As filed with the Securities and Exchange Commission on December 15, 2004
Registration No. 333-_____
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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AMERICAN HOME MORTGAGE INVESTMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
Maryland 20-0103914
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
538 Broadhollow Road
Melville, New York 11747
(516) 396-7700
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------------
Michael Strauss
Chief Executive Officer and President
American Home Mortgage Investment Corp.
538 Broadhollow Road
Melville, New York 11747
(516) 396-7700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------
Copies to:
Louis J. Bevilacqua, Esq.
Cadwalader, Wickersham & Taft LLP
100 Maiden Lane
New York, New York 10038
(212) 504-6000
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]
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
under the Securities Act, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
=========================================================== ===================== =============================
Proposed Maximum
Title of Each Class of Securities to be Registered and Aggregate Offering Amount of Registration
Sold by the Registrant Price(1)(2)(6) Fee(6)
----------------------------------------------------------- --------------------- -----------------------------
Common Stock, par value $0.01 per share(3)(4)
Preferred Stock, par value $0.01 per share(3)
Debt Securities (3)(5)
Warrants(3) .......................................
Subtotal........................................ $761,875,000 $88,275
=========================================================== ===================== =============================
(1) There are being registered hereunder such indeterminate number of shares of
common stock, preferred stock, debt securities and warrants to purchase
common stock or preferred stock and such indeterminate number of shares of
common stock as may be issued upon the exercise of warrants to purchase
common stock or preferred stock, as shall have an aggregate initial
offering price not to exceed $761,875,000. Pursuant to General Instruction
II.D of Form S-3, information regarding the "Proposed Maximum Offering
Price Per Unit" is not required. Any securities registered hereunder may be
sold separately or as units with other securities registered hereunder.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.
(3) In addition to the securities issued directly under this Registration
Statement, we are registering an indeterminate number of shares of common
stock as may be issued upon the conversion or exchange of the securities
issued directly under this Registration Statement. No separate
consideration will be received for any shares of common stock so issued
upon conversion or exchange.
(4) The amount of common stock registered in any at-the-market offering by us
or on our behalf shall be limited to that which is permissible under Rule
415(a)(4)(ii) under the Securities Act.
(5) There is being registered hereunder an indeterminate principal amount of
debt securities of American Home Mortgage Investment Corp. as may be sold
from time to time. If any debt securities are issued at an original issue
discount, then the offering price shall be in such greater principal amount
as shall result in an aggregate initial offering price not to exceed
$761,875,000.
(6) Pursuant to Rule 429(b) under the Securities Act, this Registration
Statement includes common stock, preferred stock, debt securities and
warrants to purchase common stock or preferred stock and such indeterminate
number of shares of common stock as may be issued upon the exercise of
warrants to purchase common stock or preferred stock having an initial
offering price of $500,000,000 and previously registered on Registration
Statement No. 333-111546 filed by the Registrant on Form S-3 and declared
effective on January 12, 2004. In connection with such amount of common
stock, preferred stock, debt securities and warrants to purchase common
stock or preferred stock and such indeterminate number of shares of common
stock as may be issued upon the exercise of warrants to purchase common
stock or preferred stock previously registered on Registration Statement
No. 333-111546, the Registrant paid a fee of $40,450, of which $960.69 is
attributable to $11,875,000 of securities being carried forward. In
connection with this Registration Statement, the Registrant is paying a fee
based solely on the additional common stock, preferred stock, debt
securities and warrants to purchase common stock or preferred stock and
such indeterminate number of shares of common stock as may be issued upon
the exercise of warrants to purchase common stock or preferred stock being
registered and having an aggregate initial offering price of $750,000,000.
Pursuant to Rule 429 under the Securities Act, the prospectus included in
this Registration Statement is a combined prospectus and relates to this
Registration Statement and Registration Statement No. 333-111546. This
Registration Statement also constitutes Post-Effective Amendment No. 1 to
Registration Statement No. 333-111546 and such Post-Effective Amendment
shall hereafter become effective concurrently with the effectiveness of
this Registration Statement in accordance with Section 8(c) of the
Securities Act.
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 the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 15, 2004
AMERICAN HOME MORTGAGE INVESTMENT CORP.
[LOGO]
$761,875,000
Common Stock
Preferred Stock
Debt Securities
Warrants to Purchase Common Stock or Preferred Stock
By this prospectus, we intend to offer at one or more times,
Common Stock
Preferred Stock
Debt Securities
Warrants to Purchase Common Stock or Preferred Stock,
in one or more series, with an aggregate initial public offering price of up to
$761,875,000 (as described in the applicable prospectus supplement). We will
provide the specific terms for each of these securities in supplements to this
prospectus.
The securities may be sold directly by us to investors, through agents
designated from time to time or to or through dealers or underwriters. See "Plan
of Distribution" beginning on page 27 of this prospectus. We will set forth the
names of any dealers, underwriters or agents in a prospectus supplement. The net
proceeds we expect to receive from such sales also will be set forth in a
prospectus supplement.
Our common stock is traded on the New York Stock Exchange under the symbol
"AHM."
We are incorporated in the State of Maryland. Our principal executive
offices are located at 538 Broadhollow Road, Melville, New York 11747, and our
telephone number is (516) 396-7700.
You should read this prospectus and any supplements carefully before you
invest. We strongly recommend that you read carefully the risks we describe in
this prospectus as well as any accompanying prospectus supplements, the risk
factors in our most current reports filed with the Securities and Exchange
Commission, for a fuller understanding of the risks and uncertainties that we
face. See "Risk Factors" beginning on page 10 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
TO FACILITATE MAINTENANCE OF OUR QUALIFICATION AS
A REAL ESTATE INVESTMENT TRUST FOR FEDERAL INCOME
TAX PURPOSES, SUBJECT TO CERTAIN EXCEPTIONS, WE
PROHIBIT OWNERSHIP BY ANY PERSON OF MORE THAN (i)
6.5% (BY VALUE OR NUMBER OF SHARES, WHICHEVER IS
MORE RESTRICTIVE) OF OUR ISSUED AND OUTSTANDING
SHARES OF COMMON STOCK OR COMMON STOCK TOGETHER
WITH PREFERRED STOCK OF ANY CLASS OR SERIES, (ii)
MORE THAN 9.8% OF EITHER THE TOTAL NUMBER OR THE
VALUE OF THE TOTAL NUMBER OF OUTSTANDING SHARES OF
THE SERIES A PREFERRED STOCK OR (iii) MORE THAN
9.8% OF EITHER THE TOTAL NUMBER OR THE VALUE OF
THE TOTAL NUMBER OF OUTSTANDING SHARES OF THE
SERIES B PREFERRED STOCK. SEE "DESCRIPTION OF
CAPITAL STOCK--RESTRICTIONS ON OWNERSHIP AND
TRANSFER" BEGINNING ON PAGE 34 OF THIS PROSPECTUS.
The date of this prospectus is _______________, 2004
The information contained in this prospectus is not complete and may be changed.
You should only rely on the information provided in this prospectus or
incorporated by reference herein or in any supplement to this prospectus. We
have not authorized anyone else to provide you with different information. These
securities are not being offered in any state where the offer is not permitted.
You should not assume that the information in this prospectus or any supplement
to this prospectus is accurate as of any date other than the date on the front
of those documents.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS..........................................................1
EXPLANATORY NOTE...............................................................1
WHERE YOU CAN FIND MORE INFORMATION............................................1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................3
OUR COMPANY....................................................................5
SUMMARY OF THE SECURITIES OFFERED BY THIS PROSPECTUS...........................9
RISK FACTORS..................................................................10
USE OF PROCEEDS...............................................................26
RATIO INFORMATION.............................................................26
PLAN OF DISTRIBUTION..........................................................27
DESCRIPTION OF CAPITAL STOCK..................................................31
DESCRIPTION OF DEBT SECURITIES................................................37
DESCRIPTION OF WARRANTS.......................................................47
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT..........49
LEGAL MATTERS.................................................................67
EXPERTS.......................................................................67
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ABOUT THIS PROSPECTUS
This prospectus is part of a Registration Statement we filed with the
Securities and Exchange Commission, or the SEC, utilizing a "shelf" registration
process. Under this shelf process, we may, from time to time, sell any
combination of the securities described in this prospectus in one or more
offerings up to a total dollar amount of $761,875,000. This prospectus provides
you with a general description of the securities we may offer.
Each time we sell securities under this prospectus, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. Before investing in our securities,
you should read both this prospectus and any prospectus supplement, together
with additional information described immediately below under the heading "Where
You Can Find More Information."
EXPLANATORY NOTE
In this prospectus, unless the context indicates otherwise, references to
the "Company," "we," "our" and "us" refer to the activities and the assets and
liabilities of American Home Mortgage Investment Corp., including our
subsidiaries, American Home Mortgage Holdings, Inc., a Delaware corporation,
which is sometimes referred to in this prospectus as AHM Holdings, American Home
Mortgage Corp., a New York corporation, American Home Mortgage Servicing, Inc.
(formerly known as Columbia National, Incorporated), a Maryland corporation, and
American Home Mortgage Acceptance, Inc., a Maryland corporation. References in
this prospectus to "AHM Investment" refer solely to American Home Mortgage
Investment Corp. AHM Investment was formed in order to combine the businesses of
AHM Holdings and Apex Mortgage Capital, Inc., which is sometimes referred to in
this prospectus as Apex, and to reorganize those businesses into a real estate
investment trust, or REIT, with a taxable mortgage origination subsidiary. The
business combination of AHM Holdings and Apex was completed on December 3, 2003.
See "Our Company--Company History" on page 8 of this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information required by the Securities Exchange Act of 1934, as amended, or the
Exchange Act, with the SEC. You may read and copy any of these filed documents
at the SEC's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the SEC's public reference room. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. Copies of
these reports, proxy statements and other information can also be inspected at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
Our website is http://www.americanhm.com. We make available free of charge
on our website, via a link to a third party website, our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements and Forms 3, 4 and 5 filed on behalf of directors and executive
officers and any amendments to such reports filed or furnished pursuant to the
Exchange Act as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the SEC. Unless specifically
incorporated by reference into this prospectus, information contained on our
website is not, and should not be interpreted to be, part of this prospectus.
This prospectus is part of a Registration Statement and does not contain
all of the information included in the Registration Statement. Whenever a
reference is made in this prospectus to any contract or other document of ours,
you should refer to the exhibits that are a part of the Registration Statement
or the prospectus supplement for a copy of the referenced contract or document.
Statements contained in this prospectus concerning the provisions of any
documents are necessarily summaries of those documents, and each statement is
qualified in its entirety by reference to the copy of the document filed with
the SEC.
The SEC allows us to "incorporate by reference" into this prospectus
information that we file with the SEC in other documents. This means that we can
disclose important information to you by referring you to other documents
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filed separately with the SEC. The information that we incorporate by reference
is considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede the information contained
in this prospectus.
This prospectus incorporates by reference the documents that we have filed
with the SEC. These documents contain important information about us that is not
included in or delivered with this prospectus. The following documents filed
with the SEC pursuant to Section 13 of the Exchange Act (File No. 001-31916) are
incorporated by reference:
o Our Annual Report on Form 10-K for the fiscal year ended December 31,
2003, including those portions incorporated by reference therein of
our Definitive Proxy Statement on Schedule 14A filed with the SEC on
April 29, 2004;
o Our Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 2004, June 30, 2004 and September 30, 2004; and
o Our Current Reports on Form 8-K dated January 12, 2004, February 12,
2004, June 21, 2004, July 28, 2004, August 30, 2004 and November 30,
2004.
All documents that we will file with the SEC under the provisions of
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and prior to the termination of any offering of securities under this
prospectus shall be deemed to be incorporated by reference and to be a part of
this prospectus from the date such documents are filed, provided, however, that
we are not incorporating by reference any information furnished under Item 2.02
or Item 7.01 of any Current Report on Form 8-K.
We will provide to you, without charge, a copy of any or all documents
incorporated by reference into this prospectus except the exhibits to those
documents (unless they are specifically incorporated by reference in those
documents). You may request copies by writing or telephoning: Alan B. Horn,
Esq., Secretary, American Home Mortgage Investment Corp., 538 Broadhollow Road,
Melville, New York 11747, telephone number (516) 396-7700.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. These statements may be made directly in
this prospectus and they also may be made a part of this prospectus by reference
to other documents we file with the SEC.
Some of the forward-looking statements can be identified by the use of
forward-looking words. When used in our documents or in any oral presentation,
statements that are not historical in nature, including the words "anticipate,"
"may," "estimate," "should," "seek," "expect," "plan," "believe," "intend," and
similar words, or the negatives of those words, are intended to identify
forward-looking statements. They also include statements containing a projection
of revenues, earnings (loss), capital expenditures, dividends, capital structure
or other financial terms. Certain statements regarding the following
particularly are forward-looking in nature:
o our business strategy;
o future performance, developments, market forecasts or projected
dividends;
o projected acquisitions or joint ventures; and
o projected capital expenditures.
It is important to note that the description of our business in general,
and our securities holdings in particular, is a statement about our operations
as of a specific point in time. It is not meant to be construed as an investment
policy, and the types of assets we hold, the amount of leverage we use, the
liabilities we incur and other characteristics of our assets and liabilities are
subject to reevaluation and change without notice.
The forward-looking statements in this prospectus are based on our
management's beliefs, assumptions and expectations of our future economic
performance, taking into account the information currently available to it.
These statements are not statements of historical fact. Forward-looking
statements are subject to a number of factors, risks and uncertainties, some of
which are not currently known to us, that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial position. These factors
include, without limitation:
o our limited operating history with respect to our portfolio strategy;
o the ability of our management to change or modify our portfolio
strategy without advance notice to stockholders which may cause us to
suffer losses;
o our need for a significant amount of cash to operate our business;
o risks associated with the use of leverage;
o failure to maintain our status as a REIT;
o changes in federal and state tax laws affecting REITs;
o repayment speeds within the mortgage-backed securities market;
o changes in federal and state regulation of mortgage banking;
o disruptions in the market for repurchase facilities;
o failure to match the interest rates on our borrowings with the
interest rates on the mortgage-backed securities we hold;
o the overall environment for interest rates and their subsequent effect
on our business;
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o dividends declared by us that are not as high as expected;
o risks associated with equity investments and the general volatility of
the capital markets and the market price of our common stock;
o competition for business and personnel;
o our ability to identify and complete acquisitions and successfully
integrate the businesses we acquire;
o general economic, political, market, financial or legal conditions;
and
o the other factors referenced in this prospectus, including, without
limitation, those under the "Risk Factors" section.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur, and we qualify any and all
of our forward-looking statements entirely by these cautionary factors. You are
cautioned not to place undue reliance on forward-looking statements, which speak
only as of the date of this prospectus or as of the date of any document
incorporated by reference in this prospectus, as applicable. Such
forward-looking statements are inherently uncertain, and you must recognize that
actual results may differ from expectations. We are not under any obligation,
and we expressly disclaim any obligation, to update or alter any forward-looking
statements, whether as a result of new information, future events or otherwise.
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OUR COMPANY
We are in the business of investing in mortgage-backed securities resulting
from the securitization of primarily prime-quality, residential mortgage loans
that we originate and service. Self-originating the loans underlying our
securities allows us to invest in those securities at a lower cost than
acquiring similar assets in the capital markets, and therefore is expected to
enhance the return we earn on those securities. Our business strategy is to
securitize most of the adjustable-rate mortgage, or ARM, loans that we
originate, to hold a portion of the securities resulting from these
securitizations, to service those loans underlying our securities and to sell
the fixed-rate mortgage loans that we originate. Generally, loans we originate
are high-credit-quality, prime loans that are either eligible for sale to Fannie
Mae or Freddie Mac, or are jumbo loans for borrowers with high FICO credit
scores, typically 680 or above. We have elected in our tax return for the year
ended December 31, 2003 to be treated as a REIT, and we expect to qualify as a
REIT for federal income tax purposes from our date of incorporation.
Consequently, the net interest income we earn on the securities we hold
generally will not be subject to federal income tax to the extent we distribute
those earnings to stockholders.
We originate loans through our mortgage banking operation, which originated
approximately $21.7 billion in aggregate principal amount of loans in 2003 and
for the third quarter of 2004 was ranked as the nation's 21st largest
residential mortgage lender according to National Mortgage News. We offer a
broad array of home mortgage products through an extensive nationwide network of
retail loan production offices as well as through our wholesale and Internet
mortgage lending operations. We currently operate more than 300 loan production
offices in 40 states and make loans throughout all 50 states. Our mortgage
banking operation also services the loans underlying the securities we create as
well as certain of the loans we sell to third-party purchasers. The aggregate
principal amount of loans we serviced was approximately $13.6 billion as of
September 30, 2004.
We seek to generate attractive, long-term investment returns from the
mortgage-backed securities that we hold. We believe that our return is enhanced
as the result of our ability to self-originate the mortgage loans underlying
these securities, which results in a lower acquisition cost of the securities,
and not from anticipating market forces, such as the direction of interest
rates. We seek to limit our exposure to fluctuating interest rates by attempting
to match the duration of our liabilities and hedges with the duration of our
mortgage-backed securities holdings. We also seek to reduce risk by holding
primarily securities backed by ARM loans with investment characteristics that
are less sensitive to changes in interest rates and that are easier to
match-fund than fixed-rate loans.
We hold our mortgage-backed securities directly or in our qualified REIT
subsidiary, or QRS, while part of our origination business and all of our
servicing business are housed in our taxable REIT subsidiaries, or TRSs. The net
interest income that we earn on our mortgage-backed securities that are held
through our QRS generally will constitute REIT taxable income, and we are
required by federal tax laws to distribute at least 90% of such REIT taxable
income to our stockholders. We generally will not be subject to federal income
tax on such income to the extent that such income is distributed. By contrast,
income that we earn on activities we conduct in our TRSs, including sourcing,
selling and servicing mortgage loans, will be subject to federal and state
corporate income tax. We may retain any after-tax income generated by our TRSs,
and, as a result, may increase our consolidated equity capital and thereby grow
our business through retained earnings. We may, however, dividend all or a
portion of our after-tax TRS earnings to our stockholders, subject to REIT
qualifying limitations. See "Certain U.S. Federal Income Tax Consequences of Our
Status as a REIT" in this prospectus.
Mortgage-Backed Securities Holdings
Our current portfolio strategy, which is subject to change at any time
without advance notice to our stockholders and which we expect may change from
time to time, is to use our equity capital and borrowed funds to invest in
mortgage-backed securities resulting from the securitization of loans we
originate, thereby producing net interest income. Accordingly, we expect net
interest income from our securities to be the largest component of our earnings
in the future. We believe that the cost advantage we obtain from
self-originating loans and holding such loans in securitized form in the REIT or
our QRS is primarily the result of two economic factors. First, through
self-origination, we avoid the intermediation costs associated with purchasing
mortgage assets in the capital markets. Second, the REIT or our QRS is able to
acquire loan applications from our TRSs, rather than purchase closed loans, at a
price substantially less than the purchase price of a closed loan. We expect
that our strategy and the use of
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borrowings to leverage the mortgage-backed securities we hold will produce an
attractive return for our stockholders. As of September 30, 2004, we held
approximately $7.3 billion of mortgage-backed securities and $398.7 million of
mortgage loans awaiting securitization, substantially all of which were backed
by or were ARM loans. Of these mortgage-backed securities, approximately 41%
were backed by loans we originated and approximately 59% were mortgage-backed
securities purchased in the capital markets. During the remainder of 2004 and
throughout 2005, we expect the percentage of securities we hold that are backed
by self-originated loans to increase until this type of security constitutes
substantially all of our portfolio.
We seek to avoid many of the risks typically associated with companies that
purchase mortgage-backed securities in the capital markets. For example, we
attempt to closely match the duration of our liabilities and hedges with the
duration of our mortgage-backed securities holdings. We also structure our
liabilities to mitigate potential negative effects of changes in the
relationship between short-term and longer-term interest rates. A substantial
portion of the securities we hold are either obligations of Fannie Mae or
Freddie Mac or are rated AAA by Standard & Poor's. Finally, substantially all of
our securities are backed by ARM loans. Because we are focused on holding ARM
loans rather than fixed-rate loans, we believe we will be less adversely
affected by prepayments due to falling interest rates or a reduction in our net
interest income due to rising interest rates.
We generally borrow a substantial portion of the funds required to invest
in our mortgage-backed securities, and will seek to maintain an overall
debt-to-equity ratio ranging from 10:1 to 12:1. The liabilities we use to fund
our portfolio of mortgage-backed securities are primarily repurchase agreements
with maturities ranging from one to twelve months. We use interest rate swaps to
extend the duration of our liabilities to attempt to match the duration of our
assets. We use repurchase agreements with laddered maturities to reduce the risk
of a disruption in the repurchase market. We also believe we are less
susceptible to a disruption in the repurchase market because we hold primarily
Fannie Mae and Freddie Mac securities and securities rated AAA by Standard &
Poor's, which have typically been eligible for repurchase market financing even
when repurchase financing was not available for other classes of mortgage
assets.
Under our current business strategy, we expect to maximize the operational
and tax benefits provided by our REIT structure. Our TRSs accept and process
loan applications. Loan applications that meet the requirements of the REIT,
which typically consist of ARMs and hybrid ARMs, are then sold by our TRSs to
our QRS, while loans that do not meet these requirements are closed and sold to
third-party purchasers. The associated servicing rights of all loans originated
by our QRS are retained by our TRSs. We generate net interest income from our
portfolio of mortgage loans and mortgage-backed securities, which is the
difference between (i) the interest income we receive from mortgage loans and
mortgage-backed securities we hold and (ii) the interest we pay, plus certain
administrative costs.
Origination Business
Our loan origination business originates primarily first mortgages on
one-to-four family dwellings through our retail and wholesale loan origination
channels, each of which accounted for approximately half of our total loan
originations during the third quarter of 2004. We seek to utilize a combination
of skilled loan officers, state of the art technology, a broad and fairly priced
product line and a high level of customer service to successfully compete in the
marketplace. Once a consumer applies for a loan, our mortgage banking operation
processes and underwrites the consumer's application and we fund the consumer's
loan by drawing on a warehouse line of credit. The loan is then typically either
securitized and the resulting securities held by us as a long-term investment or
sold by us for a profit.
Our loan origination business has rapidly grown its market share and scale.
The aggregate principal amount of our total loan originations has grown from
$12.2 billion in 2002 to $21.7 billion in 2003. We believe our growth has made
our mortgage banking operation more profitable and more effective at serving our
customers. Specifically, growth in originations has lowered the per-loan cost of
our centralized support operations and, consequently, our overall per-loan cost
of origination. Our growth has also given us a relatively large presence in the
secondary mortgage market, and, as a result, has improved our ability to execute
loan sales to third-party purchasers. In addition, our size has enabled us to
negotiate better terms with warehouse lenders and credit enhancers such as
Fannie Mae and Freddie Mac. Finally, our size has made it possible for us to
profitably enter businesses ancillary to mortgage lending, such as mortgage
reinsurance, title brokerage and vendor management.
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We currently conduct lending through more than 300 loan production offices
located in 40 states across the United States, through mortgage brokers and
through our Internet call center, which serves customers located in all 50
states. In the third quarter of 2004, our retail activities, which are conducted
through our community loan production offices and Internet call center,
accounted for approximately 51% of our loan originations, while mortgage brokers
accounted for approximately 49% of our originations. We offer a broad array of
mortgage products, but primarily make high-credit-quality loans; more than 54%
of our originations are eligible for Fannie Mae, Freddie Mac or Ginnie Mae
programs, while most of the balance of our loans consists of jumbo loans for
borrowers with high FICO credit scores, typically 680 or above. In the third
quarter of 2004, approximately 56% of our loan originations carried adjustable
interest rates or hybrid interest rates, while approximately 44% carried fixed
interest rates.
AHM Holdings has grown its loan origination franchise substantially since
becoming a public company in October of 1999. In 2003, the aggregate principal
amount of our loan originations was approximately $21.7 billion, compared to
$12.2 billion in 2002, $7.8 billion in 2001 and $3.0 billion in 2000. Our growth
has resulted principally from growing our network of loan production offices by
acquisitions and internally growing loan production offices so acquired. We have
increased our number of loan production offices by acquiring small to mid-sized
mortgage businesses. AHM Holdings has completed seven such acquisitions since
December of 1999. In each acquisition, we have generally retained and grown the
acquired company's loan production offices while substantially eliminating their
centralized support operations and associated costs. These acquisitions have
significantly increased our origination capability. Our strategy is to continue
to opportunistically seek acquisitions to grow our loan origination business.
Growth in AHM Holdings' business with mortgage brokers has resulted from
adding additional branches and account executives in our mortgage broker channel
and increasing the depth of our mortgage broker support capabilities.
Servicing Business
Our servicing business services the loans that back our portfolio of
self-originated mortgage-backed securities. It also services loans owned by
others, which are typically loans that we or our predecessors originated and
sold. As of September 30, 2004, our TRSs serviced approximately 87,704 loans
with an aggregate principal amount of approximately $13.6 billion. The average
annual servicing fee on our servicing portfolio as of September 30, 2004 was
0.354% of the principal amount of each loan we service for others. Our servicing
business collects mortgage payments, administers tax and insurance escrows,
seeks to mitigate losses on defaulted loans and responds to borrower inquiries.
Our servicing capabilities have received the "Select Servicer" rating from
Standard & Poor's.
We expect our servicing business to grow as we increase our portfolio of
self-originated mortgage-backed securities. Our servicing business enables us to
retain an ongoing business relationship with our borrowers, which we believe
makes it more likely that we will earn those borrowers' business when they need
a new loan or wish to refinance an existing loan. We believe that our servicing
capability also enables us to sell loans to Fannie Mae, Freddie Mac and Ginnie
Mae on more advantageous terms than if we did not service our originations.
Competitive Advantages
We believe that we have several competitive advantages compared to other
mortgage REITs. These competitive advantages include the following:
o We believe that our net origination costs through self-origination
typically have been lower than the price at which traditional mortgage
REITs purchase similar mortgage loans on the open market. We believe that
this lower cost allows us to earn a higher yield than mortgage REITs that
primarily purchase assets in the capital markets.
o Because we believe we can earn a higher yield than mortgage REITs that
primarily purchase their assets in the capital markets, we can afford to
sacrifice a portion of this yield to reduce (i) our interest rate risk, by
limiting our portfolio to ARMs and attempting to match-fund our liabilities
and hedges with our assets and (ii) our credit risk, by focusing on highly
rated assets.
-7-
o We believe that we have a competitive advantage over other mortgage REITs
that self-originate mortgage-backed securities because we typically
originate a larger volume of loans than those companies and, consequently,
can select the types of loans we would like to retain as long-term assets
-- specifically, high-credit-quality ARM loans.
We believe that other competitive advantages of our mortgage banking
business include the following:
o We expect that the net interest income generated by our portfolio of
mortgage-backed securities will become the most substantial component of
our revenue, thereby reducing the volatility generally experienced by
mortgage banking companies that sell all or a majority of their loan
products and do not maintain a portfolio of mortgage-backed securities.
o Our origination and servicing businesses are countercyclical. During
periods of falling interest rates, the results of originations are expected
to be strong, while our servicing business is expected to experience
losses. Conversely, during periods of rising interest rates, the results
from originations are expected to diminish, while net income from servicing
is expected to increase. Despite this counterbalancing effect of our
servicing business, during a period of rising interest rates, we expect the
impact of the rising interest rates to reduce the profitability of our
business, since we do not expect the diminished results of originations to
be fully offset by increases in net income from our servicing business.
o We have the scale and skills that support a robust set of capabilities in
the areas of sales support and marketing, technology, product development
and training. These capabilities enhance the effectiveness of our loan
officers and account executives in the marketplace and enable us to better
serve our customers.
o We offer our customers a broad array of products through our substantial
retail branch network, wholesale mortgage broker network and Internet
presence. We believe reaching customers through multiple channels with
balanced and multi-faceted products enhances the stability of our
origination business and reduces its vulnerability to changes in the
mortgage market. Our retail channel allows us to maintain a direct
relationship with our customers that we believe fosters customer loyalty
for future business.
o As a result of our loan servicing business, we maintain a relationship with
a large number of our customers and, consequently, are more likely to earn
those customers' business when they need a new loan or when they wish to
refinance existing loans. In addition, through our loan servicing business,
we are able to maintain control over our collection and default mitigation
processes and better manage the credit performance of borrowers.
Company History
AHM Investment was incorporated in July 2003 under the laws of the State of
Maryland. AHM Investment was formed in order to combine the net assets of Apex
with the mortgage origination and servicing businesses of AHM Holdings. In
December 2003, AHM Investment became the parent company of AHM Holdings through
an internal reorganization and acquired Apex by merger. In connection with these
transactions, our common stock was exchanged for the outstanding shares of
common stock of AHM Holdings and Apex. Our strategy in combining the net assets
of Apex with the origination and servicing businesses of AHM Holdings was to
realize the benefits of holding a portfolio of self-originated mortgage-backed
securities as well as certain other competitive advantages, described above.
Prior to our conversion into a REIT, our business strategy was to sell
substantially all of the loans that we originated, and the largest component of
our net income was generated by the gain on sale of such loans. Our historical
financial results prior to 2004 reflect this discontinued strategy of selling
virtually all of the loans that we originated. Since our REIT conversion, our
business strategy is to hold a portion of the mortgage-backed securities
resulting from the securitization of ARM loans we originate, and, consequently,
we believe that the largest component of our net income in the future will be
net interest income generated by our holdings. While we expect that holding our
originations in securitized form will be beneficial to our financial results, we
cannot assure you that our new business strategy will be successful.
-8-
SUMMARY OF THE SECURITIES OFFERED BY THIS PROSPECTUS
We may offer any of the following securities from time to time:
o common stock;
o preferred stock;
o debt securities; and
o warrants to purchase common stock or preferred stock.
When we use the term "securities" in this prospectus, we mean any of the
securities we may offer with this prospectus, unless we say otherwise. The total
dollar amount of all securities that we may issue will not exceed $761,875,000.
This prospectus, including the following summary of the securities that may be
issued, describes the general terms that may apply to the securities. The
specific terms of any particular securities that we may offer will be described
in a separate prospectus supplement.
Common Stock
We may offer shares of our common stock, which is currently traded on the
New York Stock Exchange under the symbol "AHM." See "Description of Capital
Stock" beginning on page 31 of this prospectus.
Preferred Stock
We may offer our preferred stock in one or more series. For any particular
series we offer, the applicable prospectus supplement will describe the specific
designation; the aggregate number of shares offered; the rate and periods, or
the manner of calculating the rate and periods, for dividends, if any; the
stated value and liquidation preference amount, if any; the voting rights, if
any; the terms on which the series will be convertible into or exchangeable for
other securities or property, if any; the redemption terms, if any; and any
other specific terms that apply to that series of preferred stock. See
"Description of Capital Stock" beginning on page 31 of this prospectus.
Debt Securities
We may offer debt securities at various times in one or more series. The
debt securities will be our direct unsecured general obligations and may include
debentures, notes, bonds and/or other evidences of indebtedness. The terms of
any debt securities that we offer will be set forth in the applicable prospectus
supplement. See "Description of Debt Securities" beginning on page 37 of this
prospectus.
Warrants
We may offer warrants to purchase our common stock or preferred stock. For
any particular warrants we offer, the applicable prospectus supplement will
describe the underlying security; the expiration date; the exercise price or the
manner of determining the exercise price; the amount and kind, or the manner of
determining the amount and kind, of security to be delivered by us upon
exercise; and any other specific terms. We may issue the warrants under warrant
agreements between us and one or more warrant agents. See "Description of
Warrants" beginning on page 47 of this prospectus.
Listing
If any securities are to be listed or quoted on a securities exchange or
quotation system, the applicable prospectus supplement will state such
information.
-9-
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision with respect to our securities. Our results of operations,
financial condition and business prospects could be harmed by any of these
risks. This prospectus and the documents incorporated by reference in this
prospectus also contain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described below and elsewhere in this prospectus and in
the documents incorporated by reference into this prospectus. The trading price
of our securities could decline due to any of these or other risks, and you may
lose all or part of your investment.
Risks Related to Our Business
We have a limited operating history with respect to our portfolio strategy,
which limits your ability to evaluate a key component of our business strategy
and our growth prospects and increases your investment risk; we are dependent on
the securitization markets.
Historically, our business has consisted primarily of the origination and
sale of mortgage loans. We currently intend to retain a substantial portion of
the loans that we originate on a long-term basis, in the form of mortgage-backed
securities secured by these loans. Under our current business strategy, we must
securitize a portion of the loans we originate to produce mortgage-backed
securities. Our ability to complete securitizations will depend upon a number of
factors, including conditions in the securities markets generally and conditions
in the mortgage-backed securities market. A disruption in the securitization
market or a change in the market's demand for our securities may have a material
adverse effect on our results of operations, financial condition and business
prospects. In addition, poor performance of our previously securitized loans
could limit our ability to access the securitization market. If we are unable to
securitize our loans efficiently, then our revenues for the duration of our
investment in those loans would decline, which would lower our earnings for the
time the loans remain in our portfolio. We cannot assure you that we will be
able to complete loan securitizations on favorable terms, or at all.
An interruption or reduction in the securitization market would harm our
financial position.
We are dependent on the securitization market for the sale of our loans
because we securitize loans directly. The securitization market is dependent
upon a number of factors, including general economic conditions, conditions in
the securities market generally and conditions in the asset-backed securities
market specifically. In addition, poor performance of our previously securitized
loans could harm our access to the securitization market. Accordingly, a decline
in the securitization market or a change in the market's demand for our loans
could harm our results of operations, financial condition and business
prospects.
Our results from holding mortgage-backed securities may be harmed by changes in
the level of interest rates, changes to the difference between short- and
longer-term interest rates, changes to the difference between interest rates for
mortgage-backed securities compared to other debt instruments, and an absence of
or reduction in the availability, at favorable terms, of repurchase financing
and other liquidity sources typically utilized by mortgage REITs.
The value of, and return from, the mortgage-backed securities we hold will
be affected by changes in the marketplace for mortgage-backed securities and
debt securities in general, as well as high prepayment speeds, and may be
volatile. The impact of changes in the marketplace for mortgage-backed
securities and debt securities on our results will be magnified because our
mortgage-backed securities holdings will be highly leveraged. Additionally, much
of the financing we use to hold our mortgage-backed securities is cancelable by
our lenders on short notice. If our lenders cease to provide financing to us on
favorable terms, we would be forced to liquidate some or all of our
mortgage-backed securities, possibly at a substantial loss.
-10-
Our business requires a significant amount of cash, and if it is not available,
our business and financial performance will be significantly harmed.
We require substantial cash to fund our loan originations, to pay our loan
origination expenses, to hold our loans pending securitization or sale and to
fund our portfolio of mortgage-backed securities. We also need cash to meet our
working capital, REIT dividend distribution requirements and other needs. Cash
could be required to meet margin calls under the terms of our borrowings in the
event that there is a decline in the market value of our loans that
collateralize our debt, the terms of our debt become less attractive or for
other reasons.
In addition, if our income as calculated for federal income tax purposes
exceeds our cash flow from operations, we could be forced to borrow or raise
capital on unfavorable terms in order to make the distributions to avoid federal
income tax and maintain our REIT status.
We expect that our primary sources of cash will consist of:
o our repurchase facilities, warehouse lines of credit, mortgage
servicing credit facilities and a commercial paper program;
o the net interest income we earn on our mortgage-backed securities
holdings;
o the income we earn from originating and selling mortgage loans; and
o the income we earn from servicing mortgage loans.
Pending sale or securitization of a pool of mortgage loans, we will
originate mortgage loans that we finance through borrowings from our warehouse
lines of credit and commercial paper program. It is possible that our warehouse
lenders could experience changes in their ability to advance funds to us,
independent of our performance or the performance of our loans. In addition, if
the regulatory capital requirements imposed on our lenders change, our lenders
may be required to increase significantly the cost of the lines of credit that
they provide to us.
As of September 30, 2004, we financed $547.6 million of loans through five
warehouse lines of credit. Each of these facilities is cancelable by the lender
for cause at any time. As of November 4, 2004, the aggregate balance outstanding
under these facilities was approximately $1.3 billion. Four of these facilities
are subject to periodic renewal and one has no expiration date. We cannot
provide any assurances that we will be able to extend these existing facilities
on favorable terms, or at all. If we are not able to renew any of these credit
facilities or arrange for new financing on terms acceptable to us, or if we
default on our covenants or are otherwise unable to access funds under any of
these facilities, we may not be able to originate new loans or continue to fund
our operations, which would have a material adverse effect on our business,
financial condition, liquidity and results of operations.
In connection with those loans we securitize other than through guaranteed
performance swaps and similar transactions with Fannie Mae, Freddie Mac, Ginnie
Mae and the Federal Home Loan Banks, we plan to provide credit enhancement for a
portion of the securities that we sell, called "senior securities," to improve
the price at which we sell them. Our current expectation is that this credit
enhancement for the senior securities will be primarily in the form of either
designating another portion of the securities we issue as "subordinate
securities" (on which the credit risk from the loans is concentrated), paying
for financial guaranty insurance policies for the loans, or both. If we use
financial guaranty insurance policies, and the expense of these insurance
policies increases, the net interest income we receive will be reduced. While we
plan to use credit enhancement features in the future, we cannot assure you that
these features will be available at costs that would allow us to achieve the
desired level of net interest income from the securitizations that we anticipate
being able to achieve.
We may not be able to achieve our optimal leverage.
We use leverage as a strategy to increase the return to our investors.
However, we may not be able to achieve our desired leverage for various reasons,
including, but not limited to, the following:
o we determine that the leverage would expose us to excessive risk;
-11-
o our lenders do not make funding available to us on acceptable terms;
or
o our lenders require that we provide additional collateral to cover our
borrowings.
Our use of repurchase facilities to borrow funds may be limited or curtailed in
the event of disruptions in the repurchase market.
We will rely upon repurchase facilities in order to finance our portfolio
of mortgage-backed securities. Our repurchase facilities are dependent on our
counterparties' ability to resell our obligations to third-party purchasers.
There have been in the past, and in the future there may be, disruptions in the
repurchase market. If there is a disruption of the repurchase market generally,
or if one of our counterparties is itself unable to access the repurchase
market, our access to this source of liquidity could be adversely affected.
Our use of repurchase agreements to borrow funds may give our lenders greater
rights in the event that either we or a lender files for bankruptcy.
Our borrowings under repurchase agreements may qualify for special
treatment under the bankruptcy code, giving our lenders the ability to avoid the
automatic stay provisions of the bankruptcy code and to take possession of and
liquidate our collateral under the repurchase agreements without delay in the
event that we file for bankruptcy. Furthermore, the special treatment of
repurchase agreements under the bankruptcy code may make it difficult for us to
recover our pledged assets in the event that a lender files for bankruptcy.
Thus, the use of repurchase agreements exposes our pledged assets to risk in the
event of a bankruptcy filing by either a lender or us.
Our efforts to match fund our mortgage-backed securities with our borrowings may
not be effective to protect against losses due to movements in interest rates.
The interest rates on our borrowings generally adjust more frequently than
the interest rates on our ARM mortgage-backed securities. Accordingly, in a
period of rising interest rates, we could experience a decrease in net income or
a net loss because the interest rates on our borrowings adjust faster than the
interest rates on our ARM mortgage-backed securities.
Although we attempt to limit our exposure to changing interest rates by
matching as closely as possible the duration of our liabilities and hedges with
the duration of our mortgage loan holdings, our liabilities, hedges and assets
could react differently than we expect in response to changes in interest rates,
which would cause us to suffer significant losses. Matched funding is difficult,
if not impossible, to achieve, and there can be no assurances that our efforts
to match fund will protect us against losses.
Our credit facilities contain covenants that restrict our operations and any
default under our credit facilities would have a material adverse effect on our
financial condition.
Our existing warehouse and repurchase facilities and commercial paper
program contain extensive restrictions and covenants and require us to maintain
or satisfy specified financial ratios and tests, including maintenance of asset
quality and portfolio performance tests. Failure to meet or satisfy any of these
covenants, financial ratios or financial tests could result in an event of
default under these agreements. These agreements are typically recourse loans
that are secured by specific mortgage loans pledged under those agreements. The
agreements also contain cross-default provisions, so that if an event of default
occurs under any agreement, the lenders could elect to declare all amounts
outstanding under all of our agreements to be immediately due and payable,
enforce their interests against collateral pledged under the agreements and, in
certain circumstances, restrict our ability to make additional borrowings.
Our warehouse and repurchase facilities contain additional restrictions and
covenants that may:
o restrict the ability of our TRSs to make distributions to us;
o restrict our ability to make certain investments or acquisitions; and
o restrict our ability to engage in certain mergers or consolidations.
-12-
These restrictions may interfere with our ability to obtain financing or to
engage in other business activities, which may have a material adverse effect on
our business, financial condition, liquidity and results of operations.
Our credit facilities are subject to margin calls based on the lender's opinion
of the value of our loan collateral. An unanticipated large margin call could
harm our liquidity.
The amount of financing we receive under our credit facilities depends in
large part on the lender's valuation of the mortgage loans that secure the
financings. Each such facility provides the lender the right, under certain
circumstances, to reevaluate the loan collateral that secures our outstanding
borrowings at any time. In the event the lender determines that the value of the
loan collateral has decreased, it has the right to initiate a margin call. A
margin call would require us to provide the lender with additional collateral or
to repay a portion of the outstanding borrowings. Any such margin call could
harm our liquidity, results of operations, financial condition and business
prospects.
If warehouse lenders and securitization underwriters face exposure stemming from
legal violations committed by the companies to whom they provide financing or
underwriting services, this could increase our borrowing costs and harm the
market for whole loans and mortgage-backed securities.
In June 2003, a California jury found a warehouse lender and securitization
underwriter liable in part for fraud on consumers committed by a lender to whom
it provided financing and underwriting services. The jury found that the
investment bank was aware of the fraud and substantially assisted the lender in
perpetrating the fraud by providing financing and underwriting services that
allowed the lender to continue to operate, and held the bank liable for 10% of
the plaintiff's damages. This is the first case we know of in which an
investment bank was held partly responsible for violations committed by the
bank's mortgage lender customer. If other courts or regulators adopt this
theory, investment banks may face increased litigation as they are named as
defendants in lawsuits and regulatory actions against the mortgage companies
with which they do business. Some investment banks may exit the business, charge
more for warehouse lending or reduce the prices they pay for whole loans in
order to build in the costs of this potential litigation. This could, in turn,
harm our results of operations, financial condition and business prospects.
If the prepayment rates for our mortgage loans are higher than expected, our
results of operations may be significantly harmed.
The rate and timing of unscheduled payments and collections of principal on
our loans is impossible to predict accurately and will be affected by a variety
of factors including, without limitation, the level of prevailing interest
rates, the availability of lender credit and other economic, demographic,
geographic, tax and legal factors. In general, however, if prevailing interest
rates fall significantly below the interest rate on a loan, the borrower is more
likely to prepay the then higher-rate loan than if prevailing rates remain at or
above the interest rate on the loan. Unscheduled principal prepayments could
adversely affect our results of operations to the extent we are unable to
reinvest the funds we receive at an equivalent or higher yield rate, if at all.
In addition, a large amount of prepayments, especially prepayments on loans with
interest rates that are high relative to the rest of the asset pool, will likely
decrease the net interest income we receive.
We may suffer credit losses with respect to, and be required to repurchase,
loans that we originate and sell, regardless of credit enhancements that we
purchase.
Although we typically purchase credit enhancements from Fannie Mae and
Freddie Mac with respect to the agency-eligible ARM loans that we originate and
sell, we may nevertheless suffer credit losses with respect to these loans if we
do not originate the loans correctly. We also may be required to repurchase the
loans under these circumstances. In addition, we may suffer credit losses on
non-agency eligible securities to the extent that they do not have, or have only
limited, credit enhancements. Credit enhancements will not protect us from such
credit losses or repurchase obligations.
-13-
Our hedging strategy may adversely affect our borrowing cost and expose us to
other risks.
From time to time, we may enter into hedging transactions with respect to
one or more of our assets or liabilities. Our hedging activities may include
entering into interest rate swaps, caps and floors, options to purchase these
items, and futures and forward contracts. Currently, we intend to primarily use
term reverse repurchase agreements and interest rate swap agreements to manage
the interest rate risk of our portfolio of adjustable-rate mortgages. However,
our actual hedging decisions will be determined in light of the facts and
circumstances existing at the time and may differ from our currently anticipated
hedging strategy. Developing an effective strategy for dealing with movements in
interest rates is complex and no strategy can completely insulate us from risks
associated with such fluctuations. There can be no assurance that our hedging
activities will effectively hedge against adverse interest rate movement.
The results from our mortgage origination business will be harmed by rising
interest rates.
Since 2001, a majority of AHM Holdings' mortgage originations were to
customers refinancing an existing loan to obtain a lower interest rate. Rising
interest rates have substantially reduced the number of potential customers that
can achieve a lower interest rate from refinancing, and to a lesser extent the
number of potential customers that can afford to buy homes, and consequently are
substantially reducing the amount of loans originated by our loan origination
business and the revenue therefrom. In addition, rising interest rates are
likely to reduce the margins achieved by our loan origination business. While
rising interest rates generally will have a beneficial impact on our mortgage
servicing business, the negative impact from rising interest rates on our
mortgage origination business generally has been greater than the offsetting
beneficial impact, and consequently, in a period of rising interest rates, our
earnings are projected to decline.
The results from our mortgage servicing business will be harmed by falling
interest rates.
AHM Holdings historically has suffered losses from its mortgage servicing
business. If interest rates remain low enough to cause a large number of
borrowers whose loans are being serviced by our servicing business to refinance,
we will experience high amortization and possibly continued impairment of our
servicing assets, and would likely experience a loss from our mortgage servicing
business.
An increase in interest rates could reduce the value of our loan inventory and
commitments and our hedging strategy may not protect us from interest rate risk
and may lead to losses.
The value of our loan inventory will be based, in part, on market interest
rates. Accordingly, we may experience losses on loan sales if interest rates
change rapidly or unexpectedly. If interest rates rise after we fix a price for
a loan or commitment but before we close or sell such loan, the value of the
loan will decrease. If the amount we receive from selling the loan is less than
our cost of originating the loan, we may incur net losses, and our business and
operating results could be harmed. While we will use hedging and other
strategies to minimize our exposure to interest rate risks, no hedging or other
strategy can completely protect us. In addition, the nature and timing of
hedging transactions may influence the effectiveness of these strategies. Poorly
designed strategies or improperly executed transactions could actually increase
our risk and losses. In addition, hedging strategies involve transaction and
other costs. We cannot assure you that our hedging strategy and the hedges that
we make will adequately offset the risks of interest rate volatility or that our
hedges will not result in losses.
We may fail to generate expected returns on our mortgage-related assets because
of interest rate caps associated with adjustable-rate mortgages.
Adjustable-rate mortgage assets are typically subject to periodic and
lifetime interest rate caps and floors, which limit the amount by which the
interest yield of an adjustable-rate mortgage asset may change during any given
period. However, our borrowing costs will not be subject to similar
restrictions. Hence, in a period of rising interest rates, interest rate costs
on our borrowings could increase without limitation by caps, while the
interest-rate yields on our adjustable-rate mortgage assets would generally be
limited by caps. This could result in the receipt of less cash income on our
adjustable-rate mortgage assets than needed in order to pay the interest cost on
our related borrowings. These factors could lower our net interest income or
cause a net loss during periods of rising interest rates, which would negatively
impact our financial condition, cash flows and results of operations.
-14-
We are subject to losses due to fraudulent and negligent acts on the part of
loan applicants, mortgage brokers, other vendors and our employees.
When we originate mortgage loans, we rely heavily upon information supplied
by third parties, including the information contained in the loan application,
property appraisal, title information and employment and income documentation.
If any of this information is intentionally or negligently misrepresented and
such misrepresentation is not detected prior to loan funding, the value of the
loan may be significantly lower than expected. Whether a misrepresentation is
made by the loan applicant, the mortgage broker, another third party or one of
our employees, we generally bear the risk of loss associated with the
misrepresentation. A loan subject to a material misrepresentation is typically
unsaleable or subject to repurchase if it is sold prior to detection of the
misrepresentation, the persons and entities involved are often difficult to
locate and it is often difficult to collect any monetary losses that we have
suffered from the misrepresentation.
We have controls and processes designed to help us identify misrepresented
information in our loan origination operations. We cannot assure you, however,
that we have detected or will detect all misrepresented information in our loan
originations.
A material difference between the assumptions used in the determination of the
value of our residual interests and our actual experience could harm our
financial position.
As of September 30, 2004, the value on our balance sheet of our residual
interests from securitization transactions was $77.1 million. The value of these
residuals is a function of the delinquency, loss, prepayment speed and discount
rate assumptions we use. It is extremely difficult to validate the assumptions
we use in valuing our residual interests. In the future, if our actual
experience differs materially from these assumptions, our cash flow, financial
condition, results of operations and business prospects could be harmed.
We depend upon distributions from our operating subsidiaries to fund our
operations and may be subordinate to the rights of their existing and future
creditors.
We conduct substantially all of our operations through our subsidiaries.
Without independent means of generating operating revenue, we depend on
distributions and other payments from the subsidiaries to make distributions to
our stockholders. Our subsidiaries must first satisfy their cash needs, which
may include salaries of our executive officers, insurance, professional fees and
service of indebtedness that may be outstanding at various times before making
distributions. Financial covenants under future credit agreements, or provisions
of the laws of Maryland, where we and our QRS are organized, or Delaware or New
York, where our other operating subsidiaries are organized, may limit our
subsidiaries' ability to make sufficient dividend, distribution or other
payments to permit us to make distributions to stockholders. By virtue of our
holding company status, our 9.75% Series A Cumulative Redeemable Preferred
Stock, or Series A Preferred Stock, and 9.25% Series B Cumulative Redeemable
Preferred Stock, or Series B Preferred Stock, is structurally junior in right of
payment to all existing and future liabilities of our subsidiaries. The
inability of our operating subsidiaries to make distributions to us could have a
material adverse effect on our results of operations, financial condition and
business.
Our financial results fluctuate as a result of seasonality and other factors,
including the demand for mortgage loans, which makes it difficult to predict our
future performance.
Our business is generally subject to seasonal trends. These trends reflect
the general pattern of resales of homes, which typically peak during the spring
and summer seasons. AHM Holdings' quarterly results have fluctuated in the past
and are expected to fluctuate in the future, reflecting the seasonality of the
industry. Further, if the sale of a loan is postponed, the recognition of income
from the sale is also postponed. If such a delay causes us to recognize income
in the next quarter, our results of operations for the previous quarter could be
harmed. Unanticipated delays could also increase our exposure to interest rate
fluctuations by lengthening the period during which our variable rate borrowings
under credit facilities are outstanding. If our results of operations do not
meet the expectations of our stockholders and securities analysts, then the
price of our securities may be harmed.
-15-
We may not be able to manage our growth efficiently, which may harm our results
and may, in turn, harm the market price of our securities and our ability to
distribute dividends.
Over the last several years, AHM Holdings experienced significant growth in
its business activities and in the number of its employees. We will seek
continued growth through both acquisitions and internal growth. AHM Holdings'
growth has required, and our growth will continue to require, increased
investment in management and professionals, personnel, financial and management
systems and controls and facilities, which could cause our operating margins to
decline from historical levels, especially in the absence of revenue growth.
We face risks in connection with any completed or potential acquisition, which
could have a material adverse impact on our growth or our operations.
AHM Holdings has completed several acquisitions over the past few years,
and we from time to time will continue to consider additional strategic
acquisitions of mortgage lenders and other mortgage banking- and finance-related
companies. Upon completion of an acquisition, we are faced with the challenges
of integrating the operations, services, products, personnel and systems of
acquired companies into our business, identifying and eliminating duplicated
efforts and systems and incorporating different corporate strategies, addressing
unanticipated legal liabilities and other contingencies, all of which divert
management's attention from ongoing business operations. Any acquisition we make
may also result in potentially dilutive issuances of equity securities, the
incurrence of additional debt and the amortization of expenses related to
goodwill and other intangible assets. We cannot assure you that we will be
successful in integrating any acquired business effectively into the operations
of our business. In addition, there is substantial competition for acquisition
opportunities in the mortgage industry. This competition could result in an
increase in the price of, and a decrease in the number of, attractive
acquisition candidates. As a result, we may not be able to successfully acquire
attractive candidates on terms we deem acceptable. We cannot guarantee that we
will be able to overcome the risks associated with acquisitions or that such
risks will not adversely affect our growth and results of operations.
We face intense competition that could harm our market share and our revenues.
We face intense competition from commercial banks, savings and loan
associations and other finance and mortgage banking companies, as well as from
Internet-based lending companies and other lenders participating on the
Internet. Entry barriers in the mortgage industry are relatively low and
increased competition is likely. As we seek to expand our business, we will face
a greater number of competitors, many of whom will be well-established in the
markets we seek to penetrate. Many of our competitors are much larger than we
are, have better name recognition than we do and have far greater financial and
other resources than we do. We cannot assure you that we will be able to
effectively compete against them or any future competitors.
In addition, competition may lower the rates we are able to charge
borrowers, thereby potentially lowering the amount of income on future loan
sales and sales of servicing rights. Increased competition also may reduce the
volume of our loan originations and loan sales. We cannot assure you that we
will be able to compete successfully in this evolving market.
The success and growth of our business will depend on our ability to adapt to
technological changes.
Our mortgage origination business is currently dependent on our ability to
effectively interface with our customers and efficiently process loan
applications and closings. The origination process is becoming more dependent on
technology advancement, such as the ability to process applications over the
Internet, accept electronic signatures, provide process status updates instantly
and other customer expected conveniences. As these requirements increase in the
future, we will have to remain competitive with new technology and such advances
may require significant capital expenditures.
An interruption in or breach of our information systems may result in lost
business.
We rely heavily upon communications and information systems to conduct our
business. Any failure or interruption or breach in security of our information
systems or the third-party information systems on which we rely could cause
underwriting or other delays and could result in fewer loan applications being
received, slower
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processing of applications and reduced efficiency in loan servicing. We are
required to comply with significant federal and state regulations with respect
to the handling of customer information, and a failure, interruption or breach
of our information systems could result in regulatory action and litigation
against us. We cannot assure you that such failures or interruptions will not
occur or if they do occur that they will be adequately addressed by us or the
third parties on which we rely. The occurrence of any failures or interruptions
could harm our results of operations, financial condition and business
prospects.
We face intense competition for personnel that could harm our business and in
turn negatively affect the market price of our securities and our ability to
distribute dividends.
Generally, our business is dependent on the highly skilled, and often
highly specialized, individuals we employ. Our failure to recruit and retain
qualified employees, including employees qualified to manage a portfolio of
structured products or mortgage-backed securities, could harm our future
operating results and may, in turn, negatively affect the market price of our
securities and our ability to pay dividends.
Specifically, we depend on our loan originators to generate customers by,
among other things, developing relationships with consumers, real estate agents
and brokers, builders, corporations and others, which we believe leads to repeat
and referral business. Accordingly, we must be able to attract, motivate and
retain skilled loan originators. In addition, our growth strategy contemplates
hiring additional loan originators. The market for such persons is highly
competitive and historically has experienced a high rate of turnover.
Competition for qualified loan originators may lead to increased costs to hire
and retain them. We cannot guarantee that we will be able to attract or retain
qualified loan originators. If we cannot attract or retain a sufficient number
of skilled loan originators, or even if we can retain them but at higher costs,
our business and results of operations could be harmed.
The conduct of the independent brokers through whom we originate our wholesale
loans could subject us to fines or other penalties.
The mortgage brokers through whom we originate wholesale loans have
parallel and separate legal obligations to which they are subject. While these
laws may not explicitly hold the originating lenders responsible for the legal
violations of mortgage brokers, federal and state agencies increasingly have
sought to impose such liability. Recently, for example, the United States
Federal Trade Commission, or the FTC, entered into a settlement agreement with a
mortgage lender where the FTC characterized a broker that had placed all of its
loan production with a single lender as the "agent" of the lender; the FTC
imposed a fine on the lender in part because, as "principal," the lender was
legally responsible for the mortgage broker's unfair and deceptive acts and
practices. The United States Department of Justice in the past has sought to
hold mortgage lenders responsible for the pricing practices of mortgage brokers,
alleging that the mortgage lender is directly responsible for the total fees and
charges paid by the borrower under the Fair Housing Act even if the lender
neither dictated what the mortgage broker could charge nor kept the money for
its own account. We exercise little or no control over the activities of the
independent mortgage brokers from whom we obtain our wholesale loans.
Nevertheless, we may be subject to claims for fines or other penalties based
upon the conduct of our independent mortgage brokers.
We depend on brokers for a substantial portion of our loan production.
We depend, to a large extent, on brokers for our originations of mortgage
loans. Our brokers are not contractually obligated to do business with us.
Further, our competitors also have relationships with the same brokers and
actively compete with us in our efforts to expand our broker networks.
Accordingly, we cannot assure you that we will be successful in maintaining our
existing relationships or expanding our broker networks. The failure to do so
could negatively impact the volume and pricing of our loans, which could have a
material adverse effect on our business, financial condition, liquidity and
results of operations.
The loss of key purchasers of our loans or a reduction in prices paid could harm
our financial condition.
In 2003, 89% of the loans that we sold were to three large national
financial institutions, two of which compete with us directly for retail
originations. If these financial institutions or any other significant purchaser
of our loans cease to buy our loans and equivalent purchasers cannot be found on
a timely basis, then our business and results of operations could be harmed. Our
results of operations could also be harmed if these financial institutions or
other
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purchasers lower the price they pay to us or adversely change the material terms
of their loan purchases from us. The prices at which we sell our loans vary over
time. A number of factors determine the price we receive for our loans. These
factors include:
o the number of institutions that are willing to buy our loans;
o the amount of comparable loans available for sale;
o the levels of prepayments of, or defaults on, loans;
o the types and volume of loans that we sell;
o the level and volatility of interest rates; and
o the quality of our loans.
We may be required to return proceeds obtained from the sale of loans, which
would negatively impact our results of operations.
When we sell a loan to an investor, we are required to make representations
and warranties regarding the loan, the borrower and the property. These
representations are made based in part on our due diligence and related
information provided to us by the borrower and others. If any of these
representations or warranties is later determined not to be true, we may be
required to repurchase the loan, including principal and interest, from the
investor or indemnify the investor for any damages or losses caused by the
breach of such representation or warranty. In connection with some non-prime
loan sales, we may be required to return a portion of the premium paid by the
investor if the loan is prepaid within the first year after its sale. If, to any
significant extent, we are required to repurchase loans, indemnify investors or
return loan premiums, it could have a material adverse effect on our business
and results of operations.
Changes in existing government sponsored and federal mortgage programs could
negatively affect our mortgage banking business.
Our ability to generate revenue through mortgage sales to institutional
investors largely depends on programs sponsored by Fannie Mae, Freddie Mac,
Ginnie Mae and others which facilitate the issuance of mortgage-backed
securities in the secondary market. A portion of our business also depends on
various programs of the Federal Housing Administration (FHA) and the Veterans
Administration (VA). Any discontinuation of, or significant reduction in, the
operation of those programs could have a material adverse effect on our mortgage
banking business and results of operations. Also, any significant adverse change
in the level of activity in the secondary market or the underwriting criteria of
these entities would reduce our revenues.
We must comply with numerous government regulations and we are subject to
changes in law that could increase our costs and adversely affect our business.
Our mortgage banking business is subject to the laws, rules and regulations
of various federal, state and local government agencies regarding the
origination, processing, underwriting, sale and servicing of mortgage loans.
These laws, rules and regulations, among other things, limit the interest rates,
finance charges and other fees we may charge, require us to make extensive
disclosure, prohibit discrimination and impose qualification and licensing
obligations on us. They also impose on us various reporting and net worth
requirements. We also are subject to inspection by these government agencies.
Our mortgage banking business is also subject to laws, rules and regulations
regarding the disclosure of non-public information about our customers to
non-affiliated third parties. Our failure to comply with any of these
requirements could lead to, among other things, the loss of approved status,
termination of contractual rights without compensation, demands for
indemnification or mortgage loan repurchases, class action lawsuits and
administrative enforcement actions.
Regulatory and legal requirements are subject to change. If such
requirements change and become more restrictive, it would be more difficult and
expensive for us to comply and could affect the way we conduct our business,
which could adversely impact our results of operations. While we believe we are
currently in material
-18-
compliance with the laws, rules and regulations to which we are subject, we
cannot assure you that we are, or will be, in full compliance with applicable
laws, rules and regulations. If we cannot comply with those laws or regulations,
or if new laws limit or eliminate some of the benefits of purchasing a mortgage,
our business and results of operations may be materially adversely affected.
As a mortgage lender, we must comply with numerous licensing requirements, and
our inability to remain in compliance with such requirements could adversely
affect our operations and our reputation generally.
Like other mortgage companies, we must comply with the applicable licensing
and other regulatory requirements of each jurisdiction in which we are
authorized to lend. These requirements are quite complex and vary from
jurisdiction to jurisdiction. We monitor and regularly review our compliance
with such requirements. From time to time we are subject to examination by
regulators, and if it is determined that we are not in compliance with the
applicable requirements, we may be fined, and our license to lend in one or more
jurisdictions may be suspended or revoked. We have in the past violated, and we
may in the future violate, certain aspects of the licensing requirements in some
jurisdictions. Although the past violations of which we are aware have not had a
material adverse effect on our business, operations or reputation, we cannot
assure you that future or past violations of which we are not aware will not
have such an effect.
The loss of our relationships with government agencies and related entities
would have an adverse effect on our business.
Our agreements with Fannie Mae, Freddie Mac, Ginnie Mae, the FHA and the VA
afford us a number of advantages and may be canceled by the counterparty for
cause. Cancellation of one or more of these agreements would have a material
adverse impact on our operating results and could result in further
disqualification with other counterparties, loss of technology and other
materially adverse consequences.
We are exposed to environmental liabilities with respect to properties to which
we take title, which could increase our costs of doing business and adversely
impact our results of operations.
In the course of our business, at various times, we may foreclose and take
title (for security purposes) to residential properties and could be subject to
environmental liabilities with respect to such properties. To date, we have not
been required to perform any environmental investigation or remediation
activities, nor have we been subject to any environmental claims relating to
these activities. We cannot assure you that this will remain the case in the
future. We may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and clean up costs incurred
by these parties in connection with environmental contamination, or may be
required to investigate or clean up hazardous or toxic substances or chemical
releases at a property. The costs associated with an environmental investigation
or remediation activities could be substantial. In addition, as the owner or
former owner of a contaminated site, we may be subject to common law claims by
third parties seeking damages and costs resulting from environmental
contamination emanating from such property.
Our Board of Directors or management may change our operating policies and
strategies without prior notice or stockholder approval and such changes could
harm our business and results of operations and the value of our securities.
Our Board of Directors and, in certain cases, our management, have the
authority to modify or waive our current operating policies and our strategies
without prior notice and without stockholder approval. We cannot predict the
effect any changes to our current operating policies and strategies would have
on our business, operating results and value of our stock and it is possible
that the effects might be adverse.
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Certain provisions of Maryland law and our charter and bylaws could hinder,
delay or prevent a change in control.
Certain provisions of Maryland law and our charter and bylaws could have
the effect of discouraging, delaying or preventing transactions that involve an
actual or threatened change in control of our company. These provisions include
the following:
o Classified Board of Directors. Our Board of Directors is divided into
three classes with staggered terms of office of three years each. The
classification and staggered terms of office of our directors make it
more difficult for a third party to gain control of our Board of
Directors. At least two annual meetings of stockholders, instead of
one, generally would be required to effect a change in a majority of
our Board of Directors.
o Removal of Directors. Under our charter, subject to the rights of one
or more classes or series of preferred stock to elect or remove one or
more directors, a director may be removed only for cause and only by
the affirmative vote of at least two-thirds of all votes entitled to
be cast by our stockholders generally in the election of directors.
o Number of Directors, Board Vacancies, Term of Office. We may, in the
future, elect to be subject to certain provisions of Maryland law
which vest in the Board of Directors the exclusive right to determine
the number of directors and the exclusive right, by the affirmative
vote of a majority of the remaining directors, to fill vacancies on
the Board even if the remaining directors do not constitute a quorum.
These provisions of Maryland law, which are applicable even if other
provisions of Maryland law or our charter or bylaws provide to the
contrary, also provide that any director elected to fill a vacancy
shall hold office for the remainder of the full term of the class of
directors in which the vacancy occurred, rather than the next annual
meeting of stockholders as would otherwise be the case, and until his
or her successor is elected and qualifies.
o Stockholder Requested Special Meetings. Our bylaws provide that our
stockholders have the right to call a special meeting only upon the
written request of the stockholders entitled to cast not less than a
majority of all the votes entitled to be cast by the stockholders at
such meeting.
o Advance Notice Provisions for Stockholder Nominations and Proposals.
Our bylaws require advance written notice for stockholders to nominate
persons for election as directors at, or to bring other business
before, any meeting of stockholders. This bylaw provision limits the
ability of stockholders to make nominations of persons for election as
directors or to introduce other proposals unless we are notified in a
timely manner prior to the meeting.
o Exclusive Authority of Our Board to Amend the Bylaws. Our bylaws
provide that our Board of Directors has the exclusive power to adopt,
alter or repeal any provision of the bylaws or to make new bylaws.
Thus, our stockholders may not effect any changes to our bylaws.
o Preferred Stock. Under our charter, our Board of Directors has
authority to issue preferred stock from time to time in one or more
series and to establish the terms, preferences and rights of any such
series of preferred stock, all without approval of our stockholders.
The issuance of shares of preferred stock could adversely impact the
voting power of the holders of common stock and could have the effect
of delaying or preventing a change in control or other corporate
action.
-20-
o Duties of Directors with Respect to Unsolicited Takeovers. Maryland
law provides protection for Maryland corporations against unsolicited
takeovers by limiting, among other things, the duties of the directors
in unsolicited takeover situations. The duties of directors of
Maryland corporations do not require them to (i) accept, recommend or
respond to any proposal by a person seeking to acquire control of the
corporation, (ii) authorize the corporation to redeem any rights
under, or modify or render inapplicable, any stockholders' rights
plan, (iii) make a determination under the Maryland Business
Combination Act or the Maryland Control Share Acquisition Act (to the
extent either Act is otherwise applicable), or (iv) act or fail to act
solely because of the effect that the act or failure to act may have
on an acquisition or potential acquisition of control of the
corporation or the amount or type of consideration that may be offered
or paid to the stockholders in an acquisition. Moreover, under
Maryland law, the act of the directors of a Maryland corporation
relating to or affecting an acquisition or potential acquisition of
control is not subject to any higher duty or greater scrutiny than is
applied to any other act of a director. Maryland law also contains a
statutory presumption that an act of a director of a Maryland
corporation satisfies the applicable standards of conduct for
directors under Maryland law.
o Ownership Limit. In order to preserve our status as a REIT under the
Internal Revenue Code, our charter generally prohibits any single
stockholder, or any group of affiliated stockholders, from
beneficially owning more than (i) 6.5% of our outstanding common
stock, or more than 6.5% of our outstanding common and preferred
stock, (ii) more than 9.8% of either the total number or the value of
the total number of outstanding shares of the Series A Preferred Stock
or (iii) more than 9.8% of either the total number or the value of the
total number of outstanding shares of the Series B Preferred Stock,
unless and to the extent to which our Board of Directors decides to
waive or modify this ownership limit.
o Maryland Business Combination Act. The Maryland Business Combination
Act provides that, unless exempted, a Maryland corporation may not
engage in business combinations, including mergers, dispositions of
10% or more of its assets, issuances of shares of stock and other
specified transactions, with an "interested stockholder" or an
affiliate of an interested stockholder for five years after the most
recent date on which the interested stockholder became an interested
stockholder, and thereafter unless specified criteria are met. An
interested stockholder is generally a person owning or controlling,
directly or indirectly, 10% or more of the voting power of the
outstanding stock of a Maryland corporation. Our Board of Directors
has adopted a resolution exempting the company from this statute.
However, our Board of Directors may repeal or modify this resolution
in the future, in which case the provisions of the Maryland Business
Combination Act will be applicable to business combinations between us
and other persons.
o Maryland Control Share Acquisition Act. Maryland law provides that
"control shares" of a corporation acquired in a "control share
acquisition" shall have no voting rights except to the extent approved
by a vote of two-thirds of the votes eligible to be cast on the matter
under the Maryland Control Share Acquisition Act. "Control shares"
means shares of stock that, if aggregated with all other shares of
stock previously acquired by the acquiror, would entitle the acquiror
to exercise voting power in electing directors within one of the
following ranges of the voting power: one-tenth or more but less than
one-third, one-third or more but less than a majority or a majority or
more of all voting power. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
If voting rights or control shares acquired in a control share
acquisition are not approved at a stockholders' meeting, then subject
to certain conditions and limitations, the issuer may redeem any or all
of the control shares for fair value. If voting rights of such control
shares are approved at a stockholders' meeting and the acquiror becomes
entitled to vote a majority of the shares of stock entitled to vote,
all other stockholders may exercise appraisal rights. Our bylaws
contain a provision exempting acquisitions of our shares from the
Maryland Control Share Acquisition Act. However, our Board of Directors
may amend our bylaws in the future to repeal or modify this exemption,
in which case any control shares of ours acquired in a control share
acquisition will be subject to the Maryland Control Share Acquisition
Act.
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Loss of Investment Company Act exemption would adversely affect us and
negatively affect the market price of shares of our securities and our ability
to distribute dividends.
We are not regulated as an investment company under the Investment Company
Act of 1940, as amended, and we intend to operate so as to not become regulated
as an investment company under the Investment Company Act. We intend to be
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate." Specifically, we
intend to invest at least 55% of our assets in mortgage loans or mortgage-backed
securities that represent the entire ownership in a pool of mortgage loans
ownership and at least an additional 25% of our assets in mortgages,
mortgage-backed securities, securities of REITs and other real estate-related
assets.
If we fail to qualify for an exemption under the Investment Company Act, we
may be required to restructure our activities. For example, if the market value
of our investments in equity securities were to increase by an amount that
resulted in less than 55% of our assets being invested in mortgage loans or
mortgage-backed securities that represent the entire ownership in a pool of
mortgage loans, we might have to sell equity securities in order to qualify for
exemption under the Investment Company Act. In the event we must restructure our
activities, our results of operations could be adversely affected.
Risks Relating to Our Status as a REIT
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code substantially limit our
ability to hedge mortgage-backed securities and related borrowings. Under these
provisions, our annual income from certain qualified hedges, together with any
other income not generated from qualified REIT real estate assets, must be less
than 25% of our gross income and, through 2004, we must limit our aggregate
non-qualified hedging income (together with aggregate income we receive from
certain services) to less than 5% of our annual gross income. As a result, we
might in the future be required to limit our use of advantageous hedging
techniques. Unhedged positions could leave us exposed to greater risks
associated with changes in interest rates than we would otherwise bear.
We may fail to qualify as a REIT and be subject to tax.
If we are compelled to sell qualifying REIT assets, or we have insufficient
cash flow to originate or purchase qualifying REIT assets, we may have
insufficient qualifying REIT assets, in which case we may fail to qualify as a
REIT. See "Certain U.S. Federal Income Tax Consequences of Our Status as a REIT"
in this prospectus.
To qualify as a REIT, not more than 20% of the value of our total assets
may be represented by the securities of one or more TRSs at the close of any
calendar quarter, subject to certain "cure" periods. See "Certain U.S. Federal
Income Tax Consequences of Our Status as a REIT--Requirements for Qualification
as a REIT--Asset Tests." We monitor the value of our investment in our TRSs in
relation to our other assets to comply with the 20% asset test. There cannot be
complete assurance that we will be successful in that effort. In certain cases,
we may need to borrow from third parties to acquire additional qualifying REIT
assets or increase the amount and frequency of dividends from our TRSs in order
to comply with the 20% asset test. Moreover, there can be no assurance that the
Internal Revenue Service will not disagree with our determinations of value. If
the Internal Revenue Service determines that the value of our investment in our
TRSs was more than 20% of the value of our total assets at the close of any
calendar quarter, we could lose our REIT status.
Our TRSs earn income from activities that are prohibited for REITs and owe
income taxes on the taxable income from these activities. For example, our TRSs
earn income from loan origination and sales activities, as well as from other
origination and servicing functions, which would generally not be qualifying
income for purposes of the gross income tests applicable to REITs or might
otherwise be subject to adverse tax liability if the income were generated by a
REIT.
We may, at some point in the future, borrow funds from one or more of our
TRSs. Although any such intercompany borrowings will be structured so as to
constitute indebtedness for all tax purposes, no assurance can be given that the
Internal Revenue Service will not challenge such arrangements, in which case the
borrowing may be
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characterized as a dividend distribution to us by our TRS. Any such
characterization may cause us to fail one or more of the REIT requirements.
Even if we continue to qualify as a REIT, we may nevertheless be subject to
taxes (and possibly excise taxes) on undistributed income, net income from
certain prohibited transactions (including certain transactions between us and
our TRSs), and state and local taxes. Prohibited transactions could include
transactions in which loans are sold by our QRS rather than by our TRSs. In
addition, in the event that any transactions between us or our QRS and our TRSs
are determined not to be on an arm's-length basis, we could be subject to excise
taxes on such transactions. We believe that all such transactions are conducted
on an arm's-length basis, but there can be no assurance that the Internal
Revenue Service will not successfully contest the arm's-length nature of such
transactions or that we will otherwise be able to avoid application of excise
taxes or other additional taxes. Any such taxes could affect our overall
profitability and the amounts of distributions to our stockholders.
Our management has limited experience operating a REIT and we cannot assure you
that our management's past experience will be sufficient to successfully manage
our business as a REIT.
The requirements for qualifying as a REIT are highly technical and complex.
We have limited experience as a REIT and our management has limited experience
in complying with the income, asset and other limitations imposed by the REIT
provisions of the Internal Revenue Code. The REIT provisions are complex and the
failure to comply with those provisions in a timely manner could prevent us from
qualifying as a REIT or could force us to pay unexpected taxes and penalties. In
such event, our net income would be substantially reduced, and we could incur a
loss, which could materially harm our results of operation, financial condition
and business prospects.
-23-
Risks Related to Our Capital Stock
Various factors may cause the market price of our capital stock to become
volatile, which could harm our ability to access the capital markets in the
future.
The following factors, many of which are beyond our control, could
contribute to the volatility of the price of our capital stock:
o actual or anticipated variations in our quarterly results;
o changes in our level of dividend payments;
o changes in the value of our mortgage holdings and related liabilities;
o changes in the prospects for, or results from, our mortgage holdings,
mortgage origination or mortgage servicing businesses;
o new products or services offered by us or our subsidiaries and our
competitors;
o our actual results being different from our earnings guidance or other
projections;
o changes in projections of our financial results by securities
analysts;
o general conditions or trends in the mortgage holding, mortgage
origination and mortgage servicing businesses;
o announcements by us of significant acquisitions, strategic
relationships, investments or joint ventures;
o negative changes in the public's perception of the prospects for
returns from holding mortgage-backed securities and from the mortgage
origination and servicing businesses, which could depress our stock
price, regardless of actual results;
o interest rate fluctuations or general economic conditions, such as
inflation or a recession;
o any obstacles in continuing to qualify as a REIT, including obstacles
due to changes in law applicable to REITs;
o additions or departures of our key personnel; and
o issuing new securities pursuant to this offering or otherwise.
This volatility may make it difficult for us to access the capital markets
through additional secondary offerings of our common stock and additional
preferred stock offerings, regardless of our financial performance, and such
difficulty may preclude us from being able to take advantage of certain business
opportunities or meet our obligations, which could, in turn, harm our results of
operations, financial condition and business prospects.
There may be substantial sales of our common stock after an offering, which
would cause a decline in our stock price.
Sales of substantial amounts of our common stock in the public market
following an offering of our securities, or the perception that such sales could
occur, could have a material adverse effect on the market price of our common
stock.
-24-
The amount of our dividends may be less than projected.
The amount of any dividend paid by us will depend on a number of factors,
including the amount of income generated from our mortgage holdings, the amount
of income generated from our mortgage origination and servicing businesses and
the amount of such earnings retained by our TRSs to provide for future growth.
Our ability to pay our dividends depends upon the availability of funds and our
actual operating results. If funds are not available or our actual operating
results are below our expectations, we may need to sell assets or borrow funds
to pay these distributions.
Dividends or distributions on shares of our securities may reduce the funds
of our company that are legally available for payment of future dividends on any
outstanding common or preferred stock. In addition, if we do not generate
sufficient cash flow from ongoing operations (including principal payments and
interest payments on our mortgage-backed securities) to fund our dividends, we
may need to sell mortgage-backed securities or borrow funds by entering into
repurchase agreements or otherwise borrowing funds under our lines of credit to
pay the distributions. If we were to borrow funds on a regular basis to make
distributions in excess of operating cash flow, it is likely that our operating
results and our stock price would be adversely affected.
Our Board of Directors may authorize the issuance of additional shares that may
cause dilution and may depress the price of our common stock.
Our charter permits our Board of Directors, without your approval, to:
o authorize the issuance of additional common or preferred stock in
connection with future equity offerings, acquisitions of securities or
other assets of companies; and
o classify or reclassify any unissued common stock or preferred stock
and to set the preferences, rights and other terms of the classified
or reclassified shares, including the issuance of shares of preferred
stock that have preference rights over the common stock with respect
to dividends, liquidation, voting and other matters or shares of
common stock that have preference rights over your common stock with
respect to voting.
The issuance of additional shares of our common stock could be
substantially dilutive to your shares and may depress the price of our common
stock.
Due to an exception to the stock ownership limitations applicable to our status
as a REIT, Michael Strauss holds a significant percentage of our outstanding
securities.
Under our charter, AHM Holdings' founder, our Chief Executive Officer and
President, Michael Strauss, is exempted from the general ownership limitation
that applies to holders of our securities in connection with maintaining our
status as a REIT and is permitted to beneficially own up to 20% of the value of
the total number of our outstanding common and preferred shares of stock. As of
September 30, 2004, Mr. Strauss beneficially owned approximately 10.55% of our
outstanding common stock. Accordingly, Mr. Strauss has the ability to influence
any of our affairs requiring stockholder approval, including, for example, the
election and removal of directors, amendments to our charter and approval of
significant corporate transactions.
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USE OF PROCEEDS
We intend to use the net proceeds from the sale of the securities offered
by us for general corporate purposes, which may include, among other things,
working capital, investing in mortgage-backed securities, acquisitions and
capital expenditures. We may temporarily invest funds that are not immediately
needed for these purposes in short-term marketable securities or use them to
make payments on our borrowings. Additional information on the use of proceeds
from the sale of securities offered by this prospectus may be set forth in the
applicable prospectus supplement relating to such offering.
RATIO INFORMATION
The ratio of earnings to fixed charges was calculated by dividing the sum
of fixed charges into the sum of earnings before taxes and minority interests
plus fixed charges and distributed income of equity investees. Fixed charges
consist of interest expense and certain other expenses. Equity investees are
investments that we account for using the equity method of accounting.
The table below sets forth the ratio of earnings to fixed charges for the
fiscal years ended December 31, 1999, December 31, 2000, December 31, 2001,
December 31, 2002, December 31, 2003 and for the nine months ended September 30,
2004.
Nine Months Ended
Years Ended December 31, September 30, 2004
---------------------------- --------------------
1999 2000 2001 2002 2003
Ratio of earnings to fixed charges................ 1.95 1.48 2.07 2.95 2.84 1.52
The ratio of earnings to combined fixed charges and preferred stock
dividends was calculated by dividing the sum of fixed charges and preferred
stock dividends into the sum of earnings before taxes and fixed charges. Fixed
charges consist of interest expense and certain other expenses. Preferred stock
dividends represent the pre-tax earnings necessary to cover the dividends on our
preferred stock, assuming such earnings are taxed at our consolidated effective
tax rate.
The table below sets forth the ratio of earnings to combined fixed charges
and preferred stock dividends for the nine months ended September 30, 2004.
Nine Months Ended
September 30, 2004
------------------
Ratio of earnings to combined
fixed charges and preferred stock dividends.(1) 1.51
------------------
(1) We did not have any preferred stock outstanding prior to the initial
issuance of our Series A Preferred Stock on July 7, 2004.
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PLAN OF DISTRIBUTION
We may sell the securities being offered hereby from time to time in one or
more of the following methods:
o to underwriters or dealers, who may act directly or through a
syndicate represented by one or more managing underwriters;
o through broker-dealers we have designated to act on our behalf as
agents;
o directly to one or more purchasers;
o through a number of direct sales or auctions performed by utilizing
the Internet or a bidding or ordering system; or
o through a combination of any of these methods of sale or by any other
legally available means.
We may distribute the securities from time to time in one or more
transactions at a fixed price or prices, which may be changed, or at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices or at negotiated prices.
Each prospectus supplement will set forth the manner and terms of an
offering of securities, including:
o whether that offering is being made to underwriters or through agents
or directly;
o the rules and procedures for any auction or bidding process, if used;
o the securities' purchase price or initial public offering price; and
o the proceeds we anticipate from the sale of the securities.
We may enter into derivative or other hedging transactions with financial
institutions. These financial institutions may in turn engage in sales of
securities to hedge their position, deliver this prospectus in connection with
some or all of those sales and use the securities covered by this prospectus to
close out any loan of securities or short position created in connection with
those sales.
We may effect sales of securities in connection with forward sale
agreements with third parties. Any distribution of securities pursuant to any
forward sale agreement may be effected from time to time in one or more
transactions that may take place through the New York Stock Exchange, or NYSE,
including block trades or ordinary broker's transactions, or through
broker-dealers acting either as principal or agent, or through privately
negotiated transactions, or through an underwritten public offering, or through
a combination of any such methods of sale, at market prices prevailing at the
time of sale, at prices relating to such prevailing market prices or at
negotiated or fixed prices.
We may also sell securities short using this prospectus and deliver
securities covered by this prospectus to close out any loan of securities or
such short positions, or loan or pledge securities to financial institutions
that in turn may sell the securities using this prospectus.
We may pledge or grant a security interest in some or all of the securities
covered by this prospectus to support a derivative or hedging position or other
obligation and, if we default in the performance of our obligations, the
pledgees or secured parties may offer and sell the securities from time to time
pursuant to this prospectus.
Sales Through Underwriters
If we use underwriters in the sale, such underwriters will acquire the
securities for their own account. The underwriters may resell the securities,
either directly to the public or to securities dealers, at various times in one
or
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more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the underwriters to purchase the securities will be subject to certain
conditions. Unless indicated otherwise in a prospectus supplement, the
underwriters will be obligated to purchase all the securities of the series
offered if any of the securities are purchased.
Any initial public offering price and any concessions allowed or reallowed
to dealers may be changed intermittently.
Sales Through Agents
Unless otherwise indicated in the applicable prospectus supplement, when
securities are sold through an agent, the designated agent will agree, for the
period of its appointment as agent, to use its best efforts to sell the
securities for our account and will receive commissions from us as will be set
forth in the applicable prospectus supplement.
Securities bought in accordance with a redemption or repayment under their
terms also may be offered and sold, if so indicated in the applicable prospectus
supplement, in connection with a remarketing by one or more firms acting as
principals for their own accounts or as agents for us. Any remarketing firm will
be identified and the terms of its agreement, if any, with us and its
compensation will be described in the prospectus supplement. Remarketing firms
may be deemed to be underwriters in connection with the securities remarketed by
them.
If so indicated in the applicable prospectus supplement, we will authorize
agents, underwriters or dealers to solicit offers by certain specified
institutions to purchase securities at the public offering price set forth in
the prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a future date specified in the prospectus supplement.
These contracts will be subject only to those conditions set forth in the
applicable prospectus supplement, and the prospectus supplement will set forth
the commissions payable for solicitation of these contracts.
Direct Sales
We may also sell offered securities directly as principal for our own
account. In this case, no underwriters or agents would be involved.
Sales Through the Internet
We may from time to time offer securities directly to the public, with or
without the involvement of agents, underwriters or dealers, and may utilize the
Internet or another electronic bidding or ordering system for the pricing and
allocation of such securities. Such a system may allow bidders to directly
participate, through electronic access to an auction site, by submitting
conditional offers to buy that are subject to acceptance by us, and which may
directly affect the price or other terms at which such securities are sold.
Such a bidding or ordering system may present to each bidder, on a
real-time basis, relevant information to assist you in making a bid, such as the
clearing spread at which the offering would be sold, based on the bids
submitted, and whether a bidder's individual bids would be accepted, prorated or
rejected. Other pricing methods may also be used. Upon completion of such an
auction process, securities will be allocated based on prices bid, terms of bid
or other factors.
The final offering price at which securities would be sold and the
allocation of securities among bidders would be based in whole or in part on the
results of the Internet bidding process or auction. Many variations of the
Internet auction or pricing and allocation systems are likely to be developed in
the future, and we may utilize such systems in connection with the sale of
securities. The specific rules of such an auction would be distributed to
potential bidders in an applicable prospectus supplement.
If an offering is made using such a bidding or ordering system you should
review the auction rules, as described in the prospectus supplement, for a more
detailed description of such offering procedures.
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General Information
Broker-dealers, agents or underwriters may receive compensation in the form
of discounts, concessions or commissions from us and/or the purchasers of
securities for whom such broker-dealers, agents or underwriters may act as
agents or to whom they sell as principal or both (this compensation to a
particular broker-dealer might be in excess of customary commissions).
Underwriters, dealers and agents that participate in any distribution of
the offered securities may be deemed "underwriters" within the meaning of the
Securities Act and any discounts or commissions they receive in connection with
the distribution may be deemed to be underwriting compensation. Those
underwriters and agents may be entitled, under their agreements with us, to
indemnification by us against certain civil liabilities, including liabilities
under the Securities Act, or to contribution by us to payments that they may be
required to make in respect of those civil liabilities. Various of those
underwriters or agents may be customers of, engage in transactions with, or
perform services for, us or our affiliates in the ordinary course of business.
We will identify any underwriters or agents, and describe their compensation, in
a prospectus supplement.
We will file a supplement to this prospectus, if required, pursuant to Rule
424(b) under the Securities Act, if we enter into any material arrangement with
a broker, dealer, agent or underwriter for the sale of securities through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer. Such prospectus supplement will disclose:
o the name of any participating broker, dealer, agent or underwriter;
o the number and type of securities involved;
o the price at which such securities were sold;
o any securities exchanges on which such securities may be listed;
o the commissions paid or discounts or concessions allowed to any such
broker, dealer, agent or underwriter where applicable; and
o other facts material to the transaction.
In order to facilitate the offering of certain securities under this
prospectus or an applicable prospectus supplement, certain persons participating
in the offering of those securities may engage in transactions that stabilize,
maintain or otherwise affect the price of those securities during and after the
offering of those securities. Specifically, if the applicable prospectus
supplement permits, the underwriters of those securities may over-allot or
otherwise create a short position in those securities for their own account by
selling more of those securities than have been sold to them by us and may elect
to cover any such short position by purchasing those securities in the open
market.
In addition, the underwriters may stabilize or maintain the price of those
securities by bidding for or purchasing those securities in the open market and
may impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in the offering are reclaimed if
securities previously distributed in the offering are repurchased in connection
with stabilization transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the securities at a level
above that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of securities to the extent that it
discourages resales of the securities. No representation is made as to the
magnitude or effect of any such stabilization or other transactions. Such
transactions, if commenced, may be discontinued at any time.
This prospectus, the applicable prospectus supplement and any applicable
pricing supplement in electronic format may be made available on the Internet
sites of, or through other online services maintained by, us and/or one or more
of the agents and/or dealers participating in an offering of securities, or by
their affiliates. In those cases, prospective investors may be able to view
offering terms online and, depending upon the particular agent or dealer,
prospective investors may be allowed to place orders online.
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Other than this prospectus, the applicable prospectus supplement and any
applicable pricing supplement in electronic format, the information on our or
any agent's or dealer's website and any information contained in any other
website maintained by any agent or dealer:
o is not part of this prospectus, the applicable prospectus supplement
and any applicable pricing supplement or the Registration Statement of
which they form a part;
o has not been approved or endorsed by us or by any agent or dealer in
its capacity as an agent or dealer, except, in each case, with respect
to the respective website maintained by such entity; and
o should not be relied upon by investors.
There can be no assurance that we will sell all or any of the securities
offered by this prospectus.
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DESCRIPTION OF CAPITAL STOCK
The following summary discusses the material terms of our capital stock.
This summary does not purport to be a complete description of our capital stock
and you should not rely on it as if it were. We have filed complete copies of
our charter, bylaws and articles supplementary establishing and fixing the
rights and preferences of our Series A Preferred Stock and Series B Preferred
Stock with the SEC and are incorporating the full text of those documents by
reference. We encourage you to read each of those documents in its entirety.
Our charter provides that we may issue up to 110,000,000 shares of capital
stock, consisting of 100,000,000 shares of common stock, par value $0.01 per
share, and 10,000,000 shares of preferred stock, par value $0.01 per share. As
of September 30, 2004, there were 40,184,333 shares of our common stock, issued
and outstanding. As of December 15, 2004, there were 2,150,000 shares of our
9.75% Series A Preferred Stock and 3,000,000 shares of our 9.25% Series B
Preferred Stock, issued and outstanding. There are currently no other classes or
series of preferred stock authorized or outstanding.
We are a Maryland corporation governed by the Maryland General Corporation
Law, which is referred to in this prospectus as the "MGCL." Under Maryland law,
stockholders generally are not responsible for a corporation's debts or
obligations.
Common Stock
Our charter authorizes the issuance of up to 100,000,000 shares of common
stock, par value $0.01 per share, of which 40,184,333 shares were outstanding as
of September 30, 2004. Each stockholder is entitled to one vote for each share
of common stock held on all matters submitted to a vote of stockholders. There
is no cumulative voting for election of directors. Accordingly, the holders of a
majority of the shares voted can elect all of the nominees for director. Except
as otherwise provided by law, holders of shares of our common stock vote
together as a single class. Holders of shares of our common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All shares
of common stock will, when issued, be fully paid and non-assessable.
Shares of our common stock are subject to restrictions upon their ownership
and transfer that were adopted for the purpose of enabling us to preserve our
status as a REIT. For a discussion of those restrictions, see "--Restrictions on
Ownership and Transfer" below.
Dividends. Subject to the preferences of any series of preferred stock that
may at times be outstanding, if any, holders of outstanding shares of common
stock are entitled to receive dividends when, as, and if declared by our Board
of Directors out of funds legally available for dividends and, if we liquidate,
dissolve or wind up, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. We intend to make regular quarterly
distributions to our stockholders. In order to qualify as a REIT for U.S.
federal income tax purposes, we must distribute to our stockholders annually at
least 90% of our taxable income, excluding the retained earnings of our taxable
REIT subsidiaries. Any profits attributable to the businesses of such taxable
REIT subsidiaries will be fully subject to corporate income tax, and after-tax
net income of these subsidiaries may be retained by the subsidiary or
distributed up to us as the parent corporation. Although we generally intend to
distribute to our stockholders each year an amount equal to 90% of our REIT
taxable income for that year, distributions paid by us will be at the discretion
of the Board of Directors and will depend on our actual cash flow, financial
condition, capital requirements, our desire to retain earnings of our taxable
subsidiaries to sustain future growth, the annual distribution requirement under
the REIT provisions of the Internal Revenue Code and other factors that the
Board of Directors deems relevant.
Subject to the MGCL and the rights of holders of any outstanding preferred
stock, holders of our common stock will be entitled to share dividends equally,
share for share.
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Preferred Stock
Our charter authorizes the issuance of up to 10,000,000 shares of preferred
stock, par value $0.01 per share. As of December 15, 2004, there were 2,150,000
shares of our Series A Preferred Stock and 3,000,000 shares of our Series B
Preferred Stock, issued and outstanding. There are currently no other classes or
series of preferred stock authorized or outstanding. We may issue, from time to
time in one or more series, additional preferred stock, the terms of which may
be determined by our Board of Directors, without further action by our
stockholders, in the resolution authorizing such series of preferred stock, and
may include voting rights, including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. Prior to the issuance of any
shares of a new series of preferred stock, we will file articles supplementary,
designating the number of shares of that series and the terms of the stock of
that series, with the State Department of Assessments and Taxation of Maryland.
Each series of preferred stock that we issue shall constitute a separate class
of stock. The issuance of any preferred stock could adversely affect the rights
of the holders of common stock and, therefore, reduce the value of the common
stock. The ability of our Board of Directors to issue preferred stock could
discourage, delay or prevent a takeover or other corporate action.
The description of the terms of a particular preferred stock in the
applicable prospectus supplement will not be complete. You should refer to the
applicable articles supplementary for complete information regarding a series of
preferred stock.
Shares of preferred stock are subject to the restrictions upon their
ownership and transfer contained in our charter and the applicable articles
supplementary for the purpose of enabling us to preserve our status as a REIT.
See "--Restrictions on Ownership and Transfer" below.
The terms of any particular series of preferred stock will be described in
the prospectus supplement relating to that particular series of preferred stock,
including, where applicable:
o the designation, stated value and liquidation preference of such
preferred stock and the number of shares offered;
o the offering price;
o the dividend rate or rates (or method of calculation), the date or
dates from which dividends shall accrue, and whether such dividends
shall be cumulative or noncumulative and, if cumulative, the dates
from which dividends shall commence to cumulate;
o any redemption or sinking fund provisions;
o the amount that shares of such series shall be entitled to receive in
the event of our liquidation, dissolution or winding-up;
o the terms and conditions, if any, on which shares of such series shall
be exchangeable for shares of our stock of any other class or classes,
or other series of the same class;
o the voting rights, if any, of shares of such series in addition to
those set forth in "--Voting Rights" below;
o the status as to reissuance or sale of shares of such series redeemed,
purchased or otherwise reacquired, or surrendered to us on conversion
or exchange;
o the conditions and restrictions, if any, on the payment of dividends
or on the making of other distributions on, or the purchase,
redemption or other acquisition by us or any subsidiary, of the common
stock or of any other class of our stock ranking junior to the shares
of such series as to dividends or upon liquidation;
o the conditions and restrictions, if any, on the creation of
indebtedness of us or of any subsidiary, or on the issue of any
additional stock ranking on a parity with or prior to the shares of
such series as to dividends or upon liquidation; and
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o any additional dividend, liquidation, redemption, sinking or
retirement fund and other rights, preferences, privileges, limitations
and restrictions of such preferred stock.
The preferred stock will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the applicable prospectus supplement, the shares
of each series of preferred stock will upon issuance rank senior to the common
stock and on a parity in all respects with each other outstanding series of
preferred stock. The rights of the holders of our preferred stock will be
subordinate to that of our general creditors.
Dividends. Unless otherwise specified in the applicable prospectus
supplement, before any dividends may be declared or paid to the holders of
shares of our common stock or of any other of our capital stock ranking junior
to any series of the preferred stock as to the payment of dividends, the holders
of the preferred stock of that series will be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available therefor,
dividends at such times and rates as will be specified in the applicable
prospectus supplement. Such rates may be fixed or variable or both. If variable,
the formula used for determining the dividend rate for each dividend period will
be specified in the applicable prospectus supplement. Dividends will be payable
to the holders of record as they appear on our stock transfer records on such
dates as will be fixed by the Board of Directors.
Dividends, if any, will be paid in the form of cash, shares of our
securities or other property, as may be determined by the Board of Directors.
Dividends on any series of preferred stock may be cumulative or noncumulative,
as specified in the applicable prospectus supplement. Dividends, if cumulative,
will be cumulative from and after the date set forth in the applicable
prospectus supplement. If the Board of Directors fails to declare a dividend
payable on a dividend payment date on any series of preferred stock for which
dividends are noncumulative, then the holders of the preferred stock of that
series will have no right to receive a dividend in respect of the dividend
period relating to such dividend payment date, and we will have no obligation to
pay the dividend accrued for such period, whether or not dividends on that
series are declared or paid on any future dividend payment dates.
The prospectus supplement relating to a series of preferred stock will
specify the conditions and restrictions, if any, on the payment of dividends or
on the making of other distributions on, or the purchase, redemption or other
acquisition by us or any of our subsidiaries of, the common stock or of any
other class of our stock ranking junior to the shares of that series as to
dividends or upon liquidation, and any other preferences, rights, restrictions
and qualifications that are not inconsistent with our charter.
Liquidation Preference. Unless otherwise specified in the prospectus
supplement relating to a series of preferred stock, upon our liquidation,
dissolution or winding up (whether voluntary or involuntary), the holders of
preferred stock of that series will be entitled to receive out of our assets
available for distribution to our stockholders, whether from capital, surplus or
earnings, the amount specified in the applicable prospectus supplement for that
series, together with all dividends accrued and unpaid, before any distribution
of the assets will be made to the holders of common stock or any other class or
series of shares ranking junior to that series of preferred stock upon
liquidation, dissolution or winding up, and will be entitled to no other or
further distribution. If, upon our liquidation, dissolution or winding up, the
assets distributable among the holders of a series of preferred stock of any
series and any other shares of preferred stock (including any other series of
preferred stock) ranking as to any such distribution on a parity to the given
series of preferred stock shall be insufficient to permit the payment in full to
the holders of that and such other shares and series of preferred stock of all
amounts payable to those holders, then the entire amount of our assets thus
distributable will be distributed ratably among the holders of that and such
other shares and series of preferred stock in proportion to the respective
amounts that would be payable per share if those assets were sufficient to
permit payment in full. Neither our consolidation, merger or other business
combination with or into any other individual, firm, corporation or other entity
nor the sale, lease, exchange or conveyance of all or any part of our property,
assets or business will be deemed to be a liquidation, dissolution or winding
up.
Redemption. If so specified in the applicable prospectus supplement, any
series of preferred stock may be redeemable, in whole or in part, at our option
or pursuant to a retirement or sinking fund or otherwise, on terms and at the
times and the redemption prices specified in that prospectus supplement. If less
than all shares of the series at the time outstanding are to be redeemed, the
shares to be redeemed will be selected pro rata or by lot, in such manner as may
be prescribed by resolution of the Board of Directors. In addition to the
foregoing, and in any event,
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shares of our preferred stock will be redeemable under certain circumstances
pursuant to the restrictions and limitations on ownership contained in our
charter and designed to protect our status as a REIT.
Voting Rights. Unless otherwise determined by the Board of Directors and
indicated in the applicable prospectus supplement, holders of the preferred
stock of that series will have only the voting rights as set forth in the
applicable articles supplementary.
Other. Our issuance of preferred stock may have the effect of delaying or
preventing a change in control. Our issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders of
common stock or could adversely affect the rights and powers, including voting
rights, of the holders of common stock. The issuance of preferred stock could
have the effect of decreasing the market price of our common stock.
Certain Effects of Authorized But Unissued Stock
We have shares of common stock and preferred stock available for future
issuance without stockholder approval. We may utilize these additional shares
for a variety of corporate purposes, including future public offerings to raise
additional capital, facilitating corporate acquisitions or paying a dividend on
the capital stock.
The existence of unissued and unreserved common stock and preferred stock
may enable the Board of Directors to issue shares to persons friendly to current
management or to issue preferred stock with terms that could render more
difficult or discourage a third party attempt to obtain control of our company
by means of a merger, tender offer, proxy contest or otherwise, thereby
protecting the continuity of our management. In addition, if we issue preferred
stock, the issuance could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation.
Restrictions on Ownership and Transfer
For us to qualify as a REIT under the federal income tax laws, we must meet
certain requirements concerning the ownership of our outstanding shares of
capital stock. Specifically, no more than 50% in value of our outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
during the last half of a calendar year. For this purpose, individuals include
natural persons, private foundations, some employee benefit plans and trusts,
and some charitable trusts. In addition, we must have at least 100 beneficial
owners of our shares of stock during at least 335 days of a taxable year of
twelve months or during a proportionate part of a shorter taxable year.
To ensure that we meet the stock ownership requirements, subject to the
exemptions and exceptions described below, our charter provides for restrictions
and limitations on the ownership and transfer of our outstanding stock.
Specifically, our charter provides that, subject to certain exceptions, no
person shall own more than (i) 6.5% of the number (or the value of the total
number) of outstanding shares of common stock or common stock together with
preferred stock of any class or series, (ii) more than 9.8% of either the total
number or the value of the total number of outstanding shares of the Series A
Preferred Stock or (iii) more than 9.8% of either the total number or the value
of the total number of outstanding shares of the Series B Preferred Stock. A
separate ownership limit may be imposed on any class or series of preferred
stock, if, as and when the terms of such class or series are established by the
Board of Directors. Our charter permits the Board to waive with respect to any
person the 6.5% ownership limit or to establish a new, less restrictive,
ownership limit, called an "excepted holder limit" in the charter, for any
person.
In addition, our charter provides that Michael Strauss is excepted from the
general limitations on the ownership of our securities, described above.
Instead, Mr. Strauss is permitted to beneficially own up to 20% of the value of
the total number of outstanding shares of our common and preferred stock.
Our charter provides that any purported transfer of shares of common stock
or preferred stock which would:
o result in any person owning, directly or indirectly, common stock or
preferred stock in excess of the applicable ownership limits as
described above;
o result in our capital stock being beneficially owned by fewer than 100
persons, determined without reference to any rules of attribution; or
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o result in our company being "closely held" within the meaning of the
U.S. federal tax laws (or otherwise failing to qualify as a REIT);
will be void, or that, if notwithstanding the other provisions of the charter,
there occurs a transfer or other event which would have any of the results
described in the bullet points above, then that number of shares of common stock
or preferred stock necessary to avoid such occurrence will be automatically
transferred to one or more trusts, effective on the day before the purported
transfer, and the person who would have otherwise been the holder or transferee
of such shares will cease to own or will not acquire any right to such shares.
The record holder of the shares of common stock or preferred stock that are
transferred to a trust will be required to submit the stock to us for
registration in the name of the trust. We will designate a trustee of the trust
that is not affiliated with us. The beneficiary of the trust will be one or more
charitable organizations that we select.
Shares in the trust will remain issued and outstanding and will be entitled
to the same rights and privileges as all other shares of the same class or
series. The trustee will receive all dividends and distributions on the shares
and will hold those dividends or distributions in trust for the benefit of the
beneficiary. The trustee will vote all shares in the trust. The trustee will
designate a permitted transferee of the shares, provided that the permitted
transferee purchases the shares for valuable consideration and acquires the
shares without the acquisition resulting in a transfer to another trust.
Our charter provides that the owner of shares in the trust will be required
to repay to the trustee the amount of any dividends or distributions received by
the owner (i) that are attributable to shares in the trust and (ii) the record
date of which was on or after the date that the shares were transferred to the
trust. The owner generally will receive from the trustee the lesser of (a) the
price per share the owner paid for the shares in the trust, or, in the case of a
gift or devise, the market price per share on the date of the transfer, or (b)
the price per share received by the trustee from the sale of the shares in the
trust. Any amounts received by the trustee in excess of the amounts to be paid
to the owner will be distributed to the beneficiary of the trust.
Shares in the trust will be deemed to have been offered for sale to us, or
our designee, at a price per share equal to the lesser of (a) the price per
share in the transaction that created the trust, or, in the case of a gift or
devise, the market price per share on the date of the transfer, or (b) the
market price per share on the date that we, or our designee, accept the offer.
We will have the right to accept the offer for a period of 90 days after the
later of (i) the date of the purported transfer that resulted in the trust, or
(ii) the date we determine in good faith that a prohibited transfer has
occurred.
Our charter provides that any person who acquires or attempts to acquire
common stock or preferred stock in violation of the restrictions set forth in
our charter, or any person who owned common stock or preferred stock that was
transferred to a trust, is required immediately to give written notice to us of
that event and to provide to us any other information that we may request in
order to determine the effect, if any, of the transfer on our status as a REIT.
The ownership limits generally will not apply to the acquisition of common
stock or preferred stock by an underwriter that participates in a public
offering of that stock for a period of 30 days. In addition, our Board of
Directors may waive application to any person of the ownership limitations or
the restrictions on transfer set forth in the charter, or may establish an
excepted holder limit for any person.
The foregoing restrictions will not otherwise be removed until:
o the restrictions are no longer required in order to qualify as a REIT,
and the Board of Directors determines that it is no longer in our best
interests to retain the restrictions; or
o the Board of Directors determines that it is no longer in our best
interests to continue to qualify as a REIT.
All certificates representing our common or preferred stock will bear a
legend referring to the restrictions described above.
All persons who own, directly or indirectly, more than 5%, or any lower
percentage as set forth in the federal tax laws, of our outstanding common stock
and preferred stock must, within 30 days after January 1 of each year,
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provide to us a written statement or affidavit stating the name and address of
the direct or indirect owner, the number of shares owned directly or indirectly,
and a description of how the shares are held. In addition, each direct or
indirect stockholder must provide to us any additional information that we
request in order to determine the effect, if any, of such ownership on our
status as a REIT and to ensure compliance with the restrictions on ownership and
transfer set forth in our charter.
Certain Provisions Affecting Change in Control
Our charter contains certain provisions that may have the effect of
delaying, deferring or preventing a change in control of the Company. For
example, in order to maintain qualification as a REIT, our charter contains
restrictions on transfer of our shares of common stock and a stock ownership
limitation. See "--Restrictions on Ownership and Transfer" above. The transfer
restrictions and ownership limitation may discourage a purchase or sale of our
shares of common stock that might result in a change in control.
In addition, our charter allows the Board of Directors to authorize the
issuance of preferred stock with terms and conditions that could have the effect
of delaying, deferring or preventing a transaction or change in control that
might involve a premium price for holders of our common stock or otherwise be in
their best interests.
For a description of other provisions of Maryland law and our charter and
bylaws that could have the effect of delaying, deferring or preventing a change
in control, see "Risk Factors--Certain provisions of Maryland law and our
charter and bylaws could hinder, delay or prevent a change in control" on page
20 of this prospectus.
Transfer Agent and Registrar
American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York
10038 is the transfer agent and registrar of our common stock, our Series A
Preferred Stock and our Series B Preferred Stock.
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DESCRIPTION OF DEBT SECURITIES
This section describes certain general terms and provisions of the debt
securities to which any prospectus supplement may relate. The particular terms
of any debt securities offered by a prospectus supplement, and the extent to
which these general terms and provisions will not apply to the particular series
of debt securities being offered, will be described in the prospectus supplement
relating to that particular series of debt securities.
We may offer debt securities for an aggregate principal amount of up to
$761,875,000 under this prospectus. As of the date of this prospectus, we have
not issued any debt securities.
The debt securities that we may issue will constitute debentures, notes,
bonds or other evidences of indebtedness of the Company, to be issued in one or
more series, which may include senior debt securities, subordinated debt
securities and senior subordinated debt securities. The particular terms of any
series of debt securities we offer, including the extent to which the general
terms set forth below may be applicable to a particular series, will be
described in a prospectus supplement relating to such series.
Debt securities that we may issue will be issued under the indenture
between us and Deutsche Bank Trust Company Americas, as trustee. This prospectus
refers to Deutsche Bank Trust Company Americas as the trustee. We have filed the
form of the indenture with the SEC as an exhibit to the Registration Statement
of which this prospectus is a part. If we enter into any indenture supplement,
we will file a copy of that supplement with the SEC.
THE FOLLOWING DESCRIPTION IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE
INDENTURE. IT DOES NOT RESTATE THE INDENTURE IN ITS ENTIRETY. THE INDENTURE IS
GOVERNED BY THE TRUST INDENTURE ACT OF 1939. THE TERMS OF THE DEBT SECURITIES
INCLUDE THOSE STATED IN THE INDENTURE AND THOSE MADE PART OF THE INDENTURE BY
REFERENCE TO THE TRUST INDENTURE ACT. The following summaries of material
provisions of the debt securities and indenture are subject to, and qualified in
their entirety by reference to, all the provisions of the indenture applicable
to a particular series of debt securities.
Unless otherwise set forth in an indenture supplement and described in a
prospectus supplement, our subsidiaries will have no direct obligation to pay
amounts due on the debt securities. The debt securities effectively will be
subordinated to all existing and future indebtedness and other liabilities of
our subsidiaries. Such indebtedness would effectively rank senior to the debt
securities. The indenture permits us and our subsidiaries to incur substantial
amounts of additional indebtedness and other liabilities. Any rights of the
Company and our creditors, including the holders of debt securities, to
participate in the assets of any of our subsidiaries upon any liquidation or
reorganization of any such subsidiary will be subject to the prior claims of
that subsidiary's creditors, including trade creditors, and the holders of any
preferred stock of that subsidiary.
Information You Will Find In The Prospectus Supplement
The indenture provides that we may issue debt securities from time to time
in one or more series. The indenture does not limit the aggregate principal
amount of debt securities that can be issued thereunder. The prospectus
supplement for a series of debt securities will provide information relating to
the terms of the series of debt securities being offered, which may include:
o the title and denominations of the debt securities of the series;
o any limit on the aggregate principal amount of the debt securities of
the series;
o the date or dates on which the principal and premium, if any, with
respect to the debt securities of the series are payable or the method
of determination thereof;
o the interest rate or rates (which may be fixed or variable) on the
debt securities of the series (if any) or the method of determining
such rate or rates;
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o the interest payment dates for the series of debt securities or the
method by which such date will be determined, the terms of any
deferral of interest and any right of ours to extend the interest
payments periods;
o the place or places where the principal and interest on the series of
debt securities will be payable;
o the terms and conditions upon which debt securities of the series may
be redeemed, in whole or in part, at our option or otherwise;
o our obligation, if any, to redeem, purchase, or repay debt securities
of the series pursuant to any sinking fund or at the option of the
holders and the terms of any such redemption, purchase, or repayment;
o the terms, if any, upon which the debt securities of the series may be
convertible into or exchanged for other securities, including, among
other things, the initial conversion or exchange price or rate and the
conversion or exchange period;
o if the amount of principal, premium, if any, or interest with respect
to the debt securities of the series may be determined with reference
to an index or formula, the manner in which such amounts will be
determined;
o any changes or additions to the provisions of the indenture dealing
with defeasance, including any additional covenants that may be
subject to our covenant defeasance option securities;
o the portion of the principal amount of debt securities of the series
which will be payable upon declaration of acceleration or provable in
bankruptcy;
o whether we will be restricted from incurring any additional
indebtedness;
o whether the debt securities of the series will be secured or
guaranteed and, if so, on what terms;
o a discussion on any material or special U.S. federal income tax
considerations applicable to the debt securities;
o any addition to or change in the events of default with respect to the
debt securities of the series and any change in the right of the
trustee or the holders to declare acceleration;
o any trustees, authenticating or paying agents, transfer agents or
registrars;
o the applicability of, and any addition to or change in, the covenants
currently set forth in the indenture or in the terms relating to
permitted consolidations, mergers, or sales of assets;
o the subordination, if any, of the debt securities of the series and
terms of the subordination; and
o any other specific terms, preferences, rights or limitations of, or
restrictions on, the debt securities.
Holders of debt securities may present debt securities for exchange in the
manner, at the places, and subject to the restrictions set forth in the debt
securities and the prospectus supplement. Holders of debt securities may present
debt securities for transfer in the manner, at the places, and subject to the
restrictions set forth in the debt securities and the prospectus supplement. We
will provide these services without charge, other than any tax or other
governmental charge payable in connection therewith, but subject to the
limitations provided in the indenture and the applicable indenture supplement.
Debt securities in bearer form and the coupons, if any, appertaining thereto
will be transferable by delivery.
Senior Debt
We may issue the senior debt securities under the indenture and any coupons
that will constitute part of our senior debt. Unless otherwise set forth in the
applicable indenture supplement and described in a prospectus
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supplement, the senior debt securities will be senior unsecured obligations,
ranking equally with all of our existing and future senior unsecured debt. The
senior debt securities will be senior to all of our subordinated debt and junior
to any secured debt we may incur as to the assets securing such debt.
Subordinated Debt
We may issue subordinated debt securities under the indenture and any
coupons that will constitute part of our subordinated debt. These subordinated
debt securities will be subordinate and junior in right of payment, to the
extent and in the manner set forth in the indenture and the applicable indenture
supplement, to all of our "senior indebtedness." "Senior indebtedness" includes
our obligations and obligations guaranteed or assumed by us for borrowed money
or evidenced by bonds, debentures, notes or other similar instruments, in each
case, identified by our Board of Directors as senior indebtedness. "Senior
indebtedness" does not include subordinated debt securities, including senior
subordinated debt securities, or any other obligations specifically designated
as being subordinate in right of payment to senior indebtedness.
In general, the holders of all senior indebtedness are entitled to receive
payment of the full amount unpaid on senior indebtedness before the holders of
any of the subordinated debt securities or coupons are entitled to receive a
payment on account of the principal or interest on the indebtedness evidenced by
the subordinated debt securities upon the occurrence of certain events. These
events include:
o any insolvency, bankruptcy, receivership, liquidation, dissolution,
reorganization or other similar proceedings which concern us or a
substantial part of our property;
o except as provided in the indenture, any default on the payment of
principal, premium, if any, or interest on or other monetary amounts
due and payable on any senior indebtedness has not been paid within
the applicable grace period;
o any other default on senior indebtedness occurs and the maturity of
such senior indebtedness is accelerated in accordance with its terms,
and unless either (a) such default shall have been cured or waived and
any such acceleration shall have been rescinded or (b) such senior
indebtedness shall have been paid in full; and
o the principal of, and accrued interest on, any series of the
subordinated debt securities having been declared due and payable upon
an event of default contained in the indenture.
If this prospectus is being delivered in connection with a series of
subordinated debt securities, the accompanying prospectus supplement or the
information incorporated by reference will set forth the approximate amount of
senior indebtedness outstanding as of the end of the most recent fiscal quarter.
Senior Subordinated Debt
We may issue the senior subordinated debt securities under the indenture
and any coupons that will constitute part of our senior subordinated debt. These
senior subordinated debt securities will be, to the extent and in the manner set
forth in the indenture, subordinate and junior in right of payment to all of our
"senior indebtedness" and senior to our other subordinated debt. See the
discussions above under "--Senior Debt" and "--Subordinated Debt" for a more
detailed explanation of our senior and subordinated indebtedness.
Interest Rate
Debt securities that bear interest will do so at a fixed rate or a floating
rate. We may sell, at a discount below the stated principal amount, any debt
securities which bear no interest or which bear interest at a rate that at the
time of issuance is below the prevailing market rate. The relevant prospectus
supplement will describe the special U.S. federal income tax considerations
applicable to:
o any discounted debt securities; and
o any debt securities issued at par which are treated as having been
issued at a discount for U.S. federal income tax purposes.
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Registered Global Securities
We may issue registered debt securities of a series in the form of one or
more fully registered global securities. We will deposit the registered global
security with a depositary or with a nominee for a depositary identified in the
prospectus supplement relating to such series. The global security or global
securities will represent and will be in a denomination or aggregate
denominations equal to the portion of the aggregate principal amount of
outstanding registered debt securities of the series to be represented by the
registered global security or securities. Unless it is exchanged in whole or in
part for debt securities in definitive registered form, a registered global
security may not be transferred, except as a whole in three cases:
o by the depositary for the registered global security to a nominee of
the depositary;
o by a nominee of the depositary to the depositary or another nominee of
the depositary; and
o by the depositary or any nominee to a successor of the depositary or a
nominee of the successor.
The prospectus supplement relating to a series of debt securities will
describe the specific terms of the depositary arrangement concerning any portion
of that series of debt securities to be represented by a registered global
security. We anticipate that the following provisions will generally apply to
all depositary arrangements.
Upon the issuance of a registered global security, the depositary will
credit, on its book-entry registration and transfer system, the principal
amounts of the debt securities represented by the registered global security to
the accounts of persons that have accounts with the depositary. These persons
are referred to as "participants." Any underwriters, agents or debtors
participating in the distribution of debt securities represented by the
registered global security will designate the accounts to be credited. Only
participants or persons that hold interests through participants will be able to
beneficially own interests in a registered global security. The depositary for a
global security will maintain records of beneficial ownership interests in a
registered global security for participants. Participants or persons that hold
through participants will maintain records of beneficial ownership interests in
a global security for persons other than participants. These records will be the
only means to transfer beneficial ownership in a registered global security.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
limit the ability of those persons to own, transfer or pledge beneficial
interests in global securities.
So long as the depositary, or its nominee, is the registered owner of a
registered global security, the depositary or its nominee will be considered the
sole owner or holder of the debt securities represented by the registered global
security for all purposes under the indenture. Except as set forth below, owners
of beneficial interests in a registered global security:
o may not have the debt securities represented by a registered global
security registered in their names;
o will not receive or be entitled to receive physical delivery of debt
securities represented by a registered global security in definitive
form; and
o will not be considered the owners or holders of debt securities
represented by a registered global security under the indenture.
Accordingly, each person owning a beneficial interest in a registered
global security must rely on the procedures of the depositary for the registered
global security and, if the person is not a participant, on the procedures of
the participant through which the person owns its interests, to exercise any
rights of a holder under the indenture applicable to the registered global
security.
We understand that, under existing industry practices, if we request any
action of holders, or if an owner of a beneficial interest in a registered
global security desires to give or take any action which a holder is entitled to
give or take under the indenture, the depositary for the registered global
security would authorize the participants holding the relevant beneficial
interests to give or take the action, and the participants would authorize
beneficial owners
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owning through the participants to give or take the action or would otherwise
act upon the instructions of beneficial owners holding through them.
Payment of Interest on and Principal of Registered Global Securities
We will make principal, premium, if any, and interest payments on debt
securities represented by a registered global security registered in the name of
a depositary or its nominee to the depositary or its nominee as the registered
owner of the registered global security. None of the Company, the trustee, or
any paying agent for debt securities represented by a registered global security
will have any responsibility or liability for:
o any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in such registered global security;
o maintaining, supervising, or reviewing any records relating to
beneficial ownership interests;
o the payments to beneficial owners of the global security of amounts
paid to the depositary or its nominee; or
o any other matter relating to the actions and practices of the
depositary, its nominee or any of its participants.
We expect that the depositary, upon receipt of any payment of principal,
premium or interest in respect of the global security, will immediately credit
participants' accounts with payments in amounts proportionate to their
beneficial interests in the principal amount of a registered global security as
shown on the depositary's records. We also expect that payments by participants
to owners of beneficial interests in a registered global security held through
participants will be governed by standing instructions and customary practices.
This is currently the case with the securities held for the accounts of
customers registered in "street name." Such payments will be the responsibility
of participants.
Exchange of Registered Global Securities
We may issue debt securities in definitive form in exchange for the
registered global security if both of the following occur:
o the depositary for any debt securities represented by a registered
global security is at any time unwilling or unable to continue as
depositary or ceases to be a clearing agency registered under the
Exchange Act; and
o we do not appoint a successor depositary within 90 days.
In addition, we may, at any time, determine not to have any of the debt
securities of a series represented by one or more registered global securities.
In this event, we will issue debt securities of that series in definitive form
in exchange for all of the registered global security or securities representing
those debt securities.
Covenants by the Company
The indenture includes covenants by us, including, among other things, that
we will make all payments of principal and interest at the times and places
required. The supplemental indenture with respect to each series of debt
securities may contain additional covenants, including covenants which could
restrict our right and our subsidiaries' right to incur additional indebtedness
or liens and to take certain actions with respect to their respective businesses
and assets.
Events of Default
Unless otherwise indicated in the applicable prospectus supplement, the
following will be events of default under the indenture with respect to each
series of debt securities issued under the indenture:
o failure to pay when due any interest on any debt security of that
series, continued for 30 days;
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o failure to pay when due principal of, or premium, if any, on, any debt
security of that series;
o default in the payment of any sinking fund installment with respect to
any debt security of that series when due and payable;
o failure to comply with the restrictive covenant prohibiting us from
engaging in certain consolidations, mergers, or transfers of all or
substantially all of our assets;
o failure to perform any other covenant or agreement of ours under the
indenture or the supplemental indenture with respect to that series or
the debt securities of that series, continued for 60 days after
written notice to us by the trustee or holders of at least 25% in
aggregate principal amount of the outstanding debt securities of the
series to which the covenant or agreement relates;
o certain events of bankruptcy, insolvency or similar proceedings
affecting us; and
o any other event of default specified in any supplemental indenture
under which such series of debt securities are issued.
Except as to certain events of bankruptcy, insolvency or similar
proceedings affecting us and except as provided in the applicable prospectus
supplement, if any event of default shall occur and be continuing with respect
to any series of debt securities under the indenture, either the trustee or the
holders of at least 25% in aggregate principal amount of outstanding debt
securities of such series may accelerate the maturity of all debt securities of
such series. Upon certain events of bankruptcy, insolvency or similar
proceedings affecting us, the principal, premium, if any, and interest on all
debt securities of each series shall be immediately due and payable.
After any such acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of each
affected series of debt securities may waive all defaults with respect to such
series and rescind and annul such acceleration if all events of default, other
than the non-payment of accelerated principal, have been cured, waived or
otherwise remedied.
No holder of any debt securities will have any right to institute any
proceeding with respect to the indenture or for any remedy under the indenture,
unless such holder shall have previously given to the trustee written notice of
a continuing event of default and the holders of at least 25% in aggregate
principal amount of the outstanding debt securities of the relevant series shall
have made written request and offered indemnity satisfactory to the trustee to
institute such proceeding as trustee, and the trustee shall not have received
from the holders of a majority in aggregate principal amount of the outstanding
debt securities of such series a direction inconsistent with such request and
shall have failed to institute such proceeding within 60 days. However, such
limitations do not apply to a suit instituted by a holder of a debt security for
enforcement of payment of the principal of and premium, if any, or interest on
such debt security on or after the respective due dates expressed in such debt
security.
Supplemental Indentures
We and the trustee may, at any time and from time to time, without notice
to or consent of any holders of debt securities, enter into one or more
indentures supplemental to the indenture, among other things:
o to add guarantees to or secure any series of debt securities;
o to provide for the succession of another person pursuant to the
provisions of the indenture relating to consolidations, mergers and
sales of assets and the assumption by such successor of our covenants,
agreements, and obligations, or to otherwise comply with the
provisions of the indenture relating to consolidations, mergers, and
sales of assets;
o to surrender any right or power conferred upon us under the indenture
or to add to our covenants further covenants, restrictions, conditions
or provisions for the protection of the holders of all or any series
of debt securities;
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o to cure any ambiguity or to correct or supplement any provision
contained in the indenture, in any supplemental indenture or in any
debt securities that may be defective or inconsistent with any other
provision contained therein;
o to modify or amend the indenture in such a manner as to permit the
qualification of the indenture or any supplemental indenture under the
Trust Indenture Act;
o to add to or change any of the provisions of the indenture to change
or eliminate any restriction on the payment of principal or premium
with respect to debt securities so long as any such action does not
adversely affect the interests of the holders of outstanding debt
securities of any series in any material respect;
o in the case of subordinated debt securities, to make any change in the
provisions relating to subordination that would limit or terminate the
benefits available to any holder of senior indebtedness under such
provisions (but only if such holder of senior indebtedness consents to
such a change);
o to add to, change, or eliminate any of the provisions of the indenture
with respect to one or more series of debt securities, so long as any
such addition, change or elimination not otherwise permitted under the
indenture shall not apply to any debt securities of any series created
prior to the execution of such supplemental indenture and entitled to
the benefit of such provision;
o to evidence and provide for the acceptance of appointment by a
successor or separate trustee;
o to establish the form or terms of debt securities of any series; and
o to make any change that does not adversely affect the interests of the
holders of outstanding debt securities.
With the consent of the holders of at least a majority in principal amount
of debt securities of each series affected by such supplemental indenture
(voting as one class), we and the trustee may enter into one or more
supplemental indentures for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the indenture or modifying
in any manner the rights of the holders of debt securities of each such series.
Notwithstanding our rights and the rights of the trustee to enter into one
or more supplemental indentures with the consent of the holders of debt
securities of the affected series as described above, no such supplemental
indenture shall, without the consent of the holder of each outstanding debt
security of the affected series, among other things:
o extend the final maturity of the principal of, or any installment of
interest on, any debt securities;
o reduce the principal amount of any debt securities or the rate of
interest on any debt securities;
o change the currency in which any debt securities are payable;
o release any security interest that may have been granted with respect
to such debt securities;
o impair the right of the holders to conduct a proceeding for any remedy
available to the trustee;
o reduce the percentage in principal amount of any series of debt
securities whose holders must consent to an amendment;
o reduce any premium payable upon the redemption of any debt securities
or change the time at which any debt security may be redeemed; or
o make any change that adversely affects the relative rights of holders
of subordinated debt securities with respect to senior debt
securities.
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Satisfaction and Discharge of the Indenture; Defeasance
To the extent set forth in a supplemental indenture with respect to any
series of debt securities, we, at our election, may discharge the indenture and
the indenture shall generally cease to be of any further effect with respect to
that series of debt securities if (a) we have delivered to the trustee for
cancellation all debt securities of that series (with certain limited
exceptions) or (b) all debt securities of that series not previously delivered
to the trustee for cancellation shall have become due and payable, or are by
their terms to become due and payable within one year or are to be called for
redemption within one year, and we have deposited with the trustee the entire
amount sufficient to pay at maturity or upon redemption all such debt
securities.
In addition, we have a "legal defeasance option" (pursuant to which we may
terminate, with respect to the debt securities of particular series, all of our
obligations under such debt securities and the indenture with respect to such
debt securities) and a "covenant defeasance option" (pursuant to which we may
terminate, with respect to the debt securities of a particular series, our
obligations with respect to such debt securities under certain specified
covenants contained in the indenture). If we exercise our legal defeasance
option with respect to a series of debt securities, payment of such debt
securities may not be accelerated because of an event of default. If we exercise
our covenant defeasance option with respect to a series of debt securities,
payment of such debt securities may not be accelerated because of an event of
default related to the specified covenants.
We may exercise our legal defeasance option or our covenant defeasance
option with respect to the debt securities of a series only if we irrevocably
deposit in trust with the trustee cash or U.S. government obligations (as
defined in the indenture) for the payment of principal, premium, if any, and
interest with respect to such debt securities to maturity or redemption, as the
case may be. In addition, to exercise either of our defeasance options, we must
comply with certain other conditions, including the delivery to the trustee of
an opinion of counsel to the effect that the holders of debt securities of such
series will not recognize income, gain or loss for federal income tax purposes
as a result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred (and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling from the Internal
Revenue Service or other change in applicable federal income tax law).
The trustee will hold in trust the cash or U.S. government obligations
deposited with it as described above and will apply the deposited cash and the
proceeds from deposited U.S. government obligations to the payment of principal,
premium, if any, and interest with respect to the debt securities of the
defeased series. In the case of subordinated debt securities, the money and U.S.
government obligations held in trust will not be subject to the subordination
provisions of the indenture.
Mergers, Consolidations and Certain Sales of Assets
We may not:
o consolidate with or merge into any other person or entity or permit
any other person or entity to consolidate with or merge into us in a
transaction in which we are not the surviving entity, or
o transfer, lease or dispose of all or substantially all of our assets
to any other person or entity,
unless:
o the resulting, surviving or transferee entity shall be a corporation
organized and existing under the laws of the United States, any state
thereof or the District of Columbia and such resulting, surviving or
transferee entity shall expressly assume, by supplemental indenture,
executed and delivered in form satisfactory to the trustee, all of our
obligations under the debt securities and the indenture;
o immediately after giving effect to such transaction (and treating any
indebtedness which becomes an obligation of the resulting, surviving
or transferee entity as a result of such transaction as having been
incurred by such entity at the time of such transaction), no default
or event of default would occur or be continuing; and
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o we shall have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the
indenture.
Unless otherwise provided in the applicable prospectus supplement, and
subject to the foregoing, the indenture permits:
o a consolidation, merger, sale of assets or other similar transaction
that may adversely affect our creditworthiness or that of a successor
or combined entity;
o a change in control; or
o a highly leveraged transaction involving us, whether or not involving
a change in control,
and the indenture, therefore, will not protect holders of the debt securities
from the substantial impact that any of the transactions described above may
have on the value of the debt securities.
Governing Law
The indenture and the debt securities will be governed by, and construed in
accordance with, the laws of the State of New York, except to the extent that
the Trust Indenture Act is applicable.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, incorporator or stockholder of the Company, as such,
shall have any liability for any obligations of the Company under the debt
securities or the indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation, solely by reason of their status
as director, officer, incorporator or stockholder of the Company. By accepting a
debt security, each holder waives and releases all such liability, but only such
liability. The waiver and release are part of the consideration for issuance of
the debt securities. Nevertheless, such waiver may not be effective to waive
liabilities under the federal securities laws and it has been the view of the
SEC that such a waiver is against public policy.
Conversion or Exchange Rights
Any debt securities offered hereby may be convertible into or exchangeable
for shares of our equity or other securities. The terms and conditions of such
conversion or exchange will be set forth in the applicable prospectus
supplement. Such terms may include, among others, the following:
o the conversion or exchange price;
o the conversion or exchange period;
o provisions regarding our ability or that of the holder to convert or
exchange the debt securities;
o events requiring adjustment to the conversion or exchange price; and
o provisions affecting conversion or exchange in the event of our
redemption of such debt securities.
Information Concerning the Trustee
The trustee, other than during the occurrence and continuance of an event
of an event of default under the indenture, undertakes to perform only those
duties as are specifically set forth in the indenture. Upon an event of default
under the indenture, the trustee must use the same degree of care as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the trustee is under no obligation to exercise any of the
powers given it by the indenture at the request of any holder of debt securities
unless it is offered reasonable security and indemnity against the costs,
expenses and liabilities that it might incur.
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The indenture contains limitations on the right of the trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received in respect of any such claim as
security or otherwise. The trustee may engage in other transactions; however, if
it acquires any conflicting interest relating to any duties with respect to the
debt securities, it must eliminate the conflict or resign as trustee.
Limitations on Issuance of Bearer Debt Securities
Debt securities in bearer form are subject to special U.S. federal tax
requirements and may not be offered, sold, or delivered within the United States
or its possessions or to a U.S. person, except in certain transactions permitted
by U.S. federal tax regulations. Investors should consult the relevant
prospectus supplement in the event that bearer debt securities are issued for
special procedures and restrictions that will apply to such an offering.
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DESCRIPTION OF WARRANTS
The following description, together with any information we may include in
any applicable prospectus supplement, summarizes the material terms and
provisions of the warrants that we may offer under this prospectus and the
related warrant agreements and warrant certificates. Although the terms
summarized below will apply generally to any warrants we may offer, we will
describe the particular terms of any series of warrants in more detail in the
applicable prospectus supplement and such terms may differ from the terms
described below.
General
We may issue, together with other securities or separately, warrants to
purchase our common stock or preferred stock. We will issue the warrants under
warrant agreements to be entered into between us and a bank or trust company, as
warrant agent, all as set forth in the applicable prospectus supplement. The
warrant agent will act solely as our agent in connection with the warrants of
the series being offered and will not assume any obligation or relationship of
agency or trust for or with any holders or beneficial owners of warrants.
This section, along with the description in the applicable prospectus
supplement, is a summary of certain provisions of the forms of warrant
agreements and warrant certificates and is not complete. We urge you to read any
applicable warrant agreements and warrant certificates, because those documents,
and not these descriptions, define your rights as a holder of warrants. We will
file copies of the forms of the warrant agreements and warrant certificates as
exhibits to the Registration Statement of which this prospectus is a part or an
amendment thereto or as exhibits to a Current Report on Form 8-K.
The applicable prospectus supplement will describe the following terms,
where applicable, of warrants in respect of which this prospectus is being
delivered:
o the title of the warrants;
o the designation, amount and terms of the securities for which the
warrants are exercisable and the procedures and conditions relating to
the exercise of such warrants;
o the designation and terms of the other securities, if any, with which
the warrants are to be issued and the number of warrants issued with
each such security;
o the price or prices at which the warrants will be issued;
o the aggregate number of warrants;
o any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants;
o the price or prices at which the securities purchasable upon exercise
of the warrants may be purchased;
o if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be
separately transferable;
o if applicable, a discussion of the material U.S. federal income tax
considerations applicable to the warrants;
o any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants;
o the date on which the right to exercise the warrants shall commence
and the date on which the right shall expire;
o the maximum or minimum number of warrants which may be exercised at
any time;
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o whether the warrants are to be issued in registered or bearer form;
o whether the warrants are extendible and the period or periods of such
extendibility; and
o information with respect to book-entry procedures, if any.
Before exercising their warrants, holders of warrants will not have any of
the rights of holders of the securities purchasable upon such exercise,
including the right to receive dividends, if any, or payments upon our
liquidation, dissolution or winding-up or to exercise voting rights, if any.
Exercise of Warrants
Each warrant will entitle the holder thereof to purchase for cash the
amount of shares of common or preferred stock at the exercise price as will in
each case be set forth in, or be determinable as set forth in, the applicable
prospectus supplement. Warrants may be exercised at any time up to the close of
business on the expiration date set forth in the applicable prospectus
supplement. After the close of business on the expiration date, unexercised
warrants will become void. Warrants may be exercised as set forth in the
applicable prospectus supplement relating to the warrants offered thereby. Upon
receipt of payment and the warrant certificate properly completed and duly
executed at the corporate trust office of the warrant agent or any other office
indicated in the applicable prospectus supplement, we will, as soon as
practicable, forward the purchased securities. If less than all of the warrants
represented by the warrant certificate are exercised, a new warrant certificate
will be issued for the remaining warrants.
The shares of common stock and preferred stock issued upon exercise of any
warrant will be issued subject to the restrictions and limitations on ownership
contained in our charter and, in the case of preferred stock, the applicable
articles supplementary establishing its terms. See "Description of Capital
Stock--Restrictions on Ownership and Transfer" beginning on page 34 of this
prospectus.
Enforceability of Rights of Holders of Warrants
Each warrant agent will act solely as our agent under the applicable
warrant agreement and will not assume any obligation or relationship of agency
or trust with any holder of any warrant. A single bank or trust company may act
as warrant agent for more than one issue of warrants. A warrant agent will have
no duty or responsibility in case of any default by us under the applicable
warrant agreement or warrant, including any duty or responsibility to initiate
any proceedings at law or otherwise, or to make any demand upon us. Any holder
of a warrant may, without the consent of the related warrant agent or the holder
of any other warrant, enforce by appropriate legal action its right to exercise,
and receive the securities purchasable upon exercise of, that holder's
warrant(s).
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
The following general discussion summarizes the material U.S. federal
income tax considerations regarding our qualification and taxation as a REIT and
material U.S. federal income tax consequences of an investment in our stock.
This discussion is based on interpretations of the Internal Revenue Code of
1986, as amended (the "Code"), regulations issued thereunder, and rulings and
decisions currently in effect (or in some cases proposed), all of which are
subject to change. Any such change may be applied retroactively and may
adversely affect the federal income tax consequences described herein. This
summary addresses only investors that beneficially own shares of our stock as
capital assets. This summary does not discuss all of the tax consequences that
may be relevant to particular stockholders or to stockholders subject to special
treatment under the federal income tax laws, such as:
o banks, thrifts, or other financial institutions or insurance
companies;
o mutual funds, REITs, or regulated investment companies;
o tax-exempt organizations;
o insurance companies;
o dealers or brokers in securities or foreign currencies;
o traders in securities that elect to apply a mark-to-market method of
accounting;
o small business investment companies or S corporations;
o retirement plans or persons holding stock in tax-deferred or
tax-advantaged accounts;
o investors whose functional currency is not the U.S. dollar;
o certain former citizens or residents of the United States;
o persons subject to the alternative minimum tax;
o persons that hold their shares as part of a hedge against currency
risk, appreciated financial position, straddle, constructive sale or
conversion transaction; or
o holders that acquired their shares upon the exercise of stock options
or otherwise as compensation.
In connection with an offering of our stock, Cadwalader, Wickersham & Taft
LLP will render an opinion that we qualify to be taxed as a REIT under the U.S.
federal income tax laws and that our organization and current and proposed
method of operation will enable us to continue to qualify as a REIT. Cadwalader,
Wickersham & Taft LLP has reviewed the discussion set forth below and is of the
opinion that the statements made in this discussion, to the extent such
statements summarize material U.S. federal tax consequences of the beneficial
ownership of our stock, are correct in all material respects. Cadwalader,
Wickersham & Taft LLP's opinion is based on various assumptions, including that
certain factual representations and covenants made by us are and remain
accurate; moreover, the opinion is subject to limitations, and will not be
binding on the Internal Revenue Service or any court. The Internal Revenue
Service may challenge the opinion of Cadwalader, Wickersham & Taft LLP, and such
a challenge could be successful.
We urge you to consult your own tax advisor regarding the specific tax
consequences to you of ownership of shares of our stock and of our election to
be taxed as a REIT. Specifically, you should consult your own tax advisor
regarding the federal, state, local, foreign, and other tax consequences of your
stock ownership and our REIT election, and regarding potential changes in
applicable tax laws.
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Taxation as a REIT
In our initial tax return, we elected to be taxed as a REIT under the U.S.
federal income tax laws beginning with our first taxable year ended December 31,
2003. We have been operating in a manner intended to qualify us as a REIT since
the beginning of our first taxable year and we intend to continue to so operate.
Our qualification and taxation as a REIT will depend on our ability to
meet, on a continuing basis, through actual annual operating results, the REIT
qualification tests set forth in the federal income tax laws. Those
qualification tests involve the percentage of income that we earn from specified
sources, the percentage of our assets that falls within specified categories,
the diversity of our stock ownership and the percentage of our earnings that we
distribute. The REIT qualification tests are described in more detail below.
While Cadwalader, Wickersham & Taft LLP has reviewed those matters in connection
with the foregoing opinion, the opinion will not require that Cadwalader,
Wickersham & Taft LLP review our compliance with those tests on a continuing
basis. Accordingly, no assurance can be given that the actual results of our
operations for any particular taxable year will satisfy those requirements. For
a discussion of the tax consequences of failure to qualify as a REIT, see
"--Failure to Qualify as a REIT" below.
As a REIT, we generally will not be subject to federal corporate income tax
on our net income that is currently distributed to our stockholders. The REIT
provisions generally allow a REIT to deduct dividends paid to its stockholders.
This deduction for dividends paid substantially eliminates the "double taxation"
at the corporate and stockholder levels that generally results from an
investment in a corporation. However, we will be subject to federal tax as
follows:
o We will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. However, we
may elect to treat as having distributed to our stockholders certain
of our capital gains upon which we have paid taxes, in which event so
much of the taxes as have been paid by us with respect to such income
would also be treated as having been distributed to stockholders. See
"--Annual Distribution Requirements" below.
o Under certain circumstances, we may be subject to the "alternative
minimum tax" on our items of tax preference.
o If we have:
o net income from the sale or other disposition of property
acquired through foreclosure, referred to as "foreclosure
property," or
o other nonqualifying income from foreclosure property,
we will be subject to tax at the highest corporate rate on such
income.
o If we have net income from certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course
of business, other than foreclosure property, such income will be
subject to a 100% tax.
o We will also incur a 100% excise tax on any transaction with a TRS
that is not conducted on an arm's-length basis.
o Further, we will pay tax at the highest corporate rate on the portion
of any excess inclusion income that we derive from residual interests
in a real estate mortgage investment conduit (or "REMIC") or from a
TMP, as defined below, equal to the percentage of our stock that is
held by "disqualified organizations." Excess inclusion income also may
include a portion of any dividends that we receive from other REITs to
the extent that those dividends are attributable to exclusion income
derived from REMIC residual interests held by those other REITs or
from those other REITs being subject to the TMP rules. A "disqualified
organization" includes:
o the United States;
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o any state or political subdivision of the United States;
o any foreign government;
o any international organization;
o any agency or instrumentality of any of the foregoing;
o any other tax-exempt organization, other than a farmer's
cooperative described in Section 521 of the Code, that is exempt
both from income taxation and from taxation under the unrelated
business taxable income provisions of the Code; and
o any rural electrical or telephone cooperative.
o If we should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed below under "--Requirements for
Qualification as a REIT--Income Tests"), but nonetheless maintain our
qualification as a REIT because certain other requirements have been
met, we will be subject to a 100% tax on an amount equal to:
o the gross income attributable to the greater of the amount by
which we fail the 75% gross income test or the amount by which
90% (95% beginning in 2005) of our gross income exceeds the
amount of our income qualifying for the 95% gross income test,
multiplied by
o a fraction intended to reflect our profitability.
o If we should fail to distribute during each calendar year at least the
sum of:
o 85% of our REIT ordinary income for such year,
o 95% of our REIT capital gain net income for such year (other than
capital gain income which we elect to retain and pay tax on), and
o any undistributed taxable income from prior periods (other than
capital gains from such years which we elected to retain and pay
tax on),
we would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed during such year.
o If we acquire any asset from a "C corporation" (i.e., generally a
corporation subject to full corporate level tax, which includes a TRS)
in a transaction in which the basis of the asset in our hands is
determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, and we recognize gain on
the disposition of such asset during the 10-year period beginning on
the date on which such asset was acquired by us, then we will be
subject to tax at the highest regular corporate rate on the lesser of:
o the amount of gain that we recognize at the time of the sale or
disposition, and
o the amount of gain that we would have recognized if we had sold
the asset at the time we acquired the asset.
Requirements for Qualification as a REIT
The Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
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(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for the
special Code provisions applicable to REITs;
(4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) of which, during the last half of each taxable year, not more than
50% in value of the outstanding stock is owned, directly or indirectly
through the application of certain attribution rules, by five or fewer
individuals (as defined in the Code to include certain entities);
(7) that meets certain other tests described below (including with
respect to the nature of its income and assets); and
(8) that has made an election to be treated as a REIT and has not been
terminated or revoked such election.
The Code provides that conditions (1) through (4) above must be met during
the entire taxable year, and that condition (5) must be met 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.
We made an election with our initial tax return to be treated as a REIT
effective for the taxable year 2003.
We have issued sufficient shares of stock with sufficient diversity of
ownership to satisfy requirements (5) and (6) above. In addition, our charter
restricts the ownership and transfer of our stock so that we should continue to
satisfy these requirements. The provisions of our charter restricting the
ownership and transfer of stock are described under "Description of Capital
Stock" in this prospectus.
To monitor our compliance with the share ownership requirements in (5) and
(6) above, we will maintain records regarding the actual ownership of our stock.
To do so, we must demand written statements each year from our record holders of
certain percentages of our stock, including disclosure of the actual owners of
our stock (i.e., the persons required to include in gross income our dividends).
A list of those persons failing or refusing to comply with our demand must be
maintained as part of our records. A stockholder who fails or refuses to comply
with our demand must submit a statement with its tax return disclosing the
actual ownership of the stock and certain other information.
Qualified REIT Subsidiaries. A corporation that is a QRS is not treated as
a corporation separate from its parent REIT for U.S. federal income tax
purposes. All assets, liabilities and items of income, deduction and credit of a
QRS are treated as assets, liabilities and items of income, deduction and credit
of the REIT. A QRS is a corporation, all of the capital stock of which is owned
by the REIT and that is not a TRS. Thus, in applying the requirements described
herein, any QRS that we own will be ignored, and all assets, liabilities and
items of income, deduction and credit of the QRS will be treated as our assets,
liabilities and items of income, deduction and credit. Other domestic entities,
such as limited liability companies, that are wholly-owned by us, by any QRS or
by any combination of the two are also generally disregarded as separate
entities for U.S. federal income tax purposes, including for purposes of the
REIT income and asset tests.
Flow-Through Entities. We will also be deemed to own our proportionate
share of the assets of a partnership or other entity that is treated as a
partnership for tax purposes (collectively, a "flow-through entity") and to earn
our proportionate share of the flow-through entity's income for purposes of the
REIT income and asset tests. Thus, our proportionate share of the assets,
liabilities and items of income of any flow-through entity in which we acquire
an interest, directly or indirectly, will be invested as our asset and gross
income for purposes of applying the various REIT qualification tests. There can
be no assurance, however, that any such flow-through entity will be organized or
operated in a manner that will enable us to continue to satisfy the REIT
requirements of the Code.
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Taxable REIT Subsidiaries. We may jointly elect with any subsidiary
corporation, whether or not wholly-owned, to treat the subsidiary corporation as
a TRS. In addition, if a TRS owns, directly or indirectly, securities
representing more than 35% of the vote or value of a subsidiary corporation,
that subsidiary will also be treated as a TRS. However, an entity will not
qualify as a TRS if it directly or indirectly operates or manages a lodging or
health care facility or, generally, provides to another person, under a
franchise, license or otherwise, rights to any brand name under which any
lodging facility or healthcare facility is operated. The separate existence of a
TRS or other taxable corporation, unlike a disregarded subsidiary (as discussed
above), is not disregarded for federal income tax purposes. Instead, such an
entity would generally be subject to corporate income tax on its earnings, which
may reduce the cash flow generated by us and our subsidiaries in the aggregate,
and hence our ability to make distributions to our stockholders.
We are not treated as holding the assets of a TRS or as receiving any
income that the TRS earns. Rather, the stock issued by the subsidiary is an
asset in our hands, and we would recognize as income the dividends, if any, that
we receive from the subsidiary. This treatment can affect the income and asset
test calculations that apply to us. Because we do not include the assets and
income of such subsidiary corporations in determining our compliance with the
REIT requirements, such entities may be used by us to undertake indirectly
activities that the REIT rules might otherwise preclude us from doing directly
or through pass-through subsidiaries (for example, activities that give rise to
certain categories of income such as management fees or foreign currency gains).
We would be obligated to pay a 100% penalty tax on some payments that we
receive from, or on certain expenses deducted by, our TRSs if the Internal
Revenue Service were to assert successfully that the economic arrangements
between us and our subsidiaries are not comparable to similar arrangements among
unrelated parties.
Asset Tests. In order to maintain our qualification as a REIT, we must,
each quarter, satisfy three tests relating to the nature of our assets. First,
at least 75% of the value of our total assets (owned directly, or indirectly
through a QRS or flow-through entity) must be represented by:
o interests in real property, including leaseholds and options to
acquire real property and leaseholds;
o interests in mortgages on real property;
o stock or debt instruments purchased with the proceeds of a stock
offering or long-term (at least five years) public debt issuance held
during the one-year period following the applicable offering or
issuance;
o cash;
o cash items, including receivables;
o U.S. government securities; and
o equity interests in certain REITs and interests in REMICs. However, if
less than 95% of the assets of a REMIC consist of assets that are
qualifying real estate-related assets under the U.S. federal income
tax laws, determined as if we held such assets, we will be treated as
holding directly our proportionate share of the assets of such REMIC.
Second, not more than 25% of our total assets (owned directly, or
indirectly through a QRS or flowthrough entity) may consist of stock or
securities other than stock and securities that are qualifying assets for
purposes of the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any
one issuer's securities owned directly or indirectly by us may not exceed 5% of
the value of our total assets, and we may not own directly or indirectly more
than 10% of the total voting power of the outstanding securities or more than
10% of the value of the outstanding securities of any one issuer. For purposes
of the 5% value restriction and the restriction against ownership of more than
10% of the voting securities of any issuer, the term "securities" does not
include stock in another REIT, equity or debt securities of a QRS or TRS, or
equity interests in any partnership. The term "securities," however, generally
includes debt securities issued by another REIT or a partnership, except that
certain "straight debt" is not treated as securities for purposes of the 10%
value test.
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These three tests will not, however, apply to an investment by us in a TRS.
We, AHM Holdings, and each first-tier subsidiary of AHM Holdings have jointly
made an election to treat AHM Holdings and each such subsidiary as a TRS. The
aggregate value of our TRS stock and securities owned by us cannot, in the
aggregate, exceed 20% of the value of our total gross assets (including the TRS
stock and securities). We will monitor at all times the value of our investments
in our TRSs for the purpose of ensuring compliance with the 20% asset test.
There can be no assurance, however, that we will be able to comply with the 20%
limitation on TRS stock and securities on an ongoing basis so as to maintain
REIT status.
In addition, the mortgage loans and mortgage-backed securities that we own
are qualifying assets for purposes of the 75% asset test. However, if the
outstanding principal balance of a mortgage loan exceeds the fair market value
of the real property securing the loan, a portion of such loan likely will not
be a qualifying real estate asset under the U.S. federal income tax laws. The
non-qualifying portion of that mortgage loan will be equal to the portion of the
loan amount that exceeds the value of the associated real property. Mezzanine
loans owned by us will be treated as qualifying assets for purposes of the 75%
asset test if certain requirements are satisfied.
Stock in other REITs owned by us will be qualifying assets for purposes of
the 75% asset test. However, if a REIT in which we own stock fails to qualify as
a REIT in any year, the stock in such REIT will not be a qualifying asset for
purposes of the 75% asset test. Instead, we would be subject to the second and
third asset tests described above with respect to our investment in such
disqualified REIT. Finally, we satisfy and will continue to satisfy the second
and third asset tests with respect to our stock in non-REIT C corporations. To
the extent that we own debt securities issued by other REITs or C corporations
that are not secured by mortgages on real property, those debt securities will
not be qualifying assets for purposes of the 75% asset test. Instead, we would
be subject to the second and third asset tests with respect to those debt
securities. We monitor and will continue to monitor closely the purchase,
holding and disposition of our assets in order to comply with the REIT asset
tests. In particular, we intend to limit and diversify the ownership of our
assets so that (i) not more than 25% of the value of our assets in the aggregate
fail to satisfy the 75% asset test, (ii) not more than 5% of our assets, by
value, are issued by any single issuer (other than a TRS, a QRS or a
flow-through entity), and (iii) we do not own more than 10% of the outstanding
securities of any one issuer (other than a TRS, a QRS or a flow-through entity),
measured by voting power or by value of such securities. If these limits would
be exceeded, we intend to take appropriate measures, including the disposition
of non-qualifying assets, to avoid exceeding such limits.
We may securitize mortgage loans and/or mortgage-backed securities. If we
intend to sell the securities received by us in any such securitization, and
such sale would create any substantial risk that the securities to be sold could
be treated as "dealer property," which would subject us to a 100% tax on any
gain, we will engage in the securitization transactions through one or more
TRSs. In this case, the TRSs may be subject to a 35% corporate tax, but we would
not be subject to any tax. We also may securitize such mortgage assets through
non-REMIC collateralized mortgage transactions, under which we retain an equity
interest in the mortgage-backed assets used as collateral in the securitization
transaction. These securitizations may cause us to be subject to the taxable
mortgage pool rules.
If we should fail to satisfy any asset test at the end of a calendar
quarter, such a failure would not cause us to lose our REIT status if:
o we satisfied the asset tests at the close of the preceding calendar
quarter; and
o the discrepancy between the value of our assets and the asset test
requirements arose from changes in the market value of our assets and
was not wholly or partly caused by the acquisition of one or more
non-qualifying assets.
If we should fail to satisfy an asset test at the end of a calendar quarter
by reason of an acquisition of securities or other property during the calendar
quarter, we still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose.
Alternatively, if we should fail to satisfy an asset test as a result of assets
with a value that does not exceed the lesser of 1% of the total value of our
assets and $10,000,000 (the "de minimis amount"), we could avoid
disqualification by disposing of the assets or otherwise satisfying the asset
test within six months. Finally, if we fail to satisfy an asset test by reason
of assets exceeding the de minimis amount, we could avoid disqualification if
(i) we satisfy certain identification and filing requirements, (ii) we dispose
of the disqualifying assets or otherwise satisfy the asset test within six
months, (iii) the failure was
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due to reasonable cause and not willful neglect, and (iv) we pay an excise tax
equal to the greater of $50,000 and the product of (x) net income generated by
the disqualifying assets for the period beginning on the first date of the
failure and ending on the date we dispose of the disqualifying assets or
otherwise satisfy the asset test and (y) the highest rate of corporate tax.
Income Tests. We must also satisfy two gross income requirements each year.
First, at least 75% of our gross income for each taxable year must consist of
defined types of income that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or temporary investment
income. Qualifying income for purposes of that 75% gross income test generally
includes:
o rents from real property;
o interest on debt secured by mortgages on real property or on interests
in real property;
o dividends or other distributions on, and gain from the sale of, shares
in other REITs;
o gain from the sale of real property or mortgage loans; and
o interest or dividend income from the investment of the net proceeds of
stock offerings or certain long-term debt issuances derived during the
one-year period following the applicable offering or issuance.
Second, in general, at least 95% of our gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
income that is qualifying income for purposes of the 75% gross income test, TRS
dividends, other types of dividends and interest, gain from the sale or
disposition of stock or securities, income received in 2004 from certain hedging
transactions, or any combination of the foregoing. Gross income from fees
generally is not qualifying income for purposes of either gross income test. In
addition, gross income from the sale of property that we hold primarily for sale
to customers in the ordinary course of business is excluded from both the
numerator and the denominator in both income tests. We monitor the amount of
non-qualifying income that our assets produce and manage our portfolio to comply
at all times with the gross income tests. The following paragraphs discuss the
specific application of the gross income tests to the Company.
Interest Income. The term "interest," as defined for purposes of both gross
income tests, generally excludes any amount that is based in whole or in part on
the income or profits of any person. However, interest generally includes the
following:
o an amount that is based on a fixed percentage or percentages of
receipts or sales; and
o an amount that is based on the income or profits of a debtor, as long
as the debtor derives substantially all of its income from the real
property securing the debt from leasing substantially all of its
interest in the property, and only to the extent that the amounts
received by the debtor would be qualifying "rents from real property"
if received directly by a REIT.
If a loan contains a provision that entitles a REIT to a percentage of the
borrower's gain upon the sale of the real property securing the loan or a
percentage of the appreciation in the property's value as of a specific date,
income attributable to that loan provision will be treated as gain from the sale
of the property securing the loan, which generally is qualifying income for
purposes of both gross income tests.
Interest on debt secured by mortgages on real property or on interests in
real property generally is qualifying income for purposes of the 75% and 95%
gross income tests. However, if the highest principal amount of a loan
outstanding during a taxable year exceeds the fair market value of the real
property securing the loan as of the date we (or Apex or AHM Holdings, as
applicable) agreed to originate or acquire the loan, a portion of the interest
income from the loan will not be qualifying income for purposes of the 75% gross
income test, but will be qualifying income for purposes of the 95% gross income
test. The portion of the interest income that will not be qualifying income for
purposes of the 75% gross income test will be equal to the portion of the
principal amount of the loan that is not secured by real property.
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Interest derived from mezzanine loans will be treated as qualifying income
for purposes of the 75% and 95% gross income tests if certain requirements are
satisfied.
Any amount includible in gross income by us with respect to a regular or
residual interest in a REMIC is generally treated as interest on an obligation
secured by a mortgage on real property for purposes of the 75% gross income
test. If, however, less than 95% of the assets of a REMIC consist of qualifying
real estate-related assets, we will be treated as receiving directly our
proportionate share of the income of the REMIC, which would generally include
non-qualifying income for purposes of the 75% gross income test. In addition, if
we receive interest income with respect to a mortgage loan that is secured by
both real property and other property and the principal amount of the loan
exceeds the fair market value of the real property on the date we purchase the
mortgage loan, interest income on the loan will be apportioned between the real
property and the other property, which apportionment would cause us to recognize
income that is not qualifying income for purposes of the 75% gross income test.
Interest income received with respect to non-REMIC pay-through bonds and
pass-through debt instruments, such as collateralized mortgage obligations, or
CMOs, however, will not be qualifying income for this purpose.
We believe that the interest, original issue discount and market discount
income that we receive from our mortgage-related assets generally are qualifying
income for purposes of both gross income tests. However, in the event that we
own loans that are not secured by real property or interests in real property,
our interest income from those loans will be qualifying income for purposes of
the 95% gross income test, but not the 75% gross income test. In addition, the
principal amount of a mortgage loan that we own may exceed the value of the real
property securing the loan. In that case, as mentioned above, a portion of the
income from the loan will be qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test. It also is possible that, in
some instances, the interest income from a mortgage loan may be based in part on
the borrower's profits or net income. In that case, generally all of the income
from the loan will generally be non-qualifying income for purposes of both gross
income tests.
To the extent that the terms of a loan provide for contingent interest that
is based on the cash proceeds realized upon the sale of real property securing
the loan, income attributable to the participation feature will be treated as
gain from sale of the underlying real property, which generally will be
qualifying income for purposes of both the 75% and 95% gross income tests
provided that the real property is not inventory or dealer property in the hands
of the borrower or us.
Dividend Income. In the event that we own stock in other REITs, the
dividends that we receive from those REITs and our gain on the sale of the stock
in those other REITs will be qualifying income for purposes of both gross income
tests. However, if a REIT in which we own stock fails to qualify as a REIT in
any year, our income from such REIT would be qualifying income for purposes of
the 95% gross income test, but not the 75% gross income test. We may also own
stock in non-REIT C corporations (including TRSs). Our dividend income from
stock in those corporations will be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test.
Rents from Real Property. To the extent that we acquire real property or an
interest therein, any rent that we receive from the tenants of that real
property will qualify as "rents from real property," which is qualifying income
for purposes of both gross income tests, only if the following conditions are
met:
o First, the rent must not be based, in whole or in part, on the income
or profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
o Second, neither we nor a direct or indirect owner of 10% or more of
our stock may own, actually or constructively, 10% or more of a tenant
from whom we receive rent, other than a TRS in limited circumstances.
o Third, if the tenant is a TRS, at least 90% of the leased space must
be rented to persons other than our TRSs and tenants in which we own,
actually or constructively, 10% or more of the ownership interests,
and the rent paid by the TRS must be substantially comparable to the
rent paid by the unrelated tenants for comparable space. These rules
will not apply if such rents are received in respect of certain
"qualified lodging facilities."
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o Fourth, all of the rent received under a lease of real property will
not qualify as rents from real property unless the rent attributable
to the personal property leased in connection with the lease is no
more than 15% of the total rent received under the lease. We intend to
monitor the properties held by us, by our QRS or by any flow-through
entity in which we hold an interest to determine that rents
attributable to personal property do not exceed 15% of the total rent
with respect to any particular lease. However, there can be no
assurance that the Internal Revenue Service will not assert that the
rent attributable to personal property with respect to a particular
lease is greater than 15% of the total rent with respect to such
lease. If the Internal Revenue Service were successful, the rental
income would be non-qualifying income.
o Fifth, we generally must not operate or manage our real property or
furnish or render services to our tenants, other than through a TRS or
an "independent contractor" from whom we do not derive revenue and who
meets certain other requirements provided in the applicable Treasury
Regulations. To the extent that services (other than those customarily
furnished or rendered in connection with the rental of real property)
are rendered to the tenants of the property by an independent
contractor, the cost of the services must be borne by the independent
contractor. However, we may provide services directly to our tenants
if the services are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not considered to
be provided for the tenants' convenience. In addition, we may provide
a minimal amount of "noncustomary" services to the tenants of a
property, other than through an independent contractor, as long as our
actual or deemed income from the services does not exceed 1% of our
income from the related property. To the extent one of our TRSs
provides such non-customary services to our tenants, we must pay our
TRS at least 150% of the direct cost of providing the services.
Because properties may be controlled by third parties, the ability to treat
amounts from such property as "rents from real property" will be dependent on
the actions of others and will not be within our control. In addition, we
generally may not receive rent directly or indirectly through a QRS or a
flow-through entity that is based in whole or in part on the income or profits
of any person (except by reason of being based on a percentage of the tenant's
gross receipts or sales). While we will regularly attempt to monitor such
requirements, no assurance can be given that we will not realize income directly
or indirectly through a flow-through entity that would not qualify as "rents
from real property." In this case, the income would be non-qualifying income.
Prohibited Transactions. A REIT is subject to a 100% tax on the net income
derived from any sale or other disposition of property, other than foreclosure
property, that the REIT holds primarily for sale to customers in the ordinary
course of a trade or business. We believe that none of our assets will be held
for sale to customers and that a sale of any of our assets would not be in the
ordinary course of our business. Whether a REIT holds an asset primarily for
sale to customers in the ordinary course of a trade or business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular asset. Accordingly, there can be no assurance that
we will avoid owning property that may be characterized as property that we hold
primarily for sale to customers in the ordinary course of a trade or business.
Foreclosure Property. We will be subject to tax at the maximum corporate
rate on any income from foreclosure property, other than income that otherwise
would be qualifying income for purposes of the 75% gross income test, less
expenses directly connected with the production of that income. However, gross
income from foreclosure property will generally qualify for purposes of the 75%
and 95% gross income tests. Foreclosure property is any real property, including
interests in real property, and any personal property incident to such real
property:
o that is acquired by a REIT as the result of the REIT having bid on the
property at foreclosure, or having otherwise reduced the property to
ownership or possession by agreement or process of law, after there
was a default or default was imminent on a lease of the property or on
indebtedness that the property secured;
o for which the related loan was acquired by the REIT at a time when the
default was not imminent or anticipated; and
o for which the REIT makes a proper election to treat the property as
foreclosure property.
However, a REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a mortgagee-in-possession and
cannot receive any profit or sustain any loss except as a creditor of the
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mortgagor. Property generally ceases to be foreclosure property at the end of
the third taxable year following the taxable year in which the REIT acquired the
property, or longer if an extension is granted by the Secretary of the Treasury.
This grace period terminates and foreclosure property ceases to be foreclosure
property on the first day:
o on which a lease is entered into for the property that, by its terms,
will give rise to income that does not qualify for purposes of the 75%
gross income test, or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after that day that
will give rise to income that does not qualify for purposes of the 75%
gross income test;
o on which any construction takes place on the property, other than
completion of a building or any other improvement, where more than 10%
of the construction was completed before default became imminent; or
o which is more than 90 days after the day on which the REIT acquired
the property and the property is used in a trade or business which is
conducted by the REIT, other than through an independent contractor
from whom the REIT itself does not derive or receive any income.
We do not anticipate that we will receive any income from property acquired
through foreclosure that is not qualifying income for purposes of the 75% gross
income test, but, if we do receive this income, we intend to make an election to
treat the related property as foreclosure property.
Hedging Transactions. From time to time, we may enter into hedging
transactions with respect to one or more of our assets or liabilities. Our
hedging activities may include entering into interest rate swaps, caps and
floors, options to purchase these items, and futures and forward contracts. To
the extent that we enter into an interest rate swap or cap contract, option,
futures contract, forward rate agreement or any similar financial instrument to
reduce risks with respect to interest rates on our indebtedness incurred to
acquire or carry "real estate assets," any income or gain from that contract
should be qualifying income for purposes of the 95% gross income test, but not
the 75% gross income test. However, beginning in 2005, such income (as well as
income or gain from similar hedges for currency fluctuations of such debt) will
be excluded income for purposes of calculating the REIT 95% gross income test if
certain requirements are satisfied, but will not be excluded and will not be
qualifying income for purposes of calculating the 75% gross income test. To the
extent that we hedge with other types of financial instruments, or in other
situations, the income from those transactions is not likely to be treated as
qualifying income for purposes of the gross income tests.
Other. Loan guarantee fees, origination fees and income from mortgage
servicing and other service contracts will not qualify for either the 95% or 75%
gross income tests if such income constitutes fees for services rendered by us
or is not treated as interest on obligations secured by mortgages on real
property or on interests in real property for purposes of the 75% gross income
test. Commitment fees generally will qualify for purposes of the 75% and 95%
gross income tests.
We intend to maintain our REIT status by carefully monitoring our income,
including income from dividends, hedging transactions, services and sales of
loans and other assets to comply with the 75% gross income test and the 95%
gross income test.
Failure to Satisfy Gross Income Tests. If we fail to satisfy one or both of
the 75% or 95% gross income tests for any taxable year, we may nevertheless
qualify as a REIT for such year if we are entitled to relief under certain
provisions of the Code. These relief provisions will be generally available if
our failure to meet such tests was due to reasonable cause and not due to
willful neglect, we satisfy certain identification and filing requirements, and
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances we
would be entitled to the benefit of these relief provisions. If these relief
provisions are inapplicable to a particular set of circumstances involving us,
we will not qualify as a REIT. As discussed above in "--Taxation as a REIT,"
even where these relief provisions apply, a tax is imposed with respect to the
excess net income.
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Annual Distribution Requirements
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to:
o the sum of 90% of our "REIT taxable income" (computed without regard
to the dividends paid deduction and our net capital gain) and 90% of
the net income (after tax), if any, from foreclosure property; minus
o the sum of certain items of noncash income.
We must pay these distributions in the taxable year to which they relate or
in the following taxable year if declared before we timely file our tax return
for such year and if paid with or before the first regular dividend payment
after such declaration. To the extent that we do not distribute all of our net
capital gain or distribute (or are treated as having distributed) at least 95%,
but less than 100%, of our "REIT taxable income" as adjusted, we will be subject
to tax thereon at regular corporate tax rates.
Furthermore, if we should fail to distribute during each calendar year at
least the sum of:
o 85% of our REIT ordinary income for such year;
o 95% of our REIT capital gain income for such year (other than capital
gain income which we elect to retain and pay tax on as provided for
below); and
o any undistributed taxable income from prior periods (other than
capital gains from such years which we elected to retain and pay tax
on),
we would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. We intend to make timely
distributions sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, we may experience timing
differences between:
o the actual receipt of income and actual payment of deductible
expenses; and
o the inclusion of that income and deduction of such expenses in
arriving at our REIT taxable income.
Possible examples of such timing differences include the following:
o We may have taxable income that exceeds our economic income because we
may deduct capital losses only to the extent of our capital gains.
o We will recognize taxable income in advance of the related cash flow
if any of our subordinated mortgage-backed securities or mortgage
loans are deemed to have original issue discount. We generally must
accrue original issue discount based on a constant yield method that
takes into account projected prepayments but that defers taking into
account credit losses until they are actually incurred.
o We may be required to recognize the amount of any payment projected to
be made pursuant to a provision in a mortgage loan that entitles us to
share in the gain from the sale of, or the appreciation in, the
mortgaged property over the term of the related loan using the
constant yield method, even though we may not receive the related cash
until the maturity of the loan.
o We may recognize taxable market discount income when we receive the
proceeds from the disposition of, or principal payments on, loans that
have a stated redemption price at maturity that is greater than our
tax basis in those loans, although such proceeds often will be used to
make nondeductible principal payments on related borrowings.
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o We may recognize taxable income without receiving a corresponding cash
distribution if we foreclose on or make a significant modification to
a loan, to the extent that the fair market value of the underlying
property or the principal amount of the modified loan, as applicable,
exceeds our basis in the original loan.
o Although several types of noncash income are excluded in determining
the annual distribution requirement, we will incur corporate income
tax and the 4% excise tax with respect to those noncash income items
if we do not distribute those items on a current basis.
o We may recognize phantom taxable income from any residual interests in
REMICs or retained ownership interests in mortgage loans subject to
collateralized mortgage obligation debt that we own.
As a result of the foregoing, we may have less cash flow than is necessary
to satisfy the distribution requirement and to avoid corporate income tax and
the excise tax imposed on undistributed income. In such a situation, we may need
to use cash reserves, borrow funds, sell assets or issue preferred stock or
additional stock.
Under certain circumstances, we may be able to rectify a failure to meet
the annual distribution requirements for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest based on the amount of any deduction taken for deficiency
dividends.
Alternatively, we may attempt to declare a consent dividend (a hypothetical
distribution to stockholders out of our earnings and profits). The effect of
such a consent dividend, to those stockholders who agree to such treatment,
would be that those stockholders would be treated for federal income tax
purposes as if the amount of the consent dividend had been paid to them in cash
and they had then immediately contributed that amount back to us as additional
paid-in capital. A consent dividend would result in a deemed taxable
distribution but would also increase the stockholders' tax bases in their shares
by the amount of the taxable income recognized.
We may elect to retain rather than distribute our net long-term capital
gains. The effect of such an election is that:
o we are required to pay the tax on such retained gains at regular
corporate tax rates;
o our stockholders will be required to include in income their
proportionate share of the portion of such retained long-term capital
gain designated by us in a notice mailed to stockholders and will
receive a credit or refund for their share of the tax paid by us in
respect of such designated amount included in income; and
o a stockholder's basis in its stock would be increased by the amount of
the retained long-term capital gains (minus the amount of capital
gains tax paid by us) included in income by such stockholder.
Failure to Qualify as a REIT
If we fail to qualify for taxation as a REIT in any taxable year, and
certain relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to stockholders in any year in which we fail to qualify
will not be deductible by us nor will they be required to be made under the
Code. In such event, to the extent of current and accumulated earnings and
profits, corporate stockholders may be eligible for the dividends received
deduction and noncorporate U.S. Holders may be eligible for a reduced income tax
rate with respect to such dividend. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a REIT for
the four taxable years following the year during which disqualification
occurred. It is not possible to predict whether in all circumstances we would be
entitled to such statutory relief.
Furthermore, in the event that Apex has failed to qualify for taxation as a
REIT and certain relief provisions do not apply, we will also be disqualified
from taxation as a REIT for the four taxable years following the year during
which disqualification occurred.
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Taxable Mortgage Pool Rules
A REIT or a portion of a REIT may be classified as a "taxable mortgage
pool," referred to as "TMP," under the Code if (1) substantially all of the
REIT's assets (or substantially all of the assets of a portion of the REIT, such
as a QRS or other entity owned by the REIT) consist of debt obligations (or
interests therein), (2) more than 50% of the REIT's (or more than 50% of the
portion of the REIT's) investments in debt obligations are real estate mortgages
(or interests therein), (3) the REIT (or the portion of the REIT) is obligated
for debts with two or more maturities, and (4) the payments required to be made
by the REIT (or the portion of the REIT) on its debt obligations bear a
relationship to the payments received by the REIT (or the portion of the REIT)
from its assets. Under regulations issued by the U.S. Treasury Department, an
entity whose investments in debt obligations are less than 80% of its total
assets will qualify for a safe harbor and not be considered a TMP. To the extent
we are subject to the TMP rules, our status as a REIT will not be impaired but a
portion of the taxable income generated by our mezzanine debt and other assets
constituting a taxable mortgage pool may, under regulations to be issued by the
U.S. Treasury Department, be characterized as "excess inclusion" income and
allocated to our stockholders. Any such excess inclusion income (i) will not be
allowed to be offset by the net operating losses of a stockholder, (ii) will be
subject to tax as unrelated business taxable income, referred to as "UBTI" to a
tax-exempt stockholder, (iii) will result in the application of U.S. federal
income tax withholding at the maximum rate (without reduction for any otherwise
applicable income tax treaty) on any excess inclusion income allocable to
Non-U.S. Holders, and (iv) may result in the REIT having to pay tax on excess
inclusion income to the extent the REIT's shareholders are disqualified
organizations. (See "--Taxation of Tax-Exempt U.S. Holders" and "--Taxation of
Non-U.S. Holders" below.)
Taxation of U.S. Holders
As used in this summary, a "U.S. Holder" is a beneficial owner of shares
that is:
o an individual who is a citizen or resident of the United States for
U.S. federal income tax purposes;
o a corporation (or other entity that is treated as a corporation for
U.S. federal tax purposes) that is created or organized in or under
the laws of the United States or any State thereof (including the
District of Columbia);
o an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
o a trust if a court within the United States is able to exercise
primary supervision over its administration, and one or more United
States persons have the authority to control all of its substantial
decisions.
If a partnership (or other entity that is treated as a partnership for U.S.
federal tax purposes) is a beneficial owner of shares, the treatment of a
partner in the partnership will generally depend upon the status of the partner
and upon the activities of the partnership. A beneficial owner of shares that is
a partnership, and partners in such a partnership, should consult their tax
advisors about the U.S. federal income tax consequences of holding and disposing
of the shares.
An individual may, subject to certain exceptions, be deemed to be a
resident of the United States for U.S. federal income tax purposes by reason of
being present in the United States for at least 31 days in the calendar year and
for an aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year).
General. As long as we qualify as a REIT, distributions made to U.S.
Holders out of current earnings and profits that are not designated as capital
gain dividends will be taken into account by U.S. Holders as ordinary income and
will not be eligible for the dividends received deduction for corporations.
Distributions from the REIT to noncorporate U.S. Holders may be eligible for a
reduced rate of tax to the extent of (i) the aggregate "qualified dividend
income" received by the REIT from its TRSs and other non-REIT corporations, (ii)
the excess of the REIT's taxable income for the preceding year over the tax
payable for that preceding year, and (iii) any amount recognized as built-in
gain on property transferred by a C corporation to the REIT, minus the tax paid
by the REIT for this gain. However, our ordinary REIT dividends will continue to
be taxed at the higher tax rate applicable to ordinary income.
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U.S. Holders will not incur tax on a distribution in excess of our current
and accumulated earnings and profits if the distribution does not exceed the
adjusted basis of the U.S. Holder's shares of stock. Instead, the distribution
will reduce the adjusted basis of the U.S. Holder's shares of stock. A U.S.
Holder will recognize a distribution in excess of both our current and
accumulated earnings and profits and the U.S. Holder's adjusted basis in the
U.S. Holder's shares of stock as long-term capital gain, or short-term capital
gain if the shares of stock have been held for one year or less. The calculation
of the amount of distributions that are applied against or exceed adjusted tax
basis is on a share-by-share basis.
For purposes of determining whether distributions are made out of current
or accumulated earnings and profits, our earnings and profits will be allocated
first to the preferred stock (pro rata between series) and then to the common
stock. We anticipate that distributions we pay on the preferred stock will not
be in excess of our current and accumulated earnings and profits and therefore
that all distributions on the preferred stock will be taxable to you.
We may recognize taxable income in excess of our economic income. As a
result, U.S. Holders at times may be required to pay U.S. federal income tax on
distributions that economically represent a return of capital rather than a
dividend. These distributions would be offset in later years by distributions
representing economic income in excess of taxable income that would be treated
as returns of capital for U.S. federal income tax purposes. To the extent we
hold REMIC residual interests or are subject to the TMP rules, any excess
inclusion income will not be allowed to be offset by the net operating losses of
a U.S. Holder. (See "--Taxable Mortgage Pool Rules" above.)
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent that they do not exceed our actual net
capital gain for the taxable year) without regard to the period for which the
U.S. Holder has held its stock. Individuals are generally subject to a reduced
rate on long-term capital gains. U.S. Holders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income pursuant to Section 291(d) of the Code.
We may designate a portion of a dividend as a capital gain dividend. We may
elect to retain and pay income tax on any net long-term capital gain, in which
case U.S. Holders would include in their income as long-term capital gain their
proportionate shares of such retained long-term capital gain to the extent
designated in a notice mailed to stockholders. In such a case, and to such an
extent, a U.S. Holder will receive a credit or refund and a basis adjustment
reflecting the deemed distribution and deemed payment of taxes by the U.S.
Holder. To the extent that we make distributions in excess of our current and
accumulated earnings and profits, such distributions will be treated first as a
tax-free return of capital to each U.S. Holder, reducing the adjusted basis
which such U.S. Holder has in its shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Holder's adjusted basis in its shares taxable as capital gains. Dividends
declared by us in October, November or December of any year and payable to a
U.S. Holder of record on a specified date in any such month shall be treated as
both paid by us and received by the U.S. Holder on December 31 of such year, so
long as the dividend is actually paid by us on or before January 31 of the
following calendar year. We will notify stockholders after the close of our
taxable year as to their portions of the distributions attributable to that year
that constitute ordinary income, return of capital, and capital gain.
U.S. Holders may not include in their own income tax returns any of our net
operating losses or capital losses. Instead, these losses are generally carried
over by us for potential offset against our future income. Taxable distributions
from us and gain from the disposition of shares of our stock will not be treated
as passive activity income and, therefore, U.S. Holders generally will not be
able to apply any passive activity losses (including losses from certain types
of limited partnerships in which the U.S. Holder is a limited partner) against
such income. In addition, taxable distributions from us and gain from the
disposition of shares of our stock generally will be treated as investment
income for purposes of the investment interest limitations.
A noncorporate U.S. Holder may elect to treat capital gain dividends,
capital gains from the disposition of stock and income designated as qualified
dividend income as investment income for purposes of the investment interest
limitation, in which case the applicable gains will be taxed at ordinary income
tax rates.
Sale or Exchange of Shares of Stock. Upon a sale or other disposition of
shares, a U.S. Holder will generally recognize a capital gain or loss in an
amount equal to the difference between the amount realized and the U.S. Holder's
adjusted basis in such shares, which gain or loss will be long-term if such
shares have been held for more
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than one year. To the extent of any long-term capital gain dividends received by
a U.S. Holder, any loss on the sale or other disposition of shares held by such
U.S. Holder for six months or less will generally be treated as a long-term
capital loss.
Redemption of Shares of Stock. If we redeem all or a portion of the stock,
under section 302 of the Code, the redemption will be treated as a dividend,
generally taxable at ordinary income tax rates (to the extent of our current and
accumulated earnings and profits), unless the redemption satisfies one or more
of the tests set forth in section 302(b) of the Code that enable the redemption
to be treated as a sale or exchange of the redeemed stock. A redemption will
satisfy these tests if it: (i) is "substantially disproportionate" with respect
to the U.S. Holder; (ii) results in a "complete termination" of the U.S.
Holder's interest in all classes of our stock; or (iii) is "not essentially
equivalent to a dividend;" all within the meaning of section 302(b) of the Code.
In determining whether any of these tests have been met, shares considered to be
owned by a U.S. Holder by reason of certain constructive ownership rules set
forth in the Code, as well as shares actually owned, must generally be taken
into account. Because the determination as to whether any of the alternative
tests of section 302(b) of the Code is satisfied with respect to any particular
U.S. Holder will depend upon the facts and circumstances as of the time the
determination is made, prospective investors are advised to consult their tax
advisors to determine their tax treatment.
If a redemption of stock is treated as a distribution that is taxable as a
dividend, the amount of the distribution would be measured by the amount of cash
and the fair market value of any property the U.S. Holder receives. The U.S.
Holder's adjusted tax basis in the redeemed stock would, in that case, be
transferred to any other stock of ours that the U.S. Holder owns. If, however,
the U.S. Holder has no other stock of ours, this basis may, under certain
circumstances, be transferred to a related person, or it may be lost entirely.
Under certain proposed regulations, any tax basis of a redeemed U.S. Holder
would be recognized as a loss by such U.S. Holder upon the occurrence of certain
subsequent events. There can be no assurance that these proposed Treasury
Regulations will be adopted, or that they will be adopted in their current form.
Taxation of Tax-Exempt U.S. Holders
Distributions by us to a U.S. Holder that is a tax-exempt entity generally
will not constitute UBTI, so long as the tax-exempt entity has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Code and the shares are not otherwise used in an unrelated trade or business
of the tax-exempt entity.
However, a portion of the dividends paid by us may be treated as UBTI to
certain domestic private pension trusts that hold more than 10% of our stock (a
"10% qualified trust") if (i) at least one 10% qualified trust owns more than
25% of the value of our stock or (ii) one or more 10% qualified trusts own in
the aggregate more than 50% of the value of our stock, and we are therefore
treated as a "pension-held REIT." We believe that we are not, and do not expect
to become, a pension-held REIT.
To the extent we hold REMIC residual interests or are subject to the TMP
rules, any excess inclusion income will be subject to tax as UBTI to a
tax-exempt stockholder. (See "--Taxable Mortgage Pool Rules" above.)
Taxation of Non-U.S. Holders
As used in this summary, the term "Non-U.S. Holder" means a beneficial
owner of our stock that is not a U.S. Holder.
Ordinary Dividends. The portion of dividends or redemptions treated as
dividends (as discussed in "--Taxation of U.S. Holders--Redemption of Shares of
Stock") received by Non-U.S. Holders payable out of our current and accumulated
earnings and profits which are not attributable to our capital gains and which
are not effectively connected with a U.S. trade or business of the Non-U.S.
Holder and which are not attributable to gain from sales or exchanges by us of a
"United States real property interest" (as defined below) will be subject to
U.S. withholding tax at the rate of 30% (which may be reduced by treaty). In
general, Non-U.S. Holders will not be considered engaged in a U.S. trade or
business solely as a result of their ownership of our stock. In cases where the
dividend income from a Non-U.S. Holder's investment in our stock is (or is
treated as) effectively connected with the Non-U.S. Holder's conduct of a trade
or business in the United States, the Non-U.S. Holder generally will be subject
to U.S. federal income tax at graduated rates, in the same manner as U.S.
Holders are taxed with respect to such dividends (and may also be subject to a
branch profits tax in the case of a Non-U.S. Holder that is a foreign
corporation).
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To the extent we hold REMIC residual interests or are subject to the TMP
rules, any excess inclusion income will be subject to U.S. federal income tax
withholding at the maximum rate (without reduction for any otherwise applicable
income tax treaty) on any excess inclusion income allocable to Non-U.S. Holders.
(See "--Taxable Mortgage Pool Rules" above.)
Non-Dividend Distributions. Unless our stock constitutes a "United States
real property interest" (as defined below) or our stock is effectively connected
with the conduct by a Non-U.S. Holder of a trade or business in the United
States, distributions by us that are not dividends will not be subject to U.S.
income or withholding tax. If it cannot be determined at the time a distribution
is made whether or not such distribution will be a dividend, the distribution
will be subject to withholding at the rate applicable to dividends. However, the
Non-U.S. Holder may seek a refund of such amounts from the Internal Revenue
Service if it is subsequently determined that such distribution was, in fact,
not a dividend and if the proper forms are filed with the Internal Revenue
Service by the Non-U.S. Holder on a timely basis. If our stock constitutes a
United States real property interest, such distribution will be subject to
withholding tax and may be subject to taxation, as described below.
Capital Gain Dividends. To the extent a distribution made by us to a
Non-U.S. Holder is attributable to gains from dispositions of United States real
property interests that are owned by us directly or indirectly through a
flow-through entity, the distribution will be considered effectively connected
with a trade or business in the United States of the Non-U.S. Holder and subject
to U.S. income tax at the rate applicable to U.S. individuals or corporations,
without regard to whether such distribution is designated as a capital gain
dividend. Beginning in 2005, if (i) the capital gain dividend is received by a
Non-U.S. Holder with respect to a class of stock that is regularly traded on an
established securities market located in the United States (such as the NYSE),
and (ii) the Non-U.S. Holder does not own more than 5% of that class of stock at
any time during the taxable year in which the capital gain dividend is received,
the distribution will be treated in the same manner as an ordinary income
dividend, subject to applicable withholding tax as described above.
The term "United States real property interests" includes interests (other
than solely as a creditor) in real property and in corporations at least 50% of
whose assets consist of United States real property interests. A "United States
real property interest" does not include mortgage-backed securities and does not
include mortgage loans unless the holder of the loan has a right to share in the
appreciation in value of or the income generated by the underlying property. In
addition, we will be required to withhold tax on the amount of dividends to the
extent such dividends are attributable to gains from dispositions of United
States real property interests. Distributions attributable to gains from
dispositions of United States real property interests may also be subject to a
branch profits tax in the hands of a foreign corporate stockholder that is not
entitled to treaty exemption.
Disposition of Stock of the Company. If we are treated as a "United States
real property holding corporation" a Non-U.S. Holder potentially could be
subject to tax (enforced by withholding) upon a sale of shares of our stock. We
generally will be a United States real property holding corporation if at least
50% of the fair market value of our assets has consisted of United States real
property interests at any time during the five-year period ending on the date of
the Non-U.S. Holder's disposition of shares of our stock. Because United States
real property interests do not include mortgage-backed securities or mortgage
loans without appreciation rights, we do not expect to be a United States real
property holding corporation. Moreover, even if we were a United States real
property holding corporation, a Non-U.S. Holder generally will not be subject to
tax upon a sale of shares of our stock as long as at all times foreign persons
hold, directly or indirectly, less than 50% in value of our shares. There can be
no assurance that this test will be met. Finally, a Non-U.S. Holder that owns,
actually or constructively, 5% or less of the shares of our stock at all times
during a specified testing period also will not incur tax so long as the shares
of our stock are "regularly traded" on an established securities market. Because
our stock is, and is expected to continue to be, regularly traded on the New
York Stock Exchange, we do not expect that a Non-U.S. Holder will be subject to
tax on gain on the sale of our stock unless it owns more than 5% of our stock.
If gain on the sale of shares of our stock is taxable, a Non-U.S. Holder would
be taxed on that gain in the same manner as U.S. Holders, subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of Non-U.S. Holders that are corporations.
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Furthermore, a Non-U.S. Holder will be subject to tax on gain from the sale
of our stock if:
o the gain is effectively connected with the Non-U.S. Holder's trade or
business in the United States, in which case the Non-U.S. Holder will
be subject to the same treatment as U.S. Holders with respect to such
gain and Non-U.S. Holders that are corporations may be subject to an
additional 30% branch profits tax; or
o the Non-U.S. Holder is a nonresident alien individual who was present
in the United States for 183 days or more during the taxable year and
has a "tax home" in the United States, in which case the Non-U.S.
Holder will incur a 30% tax on his or her capital gains.
Estate Tax. Shares of our stock owned or treated as owned by an individual
who is a Non-U.S. Holder at the time of death will be includible in the
individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may be
subject to U.S. federal estate tax on the property includible in the estate for
U.S. federal estate tax purposes.
Information Reporting and Backup Withholding
U.S. Holders. We will report to the U.S. Holders and the Internal Revenue
Service the amount of distributions paid during each calendar year and the
amount of tax withheld, if any. Under the backup withholding rules, a U.S.
Holder may be subject to backup withholding with respect to distributions paid
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Holder that does not provide us with its correct
taxpayer identification number may also be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding will be
creditable against the U.S. Holder's income tax liability. In addition, we may
be required to withhold a portion of capital gain distributions to any U.S.
Holders who fail to certify their non-foreign status to us. See "--Taxation of
Non-U.S. Holders" above.
Non-U.S. Holders. We must report annually to the Internal Revenue Service
and to each Non-U.S. Holder the amount of dividends (including any capital gain
dividends) paid to, and the tax withheld with respect to, such Non-U.S. Holder.
These reporting requirements apply regardless of whether withholding was reduced
or eliminated by an applicable tax treaty. Copies of these returns may also be
made available under the provisions of a specific treaty or agreement with the
tax authorities in the country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed on certain payments to
persons that fail to furnish the information required under the U.S. information
reporting requirements) and information reporting generally will not apply to
dividends (including any capital gain dividends) paid on our stock to a Non-U.S.
Holder at an address outside the United States.
The payment of the proceeds from the disposition of our stock to or through
a U.S. office of a broker will be subject to information reporting and backup
withholding unless the owner, under penalties of perjury, certifies, among other
things, its status as a Non-U.S. Holder, or otherwise establishes an exemption.
The payment of the proceeds from the disposition of stock to or through a
non-U.S. office of a non-U.S. broker generally will not be subject to backup
withholding and information reporting.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Holder's U.S. federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
Foreign, State and Local Tax Consequences
We and our stockholders may be subject to foreign, state or local taxation
in various foreign, state or local jurisdictions, including those in which we or
they transact business or reside. The foreign, state and local tax treatment of
us and our stockholders may not conform to the U.S. federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their tax advisors regarding the effect of foreign, state and local tax
laws on an investment in our stock.
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Possible Legislative or Other Actions Affecting Tax Consequences.
Prospective investors should recognize that the present federal income tax
treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time, and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the Internal Revenue Service and the U.S. Treasury
Department, resulting in revisions and revised interpretations of the Code,
regulations, and established concepts.
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LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed upon for us by Cadwalader, Wickersham & Taft LLP, New York, New York.
Certain legal matters relating to Maryland law, including the validity of the
common stock and preferred stock to be offered hereby, will be passed upon for
us by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
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[LOGO]
AMERICAN HOME MORTGAGE INVESTMENT CORP.
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PROSPECTUS
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, 2004
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following statement sets forth our expenses in connection with the
offering described in the Registration Statement (all of which will be borne by
us). All amounts shown are estimated, except the SEC registration fee.
SEC registration fee $ 88,275
Trustee's fees and expenses 0
Printing and engraving expenses 0
Accountants' fees and expenses 35,000
Legal fees and expenses 50,000
Miscellaneous 1,500
TOTAL $ 174,775
============
Item 15. Indemnification of Directors and Officers
Our charter provides that we will indemnify our officers and directors
in the manner and to the fullest extent permitted by applicable law and will
indemnify our employees and agents to such extent as shall be authorized by our
Board of Directors or our bylaws and permitted by law. Maryland law presently
permits the liability of directors and officers to a corporation or its
stockholders for money damages to be limited, except (i) to the extent that it
is proved that the director or officer actually received an improper benefit or
profit or (ii) if the judgment or other final adjudication is entered in a
proceeding based on a finding that the directors or officers action, or failure
to act, was a result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding. The provisions of our charter do
not limit the ability of us or our stockholders to obtain other relief, such as
injunction or rescission.
Our charter and bylaws provide that we shall indemnify, in the manner
and to the fullest extent permitted by law, any person who is or was a party to,
or is threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the Company,
and whether civil, criminal, administrative, investigative or otherwise, by
reason of the fact that such person is or was our director or officer, or, as
our director or officer, is or was serving at the request of us as a director,
officer, trustee, partner, member, agent or employee of another corporation,
partnership, limited liability company, association, joint venture, trust,
benefit plan or other enterprise. To the fullest extent permitted by law, such
indemnification shall include reasonable expenses (including attorneys' fees),
judgment, fines and amounts paid in settlement. Without requiring a preliminary
determination of ultimate entitlement to indemnification, any such expenses
incurred by any present or former director, and any such expenses incurred by
any officer of the Company by reason of his service as such, shall be paid by us
in advance of the final disposition of such action, suit or proceeding. However,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In addition, the Maryland General Corporation
Law requires a corporation, as a condition to advancing expenses, to obtain (a)
a written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by such
corporation as authorized by the Maryland General Corporation Law and (b) a
written statement by or on his behalf to repay the amount paid or reimbursed by
such corporation if it shall ultimately be determined that the standard of
conduct was not met.
Article XI of the our bylaws further provides that we may, with the
approval of our Board of Directors, provide such indemnification and advancement
of expenses as set forth in the above paragraph to any officer or director who
served a predecessor of the Company, and to any employee or agent of the Company
or any predecessor.
Section 2-418 of the Maryland General Corporation Law requires a
corporation, unless its charter provides otherwise, which our charter does not,
to indemnify a director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity.
II-1
Section 2-418 of the Maryland General Corporation Law generally permits
indemnification of any director or officer made a party to any proceedings by
reason of service as a director or officer unless it is established that (i) the
act or omission of such person 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; (ii) such person actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, such person had reasonable cause to believe that the act or omission
was unlawful. The indemnity may include judgments, penalties, fines, settlements
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding; provided, however, that if the proceeding is one
by, or in the right of the corporation, indemnification is not permitted with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer adjudged to be liable on the basis that personal benefit
was improperly received. The termination of any proceeding by conviction or upon
a plea of nolo contendere or its equivalent or an entry of an order of probation
prior to judgment creates a rebuttable presumption that the director or officer
did not meet the requisite standard of conduct required for permitted
indemnification. The termination of any proceeding by judgment, order or
settlement, however, does not create a presumption that the director or officer
failed to meet the requisite standard of conduct for permitted indemnification.
We have obtained a policy of insurance under which our directors and
officers will be insured, subject to the limits of the policy, against certain
losses arising from claims made against such directors and officers by reason of
any acts or omissions covered under such policy in their respective capacities
as directors or officers, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
For the undertaking with respect to indemnification, see Item 17 in this
Registration Statement.
II-2
Item 16. Exhibits
Exhibit No. Description
------------------------- -------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.(1)
4.1 Form of Warrant Agreement for Common Stock.(2)
4.2 Form of Warrant Agreement for Preferred Stock.(2)
4.3 Indenture, dated as of January 8, 2004, between the Company and Deutsche Bank Trust
Company Americas.(2)
4.4 Articles of Amendment and Restatement of the Registrant.(3)
4.5 Amended and Restated Bylaws of the Registrant.(4)
4.6 Specimen Certificate for the Common Stock of the Registrant.(5)
4.7 Articles Supplementary of the Company establishing
and fixing the rights and preferences of the
Company's 9.75% Series A Cumulative Redeemable
Preferred Stock, which the Company filed with the
State Department of Assessments and Taxation of
Maryland on July 6, 2004.(6)
4.8 Articles Supplementary of the Company establishing
and fixing the rights and preferences of 747,000
additional shares of the Company's 9.75% Series A
Cumulative Redeemable Preferred Stock, which the
Company filed with the State Department of
Assessments and Taxation of Maryland on July 19, 2004.(7)
4.9 Form of Stock Certificate for the Series A Preferred Stock of the Registrant.(8)
4.10 Articles Supplementary of the Company establishing
and fixing the rights and preferences of the
Company's 9.25% Series B Cumulative Redeemable
Preferred Stock, which the Company filed with the
State Department of Assessments and
Taxation of Maryland on December 14, 2004.(9)
4.11 Form of Stock Certificate for the Series B Preferred Stock of the Registrant.(10)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.(9)
5.2 Opinion of Cadwalader, Wickersham & Taft LLP.(9)
8.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to tax matters.(9)
12.1 Computation of Ratio of Earnings to Fixed Charges.(9)
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Dividends.(9)
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5.1).(9)
23.2 Consent of Cadwalader, Wickersham & Taft LLP (included in Exhibits 5.2 and 8.1).(9)
23.3 Consent of Deloitte & Touche LLP.(9)
24.1 Power of Attorney (included on signature page to this Registration Statement).(9)
25.1 Statement of Eligibility of Trustee on Form T-1.(9)
(1) To be filed either as an exhibit to an amendment to this Registration
Statement or as an exhibit to a subsequent filing on Form 8-K.
(2) Incorporated by reference to similarly numbered exhibits to the Company's
Registration Statement on Form S-3, as amended (File No. 333-111546).
(3) Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-31916).
(4) Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-31916).
(5) Incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-31916).
(6) Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2004 (File No.
001-31916).
(7) Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2004 (File No.
001-31916).
(8) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A filed with the SEC on June 30, 2004 (File No.
001-31916).
(9) Filed herewith.
(10) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A filed with the SEC on December 10, 2004 (File No.
001-31916).
II-3
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities in the post-effective amendment at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission this type of indemnification is against public policy as expressed in
the Act and is, therefore unenforceable. In the event that a claim for
indemnification against liabilities arising under the Securities Act of 1933
(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 any 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 a court of appropriate jurisdiction
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 the
submitted issue.
(6) (i) For the purposes of determining liability under the Securities Act
of 1933, 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 of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-4
(ii) For the purpose of determining any liability under the Securities
Act of 1933, 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.
(7) To file an application for the purpose of determining the eligibility
of the trustee to act under subsection (a) of Section 310 of the Trust Indenture
Act in accordance with the rules and regulations prescribed by the SEC under
Section 305(b)(2) of the Act.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused the Registration
Statement of which this prospectus is a part to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Melville and the State of
New York on the 15th day of December, 2004.
AMERICAN HOME MORTGAGE INVESTMENT CORP.
By: /s/ Michael Strauss
------------------------------------
Name: Michael Strauss
Title: Chief Executive Officer and
President
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned officers and directors of American Home Mortgage
Investment Corp., hereby severally constitute and appoint Michael Strauss as our
true and lawful attorney with full power to him to sign for us and in our names
in the capacities indicated below the Registration Statement on Form S-3 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering or for any additional offerings (as contemplated by the Registration
Statement filed herewith) which may be filed under Rule 415 or Rule 462, and
generally to do all that is necessary in our name and on our behalf in our
capacities as officers and directors to enable American Home Mortgage Investment
Corp. to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorney to said
Registration Statement and any and all amendments thereto or to any subsequent
Registration Statement for the same offering or for any additional offerings (as
contemplated by the Registration Statement of which this prospectus is a part
filed herewith) which may be filed under Rule 415 or Rule 462.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 15th day of December, 2004.
Signature Title
/s/ Michael Strauss Chief Executive Officer
--------------------------------- and President (Principal Executive
Michael Strauss Officer)
/s/ John A. Johnston Director
---------------------------------
John A. Johnston
/s/ Nicholas R. Marfino Director
---------------------------------
Nicholas R. Marfino
/s/ Michael A. McManus, Jr. Director
---------------------------------
Michael A. McManus, Jr.
/s/ C. Cathleen Raffaeli Director
---------------------------------
C. Cathleen Raffaeli
/s/ Kenneth P. Slosser Director
---------------------------------
Kenneth P. Slosser
/s/ Irving J. Thau Director
---------------------------------
Irving J. Thau
/s/ Stephen A. Hozie Chief Financial Officer
--------------------------------- (Principal Financial Officer)
Stephen A. Hozie
/s/ Robert Bernstein Controller
--------------------------------- (Principal Accounting Officer)
Robert Bernstein
EXHIBIT INDEX
Exhibit No. Description
------------------------- --------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.(1)
4.1 Form of Warrant Agreement for Common Stock.(2)
4.2 Form of Warrant Agreement for Preferred Stock.(2)
4.3 Indenture, dated as of January 8, 2004, between the Company and Deutsche Bank Trust
Company Americas.(2)
4.4 Articles of Amendment and Restatement of the Registrant.(3)
4.5 Amended and Restated Bylaws of the Registrant.(4)
4.6 Specimen Certificate for the Common Stock of the Registrant.(5)
4.7 Articles Supplementary of the Company establishing
and fixing the rights and preferences of the
Company's 9.75% Series A Cumulative Redeemable
Preferred Stock, which the Company filed with the
State Department of Assessments and Taxation of
Maryland on July 6, 2004.(6)
4.8 Articles Supplementary of the Company establishing
and fixing the rights and preferences of 747,000
additional shares of the Company's 9.75% Series A
Cumulative Redeemable Preferred Stock, which the
Company filed with the State Department of
Assessments and Taxation of Maryland on July 19, 2004.(7)
4.9 Form of Stock Certificate for the Series A Preferred Stock of the Registrant.(8)
4.10 Articles Supplementary of the Company establishing
and fixing the rights and preferences of the
Company's 9.25% Series B Cumulative Redeemable
Preferred Stock, which the Company filed with the
State Department of Assessments and
Taxation of Maryland on December 14, 2004.(9)
4.11 Form of Stock Certificate for the Series B Preferred Stock of the Registrant.(10)
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP.(9)
5.2 Opinion of Cadwalader, Wickersham & Taft LLP.(9)
8.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to tax matters.(9)
12.1 Computation of Ratio of Earnings to Fixed Charges.(9)
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Dividends.(9)
23.1 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5.1).(9)
23.2 Consent of Cadwalader, Wickersham & Taft LLP (included in Exhibits 5.2 and 8.1).(9)
23.3 Consent of Deloitte & Touche LLP.(9)
24.1 Power of Attorney (included on signature page to this Registration Statement).(9)
25.1 Statement of Eligibility of Trustee on Form T-1.(9)
(1) To be filed either as an exhibit to an amendment to this Registration
Statement or as an exhibit to a subsequent filing on Form 8-K.
(2) Incorporated by reference to similarly numbered exhibits to the Company's
Registration Statement on Form S-3, as amended (File No. 333-111546).
(3) Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-31916).
(4) Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-31916).
(5) Incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-31916).
(6) Incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2004 (File No.
001-31916).
(7) Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2004 (File No.
001-31916).
(8) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A filed with the SEC on June 30, 2004 (File No.
001-31916).
(9) Filed herewith.
(10) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A filed with the SEC on December 10, 2004 (File No.
001-31916).