTMENTS
A small portion of the Company's portfolio may be invested in Mortgage-Backed Securities for which the secondary trading market is not as well developed as the market for certain other Mortgage-Backed Securities (or which are otherwise considered less marketable or illiquid). Although the Company expects that most of the Company's investments will be in Mortgage-Backed Securities for which a resale market exists, certain of the Company's investments may lack a regular trading market and may be illiquid. In addition, during turbulent market conditions, the liquidity of all of the Company's Mortgage-Backed Securities may be adversely impacted. There is no limit on the percentage of the Company's investments that may be invested in illiquid Mortgage-Backed Securities.
ISSUANCE OF PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to reclassify any of the unissued shares of authorized capital stock into a class or classes of preferred stock. The issuance of preferred stock could have the effect of making an attempt to gain control of the Company more difficult by means of a merger, tender offer, proxy contest or otherwise. Preferred stock, if issued, could have a preference on dividend payments over the Common Stock which could affect the ability of the Company to make dividend distributions to the holders of Common Stock.
RESTRICTIONS ON OWNERSHIP OF CAPITAL STOCK
In order that the Company may meet the requirements for qualification as a REIT, the Articles of Incorporation prohibit any person from acquiring or holding, directly or constructively, ownership of a number of shares of capital stock in excess of 9.8% in number of shares or value (the "Ownership Limit") of the outstanding shares. For this purpose the term "ownership" is defined as either direct ownership or constructive ownership in accordance with the constructive ownership provisions of section 544 of the Code. Any transfer of shares of capital stock 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, or (b) from and after the earlier of January 1, 1998 and the date of closing of the sale of Shares pursuant to the Offering (the "One Hundred Stockholder Date"), result in the shares of stock being beneficially owned (within the meaning 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 (the "purported transferee") will acquire no rights to such shares. Any purported transfer of shares 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) due to the unenforceability of the transfer restrictions set forth above will constitute "Excess Securities." Excess Securities will be transferred by operation of law to a trust to be established by the Company for the exclusive benefit of a charitable organization, until such time as the trustee of the trust, which shall be a banking institution designated as trustee by the Company which is unaffiliated with either the Company or the purported transferee, retransfers the Excess Securities. Subject to the Ownership Limit, Excess Securities may be transferred by the trust 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 cease to be Excess Securities. See "Description of Capital Stock --Restrictions on Ownership and Transfer" and "Certain Federal Income Tax Considerations -- General -- Stock Ownership Tests."
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 has the right, pursuant to the Company's Articles of Incorporation, to waive the Ownership Limit for and at the request of a purchaser of the Common Stock. In connection with any such waiver, the Company may require that the stockholder requesting such a waiver enter into an agreement with the Company providing for the repurchase by the Company of shares from the stockholder under certain circumstances to ensure compliance with the REIT Provisions of the Code. Such repurchase would be at fair market value as set forth in the agreement between the Company and such stockholder. The consideration received by the stockholder in such repurchase might be characterized as the receipt by the stockholder of a dividend from the Company, and any stockholder entering into such an agreement with the Company should consult its tax advisor in connection with its entering into such an agreement. At present, the Company does not intend to waive the Ownership Limit for any purchaser of shares of the Common Stock.
The provisions described above may inhibit market activity and a resulting takeover or other transaction in which holders of some or a majority of the Company's capital stock might receive a premium for their shares or which such holders might believe to be otherwise in their best interests. 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. See "Description of Capital Stock -- Restrictions on Ownership and Transfer."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation limit the liability of its directors
and officers to the Company and its stockholders to the fullest extent permitted
by Maryland law, and the Company's Articles of Incorporation provide for
indemnification of the directors and officers to such extent. See "Management -
- Limits of Responsibility."
THE COMPANY
Annaly Mortgage Management, Inc. (the "Company") was incorporated in the State of Maryland on November 25, 1996. The Company commenced operations on February 18, 1997 upon the consummation of the Private Placement. The Company raised additional capital on July 31, 1997 upon the consummation of the Direct Offering.
The Company specializes in investing in Mortgage-Backed Securities. Its principal business objective is to generate net income for distribution to stockholders from the spread between the interest income on its Mortgage-Backed Securities and the costs of borrowing to finance its acquisition of Mortgage- Backed Securities. The Company will elect to be taxed as a REIT.
The Company is self-advised and self-managed. The management of the Company manages the day-to-day operations, subject to the supervision of the Company's Board of Directors. Messrs. Farrell and Guba, and Ms. St. Claire, executive officers of the Company, have an average of 15 years' experience in the investment banking and investment management industries where, in various capacities, they have each managed portfolios of Mortgage-Backed Securities, arranged collateralized borrowings and utilized hedging techniques to mitigate interest rate and other risk within fixed-income portfolios. Ms. Fagan, the Company's Chief Financial Officer and Treasurer, has served as Chief Financial Officer and Controller of a publicly owned savings and loan association. See "Management."
The Company has an office located at 1500 Harbor Blvd., Weehawken, New Jersey 07087 which it leases. The telephone number for the Company is (201) 223-1900.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 6,250,000 Shares being offered hereby by the Company are estimated to be approximately $________ after deducting the expenses of the Offering. If the Underwriters' over-allotment option is exercised in full, the net proceeds to the Company are estimated to be approximately $_________. The Company will not receive any proceeds from the sale of Shares by the Selling Stockholders.
The Company intends to use such net proceeds to acquire additional Mortgage- Backed Securities. The Company then intends to increase its investment assets by borrowing against such Mortgage-Backed Securities and using the proceeds to acquire additional Mortgage-Backed Securities. See "Business Strategy -- Capital Investment Policy -- Capital and Leverage."
It is expected that the Company may require from one to four months to invest fully the proceeds of the Offering in Mortgage-Backed Securities and to implement fully the Company's leveraging strategy to increase its Mortgage- Backed Security investments to the desired level. Pending full investment in the desired mix of Mortgage-Backed Securities, the net proceeds will be invested in High Quality Short-Term Investments that are expected to provide a lower net return than the Company hopes to achieve from its intended primary Mortgage- Backed Security investments.
CAPITALIZATION
The capitalization of the Company, at June 30, 1997, as adjusted to reflect the sale of 87,800 shares of Common Stock at a price of $10.00 per share pursuant to the Direct Offering, and as adjusted to reflect the sale of the 6,250,000 Shares offered by the Company pursuant to the Offering, is as follows:
As Adjusted for
As Adjusted Direct Offering
for Direct and the Offering
Actual (1) Offering (1) (1)(2)
-------------------------------------------------
Common Stock, par value $.01 per share:
Authorized -- 100,000,000 shares
Outstanding -- 3,680,000 shares (as adjusted,
3,767,800 shares and 10,017,800 shares,
respectively) .............................. $ 36,800 $ 37,678 $100,178
Additional Paid-In Capital..................... 32,955,104 33,832,226
------------------------------------------------
Total $32,991,904 $33,869,904 $
================================================
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DISTRIBUTION POLICY
The Company intends to distribute substantially all of its taxable income with respect to each year (which does not ordinarily equal net income as calculated in accordance with GAAP) to its stockholders so as to comply with the REIT Provisions of the Code. The Company intends to declare regular quarterly dividends. It is intended that any taxable income remaining after the distribution of the final regular quarterly dividend each year will be distributed together with the first regular quarterly dividend payment of the following taxable year or in a special dividend distributed prior thereto. The dividend policy is subject to revision at the discretion of the Board of Directors. All distributions will be made by the Company at the discretion of the Board of Directors and will depend on the taxable earnings of the Company, the financial condition of the Company, maintenance of REIT status and such other factors as the Board of Directors deems relevant. See "Certain Federal Income Tax Considerations -- General -- Distribution Requirement."
To date, the Company has declared a dividend of $0.075 per share of Common Stock (or $276,000 in the aggregate) for the period from February 18, 1997 (commencement of operations) to March 31, 1997, and a dividend of $.255 per share of Common Stock (or $938,400 in the aggregate) for the second quarter of 1997. The level of quarterly dividends is based on a number of factors and should not be deemed indicative of taxable income for the quarter in which declared or future quarters or of income calculated in accordance with GAAP. All dividends declared following the closing of the Offering will be payable to holders of the Common Stock, subject to the terms of any other class of capital stock that may be issued in the future. See "Risk Factors -- Legal and Other Risks -- Dilution."
Distributions to stockholders will generally be subject to tax as ordinary income, although a portion of such distributions may be designated by the Company as capital gain or may constitute a tax-free return of capital. The Company does not intend to declare dividends that would result in a return of capital. The Company will annually furnish to each of its stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, capital gains or return of capital. For a discussion of the Federal income tax treatment of distributions by the Company, see "Certain Federal Income Tax Considerations -- Taxation of Stockholders."
The Company is considering the adoption of a Dividend Reinvestment Plan that will allow holders of Common Stock to have their dividends reinvested automatically in additional shares of Common Stock. The Company has no plans to adopt such a Dividend Reinvestment Plan (if at all) prior to 1998.
DILUTION
The net tangible book value of the Company at June 30, 1997 was $32.8 million, or $8.92 per share of Common Stock. Net tangible book value per share represents the total tangible assets of the Company, reduced by the amount of its total liabilities, and divided by the number of shares of Common Stock outstanding as of that date.
After giving effect to the net proceeds from the sale of shares of Common Stock in the Direct Offering on July 31, 1997, and assuming no exercise of any options granted to directors of the Company which are exercisable at June 30, 1997, the pro forma net tangible book value of the Company at June 30, 1997 would have been $33.7 million, or $8.94 per share.
After giving effect to the net proceeds from the sale of shares in the Direct Offering on July 31, 1997 and the estimated net proceeds to the Company from the sale of the Shares offered by the Company hereby at an assumed initial public offering price of $12.00 per share, and assuming no exercise of any options granted to directors of the Company which were exercisable at June 30, 1997, the pro forma net tangible book value of the Company at June 30, 1997 would have been $108.7 million or $10.85 per share of Common Stock. This represents an immediate increase in net tangible
book value of $1.91 per share to existing stockholders and immediate dilution of $1.15 per share to new investors purchasing Shares in the Offering at an assumed Offering Price equal to $12.00 per Share.
The following table illustrates this dilution in net tangible book value on a per-share basis:
Assumed initial public offering price per Share.......................... $12.00
Net tangible book value per share at June 30, 1997.................... $8.92
Increase attributable to sale of shares of Common Stock in the Direct
Offering............................................................ .02
Increase attributable to purchase of Shares by new investors in the
Offering............................................................ 1.91
-----
Pro forma net tangible book value per share of Common Stock after
giving effect to the consummation of the Offering....................... $10.85
------
Dilution in net tangible book value per share of Common Stock to new
investors in the Offering............................................... $ 1.15
======
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The following table summarizes on a pro forma basis at June 30, 1997 the total consideration and the average price per share of Common Stock paid by (i) existing stockholders at June 30, 1997, (ii) purchasers in the Direct Offering, and (iii) new investors in the Offering at an assumed Offering Price of $12.00 per share:
Shares Purchased Total Consideration
----------------- -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
Existing Stockholders at June 30, 1997......... 3,680,000 36.73% $ 36,012,000 32.19% $ 9.79
Purchasers in the Direct Offering.............. 87,800 0.88% $ 878,000 0.78% $10.00
New Investors in the Offering.................. 6,250,000 62.39% $ 75,000,000 67.03% $12.00
Total..................................... 10,017,800 100.00% $111,890,000 100.00%
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The above calculations assume no exercise of the Underwriters' over- allotment option. The above calculations also assume no exercise of any outstanding options under the Company's Incentive Plan. As of August 4, 1997, options to acquire 348,500 shares of Common Stock were outstanding, consisting of: options to acquire 208,250 shares at an exercise price of $4.00 per share, which options will vest in four equal installments on January 2, 1998, 1999, 2000 and 2001; options to acquire 66,750 shares at an exercise price of $10.00 per share, which options will vest in four equal installments on January 2, 1998, 1999, 2000 and 2001; options to acquire 36,000 shares at an exercise price of $10.00 per share, which options will vest in four equal installments on January 21, 1998, 1999, 2000 and 2001; options to acquire 25,000 shares at an exercise price of $10.00 per share, which options will vest in four equal installments on January 28, 1998, 1999, 2000 and 2001; an option to acquire 5,000 shares at an exercise price of $10.00 per share, which option will vest in four equal installments on June 26, 1998, 1999, 2000 and 2001; and options to acquire 7,500 shares of Common Stock at an exercise price of $10.00 per share, which options vested on June 26, 1997. See "Management--Long-Term Stock Incentive Plan."
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited financial statements of the Company for the period from commencement of operations on February 18, 1997 to June 30, 1997. The selected financial data should be read in conjunction with the more detailed information contained in the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
PERIOD FROM FEBRUARY 18, 1997 TO JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Days in period 133
Interest income $ 6,509
Interest expense 5,149
----------
Net interest income 1,360
Gain on sale of mortgage-backed securities 230
General and administrative expenses (G&A expense) 250
----------
Net income $ 1,340
==========
Net income per share $ 0.36
Dividends declared per share 0.33
BALANCE SHEET DATA AT JUNE 30, 1997:
Mortgage-Backed Securities 364,367
Total assets 398,236
Repurchase agreements 326,987
Total liabilities 365,418
Stockholders' equity 32,819
Number of common shares outstanding 3,680,000
Interest rate spread 0.99%
OTHER DATA:
Average total assets $ 283,100
Average borrowings 242,027
Average equity 33,115
Yield on interest earning assets at June 30, 1997 6.63%
Cost of funds on interest bearing liabilities at June 30, 1997 5.64%
Efficiency ratio (G&A expense/net interest income) 18.37%
ANNUALIZED FINANCIAL RATIOS(1):
Net interest margin (net interest income/average total assets) 1.32%
G&A expense as a percentage of average assets 0.24%
G&A expense as a percentage of average equity 2.07%
Return on average assets 1.30%
Return on average equity 11.11%
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(1) Each ratio has been computed by annualizing the results for the 133-day period ended June 30, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a real estate investment trust ("REIT") which acquires and manages Mortgage-Backed Securities which can be readily financed. The Company commenced operations on February 18, 1997 upon the closing of the Private Placement which resulted in proceeds to the Company of approximately $33 million. The Company received additional proceeds of $878,000 upon the closing of the Direct Offering on July 31, 1997.
The Company's principal business objective is to generate net income for distribution to stockholders from the spread between the interest income on its Mortgage-Backed Securities and the costs of borrowing to finance its acquisition of Mortgage-Backed Securities. Since the commencement of operations on February 18, 1997, the Company has been in the process of building its balance sheet by acquiring Mortgage-Backed Securities. Therefore, the operating results of the Company reflected in the financial statements included in this Prospectus should be interpreted in light of this growth process and are not necessarily representative of what they may be in the future.
The Company will seek to generate growth in earnings and dividends per share
in a variety of ways, including through (i) issuing new Common Stock and
increasing the size of the balance sheet when opportunities in the market for
Mortgage-Backed Securities are likely to allow growth in earnings per share,
(ii) seeking to improve productivity by increasing the size of the balance sheet
at a rate faster than the rate of increase in operating expenses, (iii)
continually reviewing the mix of Mortgage-Backed Security types on the balance
sheet in an effort to improve risk-adjusted returns, and (iv) attempting to
improve the efficiency of the Company's balance sheet structure through the
issuance of uncollateralized subordinated debt, preferred stock and other forms
of capital, to the extent management deems such issuances appropriate.
RESULTS OF OPERATIONS: FEBRUARY 18, 1997 TO JUNE 30, 1997
The Company's 1997 fiscal year commenced with the start of operations on February 18, 1997 and will conclude December 31, 1997. The 133-day period from February 18, 1997 to June 30, 1997 is referred to herein as "the period ended June 30, 1997."
NET INCOME SUMMARY
For the period ended June 30, 1997, net income was $1,340,059, or $0.36 per share. Net income per share is computed by dividing net income by the weighted average number of shares of outstanding Common Stock during the period. Dividends per share was $0.33 per share, $1,214,400 in total. Taxable income did not differ from GAAP income for the period. Return on average equity was 11.11% on an annualized basis.
Management's policy is to focus on income and expense measures as a percentage of equity rather than as a percentage of assets. Therefore, improvements in asset-based measures such as net interest margin or operating expenses as a percentage of assets do not necessarily translate into improved stockholder returns. Improvements in net interest income or operating expenses as a percentage of equity, however, indicate that the Company is effectively utilizing its equity capital base. The Company seeks to increase net income as a percentage of equity consistent with its Capital Investment Policy.
Period Ended
June 30, 1997
------------------
(dollars in
thousands, except
per share amounts)
Interest Income................................... $ 6,509
Interest Expense.................................. 5,149
----------
Net Interest Income............................... 1,360
Gain on Sale of Mortgage-Backed Securities........ 230
General and Administrative Expenses............... 250
----------
Net Income........................................ 1,340
Average Number of Outstanding Shares.............. 3,680,000
Net Income Per Share.............................. $ 0.36
Average Total Assets.............................. $ 283,100
Average Equity.................................... $ 33,115
Annualized Return on Average Assets 1.30%
Annualized Return on Average Equity 11.11%
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TAXABLE INCOME AND GAAP INCOME
For the period ended June 30, 1997, income as calculated for tax purposes (taxable income) did not differ from income as calculated according to generally accepted accounting principles (GAAP income). However, such amounts could differ in the future for various reasons. For example, the Company may take credit provisions which would affect GAAP income whereas only actual credit losses are deducted in calculating taxable income. In addition, general and administrative expenses may differ due to differing treatment of leasehold amortization, certain stock option expenses and other items. As of June 30, 1997, the Company had not taken credit provisions because all of the Mortgage- Backed Securities acquired by the Company through June 30, 1997 had been Agency Certificates which, although not rated, carry an implied "AAA" rating.
The distinction between taxable income and GAAP income is important to the Company's stockholders because dividends are declared on the basis of taxable income. While the Company does not pay taxes so long as it satisfies the requirements for exemption from taxation pursuant to the REIT Provisions of the Code, each year the Company completes a corporate tax form wherein taxable income is calculated as if the Company were to be taxed. This taxable income level determines the amount of dividends the Company can pay out over time.
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
The Company had average earning assets of $275.9 million for the period ended June 30, 1997. The Company's primary source of income for the period ended June 30, 1997 was interest income. A portion of income was generated by gains on sales of Mortgage-Backed Securities. Interest income was $6.5 million for the period ended June 30, 1997. The yield on average earning assets was 6.44% for the same period. The table below shows the Company's average balance of cash equivalents and Mortgage-Backed Securities, the yields earned on each type of earning assets, the yield on average earning assets and interest income.
AVERAGE EARNING ASSET YIELD
---------------------------
Yield on
Average Average
Amortized Amortized
Cost of Yield on Cost of Yield on
Average Mortgage- Average Average Mortgage- Average
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------- ---------- ------- ----------- ---------- -------- ---------
(dollars in thousands)
For the Period Ended June 30, 1997.. $121 $275,858 $275,979 4.63% 6.44% 6.44% $6,509
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The Constant Prepayment Rate (or "CPR") on the Company's portfolio of Mortgage-Backed Securities for the period ended June 30, 1997 was 12%. "CPR" means an assumed rate of prepayment for the Company's Mortgage-Backed Securities, expressed as an annual rate of prepayment relative to the outstanding principal balance of the Company's Mortgage-Backed Securities. This CPR does not purport to be either a historical description of the prepayment experience of the Company's Mortgage-Backed Securities or a prediction of the anticipated rate of prepayment of the Company's Mortgage-Backed Securities. Since a large portion of the Company's assets was purchased at a premium to par value and only a small portion of the Company's assets was purchased at a discount to par value, the premium balance in the Company's portfolio is substantially higher than the discount balance. Principal prepayments had a negative effect on the Company's earning asset yield for the period ended June 30, 1997 because the Company adjusts its rates of premium amortization and discount accretion monthly based on actual payments received.
INTEREST EXPENSE AND THE COST OF FUNDS
The Company anticipates that its largest expense will usually be the cost of borrowed funds. The Company had average borrowed funds of $242.0 million and total interest expense of $5.1 million for the period ended June 30, 1997. The average cost of funds was 5.84% for the same period. Interest expense is calculated in the same manner for GAAP and tax purposes.
With the Company's current asset/liability management strategy, changes in the Company's cost of funds are expected to be closely correlated with changes in short-term LIBOR, although the Company may choose to extend the maturity of its liabilities at any time. See "Business Strategy -- Capital Investment Policy -- Interest Rate Risk Management." The Company's average cost of funds was 0.15% above one-month LIBOR for the period ended June 30, 1997. The Company generally has structured its borrowings to adjust with one-month LIBOR because the Company believes that one-month LIBOR may continue to be lower than six- month LIBOR in the present interest rate environment. On average, one-month LIBOR was 0.28% lower than six-month LIBOR during the period ended June 30, 1997.
The table below shows the Company's average borrowed funds and average cost of funds as compared to average one- and average six-month LIBOR.
Average
One-Month Average Cost of Average Cost of
Average Average LIBOR Relative Funds Relative Funds Relative to
Average Average One- Six- to Average to Average Average
Borrowed Interest Cost of Month Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
----------------------------------------------------------------------------------------------------------
(dollars in thousands)
For the Period Ended
June 30, 1997...... $242,027 $5,149 5.84% 5.69% 5.97% (0.28%) 0.15% (0.13%)
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NET INTEREST RATE AGREEMENT EXPENSE
For the period ended June 30, 1997, the Company did not enter into any interest rate agreements. As part of its asset/liability management process, the Company may enter into interest rate agreements such as interest rate caps, floors and swaps. These agreements would be entered into to reduce interest rate risk and would be designed to provide income and capital appreciation to the Company in the event of certain changes in interest rates. The Company reviews the need for interest rate agreements on a regular basis consistent with its Capital Investment Policy. While the Company has determined, based upon the current interest rate environment and other relevant factors, that it would not be economically advantageous, at present, for the Company to enter into interest rate agreements, the Company may enter into such agreements in the future.
NET INTEREST INCOME
Net interest income, which equals interest income less interest expense, totaled $1.4 million for the period ended June 30, 1997. Net interest spread, which equals the yield on the Company's average assets for the period less the average cost of funds for the period, was 0.60% for the period ended June 30, 1997. Net interest margin, which equals net interest income divided by average total assets, was 1.32% on an annualized basis. The principal reason that annualized net interest margin exceeded net interest spread is that average assets exceeded average liabilities. A portion of the Company's assets are funded with equity rather than borrowings. The Company did not have any interest rate agreement expenses for the period ended June 30, 1997.
The table below shows interest income by earning asset type, average earning assets by type, total interest income, interest expense, average repurchase agreements, average cost of funds, and net interest income for the period ended June 30, 1997.
Average
Amortized
Cost of Interest Yield on
Mortgage- Income on Interest Average
Backed Mortgage- Income on Total Interest
Securities Backed Average Cash Interest Earning
Held Securities Cash Equivalents Equivalents Income Assets
------------------------------------------------------------------------------------------
For the Period Ended
June 30, 1997............ $275,858 $6,478 $121 $31 $6,509 6.44%
Average
Balance of Average Net
Repurchase Interest Cost of Interest
Agreements Expense Funds Income
----------------------------------------------------
For the Period Ended
June 30, 1997............ $242,027 $5,149 5.84% $1,360
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GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the period ended June 30, 1997, the Company sold Mortgage-Backed Securities with an aggregate historical amortized cost of $74.5 million for an aggregate gain of $229,865. The difference between the sale price and the historical amortized cost of the Mortgage-Backed Securities is a realized gain and increased income accordingly. The Company does not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets which management believes might have higher risk-adjusted returns or to manage its balance sheet as part of management's asset/liability management strategy.
CREDIT EXPENSES
The Company has not experienced credit losses on its portfolio of Mortgage- Backed Securities to date, but losses may be experienced in the future. At June 30, 1997, the Company had limited its exposure to credit losses on its portfolio of Mortgage-Backed Securities by purchasing only Agency Certificates which, although not rated, carry an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expense" or "G&A expense") was $249,895 for the period ended June 30, 1997. There were no differences in the calculation of G&A expense for taxable and GAAP income purposes.
Total G&A Total G&A
Cash Comp Other G&A Total G&A Expense/Average Expense/Average Efficiency
and Benefits Expense Expense Assets Equity Ratio
Expense (annualized) (annualized) (annualized)
-----------------------------------------------------------------------------------------
(dollars in thousands)
For the Period Ended
June 30, 1997...... $140 $110 $250 0.24% 2.07% 18.37%
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The Company expects G&A expense to increase following the Offering. The Company plans to hire new employees to expand the Company's capabilities with respect to acquiring and monitoring its portfolio of Mortgage-Backed Securities. In addition, certain compensation expenses will increase commensurate with growth in the Company's equity base. See "Management -- Compensation of Directors and Executive Officers." Despite these increases in operating expenses, management believes that the Company's operating expenses over time are likely to grow at a slower rate than its asset or equity base and thus management believes that the Company's operating expense ratios are likely to continue to improve over time.
NET INCOME AND RETURN ON AVERAGE EQUITY
Net income was $1.3 million in the period ended June 30, 1997. Return on average equity was 11.11% on an annualized basis. The table below shows, on an annualized basis, the Company's net interest income, gain on sale of Mortgage- Backed Securities and G&A expense each as a percentage of average equity, and the return on average equity.
COMPONENTS OF RETURN ON AVERAGE EQUITY
--------------------------------------
Gain on Sale of
Mortgage-Backed
Net Interest Securities/ G&A Return on
Income/Average Average Expense/Average Average
Equity Equity Equity Equity
---------------- ----------------- ----------------- ----------
For the Period Ended June 30, 1997
(on an annualized basis)....... 11.27% 1.91% 2.07% 11.11%
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DIVIDENDS AND TAXABLE INCOME
The Company will elect to be taxed as a REIT under the Code. Accordingly, the Company intends to distribute substantially all of its taxable income for each year to stockholders, including income resulting from gains on sales of Mortgage-Backed Securities. On a cumulative basis through June 30, 1997, earned taxable income exceeded dividend declarations by $125,659, or $0.03 per share, based on the number of shares of Common Stock outstanding at period end.
DIVIDEND SUMMARY
----------------
Taxable Cumulative
Taxable Common Net Dividends Dividend Undistributed
Net Shares Income Declared Total Pay-out Taxable
Income Outstanding Per Share Per Share Dividends Ratio Income
------- ----------- ----------- --------- --------- --------- -------------
(dollars in thousands, except per share data)
For the Period Ended
June 30, 1997...... $1,340 3,680,000 $0.36 $0.33 $1,214 90.6% $126
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FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of the Company's Mortgage-Backed Securities at June 30, 1997 were adjustable-rate or fixed-rate Mortgage-Backed Securities backed by Single-Family Mortgage Loans. All of the mortgage assets underlying such Mortgage-Backed Securities were secured with a first lien position with respect to the underlying single-family properties. At June 30, 1997, all the Company's Mortgage-Backed Securities were Agency Certificates which carry an implied "AAA" rating. All of the Company's earning assets are marked-to-market at liquidation value.
Discount balances are accreted as an increase in interest income over the life of discount Mortgage-Backed Securities and premium balances are amortized as a decrease in interest income over the life of premium Mortgage-Backed Securities. At June 30, 1997, the Company had on its balance sheet a total of $2,399 of unamortized discount (which is the difference between the remaining principal value and current historical amortized cost of Mortgage-Backed Securities acquired at a price below principal value) and a total of $10.3 million of unamortized premium (which is the difference between the remaining principal value and the current historical amortized cost of Mortgage-Backed Securities acquired at a price above principal value).
Mortgage principal repayments received were $13.7 million for the period ended June 30, 1997, which equals a CPR of 12%. Given the Company's current portfolio composition, if mortgage principal prepayment rates increase over the life of the Mortgage-Backed Securities comprising the current portfolio, all other factors being equal, the Company's net interest income should decrease during the life of such Mortgage-Backed Securities as the Company will be required to amortize its net premium balance into income over a shorter time period. Similarly, if mortgage
principal prepayment rates decrease over the life of such Mortgage-Backed Securities, all other factors being equal, the Company's net interest income should increase during the life of such Mortgage-Backed Securities as the Company will amortize its net premium balance over a longer time period.
The table below summarizes the Company's Mortgage-Backed Securities at June 30, 1997.
Estimated
Amortized Estimated Fair Value/ Weighted
Net Amortized Cost/Principal Fair Principal Average
Principal Value Premium Cost Value Value Value Yield
--------------- ------- --------- ---------------- --------- ------------- ---------
(dollars in thousands)
At June 30, 1997.. $354,329 $10,337 $364,666 102.92% $364,367 102.83% 6.63%
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During the period ended June 30, 1997, the Company's Mortgage-Backed Securities consisted solely of Agency Certificates. However, the Company may purchase other types of Mortgage-Backed Securities in the future.
The tables below set forth certain characteristics of the Company's Mortgage-Backed Securities at June 30, 1997. The index level for adjustable- rate Mortgage-Backed Securities is the weighted average rate of the various short-term interest rate indices which determine the coupon rate.
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
--------------------------------------------------------
Weighted
Weighted Weighted Average Principal Value at
Average Average Weighted Term Weighted Weighted Period End as % of
Principal Coupon Index Average Net to Next Average Average Asset Mortgage-Backed
Value Rate Level Margin Adjustment Lifetime Cap Yield Securities
-----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
At June 30, 1997.. $329,953 7.25% 5.47% 1.78% 1 month 11.22% 6.59% 93.13%
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FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
---------------------------------------------------
Principal Value at
Weighted Weighted Period End as % of
Principal Average Average Mortgage-Backed
Value Coupon Rate Asset Yield Securities
-------------------------------------------------------------------------
(dollars in thousands)
At June 30, 1997.. $24,376 8.00% 7.33% 6.87%
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At June 30, 1997, the Company held Mortgage-Backed Securities with coupons linked to the one- and three-year Treasury Indices, one-month LIBOR and the six- month CD rate. The table below segments the Company's adjustable-rate Mortgage- Backed Securities by type of adjustment index, coupon adjustment frequency and annual and lifetime cap adjustment.
1-Year 3-Year
One-Month Six-Month Treasury Treasury
LIBOR CD Rate Index Index
---------- ---------- --------- ---------
Weighted Average Adjustment Frequency..... 1 mo. 6 mo. 12 mo. 36 mo.
Weighted Average Term to Next Adjustment... 1 mo. 3 mo. 6 mo. 12 mo.
Weighted Average Annual Period Cap......... none 2.00% 1.78% 2.00%
Weighted Average Lifetime Cap.............. 9.73% 11.06% 11.82% 14.16%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities............... 18.73% 21.59% 52.21% 0.60%
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The table below shows unrealized gains and losses on the Mortgage-Backed Securities in the Company's portfolio.
At June 30,
1997
------------
(dollars in
thousands)
Unrealized Gain......................................................... $ 438
Unrealized Loss......................................................... (737)
Net Unrealized Loss..................................................... (299)
Net Unrealized Loss as % of Mortgage-Backed Securities Principal Value.. 0.08%
Net Unrealized Loss as % of Mortgage-Backed Securities Amortized Cost... 0.08%
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INTEREST RATE AGREEMENTS
Interest rate agreements are assets that are carried on a balance sheet at estimated liquidation value. At June 30, 1997, there were no interest rate agreements on the Company's balance sheet.
BORROWINGS
To date, the Company's debt has consisted entirely of borrowings collateralized by a pledge of the Company's Mortgage-Backed Securities. These borrowings appear on the balance sheet as repurchase agreements. At June 30, 1997, the Company had established uncommitted borrowing facilities in this market with nineteen lenders in amounts which the Company believes are in excess of its needs. All of the Company's Mortgage-Backed Securities are currently accepted as collateral for such borrowings. The Company, however, limits its borrowings, and thus its potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity and strength of its balance sheet.
For the period ended June 30, 1997, the term to maturity of the Company's borrowings has ranged from one day to six months, with a weighted average original term to maturity of 66 days and a weighted average remaining maturity of 20 days at June 30, 1997. Many of the Company's borrowings have a cost of funds which adjust monthly based on a fixed spread over or under one-month LIBOR or based on the daily Fed Funds rate. As a result, the average term to the next rate adjustment for the Company's borrowings is typically shorter than the term to maturity for the Company's Mortgage-Backed Securities. At June 30, 1997, the weighted average cost of funds for all of the Company's borrowings was 5.64% and the weighted average term to next rate adjustment was 20 days.
LIQUIDITY
Liquidity, which is the Company's ability to turn non-cash assets into cash, allows the Company to purchase additional Mortgage-Backed Securities and to pledge additional assets to secure existing borrowings should the value of pledged assets decline. Potential immediate sources of liquidity for the Company include cash balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the market value of the Company's Mortgage- Backed Securities varies. The Company's balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should the Company's needs ever exceed these on- going sources of liquidity plus the immediate sources of liquidity discussed above, management believes that the Company's Mortgage-Backed Securities could in most circumstances be sold to raise cash. The maintenance of liquidity is one of the goals of the Company's Capital Investment Policy. Under this policy, asset growth is limited in order to preserve unused borrowing capacity for liquidity management purposes.
STOCKHOLDERS' EQUITY
The Company uses "available-for-sale" treatment for its Mortgage-Backed Securities; these assets are carried on the balance sheet at estimated market value rather than historical amortized cost. Based upon such "available-for- sale" treatment, the Company's equity base at June 30, 1997 was $32.8 million, or $8.92 per share. If the Company had used historical amortized cost accounting, the Company's equity base at June 30, 1997 would have been $33.1 million, or $9.00 per share.
With the Company's "available-for-sale" accounting treatment, unrealized fluctuations in market values of assets do not impact GAAP or taxable income but rather are reflected on the balance sheet by changing the carrying value of the asset and reflecting the change in stockholders' equity under "Net Unrealized Losses on Assets Available for Sale." By accounting for its assets in this manner, the Company hopes to provide useful information to stockholders and creditors and to preserve flexibility to sell assets in the future without having to change accounting methods.
As a result of this mark-to-market accounting treatment, the book value and book value per share of the Company are likely to fluctuate far more than if the Company used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may be misleading.
Unrealized changes in the estimated net market value of Mortgage-Backed Securities have one direct effect on the Company's potential earnings and dividends: positive market-to-market changes will increase the Company's equity base and allow the Company to increase its borrowing capacity while negative changes will tend to limit borrowing capacity under the Company's Capital Investment Policy. A very large negative change in the net market value of the Company's Mortgage-Backed Securities might impair the Company's liquidity position, requiring the Company to sell assets with the likely result of realized losses upon sale. "Net Unrealized Losses on Assets Available for Sale" was $298,761, or 0.08% of the amortized cost of Mortgage-Backed Securities at June 30, 1997.
The table below shows the Company's equity capital base as reported and on a historical amortized cost basis at June 30, 1997. The historical cost equity capital base is influenced by issuances of Common Stock, the level of GAAP earnings as compared to dividends declared, and other factors. The GAAP reported equity capital base is influenced by these factors plus changes in the "Net Unrealized Losses on Assets Available for Sale" account.
GAAP
Historical Net Unrealized Reported Historical GAAP Reported
Amortized Cost Losses on Assets Equity Base Amortized Cost Equity (Book
Equity Base Available for Sale (Book Value) Equity Per Share Value) Per Share
----------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
At June 30, 1997.. $33,118 $299 $32,819 $9.00 $8.92
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LEVERAGE
The Company's debt-to-GAAP reported equity ratio at June 30, 1997 was 10:1. The Company generally expects to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from time to time based upon various factors, including management's opinion of the level of risk of its assets and liabilities, the Company's liquidity position, the level of unused borrowing capacity and over-collateralization levels required by lenders when the Company pledges assets to secure borrowings.
The target debt-to-GAAP reported equity ratio is determined under the Company's Capital Investment Policy. Should the actual debt-to-equity ratio of the Company increase above the target level due to asset acquisition and/or market value fluctuations in assets, management will cease to acquire new assets. Management will, at such time, present a plan to its Board of Directors to bring the Company back to its target debt-to-equity ratio; in many circumstances, this would be accomplished in time by the monthly reduction of the balance of Mortgage-Backed Securities through principal repayments. See "Business Strategy -- Capital Investment Policy --Capital and Leverage."
ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES
Management continually reviews the Company's asset/liability management strategy with respect to interest rate risk, mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. The Company seeks attractive risk-adjusted stockholder returns while maintaining a strong balance sheet.
The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although it has not done so to date, the Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in its portfolio of Mortgage-Backed Securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. While the Company has determined, based upon the current interest rate environment and other relevant factors, that it would not be economically advantageous, at present, for the Company to enter into interest rate agreements, the Company may enter into such agreements in the future.
Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Mortgage-Backed Securities. The Company will seek to mitigate the effect of changes in the mortgage principal repayment rate from an economic point of view by balancing assets purchased at a premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggregate discount on Mortgage-Backed Securities in the Company's portfolio. As a result, prepayments, which result in the expensing of unamortized premium, will reduce the Company's net income compared to what net income would be absent such prepayments.
INFLATION
Virtually all of the Company's assets and liabilities are financial in nature. As a result, interest rates and other factors drive the Company's performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company's financial statements are prepared in
accordance with GAAP and the Company's dividends are determined by the Company's net income as calculated for tax purposes; in each case, the Company's activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation.
BUSINESS STRATEGY
GENERAL
The Company's principal business objective is to generate income for distribution to its stockholders, primarily from the net cash flows on its Mortgage-Backed Securities qualifying as Qualified REIT Real Estate Assets. The Company's net cash flows result primarily from the difference between (i) the interest income on its Mortgage-Backed Security investments and (ii) the borrowing and financing costs of the Mortgage-Backed Securities. To achieve its business objective and generate dividend yields, the Company's strategy is:
. to purchase Pass-Through Certificates, CMOs and other Mortgage-Backed Securities, substantially all of which are expected to have adjustable interest rates based on changes in short-term market interest rates;
. to acquire only those Mortgage-Backed Securities which the Company believes it has the necessary expertise to evaluate and manage, which can be readily financed and which are consistent with the Company's balance sheet guidelines and risk management objectives and generally to seek to acquire assets whose investment returns are attractive in more than a limited range of scenarios;
. to finance purchases of Mortgage-Backed Securities with the proceeds of equity offerings and, to the extent permitted by the Company's Capital Investment Policy, to utilize leverage to increase potential returns to stockholders through borrowings (primarily under repurchase agreements);
. 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 and floating rate Mortgage- Backed Securities 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 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; and
. to issue new equity or debt and increase the size of the balance sheet when opportunities in the market for Mortgage-Backed Securities are likely to allow growth in earnings per share.
The Company believes it is able to obtain cost efficiencies through its facilities-sharing arrangement with FIDAC and by virtue of management's experience in managing portfolios of Mortgage-Backed Securities and in arranging collateralized borrowings. The Company will strive to become even more cost- efficient over time by:
. seeking to raise additional capital from time to time in order to increase its ability to invest in Mortgage-Backed Securities as operating costs are not anticipated to increase as quickly as assets and
because growth will increase the Company's purchasing influence with suppliers of Mortgage-Backed Securities;
. striving to lower its effective borrowing costs over time through seeking direct funding with collateralized lenders rather than using financial intermediaries and investigating the possibility of using commercial paper and medium term note programs;
. improving the efficiency of its balance sheet structure by investigating the issuance of uncollateralized subordinated debt, preferred stock and other forms of capital; and
. 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-Backed Securities, improve its ability to assess credit risk, improve hedge efficiency and lower operating costs.
MORTGAGE-BACKED SECURITIES
GENERAL
The Company's Capital Investment Policy provides that at least 75% of its total assets will be comprised of High Quality Mortgage-Backed Securities and High Quality Short-Term Investments. The term "High Quality" as used herein means securities (i) which are rated within one of the two highest rating categories by at least one of the nationally recognized rating agencies, (ii) that are unrated but are either guaranteed by the United States government or an agency of the United States government, or (iii) that are unrated or whose ratings have not been updated but are determined to be of comparable quality to rated High Quality Mortgage-Backed Securities on the basis of credit enhancement features that meet the High Quality credit criteria approved by the Company's Board of Directors. To date, all of the Mortgage-Backed Securities acquired by the Company have been High Quality Mortgage-Backed Securities which, although not rated, carry an implied "AAA" rating.
In accordance with the Company's Capital Investment Policy, the remainder of the Company's assets, comprising not more than 25% of total assets, may consist of Mortgage-Backed Securities and other Qualified REIT Real Estate Assets which are unrated or rated less than High Quality, but which are at least "investment grade" (rated "BBB" or better) or, if not rated, are determined by the Company to be of comparable credit quality to an investment which is rated "BBB" or better. The foregoing-described Mortgage-Backed Securities, comprising in the aggregate not more than 25% of the Company's total assets, are sometimes referred to herein as "Limited Investment Assets." The Company intends to structure its portfolio to maintain a minimum weighted average rating (including the Company's deemed comparable ratings for unrated Mortgage-Backed Securities based on a comparison to rated Mortgage-Backed Securities with like characteristics) of its Mortgage-Backed Securities of at least single "A" under the S&P rating system and at the comparable level under the other rating systems.
Allocation of the Company's investments among the permitted investment types may vary from time-to-time based on the evaluation by the Company's Board of Directors of economic and market trends and the Company's perception of the relative values available from such types of investments, provided that in no event will the Company's investment in Limited Investment Assets exceed 25% of the Company's total assets.
The Company acquires only those Mortgage-Backed Securities which the Company believes it has the necessary expertise to evaluate and manage, which are consistent with the Company's balance sheet guidelines and risk management objectives and which the Company believes can be readily financed. Since the intention of the Company is generally to hold its Mortgage-Backed Securities until maturity, the Company generally does not seek to acquire assets whose investment returns are only attractive in a limited range of scenarios. The Company believes that future
interest rates and mortgage prepayment rates are very difficult to predict. Therefore, the Company seeks to acquire Mortgage-Backed Securities which the Company believes will provide acceptable returns over a broad range of interest rate and prepayment scenarios.
The Mortgage-Backed Securities acquired and to be acquired by the Company consist of (i) Pass-Through Certificates, (ii) CMOs, and (iii) other Mortgage- Backed Securities, including mortgage derivative securities representing the right to receive interest only or a disproportionately large amount of interest. It is expected that the Pass-Through Certificates acquired by the Company for its investment portfolio will continue to consist primarily of adjustable-rate Agency Certificates, which include adjustable-rate mortgage participation certificates issued by FHLMC, mortgage pass-through certificates issued by FNMA, and fully modified Pass-Through Certificates guaranteed by GNMA (collectively, "Agency Certificates"). To date, all of the Mortgage-Backed Securities acquired by the Company have been Agency Certificates. The Company has not and will not invest in REMIC residuals, other CMO residuals or Mortgage-Backed Securities, such as inverse floaters, which have imbedded leverage as part of their structural characteristics.
DESCRIPTION OF MORTGAGE-BACKED SECURITIES
The Mortgage-Backed Securities in which the Company invests provide funds for mortgage loans made primarily to residential homeowners. These include securities which represent interests in pools of mortgage loans made by lenders such as savings and loan institutions, mortgage bankers and commercial banks. Pools of mortgage loans are assembled for sale to investors (such as the Company) by various governmental, government-related and private organizations.
Interests in pools of Mortgage-Backed Securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, Mortgage-Backed Securities provide for a monthly payment, which consists of both interest and principal. In effect, these payments are a "pass- through" of the monthly interest and principal payments made by the individual borrower on its residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments result from prepayments of principal resulting from the sale of the underlying residential property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-backed securities, such as securities issued by GNMA, are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, regardless of whether or not the mortgagors actually make mortgage payments when due.
The investment characteristics of pass-through Mortgage-Backed Securities differ from those of traditional fixed-income securities. The major differences include the payment of interest and principal on the mortgage-backed securities on a more frequent schedule, as described above, and the possibility that principal may be prepaid at any time due to prepayments on the underlying mortgage loans or other assets. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed- income securities.
The occurrences of mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. Generally prepayments on pass-through mortgage-backed securities increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of the Company's investments.
FHLMC CERTIFICATES
FHLMC is a privately owned government-sponsored enterprise created pursuant to an Act of Congress (Title III of the Emergency Home Finance Act of 1970, as amended, 12 U.S.C. (S)(S) 1451-1459), on July 24, 1970. The
principal activity of FHLMC currently consists of the purchase of conventional Conforming Mortgage Loans or participation interests therein and the resale of the loans and participations so purchased in the form of guaranteed Mortgage- Backed Securities. FHLMC guarantees to each holder of FHLMC Certificates the timely payment of interest at the applicable pass-through rate and ultimate collection of all principal on the holder's pro rata share of the unpaid principal balance of the related Mortgage Loans, but does not guarantee the timely payment of scheduled principal of the underlying Mortgage Loans. The obligations of FHLMC under its guarantees are solely those of FHLMC and are not backed by the full faith and credit of the United States. If FHLMC were unable to satisfy such obligations, distributions to holders of FHLMC Certificates would consist solely of payments and other recoveries on the underlying Mortgage Loans and, accordingly, monthly distributions to holders of FHLMC Certificates would be affected by delinquent payments and defaults on such Mortgage Loans.
FHLMC Certificates may be backed by pools of Single-Family Mortgage Loans or Multifamily Mortgage Loans. Such underlying Mortgage Loans may have original terms to maturity of up to 40 years. FHLMC Certificates may be issued under Cash Programs (composed of Mortgage Loans purchased from a number of sellers) or Guarantor Programs (composed of Mortgage Loans purchased from one seller in exchange for participation certificates representing interests in the Mortgage Loans purchased). FHLMC Certificates may pay interest at a fixed rate or adjustable rate. The interest rate paid on FHLMC ARM Certificates adjusts periodically within 60 days prior to the month in which the interest rates on the underlying Mortgage Loans adjust. The interest rates paid on FHLMC ARM Certificates issued under FHLMC's standard ARM programs adjust in relation to the Treasury Index. Other specified indices used in FHLMC ARM programs include the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San Francisco, LIBOR and other indices. Interest rates paid on fully-indexed FHLMC ARM Certificates equal the applicable index rate plus a specified number of basis points ranging typically from 125 to 250 basis points. In addition, the majority of series of FHLMC ARM Certificates issued to date have evidenced pools of Mortgage Loans with monthly, semi-annual or annual interest adjustments. Adjustments in the interest rates paid are generally limited to an annual increase or decrease of either 100 or 200 basis points and to a lifetime cap of 500 or 600 basis points over the initial interest rate. Certain FHLMC programs include Mortgage Loans which allow the borrower to convert the adjustable mortgage interest rate to a fixed rate. ARMs which are converted into fixed-rate Mortgage Loans are repurchased by FHLMC or by the seller of such loan to FHLMC at the unpaid principal balance thereof plus accrued interest to the due date of the last adjustable rate interest payment.
FNMA CERTIFICATES
FNMA is a privately owned, federally chartered corporation organized and existing under the Federal National Mortgage Association Charter Act (12 U.S.C. (S) 1716 et seq.). FNMA provides funds to the mortgage market primarily by purchasing home Mortgage Loans from local lenders, thereby replenishing their funds for additional lending. FNMA guarantees to the registered holder of a FNMA Certificate that it will distribute amounts representing scheduled principal and interest (at the rate provided by the FNMA Certificate) on the Mortgage Loans in the pool underlying the FNMA Certificate, whether or not received, and the full principal amount of any such mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. The obligations of FNMA under its guarantees are solely those of FNMA and are not backed by the full faith and credit of the United States. If FNMA were unable to satisfy such obligations, distributions to holders of FNMA Certificates would consist solely of payments and other recoveries on the underlying Mortgage Loans and, accordingly, monthly distributions to holders of FNMA Certificates would be affected by delinquent payments and defaults on such Mortgage Loans.
FNMA Certificates may be backed by pools of Single-Family or Multifamily Mortgage Loans. The original terms to maturities of the Mortgage Loans generally do not exceed 40 years. FNMA Certificates may pay interest at a fixed rate or adjustable rate. Each series of FNMA ARM Certificates bears an initial interest rate and margin tied to an index based on all loans in the related pool, less a fixed percentage representing servicing compensation and FNMA's guarantee fee. The specified index used in each such series has included the Treasury Index, the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San Francisco, LIBOR and other indices. Interest rates paid
on fully-indexed FNMA ARM Certificates equal the applicable index rate plus a specified number of basis points ranging typically from 125 to 250 basis points. In addition, the majority of series of FNMA ARM Certificates issued to date have evidenced pools of Mortgage Loans with monthly, semi-annual or annual interest rate adjustments. Adjustments in the interest rates paid are generally limited to an annual increase or decrease of either 100 or 200 basis points and to a lifetime cap of 500 or 600 basis points over the initial interest rate. Certain FNMA programs include Mortgage Loans which allow the borrower to convert the adjustable mortgage interest rate of its ARM to a fixed rate. ARMs which are converted into fixed-rate Mortgage Loans are repurchased by FNMA or by the seller of such loans to FNMA at the unpaid principal balance thereof plus accrued interest to the due date of the last adjustable rate interest payment. Adjustments to the interest rates on FNMA ARM Certificates are typically subject to lifetime caps and periodic rate or payment caps.
GNMA CERTIFICATES
GNMA is a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development ("HUD"). Section 306(g) of Title III of the National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of the principal of and interest on certificates which represent an interest in a pool of mortgages insured by the FHA under the Housing Act or Title V of the Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States Code and other loans eligible for inclusion in mortgage pools underlying GNMA Certificates. Section 306(g) of the Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." An opinion, dated December 12, 1969, of an Assistant Attorney General of the United States provides that such guarantees under section 306(g) of GNMA Certificates of the type which may be purchased or received in exchange by the Company are authorized to be made by GNMA and "would constitute general obligations of the United States backed by its full faith and credit."
At present, most GNMA Certificates are backed by Single-Family Mortgage Loans. The interest rate paid on GNMA Certificates may be fixed rate or adjustable rate. The interest rate on GNMA Certificates issued under GNMA's standard ARM program adjusts annually in relation to the Treasury Index. Interest rates paid on GNMA ARM Certificates typically equal the index rate plus 150 basis points. Adjustments in the interest rate are generally limited to an annual increase or decrease of 100 basis points and to a lifetime cap of 500 basis points over the initial coupon rate.
SINGLE-FAMILY AND MULTIFAMILY PRIVATELY-ISSUED CERTIFICATES
Single-Family and Multifamily Privately-Issued Certificates are Pass-Through Certificates that are not issued by one of the Agencies and that are backed by a pool of conventional Single-Family or Multifamily Mortgage Loans, respectively. Single-Family and Multifamily Privately-Issued Certificates are issued by originators of, investors in, and other owners of Mortgage Loans, including savings and loan associations, savings banks, commercial banks, mortgage banks, investment banks and special purpose "conduit" subsidiaries of such institutions.
While Agency Certificates are backed by the express obligation or guarantee of one of the Agencies, as described above, Single-Family and Multifamily Privately-Issued Certificates are generally covered by one or more forms of private (i.e.,nongovernmental) credit enhancements. Such credit enhancements provide an extra layer of loss coverage in the event that losses are incurred upon foreclosure sales or other liquidations of underlying mortgaged properties in amounts that exceed the equity holder's equity interest in the property and result in Realized Losses. Forms of credit enhancements include, but are not limited to, limited issuer guarantees, reserve funds, private mortgage guaranty pool insurance, over-collateralization and subordination.
Subordination is a form of frequently used credit enhancement and involves the issuance of multiple classes of Senior-Subordinated Mortgage-Backed Securities. Such classes are structured into a hierarchy of levels for purposes of allocating Realized Losses and also for defining priority of rights to payment of principal and interest. Typically, one or more classes of Senior Securities are created which are rated in one of the two highest rating levels by one or more nationally recognized rating agencies and which are supported by one or more classes of Mezzanine Securities and Subordinated Securities that bear Realized Losses prior to the classes of Senior Securities. Mezzanine Securities for purposes of this Prospectus will refer to any classes that are rated below the two highest levels but no lower than a single "B" level under the S&P rating system (or comparable level under other rating systems) and are supported by one or more classes of Subordinated Securities which bear Realized Losses prior to the classes of Mezzanine Securities. For purposes of this Prospectus, Subordinated Securities will refer to any class that bears the "first loss" from Realized Losses or that is rated below a single "B" level (or, if unrated, is deemed by the Company to be below such level based on a comparison of characteristics of such class with other rated Subordinated Securities with like characteristics). In some cases, only classes of Senior Securities and Subordinated Securities are issued. By adjusting the priority of interest and principal payments on each class of a given series of Senior- Subordinated Mortgage-Backed Securities, issuers are able to create classes of Mortgage-Backed Securities with varying degrees of credit exposure, prepayment exposure and potential total return, tailored to meet the needs of sophisticated institutional investors.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Mortgage-Backed Securities in which the Company may invest may include collateralized mortgage obligations ("CMOs") and multi-class pass-through securities. CMOs are debt obligations issued by special purpose entities that are secured by mortgage-backed certificates, including, in many cases, certificates issued by government and government-related guarantors, including GNMA, FNMA and FHLMC, together with certain funds and other collateral. Multi- class pass-through securities are equity interests in a trust composed of mortgage loans or other mortgage-backed securities. Payments of principal and interest on underlying collateral provide the funds to pay debt service on the CMO or make scheduled distributions on the multi-class pass-through securities. CMOs and multi-class pass-through securities may be issued by agencies or instrumentalities of the U.S. Government or by private organizations. The discussion of CMOs in the following paragraphs is similarly applicable to multi- class pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specific coupon rate (which, as discussed below, may be an adjustable rate subject to a cap) and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than the stated maturities or final distribution dates. Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or semi-annual basis. The principal and interest on underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. In a common structure, payments of principal, including any principal prepayments, on the underlying mortgages are applied to the classes of the series of a CMO in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on any class of a CMO until all other classes having an earlier stated maturity or final distribution date have been paid in full.
Other types of CMO issues include classes such as parallel pay CMOs, some of which, such as Planned Amortization Class CMOs ("PAC Bonds"), provide protection against prepayment uncertainty. Parallel pay CMOs are structured to provide payments of principal on certain payment dates to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class which, as with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PAC Bonds generally require payment of a specified amount of principal on each payment date so long as prepayment speeds on the underlying collateral fall within a specified range. PAC Bonds are always parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes.
Other types of CMO issues include Targeted Amortization Class CMOs ("TAC Bonds"), which are similar to PAC Bonds. While PAC Bonds maintain their amortization schedule within a specified range of prepayment speeds, TAC Bonds are generally targeted to a narrow range of prepayment speeds or a specified prepayment speed. TAC Bonds can provide protection against prepayment uncertainty since cash flows generated from higher prepayments of the underlying mortgage-related assets are applied to the various other pass-through tranches so as to allow the TAC Bonds to maintain their amortization schedule.
CMOs may be subject to certain rights of issuers thereof to redeem such CMOs prior to their stated maturity dates, which may have the effect of diminishing the Company's anticipated return on its investment. Privately-Issued Single- Family and Multifamily CMOs are supported by private credit enhancements similar to those used for Privately-Issued Certificates and are often issued as Senior- Subordinated Mortgage-Backed Securities. The Company will only acquire CMOs or multi-class pass-through certificates that constitute debt obligations or beneficial ownership in grantor trusts holding Mortgage Loans, or regular interests in REMICs, or that otherwise constitute Qualified REIT Real Estate Assets (provided that the Company has obtained a favorable opinion of its tax advisor or a ruling from the IRS to that effect).
One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index such as LIBOR. These adjustable rate tranches, known as "floating rate CMOs", may be backed by fixed or adjustable- rate mortgages. To date, fixed-rate mortgages have been more commonly utilized for this purpose. Floating rate CMOs are typically issued with lifetime caps on the coupon rate thereon. These caps, similar to the caps on adjustable-rate mortgages described in "Floating Rate Mortgage-Backed Securities" below, represent a ceiling beyond which the coupon rate on a floating rate CMO may not be increased regardless of increases in the interest rate index to which the floating rate CMO is geared.
FLOATING RATE MORTGAGE-BACKED SECURITIES
CMOs in which the Company may invest include floating rate CMOs ("Floaters"). The interest rates on Floaters are reset at periodic intervals to an increment over some predetermined interest rate index. There are two main categories of indices: (i) those based on U.S. Treasury securities, and (ii) those derived from calculated measures such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year Treasury rate, the three-month Treasury bill rate, the six-month Treasury bill rate, rates on long-term Treasury securities, the 11th District Federal Home Loan Bank Costs of Funds Index, the National Median Cost of Funds, the one-month or three-month LIBOR, the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds Index, tend to lag changes in market rate level. The Company will seek to diversify its investments in Floaters among a variety of indices and reset periods so that the Company is not at any one time unduly exposed to the risk of interest rate fluctuations. In selecting the type of Floaters for investment, the Company will also consider the liquidity of the market for such Floaters.
The Company believes that Floaters are particularly well-suited to facilitate its ability to accomplish the Company's investment objective of high current income, consistent with modest volatility of net asset value, because the value of the Floaters should remain relatively stable as compared to that of traditional fixed-rate debt securities paying comparable rates of interest. While the value of Floaters, like other debt securities, generally varies inversely with changes in market interest rates (increasing in value during periods of declining interest rates and decreasing in value during periods of increasing interest rates), the value of Floaters should generally be more resistant to price swings than other debt securities because the interest rates of Floaters move with market interest rates. Accordingly, as interest rates change, the value of the Company's shares should be more stable than that of funds which invest primarily in securities backed by fixed-rate mortgages or in other non-mortgage-backed debt securities, which do not provide for adjustment in the interest rates thereon in response to change in interest rates.
Floaters typically have caps, which limit the maximum amount by which the interest rate may be increased or decreased at periodic intervals or over the life of the Floater. To the extent that interest rates rise faster than the allowable caps on Floaters, such Floaters will behave more like fixed-rate securities. Consequently, interest rate increases in excess of caps can be expected to cause Floaters to behave more like traditional debt securities than adjustable-rate securities and, accordingly, to decline in value to a greater extent than would be the case in the absence of such caps.
Floaters, like other Mortgage-Backed Securities, differ from conventional bonds in that principal is to be paid back over the life of Floaters rather than at maturity. As a result, the holder of the Floaters (i.e., the Company) receives monthly scheduled payments of principal and interest and may receive unscheduled principal payments representing prepayments on the underlying mortgages. When the holder reinvests the payments and any unscheduled prepayments it receives, it may receive a rate of interest on the reinvestment which is lower than the rate on the existing Floaters. For this reason, Floaters are less effective than longer-term debt securities as a means of "locking in" longer-term interest rates.
Floaters, while having less risk of price decline during periods of rapidly rising rates than certain fixed-rate Mortgage-Backed Securities of comparable maturities, could have less potential for capital appreciation than such securities. In addition, to the extent Floaters are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments will result in some loss of the holders' principal investment to the extent of the premium paid. On the other hand, if Floaters are purchased at a discount, an unscheduled prepayment of principal could increase total return and accelerate the recognition of income to the Company and, as a result, could increase the amount of income received by stockholders to the extent that the Company distributes such income.
OTHER FLOATING RATE INSTRUMENTS
The Company may also invest in structured floating rate notes issued or guaranteed by government agencies, such as FNMA and FHLMC. Such instruments are typically structured to reflect an interest rate arbitrage (i.e., the difference between the agency's cost of funds and the income stream from specified assets of the agency) and their reset formulas may provide more attractive returns than other floating rate instruments. The indices used to determine resets are the same as those referred to under "--Floating Rate Mortgage-Backed Securities" above.
SUBORDINATED INTERESTS
The Company may acquire Subordinated Interests which are classes of Mortgage- Backed Securities that are junior to other classes of such series of Mortgage- Backed Securities in the right to receive payments from the underlying mortgages. The subordination is for credit enhancement and may be for all payment failures on the Mortgage Loans securing or underlying such series of Mortgage-Backed Securities. The subordination will not be limited to those resulting from certain types of risks, such as those resulting from war, earthquake or flood, or the bankruptcy of a mortgagor. The subordination may be for the entire amount of the series of Mortgage-Backed Securities or may be limited in amount. The Subordinated Interests held by the Company will be part of its Limited Investment Assets that in the aggregate will not constitute more than 25% of the Company's total assets.
It is anticipated that substantially all of the Subordinated Interests which the Company may acquire will be rated at least investment grade by one of the rating agencies. If not so rated, the Company will establish reserves against future potential losses in an amount equivalent to the credit enhancement required to achieve an investment grade credit rating.
Any Subordinated Interests acquired by the Company will be limited in amount and bear yields which the Company believes are commensurate with the risks involved. The market for Subordinated Interests is not extensive and may be illiquid. In addition, the Company's ability to sell Subordinated Interests will be limited by the REIT
Provisions of the Code. Accordingly, the Company intends to purchase Subordinated Interests for investment purposes only. Although publicly offered Subordinated Interests generally will be rated, the risks of ownership will be substantially the same as the ownership of unrated Subordinated Interests because the rating does not address the possibility that the Company might suffer a lower than anticipated yield or fail to recover its initial investment. The Company will not purchase any Subordinated Interests that do not qualify as Qualified REIT Real Estate Assets.
MORTGAGE LOANS
The Company may from time to time invest a small percentage of its assets directly in Single-Family, Multi-Family or Commercial Mortgage Loans. The Company expects that substantially all of such Mortgage Loans acquired by it would be ARMs. The interest rate on an ARM is typically tied to an index (such as LIBOR or the interest rate on United States Treasury Bills), and is adjustable periodically at various intervals. Such Mortgage Loans are typically subject to lifetime interest rate caps and periodic interest rate and/or payment caps. The acquisition of Mortgage Loans generally involves credit risk. The Company may obtain credit enhancement to mitigate such risk; however, there can be no assurances that the Company will able to obtain such credit enhancement or that such credit enhancement will mitigate the credit risk of the underlying Mortgage Loans.
CAPITAL INVESTMENT POLICY
ASSET ACQUISITIONS
The Company's Capital Investment Policy provides that at least 75% of the Company's total assets will be comprised of High Quality Mortgage-Backed Securities and High Quality Short-Term Investments. The remainder of the Company's assets (comprising not more than 25% of total assets), may consist of Mortgage-Backed Securities and other Qualified REIT Real Estate Assets which are unrated or rated less than High Quality but which are at least "investment grade" (rated "BBB" or better) or, if not rated, are determined by the Company to be of comparable credit quality to an investment which is rated "BBB" or better.
The Company structures its portfolio to maintain a minimum weighted average rating (including the Company's deemed comparable ratings for unrated Mortgage- Backed Securities based on a comparison to rated Mortgage-Backed Securities with like characteristics) of its Mortgage-Backed Securities of at least single "A" under the S&P rating system and at the comparable level under the other rating systems. To date, all of the Mortgage-Backed Securities acquired by the Company have been Agency Certificates which, although not rated, have an implied "AAA" rating.
The Company intends to acquire only those Mortgage-Backed Securities which the Company believes it has the necessary expertise to evaluate and manage, which are readily financed and which are consistent with the Company's balance sheet guidelines and risk management objectives. Since the Company expects to hold such assets until maturity, the Company generally does not seek to acquire assets whose investment returns are only attractive in a limited range of scenarios. The Company believes that future interest rates and mortgage prepayment rates are very difficult to predict and, as a result, seeks to acquire Mortgage-Backed Securities which the Company believes provide acceptable returns over a broad range of interest rate and prepayment scenarios.
Among the asset choices available to the Company, the Company's policy is to acquire those Mortgage-Backed Securities which the Company believes generate the highest returns on capital invested, after considering (i) the amount and nature of anticipated cash flows from the asset, (ii) the Company's ability to pledge the asset to secure collateralized borrowings, (iii) the increase in the Company's capital requirement determined by the Company's Capital Investment Policy resulting from the purchase and financing of the asset, and (iv) the costs of financing, hedging, managing and reserving for the asset. Prior to acquisition, potential returns on capital employed are assessed over the life of the asset and in a variety of interest rate, yield spread, financing cost, credit loss and prepayment scenarios.
Management also gives consideration to balance sheet management and risk diversification issues. A specific asset which is being evaluated for potential acquisition is deemed more or less valuable to the Company to the extent it serves to increase or decrease certain interest rate or prepayment risks which may exist in the balance sheet, to diversify or concentrate credit risk, and to meet the cash flow and liquidity objectives management may establish for the Company's balance sheet from time to time. Accordingly, an important part of the asset evaluation process is a simulation, using the Company's risk management model, of the addition of a potential asset and its associated borrowings and hedges to the balance sheet and an assessment of the impact this potential asset acquisition would have on the risks in and returns generated by the Company's balance sheet as a whole over a variety of scenarios.
The Company focuses primarily on the acquisition of adjustable-rate Mortgage- Backed Securities. The Company has, however, purchased fixed-rate assets and may continue to do so in the future should management believe that the potential returns on capital invested, after hedging and all other costs, clearly exceed the returns available from other assets or if the purchase of such assets would serve to reduce or diversify the risks of the Company's balance sheet.
Although it has not yet done so, the Company may purchase the stock of mortgage REITs or similar companies when the Company believes that such purchases will yield attractive returns on capital employed. When the stock market valuations of such companies are low in relation to the market value of their assets, such stock purchases can be a way for the Company to acquire an interest in a pool of Mortgage-Backed Securities at an attractive price. The Company does not, however, presently intend to invest in the securities of other issuers for the purpose of exercising control or to underwrite securities of other issuers.
The Company may acquire newly-issued Mortgage-Backed Securities, and also will seek to expand its capital base in order to further increase the Company's ability to acquire new assets, when the potential returns from new investments appear attractive relative to the return expectations of stockholders. The Company may in the future acquire Mortgage-Backed Securities by offering its debt or equity securities in exchange for such Mortgage-Backed Securities.
The Company generally intends to hold Mortgage-Backed Securities for extended periods. In addition, the REIT Provisions of the Code limit in certain respects the ability of the Company to sell Mortgage-Backed Securities. See "Certain Federal Income Tax Considerations -- General -- Gross Income Tests" and "-- Taxation of the Company." Management may decide to sell assets from time to time, however, for a number of reasons including, without limitation, to dispose of an asset as to which credit risk concerns have arisen, to reduce interest rate risk, to substitute one type of Mortgage-Backed Security for another to improve yield or to maintain compliance with the 55% requirement under the Investment Company Act, and generally to re-structure the balance sheet when management deems such action advisable. Management selects any Mortgage-Backed Securities to be sold according to the particular purpose such sale will serve.
The Board of Directors has not adopted a policy that would restrict management's authority to determine the timing of sales or the selection of Mortgage-Backed Securities to be sold.
The Company does not invest in principal-only interests in Mortgage-Backed Securities, residual interests, accrual bonds, inverse-floaters, two-tiered index bonds, cash flow bonds, Mortgage-Backed Securities with imbedded leverage or Mortgage-Backed Securities that would be deemed unacceptable for collateralized borrowings, excluding shares in mortgage REITs.
As a requirement for maintaining REIT status, the Company will distribute to stockholders aggregate dividends equaling at least 95% of its taxable income. See "Certain Federal Income Tax Considerations." The Company will make additional distributions of capital when the return expectations of the stockholders appear to exceed returns potentially available to the Company through making new investments in Mortgage-Backed Securities. Subject to the limitations of applicable securities and state corporation laws, the Company can distribute capital by making purchases of its own capital stock or through paying down or re-purchasing any outstanding uncollateralized debt obligations.
The Company's asset acquisition strategy may change over time as market conditions change and as the Company evolves.
CREDIT RISK MANAGEMENT
The Company has not taken on credit risk to date, but may do so in the future. In such event, the Company will review credit risk and other risk of loss associated with each investment and determine the appropriate allocation of capital to apply to such investment under its Capital Investment Policy. The Board of Directors will monitor the overall portfolio risk and determine appropriate levels of provision for loss.
CAPITAL AND LEVERAGE
The Company expects generally to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from time to time depending upon market conditions and other factors deemed relevant by management, including the composition of the Company's balance sheet, haircut levels required by lenders, the market value of the Mortgage-Backed Securities in the Company's portfolio and "Excess Capital Cushion" percentages (as described below) set by the Board of Directors from time to time. For purposes of calculating this ratio, the Company's equity is equal to the value of the Company's investment portfolio on a mark-to-market basis less the book value of the Company's obligations under repurchase agreements and other collateralized borrowings. At June 30, 1997, the Company's ratio of debt-to-equity was 10:1.
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 ability to meet its obligations during adverse market conditions. The Company's Capital Investment Policy limits management's ability to acquire additional assets during times when the Company's debt-to-equity ratio exceeds 12:1. In this way, the Company intends that use of balance sheet leverage will be controlled. The actual capital base as defined for the purpose of this 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.
Management is prohibited from acquiring additional assets during periods when the actual capital base of the Company is less than the minimum amount required under the Capital Investment Policy (except when such asset acquisitions may be necessary to maintain REIT status or the Company's exemption from the Investment Company Act). In addition, when the actual capital base falls below the risk- managed capital requirement, management will be required to submit to the Board a plan for bringing the actual capital base into compliance with the Capital Investment Policy guidelines. It is anticipated that in most circumstances this goal will be achieved over time without overt management action through the natural process of mortgage principal repayments and increases in the market values of Mortgage-Backed Securities as their coupon rates adjust upwards to market levels. Management anticipates that the actual capital base is likely to exceed the risk-managed capital requirement during periods following new equity offerings and during periods of falling interest rates and that the actual capital base could fall below the risk-managed capital requirement during periods of rising interest rates.
The first component of the Company's capital requirements is the current aggregate over-collateralization amount or "haircut" the lenders require the Company to hold as capital. The haircut for each Mortgage-Backed Security is determined by the lender based on the risk characteristics and liquidity of that asset. Haircut levels on individual borrowings generally range from 3% for Agency Certificates to 20% for certain Privately-Issued Certificates, and the Company anticipates that haircut levels will average 3% to 10% for the Company as a whole. At June 30, 1997, the weighted average haircut level on the Company's securities was 3%. Should the market value of the pledged assets
decline, the Company will be required to deliver additional collateral to the lenders in order to maintain a constant over-collateralization level on its borrowings.
The second component of the Company's capital requirement is the "Excess Capital Cushion." The Excess Capital Cushion is an additional amount of capital in excess of the haircut maintained by the Company in order to help the Company meet the demands of the lenders for additional collateral should the market value of the Company's Mortgage-Backed Securities decline. The aggregate Excess Capital Cushion equals the sum of liquidity cushion amounts assigned under the Capital Investment Policy to each of the Company's Mortgage-Backed Securities. Excess Capital Cushions are assigned to each Mortgage-Backed Security based on management's assessment of the Mortgage-Backed Security's market price volatility, credit risk, liquidity and attractiveness for use as collateral by lenders. The process of assigning Excess Capital Cushions relies on management's ability to identify and weigh the relative importance of these and other factors. Consideration is also given to hedges associated with the Mortgage- Backed Security and any effect such hedges may have on reducing net market price volatility, concentration or diversification of credit and other risks in the balance sheet as a whole and the net cash flows that can be expected to arise from the interaction of the various components of the Company's balance sheet. The Board of Directors thus 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 Capital Investment Policy is either too low or too high, the Board of Directors may raise or lower the capital requirement accordingly.
The Capital Investment Policy stipulates that at least 25% of the capital base maintained to satisfy the Excess Capital Cushion shall be invested in Agency Certificates, AAA-rated adjustable-rate Mortgage-Backed Securities or assets with similar or better liquidity characteristics. To date, 100% of the Company's Mortgaged-Backed Securities are Agency Certificates, though this may change in the future.
Pursuant to the Company's overall business strategy, a substantial portion of the Company's borrowings are short-term or variable-rate. The Company's borrowings are implemented primarily through repurchase agreements (a borrowing device evidenced by an agreement to sell securities or other assets to a third- party and a simultaneous agreement to repurchase them at a specified future date and price, the price difference constituting interest on the borrowing), but in the future may also be obtained through loan agreements, lines of credit, Dollar-Roll Agreements (an agreement to sell a security for delivery on a specified future date and a simultaneous 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, CMOs and senior or subordinated notes. The Company enters into financing transactions only with institutions that it believes are sound credit risks and follows other internal policies designed to limit its credit and other exposure to financing institutions.
It is expected that repurchase agreements will continue to be the principal financing devices utilized by the Company to leverage its Mortgage-Backed Securities portfolio. The Company anticipates that, upon repayment of each borrowing in the form of a repurchase agreement, the collateral will immediately be used for borrowing in the form of a new repurchase agreement. To date, the Company has entered into uncommitted facilities with nineteen (19) lenders for borrowings in the form of repurchase agreements. The Company has not at the present time entered into any commitment agreements under which the lender would be required to enter into new repurchase agreements during a specified period of time, nor does the Company presently plan to have liquidity facilities with commercial banks. The Company, however, may enter into such commitment agreements in the future if deemed favorable to the Company. The Company enters into repurchase agreements primarily with national broker/dealers, commercial banks and other lenders which typically offer such financing. The Company enters into collateralized borrowings only with financial institutions meeting credit standards approved by the Company's Board of Directors, and monitors the financial condition of such institutions on a regular basis.
A repurchase agreement, although structured as a sale and repurchase obligation, acts as a financing under which the Company effectively pledges its Mortgage-Backed Securities as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount equal to a percentage of the market value of the pledged collateral. At the maturity of the repurchase agreement, the Company is required to repay the loan and correspondingly receives back its collateral. While used as collateral, Mortgage-Backed Securities continue to pay principal and interest which inure to the benefit of the Company. In the event of the insolvency or bankruptcy of the Company, certain repurchase agreements may qualify for special treatment under the Bankruptcy Code, the effect of which is, among other things, to allow the creditor under such agreements to avoid the automatic stay provisions of the Bankruptcy Code and to foreclose on the collateral agreements without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and the Company's claim against the lender for damages therefrom may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, the Company's ability to exercise its rights to recover its securities under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages actually suffered by the Company.
Substantially all of the Company's borrowing agreements require the Company to deposit additional collateral in the event the market value of existing collateral declines, which may require the Company to sell assets to reduce the Company's borrowings. The Company's liquidity management policy is designed to maintain a cushion of equity sufficient to provide required liquidity to respond to the effects under its borrowing arrangements of interest rate movements and changes in market value of its Mortgage-Backed Securities, as described above. However, a major disruption of the repurchase or other market relied on by the Company for short-term borrowings would have a material adverse effect on the Company unless the Company were able to arrange alternative sources of financing on comparable terms. See "Risk Factors -- Operations Risks -- Risks Associated with Leverage" and -- Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations."
The Company's Bylaws do not limit its ability to incur borrowings, whether secured or unsecured.
INTEREST RATE RISK MANAGEMENT
To the extent consistent with its election to qualify as a REIT, the Company follows an interest rate risk management program intended to protect its portfolio of Mortgage-Backed Securities and related debt 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-Backed Securities and the differences between interest rate adjustment indices and interest rate adjustment periods of its adjustable-rate Mortgage-Backed Securities and related borrowings. The Company's interest rate risk management program encompasses a number of procedures, including the following: (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-Backed Securities purchased by the Company, so as to limit any mismatching 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-Backed Securities to have a range of different maturities and interest rate adjustment periods (although substantially all 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 any differences between interest rate adjustment periods of adjustable-rate Mortgage-Backed Securities and related borrowings that may occur.
Although it has not done so to date, the Company may purchase from time to time interest rate caps, interest rate swaps, interest rate collars, caps or floors, "interest only" Mortgage-Backed Securities 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 assets during a period of rising interest rates or to mitigate prepayment risk. In this way, the Company may hedge as much of the interest rate risk as management determines is in the best interests of the stockholders of the Company, given the cost of such hedging transactions and the need to maintain the Company's status as a REIT. See "Certain Federal Income Tax Considerations -- General -- Gross Income Tests." 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 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 "duration." This is the expected percentage change in market value of the Company's assets that would be caused by a 1% change in short and long term interest rates. To monitor 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-Backed Securities, liabilities and interest rate agreements. See "Risk Factors -- Operations Risks -- Risk of Decrease in Net Interest Income Due to Interest Rate Fluctuations." At June 30, 1997, the Company estimates that the duration of the Company's assets was less than 1%. The Company believes that the Company's interest rate risk management program will allow the Company to maintain operations throughout a wide variety of potentially adverse circumstances. Nevertheless, in order to further preserve the Company's capital base (and lower its duration) during periods when management believes a trend of rapidly rising interest rates has been established, management may decide to enter into or 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.
The Company may elect to conduct a portion of its hedging operations through one or more subsidiary corporations which would not be a Qualified REIT Subsidiary and would be subject to Federal and state income taxes. In order to comply with the nature of asset tests applicable to the Company as a REIT, the value of the securities of any such subsidiary held by the Company must be limited to less than 5% of the value of the Company's total assets as of the end of each calendar quarter and no more than 10% of the voting securities of any such subsidiary may be owned by the Company. See "Certain Federal Income Tax Considerations -- General -- Asset Tests." A taxable subsidiary would not elect REIT status and would distribute any net profit after taxes to the Company and its other stockholders. Any dividend income received by the Company from any such taxable subsidiary (combined with all other income generated from the Company's assets, other than Qualified REIT Real Estate Assets) must not exceed 25% of the gross income of the Company. See "Certain Federal Income Tax Considerations -- General -- Gross Income Tests." Before the Company forms any such taxable subsidiary corporation for its hedging activities, the Company will obtain an opinion of counsel to the effect that the formation and contemplated method of operation of such corporation will not cause the Company to fail to satisfy the nature of assets and sources of income tests applicable to it as a REIT.
The Company believes that it has developed a cost-effective asset/liability management program to provide a level of protection against interest rate and prepayment risks. However, no strategy can completely insulate the Company from interest rate changes, prepayment risks and defaults by counter-parties. Further, as noted above, 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. The Company monitors carefully, and may have to limit, its asset/liability management program to assure that it does not realize excessive hedging income, or hold hedging assets having excess value in relation to total assets, which would result in the Company's disqualification as a REIT or, in the case of excess hedging income, the payment of a penalty tax for failure to satisfy certain REIT income tests under
the Code, provided such failure was for reasonable cause. See "Certain Federal Income Tax Considerations -- General." In addition, asset/liability management involves transaction costs which increase dramatically as the period covered by the hedging protection increases. Therefore, the Company may be prevented from effectively hedging its interest rate and prepayment risks.
PREPAYMENT RISK MANAGEMENT
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-Backed Securities with prepayment prohibitions and penalties, investing in certain Mortgage-Backed Security structures which have prepayment protections, and balancing assets purchased at a premium with assets purchased at a discount. 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.
FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Board of Directors has established the investment policies and operating policies and strategies set forth in this Prospectus. The Board of Directors has the power to modify or waive such policies and strategies without the consent of the stockholders to the extent that the Board of Directors determines that such modification or waiver is in the best interests of stockholders. Among other factors, developments in the market which affect the policies and strategies mentioned herein or which change the Company's assessment of the market may cause the Board of Directors to revise the Company's policies and strategies.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or to which any property of the Company is subject.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Name Position(s) Held
---- ----------------
Michael A.J. Farrell (1) Chairman of the Board, Chief Executive Officer and
Director
Timothy J. Guba President, Chief Operating Officer and Director
Wellington J. St. Claire Vice Chairman of the Board and Director
Kathryn F. Fagan Chief Financial Officer and Treasurer
Jennifer A. Stephens Secretary
Kevin P. Brady (2)(3) Director
Spencer I. Browne (1)(3) Director
52
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Name Position(s) Held ---- ---------------- John S. Grace (3) Director Jonathan D. Green (2)(3) Director John A. Lambiase (2)(3) Director Donnell A. Segalas (1)(3) Director ----------------- |
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Independent Director.
Michael A. J. Farrell, age 46, was elected on December 5, 1996 to serve as Chairman of the Board and Chief Executive Officer of the Company. Since July 1994, he has been the President and CEO of FIDAC. He is a member of the board of directors of the U.S. Dollar Floating Rate Fund. Prior to founding FIDAC, from February 1992 to July 1994, Mr. Farrell served as President of Citadel Funding Corporation ("Citadel"). From April 1990 to January 1992, Mr. Farrell was a Managing Director for Schroder Wertheim & Co. Inc. in the Fixed Income Department. In addition to being the former Chairman of the Primary Dealers Operations Committee of the Public Securities Association (from 1981 through 1985) and its Mortgage Backed Securities Division, he is a former member of the Executive Committee of its Primary Dealers Division. Prior to his employment with Schroder Wertheim, Mr. Farrell had been President of L.F. Rothschild Mortgage Capital, Inc., Vice President of Trading at Morgan Stanley and Co., Inc., and Senior Vice President of Merrill Lynch and Co., Inc. Mr. Farrell has 24 years of experience in fixed income trading, management and operations.
Timothy J. Guba, age 39, was elected on December 5, 1996 to serve as President, Chief Operating Officer and a director of the Company. Mr. Guba joined FIDAC in March 1995 as a Senior Vice President, to assist FIDAC's financial institutional clients with securities financing management. From April 1991 to December 1994, Mr. Guba worked as a Vice President at Paine Webber Inc. in its Taxable Fixed Income Department specializing in Mortgage-Backed Securities. Mr. Guba was President of JPC Brokers Inc., a subsidiary of Fundamental Brokers, from 1988 through 1991. He was responsible for a staff of 35 employees and a daily transactional volume of over $300 million in Mortgage- Backed Securities. Mr. Guba was a Senior Vice President at L.F. Rothschild Mortgage Capital from 1986 to 1988, specializing in trading of mortgage pass- through certificates, where he established LF Rothschild as a member in the FNMA and FHLMC selling groups. Mr. Guba began his career in 1980 at Morgan Guaranty Trust Company in the Treasurer's Department trading various money market instruments. Mr. Guba has a BS in Finance and Business Management from Cornell University.
Wellington J. St. Claire, age 33, was elected on December 5, 1996 to serve as Vice Chairman of the Board, and a director of the Company with responsibility for managing the portfolio of the Company. She has been Senior Vice President of FIDAC from March 1995 to the present and Treasurer since July 1994. From July 1994 through March 1995 she was a Vice President of FIDAC. Ms. St. Claire has been the portfolio manager for the Floating Rate Fund since its inception in August 1994. Prior to joining FIDAC, from March 1992 to July 1994, Ms. St. Claire had been Vice President responsible for asset selection and financing at Citadel Funding Corporation. Prior to joining Citadel she had been a trader on the Mortgage-Backed Securities desk at Schroder Wertheim and Co., Inc. She has attended the New York Institute of Finance for intense Mortgage-Backed Securities studies.
Kathryn F. Fagan, age 30, was employed by the Company on March 31, 1997 in the positions of Chief Financial Officer and Treasurer. From June 1, 1992 to February 28, 1997, Ms. Fagan was Chief Financial Officer and
Controller of First Federal Savings & Loan Association of Opelousas, Louisiana. First Federal is a publicly-owned savings and loan which converted to the stock form of ownership during her employment period. Ms. Fagan's responsibilities at First Federal included all financial reporting, including reports for internal use and reports required by the Commission and the Office of Thrift Supervision. Her duties also included asset/liability management, internal control compliance and the management of First Federal's investment portfolio. During the period from September 1988 to May 1992, Ms. Fagan was employed as a bank and savings and loan auditor by John S. Dowling & Company, a corporation of Certified Public Accountants. Ms. Fagan is a Certified Public Accountant and has a Masters Degree in Business Administration.
Jennifer A. Stephens, age 26, was elected on December 5, 1996 to serve as Secretary of the Company. She joined FIDAC at its inception in July 1994 and became Vice President in March 1995. Ms. Stephens has been the assistant portfolio manager for the U.S. Dollar Floating Rate Fund since its inception in August 1994. She has designed several software systems for FIDAC including portfolio management systems, mortgage-backed security pricing systems, exposure reporting systems, and accounting systems. Prior to joining FIDAC, she worked for Citadel Funding Corporation where she assisted in the management of the funding of mortgage-backed security portfolios.
Kevin P. Brady, age 42, was elected on January 28, 1997 to serve as a director of the Company. Mr. Brady is the principal of KPB Associates Inc., an accounting firm which specializes in corporate taxation. Mr. Brady founded KPB Associates Inc. in December 1993. From July 1986 through November 1993, Mr. Brady worked for Price Waterhouse LLP in New York City where he specialized in international tax structures and financial reporting and held a number of senior management positions. Prior to joining Price Waterhouse LLP, Mr. Brady worked in the corporate tax department of Merck & Co. Mr. Brady is a Certified Public Accountant.
Spencer I. Browne, age 48, was elected on January 28, 1997 to serve as a director of the Company. Mr. Browne has held various executive and management positions with several publicly traded companies engaged in businesses related to the residential and commercial mortgage loan industry . From August 1988 until September 1996, Mr. Browne served as President, Chief Executive Officer and a director of Asset Investors Corporation ("AIC"), a New York Stock Exchange traded company he co-founded in 1986. He also served as President, Chief Executive Officer and a director of Commercial Assets, Inc., an American Stock Exchange traded company affiliated with AIC, from its formation in October 1993 until September 1996. In addition, from June 1990 until March 1996, Mr. Browne served as President and a director of M.D.C. Holdings, Inc., a New York Stock Exchange traded company and the parent company of a major homebuilder in Colorado.
John S. Grace , age 39, was elected on June 26, 1997 to serve as a director of the Company. For the past five years, Mr. Grace has been the Chairman of Sterling Grace Corporation, Co-Chairman of Associated Asset Management, Inc. and general partner of Anglo American Securities Fund, L.P. Mr. Grace is also a director of the Cold Spring Harbor Laboratory Association, a genetic research institute, and a director of Andersen Group, Inc. Mr. Grace has also served as governor of the Foundation for Advanced Information and Research of Tokyo, a research center whose membership includes senior executives from Japanese companies, and as a trustee of the Ford Theater in Washington, D.C.
Jonathan D. Green, age 50, was elected on January 28, 1997 to serve as a director of the Company. Mr. Green has been the President and Chief Executive Officer of Rockefeller Center Management Corporation ("RCMC") and Rockefeller Center Development Corporation ("RCDC"), subsidiaries of The Rockefeller Group ("RGI"), from July 1995 to the present. Mr. Green joined RGI in 1980 as Assistant Vice President and Real Estate Counsel, was appointed Vice President, Secretary and General Counsel in 1983, and was elected Chief Corporate Officer in 1991. As President of RCMC, Mr. Green is responsible for all aspects of RGI's real estate ownership and management interests in Rockefeller Center in midtown Manhattan. As President of RCDC, Mr. Green oversees RGI's real estate development projects including the International Trade Center in Morris County, New Jersey and Rockefeller Plaza West in midtown Manhattan. Before joining RGI, Mr. Green was affiliated with the New York City law firm of Thacher, Proffitt & Wood.
John A. Lambiase, age 57, was elected on January 28, 1997 to serve as a director of the Company. Mr. Lambiase was Managing Director in Global Operations at Salomon Brothers from 1985 through his retirement in 1991. Mr. Lambiase joined Salomon in 1979 as Director of Internal Audit. Mr. Lambiase has served as Chairman of the Mortgage-Backed Securities Clearance Corporation, a member of the board of directors of Prudential Home Mortgage and a member of the Board of the National Securities Clearance Corporation, and was a founding director and Chairman of the Participation Trust Company. Mr. Lambiase also served on Salomon's Credit Committee. Prior to joining Salomon, from 1972 through 1979, Mr. Lambiase was President of Loeb Rhodes Wall Street Settlement Corporation with responsibility for securities clearance of over 130 member firms. Prior to Loeb Rhodes, Mr. Lambiase had been the Chief Financial Officer and a General Partner of W.E. Hutton. Mr. Lambiase is a certified public accountant.
Donnell A. Segalas, age 39, was elected on January 28, 1997 to serve as a director of the Company. Mr. Segalas is a Senior Partner of Beaconsfield Capital, L.L.C., a cross border mergers and acquisitions and corporate financial advisory firm which he co-founded in June 1997. Mr. Segalas is also Managing Partner of Beaconsfield Partners, L.L.C., a wholly-owned subsidiary of Beaconsfield Capital, which is engaged in private equity investing in the United States and Mexico. Prior to his co-founding of Beaconsfield Capital and Beaconsfield Partners, Mr. Segalas was a Managing Director at Rodman & Renshaw, Inc. in the Mortgage- Backed Securities Department from 1994 to June 1997. In December 1995, Mr. Segalas was also given the additional responsibility to manage Rodman & Renshaw's Structured Finance Group. From 1990 to 1994, Mr. Segalas served as Senior Vice President in the Mortgage-Backed Securities Department at Tucker Anthony, Inc., where he co-managed the firm's Structured Finance Group. Prior to that time, Mr. Segalas had been a Senior Vice President at Smith Barney, Inc. and Corporate Vice President at Drexel Burnham Lambert.
All directors are elected at each annual meeting of the Company's stockholders for a term of one year, and hold office until their successors are elected and qualified. All officers serve at the discretion of the Board of Directors. The Company will pay an annual director's fee to each Independent Director equal to $10,000 (assuming consummation of the Offering), a fee of $500 for each meeting of the Board of Directors attended by each Independent Director (or $250 for any meeting at which the Independent Director participates by conference telephone call) and reimbursement of costs and expenses of all directors for attending such meetings. Directors who are officers of the Company do not receive an annual director's fee.
The Bylaws of the Company provide that, except in the case of a vacancy, a majority of the members of the Board of Directors and of any committee of the Board of Directors will at all times be Independent Directors. Vacancies occurring on the Board of Directors among the Independent Directors will be filled by a vote of a majority of the directors, including a majority of the Independent Directors.
The Articles of Incorporation of the Company provide for the indemnification of the directors and officers of the Company to the fullest extent permitted by Maryland law. See "Description of Capital Stock -- Indemnification." The Articles of Incorporation of the Company also provide that the personal liability of any director or officer of the Company to the Company or its stockholders for money damages is limited to the fullest extent allowed by the statutory or decisional law of the State of Maryland as amended or interpreted. See "Description of Capital Stock -- Limitation of Liability."
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has entered into Employment Agreements with Mr. Farrell, Mr. Guba and Ms. St. Claire. See "-- Employment Agreements." The Employment Agreements provide for annual salaries to Mr. Farrell, Mr. Guba and Ms. St. Claire based upon the book value of the Company. Mr. Farrell's Employment Agreement provides for an annual salary equal to .20% of the book value of the Company, subject to a maximum per annum amount of $250,000; Mr. Guba's and Ms. St. Claire's Employment Agreements provide for annual salaries equal to .17% of the book value of
the Company, subject to a maximum per annum amount of $200,000. The Company's "book value" is defined in the Employment Agreements as the aggregate amounts reported on the Company's balance sheet as "Stockholders' Equity", excluding any adjustments for valuation reserves (i.e., changes in the value of the Company's portfolio of investments as a result of mark-to-market valuation changes). Base salary is determined quarterly by the Board of Directors and upon the raising of additional equity. The maximum salary caps may be raised at the discretion of the Compensation Committee. Base salary can also be lowered at management's discretion based upon the Company's cash flow needs. In addition, the Board of Directors has established a bonus incentive compensation plan for executive officers of the Company. This program permits the Board of Directors, in its discretion, to award cash bonuses annually to executive officers of the Company.
On January 2, 1997, the Company granted to each of Mr. Farrell, Mr. Guba and Ms. St. Claire incentive stock options to purchase 66,750 shares of Common Stock at an exercise price of $4.00 per share, which options will vest in four equal installments over a period of four years from the date of grant, subject to the approval of the Board in its discretion each year. Any options which have not vested during the four year period commencing from the date of grant will vest automatically on the fourth anniversary of the date of grant. On January 2, 1997, the Company also granted to other employees of the Company incentive stock options to purchase, in the aggregate, 8,000 shares of Common Stock at an exercise price of $4.00 per share, subject to the vesting provisions described in this paragraph.
On January 21, 1997, the Company granted to each of Mr. Farrell, Mr. Guba and Ms. St. Claire incentive stock options to purchase, at an exercise price of $10.00 per share, a number of shares equal to the product of (i) 2% and (ii) the number of shares of Common Stock sold in the Private Placement in excess of 3,000,000 which, upon consummation of the Private Placement on February 18, 1997, resulted in the grant to each of them of options to purchase 12,000 shares of Common Stock. Such options are subject to the same vesting provisions described in the preceding paragraph.
All of the foregoing options were granted pursuant to the Company's Long-Term Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan also provides for the award of options to directors who are not officers or employees of the Company upon their appointment to the Board of Directors and on June 26 of each year. The Company may, from time to time, grant additional stock options and other incentive compensation awards to some or all of the Company's executive officers and employees pursuant to the Incentive Plan or such other incentive compensation plan which may be adopted by the Company. See "-- Long-Term Stock Incentive Plan."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Farrell, Mr. Guba and Ms. St. Claire. Each employment agreement provides for a term through December 31, 1999 and will be automatically extended for an additional year at the end of each year of the employment agreement, unless either party provides a prescribed prior written notice to the contrary. Each employment agreement provides for the initial annual base salary set forth under the caption "-- Compensation of Directors and Executive Officers" and for participation by the subject officer in the bonus incentive compensation plan. Each employment agreement provides for the subject officer to receive his or her base salary and bonus compensation to the date of the termination of employment by reason of death, disability or resignation and to receive base compensation to the date of the termination of employment by reason of a termination of employment for cause as defined in the employment agreement. Each employment agreement also provides for the subject officer to receive, in the event that the Company terminates the subject officer's employment without cause, or if the subject officer resigns for "good reason" (as defined in the employment agreement, including the occurrence of a "Change of Control" of the Company as defined in the employment agreement), an amount, 50% payable immediately and 50% payable in monthly installments over the succeeding twelve months, equal to three times the greater of such officer's combined maximum salary base and actual bonus compensation for the preceding fiscal year or the average for the three preceding years of such officer's combined actual base salary and bonus compensation, subject in each case to a maximum amount of 1% of the Company's book equity value (exclusive of valuation adjustments) and a minimum amount of $250,000. Section 280G of the Code may limit the deductibility of such payments by the Company for
Federal income tax purposes. Each employment agreement also contains a "non- compete" provision prohibiting the subject officer from managing, controlling, participating in or operating a competing REIT for a period of one year following termination of employment following the Company's termination of the subject officer without cause or resignation of the subject officer for "good reason" (including a "Change of Control"). Providing services to FIDAC and its customers is expressly excluded from operation of the "non-compete" provision. In addition, all outstanding options and Awards (see "-- Long-Term Stock Incentive Plan" below) granted to the subject officer under the Incentive Plan shall immediately vest upon his or her termination without cause or termination for "good reason" (including upon a "Change of Control"). "Change of Control" for purposes of the agreements would include a merger or consolidation of the Company, a sale of all or substantially all of the assets of the Company, changes in the identity of a majority of the members of the Board of Directors of the Company (other than due to the death, disability or age of a director) or acquisitions of more than 9.8% of the combined voting power of the Company's capital stock, subject to certain limitations. Each agreement requires that the subject officer act in accordance with provisions of Maryland law relating to corporate opportunities as described under the caption "-- Certain Relationships; Conflicts of Interest."
LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted the Incentive Plan to provide officers, directors and other key employees and consultants of the Company with additional incentives to exert their best efforts on behalf of the Company, to increase their proprietary interest in the success of the Company, to award outstanding performance, and to attract and retain executive personnel of outstanding ability. The effective date of the Incentive Plan was January 2, 1997.
Awards under the Incentive Plan to officers and other key employees of, and
consultants to, the Company may be granted by the Compensation Committee of the
Board of Directors, which will administer the Incentive Plan. Awards under the
Incentive Plan may include: (i) options to purchase shares of Common Stock,
including incentive stock options, non-qualified stock options or both, which
options may contain automatic reload features; (ii) stock appreciation rights,
whether in conjunction with the grant of stock options or independent of such
grant, or stock appreciation rights that are only exercisable in the event of a
change in control of the Company (as defined in the Incentive Plan) or upon
other events; (iii) restricted stock, in which Common Stock is granted to
participants subject to restrictions on transferability and other restrictions,
which lapse over time; (iv) deferred stock, in which delivery of Common Stock
occurs upon expiration of a deferral period; (v) bonus stock, consisting of a
right to receive Common Stock in an amount determined with reference to a fixed
bonus amount; (vi) dividend equivalents, consisting of a right to receive cash,
other awards, or other property equal in value to dividends paid with respect to
a specified number of shares of Common Stock, or other periodic payments; or
(vii) other awards not otherwise provided for, the value of which are based in
whole or in part upon the value of the Common Stock. The Compensation Committee
is composed of two Independent Directors and Michael Farrell.
The Incentive Plan also provides that each person who becomes a director, but who is not an officer or employee of the Company, upon appointment to the Board of Directors will receive a non-discretionary automatic grant of non-qualified stock options for the purchase of 5,000 shares of Common Stock, which options shall vest in four equal installments over a period of four years from the date of grant. Accordingly, on January 28, 1997, firm non-employee directors of the Company were each granted options to purchase 5,000 shares of Common Stock at an exercise price of $10.00 per share, which options will vest in four equal installments over a four-year period from the date of grant and on June 26, 1997, a newly-appointed director was granted options to purchase 5,000 shares of Common Stock at an exercise price of $10.00 per share, which options also vest in four equal installments over a four-year period. In addition, each non- employee director is entitled to receive on June 26 of each year that he or she serves as a director of the Company options to purchase an additional 1,250 shares of Common Stock, which options shall vest on the date of grant. Accordingly, on June 26, 1997, the six non-employee directors of the Company were granted options to purchase an aggregate of 7,500 shares of Common Stock at an exercise price of $10.00 per share. The exercise price for each share of Common Stock subject to the non-employee directors' options is equal to the fair market value of the Common Stock on the date the option is granted.
The flexible terms of the Incentive Plan are intended, among other things, to permit the Compensation Committee of the Board of Directors, which administers the Incentive Plan, to impose performance conditions with respect to any award to officers and key employees, thereby requiring forfeiture of all or a part of any award if performance objectives are not met, or linking the time of exercisability or settlement of an award to the achievement of performance conditions. Awards granted under the Incentive Plan are generally not assignable or transferable except by the laws of descent and distribution.
The Compensation Committee has the authority under the Incentive Plan, among other things, to: (i) select the officers and other key employees and consultants entitled to receive awards under the Incentive Plan; (ii) determine the form of awards, or combinations thereof, and whether such awards are to operate on a tandem basis or in conjunction with other awards; (iii) determine the number of shares of Common Stock or rights covered by an award; and (iv) determine the terms and conditions of any awards granted under the Incentive Plan, including, any restrictions or limitations on transfer, any vesting schedules or the acceleration thereof, and any forfeiture or termination provisions (or waivers thereof) including, but not limited to, in connection with a determination that an Incentive Plan participant has been terminated for cause (as defined in the Incentive Plan). Other than with respect to the grant of non-discretionary stock options to non-employee directors as described above, the exercise price at which shares of Common Stock may be purchased pursuant to the grant of stock options under the Incentive Plan is required to be determined by the Compensation Committee at the time of grant in its discretion, which discretion includes the ability to set an exercise price that is below the fair market value of the shares of Common Stock covered by such grant at the time of grant. In addition, unless otherwise provided by the Compensation Committee in an award agreement, all restrictions relating to the continued performance of services and/or the achievement of performance objectives will immediately lapse upon a change in control of the Company.
Subject to anti-dilution provisions for stock splits, stock dividends and similar events, the total number of shares of Common Stock that are reserved and available for issuance under the Incentive Plan is the greater of 500,000 or 5% of the total number of shares of Common Stock outstanding on a fully diluted basis, assuming, if applicable, the conversion of all warrants and convertible securities into Common Stock. No awards may be granted under the Incentive Plan to any person who, assuming exercise or settlement of all options and rights held by such person, would own or be deemed to own more than 9.8% in number of shares or value of any class of capital stock of the Company.
The Incentive Plan may be amended, altered, suspended, discontinued, or terminated by the Board of Directors without stockholder approval unless such approval is required by law or regulation or under the rules of any stock exchange or automated quotation system on which the Common Stock is then listed or quoted.
INVOLVEMENT OF OFFICERS IN CERTAIN LEGAL PROCEEDINGS
On November 15, 1994, Citadel Funding Corporation ("Citadel") and certain of its principals, including Michael A. J. Farrell (the "respondents"), entered into a Decision and Order of Acceptance of Respondents' Offer of Settlement (the "DBCC Settlement") with the National Association of Securities Dealers, Inc. District Business Conduct Committee for District No. 3 (the "DBCC"), pursuant to which the respondents consented to censure, a fine of $150,000 jointly and severally among the respondents and a thirty calendar day suspension of Mr. Farrell from being associated with any member of the National Association of Securities Dealers. The DBCC had alleged in its complaint against the respondents that Citadel had failed to maintain the minimum net capital required by Commission Rule 15c3-1 and that Mr. Farrell had acted in a capacity which required registration as a general securities principal prior to his qualification as such a principal. The disputed net capital issue involved a determination as to whether Citadel was acting as agent or principal in certain transactions and, consequently, whether Citadel was required to maintain capital against such amounts.
In a statement of mitigating circumstances submitted to the DBCC, respondents stated that the violations alleged in the DBCC complaint involved complex and highly technical provisions of the Commission's net capital rule
and that Citadel had acted in reliance upon an opinion from the accounting firm which it had retained that the transactions in question were not principal transactions. The respondents further stated that no customer suffered any harm as a result of any of the violations alleged by the DBCC and that none of the respondents obtained any monetary benefit as a result of the alleged violations. Subsequent to the DBCC Settlement, the respondents and certain other principals of Citadel entered into a settlement agreement whereby the accounting firm which had provided the opinion agreed to pay a cash settlement to such respondents and principals.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
Michael Farrell, Chairman of the Board and Chief Executive Officer of the
Company, Timothy Guba, President and Chief Operating Officer of the Company,
Wellington St. Claire, Vice Chairman of the Board of the Company, and Jennifer
A. Stephens, Secretary of the Company, are actively involved in the management
of FIDAC. FIDAC is a registered investment adviser which, at June 30, 1997,
managed, assisted in managing or supervised approximately $500 million in gross
assets for a wide array of clients, of which, at such date, approximately $250
million was managed on a discretionary basis. Michael Farrell is a member of
the Boards of Directors of the Floating Rate Fund. FIDAC is the investment
adviser to the Floating Rate Fund. The executive officers of the Company named
above have performed and will continue to perform such services for FIDAC, such
institutional clients and the Floating Rate Fund; however, such officers intend
to continue to devote a majority of their time to the business of the Company.
These responsibilities may create conflicts of interest if such members of management are presented with corporate opportunities that may benefit both the Company and the Floating Rate Fund and other clients for whom FIDAC acts as an investment adviser. In the event that an investment opportunity arises, such investment will be allocated to the Company or another entity by determining the entity or account for which such investment is most suitable. In making such determination, management will consider the investment strategy and guidelines of each entity or account with respect to acquisition of assets, leverage, liquidity and other factors which management shall determine appropriate.
Generally, under Maryland corporate law, a director of a corporation would be required to first offer to the Company corporate opportunities learned of solely as a result of his or her service as a member of the Board of Directors. Maryland law provides further that in order for a contract or other transaction between a corporation and any of its directors or in which a director has a material financial interest not to be void or voidable: (i) the contract or transaction must be fair and reasonable to the corporation; or (ii) the fact of such interest must be disclosed or known to (a) the board or committee that authorizes, approves or ratifies the contract or transaction and such authorization, approval or ratification must be by a vote of the majority of disinterested directors or (b) the stockholders entitled to vote and the contract or transaction is authorized, approved and ratified by a majority of the votes cast by disinterested stockholders entitled to vote.
The Company's policy is that the approval of the Board of Directors (with any interested director abstaining) is required for any director, officer, security holder or affiliate of the Company (a) to engage for their own account in realizing upon a corporate opportunity learned of solely as a result of their service to or representation of the Company or (b) to have any direct or indirect pecuniary interest in any investment to be acquired or disposed of by the Company or in any transaction to which the Company is a party or has an interest.
The Company shares with FIDAC office space and certain office expenses, such as lease payments, utilities charges and ancillary services performed by office personnel, at cost on a pro rata basis based on the relative use of such facilities and services by the Company and FIDAC. The Independent Directors will periodically review leases and other arrangements with FIDAC to ensure that such arrangements are on an arm's-length basis and to ensure compliance with the REIT Provisions of the Code.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of July 31, 1997 (after giving effect to the Direct Offering), and as adjusted to reflect the sale of Common Stock being offered hereby, relating to the beneficial ownership of the Common Stock by (i) all persons known by the Company to beneficially own more than 5% of the outstanding shares of the Common Stock, (ii) each executive officer and director of the Company and (iii) all officers and directors of the Company as a group. The following table also sets forth the number of Shares to be sold by each Selling Stockholder.
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK COMMON STOCK
BEFORE OFFERING AFTER OFFERING
---------------------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
------------------------------------------------- ---------------- ---------- ---------------- ----------
Michael A.J. Farrell
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087............................. 45,000 1.2% 45,000 *
Timothy J. Guba
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087............................. 25,300 * 25,300 *
Wellington J. St. Claire
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087............................. 23,000 * 23,000 *
Kathryn F. Fagan
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087.............................. 1,000 * 1,000 *
Kevin P. Brady
KPB Associates
12 Macatom Drive
Cranford, NJ 07016-1632......................... 2,750(1) * 2,750(1) *
Spencer I. Browne
World Trade Center
1675 Broadway
Suite 2100
Denver, CO 80202................................ 8,750(1) * 8,750(1) *
John S. Grace
55 Brookville Road
P.O. Box 163
Glen Head, NY 11545-0163........................ 126,250(1)(2) 3.3% 126,250(1)(2) 1.3%
Jonathan D. Green
Rockefeller Group
1230 Avenue of the Americas
5th Floor
New York, NY 10017.............................. 3,750(1) * 3,750(1) *
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BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK COMMON STOCK
BEFORE OFFERING AFTER OFFERING
---------------------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
------------------------------------------------- ---------------- ---------- ---------------- ----------
John A. Lambiase
1489 Sweetbay Circle
Palm City, FL 34990............................. 11,250(1) * 11,250(1) *
Donnell A. Segalas
Village Road
New Vernon, NJ 07976............................. 6,250(1) * 6,250(1) *
Zweig-DiMenna Associates LLC
900 Third Avenue
30th Floor
New York, NY 10022.............................. 205,000(3) 5.4%
Frorer Partners, L.P.
419 Hilbrook Road
Bryn Mawr, PA 19010(4).......................... 250,000 6.6%
Eaton Vance Total Return Portfolio
24 Federal Street
Boston, MA 02110-2512(5)........................ 350,000 9.3%
Bay Pond Partners, L.P.
c/o Wellington Management
75 State Street
19th Floor
Boston, MA 02109................................ 304,500 8.1%
Loews Corporation
667 Madison Avenue
7th Floor
New York, NY 10021-8087......................... 270,000 7.2%
Kramer Spellman, L.P.
2050 Center Avenue
Suite 300
Fort Lee, NJ 07024.............................. 350,000(6) 9.3%
Boston Provident Partners, L.P.
c/o Kramer Spellman, L.P.
2050 Center Avenue
Suite 300
Fort Lee, NJ 07024............................... 210,000(6) 5.6%
All Executive Officers and Directors as a Group
(10 persons).................................... 253,300(1)(2) 6.7% 253,300(1)(2) 2.5%
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(1) Includes 1,250 shares of Common Stock subject to vested options granted under the Company's Incentive Plan to each of the following non-employee directors of the Company: Kevin P. Brady; Spencer I. Browne; John S. Grace; Jonathan D. Green; John A. Lambiase and Donnell A. Segalas.
(2) Includes 35,000 shares held by Sterling Grace Capital Management, L.P., as to which Mr. Grace may be deemed to have sole voting and dispositive power, and 35,000 shares held by Anglo-American Securities Fund, L.P., 20,000 shares held by Drake Associates, L.P. and 10,000 shares held by Diversified Long Term Growth Fund, L.P., as to which Mr. Grace may be deemed to have shared voting and dispositive power. Mr. Grace disclaims beneficial ownership of all shares held by such limited partnerships in excess of his pecuniary interest.
(3) Includes 133,000 shares of Common Stock held by Zweig-DiMenna Partners, L.P. ("ZD Partners") and 72,000 shares of Common Stock held by Zweig-DiMenna Special Opportunities, L.P. ("ZD Opportunities"). Zweig-DiMenna Associates LLC ("ZD Associates") is the general partner of ZD Partners and ZD Opportunities. ZD Associates may be deemed to be affiliated with Zweig- DiMenna International Managers, Inc. which acts as investment manager to Zweig-DiMenna International Ltd. ("ZD International"). ZD International also owns 145,000 shares of Common Stock. Each entity disclaims beneficial ownership of all shares in excess of its pecuniary interest.
(4) The general partners of Frorer Partners, L.P. are Frorer Capital Management, Inc. and Peter H. Frorer. Each general partner disclaims beneficial ownership in excess of its pecuniary interest.
(5) Eaton Vance Total Return Portfolio is a mutual fund managed by Eaton Vance Management.
(6) Kramer Spellman, L.P. serves as general partner to investment partnerships, including Boston Provident Partners, L.P., and as discretionary investment manager to managed accounts which, in the aggregate, own 350,000 shares of Common Stock of the Company. 210,000 of these 350,000 shares are owned by Boston Provident Partners, L.P. Orin S. Kramer and Jay Spellman are the general partners of Kramer, Spellman, L.P. Kramer Spellman, L.P. and Messrs. Kramer and Spellman disclaim beneficial ownership of all shares held by any entity in excess of their respective pecuniary interests.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes certain Federal income tax considerations to the Company and the purchasers of the Common Stock. This discussion is based on existing Federal income tax law, which is subject to change, possibly retroactively. This discussion does not discuss all aspects of Federal income taxation which may be relevant to a particular investor in light of its personal investment circumstances or to certain types of investors subject to special treatment under the Federal income tax laws (including financial institutions, insurance companies, broker-dealers and, except to the extent discussed below, tax-exempt entities and foreign taxpayers) and it does not discuss any aspects of state, local or foreign tax law. This discussion assumes that investors will hold their Common Stock as a "capital asset" (generally, property held for investment) under the Code. Prospective investors are advised to consult their tax advisors as to the specific tax consequences of purchasing, holding and disposing of the Common Stock, including the application and effect of Federal, state, local and foreign income and other tax laws.
The Company will elect to become subject to tax as a REIT, for Federal income tax purposes, commencing with the taxable year ending December 31, 1997. 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 qualification as a REIT for the taxable year ending December 31, 1997, 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 form of dividends.
In the opinion of Morgan, Lewis & Bockius LLP, special tax counsel to the Company, the Company will meet the requirements for qualification as a REIT under the Code commencing with the Company's taxable year ending December 31, 1997, and the Company's current and contemplated method of operation described in this Prospectus and as represented by the Company will enable it to continue to satisfy the requirements for such qualification. This opinion is based on various assumptions relating to the organization and operation of the Company 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 the various qualification tests imposed by the Code as discussed below. 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, however, that the Company will 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 tax in the same manner as stockholders of such corporation. In this event, the Company could 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.
The following is a brief summary of certain technical requirements that the Company must meet on an ongoing basis in order to qualify, and remain qualified, as a REIT under the Code:
STOCK OWNERSHIP TESTS
(i) The capital stock of the Company must be transferable, (ii) the capital stock of the Company must be held by at least 100 persons during at least 335 days of a taxable year of 12 months (or during a proportionate part of a taxable year of less than 12 months), and (iii) no more than 50% of the value of such capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of the taxable year. Tax-exempt entities, other than private foundations and certain unemployment compensation trusts, are generally not treated as individuals for these purposes. The requirements of items (ii) and (iii) above are not applicable to the first taxable year for which an election to be taxed as a REIT is made. However, these stock ownership requirements must be satisfied in the Company's second taxable year and in each subsequent taxable year. The Articles of Incorporation provide restrictions regarding the transfer of the Company's shares in order to aid in meeting the stock ownership requirements. See "Description of Capital Stock -- Restrictions on Ownership and Transfer."
ASSET TESTS
The Company must generally meet the following asset tests (the "REIT Asset Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Company's total assets must consist of Qualified REIT Real Estate Assets, government securities, cash and cash items (the "75% Asset Test"); and
(b) the value of securities held by the Company but not taken into account for purposes of the 75% Asset Test must not exceed (i) 5% of the value of the Company's total assets in the case of securities of any one issuer, or (ii) 10% of the outstanding voting securities of any such issuer.
At June 30, 1997, 100% of the Company's assets were Qualified REIT Real Estate Assets. The Company expects that substantially all of its assets will continue to be Qualified REIT Real Estate Assets. In addition, the Company does not expect that the value of any security of any one entity would ever exceed 5% of the Company's total assets, and the Company does not expect to own more than 10% of any one issuer's voting securities.
The Company monitors closely the purchase, holding and disposition of its assets in order to comply with the REIT Asset Tests. In particular, the Company intends to limit and diversify its ownership of any assets not qualifying as Qualified REIT Real Estate Assets to less than 25% of the value of the Company's assets and to less than 5%, by value, of any single issuer. If it is anticipated that these limits would be exceeded, the Company intends to take appropriate measures, including the disposition of non-qualifying assets, to avoid exceeding such limits.
GROSS INCOME TESTS
The Company must generally meet the following gross income tests (the "REIT Gross Income Tests") for each taxable year:
(a) at least 75% of the Company's gross income must be derived from certain specified real estate sources including interest income and gain from the disposition of Qualified REIT Real Estate Assets or "qualified temporary investment income" (i.e., income derived from "new capital" within one year of the receipt of such capital) (the "75% Gross Income Test");
(b) at least 95% of the Company's gross income for each taxable year must be derived from sources of income qualifying for the 75% Gross Income Test, dividends, interest, and gains from the sale of stock or other securities (including certain interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire Qualified REIT Real Estate Assets) not held for sale in the ordinary course of business (the "95% Gross Income Test"); and
(c) less than 30% of the Company's gross income is derived from the sale of Qualified REIT Real Estate Assets held for less than four years, stock or securities held for less than one year (including certain interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire Qualified Real Estate Assets) and certain "dealer" property (the "30% Gross Income Test").
The Company intends to maintain its REIT status by carefully monitoring its income, including income from hedging transactions and sales of Mortgage-Backed Securities, to comply with the REIT Gross Income Tests. In particular, the Company will treat income generated by its interest rate caps and other hedging instruments as non-qualifying income for purposes of the 95% Gross Income Test unless it receives advice from its tax advisor that such income constitutes qualifying income for purposes of such test. Under certain circumstances, for example, (i) the sale of a substantial amount of Mortgage-Backed Securities to repay borrowings in the event that other credit is unavailable or (ii) an unanticipated decrease in the qualifying income of the Company which may result in the non-qualifying income exceeding 5% of gross income or a breach of the 30% Gross Income Test, the Company may be unable to comply with certain of the REIT Gross Income Tests. See "--Taxation of the Company" for a discussion of the tax consequences of failure to comply with the REIT Provisions of the Code.
PENDING LEGISLATION
Under legislation which has passed both houses of Congress, the 30% Gross Income Test would be repealed, facilitating disposition of Qualified REIT Real Estate Assets or other stock or securities held by the Company. In addition, the categories of hedges of the Company's liabilities (incurred to acquire Qualified REIT Real Estate Assets) which may produce income or gain on sale qualifying under the 95% Gross Income Test would be expanded to include options, futures contracts, forward rate agreements
or similar financial instruments. However, hedges of the Company's Qualified REIT Real Estate Assets themselves would still not produce income qualifying under either the 95% Gross Income Test or the 75% Gross Income Test, limiting the Company's ability to hedge its interest rate and prepayment risks. This legislation would be effective for taxable years of the Company beginning after the date of enactment.
DISTRIBUTION REQUIREMENT
The Company must generally distribute to its stockholders an amount equal to at least 95% of the Company's REIT taxable income before deductions of dividends paid and excluding net capital gain.
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.
Notwithstanding its qualification as a REIT, the Company may also be subject to tax in certain other circumstances. If the Company fails to satisfy either the 75% or the 95% Gross Income Test, but nonetheless maintains its qualification as a REIT because certain other requirements are met, it will generally be subject to a 100% tax on the greater of the amount by which the Company fails either the 75% or the 95% Gross Income Test. The Company will also be subject to a tax of 100% on net income derived from any "prohibited transaction," and if the Company has (i) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, it will be subject to Federal income tax on such income at the highest corporate income tax rate. In addition, if the Company fails to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year and (ii) 95% of its REIT capital gain net income for such year, the Company would be subject to a 4% Federal excise tax on the excess of such required distribution over the amounts actually distributed during the taxable year, plus any undistributed amount of ordinary and capital gain net income from the preceding taxable year. The Company may also be subject to the corporate alternative minimum tax, as well as other taxes in certain situations not presently contemplated.
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.
The Company intends to monitor on an ongoing basis its compliance with the REIT requirements described above. In order to maintain its REIT status, the Company will be required to limit the types of assets that the Company might otherwise acquire, or hold certain assets at times when the Company might otherwise have determined that the sale or other disposition of such assets would have been more prudent.
TAXABLE SUBSIDIARIES
Hedging activities and the creation of Mortgage-Backed Securities through securitization may be done through a taxable subsidiary of the Company. The Company and one or more other entities may form and capitalize one or more taxable subsidiaries. In order to ensure that the Company would not violate the more than 10% voting stock of a single issuer limitation described above, the Company would own only nonvoting preferred and common stock and the other
entities would own all of the voting common stock. The value of the Company's investment in such a subsidiary must also be limited to less than 5% of the value of the Company's total assets at the end of each calendar quarter so that the Company can also comply with the 5% of value, single issuer asset limitation described above under -- General -- Asset Tests." The taxable subsidiary would not elect REIT status and would distribute only net after-tax profits to its stockholders, including the Company. Before the Company engages in any hedging or securitization activities or forms any such taxable subsidiary corporation, the Company will obtain an opinion of its tax advisor to the effect that such activities or the formation and contemplated method of operation of such corporation will not cause the Company to fail to satisfy the REIT Asset and REIT Gross Income Tests.
TAXATION OF STOCKHOLDERS; COMMON STOCK
Distributions (including constructive distributions) made to holders of Common 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 the Common Stock, which will reduce the stockholder's basis in the Common Stock but not be subject to tax, and thereafter as a 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. See "Risk Factors -- Legal and Other Risks --Taxable Mortgage Pool Risk; Increased Taxation." 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 December 31 of the taxable year in which declared 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 will be treated as having received such dividend in the taxable year in which the distribution is actually made.
Upon a sale or other disposition of the Common 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 a share of Common Stock 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 with respect to such share of its stock.
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.
In any year in which the Company does not qualify as a REIT, distributions made to its stockholders would be taxable in the same manner discussed above, except that no distributions could be designated as capital gain dividends, distributions would be eligible for the corporate dividends received deduction, the excess inclusion income rules would
not apply to the stockholders, and stockholders would not receive any share of the Company's tax preference items. In such event, however, the Company could be subject to potentially substantial Federal income tax liability, and the amount of earnings and cash available for distribution to its stockholders could be significantly reduced or eliminated.
TAXATION OF TAX-EXEMPT ENTITIES
Subject to the discussion below regarding a "pension-held REIT," a tax- exempt stockholder is generally not subject to tax on distributions from the Company or gain realized on the sale of the Common Stock, provided that such stockholder has not incurred indebtedness to purchase or hold its Common Stock, that its shares are not otherwise used in an unrelated trade or business of such stockholder, and that the Company, consistent with its present intent, does not hold a residual interest in a REMIC that gives rise to "excess inclusion" income as defined under section 860E of the Code. If the Company were to be treated as a "taxable mortgage pool," however, a substantial portion of the dividends paid to a tax-exempt stockholder may be subject to tax as UBTI. Although the Company does not believe that the Company, or any portion of its assets, will be treated as a taxable mortgage pool, no assurance can be given that the IRS might not successfully maintain that such a taxable mortgage pool exists. See "Risk Factors -- Legal and Other Risks --Taxable Mortgage Pool Risk; Increased Taxation."
If a qualified pension trust (i.e., any pension or other retirement trust
that qualifies under section 401(a) of the Code) holds more than 10% by value of
the interests in a "pension-held REIT" at any time during a taxable year, a
substantial portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is any REIT
(i) that would not have qualified as a REIT but for the provisions of the Code
which look through qualified pension trust stockholders to the qualified pension
trust's beneficiaries in determining ownership of stock of the REIT and (ii) in
which at least one qualified pension trust holds more than 25% by value of the
interests of such REIT or one or more qualified pension trusts (each owning more
than a 10% interest by value in the REIT) hold in the aggregate more than 50% by
value of the interests in such REIT. Assuming compliance with the Ownership
Limit provisions described in "Description of Capital Stock -- Restrictions on
Ownership and Transfer," it is unlikely that pension plans will accumulate
sufficient stock to cause the Company to be treated as a pension-held REIT.
Distributions to certain types of tax-exempt stockholders exempt from
Federal income taxation under sections 501 (c) (7), (c) (9), (c) (17), and (c)
(20) of the Code may also constitute UBTI, and such prospective investors should
consult their tax advisors concerning the applicable "set aside" and reserve
requirements.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the Federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Common Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN HOLDERS
The following discussion summarizes certain United States Federal tax consequences of the acquisition, ownership and disposition of the Common Stock by a purchaser of the Common Stock that, for United States Federal income tax purposes, is not a "United States person" (a "Non-United States Holder"). For purposes of this discussion, a "United States person" means: a citizen or resident of the United States; a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof; or an estate or trust whose income is includible in gross income for United States Federal income tax purposes regardless of its source. This discussion does not consider any specific facts or circumstances that may apply to a particular Non-
United States Holder. Prospective investors are urged to consult their tax advisors regarding the United States Federal tax consequences of acquiring, holding and disposing of Common Stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction.
DIVIDENDS
Dividends paid by the Company out of earnings and profits, as determined for United States Federal income tax purposes, to a Non-United States Holder will generally be subject to withholding of United States Federal income tax at the rate of 30%, unless reduced or eliminated by an applicable tax treaty or unless such dividends are treated as effectively connected with a United States trade or business. Distributions paid by the Company in excess of its earnings and profits will be treated as a tax-free return of capital to the extent of the holder's adjusted basis in his Common Stock, and thereafter as gain from the sale or exchange of a capital asset as described below. If it cannot be determined at the time a distribution is made whether such distribution will exceed the earnings and profits of the Company, the distribution will be subject to withholding at the same rate as dividends. Amounts so withheld, however, will be refundable or creditable against the Non-United States Holder's United States Federal tax liability if it is subsequently determined that such distribution was, in fact, in excess of the earnings and profits of the Company. If the receipt of the dividend is treated as being effectively connected with the conduct of a trade or business within the United States by a Non-United States Holder, the dividend received by such holder will be subject to the United States Federal income tax on net income that applies to United States persons generally (and, with respect to corporate holders and under certain circumstances, the branch profits tax).
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States Federal income tax on gain recognized on a sale or other disposition of the Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder, (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met, or (iii) the Non-United States Holder is subject to tax under the FIRPTA rules discussed below. Gain that is effectively connected with the conduct of a trade or business within the United States by a Non-United States Holder will be subject to the United States Federal income tax on net income that applies to United States persons generally (and, with respect to corporate holders and under certain circumstances, the branch profits tax) but will not be subject to withholding. Non-United States Holders should consult applicable treaties, which may provide for different rules.
The Company does not expect to hold assets that would be treated as "United States real property interests" under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Therefore, the FIRPTA provisions relating to certain distributions to foreign persons and to certain gains realized by foreign persons on the sale of stock should not apply to non-United States Holders of the Common Stock.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under temporary United States Treasury regulations, United States information reporting requirements and backup withholding tax will generally not apply to dividends paid on the Common Stock to a Non-United States Holder at an address outside the United States. Payments by a United States office of a broker of the proceeds of a sale of the Common Stock is subject to both backup withholding at a rate of 31% and information reporting unless the holder certifies its Non-United States Holder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to payments of the proceeds of sales of the Common Stock by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the holder is a Non-United States Holder and certain other conditions are met, or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the Non-United States Holder's United States Federal income tax liability, provided that the required information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by the United States Treasury and their application to the Common Stock could be changed by future regulations.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the prohibited transaction provisions of Section 4975 of the Code that may be relevant to a prospective purchaser of the Shares. The discussion does not purport to deal with all aspects of ERISA or Section 4975 of the Code that may be relevant to particular stockholders (including plans subject to Title I of ERISA, other retirement plants and IRAs subject to the prohibited transaction provisions of Section 4975 of the Code, and governmental plans or church plans that are exempt from ERISA and Section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code, existing and currently proposed regulations under ERISA and the Code, the legislative history of ERISA and the Code, existing administrative rulings of the Department of Labor ("DOL") and reported judicial decisions. No assurance can be given that legislative, judicial, or administrative changes will not affect the accuracy of any statements herein with respect to transactions entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED RETIREMENT PLAN OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, retirement or other employee benefit plan (a "Plan") subject to Title I of ERISA should consider carefully whether an investment in Shares is consistent with the fiduciary's fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and in the best interests of the Plan, its participants and its beneficiaries, (ii) diversified in order to minimize the risk of large losses, unless it is clearly prudent not to do so, and (iii) authorized under the terms of the Plan's governing documents (provided the documents are consistent with ERISA). In determining whether an investment in all Shares is prudent for purposes of ERISA, the appropriate fiduciary of a Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the Plan's portfolio for which the fiduciary has investment responsibility, to meet the objectives of the Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment and the diversification, cash flow and funding requirements of the Plan's portfolio. A fiduciary also should take into account the nature of the Company's business, the management of the Company, the length of the Company's operating history and the fact that certain investment assets may not have been identified yet.
The fiduciary of an IRA or of a qualified retirement plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should
consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. A "party in interest" or "disqualified person" with respect to a Plan or with respect to a Plan or IRA subject to Code Section 4975 is subject to (i) an initial 10% excise tax on the amount involved in any prohibited transaction involving the assets of the Plan or IRA and (ii) an excise tax equal to 100% of the amount involved if any prohibited transaction is not corrected. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA will lose its tax- exempt status and its assets will be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. In addition, a fiduciary who permits a Plan to engage in a transaction that the fiduciary knows or should know is a prohibited transaction may be liable to the Plan for any loss the Plan incurs as a result of the transaction or for any profits earned by the fiduciary in the transaction.
STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in determining whether the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA and the Code apply to an entity because one or more investors in the equity interests of the entity is a Plan or is a Non-ERISA Plan or IRA subject to Section 4975 of the Code. A Plan fiduciary also should consider the relevance of those principles to ERISA's prohibition on improper dele gation of control over or responsibility for "plan assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who participates in, permits (by action or inaction) the occurrence of, or fails to remedy a known breach by another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to any transactions involving the Company's assets, (ii) persons who exercise any authority over the Company's assets, or who provide investment advice to the Company, would (for purposes of the fiduciary responsibility provisions of ERISA) be fiduciaries of each Plan that acquires Common Stock, and transactions involving the Company's assets undertaken at their direction or pursuant to their advice might violate their fiduciary responsibilities under ERISA, especially with regard to conflicts of interest, (iii) a fiduciary exercising investment discretion over the assets of a Plan to cause it to acquire or hold the Shares could be liable under Part 4 of Title I of ERISA for transactions entered into by the Company that do not conform to ERISA standards of pru dence and fiduciary responsibility, and (iv) certain transactions that the Company might enter into in the ordinary course of its business and operations might constitute "prohibited transactions" under ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and the security is neither a "public- offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the issuer of such equity interest, unless one or more exceptions specified in the Plan Asset Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security that is "widely-held," "freely transferable," and either part of a class of securities under the Exchange Act, or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Shares are being sold in an offering registered under the Securities Act and will be registered under the Exchange Act. The Plan Asset Regulations provide that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors
falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The Company anticipates that upon completion of the Offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with the Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. Generally, the restrictions on transfer
enumerated in the Plan Asset Regulations as not affecting that finding include,
among others: (i) any restriction on or prohibition against any transfer or
assignment that would result in the termination or reclassification of an entity
for federal or state tax purposes, or that otherwise would violate any federal
or state law or court order, (ii) any requirement that advance notice of a
transfer or assignment be given to the issuer, (iii) any administrative
procedure that establishes an effective date, or an event (such as completion of
an offering), prior to which a transfer or assignment will not be effective, and
(iv) limitation or restriction on transfer or assignment that is not imposed by
the issuer or a person acting on behalf of the issuer. The Company believes that
the restrictions imposed under the Articles of Incorporation on the transfer of
the Company's stock will not result in the failure of the Shares to be "freely
transferable." However, no assurance can be given that the DOL or the Treasury
Department will not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and that no other facts and circumstances other than those referred to in the preceding paragraph exist that restrict transferability of the Shares, the Shares should be publicly offered securities and the assets of the Company should not be deemed to be "plan assets" of any Plan, IRA or Non-ERISA Plan that invests in the Shares.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock. Assuming the sale by the Company of 6,250,000 Shares in the Offering, 10,017,800 shares of Common Stock will be outstanding upon consummation of the Offering.
COMMON STOCK
VOTING
Each holder of Common Stock is entitled to one vote for each share held of record on each matter submitted to a vote of holders of Common Stock of the Company. The Company's Articles of Incorporation do not provide for cumulative voting and, accordingly, the holders of a majority of the outstanding shares of Common Stock have the power to elect all directors to be elected each year.
The Company's bylaws provide that annual meetings of the stockholders of the Company are to be held each calendar year on such date as shall be determined by the Board of Directors or the President, and special meetings may be called by a majority of the Board of Directors, by the Chairman of the Board of Directors, by a majority of the Independent Directors, by the President or generally by stockholders entitled to cast at least 25% of the votes which all stockholders are entitled to cast at the meeting. The Articles of Incorporation of the Company may be amended in accordance with Maryland law, subject to certain limitations set forth in the Articles of Incorporation.
DIVIDENDS; LIQUIDATION; OTHER RIGHTS
The holders of shares of Common Stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of funds legally available therefor. The right of holders of Common Stock to receive dividends shall be subject and subordinate to the rights of holders of preferred stock or other senior stock as may be authorized by the Company. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock will share ratably in all assets of the Company remaining after the payment of liabilities and the payment of all liquidation and other preference amounts to holders of such classes of preferred stock or other senior stock as may be authorized by the Company. There are no preemptive or other subscription rights, conversion rights, or redemption or sinking fund provisions with respect to shares of Common Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order that the Company may meet the requirements for qualification as a REIT, the Articles of Incorporation prohibit any person from acquiring or holding, directly or constructively, ownership of a number of shares of capital stock in excess of 9.8% (the "Ownership Limit") of the outstanding shares. See "Certain Federal Income Tax Considerations -- General -- Stock Ownership Tests." 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.
The constructive ownership provisions of section 544 of the Code, 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. 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 that would result in disqualification of the Company as a REIT or that would (a) create a direct or constructive ownership of shares of capital stock in excess of the Ownership Limit, or (b) from and after the One Hundred Stockholder Date, result in the shares of capital 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 (the "purported transferee") will acquire no rights to such shares. 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.
Any purported transfer of shares of capital stock that would result in a purported transferee owning (directly or constructively) shares of capital stock in excess of the Ownership Limit (except as otherwise waived by the Board of Directors as set forth below) due to the unenforceability of the transfer restrictions set forth above will constitute "Excess Securities." Excess Securities be transferred by operation of law to a trust to be established by the Company for the exclusive benefit of a charitable organization, until such time as the trustee of the trust, which shall be a banking institution designated as trustee by the Company which is unaffiliated with either the Company or the purported transferee, retransfers the Excess Securities. While the Excess Securities are held in trust, the purported transferee will not be entitled to vote or to share in any dividends or other distributions with respect to such securities. Subject to the Ownership Limit, Excess Securities may be transferred by the trust 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 cease to be Excess Securities.
From and after a purported transfer of Excess Securities, the purported transferee shall cease to be entitled to distributions, voting rights and other benefits with respect to such shares of the capital stock except the right to payment of the purchase price for the shares of capital stock 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 capital stock have been transferred in violation of the provisions of the Company's Articles of Incorporation 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 capital stock will bear a legend referring to the restrictions described above.
Any person who acquires shares in violation of the Articles of Incorporation, 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 has the right, pursuant to the Company's Articles of Incorporation, to waive the Ownership Limit for and at the request of a purchaser of the Company's Common Stock. In connection with any such waiver, the Company may require that the stockholder requesting such a waiver enter into an agreement with the Company providing for the repurchase by the Company of shares from the stockholder under certain circumstances to ensure compliance with the REIT Provisions of the Code. Such repurchase would be at fair market value as set forth in the agreement between the Company and such stockholder. The consideration received by the stockholder in such repurchase might be characterized as the receipt by the stockholder of a dividend from the Company, and any stockholder entering into such an agreement with the Company should consult its tax advisor in connection with its entering into such an agreement. At present, the Company does not intend to waive the Ownership Limit for any purchaser of shares of the Company's Common Stock.
The provisions described above may inhibit market activity and the resulting opportunity for the holders of the Company's capital stock to receive a premium for their shares 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.
INDEMNIFICATION
The Company's Articles of Incorporation obligate the Company to indemnify
its directors and officers and to pay or reimburse expenses for such individuals
in advance of the final disposition of a proceeding to the maximum extent
permitted from time to time by Maryland law. The Corporations and Associations
Article of the Annotated Code of Maryland (the "Maryland General Corporation
Law") permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities, unless it is established that (a) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(i) was committed in bad faith, or (ii) was the result of active and deliberate
dishonesty, or (b) the director or officer actually received an improper
personal benefit in money, property or services, or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful.
LIMITATION OF LIABILITY
The Maryland General Corporation Law permits the charter of a Maryland corporation to include a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages, except to the extent that (i) it is proved that the person actually received an improper benefit or profit in money, property or services, or (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Company's Articles of Incorporation contain a provision providing for elimination of the liability of its directors and officers to the Company or its stockholders for money damages to the maximum extent permitted by Maryland law from time to time.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law provides that "control shares" of a 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 entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. "Control shares" do not include shares 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 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 Articles of Incorporation or bylaws of the corporation adopted prior to the acquisition of the shares.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street, 15th Floor, New York, New York 10001 (telephone number : (800) 851-9677), is the transfer agent and registrar with respect to the Common Stock of the Company (the "Transfer Agent").
COMMON STOCK AVAILABLE FOR FUTURE SALE
Following the closing of the Offering (and assuming that the Underwriters'
over-allotment option is not exercised), the Company will have outstanding (or
reserved for issuance upon exercise of outstanding options) 10,366,300 shares of
Common Stock, which include (i) 6,250,000 Shares being offered by the Company
hereby, (ii) 3,600,000 shares of Common Stock sold in the Private Placement,
(iii) 87,800 shares of Common Stock sold to certain directors, officers and
employees of the Company in the Direct Offering (the "Direct Offering Shares"),
(iv) 80,000 shares of Common Stock issued to founders of the Company (the
"Founders' Shares") and (v) 348,500 shares of Common Stock reserved for issuance
upon the exercise of outstanding options. The Common Stock issued in the
Offering will be freely tradeable by persons other than "affiliates" of the
Company (as defined under Rule 144 promulgated under the Securities Act) without
restriction under the Securities Act, subject to certain limitations on
ownership set forth in the Articles of Incorporation. See "Description of
Capital Stock -- Restrictions on Ownership and Transfer."
Private Placement Shares not being included in the Offering, the Direct Offering Shares and the Founders' Shares are "restricted" securities within the meaning of Rule 144 and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. As described below, the Company has granted certain holders registration rights with respect to their shares of Common Stock.
In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any affiliate of the Company, as that term is defined under Rule 144, the holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of restricted shares from the Company or from any affiliate of the Company, and the holder thereof is deemed not to have been an affiliate of the Company at any time during the three months preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. Certain Private Placement Shares are also presently available for resale, under certain conditions, to institutional "accredited investors" within the meaning of Regulation D under the Securities Act, "qualified institutional buyers" within the meaning of Rule 144A under the Securities Act, and to persons who are not "U.S. persons" within the meaning of Regulation S under the Securities Act. The directors, officers and employees of the Company have agreed not to sell any shares of Common Stock held by them for a period of 180 days following the closing of the Offering without the consent of the Representatives.
As of August 5, 1997, options to purchase 348,500 shares of Common Stock were outstanding, of which options to purchase 7,500 shares are currently exercisable; options to purchase 275,000 shares vest in four equal installments on January 2, 1998, 1999, 2000 and 2001; options to purchase 36,000 shares vest in four equal installments on January 21, 1998, 1999, 2000 and 2001; options to purchase 25,000 shares vest in four equal installments on January 28, 1998, 1999, 2000 and 2001; and an option to purchase 5,000 shares vests in four equal installments on June 26, 1998, 1999, 2000 and 2001. None of the shares of Common Stock underlying the outstanding stock options has been registered under the Securities Act.
No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, may affect adversely prevailing market prices of the Common Stock.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement entered into between the Company and Friedman, Billings, Ramsey & Co., Inc., as initial purchaser, in connection with the Company's Private Placement, holders of Private Placement Shares are entitled to certain rights with respect to registration of the Private Placement Shares under the Securities Act. Such holders are entitled to include Private Placement Shares held by them in either of the Company's first two registered securities offerings (other than in connection with a merger or pursuant to a registration statement on Form S-8, S-4 or a comparable registration statement), subject to certain conditions, including the right of the Company to exclude such Private Placement Shares from a registered offering if the managing underwriter advises the Company that in its opinion the number of securities requested to be included in the offering exceeds the number that can be sold in such offering.
In addition, if the Company has registered securities under the Securities Act on two separate occasions and, on either occasion, the Private Placement Shares were excluded from such offering, holders of greater than 50% of the restricted Private Placement Shares have the right, on one occasion, to require the Company to prepare and file with the Commission a registration statement and such other documents as may be necessary so as to permit a public offering and sale of the restricted Private Placement Shares.
The foregoing registration rights are not applicable in the event that holders of Private Placement Shares who are not affiliated with the Company are able to resell all of such shares without restrictions on transfer in accordance with Rule 144 of the Securities Act or any other applicable exemption.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement (the "Underwriting Agreement") among the Company, the Selling Stockholders and Friedman, Billings, Ramsey & Co., Inc. ("FBR"), Sutro & Co. Incorporated and Tucker Anthony Incorporated as representatives (in such capacity, the "Representatives") for each of the underwriters named below (the "Underwriters"), the Company and the Selling Stockholders have agreed to sell, and each of the Underwriters has severally agreed to purchase the number of Shares offered hereby set forth below opposite its name.
Underwriters Number of Shares ------------ ---------------- Friedman, Billings, Ramsey & Co., Inc.................. Sutro & Co. Incorporated............................... Tucker Anthony Incorporated............................ |
Total..................................................
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to purchase all the Shares offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company that they propose initially to offer the Shares to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such offering price less a concession not to exceed $_________ per share of Common Stock. The Underwriters may allow and such dealers may reallow a concession not to exceed $_________ per share of Common Stock to certain other dealers. After the Shares are released for sale to the public, the offering price and other selling terms may be changed by the Underwriters. The Shares are offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an option exercisable during a 30-day period after the date hereof to purchase, at the initial offering price less underwriting discounts and commissions, up to an additional 937,500 Shares of Common Stock for the sole purpose of covering over-allotments, if any. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment as shown in the foregoing table.
The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain civil liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof.
In connection with the Offering, the Company has agreed to reimburse FBR for up to $75,000 of the fees and expenses of legal counsel to the Underwriters. Additionally, the Company has agreed to grant to FBR for a period of one year the right of first refusal to act as exclusive or lead underwriter or placement agent in connection with public or private offerings of securities or securitizations by the Company, and as exclusive financial advisor in connection with any merger or sale of substantially all of the assets of the Company. Fees to be paid to FBR in connection with any such transaction would be subject to mutual agreement between the Company and FBR and consistent with customary fees paid in similar transactions.
FBR served as the initial purchaser in connection with the Private Placement for which it received an initial purchaser's discount equal to $2,520,000.
Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiation between the Company and the Representatives. Among the factors to be considered in making such determination will be the history of, and the prospects for, the industry in which the Company competes, an assessment of the skills of the Company's management and the Company's prospects for future earnings, the general conditions of the economy and the securities market and the prices of offerings by similar issuers. However, there can
be no assurance that the price at which the shares of Common Stock will sell in the public market after the Offering will not be lower than the price at which they are sold by the Underwriters.
The Representatives have informed the Company that the Underwriters do not intend to confirm sales of the Shares offered hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Shares is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for or purchase the Common Stock. As an exception to these rules, the Representatives are 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 Underwriters create a short position in the Common Stock in connection with the Offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares of Common Stock as part of the Offering.
In general, purchases of securities 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 any of the Underwriters 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 any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.
The Company and the Company's directors and executive officers have agreed not to offer, sell or contract to sell or otherwise dispose of any Common Stock of the Company without the prior consent of the Representatives for a period of 180 days from the date of this Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Shares will be passed on for the Company by Morgan, Lewis & Bockius LLP, New York, New York. Certain legal matters will be passed on for the Underwriters by Andrews & Kurth L.L.P., Washington, D.C.
EXPERTS
The Balance Sheet of the Company at June 30, 1997, and the Statements of Operations, Stockholders' Equity and Cash Flows for the period from February 18, 1997 (commencement of operations) to June 30, 1997, included in this Prospectus have been included herein in reliance on the report of Deloitte & Touche LLP, independent certified public accountants, given on the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (File No. 333-_________) under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information with respect to the Company and the Common Stock,
reference is hereby made to such Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. Copies of the Registration Statement, including
all exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, Room 1400, Chicago,
Illinois 60606 and at 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
The address of the Commission's website is http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing audited financial statements and an opinion thereon expressed by the Company's independent auditors as well as quarterly reports for the first three fiscal quarters of each fiscal year containing unaudited condensed financial statements.
GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below have the meanings indicated.
"Accredited Investor" has the meaning set forth in Rule 501(a)(1), (2), (3) or (7) under the Securities Act.
"Agency" means GNMA, FNMA or FHLMC.
"Agency Certificates" means GNMA Certificates, FNMA Certificates and FHLMC Certificates.
"amortized cost" means, with respect to Mortgage-Backed Securities, the purchase price as adjusted for subsequent amortization of discount or premium and for principal repayments.
"ARM" means a Mortgage Loan or any mortgage loan underlying a Mortgage- Backed Security that features adjustments of the underlying interest rate at predetermined times based on an agreed margin to an established index. An ARM is usually subject to periodic interest rate and/or payment caps and a lifetime interest rate cap.
"ARM Certificate" means an adjustable-rate Pass-Through Certificate.
"Articles of Incorporation" means the Company's Articles of Incorporation, as amended and restated by the Company's Articles of Amendment and Restatement, filed with the State of Maryland.
"Bankruptcy Code" means Title 11 of the United State Code, entitled "Bankruptcy."
"Board" or "Board of Directors" means the Board of Directors of the Company.
"Capital Investment Policy" means the policy established by the Company, including a majority of the Independent Directors, establishing guidelines for management relating to asset acquisitions, credit risk management,
capital and leverage, interest rate risk management and prepayment risk management, as more fully described under "Business Strategy--Capital Investment Policy."
"capital stock" means the Common Stock and any additional classes of capital stock authorized by the Board of Directors in the future.
"carrying value" means the value placed on an asset or liability for balance sheet presentation purposes. With respect to Mortgage-Backed Securities and interest rate cap agreements, the carrying value equals management's estimate of the bid-side market value of that asset. Management will generally base its estimate on the lowest of third-party bid-side indications of market value obtained on a regular basis from firms making a market in or lending against such assets. With respect to all other balance sheet items, carrying value equals amortized cost.
"CD Rate" means the weekly average of secondary market interest rates on six-month negotiable certificates of deposit, as published by the Federal Reserve Board in its Statistical Release H.15(519), Selected Interest Rates.
"Citadel" means Citadel Funding Corporation, a dissolved Colorado corporation.
"CMOs" or "Collateralized Mortgage Obligations" means adjustable- or fixed- rate debt obligations (bonds) that are collateralized by Mortgage Loans or mortgage certificates. CMOs are structured so that principal and interest payments received on the collateral are sufficient to make principal and interest payments on the bonds. Such bonds may be issued by United States government sponsored entities or private issuers in one or more classes with fixed or adjustable interest rates, maturities and degrees of subordination which are characteristics designed for the investment objectives of different bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loans" means Mortgage Loans secured by commercial property.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's shares of Common Stock, par value $0.01 per share.
"Company" means Annaly Mortgage Management, Inc., a Maryland corporation.
"Conforming Mortgage Loans" means Single-Family Mortgage Loans that either comply with requirements for inclusion in credit support programs sponsored by FHLMC or FNMA or are FHA or VA Loans.
"coupon rate" means, with respect to Mortgage-Backed Securities, the annualized cash interest income actually received from the asset, expressed as a percentage of the face value of the asset.
"CPR" means an assumed rate of prepayment for the Company's Mortgage-Backed Securities, expressed as an annual rate of prepayment relative to the outstanding principal balance of the Company's Mortgage-Backed Securities. CPR does not purport to be either a historical description of the prepayment experience of the Company's Mortgage-Backed Securities or a prediction of the anticipated rate of prepayment of the Company's Mortgage-Backed Securities.
"DBCC" means the National Association of Securities Dealers, Inc. District Business Conduct Committee for District No. 3.
"DBCC Settlement" means the Decision and Order of Acceptance of Respondents' Offer of Settlement dated November 15, 1994 entered into by Citadel and certain of its principals with the DBCC.
"Direct Offering" means the Company's sale on July 31, 1997 of an aggregate of 87,800 shares of Common Stock to certain directors, officers and employees of the Company.
"Direct Offering Shares" means the 87,800 shares of Common Stock sold to certain directors, officers and employees of the Company in the Direct Offering.
"DOL" means the Department of Labor.
"Dollar-Roll Agreement" means an agreement to sell a security for delivery on a specified future date and a simultaneous agreement to repurchase the same or a substantially similar security (with the same coupon and original maturity periods) on a specified future date.
"duration" means the expected percentage change in the market value of the Company's assets that would be caused by a 1% change in short and long term interest rates.
"efficiency ratio" means general and administrative expenses as a percentage of net interest income.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Plan" means a pension, profit-sharing, retirement or other employee benefit plan which is subject to Title I of ERISA.
"Excess Securities" means shares of capital stock representing ownership, directly or constructively, in excess of 9.8%, in number of shares or value, of any class of shares of the outstanding capital stock (except as otherwise waived by the Board of Directors).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excess Capital Cushion" is a term defined in the Company's Capital Investment Policy. It represents a portion of the capital the Company is required to maintain as part of this policy in order to continue to make asset acquisitions. The Excess Capital Cushion is that part of the required capital base which is in excess of the Company's haircut requirements
"face value" means, with respect to Mortgage-Backed Securities, the outstanding principal balance of Mortgage Loans or Mortgage-Backed Securities comprising the Mortgage-Backed Securities. In the absence of credit losses, the face value equals the sum of the principal repayments that will be received by the Company over the life of the Mortgage-Backed Security.
"FBR" means Friedman, Billings, Ramsey & Co., Inc.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve System.
"Fed Funds Rate" means the interest rate charged by banks with excess reserves at a Federal Reserve System district bank to banks needing overnight loans to meet reserve requirements.
"FHA" means the United States Federal Housing Administration.
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLMC ARM Certificates" means adjustable-rate FHLMC Certificates.
"FHLMC Certificates" means mortgage participation certificates issued by FHLMC, either in certificated or book-entry form.
"FIDAC" means Fixed Income Discount Advisory Company, a Delaware corporation.
"Floaters" means adjustable-rate CMOs.
"Floating Rate Fund" means the U.S. Dollar Floating Rate Fund, Ltd., a British Virgin Islands corporation and an open-end investment company.
"FNMA" means the Federal National Mortgage Association.
"FNMA ARM Certificates" means adjustable-rate FNMA Certificates.
"FNMA Certificates" means mortgage pass-through certificates issued by FNMA, either in certificated or book-entry form.
"Founders' Shares" means the 80,000 shares of Common Stock issued to founders of the Company in December 1996.
"fully-indexed rate" means, with respect to ARMs, the rate that would be paid by the borrower ("gross") or received by the Company as owner of the Mortgage Asset ("net") if the coupon rate on the ARM were able to adjust immediately to a market rate without being subject to adjustment periods, periodic caps, or life caps. It is equal to the current yield of the ARM index plus the gross or net margin.
"GAAP" means generally accepted accounting principles.
"GNMA" means the Government National Mortgage Association.
"GNMA ARM Certificates" means adjustable-rate GNMA Certificates.
"GNMA Certificates" means fully modified pass-through mortgage-backed certificates guaranteed by GNMA and issued either in certificated or book-entry form.
"gross margin" means, with respect to ARMs, the coupon rate to be paid by the borrower. The term "gross" is used to differentiate payments made by the borrower with the lower "net" payments actually received by the Company after the acquisition of a Mortgage Asset. The difference between the gross margin and the net margin reflects loan servicing fees and other pre-determined contractual deductions. The fully-indexed gross coupon rate equals the current yield on the ARM index (six month LIBOR, one year Treasury, etc.) plus the gross margin. The actual coupon rate paid by the borrower may be lower than the fully-indexed gross rate at the initiation of the loan if originated at a "teaser rate" or during periods of rising interest rates due to the limitations of the ARM adjustment schedule and the periodic and life caps. If so, the coupon rate paid by the borrower would move towards the fully-indexed gross rate over time.
"haircut" means the over-collateralization amount required by a lender in connection with a collateralized borrowing.
"High Quality" means (i) securities which are rated within one of the two highest rating categories by at least one of the nationally recognized rating agencies, (ii) securities that are unrated but are guaranteed by the United States
government or an agency of the United States government, or (iii) securities that are unrated or whose ratings have not been updated but are determined to be of comparable quality to rated High Quality Mortgage-Backed Securities on the basis of credit enhancement features that meet the High Quality credit criteria approved by the Company's Board of Directors.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the Department of Housing and Urban Development.
"Incentive Plan" means the Company's Long-Term Stock Incentive Plan.
"Independent Director" means a director of the Company who is not an officer or employee of the Company.
"interest-only strip," "interest only security" or "IO" means a type of Mortgage-Backed Security which receives a portion of the interest payments from an underlying pool of mortgage loans but will receive little or no principal payments and hence will have little or no face value. The market value and yield of an IO are unusually sensitive to the prepayment rates experienced on and anticipated for the underlying pool of mortgage loans. The market values and yields of IOs may increase as interest rates increase and, in certain conditions, IOs may act in a counter-cyclical manner as compared to other Mortgage-Backed Securities.
"interest rate adjustment indices" means, in the case of Mortgage-Backed Securities, any of the objective indices based on the market interest rates of a specified debt instrument (such as United States Treasury Bills in the case of the Treasury Index and United States dollar deposits in London in the case of LIBOR) or based on the average interest rate of a combination of debt instruments (such as the 11th District Cost of Funds Index), used as a reference base to reset the interest rate for each adjustment period on the Mortgage Asset, and in the case of borrowings, is used herein to mean the market interest rates of a specified debt instrument (such as repurchase agreements for Mortgage-Backed Securities) as well as any of the objective indices described above that are used as a reference base to reset the interest rate for each adjustment period under the related borrowing instrument.
"interest rate adjustment period" means, in the case of Mortgage-Backed Securities, the period of time set forth in the debt instrument that determines when the interest rate is adjusted and, with respect to borrowings, is used to mean the term to maturity of a short-term, fixed-rate debt instrument (such as a 30-day repurchase agreement) as well as the period of time set forth in a long- term, adjustable-rate debt instrument that determines when the interest rate is adjusted.
"interest rate agreement" means an agreement, such as an interest rate swap cap, collar or floor, entered into for the purpose of hedging risks associated with changes in interest rates..
"Investment Company Act" means the Investment Company Act of 1940, as amended.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Interbank Offered Rate as it may be defined, and for a period of time specified, in a Mortgage-Backed Security or borrowing of the Company.
"lifetime interest rate cap" or "life cap" means in the case of a Mortgage Loan that is an ARM, the maximum coupon rate that may accrue during any period over the term of such Mortgage Loan as stated in the governing instruments evidencing such Mortgage Loan, and in the case of a Mortgage-Backed Security evidencing ARMs, the maximum weighted average coupon rate that may accrue during any period over the term of such Mortgage-Backed Security as stated in the governing instruments thereof.
"Limited Investment Assets" means assets of the Company, comprising not more than 25% of total assets, which are unrated or rated less than High Quality.
"Maryland General Corporation Law" means the Corporations and Associations Article of the Annotated Code of Maryland.
"Mezzanine Securities" means Mortgage-Backed Securities rated below the two highest levels but no lower than a single "B" level under the S&P rating system (or comparable level under other rating systems) which are supported by one or more classes of Subordinated Securities which bear Realized Losses prior to the classes of Mezzanine Securities.
"Mortgage Loans" means Single-Family Mortgage Loans, Multifamily Mortgage Loans and Commercial Mortgage Loans.
"Mortgage-Backed Securities" means (i) Pass-Through Certificates, and (ii) CMOs.
"Multifamily Mortgage Loans" means Mortgage Loans secured by multifamily (in excess of four units) residential property.
"Multifamily Privately-Issued Certificates" means Privately-Issued Certificates evidencing ownership interests in a pool of Multifamily Mortgage Loans.
"Multifamily CMOs" means CMOs that are collateralized by Multifamily Mortgage Loans.
"net margin" is part of the calculation of the coupon rate to be received by the Company as owner of an ARM. The term "net" is used to differentiate payments actually received by the Company from a Mortgage Asset from the higher "gross" payment made by the borrower. The difference between the gross margin and the net margin reflects loan servicing fees and other pre-determined contractual deductions. The fully-indexed net rate equals the current yield on the ARM index (six month LIBOR, one year Treasury, etc.) plus the net margin. The actual coupon rate received by the Company may be lower than the fully-indexed net rate at the initiation of the loan if originated at a "teaser rate" or during periods of rising interest rates due to the limitations of the ARM adjustment schedule and the periodic and life caps. If so, the coupon rate received by the Company would move towards the fully-indexed net coupon rate over time.
the "95% Gross Income Test" means the requirement for each taxable year that at least 95% of the Company's gross income for each taxable year must be derived from sources of income qualifying for the 75% Gross Income Test, dividends, interest, and gains from the sale of stock or other securities (including certain interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire Qualified REIT Real Estate Assets) not held for sale in the ordinary course of business.
"Non-ERISA Plan" means a Plan that does not cover common law employees.
"Non-United States Holder" means a purchaser of the Common Stock that, for United States Federal income tax purposes, is not a "United States person."
the "Offering" or this "Offering" means the offering of Common Stock covered by this Prospectus.
the "Offering Price" means the price per share of Common Stock in the Offering.
"One Hundred Stockholder Date" means the earlier of (i) January 1, 1998 and
(ii) the date of closing of the sale of Shares pursuant to the Offering.
"Ownership Limit" means 9.8% of the outstanding shares of capital stock, as may be increased or reduced by the Board of Directors of the Company.
"Pass-Through Certificates" means securities (or interests therein), including Agency Certificates and Privately-Issued Certificates, evidencing undivided ownership interests in a pool of Mortgage Loans, the holders of which receive a "pass-through" of the principal and interest paid in connection with the underlying Mortgage Loans in accordance with the holders' respective, undivided interests in the pool.
"period ended June 30, 1997" means the period from the commencement of operations by the Company on February 18, 1997 through June 30, 1997.
"periodic interest rate cap" or "periodic cap" means, with respect to ARMs, the maximum change in the coupon rate permissible under the terms of the loan at each coupon adjustment date. Periodic caps limit both the speed by which the coupon rate can adjust upwards in a rising interest rate environment and the speed by which the coupon rate can adjust downwards in a falling rate environment.
"Plan" means a pension, profit-sharing, retirement or other employee benefit plan which is subject to ERISA.
"Plan Asset Regulations" means regulations of the DOL defining "plan assets."
"Private Placement" means the sale by the Company on February 18, 1997 of 3,600,000 shares of Common Stock in an offering exempt from registration under the Securities Act and state securities laws.
"Private Placement Shares" means the 3,600,000 shares of Common Stock issued by the Company in the Private Placement.
"Privately-Issued Certificates" means privately-issued Pass-Through Certificates issued by a third party issuer which is not an Agency Certificate.
"Prospectus" means this Prospectus.
"PTE" means a U.S. Department of Labor Prohibited Transaction Exemption.
"purported transferee" means the intended transferee in connection with any transfer of shares of capital stock 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 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.
"Qualified Institutional Buyer" has the meaning set forth in Rule 144A under the Securities Act.
"Qualified REIT Real Estate Assets" means Pass-Through Certificates, Mortgage Loans, Agency Certificates, and other assets of the type described in section 856(c) (6)(B) of the Code.
"Qualified REIT Subsidiary" means a corporation whose stock is entirely owned by the REIT at all times during such corporation's existence.
"Qualifying Interests" means "mortgages and other liens on and interests in real estate," as defined in section 3(c)(5)(C) under the Investment Company Act.
"rating" means (i) the rating assigned to an asset by one or more of the four nationally recognized rating agencies as adjusted to the rating scale under the S&P rating system, (ii) in the case of assets rated differently by such rating agencies, the rating deemed by management to most appropriately reflect such asset's credit quality or (iii) for unrated assets, the Company's deemed comparable rating.
"Realized Losses" means losses incurred in respect of Mortgage-Backed Securities upon foreclosure sales and other liquidations of underlying mortgaged properties that result in failure to recover all amounts due on the loans secured thereby.
"Regulation D" means Regulation D (Rules 501-506) promulgated under the Securities Act.
"Regulation S" means Regulation S (Rules 901-904) promulgated under the Securities Act.
a "REIT" means a Real Estate Investment Trust.
"REIT Provisions of the Code" means sections 856 through 860 of the Code.
"REMIC" means Real Estate Mortgage Investment Conduit.
"Representatives" means Friedman, Billings, Ramsey & Co., Inc., Sutro & Co. Incorporated and Tucker Anthony Incorporated, as the representatives for the Underwriters in connection with the Offering.
"repurchase agreement" means a borrowing device evidenced by an agreement to sell securities or other assets to a third-party and a simultaneous agreement to repurchase them at a specified future date and price, the price difference constituting the interest on the borrowing.
"residuals" means the right to receive the remaining or residual cash flows from a pool of Mortgage Loans or Mortgage-Backed Securities after distributing required amounts to the holders of interests in or obligations backed by such loans or securities and after payment of any required pool expenses.
"Rule 144" means Rule 144 under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Corporation, a New York corporation.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Stockholders" means stockholders of the Company who are offering Shares for sale to the public in the Offering.
"Senior Securities" means a class of Mortgage-Backed Security that has a prior right to receive principal and/or interest from the underlying pool of Mortgage Loans.
"Senior-Subordinated Mortgage-Backed Securities" means a series of Pass- Through Certificates or CMOs in which one or more classes have a prior right to receive principal and/or interest payments from the underlying pool of Mortgage Loans.
the "75% Asset Test" at the close of each quarter of each taxable year means the requirement that at least 75% of the value of the Company's total assets must consist of Qualified REIT Real Estate Assets, government securities, cash and cash items.
the "75% Gross Income Test" means the requirement for each taxable year that at least 75% of the Company's gross income must be derived from certain specified real estate sources including interest income and gain from the disposition of Qualified REIT Real Estate Assets or "qualified temporary investment income" (i.e., income derived from "new capital" within one year of the receipt of such capital).
"Shares" means the _________ shares of Common Stock being offered pursuant to the Offering.
"Short-Term Investments" means the short-term bank certificates of deposit, short-term United States treasury securities, short-term United States government agency securities, commercial paper, reverse repurchase agreements, short-term CMOs, short-term asset-backed securities and other similar types of short-term investment instruments, all of which will have maturities or average durations of less than one year.
"Single-Family Mortgage Loans" means Mortgage Loans secured by single-family (one- to four-units) residential property.
"Single-Family Privately-Issued Certificates" means Privately-Issued Certificates evidencing ownership interests in a pool of Single-Family Mortgage Loans.
"Single-Family CMOs" means CMOs that are collateralized by Single-Family Mortgage Loans.
"Subordinated Interests" means a class of Mortgage-Backed Securities that is subordinated to one or more other classes of Mortgage-Backed Securities, all of which classes share the same collateral.
"Subordinated Securities" means any class that bears the "first loss" from Realized Losses or that is rated below a single "B" level (or, if unrated, is deemed by the Company to be below such level).
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other employee retirement benefit plan, Keogh plans, bank commingled trust funds for such plans, individual retirement accounts and other similar entities intended to be exempt from Federal income taxation.
the "30% Gross Income Test" is the requirement for each taxable year that less than 30% of the Company's gross income is derived from the sale of Qualified REIT Real Estate Assets held for less than four years, stock or securities held for less than one year (including certain interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire Qualified Real Estate Assets) and certain "dealer" property.
"Transfer Agent" means ChaseMellon Shareholder Services, LLC, acting as transfer agent and registrar with respect to the Common Stock of the Company.
"Treasury Department" means the United States Department of the Treasury.
"Treasury Index" means the weekly average yield of the benchmark U.S. Treasury securities, as published by the Board of Governors of the Federal Reserve System.
"UBTI" means "unrelated business taxable income" as defined in section 512 of the Code.
"Underwriters" means the underwriters named in this Prospectus acting as underwriters in the Offering.
"Underwriting Agreement" means the Underwriting Agreement among the Company, the Selling Stockholders and the Representatives on behalf of the Underwriters.
"United States person" means a citizen or resident of the United States; a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof; or an estate or trust whose income is includible in gross income for United States Federal income tax purposes regardless of its source.
"VA" means the United States Department of Veterans Affairs.
"VA Loans" means Mortgage Loans partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Annaly Mortgage Management, Inc.
We have audited the accompanying balance sheet of Annaly Mortgage Management, Inc. as of June 30, 1997, and the related statements of operations, stockholders' equity and cash flows for the period February 18, 1997 (commencement of operations) through June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at June 30, 1997 and the results of its operations and its cash flows for the period February 18, 1997 (commencement of operations) through June 30, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
July 31, 1997
ANNALY MORTGAGE MANAGEMENT, INC.
ASSETS:
CASH AND CASH EQUIVALENTS $ 28,005
RECEIVABLE FOR MORTGAGE-BACKED
SECURITIES SOLD 31,885,170
MORTGAGE-BACKED SECURITIES - Net 364,367,237
ACCRUED INTEREST RECEIVABLE 1,945,577
OTHER ASSETS 10,195
------------
TOTAL ASSETS $398,236,184
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $326,987,090
Payable for Mortgage-Backed Securities purchased 35,060,243
Accrued interest payable 2,404,224
Dividends payable 938,400
Accounts payable 27,634
------------
Total liabilities 365,417,591
============
STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per share;
100,000,000 authorized, 3,680,000
shares issued and outstanding 36,800
Additional paid-in capital 32,955,104
Unrealized losses on Mortgage-Backed Securities (298,761)
Retained earnings 125,450
------------
Total stockholders' equity 32,818,593
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $398,236,184
============
|
See notes to financial statements.
ANNALY MORTGAGE MANAGEMENT, INC.
INTEREST INCOME:
Mortgage-Backed Securities $6,478,162
Money market account 30,745
----------
Total interest income 6,508,907
INTEREST EXPENSE:
Repurchase agreements 5,148,817
----------
NET INTEREST INCOME 1,360,090
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 229,865
GENERAL AND ADMINISTRATIVE EXPENSES 249,896
----------
NET INCOME $1,340,059
==========
NET INCOME PER SHARE $0.36
==========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,680,000
==========
|
See notes to financial statements.
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON ADDITIONAL
STOCK PAID-IN UNREALIZED RETAINED
PAR VALUE CAPITAL LOSS EARNINGS TOTAL
-------- ----------- ---------- -------- -------------
BALANCE,
FEBRUARY 18, 1997 $ 800 $ 11,200 $ - $ (209) $ 11,791
Issuance of common stock 36,000 32,943,904 - - 32,979,904
Available for sale securities -
Fair value adjustment - - (298,761) - (298,761)
Net income - - - 1,340,059 1,340,059
Dividends declared -
$0.33 per share - - - (1,214,400) (1,214,400)
------- ----------- ---------- ----------- -------------
BALANCE, JUNE 30, 1997 $36,800 $32,955,104 $(298,761) $ 125,450 $32,818,593
======= =========== ========== =========== =============
|
See notes to financial statements.
ANNALY MORTGAGE MANAGEMENT, INC.
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,340,059
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net 622,679
Gain on sale of Mortgage-Backed Securities (229,865)
Increase in accrued interest receivable (1,945,577)
Increase in other assets (8,745)
Increase in accrued interest payable 2,404,224
Increase in accrued expenses and other liabilities 27,414
------------
Net cash provided by operating activities 2,210,189
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (418,416,100)
Proceeds from sale of Mortgage-Backed Securities 42,872,029
Principal payments on Mortgage-Backed Securities 13,660,333
Purchase of furniture (1,451)
------------
Net cash used in investing activities (361,885,189)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 785,260,090
Principal payments on repurchase agreements (458,273,000)
Net proceeds from private placement equity offering 32,979,904
Dividends paid (276,000)
------------
Net cash provided by financing activities 359,690,994
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,994
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,011
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,005
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,744,593
============
NONCASH FINANCING ACTIVITIES:
Unrealized losses on available-for-sale securities $ 298,761
============
Dividends declared, not yet paid $ 938,400
============
|
See notes to financial statements.
ANNALY MORTGAGE MANAGEMENT, INC.
Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland on November 25, 1996. The Company commenced its operations of purchasing and managing an investment portfolio of primarily adjustable-rate Mortgage-Backed Securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital (see Note 5).
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and money market funds. The carrying amounts of cash equivalents approximates their value.
MORTGAGE-BACKED SECURITIES - The Company invests primarily in mortgage pass- through certificates, collateralized mortgage obligations and other mortgage- backed securities representing interests in or obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to classify its investments as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Mortgage-Backed Securities until maturity, it may, from time to time, sell any of its Mortgage-Backed Securities as part of its overall management of its balance sheet. Accordingly, this flexibility requires the Company to classify all of its Mortgage-Backed Securities as available-for-sale. All assets classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholder's equity.
Unrealized losses on Mortgage-Backed Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the Mortgage-Backed Securities is adjusted.
Interest income is accrued based on the outstanding principal amount of the Mortgage-Backed Securities and their contractual terms. Premiums and discounts associated with the purchase of the Mortgage-Backed Securities are amortized into interest income over the lives of the securities using the effective yield method.
Mortgage-Backed Securities transactions are recorded on the date the securities are purchased or sold. Purchases of newly issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are removed, generally shortly before settlement date. Realized gains and losses on Mortgage-Backed Securities transactions are determined on the specific identification basis.
Credit Risk - At June 30, 1997, the Company has limited is exposure to credit losses on its portfolio of Mortgage-Backed Securities by only purchasing securities from Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), or Government National Mortgage Association ("GNMA").
The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective agencies and the payment of principal and interest on the GNMA Mortgage-Backed Securities are backed by the full-faith-and-credit of the U.S. government. At June 30, 1997, all of the Company's Mortgage-Backed Securities have an implied "AAA" rating.
Income Taxes - The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") with respect thereto. Accordingly, the Company will not be subjected to federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met.
Net Income Per Share - Net income per share is computed by dividing net income by the weighted average number of common shares and common share equivalents (e.g., stock options), if dilutive, outstanding during the period. The Company had no dilutive common stock equivalents outstanding during the period.
Use Of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities classified as available-for-sale as of June 30, 1997, which are carried at their fair value:
FEDERAL FEDERAL GOVERNMENT
HOME LOAN NATIONAL NATIONAL TOTAL
MORTGAGE MORTGAGE MORTGAGE MORTGAGE
MORTGAGE-BACKED SECURITIES CORPORATION ASSOCIATION ASSOCIATION ASSETS
Mortgage-Backed Securities,
gross $29,076,869 $240,120,747 $85,130,964 $354,328,580
Unamortized discount (2,399) - - (2,399)
Unamortized premium 674,285 7,573,379 2,092,153 10,339,817
----------- ------------ ----------- ------------
Amortized cost 29,748,755 247,694,126 87,223,117 364,665,998
Gross unrealized gains 20,475 339,916 77,792 438,183
Gross unrealized losses (101,590) (401,427) (233,927) (736,944)
----------- ------------ ----------- ------------
Estimated fair value $29,667,640 $247,632,615 $87,066,982 $364,367,237
=========== ============ =========== ============
|
At June 30, 1997, all investments in Mortgage-Backed Securities consist of securities backed by mortgage loans secured by single-family residential housing. All of the securities acquired, as of June 30, 1997, are securitized by either FHLMC, FNMA or GNMA. The original maturity of 87% of the Mortgage- Backed Securities is over a period of thirty years; the actual maturity is subject to change based on the prepayments of the underlying mortgage loans.
The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are limited to no more than 1% every six months) and lifetime caps. At June 30, 1997, the weighted average lifetime cap was 11%.
During the period ended June 30, 1997, the Company realized $229,865 in gains from sales of Mortgage-Backed Securities. There were no losses on sales of Mortgage-Backed Securities during the period.
3. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance most of its Mortgage-Backed Securities. The repurchase agreements are secured by the market value of the Company's Mortgage-Backed Securities and bear interest rates that have historically moved in close relationship to LIBOR.
As of June 30, 1997, the Company had outstanding $326,987,090 of repurchase agreements with a weighted average borrowing rate of 5.64% and a weighted average remaining maturity of 20 days. At June 30, 1997, Mortgage-Backed Securities actually pledged had an estimated fair value of $364,367,237.
At June 30, 1997, the repurchase agreements had the following remaining maturities:
Within 30 Days $281,097,090
30 to 90 days 45,890,000
------------
$326,987,090
============
|
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at June 30, 1997. FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale:
CARRYING FAIR
AMOUNT VALUE
Mortgage-Backed Securities $364,665,999 $364,367,237
|
The fair values of the Company's Mortgage-Backed Securities are based on market prices provided by certain dealers who make markets in these financial instruments. The fair values reported reflect estimates and may not necessarily be indicative of the amounts the Company could realize in a current market exchange. Cash and cash equivalents, interest receivable, repurchase agreements and other liabilities are reflected in the financial statements at their amortized cost, which approximates their fair value because of the short-term nature of these instruments.
5. COMMON STOCK
During the period the Company completed a private placement of equity capital. The Company received net proceeds of $32,979,904 from an issuance of 3,600,000 shares of common stock.
During the Company's period ending June 30, 1997, the Company declared dividends to shareholders totaling $.33 per share, of which $.075 was paid during the period and $.255 was paid on July 23, 1997.
For Federal income tax purposes, $.06 of the dividend was long-term capital gains and all other dividends paid for the period are ordinary income to the Company's stockholders.
6. LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted a Long-Term Stock Incentive Plan for executive officers, key employees and nonemployee directors (the "Incentive Plan"). The Incentive Plan authorizes the Compensation Committee of the Board of Directors to grant awards, including incentive stock options as defined under section 422 of the Code ("ISOs") and options not so qualified ("NQSOs"). The Incentive Plan authorizes the granting of options or other awards for an aggregate of the greater of 500,000 shares or 5% of the outstanding shares of the Company's common stock.
The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost for the Incentive Plan has been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123. For the Company's pro forma net earnings, the compensation cost will be amortized over the four year vesting period of the options. The Company's net earnings per share would have been reduced to the pro forma amounts indicated below:
Net earnings - as reported $1,340,059 Net earnings - pro forma 1,249,978 Earnings per share - as reported $0.36 Earnings per share - pro forma $0.34 |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in the period ended June 30, 1997: dividend yield of 10%; expected volatility of 25%; risk-free interest rate of 6.07%; and expected lives of four years.
Information regarding options is as follows:
Weighted
Average
Exercise
Shares Price
Granted (311,000 ISOs, 37,500 NQSOs) 348,500 $ 6.42
Exercised - -
Expired - -
-------- ---------
Outstanding, end of period 348,500 $ 6.42
======== =========
Weighted average fair value per share of
options granted during the period $ 2.07
========
|
The following table summarizes information about stock options outstanding:
Options Outstanding
------------------------------
Weighted
Average Weighted
Remaining Average
Range of Options Contractual Exercise
Exercise Prices Outstanding Life (Yrs.) Price
$ 4.00 208,250 4.0 $ 4.00
10.00 140,250 3.8 10.00
---------- ---------
$4.00-$10.00 348,500 3.9 $ 6.42
============ ========= ==== ======
|
The vesting for the options is as follows: 7,500 options vested as of June 26, 1997. The remainder of the options will vest in four equal annual installments from 1998 through 2001.
7. SUBSEQUENT EVENT
The Company raised additional capital on July 31, 1997 upon the consummation of the sale of an aggregate of 87,800 shares, totaling $878,000, of Common Stock to directors, officers and employees of the Company.
8. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations.
Period Ended
March 31, June 30,
1997 1997
Interest income from Mortgage-Backed
Securities and cash $1,060,692 $5,448,215
Interest expense on repurchase
agreements 713,120 4,435,697
---------- ----------
Net interest income 347,572 1,012,518
Gain on sale of Mortgage-Backed Securities - 229,865
General and administrative expenses 64,047 185,849
--------- ---------
Net income $ 283,525 $1,056,534
========= ==========
Net income per share $0.08 $0.28
===== =====
Average number of shares outstanding 3,680,000 3,680,000
========== =========
|
******
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS NOT BEEN A CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
SUMMARY TABLE OF CONTENTS
--------------------------------------------------------- PAGE ---------------------------------------------------- Prospectus Summary.................................. 4 Risk Factors........................................ 11 The Company......................................... 23 Use of Proceeds..................................... 23 Capitalization...................................... 24 Distribution Policy................................. 25 Dilution............................................ 25 Selected Financial Data............................. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 28 Business Strategy................................... 38 Management.......................................... 52 Principal and Selling Stockholders.................. 60 Certain Federal Income Tax Considerations........... 62 ERISA Considerations................................ 69 Description of Capital Stock........................ 71 Common Stock Available for Future Sale.............. 75 Underwriting........................................ 76 Legal Matters....................................... 78 Experts............................................. 78 Additional Information.............................. 78 Glossary............................................ 79 Index to Financial Statements....................... F-1 |
UNTIL ________, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
______________________ SHARES
[LOGO]
ANNALY MORTGAGE
MANAGEMENT, INC.
COMMON STOCK
PROSPECTUS
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
SUTRO & CO. INCORPORATED
TUCKER ANTHONY INCORPORATED
____________, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31.OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and distribution of the securities being registered are as set forth below. All such expenses, except for the Securities Exchange Commission ("SEC" or the "Commission") registration fee, the NASD filing fee and the Nasdaq National Market listing fee, are estimated:
SEC Registration.................... $27,225.38
NASD Filing Fee..................... $ 9,484.38
Nasdaq National Market Listing Fee.. $30,468.75
Legal Fees and Expenses............. $ *
Accounting Fees and Expenses $ *
Blue Sky Qualification Fees and
Expenses (including counsel fees) $ *
Printing Fees $ *
Transfer Agent and Registrar Fees $ *
Miscellaneous $ *
----------
Total $ *
==========
_______________
|
*To be completed by amendment.
ITEM 32.SALES TO SPECIAL PARTIES.
On July 31, 1997, the Registrant sold 87,800 shares of Common Stock to certain directors, officers and employees of the Company at a price of $10.00 per share of Common Stock or $878,000 in the aggregate. The foregoing shares were sold without registration under the Securities Act of 1933, as amended, in reliance on the exemption provided by Section 4(2) thereof.
ITEM 33.RECENT SALES OF UNREGISTERED SECURITIES.
On December 10, 1996, the Registrant issued 20,000 shares of Common Stock to each of Timothy J. Guba and Wellington St. Claire in exchange for an aggregate cash purchase price of $3,000 paid by each of them. On December 17, 1996, the Registrant issued 20,000 shares to Michael A.J. Farrell in exchange for an aggregate cash purchase price of $3,000. On December 18, 1996, the Registrant issued 20,000 shares to the Bellfiore Trust in exchange for an aggregate cash purchase price of $3,000. The foregoing shares of Common Stock were sold without registration under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption provided by Section 4(2) thereof.
On February 18, 1997, the Registrant sold an aggregate of 3,600,000 shares of Common Stock to purchasers who were either "Qualified Institutional Buyers" (as defined in Rule 144A under the Securities Act), or institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act), or to purchasers who were not U.S. persons (as defined in Regulation S under the Securities Act) pursuant to offers and sales that occurred outside the United States within the meaning of Regulation S under the Securities Act. The foregoing shares of Common Stock were sold without registration under the Securities Act in reliance on the exemptions provided by Sections 4(1) and 4(2) thereof and Rule 144A, Regulation D and Regulation S thereunder. The purchasers in the offering paid $10.00 per share of Common Stock or $36,000,000 in the aggregate. The shares of Common Stock were sold initially to Friedman, Billings, Ramsey & Co., Inc., as the initial purchaser in the offering (the "Initial Purchaser"), for a purchase price of $9.30 per share, or $33,480,000 in the aggregate, and resold by the Initial Purchaser to the purchasers in the offering. The Initial Purchaser's discount in the offering was $.70 per share, or $2,520,000 in the aggregate.
On July 31, 1997, the Registrant sold 87,800 shares of Common Stock to certain directors and officers of the Company at a price of $10.00 per share of Common Stock or $878,000 in the aggregate. The foregoing shares were sold without registration under the Securities Act in reliance on the exemption provided by Section 4(2) thereof.
II-1
ITEM 34.INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Corporations and Associations Article of the Annotated Code of Maryland (the "Maryland General Corporation Law") provides that a Maryland corporation may indemnify any director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise or employee benefit plan, is made a party to any proceeding by reason of service in that capacity unless it is established that the act or omission of the director was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; or the director actually received an improper personal benefit in money, property or services; or, in the case of any criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. Indemnification may be against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the director in connection with the proceeding, but if the proceeding was one by or in the right of the corporation, indemnification may not be made in respect of any proceeding in which the director shall have been adjudged to be liable to the corporation. Such indemnification may not be made unless authorized for a specific proceeding after a determination has been made, in the manner prescribed by the law, that indemnification is permissible in the circumstances because the director has met the applicable standard of conduct. On the other hand, the director must be indemnified for expenses if he has been successful in the defense of the proceeding or as otherwise ordered by a court. The law also prescribes the circumstances under which the corporation may advance expenses to, or obtain insurance or similar protection for, directors.
The law also provides for comparable indemnification for corporate officers and agents.
The Registrant's Articles of Incorporation provide that its directors and officers shall, and its agents in the discretion of the Board of Directors may, be indemnified to the fullest extent required or permitted from time to time by the laws of Maryland.
The Maryland General Corporation Law permits the charter of a Maryland corporation to include a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except to the extent that (i) it is proved that the person actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received, or (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Company's Articles of Incorporation contain a provision providing for elimination of the liability of its directors and officers to the Company or its stockholders for money damages to the maximum extent permitted by Maryland law from time to time.
Policies of insurance may be obtained and maintained by the Company under which its directors and officers will be insured, within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of, and certain liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been such directors of officers.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The financial statements of the Registrant at June 30, 1997, and for the period from February 18, 1997 (commencement of operations) through June 30, 1997, are included in the Prospectus. All schedules are omitted because they are not applicable or not required.
(b) Exhibits:
1.1 Form of Underwriting Agreement/*/
3.1 Articles of Incorporation of the Registrant
II-2
3.2 Articles of Amendment and Restatement of the Articles of Incorporation of the Registrant
3.3 Bylaws of the Registrant, as amended
4.1 Specimen Common Stock Certificate/*/
5.1 Opinion of Morgan, Lewis & Bockius LLP (including consent of such firm)/*/
8.1 Opinion of Morgan, Lewis & Bockius LLP, as to certain tax matters (including consent of such firm)/*/
10.1 Purchase Agreement, dated February 12, 1997, between the Registrant and Friedman, Billings, Ramsey & Co., Inc. ("FBR")
10.2 Registration Rights Agreement, dated February 12, 1997, between the Registrant and FBR
10.3 Long-Term Stock Incentive Plan
10.4 Employment Agreement, effective as of January 27, 1997, between the Company and Michael A.J. Farrell
10.5 Employment Agreement, effective as of January 27, 1997, between the Company and Timothy J. Guba
10.6 Employment Agreement, effective as of January 27, 1997, between the Company and Wellington J. St. Claire
10.7 Form of Master Repurchase Agreement
10.8 Form of Purchase Agreement between the Company and the purchasers in the Direct Offering
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibits 5.1 and 8.1)
23.2 Consent of Deloitte & Touche L.L.P.
24.1 Power of Attorney (included on page II-4)
ITEM 37. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters specified in the Underwriting Agreement at the closing certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to court of appropriate jurisdiction in the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) for the purpose of determining liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of ___________, State of _________ on the _____ day of ____________, 1997.
ANNALY MORTGAGE
MANAGEMENT, INC.
By:/s/ MICHAEL A. J. FARRELL ------------------------------------ Michael A. J. Farrell Chief Executive Officer |
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael A. J. Farrell, Timothy J. Guba and Wellington J. St. Claire, any of whom may act without the joinder of the other, as his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
------------------------------ ----------------------------------------------- ------
/s/ KEVIN P. BRADY Director , 1997
----------------------
Kevin P. Brady
/s/ SPENCER I. BROWNE Director , 1997
----------------------
Spencer I. Bowne
/s/ KATHRYN F. FAGAN Chief Financial Officer and Treasurer , 1997
---------------------- (principal financial and accounting officer)
Kathryn F. Fagan
/s/ MICHAEL A.J. FARRELL Chairman of the Board, Chief Executive Officer , 1997
---------------------- and Director (principal executive officer)
Michael A. J. Farrell
/s/ JOHN S. GRACE Director , 1997
----------------------
John S. Grace
/s/ JONATHAN D. GREEN Director , 1997
----------------------
Jonathan D. Green
/s/ TIMOTHY J. GUBA President, Chief Operating Officer and Director , 1997
----------------------
Timothy J. Guba
/s/ JOHN A. LAMBIASE Director , 1997
----------------------
John A. Lambiase
/s/ DONNELL A. SEGALAS Director , 1997
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Donnell A. Segalas
/s/ WELLINGTON J. ST. CLAIRE Vice Chairman of the Board and Director , 1997
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Wellington J. St. Claire
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II-4
EXHIBIT INDEX
1.1 Form of Underwriting Agreement/*/
3.1 Articles of Incorporation of the Registrant
3.2 Articles of Amendment and Restatement of the Articles of Incorporation of
the Registrant
3.3 Bylaws of the Registrant, as amended
4.1 Specimen Common Stock Certificate/*/
5.1 Opinion of Morgan, Lewis & Bockius LLP (including consent of such
firm)/*/
8.1 Opinion of Morgan, Lewis & Bockius LLP, as to certain tax matters
(including consent of such firm)/*/
10.1 Purchase Agreement, dated February 12, 1997, between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. ("FBR")
10.2 Registration Rights Agreement, dated February 12, 1997, between the
Registrant and FBR
10.3 Long-Term Stock Incentive Plan
10.4 Employment Agreement, effective as of January 27, 1997, between the
Company and Michael A.J. Farrell
10.5 Employment Agreement, effective as of January 27, 1997, between the
Company and Timothy J. Guba
10.6 Employment Agreement, effective as of January 27, 1997, between the
Company and Wellington J. St. Claire
10.7 Form of Master Repurchase Agreement
10.8 Form of Purchase Agreement between the Company and the purchasers in the
Direct Offering
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibits 5.1 and 8.1)
23.2 Consent of Deloitte & Touche L.L.P.
24.1 Power of Attorney (included on page II-4)
________________________
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* To be filed by amendment.
II-5
EXHIBIT 3.1
ARTICLE I
The undersigned, Jacqueline D. Andersen, whose address is 32 South Street, Baltimore, Maryland 21202, being at least eighteen (18) years of age, does hereby act as an incorporator, under and by virtue of the General Laws of the State of Maryland authorizing the formation of corporations, and with the intention of forming a corporation, does hereby form a corporation under the General Laws of the State of Maryland.
ARTICLE II
The name of the corporation (which is hereinafter called the "Corporation") is:
Annaly Mortgage Management, Inc.
ARTICLE III
The purpose for which the Corporation is formed is to transact any or all lawful business, not required to be specifically stated in these Articles, for which corporations may be incorporated under the Maryland General Corporation Law, as amended from time to time.
ARTICLE IV
The present address of the principal office of the Corporation in the State of Maryland is:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
ARTICLE V
The name and address of the resident agent of the Corporation in the State of Maryland are:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation actually residing in the State of Maryland.
ARTICLE VI
A. The total number of shares of stock of all classes which the Corporation has authority to issue is one hundred million (100,000,000) shares of capital stock, par value one cent ($0.01) per share, amounting in aggregate par value to one million dollars ($1,000,000). All of such shares are initially classified as "Common Stock." The Board of Directors may classify and reclassify any unissued shares of Common Stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock.
B. The following is a description of the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the Common Stock of the Corporation.
(1) Each share of Common Stock shall have one vote, and, except as otherwise provided in respect of any class of capital stock hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the Common Stock.
(2) Subject to the provisions of law and any preferences of any class of capital stock hereafter classified or reclassified, dividends, including dividends payable in shares of the Corporation's stock, may be paid on the Common Stock of the Corporation at such time and in such amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Common Stock shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amount to which the holders of any class of capital stock hereafter classified or reclassified having a preference on distributions in the liquidation, dissolution or winding up of the Corporation, shall be entitled, together with the holders of any other class of capital stock hereafter classified or reclassified not having a preference on distributions in the liquidation,
dissolution or winding up of the Corporation, to share ratably in the remaining net assets of the Corporation.
C. Subject to the foregoing, the power of the Board of Directors to classify and reclassify any of the shares of capital stock shall include, without limitation, subject to the provisions of the charter, authority to classify or reclassify any unissued shares of such capital stock into a class or classes of preferred stock, preference stock, special stock, or other stock, and to divide and classify shares of any class into one or more series of such class, by determining, fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the number of shares to constitute such class or series; provided that, unless otherwise prohibited by the terms of such or any other class or series, the number of shares of any class or series may be decreased by the Board of Directors in connection with any classification or reclassification of unissued shares and the number of shares of such class or series may be increased by the Board of Directors in connection with any such classification or reclassification, and any shares of any class or series which have been redeemed, purchased, otherwise acquired or converted into shares of Common Stock or any other class or series shall become part of the authorized capital stock and be subject to classification and reclassification as provided in this subparagraph.
(2) Whether or not and, if so, the rates, amounts and times at which, and the conditions under which, dividends shall be payable on shares of such class or series, whether any such dividends shall rank senior or junior to or on a parity with the dividends payable on any other class or series of capital stock, and the status of any such dividends as cumulative, cumulative to a limited extent or noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series shall have voting rights in addition to any voting rights provided by law and, if so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall have conversion or exchange privileges and, if so, the terms and conditions thereof, including provision for adjustment of the conversion or exchange rate in such events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject to redemption and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; and whether or not there shall be any sinking fund or purchase account in respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or series upon the liquidation, dissolution or winding up of the affairs of, or upon any distribution of the assets of, the Corporation, which rights may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates, and whether such rights shall rank senior or junior to or on a parity with such rights of any other class or series of capital stock.
(7) Whether or not there shall be any limitations applicable, while shares of such class or series are outstanding, upon the payment of dividends or making of distributions on, or the acquisition of, or the use of moneys for purchase or redemption of, any capital stock of the Corporation, or upon any other action of the Corporation, including action under this subparagraph, and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including restrictions on transferability, and qualifications of shares of such class or series, not inconsistent with law and the Charter.
D. For the purposes hereof and of any Articles Supplementary hereto providing for the classification or reclassification of any shares of capital stock or of any other charter document of the Corporation (unless otherwise provided in any such Articles or document), any class or series of capital stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or upon liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable on liquidation, dissolution or winding up, as the case may be, in preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation price per share thereof be different from those of such others, if the holders of such class or series of stock shall be entitled to receipt of dividends or amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or redemption or liquidation prices, without preference or priority over the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon liquidation, if the rights of the holders of such class or series shall be subject or subordinate to the rights of the holders of such other class or series in respect of the receipt of dividends or the amounts distributable upon liquidation, dissolution or winding up, as the case may be.
ARTICLE VII
The number of Directors of the Corporation shall be three (3), which number may be increased or decreased pursuant to the by-laws of the Corporation, but shall never be less than the minimum number permitted by the General Laws of the State of Maryland now or hereafter in force. The names of the directors who shall act until the first annual meeting or until their successors are duly chosen and qualified are:
Michael A. J. Farrell
Timothy J. Guba
Wellington J. St. Claire
ARTICLE VIII
Except as may otherwise be provided by the Board of Directors of the Corporation, no holder of any shares of the stock of the Corporation shall have any preemptive or preferential right to purchase, subscribe for, or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any securities exchangeable for or convertible into such shares, or any warrants or other instruments evidencing rights or options to subscribe for, purchase or otherwise acquire such shares.
ARTICLE IX
The Corporation shall indemnify (A) its directors and officers, whether serving the Corporation or at its request any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law and (B) other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation's By- Laws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such By-Laws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the charter of the Corporation or repeal of any of its provisions shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
ARTICLE X
To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal.
ARTICLE XI
"Beneficial Ownership" shall mean ownership of Capital Stock by a Person either directly or constructively through the application of section 544 of the Code, as modified by sections 856(h)(l)(B) and 856(h)(3)(A) of the Code and determined without respect to whether such ownership has the effect of meeting the stock ownership requirement of section 542(a)(2) of the Code. The terms "Beneficial Owner," "Beneficially Owning," "Beneficially Own" and "Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean the beneficiary of the Trust as determined pursuant to Section 9 of this Article XI.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Capital Stock" shall mean stock that is either Common Stock, Preferred Stock or any other class of capital stock of the Corporation classified or reclassified pursuant to Article VI or this Article XI.
"Excess Securities" shall have the meaning set forth in Section 4 of this Article XI.
"Initial Public Offering" shall mean the sale of shares of Common Stock pursuant to the Corporation's first effective registration statement for such Common Stock filed under the Securities Act of 1933, as amended.
"Market Price" for any class of Capital Stock shall mean the last reported sales price reported on the New York Stock Exchange of such Capital Stock, on the trading day immediately preceding the relevant date, or if not then traded on the New York Stock Exchange,
the last reported sales price of such Capital Stock on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which such Capital Stock may be traded, or if not then traded over any exchange or quotation system, then the market price of the Capital Stock on the relevant date as determined in good faith by the Board of Directors of the Corporation.
"NYSE" shall mean the New York Stock Exchange.
"Ownership Limit" shall mean the Beneficial Ownership of 9.8%, in number of shares or value, of each class of outstanding Capital Stock of the Corporation, and after adjustment as set forth in Section 11 of this Article XI, shall mean such greater or lesser percentage of the outstanding Capital Stock as so adjusted. The number and value of shares of the outstanding Capital Stock of the Corporation shall be determined by the Board of Directors in good faith, which determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in section 642(c) of the Code, association, private foundation within the meaning of section 509(a) of the Code, joint stock company or other entity; but does not include an underwriter which participated in a public offering or private placement of Capital Stock for a period of 90 days following the purchase by such underwriter of such Capital Stock.
"Purported Transferee" shall mean, with respect to any purported
Transfer which results in Excess Securities, the purported transferee who would
have acquired shares of Capital Stock, if such Transfer had been valid under
Section 2 of this Article XI.
"REIT" shall mean a real estate investment trust as defined under section 856 of the Code.
"Restriction Termination Date" shall mean the first day of the taxable year as to which the Board of Directors of the Corporation determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or other disposition of Capital Stock (including (a) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Capital Stock, (b) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock, but excluding the actual conversion or exchange of such securities or rights into Capital Stock and (c) any transfer or other disposition of any interest in Capital Stock as a result of a change in the martial status of the holder thereof), whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise. The terms "Transfers" and "Transferred" shall have the correlative meanings.
"Trust" shall mean the trust created pursuant to Section 6 of this Article XI.
"Trustee" shall mean a banking institution designated by the Corporation as trustee for the Trust that is unaffiliated with either the Corporation or the Purported Transferee.
(A) Except as provided in Section 12 of this Article XI, from the earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998, and until the Restriction Termination Date, no Person shall Beneficially Own any class of shares of the outstanding Capital Stock in excess of the Ownership Limit.
(B) Except as provided in Section 12 of this Article XI, from the earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer that, if effective, would result in any Person Beneficially Owning any class of Capital Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of such shares of Capital Stock representing Beneficial Ownership of shares of any class of Capital Stock in excess of the Ownership Limit; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(C) Except as provided in Section 12 of this Article XI, from the earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer that, if effective, would result in the Capital Stock being beneficially owned (as provided in section 856(a) of the Code) by less than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of such shares of Capital Stock which would be otherwise beneficially owned (as provided in section 856(a) of the Code) by the intended transferee; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(D) From the earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer that, if effective, would result in the Corporation being "closely held" within the meaning of section 856(h) of the Code shall be void ab initio as to the Transfer of such shares of Capital Stock which would cause the Corporation to be "closely held" within the meaning of section 856(h) of the Code; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(E) Until the Restriction Termination Date, any Transfer that, if effective, would result in disqualification of the Corporation as a REIT shall be void ab initio as to the Transfer of such shares of Capital Stock; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(F) Nothing contained herein shall impair the settlement of transactions entered into on the facilities of the NYSE or any other exchange or quotation system on which shares of Capital Stock are traded.
If any of the foregoing restrictions on transfer of Excess Securities are determined to be void, invalid or unenforceable by any court of competent jurisdiction, then the Purported Transferee may be deemed, at the option of the Corporation, to have acted as an agent of the Corporation in acquiring such Excess Securities and to hold such Excess Securities on behalf of the Corporation.
(A) 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% (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 Corporation shall, within 30 days after December 31 of each year, give written notice to the Corporation stating the name and address of such record owner, the number of shares Beneficially Owned, and a description of how such shares are held. Each such record owner shall also provide to the Corporation such additional information as the Corporation may reasonably request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation's status as a REIT.
(B) Each Person who is a Beneficial Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial Owner shall provide to the Corporation such information that the Corporation may reasonably request in order to determine the Corporation's status as a REIT, to comply with the requirements of any taxing authority or governmental agency, or to determine any such compliance.
(A) Any decrease may be made prospectively as to subsequent holders (other than a decrease as a result of a retroactive change in existing law, in which case such decrease shall be effective immediately);
(B) The Ownership Limit may not be increased if, after giving effect to such increase, five Beneficial Owners of Common Stock could Beneficially Own, in the aggregate, more than 50.0% in value of the shares of Capital Stock then outstanding; and
(C) Prior to the modification of the Ownership Limit the Board of Directors of the Corporation may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT.
ARTICLE XII
The Corporation hereby expressly elects not to be governed by the provisions of Section 3-602 of the Maryland General Corporation Law.
ARTICLE XIII
Notwithstanding any provision of law requiring the authorization of any action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes outstanding and entitled to vote thereon, except as otherwise provided in the charter.
ARTICLE XIV
The Board of Directors is hereby empowered to authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares of its stock of any class or classes, whether now or hereafter authorized, for such consideration as may be deemed advisable by the Board of Directors and without any action by the stockholders.
ARTICLE XV
The Corporation reserves the right from time to time to make any amendments of its charter which may now or hereafter be authorized by law, including any amendments changing the terms or contract rights, as expressly set forth in its charter, or any of its outstanding stock by classification, reclassification or otherwise.
ARTICLE XVI
The enumeration and definition of particular powers of the Board of Directors included in the foregoing Articles shall in no way be limited or restricted by reference to or inference from the terms of any other Article of the charter of the Corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force.
ARTICLE XVII
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and hereby acknowledge the same to be my act.
Dated the 25 day of November, 1996.
/S/ Jacqueline D. Andersen
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Jacqueline D. Andersen
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EXHIBIT 3.2
ANNALY MORTGAGE MANAGEMENT, INC., a Maryland corporation, having its principal office at The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202 (hereinafter referred to as the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
ARTICLE I
The undersigned, Jacqueline D. Andersen, whose address is 32 South Street, Baltimore, Maryland 21202, being at least eighteen (18) years of age, does hereby act as an incorporator, under and by virtue of the General Laws of the State of Maryland authorizing the formation of corporations, and with the intention of forming a corporation, does hereby form a corporation under the General Laws of the State of Maryland.
ARTICLE II
The name of the corporation (which is hereinafter called the "Corporation") is:
Annaly Mortgage Management, Inc.
ARTICLE III
The purpose for which the Corporation is formed is to transact any or all lawful business, not required to be specifically stated in these Articles, for which corporations may be incorporated under the Maryland General Corporation Law, as amended from time to time.
ARTICLE IV
The present address of the principal office of the Corporation in the State of Maryland is:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
ARTICLE V
The name and address of the resident agent of the Corporation in the State of Maryland are:
The Corporation Trust Incorporated
32 South Street
Baltimore, Maryland 21202
Said resident agent is a Maryland corporation actually residing in the State of Maryland.
ARTICLE VI
A. The total number of shares of stock of all classes which the Corporation has authority to issue is one hundred million (100,000,000) shares of capital stock, par value one cent ($0.01) per share, amounting in aggregate par value to one million dollars ($1,000,000). All of such shares are initially classified as "Common Stock." The Board of Directors may classify and reclassify any unissued shares of Common Stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock.
B. The following is a description of the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the Common Stock of the Corporation.
(1) Each share of Common Stock shall have one vote, and, except as otherwise provided in respect of any class of capital stock hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the Common Stock.
(2) Subject to the provisions of law and any preferences of any class of capital stock hereafter classified or reclassified, dividends, including dividends payable in shares
of the Corporation's stock, may be paid on the Common Stock of the Corporation at such time and in such amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Common Stock shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amount to which the holders of any class of capital stock hereafter classified or reclassified having a preference on distributions in the liquidation, dissolution or winding up of the Corporation, shall be entitled, together with the holders of any other class of capital stock hereafter classified or reclassified not having a preference on distributions in the liquidation, dissolution or winding up of the Corporation, to share ratably in the remaining net assets of the Corporation.
C. Subject to the foregoing, the power of the Board of Directors to classify and reclassify any of the shares of capital stock shall include, without limitation, subject to the provisions of the charter, authority to classify or reclassify any unissued shares of such capital stock into a class or classes of preferred stock, preference stock, special stock, or other stock, and to divide and classify shares of any class into one or more series of such class, by determining, fixing or altering one or more of the following:
(1) The distinctive designation of such class or series and the number of shares to constitute such class or series; provided that, unless otherwise prohibited by the terms of such or any other class or series, the number of shares of any class or series may be decreased by the Board of Directors in connection with any classification or reclassification of unissued shares and the number of shares of such class or series may be increased by the Board of Directors in connection with any such classification or reclassification, and any shares of any class or series which have been redeemed, purchased, otherwise acquired or converted into shares of Common Stock or any other class or series shall become part of the authorized capital stock and be subject to classification and reclassification as provided in this subparagraph.
(2) Whether or not and, if so, the rates, amounts and times at which, and the conditions under which, dividends shall be payable on shares of such class or series, whether any such dividends shall rank senior or junior to or on a parity with the dividends payable on any other class or series of capital stock, and the status of any such dividends as cumulative, cumulative to a limited extent or noncumulative and as participating or nonparticipating.
(3) Whether or not shares of such class or series shall have voting rights in addition to any voting rights provided by law and, if so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall have conversion or exchange privileges and, if so, the terms and conditions thereof, including provision for
adjustment of the conversion or exchange rate in such events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject to redemption and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; and whether or not there shall be any sinking fund or purchase account in respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or series upon the liquidation, dissolution or winding up of the affairs of, or upon any distribution of the assets of, the Corporation, which rights may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates, and whether such rights shall rank senior or junior to or on a parity with such rights of any other class or series of capital stock.
(7) Whether or not there shall be any limitations applicable, while shares of such class or series are outstanding, upon the payment of dividends or making of distributions on, or the acquisition of, or the use of moneys for purchase or redemption of, any capital stock of the Corporation, or upon any other action of the Corporation, including action under this subparagraph, and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including restrictions on transferability, and qualifications of shares of such class or series, not inconsistent with law and the Charter.
D. For the purposes hereof and of any Articles Supplementary hereto providing for the classification or reclassification of any shares of capital stock or of any other charter document of the Corporation (unless otherwise provided in any such Articles or document), any class or series of capital stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or upon liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable on liquidation, dissolution or winding up, as the case may be, in preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation price per share thereof be different from those of such others, if the holders of such class or series of stock shall be entitled to receipt of dividends or amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or priority over the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon liquidation, if the rights of the holders of such class or series shall be subject or subordinate to the rights of the holders of such other class or series in respect of the receipt of dividends or the amounts distributable upon liquidation, dissolution or winding up, as the case may be.
ARTICLE VII
The number of Directors of the Corporation shall be three (3), which number may be increased or decreased pursuant to the by-laws of the Corporation, but shall never be less than the minimum number permitted by the General Laws of the State of Maryland now or hereafter in force. The names of the directors who shall act until the first annual meeting or until their successors are duly chosen and qualified are:
Michael A. J. Farrell
Timothy J. Guba
Wellington J. St. Claire
ARTICLE VIII
Except as may otherwise be provided by the Board of Directors of the Corporation, no holder of any shares of the stock of the Corporation shall have any preemptive or preferential right to purchase, subscribe for, or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any securities exchangeable for or convertible into such shares, or any warrants or other instruments evidencing rights or options to subscribe for, purchase or otherwise acquire such shares.
ARTICLE IX
The Corporation shall indemnify (A) its directors and officers, whether serving the Corporation or at its request any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law and (B) other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation's By- Laws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such By-Laws,
resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the charter of the Corporation or repeal of any of its provisions shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
ARTICLE X
To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal.
ARTICLE XI
"Beneficial Ownership" shall mean ownership of Capital Stock by a Person either directly or constructively through the application of section 544 of the Code, as modified by sections 856(h)(l)(B) and 856(h)(3)(A) of the Code and determined without respect to whether such ownership has the effect of meeting the stock ownership requirement of section 542(a)(2) of the Code. The terms "Beneficial Owner," "Beneficially Owning," "Beneficially Own" and "Beneficially Owned" shall have the correlative meanings.
"Beneficiary" shall mean the beneficiary of the Trust as determined pursuant to Section 9 of this Article XI.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Capital Stock" shall mean stock that is either Common Stock, Preferred Stock or any other class of capital stock of the Corporation classified or reclassified pursuant to Article VI or this Article XI.
"Excess Securities" shall have the meaning set forth in Section 4 of this Article XI.
"Initial Offering" shall mean the first offering by the Company involving the issuance and sale of not less than 3,000,000 shares of Common Stock, whether or not such offering is pursuant to a registration statement under the Securities Act of 1933, as amended.
"Initial Public Offering" shall mean the sale of shares of Common Stock pursuant to the Corporation's first effective registration statement for such Common Stock filed under the Securities Act of 1933, as amended.
"Market Price" for any class of Capital Stock shall mean the last reported sales price reported on the New York Stock Exchange of such Capital Stock, on the trading day immediately preceding the relevant date, or if not then traded on the New York Stock Exchange, the last reported sales price of such Capital Stock on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which such Capital Stock may be traded, or if not then traded over any exchange or quotation system, then the market price of the Capital Stock on the relevant date as determined in good faith by the Board of Directors of the Corporation.
"NYSE" shall mean the New York Stock Exchange.
"Ownership Limit" shall mean the Beneficial Ownership of 9.8%, in number of shares or value, of each class of outstanding Capital Stock of the Corporation, and after adjustment as set forth in Section 11 of this Article XI, shall mean such greater or lesser percentage of the outstanding Capital Stock as so adjusted. The number and value of shares of the outstanding Capital Stock of the Corporation shall be determined by the Board of Directors in good faith, which determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in section 642(c) of the Code, association, private foundation within the meaning of section 509(a) of the Code, joint stock company or other entity; but does not include an underwriter which participated in a public offering or private placement of Capital Stock for a period of 90 days following the purchase by such underwriter of such Capital Stock.
"Purported Transferee" shall mean, with respect to any purported
Transfer which results in Excess Securities, the purported transferee who would
have acquired shares of Capital Stock, if such Transfer had been valid under
Section 2 of this Article XI.
"REIT" shall mean a real estate investment trust as defined under section 856 of the Code.
"Restriction Termination Date" shall mean the first day of the taxable year as to which the Board of Directors of the Corporation determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or other disposition of Capital Stock (including (a) the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Capital Stock, (b) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock, but excluding the actual conversion or exchange of such securities or rights into Capital Stock and (c) any transfer or other disposition of any interest in Capital Stock as a result of a change in the martial status of the holder thereof), whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise. The terms "Transfers" and "Transferred" shall have the correlative meanings.
"Trust" shall mean the trust created pursuant to Section 6 of this Article XI.
"Trustee" shall mean a banking institution designated by the Corporation as trustee for the Trust that is unaffiliated with either the Corporation or the Purported Transferee.
(A) Except as provided in Section 12 of this Article XI, from the earlier of (x) the date of the Initial Offering or (y) January 1, 1998, and until the Restriction Termination Date, no Person shall Beneficially Own any class of shares of the outstanding Capital Stock in excess of the Ownership Limit.
(B) Except as provided in Section 12 of this Article XI, from the earlier of (x) the date of the Initial Offering or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer that, if effective, would result in any Person Beneficially Owning any class of Capital Stock in excess of the Ownership Limit shall be void ab initio as to the Transfer of such shares of Capital Stock representing Beneficial Ownership of shares of any class of Capital Stock in excess of the Ownership Limit; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(C) From the earlier of (x) the date of the Initial Public Offering or (y) January 1, 1998, and until the Restriction Termination Date, any Transfer that, if effective, would result in the Capital Stock being beneficially owned (as provided in section 856(a) of the Code) by less than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of such shares of Capital Stock which would be otherwise beneficially owned (as provided in section 856(a) of the Code) by the intended transferee; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(D) From the earlier of (x) the date of the Initial Offering or (y)
January 1, 1998, and until the Restriction Termination Date, any Transfer that,
if effective, would result in the Corporation being "closely held" within the
meaning of section 856(h) of the Code shall be void ab initio as to the Transfer
of such shares of Capital Stock which would cause the
Corporation to be "closely held" within the meaning of section 856(h) of the Code; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(E) Until the Restriction Termination Date, any Transfer that, if effective, would result in disqualification of the Corporation as a REIT shall be void ab initio as to the Transfer of such shares of Capital Stock; and the intended transferee shall acquire no rights in such shares of Capital Stock.
(F) Nothing contained herein shall impair the settlement of transactions entered into on the facilities of the NYSE or any other exchange or quotation system on which shares of Capital Stock are traded.
If any of the foregoing restrictions on transfer of Excess Securities are determined to be void, invalid or unenforceable by any court of competent jurisdiction, then the Purported Transferee may be deemed, at the option of the Corporation, to have acted as an agent of the Corporation in acquiring such Excess Securities and to hold such Excess Securities on behalf of the Corporation.
(A) 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% (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 Corporation shall, within 30 days after December 31 of each year, give written notice to the Corporation stating the name and address of such record owner, the number of shares Beneficially Owned, and a description of how such shares are held. Each such record owner shall also provide to the Corporation such additional information as the Corporation may reasonably request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation's status as a REIT.
(B) Each Person who is a Beneficial Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial Owner shall provide to the Corporation such information that the Corporation may reasonably request in order to determine the Corporation's status as a REIT, to comply with the requirements of any taxing authority or governmental agency, or to determine any such compliance.
(A) Any decrease may be made prospectively as to subsequent holders (other than a decrease as a result of a retroactive change in existing law, in which case such decrease shall be effective immediately);
(B) The Ownership Limit may not be increased if, after giving effect to such increase, five Beneficial Owners of Common Stock could Beneficially Own, in the aggregate, more than 50.0% in value of the shares of Capital Stock then outstanding; and
(C) Prior to the modification of the Ownership Limit the Board of Directors of the Corporation may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT.
evidence satisfactory to the Board of Directors and upon such other conditions as the Board of Directors may direct, may waive the Ownership Limit with respect to an intended transferee in connection with a proposed Transfer which, if consummated, would result in such intended transferee owning shares in excess of the Ownership Limit. The Board may require written notice from a transferee such number of days prior to the proposed Transfer as the Board may determine in its discretion.
ARTICLE XII
The Corporation hereby expressly elects not to be governed by the provisions of Section 3-602 of the Maryland General Corporation Law.
ARTICLE XIII
Notwithstanding any provision of law requiring the authorization of any action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes outstanding and entitled to vote thereon, except as otherwise provided in the charter.
ARTICLE XIV
The Board of Directors is hereby empowered to authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares of its stock of any class or classes, whether now or hereafter authorized, for such consideration as may be deemed advisable by the Board of Directors and without any action by the stockholders.
ARTICLE XV
The Corporation reserves the right from time to time to make any amendments of its charter which may now or hereafter be authorized by law, including any amendments changing the terms or contract rights, as expressly set forth in its charter, or any of its outstanding stock by classification, reclassification or otherwise.
ARTICLE XVI
The enumeration and definition of particular powers of the Board of Directors included in the foregoing Articles shall in no way be limited or restricted by reference to or inference from the terms of any other Article of the charter of the Corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force.
ARTICLE XVII
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the Corporation has caused these Articles to be signed in its name and on its behalf by its President and attested by its Secretary on this 30th day of January, 1997.
ATTEST ANNALY MORTGAGE MANAGEMENT, INC
EXHIBIT 3.3
BYLAWS
OF
ANNALY MORTGAGE MANAGEMENT, INC.
The Board of Directors may provide a suitable seal for the Corporation, which may be either facsimile or any other form of seal and shall remain in the custody of the Secretary. If the Board of Directors so provides, it shall be affixed to all certificates of the Corporation's stock and to other instruments requiring a seal. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation relating to a corporate seal to place the word "Seal" adjacent to the signature of the person authorized to sign the document on behalf of the Corporation.
The signatures may be either manual or facsimile signatures. In case any officer who has signed any certificate ceases to be an officer of the Corporation before the certificate is issued, the certificate may nevertheless be issued by the Corporation with the same effect as if the officer had not ceased to be such officer as of the date of its issue. Each stock certificate shall include on its face the name of the Corporation, the name of the stockholder and the class of stock and number of shares represented by the certificate. If the Corporation has authority to issue stock of more than one class, the stock certificate shall contain on its face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue and if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set,
and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such full statement or summary, there may be set forth upon the face or back of the certificate a statement that the Corporation will furnish to any stockholder upon request and without charge, a full statement or summary of such information. Every stock certificate representing shares of stock which are restricted as to transferability by the Corporation shall contain a full statement of the restriction or state that the Corporation will furnish information about the restriction to the stockholder on request and without charge. A stock certificate may not be issued until the stock represented by it is fully paid, except in the case of stock purchased under an option plan as permitted by law.
The Corporation shall refuse to register any transfer of shares not made in accordance with any applicable provisions of Regulation S under the Securities Act of 1933, as amended.
If a meeting cannot be organized because a quorum has not attended, the stockholders entitled to vote and present in person or represented by proxy may adjourn the meeting to such time and place as they may determine. At any such adjourned meeting at which a quorum may be present, such business may be transacted as might have been transacted at the meeting as originally called. No notice of any adjourned meeting of the stockholders of the Corporation shall be required to be given, except by announcement at the meeting, unless the adjournment is for more than thirty (30) days or, after the adjournment, a new record date is fixed for the adjourned meeting.
Except as otherwise specified in the Articles of Incorporation or these Bylaws or provided by applicable law, the votes, at a duly organized meeting of the stockholders present in person or by proxy and entitled to cast at least a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall be the acts of the stockholders.
secretary, or in the absence of both Secretary and assistant secretaries, a person appointed by the Chairman, shall act as Secretary.
initially composed of three (3) members who shall hold office until its successors are duly chosen and qualified. The number of directors shall be increased or decreased from time to time by vote of a majority of the entire Board of Directors; provided, however, that the number of directors may not exceed fifteen (15) nor be less than three (3) except as permitted by law. A director shall hold office until the next annual meeting and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.
At all times subsequent to the consummation of an Initial Offering (as defined below), except in the case of a vacancy, a majority of the Board of Directors shall be Independent Directors (as hereinafter defined). For the purposes of these Bylaws, (i) "Initial Offering" shall mean an offering of shares of stock of the Corporation resulting in proceeds to the Corporation of not less than $5,000,000, whether or not such offering is pursuant to a registration statement under the Securities Act of 1933, as amended, and (ii) "Independent Director" shall mean a director of the Corporation who is not an officer or employee of the Corporation, any subsidiary of the Corporation or Fixed Income Discount Advisory Company. At the first annual meeting of stockholders and at each annual meeting thereafter, the stockholders shall elect directors to hold office until the next annual meeting or until their successors are elected and qualify. Directors need not be stockholders in the Corporation.
elected to hold office until the next annual meeting of stockholders or until his successor is elected and qualified.
One-third (1/3), but not less than two (2), of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board of Directors shall otherwise provide. In the absence or disqualification of any member of any such committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of such absent or disqualified members; provided, however, that in the event of the absence of disqualification of any Independent Director, such appointee shall be an Independent Director.
Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternative members to replace any absent or disqualified member, or to dissolve any such committee.
Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by such means constitutes presence in person at a meeting.
The first meeting of each newly elected Board of Directors shall be held as soon as practicable after the annual meeting of the stockholders at which the directors were elected. The meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors as provided in this Section 7, except that no notice shall be necessary if such meeting is held immediately after the adjournment, and at the site, of the annual meeting of stockholders.
Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called at any time by two (2) or more directors or by a majority of the members of the executive committee, if one be constituted, in writing with or without a meeting of such committee, or by the Chairman of the Board of Directors or the President.
Special meetings may be held at such place or places in or out of the State of Maryland as may be designated from time to time by the Board of Directors; in the absence of such designation, such meetings shall be held at such places as may be designated in the notice of meeting.
Notice of the place and time of every special meeting of the Board of Directors shall be delivered by the Secretary to each director either personally or by telephone, telegraph, overnight courier or facsimile, or by leaving the same at his residence or usual place of business at least twenty-four (24) hours before the time at which such meeting is to be held or, if by first-class
mail, at least 72 hours before the time of such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States Mail addressed to the director at his post office address as it appears on the records of the Corporation, with postage thereon paid. Unless the Bylaws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at, or the purposes of, any special meeting of the Board of Directors. No notice of any special meeting of the Board of Directors need be given to any director who attends except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the special meeting is not lawfully called or convened, or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice.
Any meeting of the Board of Directors, regular or special, may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement.
It shall be the duty of the Board of Directors to ensure that the purchase, sale, retention and disposal of the Corporation's assets, and the investment policies of the Corporation and the limitations thereon or amendment thereof are at all times in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as amended.
SECTION 1. Officers. The officers of the Corporation shall be a Chairman of the Board, a President, a Treasurer and a Secretary, who shall be elected by the Board of Directors to serve for one year and until their respective successors are elected and qualified, except as otherwise provided in any employment agreement between the Corporation and any officer. The Board of Directors may also appoint one or more Vice Presidents. The same person may hold any two or more offices except those of President and Vice President.
Any other employee of the Corporation may be removed or dismissed at any time by the Chief Executive Officer.
The fiscal year of the Corporation shall be the twelve calendar month period ending December 31 in each year, unless otherwise provided by the Board of Directors.
occurring before its adoption. Any repeal or modification of this Bylaw shall not in any way diminish any rights to indemnification or advance of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Bylaw or any provision hereof is in force.
These Bylaws may be amended or replaced, or new Bylaws may be adopted, either (1) by the vote of the stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast thereon at any duly organized annual or special meeting of stockholders, or (2), with respect to those matters which are not by statute reserved exclusively to the stockholders, by vote of a majority of the Board of Directors, including a majority of the Independent Directors of the Corporation, in office at any regular or special meeting of the Board of Directors. It shall not be necessary to set forth such proposed amendment, repeal or new Bylaws, or a summary thereof, in any notice of such meeting, whether annual, regular or special.
EXHIBIT 10.1
ANNALY MORTGAGE MANAGEMENT, INC.
3,600,000 Shares
Common Stock
February 12, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Annaly Mortgage Management, Inc., a Maryland corporation (the
"Company"), proposes to issue and sell to you (the "Initial Purchaser"),
3,600,000 shares (the "Shares"), of its common stock par value $.01 per share
("Common Stock"). The sale of Shares to you will be made without registration of
the Shares under the Securities Act of 1933, as amended (the "Act"), in reliance
upon the exemption from the registration requirements of the Act provided by
Section 4(2) thereof. You have advised the Company that you will make an
offering of the Shares purchased by you hereunder in accordance with Section 4
hereof on the terms set forth in the Final Memorandum (as defined below), as
soon as you deem advisable after this Agreement has been executed and delivered.
In connection with the sale of the Shares, the Company has prepared a preliminary offering memorandum, dated January 27, 1997 (the "Preliminary Memorandum"), and a final offering memorandum, dated February 12, 1997 (the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Company and the Shares. The Company hereby confirms that it has authorized the use of the Preliminary Memorandum and the Final Memorandum in connection with the offering and resale by the Initial Purchaser of the Shares. Any references herein to the Preliminary Memorandum or the Final Memorandum shall be deemed to include all exhibits thereto.
The holders of the Shares will be entitled to the benefits of a Registration Rights Agreement dated the date hereof between the Company and the Initial Purchaser (the "Registration Rights Agreement").
(a) The Company represents and warrants to, and agrees with, the Initial Purchaser as set forth below in this Section 1.
(i) Each of the Preliminary Memorandum and the Final Memorandum as of its date did not, and the Final Memorandum as of the Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, that the foregoing shall not apply to statements or omissions made in reliance upon, and in conformity with, written information furnished to the Company by you specifically for use in the preparation thereof.
(ii) Neither the Company nor any affiliate (as defined in Rule
501(b) of Regulation D under the Act ("Regulation D")) of the Company
has directly, or through any agent, (i) sold, offered for sale,
solicited offers to buy or otherwise negotiated in respect of, any
security (as defined in the Act) which is or will be integrated with
the sale of the Shares in a manner that would require the registration
of the Shares under the Act or (ii) engaged in any form of general
solicitation or general advertising (within the meaning of Regulation
D) in connection with the offering of the Shares. For purposes of
this Agreement, the Initial Purchaser shall not be considered an
affiliate of the Company.
(iii) It is not necessary in connection with the offer, sale and delivery of the Shares in the manner contemplated by this Agreement and the Final Memorandum to register the Shares under the Act except as contemplated by the Registration Rights Agreement.
(iv) None of the Company, its affiliates or any person acting on behalf of the Company or its affiliates has engaged in any directed selling efforts (as that term is defined in Regulation S under the Act ("Regulation S")) with respect to the Shares, and the Company and its affiliates and any person acting on its or their behalf have complied with the offering restrictions requirement of Regulation S.
(v) The Shares satisfy the requirements set forth in Rule 144A(d)(3) under the Act. The Company has been advised by the National Association of Securities Dealers, Inc. PORTAL Market that the Shares have or will be designated PORTAL eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc.
(vi) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not or would not result in a material adverse change in the condition (financial or otherwise), management, business, prospects, net worth or results of operations of the Company (a "Material Adverse Effect").
(vii) The Company has full power (corporate and other) to own or lease its properties and conduct its business as described in the Final Memorandum; and the Company has full power (corporate and other) to enter into this Agreement and the Registration Rights Agreement and to carry out all the terms and provisions hereof and thereof to be carried out by it.
(viii) The Company has no subsidiaries and does not own, directly or indirectly, any shares of stock or other equity securities of any corporations or any equity interest in any firm, partnership, joint venture, association or other entity.
(ix) The Company has an authorized, issued and outstanding capitalization as set forth in the Final Memorandum. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Shares been duly authorized and at the Closing Date, after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. At the Closing Date, no holders of outstanding shares of capital stock of the Company will be entitled to any preemptive or other rights to subscribe for any of the Shares, and no holder of securities of the Company has any right to require the Company to register the offer or sale of any securities owned by such holder under the Act other than pursuant to the Registration Rights Agreement.
(x) The capital stock of the Company conforms to the description thereof contained in the Final Memorandum.
(xi) Except as disclosed in the Final Memorandum, there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options, and the description of the Company's stock option, stock bonus and other stock plans or arrangements and the options or other rights granted and exercised thereunder, set forth in the Final
Memorandum accurately and fairly presents in all material respects the information required to be shown with respect to such plans, arrangements, options and rights.
(xii) The financial statements and schedules of the Company included in the Final Memorandum fairly present in all material respects the financial position of the Company as of the date therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods involved.
(xiii) Deloitte & Touche LLP, who have audited certain financial statements of the Company and delivered their report with respect to the audited financial statements included in the Final Memorandum, are independent public accountants within the meaning of Rule 101 of the AICPA's Code of Professional Conduct.
(xiv) The execution and delivery of this Agreement and the Registration Rights Agreement have been duly authorized by the Company and this Agreement and the Registration Rights Agreement have been duly executed and delivered by the Company, and each is the valid and binding agreement of the Company, enforceable against the Company in accordance with its respective terms, except as such enforceability may be limited by the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to rights and remedies of creditors or by general equitable principles.
(xv) No legal or governmental proceedings are pending to which the Company is a party or to which the property of the Company is subject and no such proceedings have been threatened against the Company or with respect to any of its properties.
(xvi) No consent, approval, authorization, registration, qualification or order of or with any court or governmental agency or body is required to be obtained by the Company for the issue or sale of the Shares or for the consummation of any other of the transactions herein contemplated or for the fulfillment of the terms of this Agreement herein or in the Registration Rights Agreement except the registration statement pursuant to the Registration Rights Agreement which, in accordance with the terms thereof, must be declared effective by the Commission, and such as have been obtained and such as may be required under the blue sky laws of any jurisdiction.
(xvii) Neither the issue or sale of the Shares, nor the consummation of any other of the transactions contemplated herein or in the Registration Rights Agreement nor the fulfillment of the terms hereof or thereof, will conflict with, result in a breach or violation of, or constitute a default under, any law or regulation or the articles of incorporation or by-laws of the Company or the terms of any indenture, credit
agreement, mortgage, deed of trust, lease or other agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound, or any statute or any judgment, order, decree, rule or regulation of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over the Company.
(xviii) Subsequent to the respective dates as of which information is given in the Final Memorandum, and except as described in or specifically contemplated by the Final Memorandum, (i) the Company has not incurred any material liabilities or obligations, direct or indirect, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company; (ii) the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock, and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than the sale of the Shares hereunder), or indebtedness material to the Company (other than in the ordinary course of business); and (v) there has not been any event, circumstance, or development that results in, or that the Company believes would result in, a Material Adverse Effect, except in each case as described in or contemplated by the Final Memorandum.
(xix) Neither the Company nor any employee of the Company has made any payment of funds of the Company prohibited by law and no funds of the Company have been set aside to be used for any payment prohibited by law.
(xx) (a) The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities material to the conduct its business, all of which are valid and in full force and effect, and (b) the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.
(xxi) The Company is not in violation of any provision of its articles of incorporation or bylaws.
(xxii) The Company is conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including without limitation, all applicable local, state and federal environmental laws and regulations, except where the failure to be in compliance would not have a Material Adverse Effect.
(xxiii) The Company is not an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"), and this transaction will not cause the Company to become an "investment company" or an entity "controlled" by an "investment company" under the 1940 Act.
(xxiv) The Company has filed all necessary foreign, federal, state and local tax returns that are required to be filed on or before the date hereof and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it and required to be paid on or before the date hereof; and the Company has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company which could have a Material Adverse Effect.
(xxv) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management's general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(xxvi) No default exists, and no event has occurred that, with notice or lapse of time or both, would constitute a default, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound or may be affected, in any respect that would have a Material Adverse Effect.
(xxvii) The Company owns no real property. The Company has good and marketable title to all the properties and assets owned by it, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not have a Material Adverse Effect and do not interfere with the use made or proposed to be made of such property by the Company, and except as described in or contemplated by the Final Memorandum. The Company holds its leased properties under valid, subsisting and enforceable leases, with such exceptions as are not materially significant to the business of the Company.
(xxviii) No labor dispute with the employees of the Company exists or, to the Company's knowledge, is threatened or imminent that could result in a Material Adverse Effect.
(xxix) The Company owns or possesses, or can acquire on reasonable terms, all necessary trademarks, service marks, trade names, licenses, patents, copyrights and proprietary or other confidential information to conduct its business as now conducted or as proposed to be conducted; and the Company has not received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect.
(xxx) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which it is engaged; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
(xxxi) Neither the Company nor any of its officers, directors, employees or stockholders have incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement other than the discount and fees to be received by the Initial Purchaser.
(xxxii) As of the Closing Date, the Company will be organized and intends to operate in a manner so as to qualify as a "real estate investment trust" ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and will elect to, will use its best efforts to and intends to remain qualified to, be taxed as a REIT under the Code and pursuant to any applicable state tax laws. The Company does not know of any event which would cause or is likely to cause the Company to fail to qualify as a REIT at any time.
(xxxiii) The description set forth under the heading "ERISA Considerations" is true and correct in all material respects.
(b) Any certificate signed by any officer of the Company or any of its affiliates and delivered to the Initial Purchaser or its counsel shall be deemed a representation and warranty by the Company to the Initial Purchaser as to the matters covered thereby.
(a) The Initial Purchaser represents and warrants to and agrees with
the Company that (i) it has not solicited and will not solicit any offer to buy
or offer to sell the Shares by means of any form of general solicitation or
general advertising (within the meaning of Regulation D) with respect to Shares
sold in reliance on Regulation S, by means of any directed selling efforts and
(ii) it has solicited and will solicit offers to buy the Shares only from, and
has offered and will offer, sell to or deliver the Shares only to, (A) persons
who it reasonably believes to be qualified institutional buyers (as defined in
Rule 144A under the Act) or, if any such person is buying for one or more
institutional accounts for which such person is acting as fiduciary or agent,
only when such person has represented to it that each such account is a
qualified institutional buyer to whom notice has been given that such sale or
delivery is being made in reliance on Rule 144A, and, in each case, in
transactions under Rule 144A and who provide to it a certificate in the form of
Exhibit A hereto, (B) persons who it reasonably believes to be institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D), and who provide to it a letter in the form of Exhibit B hereto or
(C) persons to whom, and under circumstances which, it reasonably believes
offers and sales of Shares may be made without registration of the Shares under
the Act in reliance upon Regulation S thereunder, and who provide to it a letter
in the form of Exhibit C hereto. The Initial Purchaser also represents and
warrants and agrees that it has offered and will offer to sell the Shares only
to, and has solicited and will solicit offers to buy the Shares only from,
persons that in purchasing such Shares will be deemed to have represented and
agreed as provided under "Notice to Investors" in Exhibit D hereto. The Initial
Purchaser represents and warrants that it is familiar with the rules and
restrictions set forth in Regulation S and that it has not undertaken any
activity for the purpose of, or that could reasonably be expected to have the
effect of, conditioning the market for any Shares being offered in reliance on
Regulation S. The Initial Purchaser further represents and warrants that, in
the case of any sale of Shares to a distributor, a dealer (as defined in Section
2(12) of the Securities Act) or a person receiving a selling concession, fee or
other remuneration, prior to the expiration of the one-year restricted period
set forth in Rule 903(c)(3)(iii) of Regulation S, it will send a confirmation or
other notice to the purchaser stating that the purchaser is subject to the same
restrictions on offers and sales that apply to a distributor.
(b) The Purchaser represents and warrants that (i) it has not offered or sold and will not offer or sell any Shares to persons in the United Kingdom prior to the expiration of the period six months from the date of their issuance, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise lawfully be issued or passed on.
(c) The Initial Purchaser understands that the Company and, for the
purposes of the opinions to be delivered to the Initial Purchaser pursuant to
Section 7 hereof, counsel to the Company and counsel to the Initial Purchaser
will rely upon the accuracy and the truth of the forgoing representations and
Initial Purchaser hereby consents to such reliance.
(a) The Company will furnish to the Initial Purchaser, without charge, such copies of the Final Memorandum and any supplements or amendments thereof as the Initial Purchaser may reasonably request.
(b) The Company will cooperate with the Initial Purchaser and its counsel in arranging for the qualification or registration of the Shares for offering and sale under, or establishing an exemption from such qualification or registration under, the securities or blue sky laws of such jurisdictions as the Initial Purchaser may designate.
(c) If, at any time prior to the completion of the sale of the Shares by the Initial Purchaser as determined by the Initial Purchaser, (i) any event occurs as a result of which the Final Memorandum, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Final Memorandum to comply with the Act or the rules or regulations of the Commission thereunder, or (ii) the Company receives any notification with respect to the modification, rescission, withdrawal or suspension of the qualification or registration of the Shares, or any exemption from such registration or qualification, in any jurisdiction, the Company will promptly notify the Initial Purchaser thereof and will prepare, at the Company's expense, an amendment or supplement to the Final Memorandum that corrects such statement or omission or effects such compliance. The Company will use its best efforts to prevent
the issuance of any such modification, rescission, withdrawal or suspension and, if any such modification, rescission, withdrawal or suspension is issued and the Initial Purchaser so requests, to obtain the lifting thereof as promptly as possible.
(d) The Company shall, during any period in the three years (or such shorter period as may then be applicable under the Act regarding the holding period for securities under Rule 144(k) of the Act or any successor rule) after the Closing Date in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, make available, upon request, to any holder of such Shares in connection with any sale thereof and any prospective purchaser of Shares from such holder the information ("Rule 144A Information") specified in Rule 144A(d)(4) under the Act, and any such 144A information will not, at the date thereof, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.
(e) Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D) of the Company will solicit any offer to buy or offer or sell the Shares by means of any form of general solicitation or general advertising (within the meaning of Regulation D).
(f) None of the Company, its affiliates nor any person acting on behalf of the Company or its affiliates will engage in any directed selling efforts with respect to the Shares within the meaning of Regulation S, and the Company, its affiliates and each such person acting on its or their behalf will comply with the offering restrictions requirement of Regulation S.
(g) Neither the Company or any affiliate (as defined in Rule 501(b) of Regulation D) will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) the offering of which security will be integrated with the sale of the Shares in a manner which would require the registration of the Shares under the Act.
(h) The Company will apply the net proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Final Memorandum.
(i) The Company will not, directly or indirectly, without the prior written consent of the Initial Purchaser, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock (i) prior to the Closing Date and (ii) for a period of 180 days after the Closing Date, except pursuant to this Agreement and except for the grant of stock options or other awards pursuant to the Company's Long-Term Stock Incentive Plan or issuances pursuant to the exercise of such options or other awards.
(j) The Company shall not, during the period commencing on the date hereof and ending on the Closing Date, issue any press release or other communication, or hold any press
conference with respect to the Company, its financial condition, results of operations, business, properties, assets or liabilities, or the Offering, without the prior written consent of the Initial Purchaser.
(k) The Company shall use reasonable efforts in cooperation with the Initial Purchaser to obtain permission for the Shares sold to Qualified Institutional Buyers, as such term is defined in Rule 144A under the Securities Act to be eligible for clearance and settlement through the Depository Trust Company.
(l) During the period of 3 years hereafter, the Company will furnish
to the Initial Purchaser (i) as soon as practicable after the end of each fiscal
year, copies of annual distributions of audited financial statements containing
the balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereof of the Company's independent public accountants;
(ii) as soon as practicable after the issuance or filing thereof, copies of
quarterly distributions of unaudited financial statements, all current and
periodic reports promptly following the issuance or filing thereof by the
Company with any securities exchange, the Commission or any other regulatory
authority with whom the Company's securities are then registered; and (iii)
until the Company has conducted an initial public offering of its securities, a
description of any event having a Material Adverse Effect; and, (iv) as soon as
available, copies of any report or communication of the Company mailed generally
to holders of its Common Stock.
(m) The Company will continue to elect to qualify as a REIT under the Code and will use its best efforts to continue to meet the requirements to qualify as a REIT.
(n) The Company will retain Deloitte & Touche LLP, as its qualified accountants and such qualified tax experts as the Company may identify for a period of not less than 2 years beginning on the Closing Date to assist the Company in developing appropriate accounting systems and testing procedures and to conduct quarterly compliance reviews designed to determine compliance with the REIT provisions of the Code and the Company's exempt status under the 1940 Act.
(o) The Company will not invest in futures contracts, options on futures contracts or options on commodities unless the Company is exempt from the registration requirements of the Commodity Exchange Act, as amended, or otherwise complies with the Commodity Exchange Act, as amended. In addition, the Company will not engage in any activities which might be subject to the Commodity Exchange Act unless such activities are exempt from that Act or otherwise comply with that Act or with an applicable no-action letter to the Company from the Commodities Futures Trading Commission.
(p) Upon the Closing, the Company shall automatically grant to the
Initial Purchaser the right of first refusal to act as exclusive financial
advisor, underwriter or agent, as the case may be, in connection with the
Company's future financings, strategic opportunities and initiatives, including
(i) any sale of assets or stock, merger or acquisition, (ii) an offering of
equity
or debt securities, (iii) any securitization or similar transaction, (iv) any exercise of warrants or options to purchase the Company's securities by employees, agents or others pursuant to a cashless exercise or other exercise program for a term of one year. The one-year term shall be renewed annually unless terminated by the Company or the Initial Purchaser. Upon notice of termination by the Company or the Initial Purchaser, the term of the right of first refusal shall continue for an additional one-year period.
(a) (i) The Offering contemplated by this Agreement will become
qualified or be exempt from qualification under the securities laws of the
several states pursuant to subsection 5(b) not later than the Closing Date, and
(ii) at the Closing Date no stop order suspending the sale of the Shares shall
have been issued, and no proceeding for that purpose shall have been initiated
or threatened.
(b) The Final Memorandum, or any supplement thereto, will not contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
(c) The Initial Purchaser shall have received an opinion, dated the Closing Date, of Morgan, Lewis & Bockius LLP, counsel for the Company, in the form of Exhibit E.
In rendering any such opinion, such counsel may rely, as to matters of local law, on opinions of local counsel, and as to matters of fact on certificates of responsible officers of the Company and public officials, in which case their opinion is to state that they are so doing and that the Initial Purchaser is justified in relying on such opinions or certificates.
References to the Final Memorandum in this paragraph (c) shall include any amendment or supplement thereto at the date of such opinion.
(d) The Initial Purchaser shall have received from Deloitte & Touche LLP a letter or letters dated, respectively, the date hereof and the Closing Date, in form and substance satisfactory to the Initial Purchaser, to the effect that:
(i) they are independent accountants with respect to the Company within the meaning of Rule 101 of the AICPA's Code of Professional Conduct;
(ii) in their opinion, the audited financial statements examined by them and included in the Final Memorandum comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations;
(iii) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the stockholders, the board of
directors and any committees thereof of the Company, and inquiries of
certain officials of the Company who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to
believe that at a specific date not more than three business days prior to
the date of such letter, there were any changes in the capital stock or
total debt of the Company or any decreases in assets or stockholders'
equity of the Company, in each case compared with amounts shown on the
December 18, 1996 balance sheet included in the
Final Memorandum; and, except in all instances for changes, decreases or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and its consolidated subsidiaries and are included in the Final Memorandum, and have compared such amounts, percentages and financial information with such records of the Company and its consolidated subsidiaries and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such changes, decreases or increases which, in the reasonable discretion of the Initial Purchaser, are likely to result in a Material Adverse Effect, it shall be a further condition to the obligations of the Initial Purchaser such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Initial Purchaser deems such explanation unnecessary.
References to the Final Memorandum in this paragraph (d) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter.
(e) The Initial Purchaser shall have received from Andrews & Kurth L.L.P., counsel for the Initial Purchaser, such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Shares, the Final Memorandum (together with any amendment or supplement thereof or thereto) and other related matters as the Initial Purchaser may reasonably require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters.
(f) The Initial Purchaser shall have received a certificate, dated the Closing Date, of Michael A.J. Farrell and Wellington J. St. Claire in their capacities as the Chief Executive Officer and Chairman of the Board and Vice Chairman of the Board, respectively, of the Company to the effect that the signers of such certificate have carefully examined the Final Memorandum, any amendment or supplement to the Final Memorandum and this Agreement and that:
(i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Closing Date; the Final Memorandum, as amended or supplemented as of the Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date; and
(ii) subsequent to the respective dates as of which information is given in the Final Memorandum (exclusive of any amendment or supplement thereof or thereto), the Company has not sustained any loss or interference with its business or properties having or
resulting in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any event, circumstance, or development that results in, or that the Company believes would result in, a Material Adverse Effect, except in each case as described in or contemplated by the Final Memorandum (exclusive of any amendment or supplement thereto).
(g) The Initial Purchaser shall receive a certificate of the Secretary or Assistant Secretary of the Company certifying as to (i) the Articles of Incorporation of the Company and any amendments thereto, (ii) the Bylaws of the Company, and (iii) resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement, the Registration Rights Agreement and the other offering documents and (iv) a specimen Common Stock certificate.
(h) The Initial Purchaser shall have received from each officer and director of the Company an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of the Initial Purchaser, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the Closing Date.
(i) On or before the Closing Date, the Initial Purchaser and counsel for the Initial Purchaser shall have received such further certificates, documents or other information as they may have reasonably requested from the Company.
(j) At the Closing Date, the Company shall have delivered to the Initial Purchaser the duly authorized and executed Registration Rights Agreement.
All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Initial Purchaser and counsel for the Initial Purchaser. The Company shall furnish to the Initial Purchaser such copies of such opinions, certificates, letters and documents in such quantities as the Initial Purchaser and counsel for the Initial Purchaser shall reasonably request.
If any of the conditions specified in this Section 7 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Initial Purchaser and counsel for the Initial Purchaser, this Agreement and all obligations of the Initial Purchaser hereunder may be canceled at, or at any time prior to, the Closing Date by the Initial Purchaser. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing.
(a) The Company agrees to indemnify and hold harmless the Initial Purchaser and each person, if any, who controls the Initial Purchaser within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any and all losses, claims, damages or liabilities, joint or several, to which the Initial Purchaser or such controlling person may become subject under the Act, the Exchange Act, any applicable federal or state law, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon:
(ii) the omission or alleged omission to state in the Preliminary Memorandum, Final Memorandum or any amendment or supplement thereto, any Rule 144A Information or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; or
(iii) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials prepared in cooperation with the Company and used in connection with the marketing of the Shares, including without limitation, slides, videos, films, tape recordings, and, such party or parties, as the case may be, will reimburse, as incurred, the Initial Purchaser and each such controlling person for any legal or other expenses reasonably incurred by the Initial Purchaser or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action;
have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Initial Purchaser to such person as of or prior to the written confirmation of the sale of such Shares to such person if such untrue statement contained in or omission from such Preliminary Memorandum was corrected in the Final Memorandum (or the Final Memorandum as so amended or supplemented), and if the Company had previously furnished copies of such corrected Final Memorandum to the Initial Purchaser. This indemnity agreement will be in addition to any liability that the Company may otherwise have. The Company will not, without the prior written consent of the Initial Purchaser, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Initial Purchaser or any person who controls the Initial Purchaser within the meaning of the Act or the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Initial Purchaser and such controlling persons from all liability arising out of such claim, action, suit or proceeding.
(b) The Initial Purchaser agrees to indemnify and hold harmless the Company, its directors, its officers, and each person who controls the Company within the meaning of either the Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Initial Purchaser, but only with reference to written information relating to the Initial Purchaser furnished to the Company by or on behalf of the Initial Purchaser specifically for inclusion in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto. This indemnity agreement will be in addition to any liability which the Initial Purchaser may otherwise have. The Company acknowledges that the statements set forth in (i) the first sentence of the last paragraph of the cover page in the Preliminary Memorandum and the Final Memorandum and (ii) on the first, second and last sentences in the fourth paragraph under the caption "Plan of Distribution" in the Preliminary Memorandum and Final Memorandum constitute the only information furnished in writing by or on behalf of the Initial Purchaser for inclusion in the Preliminary Memorandum or the Final Memorandum.
or parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that in connection with such action the indemnifying party shall not be
liable for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Initial Purchaser, representing the indemnified parties under
paragraph (a) of this Section 8 who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Shares or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchaser on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company bear to the total Initial Purchaser's discount with respect to the Shares. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Initial Purchaser, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Initial Purchaser agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (c). Notwithstanding any other provision
of this paragraph (c), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and in no case shall the Initial Purchaser be responsible for any amount in excess of the Initial Purchaser's discount applicable to the Shares purchased by the Initial Purchaser hereunder. For the purposes of this paragraph 8(c), each person, if any, who controls the Initial Purchaser within the meaning of the Act or the Exchange Act shall have the same rights to contribution as the Initial Purchaser, and each director and officer of the Company, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act, shall have the same rights to contribution as the Company.
(a) This Agreement may be terminated with respect to the Shares in the sole discretion of the Initial Purchaser upon notice to the Company given prior to the Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto:
(i) the Company shall have, in the reasonable judgment of the Initial Purchaser, sustained any loss or interference with its business or properties having or resulting in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any event, circumstance of development that results in, or that the Company believes would result in, a Material Adverse Effect, except in each case as described in or contemplated by the Final Memorandum (exclusive of any amendment or supplement thereto);
(ii) trading generally in securities on the New York Stock Exchange or Nasdaq National Market shall have been suspended or minimum or maximum prices shall generally have been established on either such exchange or market system;
(iii) a banking moratorium shall have been declared by New York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of major hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the reasonable judgment of the Initial Purchaser, makes it impractical or inadvisable to proceed with the offering or the delivery of the Shares as contemplated by the Final Memorandum, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 10 shall be without liability of any party to any other party except for the expenses to be paid by the Company pursuant to Section 6 and except as provided in Section 8 hereof.
If the foregoing correctly sets forth our understanding please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A.J. Farrell
____________________________________
Name: Michael A.J. Farrell
Title: Chief Executive Officer and
Chairman of the Board
|
The foregoing Agreement is hereby confirmed and accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: /s/ James R. Kleeblatt ___________________________________ Name: James R. Kleeblatt Title: Managing Director |
EXHIBIT A
CERTIFICATE OF RULE 144A
QUALIFIED INSTITUTIONAL BUYER
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street, North
Arlington, Virginia 22209
Gentlemen:
We certify, to enable you to make offers and sales of securities pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), that we are a qualified institutional buyer in that we satisfy the requirements of one or more of paragraphs (i) through (vi) hereof (check applicable box(es)).
[] (i) We are an entity referred to in sub-paragraphs (A) through (F) hereof and in the aggregate owned and invested on a discretionary basis, for our own account and the accounts of other persons, at least the amount of securities specified below (not less than $100 million), calculated as provided in Rule 144A as of the date specified below.
[] (A) Corporation, etc. A corporation (other than a bank, savings and
loan or similar institution referred to in (ii) below), partnership,
Massachusetts or similar business trust, organization described in Section
501(c)(3) of the Internal Revenue Code, Small Business Development Company
licensed by the U.S. Small Business Administration, under Section 301(c) or (d)
of the Small Business Investment Act of 1958, or business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of 1940; or
[ ] (B) Insurance Company. An Insurance Company as defined in Section
(13) of the Act.
[ ] (C) ERISA Plan. An employee benefits plan within the meaning of Title
I of the Employee Retirement Income Security Act of 1974; or
[ ] (D) State or Local Plan. A plan established and maintained by a
state, its political subdivisions, or any agency or instrumentality
of a state or its political subdivisions, for the benefit of its
employees; or
[ ] (E) Investment Company. An investment company registered under the
Investment Company Act of 1940 or any business development company
as defined in Section 2(a)(48) of that Act; or
[ ] (F) Investment Adviser. An investment adviser registered under the
Investment Advisers Act of 1940.
[] (ii) Bank or Savings and Loan. We are a bank defined in Section3(a)(2) of
the Act; a savings and loan association or other institution referenced in
Section 3(a)(5)(A) of the Securities Act, or a foreign bank or savings and
loan association or equivalent institution that
Exh. A-1
in the aggregate owned and invested on a discretionary basis, for our own account and the accounts of other persons, at least the amount of securities specified below (not less than $100 million), calculated as provided in Rule 144A, as of the date specified below and had an audited net worth of at least $25 million as of the end of our most recent fiscal year. (This paragraph does not include bank commingled funds.)
[] (iii) One of a Family of Investment Companies. We are an investment company registered under the Investment Company Act of 1940 that is part of a "family of investment companies", as defined in Rule 144A, that owned in the aggregate at least the amount of securities specified below (not less than $100 million), calculated as provided in Rule 144A, as of the date specified below.
[] (iv) Dealer. We are a dealer registered under Section 15 of the Securities Exchange Act of 1934 (the "Exchange Act") that in the aggregate owned and invested on a discretionary for our own account and the accounts of other persons, at least the amount of securities specified below (not less than $10 million), calculated as provided in Rule 144A, as of the date specified below.
[] (v) Dealer (Riskless Principal Transaction). We are a dealer registered under Section 15 of the Exchange Act acting in a riskless principal transaction on behalf of a qualified institutional buyer.
[] (vi) Entity Owned by Qualified Buyers. We are an entity, all of the equity owners of which are qualified institutional buyers (each satisfying one or more of (i) through (iv) above including, as applicable, the $100 million test).
In calculating the amount of securities owned or invested by an entity as provided in Rule 144A: (a) repurchase agreements, securities owned but subject to repurchase agreements, swaps, bank deposit instruments, loan participation, securities of affiliates and dealers' unsold allotments are excluded; and (b) securities are valued at cost, except they may be valued at market if they are reported in financial statements at market and no current cost information is published.
Each entity, including a parent or subsidiary, must separately meet the requirements to be a qualified institutional buyer under Rule 144A. Securities owned by any subsidiary are included as owned or invested by its parent entity for purposes of Rule 144A only if (1) the subsidiary is consolidated in the parent entity's financial statements and (2) the subsidiary's investments are managed under the parent entity's direction (except that a subsidiary's securities are not included if the parent entity is itself a majority-owned consolidated subsidiary of another enterprise and is not a reporting company under the Exchange Act).
We further certify that we will purchase securities under Rule 144A from or
through you only for our account or for the account of another entity which is a
qualified institutional buyer. We will not purchase securities for another
entity under Rule 144A unless it satisfies one or more paragraphs (i) through
(vi) above including, as applicable, the $100 million test.
Exh. A-2
We agree to notify you of any change in the certifications herein, and each purchase by us of securities under Rule 144A from or through you will constitute a reaffirmation of the certifications herein (as modified by any such notice) as of the time of such purchase.
Amount of Securities: $ _________________ (State specific amount owned/invested - may be approximate, but no range or minimum)
Most Recent Fiscal Year-End: ____________ Date Owned/Invested: ____________________ (Complete only if this date is after most recent fiscal year-end)
Date: _____________________, 19__________
By: _____________________________________
Name: ___________________________________
Title: __________________________________
* Certificate must be signed by the Institution's chief financial officer or another executive officer, except that if the Institution is a member of a "family of investment companies", the certificate must be signed by an executive officer of such Institution's Investment Adviser.
Exh. A-3
EXHIBIT B
INVESTMENT LETTER
FOR INSTITUTIONAL ACCREDITED INVESTORS
Annaly Mortgage Management, Inc.
1500 Harbour Boulevard
Weehawken, New Jersey 07087
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street, North
Arlington, Virginia 22209
Ladies and Gentlemen:
In connection with our proposed purchase of ___ shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), of Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"), we confirm that:
1. We understand that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be sold
except as permitted in the following sentence. We understand and agree, on our
own behalf and on behalf of any accounts for which we are acting as hereinafter
stated, (x) that such Shares are being offered only in a transaction not
involving any public offering within the meaning of the Securities Act, (y) that
if we should resell, pledge or otherwise transfer such Shares within three years
(or such shorter period as may then be applicable under the Securities Act)
after the date of the original issuance of the Shares or within three months
after we cease to be an affiliate (within the meaning of Rule 144 under the
Securities Act) of the Company, such Shares may be resold, pledged or
transferred only (i) to the Company, (ii) so long as the Shares are eligible for
resale pursuant to Rule 144A under the Securities Act ("Rule 144A"), to a person
whom we reasonably believe is a "qualified institutional buyer" (as defined in
Rule 144A) ("QIB") that purchases for its own account or for the account of a
QIB to whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A (as indicated by the box checked by the transferor on the
Certificate of Transfer on the reverse of the certificate representing the
Shares), (iii) in an "offshore transaction" (within the meaning of Regulation S
under the Securities Act) (as indicated by the box checked by the transferor on
the Certificate of Transfer on the reverse of the certificate representing the
Shares), and, if such transfer is being effected prior to the expiration of the
"one year restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S under the Securities Act), the transferee shall have certified to the Company
and the Transfer Agent that such transfer is to a non-U.S. person (within the
meaning of Regulation S) and that such transferee is acquiring the Shares in an
offshore transaction (within the meaning of Regulation S), (iv) to an
institution that is an "accredited investor" as defined in Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act (as indicated by the box
checked by the transferor on the Certificate of Transfer on the reverse of the
certificate representing the Shares) that has certified to the Company and the
Transfer Agent that it is such an institutional
Exh. B-1
accredited investor and is acquiring the Shares for investment purposes and not
for distribution (provided that no transferor who has purchased Shares from any
person other than a QIB or an institutional accredited investor pursuant to
clause (iii) shall be permitted to transfer any Shares so purchased by it to an
institutional accredited investor pursuant to this clause (iv) prior to the
expiration of the "one year restricted period" (within the meaning of Rule
903(c)(3) of Regulation S under the Securities Act)), (v) pursuant to an
exemption from registration under the Securities Act provided by Rule 144 (if
applicable) under the Securities Act or (vi) pursuant to an effective
registration statement under the Securities Act and in each case in accordance
with any applicable securities laws of any state of the United States or other
jurisdictions, and we will notify any purchaser of the Shares from us of the
above resale restrictions, if then applicable. We further understand and agree
that, in connection with any transfer of the Shares by us pursuant to clauses
(iii), (iv) or (v) of the previous sentence, we and the transferee of the Shares
will deliver to the Company and the Transfer Agent certificates which may be
obtained from the Company and the Transfer Agent and such other certificates and
other information (including an opinion of counsel) as they may reasonably
require to confirm that any such transfer complies with the foregoing
restrictions.
We are able to fend for ourselves in the transactions contemplated by the Offering Memorandum relating to the Shares, we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Shares, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment for an indefinite period of time and can afford the complete loss of such investment.
3. We understand that the Company and Friedman, Billings, Ramsey & Co., Inc., as the initial purchaser of the Shares (the "Initial Purchaser"), and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and we agree that if any of the acknowledgments, representations and warranties deemed to have been made by us by our purchase of Shares, for our own account or for one or more accounts as to each of which we exercise sole investment discretion, are no longer accurate, we shall promptly notify the Company and the Initial Purchaser.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act or, if the Shares are to be
purchased for one or more accounts for which we are acting as fiduciary or
agent, each such investor account is an institutional Accredited Investor on a
like basis.
5. We are acquiring the Shares for our own account (or such investor accounts set forth in paragraph 4) and not with a view to or for resale in connection with any distribution or public offering thereof in violation of the Securities Act.
6. The Shares were not offered or sold to us by any form of general solicitation or general advertising.
7. The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), imposes certain requirements on those employee benefit plans to which it applies ("Plans") and on those persons who are fiduciaries with respect to such Plans. Plans cannot purchase Shares unless
Exh. B-2
(i) they are represented in this regard by a "qualified professional asset manager" as that term is defined in U.S. Department of Labor Prohibited Transaction Exemption ("PTE") 84-14, and other conditions to the applicability of PTE 84-14 to the purchase and holding of Common Stock are satisfied, or (ii) the conditions to the applicability of (a) PTE 90-1 (for insurance company pooled separate accounts), (b) PTE 91-38 (for bank collective funds), (c) PTE 95-60 (for insurance company general accounts) or (d) PTE 96-23 (for in-house asset managers) to the purchase and holding of Common Stock are satisfied. By purchasing Common Stock, the investing Plan is deemed to represent and agree that its is so represented and that such conditions are satisfied.
Employee benefit Plans that are governmental plans (as defined in section 3(32) of ERISA) are not subject to ERISA requirements but may be subject to somewhat similar provisions of other applicable federal or state law or legal restrictions on their ability to invest in shares of Common Stock. Accordingly, governmental plans should consult with legal counsel prior to making an investment.
The sale of shares to Plans is in no respect a representation by the Company, the Initial Purchaser or any other person associated with the sale of the Shares that such Shares meet all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such shares are otherwise appropriate for Plans generally or any particular Plan.
8. We understand that we and our professional advisor(s), if any, have the right to ask questions of and receive answers from the Company and its officers and directors, and to obtain such information concerning the terms and conditions of the offering of the Shares to the extent that the Company possesses the same or can acquire it without unreasonable effort or expense, as we and our advisor(s), if any, deem necessary to verify the accuracy of the information referred to in the Offering Memorandum pursuant to which the Company is offering the Shares to certain qualified offerees. We represent and agree that prior to our agreement to purchase Shares we and our professional advisor(s), if any, will have asked such questions, received such answers and obtained such information as we deem necessary to verify the accuracy (i) of the information referred to in the Offering Memorandum and (ii) of any other information that we deem relevant to making an investment decision with respect to the Shares.
9. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
By:__________________________________
Exh. B-3
EXHIBIT C
INVESTMENT LETTER FOR NON U.S. PURCHASERS
Annaly Mortgage Management, Inc.
1500 Harbour Boulevard
Weehawken, New Jersey 07087
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street, North
Arlington, Virginia 22209
Dear Sirs:
In connection with our proposed purchase of _______ shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), of Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"), we confirm that:
1. We understand that the Shares have not been registered under the United States Securities Act of 1933, as amended (the "Securities Act"), and may not be sold except as permitted in the following sentence. We understand and agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, (x) that such Shares are being offered only in a transaction not involving any public offering within the meaning of the Securities Act, (y) that if we should resell, pledge or otherwise transfer such Shares within three years (or such shorter period as may then be applicable under the Securities Act) after the date of the original issuance of the Shares or within three months after we cease to be an affiliate (within the meaning of Rule 144 under the Securities Act) of the Company, such Shares may be resold, pledged or transferred only (i) to the Company, (ii) so long as Shares are eligible for resale pursuant to Rule 144A under the Securities Act ("Rule 144A"), to a person whom we reasonably believe is a "qualified institutional buyer" (as defined in Rule 144A) (a "QIB") that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A (as indicated by the box checked by the transferor on the Certificate of Transfer on the reverse of the certificate representing the Shares), (iii) in an "offshore transaction" (within the meaning of Regulation S under the Securities Act) (as indicated by the box checked by the transferor on the Certificate of Transfer on the reverse of the certificate representing the Shares), and, if such transfer is being effected prior to the expiration of the "one year restricted period" (within the meaning of Rule 903(c)(3) of Regulation S under the Securities Act) the transferee shall have certified to the Company and the Transfer Agent that such transfer is to a non-U.S. person (within the meaning of Regulation S) and that such transferee is acquiring the Shares in an offshore transaction (within the meaning of Regulation S), (iv) to an institution that is an "accredited investor" as defined in rule 501(a)(1),(2),(3) or (7) of Regulation D under the Securities Act (as indicated by the box checked by the transferor on the Certificate of Transfer on the reverse of the certificate representing the Shares) that has certified to the Company and the Transfer Agent that it is such an institutional accredited investor and is acquiring the Shares for investment purposes and not for distribution
(provided that no transferor who has purchased shares from any person other than a QIB or an institutional accredited investor pursuant to clause (iii) shall be permitted to transfer any Shares so purchased by it to an institutional accredited investor pursuant to this clause (iv) prior to the expiration of the "one year restricted period" (within the meaning of Rule 903(c)(3) of Regulation S under the Securities Act)), (v) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act, or (vi) pursuant to an effective registration statement under the Securities Act and, in each case in accordance with any applicable securities laws of any state of the United States or other jurisdictions, and we will notify any purchaser of the Shares from us of the above resale restriction, if then applicable. We further understand and agree that, in connection with any transfer of the Shares by us pursuant to clause (iii), (iv) or (v) of the previous sentence, we and the transferee of the Shares will deliver to the Company and the Transfer Agent certificates which may be obtained from the Company and the Transfer Agent and such other certificates and other information, including an opinion of counsel, as the Company and the Transfer Agent may request, to confirm that any such transfer complies with the foregoing restrictions.
We are able to fend for ourselves in the transactions contemplated by the Offering Memorandum relating to the Shares, we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Shares, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment for an indefinite period of time and can afford the complete loss of such investment.
3. We have made ourselves familiar with the rules and restrictions set forth in Regulation S.
4. We have not undertaken any activity for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market for any of the Shares being offered in reliance on Regulation S.
5. We understand that the Company and Friedman, Billings, Ramsey & Co., Inc., as the initial purchaser of the Shares (the "Initial Purchaser"), and others will rely upon the truth and accuracy of the acknowledgments, representations and agreements herein and we agree that if any of the acknowledgments, representations and warranties deemed to have been made by us by our purchase of Shares, for our own account or for one or more accounts as to each of which we exercise sole investment discretion, are no longer accurate, we shall promptly notify the Company and the Initial Purchaser.
6. We are not a U.S. person (and are not purchasing for the account or benefit of a U.S. person) within the meaning of Regulation S under the Securities Act.
7. Our principal address is outside the United States and we were outside the United States at the time that any offer of the Shares was made to us and the time that the buy order for our purchase of the Shares was originated.
8. We understand that we and our professional advisor(s), if any, have the right to ask questions of and receive answers from the Company and its officers and directors, and to obtain such information concerning the terms and conditions of the offering of the Shares to the extent that the Company possesses the same or can acquire it without unreasonable effort or expense, as we and our advisor(s), if any, deem necessary to verify the accuracy of the information referred to in the Offering Memorandum pursuant to which the Company is offering the Shares to certain qualified offerees. We represent and agree that prior to our agreement to purchase Shares we and our professional advisor(s), if any, will have asked such questions, received such answers and obtained such information as we deem necessary to verify the accuracy (i) of the information referred to in the Offering Memorandum and (ii) of any other information that we deem relevant to making an investment decision with respect to the Shares.
9. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
By:_________________________________
EXHIBIT D
NOTICE TO INVESTORS
OFFERS AND SALES BY THE INITIAL PURCHASER
The Shares have not been registered under the Securities Act and may not be offered or sold except in accordance with an applicable exemption from the registration requirements thereof. Accordingly, the Shares are being offered and sold only (1) in the United States to "qualified institutional buyers" as defined in Rule 144A under the Securities Act ("Qualified Institutional Buyers") and to a limited number of other institutional "accredited investors" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act ("Accredited Investors") in a private sale exempt from the registration requirements of the Securities Act, and (2) outside the United States to non-U.S. persons ("foreign purchasers") in reliance upon Regulation S under the Securities Act. Each Qualified Institutional Buyer that is a purchaser of Shares from the Initial Purchaser will be required to sign a certificate in the form of Exhibit A hereto. Each institutional Accredited Investor that is a purchaser of Shares from the Initial Purchaser will be required to sign a certificate in the form of Exhibit B hereto. Each foreign purchaser that is a purchaser of Shares from the Initial Purchaser ("Initial Foreign Purchaser") will be required to sign a certificate in the form of Exhibit C hereto.
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of the Shares will be deemed to have represented and agreed as follows:
1. Either:
(a) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is not acquiring the Shares for the account or benefit of any U.S. person and, at the time its buy order for the Shares was originated and at the time that any offer for the Shares was made to it, it was outside the United States; it has made itself familiar with the rules and restrictions set forth in Regulation S; and it has not undertaken any activity for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market for any of the Shares being offered in reliance on Regulation S; or
(b) it is a Qualified Institutional Buyer within the meaning of Rule 144A promulgated under the Securities Act and is aware that any sale of the Shares to it will be made in reliance on Rule 144A. Such acquisition will be for its own account or for the account of another Qualified Institutional Buyer; or
(c) it is an institutional "Accredited Investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or, if the Shares are to be
Exh. D-1
purchased for one or more accounts for which it is acting as fiduciary or agent, each such investor account is an institutional Accredited Investor on a like basis; it is acquiring the Shares for its own account (or such investor accounts) and not with a view to or for resale in connection with any distribution or public offering thereof in violation of the Securities Act; it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing any of the Shares; it is aware that it may be required to bear the economic risk of an investment in the Shares for an indefinite period of time and it (or such account) is able to bear such risk for an indefinite period; and the Shares were not offered or sold to it by any form of general solicitation or general advertising;
2. it acknowledges that the Shares have not been registered under the Securities Act and may not be sold except as permitted below;
3. it understands and agrees (x) that such Shares are being offered
only in a transaction not involving any public offering within the meaning
of the Securities Act, and (y) that (A) if within three years (or such
shorter period as may then be applicable under the Securities Act regarding
the holding period for securities under Rule 144(k) of the Securities Act
or any successor rule) after the date of original issuance of the Shares or
if within three months after it ceases to be an affiliate (within the
meaning of Rule 144 under the Securities Act) of the Company, it decides to
resell, pledge or otherwise transfer such Shares on which the applicable
legend set forth below appears, such Shares may be resold, pledge or
transferred only (i) to the Company, (ii) so long as such Shares are
eligible for resale pursuant to Rule 144A, to a person who the transferor
reasonably believes is a Qualified Institutional Buyer that purchases for
its own account or for the account of a Qualified Institutional Buyer to
whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A (as indicated by the box checked by the transferor on
the Certificate of Transfer on the reverse of the certificate representing
the Shares if such Shares are not in book-entry form), (iii) in an offshore
transaction in accordance with Regulation S (as indicated by the box
checked by the transferor on the Certificate of Transfer on the reverse of
the certificate representing the Shares if such Shares are not in book-
entry form), and if such transfer is being effected pursuant to this clause
(iii) prior to the expiration of the "one year restricted period" (within
the meaning of Rule 903 (c)(3) of Regulation S), the transferee shall have
certified to the Company and the Transfer Agent that such transferee is a
non-U.S. Person (within the meaning of Regulation S) and that such
transferee is acquiring the Shares in an offshore transaction (within the
meaning of Regulation S), (iv) to an institutional Accredited Investor
(as indicated by the box checked by the transferor on the Certificate of
Transfer on the reverse of the certificate representing the Shares if such
Shares are not in book-entry form) who has certified to the Company and the
Transfer Agent that such transferee is an institutional Accredited Investor
and is acquiring the Shares for investment purposes and not for
distribution (provided that no Purchaser who has purchased Shares from any
Exh. D-2
person other than a Qualified Institutional Buyer or an institutional
Accredited Investor pursuant to clause (iii) shall be permitted to transfer
any Shares so purchased by it to an Institutional Accredited Investor
pursuant to this clause (iv) prior to the expiration of the "one year
restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S )), (v) pursuant to an exemption from registration under the Securities
Act provided by Rule 144 (if applicable) under the Securities Act, or (vi)
pursuant to an effective registration statement under the Securities Act in
each case in accordance with any applicable securities laws of any state of
the United States or other jurisdictions; (B) the purchaser will, and each
subsequent holder is required to, notify any purchaser of Shares from it of
the resale restrictions referred to in (A) above, if then applicable; and
(C) with respect to any transfer of Shares pursuant to clauses (A)(iii),
(iv) or (v) above, such holder and the transferee will deliver to the
Company and the Transfer Agent certificates which may be obtained from the
Company and such other certificates and other information, including an
opinion of counsel, as they may reasonably require to confirm that the
transfer by it to the transferee complies with the foregoing restrictions;
4. it understands that the notification requirements referred to in
3. above will be satisfied by virtue of the fact that the following legend
will be placed on the certificates representing the Shares unless otherwise
agreed by the Company:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE THIRD ANNIVERSARY (OR SUCH SHORTER PERIOD AS MAY THEN BE APPLICABLE UNDER THE SECURITIES ACT) OF THE ISSUANCE HEREOF (OR OF ANY PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED PRIOR TO THE EXPIRATION
Exh. D-3
OF THE "ONE YEAR RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED FROM THE COMPANY IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRANSFER AGENT, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION (PROVIDED THAT NO PURCHASER WHO HAS PURCHASED SHARES FROM ANY PERSON OTHER THAN A QUALIFIED INSTITUTIONAL BUYER OR AN INSTITUTIONAL ACCREDITED INVESTOR PURSUANT TO CLAUSE (3) SHALL BE PERMITTED TO TRANSFER ANY SHARES SO PURCHASED BY IT TO AN INSTITUTIONAL ACCREDITED INVESTOR PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "ONE-YEAR RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATION S)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTIONS; AND (B) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. WITH RESPECT TO ANY TRANSFER OF SECURITIES PURSUANT TO CLAUSES (A)(3), (4) AND (5) ABOVE, THE HOLDER OF THIS SECURITY AGREES THAT IT AND THE TRANSFEREE WILL FURNISH TO THE COMPANY AND THE TRANSFER AGENT CERTIFICATES IN THE RESPECTIVE FORMS ATTACHED TO THIS CERTIFICATE AND SUCH OTHER CERTIFICATES AND OTHER INFORMATION, INCLUDING AN OPINION OF COUNSEL, AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT TO THE TRANSFEREE OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE TRANSFEROR THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR ANY ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 901 UNDER) REGULATION S UNDER THE SECURITIES ACT";
Exh. D-4
5. it understands that the Company, the Initial Purchaser and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agrees that if any of the acknowledgments, representations, warranties and agreements deemed to have been made by it by its purchase of the Shares are no longer accurate, it shall promptly notify the Company and the Initial Purchaser. If it is acquiring the Shares as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and it has full power to make the foregoing acknowledgments, representations, warranties and agreements on behalf of each such account;
6. if it is a purchaser in a sale that occurs outside the United States within the meaning of Regulation S under the Securities Act, it acknowledges that until the expiration of the "one year restricted period" within the meaning of Rule 903 of Regulation S under the Securities Act, any offer or sale of the Shares shall not be made by it within the United States or to, or for the account or benefit of, a U.S. person within the meaning of Rule 902(o) of the Securities Act; and
7. it understands that the sale of Shares to Plans is in no respect a representation by the Company, the Initial Purchaser or any other person associated with the sale of the Shares that such Shares meet all relevant legal requirements with respect to investments by Plans generally or any particular Plan, or that such Shares are otherwise appropriate for Plans generally or any particular Plan.
Exh. D-5
EXHIBIT E
FORM OF OPINION OF COUNSEL TO THE COMPANY
[Letterhead of Morgan, Lewis & Bockius LLP]
Date
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
We have acted as counsel to Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"), in connection with the preparation of a preliminary offering memorandum, dated January 27, 1997 (the "Preliminary Memorandum"), and a final offering memorandum, dated February 12, 1997 (the "Final Memorandum"), relating to the sale by the Company to you (the "Initial Purchaser") of 3,600,000 shares (the "Shares") of its common stock, par value $.01 per share (the "Common Stock").
The Shares are being sold pursuant to a Purchase Agreement, dated February 12, 1997 (the "Purchase Agreement"), between the Company and the Initial Purchaser.
In connection with rendering the opinions expressed herein, we have examined,
among other things, copies of (i) the Articles of Incorporation and the Articles
of Amendment and Restatement of the Company, each as amended to date, (ii) the
by-laws of the Company, as amended to date, (iii) the Preliminary Memorandum,
(iv) the Final Memorandum, (v) the Purchase Agreement and (vi) the Registration
Rights Agreement, dated February 12, 1997, between the Company and the Initial
Purchaser (the "Registration Rights Agreement").
We have also examined originals, or copies satisfactory to us, of all such corporate records, agreements, certificates, governmental orders, permits and other documents as we have deemed relevant and necessary as a basis for the opinions hereinafter expressed. In such examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original documents of all documents submitted to us as copies. As to any facts material to such opinions (including determinations with respect to the question of materiality to the Company's business), we have relied, among other things, upon the representations and warranties of the Company and the Initial Purchaser in the Purchase
Exh. E-1
Agreement, certificates of public officials and certificates of officers or other representatives of the Company.
We have participated in conferences with representatives of the Company, representatives of the independent auditors of the Company and representatives of the Initial Purchaser, at which conferences the contents of the Preliminary Memorandum and the Final Memorandum were discussed and, although we have not established or confirmed factual matters and are not passing upon and do not assume any responsibility for the factual accuracy or completeness of the Preliminary Memorandum or the Final Memorandum, on the basis of the foregoing nothing has come to our attention to cause us to believe that the Preliminary Memorandum, as of its date, or the Final Memorandum, as of the date hereof (except for financial statements and schedules and other financial and statistical data included therein, as to which we state no belief) contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
The opinions expressed below are limited to the laws of the State of New York, United States Federal law and the Maryland General Corporation Law, except to the extent provided in paragraph 2 of this opinion letter. The opinion expressed in paragraph 1 is based solely upon our review of a Certificate of Good Standing from the State Department of Assessments and Taxation of the State of Maryland. The opinion in the first sentence of paragraph 2 is bases solely upon our review of a Certificate of Existence from the New Jersey Department of State. The opinions expressed below are also subject to the qualifications that we have assumed the due authorization, execution and delivery by each party thereto other than the Company of the Purchase Agreement and the Registration Rights Agreement (collectively, the "Agreements"), the legal right and power of each such party under all applicable laws and regulations to execute, deliver and perform its obligations under the Agreements, and the validity, binding effect and enforceability of the Agreements against such persons in accordance with the terms thereof. Whenever our opinion with respect to the existence or absence of facts is indicated to be based on our knowledge, we are referring only to the actual knowledge (after such inquiry as we have considered appropriate) of those of our attorneys who have represented the Company in connection with the transactions contemplated by the Agreements.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland.
2. The Company is authorized to transact business as a foreign corporation in the State of New Jersey and such authorization is in full force and effect. We are not aware of any other state in which the Company is required to be qualified to transact business as a foreign corporation and in which the failure to be so qualified would have a material adverse effect.
Exh. E-2
3. The Company has the corporate power to own or lease its properties and conduct is business as described in the Final Memorandum, and the Company has the corporate power to enter into the Agreements and to carry out the terms and provisions thereof to be carried out by it.
4. To our knowledge, the Company has no subsidiaries and does not own, directly or indirectly, any shares of stock or other equity securities of any corporation or any equity interest in any firm, partnership, join venture, association or other entity.
5. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any statutory preemptive rights or, to our knowledge, other preemptive rights or other rights to subscribe for or purchase securities; the Shares have been duly authorized by all necessary corporate action of the Company and, when issued, paid for and delivered pursuant to the Purchase Agreement, will be validly issued, fully paid and nonassessable; no holders of outstanding shares of capital stock of the Company are entitled as such to any statutory preemptive rights or, to our knowledge, other preemptive or other rights to subscribe for any of the Shares; and, to our knowledge, no holders of securities of the Company are entitled to have such securities registered under the Securities Act of 1933, as amended (the "Securities Act"), other than pursuant to the Registration Rights Agreement.
6. The statements set forth under the headings "Description of Capital Stock," "ERISA Consideration" and "Certain Federal Income Tax Considerations" in the Final Memorandum, insofar as such statements constitute matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, have been reviewed by us and are accurate in all material respects.
7. The execution and delivery of the Agreements have been duly and validly authorized by all necessary corporate action of the Company, the Agreements have been duly executed and delivered by the Company, and each Agreement (except as to those provisions relating to indemnity or contribution for liabilities arising under the Securities Act as to which we express no opinion) is the valid and binding agreement of the Company, enforceable against the Company in accordance with its respective terms.
8. To our knowledge, (a) no legal or govenmental proceedings are pending to which the Company is a party or to which the property of the Company is subject and (b) no such proceedings are threatened against the Company or with respect to any of its properties.
9. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by the Agreements, except for such consents, approvals, authorizations or orders as have been obtained, the registration statement to be filed pursuant to the Registration Rights Agreement which, in accordance with the terms thereof, must be declared effective by the Securities and Exchange
Exh. E-3
Commission, and such consents, approvals, authorizations or orders as may be required under the blue sky laws of any jurisdiction in conneciton with the purchase and resale of the Shares by the Initial Purchaser.
11. It is not necessary in connection with the offer, sale and delivery of the Shares in the manner contemplated by the Purchase Agreement, the Preliminary Memorandum and the Final Memorandum to register the Shares under the Securities Act, except as is contemplated by the Registration Rights Agreement.
12. Assuming that at all times either (a)(i) the Company's outstanding
securities (other than short-term paper) are beneficially owned by not more than
100 persons within the meaning of Section 3(c)(1) of the Investment Company Act
of 1940, as amended ("1940 Act"), and (ii) the Company is not making and does
not at any such time propose to make, a public offering of its securities, or
(b)(i) the Company is not engaged in the business of issuing redeemable
securities, face-amount certificates of the installment type or periodic payment
plan certificates, and (ii) the Company is primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate within the meaning of Section 3(c)(5)(C) of the 1940 Act, the
Company is not, and the transactions contemplated by the Purchase Agreement will
not cause the Company to become, an "investment company" under the 1940 Act. We
note for your information that there are other available exceptions under the
1940 Act from the definition of "investment company" thereunder.
13. The specimen stock certificate of the Company is in due and proper form under Maryland law to evidence shares of the Common Stock, has been duly authorized and approved by the Board of Directors of the Company and complies with all legal requirements; and the Common Stock conforms in all material respects to the description contained in the Final Memorandum.
14. To our knowledge, the Company is not in violation of its articles of incorporation or by-laws or other organizational documents or in breach of or default under any provision of any Material Agreement, except where such default would not have a Material Adverse Effect.
Exh. E-4
16. Assuming that the Company does not solicit, accept or receive from others funds, securities or property, either directly or through capital contributions, the sale of stock or otherwise, for the purpose of trading in any commodity (as defined in the Commodity Exchange Act, as amended (the "Commodity Act")) for future delivery on or subject to the rules of any contract market (as defined in the Commodity Act), the Company is not required to be registered as a commodity pool operator under the Commodity Act.
Our opinon in paragraph 7 is subject to (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar laws affecting the enforcement of creditors' rights generally, (ii) certain laws and judicial decisions relating to certian rights or remedies which, among other things, may affect the availability of the remedies provided in the Agreements, and (iii) general equitable principles (whether condsidered in a proceeding in equity or at law).
In connection with our opinion set forth in paragraph 11 above, we have assumed
(i) that the offer, issuance, sale and delivery of the Shares to you and the
reoffer, resale and delivery thereof to subsequent purchasers have been
conducted solely in the mangger contemplated by the Preliminary Memorandum, the
Final Memorandum and the Purchase Agreement, (ii) the accuracy of the
representations and confirmations contained in the Preliminary Memorandum, the
Final Memorandum, the Purchase Agreement and the Investor Letters referred to
below, (iii) that each offer and sale of Shares made in reliance on Regulation S
has been and will be made in an offshore transaction (as defined in Regulation
S) and to a person who is not a U.S. person (as defined in Regulation S) or a
person acquiring the securities for the account or benefit of any U.S. person
who has exeucted and delivered to the Initial Purchaser and the Company and
Investor Letter in the form of Exhibit C to the Purchase Agreement, (iv) that
each offer and sale of Shares made in reliance on Rule 144A has been and will be
made to a Qualified Institutional Buyer (as defined in Rule 144A under the
Securities Act) which has been made aware that the seller of the Shares may rely
on the exemption from registration provided under Rule 144A, which has been
provided with the information described in Rule 144A(d)(4) under the Securities
Act, and which has executed a certificate in the form of Exhibit A to the
Purchase Agreement, and (v) that each offer and sale of Shares to institutional
accredited investors has been and will be made to a person with whom the Initial
Purchaser has a preexisting relationship as a result of which the Initial
Purchaser has reason to believe that such person has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of
Exh. E-5
an investment in the Shares, and that each such institutional accredited investor has executed and delivered to the Company and Investor Letter in form of Exhibit B to the Purchase Agreement.
This opinion is furnished by us at your request for your sole benefit and this opinion is not to be used, circulated, quoted or otherwise referred to for any other purpose. No other person or entity shall be entitled to rely on this opinon without our express written consent. This opinon shall not be published or reproduced in any manner or distributed or circulated to any person or entity without our express written consent. Our opinion is limited to the matters stated herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein.
Very truly yours,
Exh. E-6
EXHIBIT 10.2
COMMON STOCK
REGISTRATION RIGHTS AGREEMENT
Dated as of February 12, 1997
by and between
ANNALY MORTGAGE MANAGEMENT, INC.
as the Company,
and
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as the Initial Purchaser
This Registration Rights Agreement is made and entered into as of February 12, 1997, by and between Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"), and Friedman, Billings, Ramsey & Co., Inc. (the "Initial Purchaser").
This Agreement is made pursuant to the purchase agreement (the "Purchase Agreement"), dated February 12, 1997, between the Company and the Initial Purchaser (the "Initial Purchaser"). In order to induce the Initial Purchaser to enter into the Purchase Agreement, the Company has agreed to provide the registration rights provided for in this Agreement to the Initial Purchaser and its respective direct and indirect transferees. The execution of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreement.
The parties hereby agree as follows:
As used in this Agreement, the following terms shall have the following meanings:
For the purposes of this definition,"control," when used with respect to any person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing.
including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference, if any, in such prospectus.
(i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in effecting such registration, qualification, or compliance, unless the Company is already subject to service or required to be so qualified in such jurisdiction and except as may be required by the Securities Act, or
(ii) if within 14 days after its receipt of a written request to effect such registration, the Company causes to be delivered to the Holders an opinion of Morgan, Lewis & Bockius LLP or other counsel reasonably acceptable to the Holders to the effect that the proposed disposition of Registrable Shares by the Holders will not require registration or qualification under the Securities Act, it being specifically understood and agreed that the Holders will promptly furnish to the Company and such counsel all information such counsel may reasonably request in order to enable such counsel to determine whether it would be able to render such opinion.
number that could be sold in such prior registered Underwritten Offerings, then on any one occasion, if the Holders of greater than 50% of the Registrable Shares request in writing that the Company register all or part of the Registrable Shares, representing more than 50% of the Registrable Shares then outstanding, the Company will:
(1) promptly give written notice of the proposed registration to all other Holders;
(2) prepare and use its best efforts to file with the Commission within 60 days of receipt of the demand therefor a Registration Statement and such other documents including a Prospectus and shall use its best effort to effect such registration (including, without limitation, filing any appropriate pre- effective or post-effective amendments, appropriate qualifications under applicable blue sky or other sate securities laws as may be necessary in the opinion of both counsel for the Company and counsel for the Holders, in order to comply with the Securities Act) at the earliest possible time so as to permit or facilitate the sale and distribution of all or such portion of the Registrable Shares as are specified in such request, together with all or such portion of the Registrable Shares of any Holder or Holders joining in such request as are specified in a written request received by the Company within 20 days after written notice from the Company is effective.
(i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in effecting such registration, qualification, or compliance, unless the Company is already subject to service or required to be so qualified in such jurisdiction and except as may be required by the Securities Act; or
(ii) if, within 14 days after its receipt of a written request to effect such registration, the Company causes to be delivered to the Holders an opinion of Morgan, Lewis & Bockius LLP or other counsel reasonably acceptable to the Holders to the effect that the proposed disposition of Registrable Shares by the Holders will not require registration or qualification under the Securities Act, it being specifically understood and agreed that the Holders will promptly furnish to the Company and such counsel all information such counsel may reasonably request in order to enable such counsel to determine whether it would be able to render such opinion.
In connection with the obligations of the Company with respect to any registration pursuant to this Agreement, the Company shall use its best efforts to effect or cause to be effected the registration of the Registrable Shares under the Securities Act to permit the sale of such Registrable Shares by the Holder or Holders in accordance with the Holders' intended method or methods of distribution, and the Company shall:
(a) prepare and file with the Commission, as specified in this Agreement, a Registration Statement, which Registration Statement shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective for the lesser of a period of 180 days (subject to the provisions of Section 2(c) hereof) or until all such Registrable Shares are sold in accordance with the intended distribution of such Shares;
(c) furnish to the Holder of Registrable Shares without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Shares; the Company consents to the use of any such Prospectus, including each preliminary Prospectus, by the Holder of Registrable Shares, if any, in connection with the offering and sale of the Registrable Shares covered by any such Prospectus;
(d) use its best efforts to register or qualify, or obtain exemption for registration or qualification for, all Registrable Shares by the time the applicable Registration Statement is declared effective by the Commission under all applicable state securities or "blue sky" laws of such jurisdictions as the Holder of Registrable Shares covered by a Registration Statement shall
(e) notify the Holder of Registrable Shares promptly and, if requested by such Holder, confirm such advice in writing (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, and (iii) of the happening of any event during the period a Registration Statement is effective as a result of which such Registration Statement or the related Prospectus contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (iv) at the request of any such Holder, promptly to furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchaser of such securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading;
(f) upon request by the Holder, furnish to the Holder of Registrable Shares copies of any request by the Commission or any state securities authority of amendments or supplements to a Registration Statement and Prospectus or for additional information;
(g) make every reasonable effort to avoid the issuance of, or, if issued, obtain the withdrawal of any enjoining order suspending the use or effectiveness of a Registration Statement or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Shares for sale in any jurisdiction, at the earliest possible moment;
(h) upon request furnish to the Holder of Registrable Shares, without charge, at least one conformed copy of each Registration Statement and any post- effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested);
(l) use its best efforts (including, without limitation, seeking to cure any deficiencies (within the Company's control) cited by the exchange or market in the Company's listing application) to list all Registrable Shares on the American Stock Exchange or The NASDAQ National Market (or the NASDAQ Small Cap Market if not qualified for the NASDAQ National Market) (unless the Company qualifies and chooses to list all Registrable Shares on the New York Stock Exchange, in which event the Company shall use its best efforts to list all Registrable Shares on the New York Stock Exchange);
(m) provide a CUSIP number for all Registrable Shares, not later than the effective date of the Registration Statement;
(n) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its securityholders, as soon as reasonably practicable, earnings statements covering at least 12 months which satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 (or any similar rule promulgated under the Securities Act) thereunder;
(o) provide and cause to be maintained a transfer agent for all Registrable Shares covered by any Registration Statement from and after a date not later than the effective date of such Registration Statement; and
(p) In connection with any sale or transfer of the Registrable Shares that will result in such securities no longer being the Registrable Shares, cooperate with the Holders and the representative of the underwriters, if any, to facilitate the timely preparation and delivery of certifi cates representing the Registrable Shares to be sold, which certificates shall not bear any restrictive legends and to enable such Registrable Shares to be in such denominations and registered in such names as the representative of the underwriters, if any, or Holders may request at least two Business Days prior to any sale of the Registrable Shares.
The Company may require the Holder of Registrable Shares to furnish to the Company such information regarding the proposed distribution by such Holder of such Registrable Shares as the Company may from time to time reasonably request in writing.
comply with Commission requirements, in each case under circumstances that would make it impractical or inadvisable to cause the Registration Statement (or such filings) to become effective or to promptly amend or supplement the Registration Statement on a post-effective basis, as applicable.
In the case of an event which causes the Company to suspend the effectiveness of a Registration Statement (a "Suspension Event"), the Company may give notice (a "Suspension Notice") to the Holders to suspend sales of the Registrable Shares so that the Company may correct or update the Registration Statement (or such filings); provided, however, that such suspension shall continue only for so long as the Suspension Event or its effect is continuing. The Holders shall not effect any sales of the Registrable Shares pursuant to such Registration Statement (or such filings) at any time after it has received a Suspension Notice from the Company. If so directed by the Company, the Holders will deliver to the Company all copies of the Prospectus covering the Registrable Shares held by them at the time of receipt of the Suspension Notice. The Holders may recommence effecting sales of the Registrable Shares pursuant to the Registration Statement (or such filings) following further notice to such effect (an "End of Suspension Notice") from the Company, which End of Suspension Notice shall be given by the Company promptly following the conclusion of any Suspension Event.
(i) from and against any and all loss, claim, liability, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Registrable Shares were registered under the Securities Act including all documents incorporated therein by reference, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they
(ii) from and against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, if such settlement is effected with the written consent of the Company; and
(iii) from and against any and all expense whatsoever, as incurred (including reasonable fees and disbursements of counsel), incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not a party, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above;
the Holder shall be required to agree to such indemnification provisions as may be required by the Underwriter in connection with such Underwritten Offering.
registration rights hereunder are a material inducement to the Holder to purchase the Registrable Shares), in connection with the statements or omissions which resulted in such losses, claims damages, liabilities or expenses, as well as any other relevant equitable considerations. Notwithstanding the foregoing, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this
(i) if to the Company, as provided in the Purchase Agreement,
(ii) if to the Initial Purchaser, as provided in the Purchase Agreement, or
(iii) if to any other person who is then the registered Holder of any Registrable Shares, to the address of such Holder as it appears in the Common Stock register of the Company.
Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when (v) delivered by hand, if personally delivered, (w) one Business Day after being timely delivered to a next-day air courier, (x) five Business Days after being deposited in the mail, postage prepaid, if mailed, (y) when answered back, if telexed or (z) when receipt is acknowledged by the recipient's telecopier machine, if telecopied.
terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of the date first written above.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A.J. Farrell
_____________________________________
Name: Michael A. J. Farrell
Title: Chief Executive Officer and
Chairman of the Board
|
The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: /s/ James R. Kleeblatt
___________________________________
Name: James R. Kleeblatt
Title: Managing Director
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EXHIBIT 10.3
ANNALY MORTGAGE MANAGEMENT, INC.
LONG-TERM STOCK INCENTIVE PLAN
"Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
"Beneficiary" shall mean the person, persons, trust, or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under this Plan upon such Participant's death or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust, or trusts entitled by will or the laws of descent and distribution to receive such benefits.
"Affiliate" has the meanings set forth in Rule 12b-2 of the 1934 Act.
"Board" means the Board of Directors of the Company.
"Cause" shall mean Cause as defined in any employment or severance agreement then in effect between the Participant and the Company or any subsidiary, or if not defined therein or if there shall be no such agreement, shall mean: (i) the willful and continued failure by the Participant to substantially perform his or her duties for the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness), (ii) the willful engaging by the Participant in misconduct which is materially and financially injurious to the Company, or (iii) the Participant's conviction of a felony.
"Change in Control" shall be deemed to have occurred upon:
(i) the date of the acquisition by any "person" (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act), excluding the Company or
any of its subsidiaries or Affiliates, of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 50% or more of either the
then outstanding shares of common stock of the Company, or the then
outstanding voting securities entitled to vote generally in the election of
directors: or
(ii) the date the individuals who constitute the Board as of the date of this Agreement, or who become directors upon or prior to the first offering of shares of the Company's Stock (the "Incumbent Board") cease for any reason to constitute at least a majority of the members of the Board, provided that any person becoming a director subsequent to the effective date of this Agreement whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than any individual whose nomination for election to Board membership was not endorsed by the Company's management prior to, or at the time of, such individual's initial nomination for election) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or
(iii) the consummation of a merger, consolidation, recapitalization, reorganization, sale or disposition of all or a substantial portion of the Company's assets, or the issuance of shares of stock of the Company in connection with the acquisition of the stock or assets of another entity, provided, however, that a Change in Control shall not occur under this clause (iii) if consummation of the transaction would result in at least 50% of the total voting power represented by the voting securities of the Company (or, if not the Company, the entity that succeeds to all or substantially all of the Company's business) outstanding immediately after such transaction being beneficially owned (within the meaning of Rule 13d-3 promulgated pursuant to the Exchange Act) by at least 50% of the holders of outstanding voting securities of the Company immediately prior to the transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction.
"Code" means the Internal Revenue Code of 1986, as amended from time to time. References to any provision of the Code shall be deemed to include regulations thereunder and successor provisions and regulations thereto.
"Committee" means the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan and, until the Board shall have designated the Compensation Committee, the entire Board.
"Common Stock" means the shares of common stock, par value $.01 per share, of the Company.
"Company" means Annaly Mortgage Management, Inc., a corporation organized under the laws of the State of Maryland, and any successor thereto; provided that unless otherwise provided in this Plan, all references in this Plan to employment by the Company shall include employment by any subsidiary of the Company, and all references to termination of employment with the Company shall include the sale of a subsidiary of the Company by which the Participant was employed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. References to any provision of the Exchange Act shall be deemed to include rules thereunder and successor provisions and rules thereto.
"Fair Market Value" means, with respect to Stock, Awards, or other property, (a) if the Stock is listed on a securities exchange or is traded over the NASDAQ National Market System, the closing sales price of the Stock on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (b) if the Stock is not listed on a securities exchange or traded over the NASDAQ National market System, the mean between the bid and offered prices of the Stock as quoted by the National Association of Securities Dealers through NASDAQ for such date, provided, that if the Committee determines that the fair market value of the Stock is not properly reflected by such NASDAQ quotations, the "Fair Market Value" of the Stock will mean the fair market value as determined by such other method as the Committee determines in good faith to be reasonable.
"ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code.
"Non-Employee Director" shall mean a member of the Board who is not otherwise an employee of the Company or any subsidiary.
"Participant" means a person who, at a time when eligible under Section 5 hereof, has been granted an Award under the Plan.
"Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act.
"Stock" means the Common Stock and such other securities as may be substituted for Stock or such other securities pursuant to Section 4.
(i) to select Participants to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to each Participant;
(iii) to determine the number of Awards to be granted, the number of shares of Stock to which an Award will relate, the terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, any restriction or condition, any schedule for lapse of restrictions or conditions relating to transferability or forfeiture, exercisability, or settlement of an Award, and waivers or accelerations thereof, and waivers of or modifications to performance conditions relating to an Award, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award;
(iv) to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(v) to determine whether, to what extent, and under what circumstances cash, Stock, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need not be identical for each Participant;
(vii) to adopt, amend, suspend, waive, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award Agreement, or other instrument hereunder; and
(ix) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan.
Other provisions of the Plan notwithstanding, the Board may perform any function of the Committee under the Plan, including without limitation for the purpose of ensuring that transactions under the Plan by Participants who are then subject to Section 16 of the Exchange Act in respect of the Company are exempt under Rule 16b-3. In any case in which the Board is performing a function of the Committee under the Plan, each reference to the Committee herein shall be deemed to refer to the Board.
purposes of this Section 4(a). Any shares of Stock delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued shares or treasury shares.
dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.
payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock and factors that may influence the value of Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries. The Committee shall determine, and set forth in an Award Agreement, the terms and conditions of such Awards. Stock issued pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may be granted pursuant to this Section 6(h).
Company or any subsidiary. Awards granted in addition to or in tandem with other Awards or awards may be granted either as of the same time as or a different time from the grant of such other Awards or awards.
transferees during the lifetime of the Participant to the extent and on such terms as then may be permitted by the Committee.
EXHIBIT 10.4
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 27th day of January, 1997, is entered into by and between Michael A. J. Farrell (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company").
The Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. The Company is currently offering for sale shares of Common Stock as set forth in an offering memorandum dated January 27, 1997 (the "Offering").
In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows:
Company's business. Furthermore, the Executive shall exercise due diligence and care in the performance of his duties to the Company under this Agreement.
result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion.
waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees.
time performance of his duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to him by the Company, he shall not have returned to the full-time performance of his duties, the Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay the Executive his Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial incapacity due to physical or mental illness in which Executive shall not have been absent from his duties for six consecutive months and shall have returned to work on a full-time basis but is not able to perform at the same level as when hired and/or is not able to perform the same functions originally hired for ("Partial Disability"), the Company shall make reasonable efforts to accommodate the Executive's Partial Disability by modifying his job description appropriately, together with a commensurate adjustment in compensation; provided, however, the Company shall be required to so continue the employment of the Executive in the event of a Partial Disability of the Executive only if the Company determines, in its sole discretion, that it can create a position for which the Executive would be suited and that would be economically advantageous to the Company.
(i) A reduction in title and/or compensation of the Executive by the Board of Directors or the assignment of duties to the Executive not consistent with those of a senior executive of the Company, except in connection with the Company's termination of the Executive's employment for Cause pursuant to Section 6(c) or as otherwise expressly contemplated herein;
(iii) The relocation of the Company's principal executive offices to a location more than 50 miles from its location as of Effective Date or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to the extent necessary to meet the standard set forth in the last two sentences of Section 1; or
(iv) A Change in Control as defined in Section 8 below. The Executive agrees to provide the Company with thirty (30) days' prior written notice of any termination for Good Reason.
below) begins a tender or exchange offer, circulates a proxy to shareholders or takes other steps to effect a Change of Control, the Executive agrees that he will not voluntarily leave the employ of the Company, and will render services to the Company commensurate with his position, until such "person" has abandoned or terminated efforts to effect a Change of Control or until a Change of Control has occurred. In the event of a termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place.
Amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) equal consecutive monthly installments beginning on the first day of the month following the termination date.
Notwithstanding the immediately preceding sentence, if, as the result of the termination of the Executive's employment, the Executive and/or his otherwise eligible dependents or beneficiaries shall become ineligible for benefits under any one or more of the Company's benefit plans or the cost of providing such benefits exceeds 200% of the cost of providing such benefits to other members of senior management, the Company, at the Company's option, shall (i) continue to provide the Executive and his eligible dependents or beneficiaries with benefits at a level at least equivalent to the level of benefits for which the Executive and his dependents and beneficiaries were eligible under such plans immediately prior to the termination date or (ii) for any Fringe Benefit not so provided, the Company shall pay the Executive 200% of the cost of providing such Fringe Benefit to other members of senior management.
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax advisors selected by the Company and reasonably acceptable to
the Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in
section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Benefit Payments or (B) the amount of
excess parachute payments within the meaning of section 280G(b)(1) of the Code
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of section 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the termination date of employment, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such
state and local taxes based on the marginal rate referenced above. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the termination date, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess but only to the extent that such interest, penalties or additions would not have been reduced by prompt payment by the Executive to the appropriate tax authority of the Gross-Up Payments previously received) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Benefit Payments.
by seeking other employment, nor shall the amount of any payment provided for in this Section 7 be reduced by any compensation earned by the Executive as the result of employment with another employer after the termination date of employment, or otherwise. Except as set forth in this Section 7, following a termination governed by this Section 7, the Executive shall not be entitled to any other compensation or benefits set forth in this Agreement, except as may be separately negotiated by the parties and approved by the Board of Directors of the Company in writing in conjunction with the termination of Executive's employment under this Section 7.
(a) Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company any trustee or other fiduciary holding securities under an Executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than 9.8% of the combined voting power of the Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period
constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this section), (i) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (ii) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an Executive benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets.
or other equity holder with, or as an officer, director or employee of, any real estate investment trust whose business strategy is competitive with that of the Company, as determined by a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement. It is further expressly agreed that the Executive's interest in and employment by Fixed Income Discount Advisory Company or eNTR shall not be deemed to violate any provisions of this Section, regardless of the scope of the Executive's activities with such firm; provided, however, that the Executive shall not in such capacity provide services to any Competing REIT.
Competing REIT.
If to the Company: Timothy J. Guba
President
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
If to the Executive: Michael A. J. Farrell
Chief Executive Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
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A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson. Either party may change such party's address for notices by notice duly given pursuant hereto.
determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute.
covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Timothy J. Guba
---------------------------------------------
Name: Timothy J. Guba
Title: President
/s/ Michael A. J. Farrell
--------------------------------------
Michael A. J. Farrell
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EXHIBIT 10.5
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 27th day of January, 1997, is entered into by and between Timothy J. Guba (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company").
The Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. The Company is currently offering for sale shares of Common Stock as set forth in an offering memorandum dated January 27, 1997 (the "Offering").
In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows:
exercise due diligence and care in the performance of his duties to the Company under this Agreement.
result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion.
waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees.
time performance of his duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to him by the Company, he shall not have returned to the full-time performance of his duties, the Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay the Executive his Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial incapacity due to physical or mental illness in which Executive shall not have been absent from his duties for six consecutive months and shall have returned to work on a full-time basis but is not able to perform at the same level as when hired and/or is not able to perform the same functions originally hired for ("Partial Disability"), the Company shall make reasonable efforts to accommodate the Executive's Partial Disability by modifying his job description appropriately, together with a commensurate adjustment in compensation; provided, however, the Company shall be required to so continue the employment of the Executive in the event of a Partial Disability of the Executive only if the Company determines, in its sole discretion, that it can create a position for which the Executive would be suited and that would be economically advantageous to the Company.
(i) A reduction in title and/or compensation of the Executive by the Board of Directors or the assignment of duties to the Executive not consistent with those of a senior executive of the Company, except in connection with the Company's termination of the Executive's employment for Cause pursuant to Section 6(c) or as otherwise expressly contemplated herein;
(iii) The relocation of the Company's principal executive offices to a location more than 50 miles from its location as of Effective Date or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to the extent necessary to meet the standard set forth in the last two sentences of Section 1; or
(iv) A Change in Control as defined in Section 8 below. The Executive agrees to provide the Company with thirty (30) days' prior written notice of any termination for Good Reason.
below) begins a tender or exchange offer, circulates a proxy to shareholders or takes other steps to effect a Change of Control, the Executive agrees that he will not voluntarily leave the employ of the Company, and will render services to the Company commensurate with his position, until such "person" has abandoned or terminated efforts to effect a Change of Control or until a Change of Control has occurred. In the event of a termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place.
Amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) equal consecutive monthly installments beginning on the first day of the month following the termination date.
Notwithstanding the immediately preceding sentence, if, as the result of the termination of the Executive's employment, the Executive and/or his otherwise eligible dependents or beneficiaries shall become ineligible for benefits under any one or more of the Company's benefit plans or the cost of providing such benefits exceeds 200% of the cost of providing such benefits to other members of senior management, the Company, at the Company's option, shall (i) continue to provide the Executive and his eligible dependents or beneficiaries with benefits at a level at least equivalent to the level of benefits for which the Executive and his dependents and beneficiaries were eligible under such plans immediately prior to the termination date or (ii) for any Fringe Benefit not so provided, the Company shall pay the Executive 200% of the cost of providing such Fringe Benefit to other members of senior management.
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax advisors selected by the Company and reasonably acceptable to
the Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in
section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Benefit Payments or (B) the amount of
excess parachute payments within the meaning of section 280G(b)(1) of the Code
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of section 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the termination date of employment, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such
state and local taxes based on the marginal rate referenced above. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the termination date, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess but only to the extent that such interest, penalties or additions would not have been reduced by prompt payment by the Executive to the appropriate tax authority of the Gross-Up Payments previously received) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Benefit Payments.
by seeking other employment, nor shall the amount of any payment provided for in this Section 7 be reduced by any compensation earned by the Executive as the result of employment with another employer after the termination date of employment, or otherwise. Except as set forth in this Section 7, following a termination governed by this Section 7, the Executive shall not be entitled to any other compensation or benefits set forth in this Agreement, except as may be separately negotiated by the parties and approved by the Board of Directors of the Company in writing in conjunction with the termination of Executive's employment under this Section 7.
(a) Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company any trustee or other fiduciary holding securities under an Executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than 9.8% of the combined voting power of the Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period
constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this section), (i) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (ii) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an Executive benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets.
or other equity holder with, or as an officer, director or employee of, any real estate investment trust whose business strategy is competitive with that of the Company, as determined by a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement. It is further expressly agreed that the Executive's interest in and employment by Fixed Income Discount Advisory Company shall not be deemed to violate any provisions of this Section, regardless of the scope of the Executive's activities with such firm; provided, however, that the Executive shall not in such capacity provide services to any Competing REIT.
Competing REIT.
If to the Company: Michael A. J. Farrell
Chairman and Chief Executive Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
If to the Executive: Timothy J. Guba
President and Chief Operating Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
|
A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson. Either party may change such party's address for notices by notice duly given pursuant hereto.
right, in addition to any other relief granted by the court, to attorneys' fees based on a determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute.
with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A. J. Farrell ---------------------------------------- Name: Michael A. J. Farrell Title: Chairman and CEO /s/ Timothy J. Guba ---------------------------------------- Timothy J. Guba |
EXHIBIT 10.6
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 27th day of January, 1997, is entered into by and between Wellington J. St. Claire (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company").
The Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. The Company is currently offering for sale shares of Common Stock as set forth in an offering memorandum dated January 27, 1997 (the "Offering").
In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows:
The Company does hereby employ, engage and hire the Executive as Vice Chairman of the Board of the Company, and the Executive does hereby accept and agree to such hiring, engagement, and employment. The Executive's duties as Vice Chairman of the Board shall be such executive and managerial duties as the Board of Directors of the Company shall from time to time prescribe and as provided in the Bylaws of the Company. The Executive shall devote such time, energy and skill to the performance of her duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company's business. Furthermore, the Executive shall exercise due diligence and care in
the performance of her duties to the Company under this Agreement.
result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion.
waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees.
time performance of her duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to her by the Company, she shall not have returned to the full-time performance of her duties, the Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the full-time performance of her duties with the Company due to Disability, the Company shall continue to pay the Executive her Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs.
(ii) If, however, as a result of the Executive's partial incapacity due to physical or mental illness in which Executive shall not have been absent from her duties for six consecutive months and shall have returned to work on a full-time basis but is not able to perform at the same level as when hired and/or is not able to perform the same functions originally hired for ("Partial Disability"), the Company shall make reasonable efforts to accommodate the Executive's Partial Disability by modifying her job description appropriately, together with a commensurate adjustment in compensation; provided, however, the Company shall be required to so continue the employment of the Executive in the event of a Partial Disability of the Executive only if the Company determines, in its sole discretion, that it can create a position for which the Executive would be suited and that would be economically advantageous to the Company.
(d) TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive shall have the right to terminate this Agreement for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any one or more of the following events:
(i) A reduction in title and/or compensation of the Executive by the Board of Directors or the assignment of duties to the Executive not consistent with those of a senior executive of the Company, except in connection with the Company's termination of the Executive's employment for Cause pursuant to Section 6(c) or as otherwise expressly contemplated herein;
(iii) The relocation of the Company's principal executive offices to a location more than 50 miles from its location as of Effective Date or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to the extent necessary to meet the standard set forth in the last two sentences of Section 1; or
(iv) A Change in Control as defined in Section 8 below. The Executive agrees to provide the Company with thirty (30) days' prior written notice of any termination for Good Reason.
below) begins a tender or exchange offer, circulates a proxy to shareholders or takes other steps to effect a Change of Control, the Executive agrees that she will not voluntarily leave the employ of the Company, and will render services to the Company commensurate with his position, until such "person" has abandoned or terminated efforts to effect a Change of Control or until a Change of Control has occurred. In the event of a termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place.
Amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) equal consecutive monthly installments beginning on the first day of the month following the termination date.
Notwithstanding the immediately preceding sentence, if, as the result of the termination of the Executive's employment, the Executive and/or his otherwise eligible dependents or beneficiaries shall become ineligible for benefits under any one or more of the Company's benefit plans or the cost of providing such benefits exceeds 200% of the cost of providing such benefits to other members of senior management, the Company, at the Company's option, shall (i) continue to provide the Executive and his eligible dependents or beneficiaries with benefits at a level at least equivalent to the level of benefits for which the Executive and her dependents and beneficiaries were eligible under such plans immediately prior to the termination date or (ii) for any Fringe Benefit not so provided, the Company shall pay the Executive 200% of the cost of providing such Fringe Benefit to other members of senior management.
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any person affiliated with the Company or such person) shall be
treated as "parachute payments" within the meaning of section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax advisors selected by the Company and reasonably acceptable to
the Executive such other payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of section 280G(b)(4)(A) of
the Code, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered, within the meaning of
section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in
section 280G(b)(3) of the Code) allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of (A) the total amount of the Benefit Payments or (B) the amount of
excess parachute payments within the meaning of section 280G(b)(1) of the Code
(after applying clause (i), above), and (iii) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of section 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the termination date of employment, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such
state and local taxes based on the marginal rate referenced above. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the termination date, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess but only to the extent that such interest, penalties or additions would not have been reduced by prompt payment by the Executive to the appropriate tax authority of the Gross-Up Payments previously received) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Benefit Payments.
by seeking other employment, nor shall the amount of any payment provided for in this Section 7 be reduced by any compensation earned by the Executive as the result of employment with another employer after the termination date of employment, or otherwise. Except as set forth in this Section 7, following a termination governed by this Section 7, the Executive shall not be entitled to any other compensation or benefits set forth in this Agreement, except as may be separately negotiated by the parties and approved by the Board of Directors of the Company in writing in conjunction with the termination of Executive's employment under this Section 7.
8. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:
(a) Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company any trustee or other fiduciary holding securities under an Executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than 9.8% of the combined voting power of the Company's then outstanding securities; or
(b) During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period
constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this section), (i) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (ii) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or
(c) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an Executive benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or
(d) The shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets.
or other equity holder with, or as an officer, director or employee of, any real estate investment trust whose business strategy is competitive with that of the Company, as determined by a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement. It is further expressly agreed that the Executive's interest in and employment by Fixed Income Discount Advisory Company shall not be deemed to violate any provisions of this Section, regardless of the scope of the Executive's activities with such firm; provided, however, that the Executive shall not in such capacity provide services to any Competing REIT.
Competing REIT.
If to the Company: Michael A. J. Farrell
Chairman and Chief Executive Officer
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
If to the Executive: Wellington J. St. Claire
Vice Chairman of the Board
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Phone: (201) 223-1900
Fax: (201) 223-1230
|
A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson. Either party may change such party's address for notices by notice duly given pursuant hereto.
right, in addition to any other relief granted by the court, to attorneys' fees based on a determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute.
with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /S/ Timothy J. Guba
------------------------------------
Name: Timothy J. Guba
Title: President
/S/ Wellington J. St. Claire
-------------------------------------
Wellington J. St. Claire
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EXHIBIT 10.7
[LOGO AND LETTERHEAD OF PUBLIC SECURITIES ASSOCIATION APPEARS HERE]
MASTER REPURCHASE AGREEMENT
DATED AS OF ___________ ___, _____
BETWEEN: ___________________________
AND
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or other assets ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder.
2. DEFINITIONS
(a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party's inability to pay such party's debts as they become due;
(b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof;
(c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Buyer's Margin Percentage to the Repurchase Price for such Transaction as of such date;
(d) "Buyer's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may
be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction;
(e) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(f) "Income", with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon;
(g) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(h) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(i) "Margin Notice Deadline", the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice);
(j) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities);
(k) "Price Differential", with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction);
(l) "Pricing Rate", the per annum percentage rate for determination of the Price Differential;
(m) "Prime Rate", the prime rate of U.S. commercial banks as published in The Wall Street Journal (or, if more than one such rate is published, the average of such rates);
(n) "Purchase Date", the date on which Purchased Securities are to be transferred by Seller to Buyer;
(o) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof;
(p) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof;
(q) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof;
(r) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination;
(s) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Seller's Margin Percentage to the Repurchase Price for such Transaction as of such date;
(t) "Seller's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or
both), as shall be agreed, shall promptly deliver to the other party a written
confirmation of each Transaction (a "Confirmation"). The Confirmation shall
describe the Purchased Securities (including CUSIP number, if any), identify
Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price,
(iii) the Repurchase Date, unless the Transaction is to be terminable on demand,
(iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v)
any additional terms or conditions of the Transaction not inconsistent with this
Agreement. The Confirmation, together with this Agreement, shall constitute
conclusive evidence of the terms agreed between Buyer and Seller with respect to
the Transaction to which the Confirmation relates, unless with respect to the
Confirmation specific objection is made promptly after receipt thereof. In the
event of any conflict between the terms of such Confirmation and this Agreement,
this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such
Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer).
(c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice.
(d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller.
(e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions).
(f) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer and Seller under subparagraphs
(a) and (b) of this Paragraph to require the elimination of a Margin Deficit or
a Margin Excess, as the case may be, may be exercised whenever such a Margin
Deficit or Margin Excess exists with respect to any single Transaction hereunder
(calculated without regard to any other Transaction outstanding under this
Agreement).
5. INCOME PAYMENTS
Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would be so entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of
Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all Income thereon and other proceeds thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer.
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller's interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof.
Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities.
*Language to be used under 17 C.F.R. (S)403.4(e) if Seller is a government securities broker or dealer other than a financial institution.
**Language to be used under 17 C.F.R. (S)403.5(d) if Seller is a financial institution.
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which Seller retains custody of Purchased Securities, the
parties expressly agree that Buyer shall be deemed, for purposes of subparagraph
(a) of this Paragraph, to have agreed to and accepted in this Agreement
substitution by Seller of other Securities for Purchased Securities; provided,
however, that such other Securities shall have a Market Value at least equal to
the Market Value of the Purchased Securities for which they are substituted.
10. REPRESENTATIONS
Each of Buyer and Seller represents and warrants to the other that (i) it is
duly authorized to execute and deliver this Agreement, to enter into
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing, in the form of an annex hereto or otherwise, in advance of
any Transaction by the other party hereto, as agent for a disclosed principal),
(iii) the person signing this Agreement on its behalf is duly authorized to do
so on its behalf (or on behalf of any such disclosed principal), (iv) it has
obtained all authorizations of any governmental body required in connection with
this Agreement and the Transactions hereunder and such authorizations are in
full force and effect and (v) the execution, delivery and performance of this
Agreement and the Transactions hereunder will not violate any law, ordinance,
charter, by-law or rule applicable to it or any agreement by which it is bound
or by which any of its assets are affected. On the Purchase Date for any
Transaction Buyer and Seller shall each be deemed to repeat all the foregoing
representations made by it.
11. EVENTS OF DEFAULT
In the event that (i) Seller fails to transfer or Buyer fails to purchase
Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to
repurchase or Buyer fails to transfer Purchased Securities upon the applicable
Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof,
(iv) Buyer fails, after one business day's notice, to comply with Paragraph 5
hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi)
any representation made by Seller or Buyer shall have been incorrect or untrue
in any material respect when made or repeated or deemed to have been made or
repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or
its intention not to, perform any of its obligations hereunder (each an "Event
of Default"):
(a) The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Insolvency) give notice to the defaulting party of the exercise of such option as promptly as practicable.
(b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations in such Transactions to repurchase all Purchased Securities, at the Repurchase Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession or control.
(c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party.
(d) If the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may:
i. as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and
ii. as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source.
Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities).
(e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party
for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder.
(f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction.
(h) To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party's rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate.
(i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law.
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted.
13. NOTICES AND OTHER COMMUNICATIONS
Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence.
14. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.
15. NON-ASSIGNABILITY; TERMINATION
(a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding.
(b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof.
17. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date.
18. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed.
(b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long
as it is a Seller in any outstanding Transaction involving a Plan Party.
19. INTENT
(a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).
(b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended.
(c) The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Transaction hereunder is a "qualified financial contract," as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).
(d) It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation", respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA).
20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a broker or
dealer registered with the Securities and Exchange Commission ("SEC") under
Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities
Investor Protection Corporation has taken the position that the provisions of
the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other
party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.
[Name of Party] [Name of Party]
By_________________________ By__________________________
Title______________________ Title_______________________
Date_______________________ Date________________________
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
This Annex I forms a part of the Master Repurchase Agreement dated as of __________________, 19__ (the "Agreement") between _______________________ and ______________________. Capitalized terms used but not defined in this Annex I shall have the meanings ascribed to them in the Agreement.
1. OTHER APPLICABLE ANNEXES. In addition to this Annex I and Annex II, the following Annexes and any Schedules thereto shall form a part of the Agreement and shall be applicable thereunder:
[Annex III (International Transactions)]
[Annex IV (Party Acting as Agent)]
[Annex V (Margin for Forward Transactions)]
[Annex VI (Buy/Sell Back Transactions)]
[Annex VII (Transactions Involving Registered Investment Companies)]
ANNEX II
NAMES AND ADDRESSES FOR COMMUNICATIONS BETWEEN PARTIES
ANNEX III
INTERNATIONAL TRANSACTIONS
This Annex III (including any Schedules hereto) forms a part of the Master Repurchase Agreement dated as of _________________, 19__ (the "Agreement") between _______________________ and ______________________. Capitalized terms used but not defined in this Annex III shall have the meanings ascribed to them in the Agreement.
1. DEFINITIONS. For purposes of the Agreement and this Annex III:
(a) The following terms shall have the following meanings:
"Base Currency", United States dollars or such other currency as Buyer and Seller may agree in the Confirmation with respect to any International Transaction or otherwise in writing;
"Business Day" or "business day":
i. in relation to any International Transaction which (A) involves an International Security and (B) is to be settled through CEDEL or Euroclear, a day on which CEDEL or, as the case may be, Euroclear is open to settle business in the currency in which the Purchase Price and the Repurchase Price are denominated;
ii. in relation to any International Transaction which (A) involves an International Security and (B) is to be settled through a settlement system other than CEDEL or Euroclear, a day on which that settlement system is open to settle such International Transaction;
iii. in relation to any International Transaction which involves a delivery of Securities not falling within (i) or (ii) above, a day on which banks are open for business in the place where delivery of the relevant Securities is to be effected; and
iv. in relation to any International Transaction which involves an obligation to make a payment not falling within (i) or (ii) above, a day other than a Saturday or Sunday on which banks are open for business in the principal financial center of the country of which the currency in which the payment is denominated is the official currency and, if different, in the place where any account designated by the parties for the making or receipt of the payment is situated (or, in the case of ECU, a day on which ECU clearing operates);
"CEDEL", CEDEL Bank, societe anonyme;
"Contractual Currency", the currency in which the International Securities subject to any International Transaction are denominated or such other currency as may be specified in the Confirmation with respect to any International Transaction;
"Euroclear", Morgan Guaranty Trust Company of New York, Brussels Branch, as operator of the Euroclear System;
"International Security", any Security that (i) is denominated in a currency other than United States dollars or (ii) is capable of being cleared through a clearing facility outside the United States;
"International Transaction", any Transaction involving (i) an International Security or (ii) a party organized under the laws of a jurisdiction other than the United States or having its principal place of business outside the United States;
"LIBOR", in relation to any sum in any currency, the offered rate for deposits for such sum in such currency for a period of three months which appears on the Reuters Screen LIBO page as of 11:00 A.M., London time, on the date on which it is to be determined (or, if more than one such rate appears, the arithmetic mean of such rates);
"Spot Rate", where an amount in one currency is to be converted into a second currency on any date, the spot rate of exchange of a comparable amount quoted by a major money-center bank in the New York interbank market, as agreed by Buyer and Seller, for the sale by such bank of such
second currency against a purchase by it of such first currency.
(b) Notwithstanding Paragraph 2 of the Agreement, the term "Prime Rate" shall mean, with respect to any International Transaction, LIBOR plus a spread, as may be specified in the Confirmation with respect to any International Transaction or otherwise in writing.
2. MANNER OF TRANSFER. All transfers of International Securities (i) shall be in suitable form for transfer and accompanied by duly executed instruments of transfer or assignment in blank (where required for transfer) and such other documentation as the transferee may reasonably request, or (ii) shall be transferred through the book-entry system of Euroclear or CEDEL, or (iii) shall be transferred through any other agreed securities clearing system or (iv) shall be transferred by any other method mutually acceptable to Seller and Buyer.
3. CONTRACTUAL CURRENCY.
(a) Unless otherwise mutually agreed, all funds transferred in respect of the Purchase Price or the Repurchase Price in any International Transaction shall be in the Contractual Currency.
(b) Notwithstanding subparagraph (a) of this Paragraph 3, the payee of any payment may, at its option, accept tender thereof in any other currency; provided, however, that, to the extent permitted by applicable law, the obligation of the payor to make such payment will be discharged only to the extent of the amount of the Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency (after deduction of any premium and costs of exchange) for delivery within the customary delivery period for spot transactions in respect of the relevant currency.
(c) If for any reason the amount in the Contractual Currency so received, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due in respect of the Agreement, the party required to make the payment shall (unless an Event of Default has occurred and such party is the nondefaulting party) as a separate and independent obligation (which shall not merge with any judgment or any payment or any partial payment or enforcement of payment) and to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall.
(d) If for any reason the amount of the Contractual Currency received by one party hereto exceeds the amount in the Contractual Currency due such party in respect of the Agreement, then (unless an Event of Default has occurred and such party is the nondefaulting party) the party receiving the payment shall refund promptly the amount of such excess.
4. NOTICES. Any and all notices, statements, demands or other communications with respect to International Transactions shall be given in accordance with Paragraph 13 of the Agreement and shall be in the English language.
5. TAXES.
(a) Transfer taxes, stamp taxes and all similar costs with respect to the transfer of Securities shall be paid by Seller.
(b) (i)Unless otherwise agreed, all money payable by one party (the "Payor") to the other (the "Payee") in respect of any International Transaction shall be paid free and clear of, and without withholding or
deduction for, any taxes or duties of whatsoever nature imposed, levied, collected, withheld or assessed by any authority having power to tax (a "Tax"), unless the withholding or deduction of such Tax is required by law. In that event, unless otherwise agreed, Payor shall pay such additional amounts as will result in the net amounts receivable by Payee (after taking account of such withholding or deduction) being equal to such amounts as would have been received by Payee had no such Tax been required to be withheld or deducted. The parties acknowledge and agree, for the avoidance of doubt, that the amount of Income required to be transferred, credited or applied by Buyer for the benefit of Seller under Paragraph 5 of the Agreement shall be determined without taking into account any Tax required to be withheld or deducted from such Income, unless otherwise agreed.
(ii) In the case of any Tax required to be withheld or deducted from any money payable to a party hereto acting as Payee by the other party hereto acting as Payor, Payee agrees to deliver to Payor (or, if applicable, to the authority imposing the Tax) any certificate or document that would entitle Payee to an exemption from, or reduction in the rate of, withholding or deduction of Tax from money payable by Payor to Payee.
(iii) Each party hereto agrees to notify the other party of any circumstance known or reasonably known to it (other than a Change of Tax Law, as defined in Paragraph 6 hereof) that causes a certificate or document provided by it pursuant to subparagraph (b)(ii) of this Paragraph to fail to be true.
(iv) Notwithstanding subparagraph (b)(i) of this Paragraph, no additional amounts shall be payable by Payor to Payee in respect of an International Transaction to the extent that such additional amounts are payable as a result of a failure by Payee to comply with its obligations under subparagraph (b)(ii) or (b)(iii) of this Paragraph with respect to such International Transaction.
6. TAX EVENT.
(a) This Paragraph 6 shall apply if either party notifies the other, with respect to a Tax required to be collected by withholding or deduction, that -
i. any action taken by a taxing authority or brought in a court of competent jurisdiction after the date an International Transaction is entered into, regardless of whether such action is taken or brought with respect to a party to the Agreement; or
ii. a change in the fiscal or regulatory regime after the date an International Transaction is entered into, (each, a "Change of Tax Law") has or will, in the notifying party's reasonable opinion, have a material adverse effect on such party in the context of an International Transaction.
(b) If so requested by the other party, the notifying party will furnish the other party with an opinion of a suitably qualified adviser that an event referred to in subparagraph (a)(i) or (a)(ii) of this Paragraph 6 has occurred and affects the notifying party.
(c) Where this Paragraph 6 applies, the party giving the notice referred to in subparagraph (a) above may, subject to subparagraph (d) below, terminate the International Transaction effective from a date specified in the notice, not being earlier (unless so agreed by the other party) than 30 days after the date of such notice, by nominating such date as the Repurchase Date.
(d) If the party receiving the notice referred to in subparagraph (a) of this Paragraph 6 so elects, it may override such notice by giving a counter-notice to the other party. If a counter-notice is given, the party
which gives such counter-notice will be deemed to have agreed to indemnify the other party against the adverse effect referred to in subparagraph (a) of this Paragraph 6 so far as it relates to the relevant International Transaction and the original Repurchase Date will continue to apply.
(e) Where an International Transaction is terminated as described in this Paragraph 6, the party which has given the notice to terminate shall indemnify the other party against any reasonable legal and other professional expenses incurred by the other party by reason of the termination, but the other party may not claim any sum constituting consequential loss or damage in respect of a termination in accordance with this Paragraph 6.
(f) This Paragraph 6 is without prejudice to Paragraph 5 of this Annex III; but an obligation to pay additional amounts pursuant to Paragraph 5 of this Annex III may, where appropriate, be a circumstance which causes this Paragraph 6 to apply.
7. MARGIN. In the calculation of "Margin Deficit" and "Margin Excess" pursuant to Paragraph 4 of the Agreement, all sums not denominated in the Base Currency shall be deemed to be converted into the Base Currency at the Spot Rate on the date of such calculation.
8. EVENTS OF DEFAULT.
(a) In addition to the Events of Default set forth in Paragraph 11 of the Agreement, it shall be an additional "Event of Default" if either party fails, after one business day's notice, to perform any covenant or obligation required to be performed by it under this Annex III, including, without limitation, the payment of taxes or additional amounts as required by Paragraph 6 of this Annex III.
(b) In addition to the other rights of a nondefaulting party under Paragraph 11 of the Agreement, following an Event of Default, the nondefaulting party may, at any time at its option, effect the conversion of any currency into a different currency of its choice at the Spot Rate on the date of the exercise of such option and offset obligations of the defaulting party denominated in different currencies against each other.
SCHEDULE III.A
INTERNATIONAL TRANSACTIONS RELATING TO [RELEVANT COUNTRY]
This Schedule III.A forms a part of Annex III to the Master Repurchase Agreement dated as of __________________, 19__ (the "Agreement") between _______________________ and ______________________. Capitalized terms used but not defined in this Schedule III.A shall have the meanings ascribed to them in Annex III.
[Insert provisions applicable to relevant country.]
Exhibit 10.8
July 18, 1997
Board of Directors
Annaly Mortgage Management, Inc.
1500 Harbor Blvd.
Weehawken, NJ 07087
Ladies and Gentlemen:
The Purchaser hereby represents and warrants to the Company that the Purchaser is acquiring the Shares for the Purchaser's own account for investment and not with a view to the distribution thereof or with any present intention of selling any thereof. The Purchaser hereby further represents and warrants to the Company that the Purchaser is able to fend for himself or herself in connection with the purchase contemplated hereby, that the Purchaser has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Shares, and that the Purchaser is able to bear the economic risk of the Purchaser's investment for an indefinite period of time and can afford the complete loss of such investment.
provisions of the Securities Act and the General Rules and Regulations of the Securities and Exchange Commission thereunder (including, without limitation, Rule 144). The Purchaser understands that under the present circumstances sales of the Shares may not be made in reliance upon Rule 144 since, among other reasons, the requisite information concerning the Company is not publicly available, and that the Company is under no obligation to the Purchaser to supply to the Purchaser or disclose to the public the information necessary to enable the Purchaser to make sales under Rule 144. The Purchaser further understands that the Company is under no obligation to register the Shares or to effect compliance with Regulation A or any other exemption.
Prior to any sale, transfer, pledge or other disposition (any of the foregoing, a "Transfer") of any of the Shares, the holder of such Shares shall give written notice to the Company of such proposed sale, transfer, pledge or other disposition and as to the circumstances thereof. Promptly upon receiving such notice, the Company may require that the holder obtain from Company counsel or, at the Company's option, other counsel reasonably acceptable to the Company, and deliver to the Company, as promptly as practicable, an opinion as to whether the proposed Transfer may be effected without registration of such Shares under the Securities Act. If in the opinion of such counsel such Transfer may be made in the manner described in the notice thereof, the holder may make such Transfer. If such counsel shall fail to render an opinion to such effect, the holder shall not make such Transfer unless and until registration of such Shares under the Securities Act has become effective or is no longer required in the opinion of such counsel or unless the Company determines not to require an opinion of counsel for such Transfer.
Each certificate representing any of the Shares or representing any shares issued in payment or distribution of any stock dividend thereon, or split-up thereof, and each certificate, issued upon any transfer or exchange of any such certificate, shall bear such legends as shall be required by the Company, including, without limitation, a legend similar to the following, unless, in the opinion of the Company's counsel, such legend is no longer necessary to assure compliance with the Securities Act and applicable state securities laws:
"The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws. The shares have been acquired for investment purposes and may not be pledged, hypothecated, sold or transferred in the absence of an effective Registration Statement for the shares under the Securities Act, and the registration of the Shares under any applicable state securities laws, or an exemption from registration under the Securities Act and any applicable state securities laws."
The Company will enter appropriate stop-transfer orders on any register or records maintained by or on behalf of the Company with respect to the Shares to insure that the Shares are not Transferred except in accordance with this letter.
In addition to the foregoing, the Purchaser agrees that prior to and for a period of 180 days following the date of the consummation of the Company's first offering and sale of shares of Common Stock pursuant to an effective registration statement under the Securities Act, the Purchaser will not Transfer, or offer or agree to Transfer, any Shares without the Company's consent.
Very truly yours,
Annaly Mortgage Management,
Inc. hereby accepts the offer
set forth above.
By:________________________
Name:
Title:
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Registration Statement No. 333-______________ of Annaly Mortgage Management, Inc. of our report dated July 31, 1997, and to the reference to us under "Experts" both of which are included in the Prospectus, which is also included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
August 4, 1997