AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 2004
REGISTRATION NO. 333-______
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ANNALY MORTGAGE MANAGEMENT, INC.
(Exact Name Of Registrant As Specified In Its Charter)
MARYLAND 6798 22-3479661
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
1211 AVENUE OF THE AMERICAS, SUITE 2902
NEW YORK, NEW YORK 10036
(212) 696-0100
(Address, Including Zip Code, And Telephone Number, Including Area Code,
Of Registrant's Principal Executive Offices)
-------------------
MICHAEL A.J. FARRELL
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
ANNALY MORTGAGE MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS, SUITE 2902
NEW YORK, NEW YORK 10036
(212) 696-0100
(Name, Address, Including Zip Code, And Telephone Number,
Including Area Code, Of Agent For Service)
-------------------
COPIES TO:
R. NICHOLAS SINGH JAMES R. TANENBAUM CHRISTOPHER G. KARRAS
MCKEE NELSON LLP MORRISON & FOERSTER LLP DECHERT LLP
1919 M STREET, N.W., SUITE 800 1290 AVENUE OF THE AMERICAS 1717 ARCH STREET
WASHINGTON, D.C. 20036 NEW YORK, NY 10104 4000 BELL ATLANTIC TOWER
(202) 775-4134 (212) 468-8163 PHILADELPHIA, PA 19103
(215) 994-2412
-------------------
Approximate Date of Commencement of Proposed Sale of the Securities to the
Public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. [_]
==================================================================================================================
Proposed
maximum Proposed maximum Amount of
Title of each class of securities to Amount to be offering price Aggregate Offering registration
be registered registered(1) per share Price fee(2)
------------------------------------ ------------- -------------- ------------------ ------------
Common Stock, par value $0.01 N/A N/A $40,500,000 $5131.35
per share
==================================================================================================================
(1) Omitted in reliance on Rule 457(o) of the Securities Act of 1933, as
amended , or Securities Act.
(2) Calculated pursuant to Rule 457(f) promulgated under the Securities Act by
multiplying the proposed maximum aggregate offering price for all
securities to be registered ($40,500,000) by 0.00012670.
------------------------------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
[LOGOs]
To the stockholders of Annaly Mortgage Management, Inc.:
PROPOSED ACQUISITION OF FIDAC BY ANNALY
On December 30, 2003, the board of directors of Annaly Mortgage
Management, Inc., or Annaly, upon the recommendation of our special committee,
consisting entirely of independent directors, approved our acquisition of Fixed
Income Discount Advisory Company, or FIDAC. We are acquiring FIDAC by having
FIDAC merge into our wholly owned Delaware subsidiary, FDC Merger Sub, Inc., or
Merger Sub. Under the merger agreement, Merger Sub will merge with and into
FIDAC and FIDAC will be the surviving corporation, in accordance with the
General Corporation Law of the State of Delaware. We are proposing the
transaction because we believe our acquisition of FIDAC will, among other
things, enable us to take advantage of significant opportunities for growth,
increase the efficiency and flexibility of our business and alleviate potential
conflicts of interest. Following completion of the acquisition, we will continue
to operate as a self-managed and self-advised real estate investment trust, or
REIT, as defined by the Internal Revenue Code of 1986, as amended, and FIDAC
will operate as our wholly owned taxable REIT subsidiary.
The merger agreement provides that FIDAC shareholders will receive
approximately 2,935 shares of our common stock for each share of FIDAC common
stock they own. In addition, FIDAC shareholders have the right to receive,
during the first quarter of 2005, 2006 and 2007, additional shares of our common
stock, if FIDAC achieves specific performance goals for fiscal years 2004, 2005
and 2006. The additional number of shares of our common stock we may issue if
FIDAC achieves its performance goals will be calculated based on the price of
our common stock and the number of FIDAC shares previously owned. The value of
the shares of our common stock to be issued to the FIDAC shareholders
immediately upon the consummation of the acquisition was fixed at $40,500,000
based upon the closing price of our shares on December 31, 2003, which is to be
paid by delivering 2,201,080 shares of our common stock. The value of the
additional shares to be paid to FIDAC shareholders has been fixed at a maximum
dollar amount of $49,500,000; however, we cannot calculate how many shares we
will issue under the earn-out provisions since that will vary depending upon
whether and the extent to which FIDAC achieves specific performance goals. Even
if FIDAC achieves specific performance goals for a fiscal year, the number of
additional shares to be issued to the FIDAC shareholders will vary depending on
our average share price for the first 20 trading days of the following fiscal
year. After giving effect to the acquisition, former FIDAC shareholders will
hold approximately 2% of the economic interest and total voting power of our
stockholders.
We will not acquire FIDAC unless holders of a majority of the votes cast
and present, in person or by proxy, at a meeting of our stockholders at which a
quorum is present, vote in favor of the merger agreement. You should be aware
that Michael A.J. Farrell, our Chairman of the Board, Chief Executive Officer
and President, and several other of our officers and directors are shareholders
of FIDAC. The shareholders of FIDAC have executed a unanimous written consent
approving the acquisition.
Although we are not required to solicit and obtain your approval of this
acquisition under Maryland law, we are required to do so pursuant to the rules
of the New York Stock Exchange, Inc. In addition, since our management and the
management of FIDAC are related parties, we would like to obtain your approval
of the acquisition.
After careful deliberation, we support our acquisition of FIDAC and join
with the board of directors of FIDAC in recommending that you vote "FOR" the
approval of the merger agreement and the issuance of our shares of common stock
contemplated by the merger agreement, "FOR" the election of each of the nominees
as directors and "FOR" the ratification of the appointment of Deloitte & Touche
LLP as our independent auditors for the current fiscal year.
Information about all the proposals is contained in this proxy
statement/prospectus, which we urge you to read in full. See "Risk Factors."
At the annual meeting, you will be asked to approve the agreement and plan
of merger, elect three directors for a term of three years each, ratify the
appointment of Deloitte & Touche LLP as our independent auditors for the current
fiscal year, and act upon such other matters as may properly come before the
meeting.
Sincerely,
MICHAEL A.J. FARRELL
Chairman of the Board, Chief Executive Officer
and President
Annaly Mortgage Management, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE ACQUISITION OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This proxy statement/prospectus is dated _________ __, 2004 and is first
being mailed to stockholders on or about _________ __, 2004.
ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Annaly from other documents that are not included in
or delivered with this proxy statement/prospectus. This information is available
to you without charge upon your written or oral request. You can obtain the
documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing or by telephone or over the Internet from us at the
following address:
Annaly Mortgage Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Facsimile: (212) 696-9809
Email: investor@annaly.com
Attention: Investor Relations
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY MAY 10, 2004, IN
ORDER TO RECEIVE THEM BEFORE THE ANNUAL MEETING.
See "Where You Can Find More Information."
LOGO
NOTICE OF ANNUAL MEETING OF ANNALY STOCKHOLDERS
To be Held May 27, 2004
To the Stockholders of Annaly Mortgage Management, Inc.:
We will hold the annual meeting of the stockholders of Annaly on May 27,
2004, at 9:30 a.m., local time, at the New York Marriott Marquis, 1535
Broadway, New York, New York 10036 in the Cantor Jolson room on the 9th floor,
to consider and vote on the following proposals:
o to approve the Agreement and Plan of Merger, dated as of December
31, 2003, by and among Annaly, Fixed Income Discount Advisory
Company, a Delaware corporation, or FIDAC, FDC Merger Sub, Inc., a
Delaware corporation and our wholly owned subsidiary, or Merger Sub,
and the shareholders of FIDAC;
o to elect three directors for a term of three years each;
o to ratify the appointment of Deloitte & Touche LLP as our
independent auditors for the current fiscal year; and
o to act upon such other matters as may properly come before our
annual meeting or any adjournment or postponement thereof.
We will transact no other business at the annual meeting, except for
business properly brought before the annual meeting or any adjournment or
postponement of it by our board of directors.
Only our stockholders of record at the close of business on March 22,
2004, the record date for the annual meeting, may vote at the annual meeting and
any adjournments or postponements of it. A complete list of our stockholders of
record entitled to vote at the annual meeting will be available for inspection
during the 10 business days before the annual meeting at our executive offices
for inspection by our stockholders during ordinary business hours for proper
purposes.
YOUR VOTE IS VERY IMPORTANT. PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD AS SOON AS POSSIBLE TO MAKE SURE THAT YOUR SHARES ARE REPRESENTED AT THE
ANNUAL MEETING. YOU ALSO MAY CAST YOUR VOTE IN PERSON AT THE ANNUAL MEETING. IF
YOUR SHARES ARE HELD IN AN ACCOUNT AT A BROKERAGE FIRM OR BANK, YOU MUST
INSTRUCT THEM ON HOW TO VOTE YOUR SHARES. IF YOU DO NOT VOTE OR DO NOT INSTRUCT
YOUR BROKER OR BANK HOW TO VOTE, IT WILL NOT COUNT "FOR" OR "AGAINST" THE
ELECTION OF DIRECTORS OR THE RATIFICATION OF DELOITTE & TOUCHE LLP AS OUR
AUDITORS. FOR PURPOSES OF DETERMINING APPROVAL OF THE MERGER AGREEMENT,
ABSTENTIONS WILL BE TREATED AS PRESENT AND ENTITLED TO VOTE BUT WILL NOT BE
COUNTED AS A VOTE CAST. FOR PURPOSES OF DETERMINING APPROVAL OF THE MERGER
AGREEMENT, BROKER NON-VOTES WILL BE TREATED AS NOT PRESENT AND NOT ENTITLED TO
VOTE.
ANNUAL MEETING ADMISSION: If you attend the annual meeting in person, you
will need to present your admission ticket, or an account statement showing your
ownership of our common stock as of the record date, and a valid
government-issued photo identification. The indicated portion of your proxy card
or voter instruction card will serve as your admission ticket.
For more information about the acquisition described above and the other
transactions contemplated by the merger agreement, please review the
accompanying proxy statement/prospectus and the merger agreement attached to it
as Annex A.
Based upon the recommendation of the special committee of our board of
directors, our board of directors recommends that you vote "FOR" approval of the
merger agreement, "FOR" the election of each of the nominees as directors and
"FOR" the ratification of the appointment of Deloitte & Touche LLP as our
independent auditors for the current fiscal year.
By Order of the Board of Directors,
JENNIFER S. KARVE
Secretary
_________ __, 2004
New York, New York
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING........................................................................1
SUMMARY..............................................................................................................10
The Companies...............................................................................................10
Annaly Mortgage Management, Inc.............................................................................10
FIDAC (Fixed Income Discount Advisory Company)..............................................................10
FDC Merger Sub, Inc.........................................................................................11
the Acquisition.............................................................................................11
Annaly's Summary Historical Condensed Consolidated Financial Data...........................................19
FIDAC Summary Historical Consolidated Financial Data........................................................20
Comparative Historical and Pro Forma Per Share Data.........................................................21
Pro Forma Financial Statements..............................................................................21
Market Price Data...........................................................................................21
RISK FACTORS.........................................................................................................23
Risks Related to the Acquisition............................................................................23
Risks Related to the Combined Businesses....................................................................24
Risks Related to FIDAC's Business...........................................................................26
Risks Related to Our Business...............................................................................29
FORWARD-LOOKING STATEMENTS...........................................................................................41
OUR ANNUAL MEETING...................................................................................................42
Date, Time and Place of the Annual Meeting..................................................................42
Purpose of the Annual Meeting...............................................................................42
Stockholder Record Date.....................................................................................43
Voting Rights...............................................................................................43
Quorum; Effect of Abstention and Broker "Non-votes".........................................................43
Vote Required for the Approval of the Acquisition...........................................................44
Vote Required for the Election of Directors and Ratification of Auditors....................................44
Voting of Proxies...........................................................................................44
Revocability of Proxies.....................................................................................44
Solicitation of Proxies.....................................................................................44
Postponement or Adjournment of Meeting......................................................................45
Annual Meeting Admission Procedures.........................................................................45
BUSINESS OF ANNALY...................................................................................................46
BUSINESS OF FIDAC....................................................................................................48
FIDAC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................50
OVERVIEW....................................................................................................50
ASSETS UNDER MANAGEMENT.....................................................................................50
CRITICAL ACCOUNTING POLICIES................................................................................51
RESULTS OF OPERATIONS.......................................................................................51
i
Investment Advisory and Service Fees........................................................................52
General and Administrative Expenses.........................................................................52
Liquidity...................................................................................................52
Off-balance Sheet Arrangements..............................................................................52
Stockholders' Equity........................................................................................53
Income Taxes................................................................................................53
THE FIDAC ACQUISITION................................................................................................54
General Description of the Acquisition......................................................................54
Background of the Acquisition...............................................................................54
Our Reasons for the Acquisition.............................................................................59
Our Special Committee.......................................................................................59
Board of Directors..........................................................................................61
Recommendation of the Special Committee and Our Board of Directors..........................................62
Certain Financial Projections...............................................................................63
Opinion of Annaly Mortgage Management Inc.'s Financial Advisor..............................................63
Interests of Certain Persons in the Acquisition.............................................................72
Material U.S. Federal Income Tax Consequences of the Acquisition............................................72
Accounting Treatment........................................................................................72
Regulatory Matters..........................................................................................72
Appraisal Rights............................................................................................73
DESCRIPTION OF THE MERGER AGREEMENT..................................................................................74
Structure of the Acquisition................................................................................74
Closing; Completion of the Acquisition......................................................................74
Merger Consideration........................................................................................74
Exchange of Stock Certificates for Our Stock Certificates...................................................75
Board of Directors and Officers of Fidac....................................................................76
REIT Qualification..........................................................................................76
Representations and Warranties of Annaly and FIDAC..........................................................76
Conduct of Business of Annaly and FIDAC Pending the Merger..................................................78
Additional Covenants Pending Completion of the Merger.......................................................79
Restrictions on Transfer of the Merger Consideration........................................................80
Escrow Agreement............................................................................................81
Registration Rights.........................................................................................81
Pre-merger Dividends........................................................................................81
Conditions to the Merger....................................................................................81
Conditions to Each Party's Obligations to Effect the Merger.................................................82
Conditions to the Obligations of Annaly to Effect the Merger................................................82
Conditions to the Obligations of FIDAC to Effect the Merger.................................................83
Termination of the Merger Agreement.........................................................................84
Right to Terminate..........................................................................................84
Effect of Termination.......................................................................................85
Expenses....................................................................................................85
Waiver and Amendment of the Merger Agreement................................................................85
Indemnification.............................................................................................86
No Solicitation by FIDAC....................................................................................86
REPORT OF INDEPENDENT ACCOUNTANTS....................................................................................88
ii
DESCRIPTION OF CAPITAL STOCK.........................................................................................96
General.....................................................................................................96
Common Stock................................................................................................96
Voting ...................................................................................................96
Dividends; Liquidation; Other Rights........................................................................96
Classification or Reclassification of Common Stock or Preferred Stock.......................................96
Restrictions on Ownership and Transfer......................................................................97
Classification of Board of Directors, Vacancies and Removal of Directors....................................99
Indemnification.............................................................................................99
Limitation of Liability....................................................................................100
VOTING..............................................................................................................100
VOTING ARRANGEMENTS.................................................................................................101
EMPLOYMENT AGREEMENTS...............................................................................................101
ELECTION OF DIRECTORS...............................................................................................105
DIRECTORS...........................................................................................................105
Class I Directors..........................................................................................105
Class II Directors.........................................................................................106
Class III Directors........................................................................................107
Meetings and Committees of the Board of Directors..........................................................108
Compensation of Directors..................................................................................110
MANAGEMENT..........................................................................................................110
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ANNALY...........................................112
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF FIDAC............................................113
EXECUTIVE COMPENSATION..............................................................................................114
Summary Compensation Table.................................................................................114
Exercises and Values of Options............................................................................115
Certain Relationships and Related Transactions.............................................................115
Compensation Committee Interlocks and Insider Participation................................................116
Equity Compensation Plan Information.......................................................................116
Employment Agreements, Termination of Employment and Change-of-control Arrangements........................117
Report of Compensation Committee...........................................................................118
Performance Analysis.......................................................................................120
THE AUDIT COMMITTEE.................................................................................................121
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS.................................................................122
Relationship with Independent Auditors.....................................................................123
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.............................................................123
ACCESS TO FORM 10-K.................................................................................................124
iii
LEGAL MATTERS.......................................................................................................124
EXPERTS.............................................................................................................124
STOCKHOLDER PROPOSALS...............................................................................................124
OTHER MATTERS.......................................................................................................124
WHERE YOU CAN FIND MORE INFORMATION.................................................................................125
ANNEX A - AGREEMENT AND PLAN OF MERGER DATED AS OF DECEMBER 31, 2003................................................A-1
ANNEX B - FAIRNESS OPINION OF LEHMAN BROTHERS INC...................................................................B-1
iv
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QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING
--------------------------------------------------------------------------------
Q: WHAT AM I VOTING ON?
A: (1) Approval of the merger agreement pursuant to which we will acquire
FIDAC;
(2) Re-election of two directors, Kevin P. Brady and Donnell A. Segalas,
and election of E. Wayne Nordberg, for terms of three years; and
(3) Ratification of the appointment of Deloitte & Touche LLP as our
independent auditors for 2004.
Q: HOW DOES THE BOARD OF DIRECTORS RECOMMEND THAT I VOTE ON THESE PROPOSALS?
A: Our board of directors, on the determination of the special committee of
independent directors that the acquisition of FIDAC by us was advisable,
approved and adopted the merger agreement and the transactions
contemplated by the merger agreement and recommends that you vote "FOR"
the merger agreement.
Our board of directors recommends you vote "FOR" the election of each of
the nominees as directors and "FOR" the ratification of the appointment of
Deloitte & Touche LLP as our independent auditors for the current fiscal
year.
Q: WHO IS ENTITLED TO VOTE AT THE MEETING?
A: Only stockholders of record as of the close of business on March 22, 2004
the record date, are entitled to vote.
Q: WHAT STOCKHOLDER APPROVALS ARE REQUIRED TO APPROVE THE PROPOSALS?
A: The approval of the holders of a majority of the votes cast (provided that
the total votes cast on the proposal represents over 50% of the voting
power of our stockholders entitled to vote as of the record date) and
present, in person or by proxy, at a meeting at which a quorum is present,
is required to approve the merger agreement.
Directors will be elected by a plurality of the votes cast by the holders
of the shares of common stock voting in person or by proxy at the annual
meeting; and ratification of the appointment of our independent auditors
will require the affirmative vote of the holders of a majority of the
votes cast at the annual meeting.
As of the record date, our directors and officers held and were entitled
to vote less than 1% of our outstanding common stock.
1
Q: WHY WAS THE SPECIAL COMMITTEE FORMED?
A. Our board of directors formed a special committee to protect the interests
of our stockholders in the evaluation and negotiation of the merger
agreement and the transactions contemplated by the merger agreement from
potential conflicts of interest. These potential conflicts of interest
arise from the ownership of FIDAC stock, and management of FIDAC, by
Michael A.J. Farrell, our Chairman of the Board, Chief Executive Officer,
President and director, Wellington J. Denahan, our Vice Chairman of the
Board, Chief Investment Officer and director, Kathryn F. Fagan, our Chief
Financial Officer and Treasurer, Jennifer S. Karve, our Executive Vice
President and Secretary, and other officers of FIDAC involved in our
management and leadership.
Q: WHY ARE WE GOING TO ACQUIRE FIDAC?
A: We believe that the acquisition will provide important strategic and
financial benefits to us and our stockholders.
These benefits include:
o the similar investment strategies of us and FIDAC and the
expectation that the transaction will increase our assets under
management and will enable us to take advantage of new opportunities
for growth;
o the potential for the transaction to broaden our investor base;
o the expectation that the acquisition would be accretive to our
earnings and book value; and
o the fact that the acquisition would alleviate some of the potential
conflicts of interest arising from the management and ownership of
FIDAC by our officers, directors and employees.
Q: WHAT IS FIDAC'S BUSINESS?
A: FIDAC, a registered investment advisor, conducts a fee-based asset
management business with a global distribution reach. At December 31,
2003, FIDAC managed or assisted in the management of approximately $13.6
billion in gross assets for both domestic and offshore clients. FIDAC's
principal business objective is to build assets under management in
existing and future products primarily through relationships with
distribution partners and, to a lesser extent, direct sales.
Q: WHAT ARE THE PRINCIPAL RISKS RELATING TO OUR ACQUISITION OF FIDAC?
A: There are a number of risks relating to the acquisition, including the
following:
o uncertainties associated with the acquisition or our ownership of
FIDAC may cause FIDAC to lose clients;
2
o because the market price of our common stock may fluctuate, you
cannot be certain of the precise value of the additional shares that
FIDAC shareholders may receive as a result of the acquisition;
o the market price for our common stock may be affected by factors
different from those affecting the shares of FIDAC;
o the business risks inherent in FIDAC's business; and
o the potential conflicts of interest between the FIDAC shareholders
and our shareholders relating to the contingent consideration which
may be payable to the FIDAC shareholders in the future.
Q: WHAT WILL HAPPEN IN THE TRANSACTION?
A: In the transaction, Merger Sub, our wholly owned subsidiary created solely
for the purpose of effectuating the merger, will merge with and into
FIDAC.
As a result of the merger:
o Merger Sub will cease to exist, and
o FIDAC will survive the merger and will operate as our wholly owned
taxable REIT subsidiary.
Q: WHAT IS A TAXABLE REIT SUBSIDIARY?
A: A taxable REIT subsidiary is a corporation in which a REIT, such as us,
owns stock and which joins the REIT in filing a taxable REIT subsidiary
election on IRS Form 8875. The term "taxable REIT subsidiary" also
includes any corporation in which a taxable REIT subsidiary owns
securities representing more than 35% of the voting power or more than 35%
of the value of the issuing corporation's outstanding securities. A
taxable REIT subsidiary can conduct activities that generate gross income
from sources that would not be qualifying sources for purposes of gross
income tests applicable to REITs and can hold assets that would not be
qualifying assets for purposes of the quarterly asset tests applicable to
REITs. As the name implies, taxable REIT subsidiaries are subject to
corporate income tax on the income they recognize, and, unlike a REIT,
they are not allowed a deduction for dividends they pay on their stock. We
will file an election to treat Merger Sub as a taxable REIT subsidiary.
Following the acquisition, FIDAC will join Annaly in filing an election on
IRS Form 8875 so that FIDAC will be a taxable REIT subsidiary of Annaly.
Q: WHAT ECONOMIC INTERESTS AND VOTING POWER WILL THE FIDAC SHAREHOLDERS HOLD
AFTER THE ACQUISITION?
A: At the conclusion of the acquisition, the former FIDAC shareholders will
hold approximately 2% of the economic interest and total voting power of
our stockholders. As part of the merger consideration, the FIDAC
shareholders may be entitled to
3
additional shares of our common stock if FIDAC meets specific performance
goals, which we refer to as an earn-out. The periods during which the
performance goals will be measured are the 2004, 2005 and 2006 fiscal
years. We cannot calculate the number of shares of our common stock to
which the FIDAC shareholders may be entitled through the earn-out because
such number is in part dependent on whether and the extent to which FIDAC
achieves specific performance goals. Even if FIDAC achieves specific
performance goals for a fiscal year, the number of additional shares to be
issued to the FIDAC shareholders will vary depending on our average share
price for the first 20 trading days of the following fiscal year. As a
result of the earn-out, the FIDAC shareholders may increase their
percentage ownership of us.
Q: WHAT WILL OUR NAME BE AFTER THE ACQUISITION?
A: We will continue to operate under the name of "Annaly Mortgage Management,
Inc." FIDAC will continue to operate under the name "Fixed Income Discount
Advisory Company" and will operate as our taxable REIT subsidiary. FIDAC
will continue to conduct its investment advisory business following the
acquisition.
Q: HOW WILL WE BE AFFECTED BY THE ACQUISITION?
A: Our stockholders will retain their shares of our common stock. Each FIDAC
shareholder will receive approximately 2,935 shares of our common stock
upon completion of the acquisition for each share of FIDAC stock the
shareholder owns and have the right to receive additional shares of our
common stock in the future, based on FIDAC achieving specific performance
goals, for each share of FIDAC stock the shareholder owns. Following the
acquisition, we will continue to conduct our business as a mortgage REIT
and FIDAC will continue to conduct its investment advisory business. We
discuss the risks associated with our business, the risks associated with
FIDAC's business and the risks associated with the acquisition below under
the caption "Risk Factors."
Q: WILL WE CONTINUE TO OPERATE AS A REIT FOLLOWING THE ACQUISITION?
A: Yes. Following the acquisition, we intend to continue to operate as a
REIT. In order to qualify as REIT for U.S. federal income tax purposes, we
must distribute to our stockholders annually at least 90% of our REIT
taxable income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain), excluding the retained
earnings of FIDAC following the acquisition. Our payment of dividends will
continue to be subject to approval and declaration by our board of
directors, and will depend on a variety of factors, including business,
financial and regulatory considerations.
Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION?
A: We have structured the transaction so that it is anticipated that the
merger of Merger Sub with and into FIDAC will be a reorganization for U.S.
federal income tax purposes. We will not be obligated to complete the
acquisition unless we receive a legal opinion to the effect that following
the acquisition, FIDAC's organization and intended method of operation
will enable it to meet the requirements for taxation as a taxable REIT
subsidiary under the Internal Revenue Code.
4
Q: IF I WOULD LIKE TO VOTE ON THE APPROVAL OF THE MERGER AGREEMENT, WHAT DO I
NEED TO DO NOW?
A: After carefully reading and considering the information contained in this
proxy statement/prospectus, please complete and sign your proxy card and
return it in the enclosed postage-paid envelope as soon as possible so
that your shares may be represented at the annual meeting and voted as you
direct in your proxy. If you sign, date and send your proxy and do not
indicate how you want to vote for the approval of the merger agreement,
your proxy will be voted for the approval of the merger agreement.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Send a later-dated, signed proxy card to our Secretary prior to the date
of the annual meeting or attend the annual meeting in person and vote. You
also may revoke your proxy by sending a notice of revocation to our
Secretary at the address indicated under "Summary--The Companies."
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY
SHARES?
A: If you do not provide your broker with instructions on how to vote your
street name shares, your broker will not be permitted to vote them on the
approval of the merger agreement, but will be able to vote them on the
election of directors and the ratification of the appointment of our
independent auditors. You should, therefore, be sure to provide your
broker with instructions on how to vote your shares. Stockholders are
urged to utilize telephone or Internet voting if their broker has provided
them with the opportunity to do so. See your voting instruction form for
instructions. If you do not give voting instructions to your broker, your
votes will not be counted as voting for the approval of the merger
agreement unless you appear and vote in person at the annual meeting. If
your broker holds your shares and you attend the annual meeting, please
bring a letter from your broker identifying you as the beneficial owner of
the shares and acknowledging that you will vote your shares.
Q: WHO ELSE MUST APPROVE THE ACQUISITION?
A: Completion of the acquisition is subject to approval of the Federal Trade
Commission and the Antitrust Division of the Department of Justice
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, the approval of which is currently being sought by us and FIDAC.
We have made the relevant filings or intend to make them as soon as
practicable. See "The Acquisition--Regulatory Matters."
Q: WHEN DO WE EXPECT TO COMPLETE THE ACQUISITION?
A: We expect to complete the acquisition as promptly as possible following
receipt of stockholder approval at the meeting and receipt of all other
necessary approvals.
Q: IF ANNALY IS ENTITLED TO TERMINATE THE MERGER AGREEMENT, WILL IT BE
ENTITLED TO REQUIRE THAT THE TERMS OF THE MERGER BE CHANGED?
5
A: No. If we are entitled to terminate the merger agreement, we may exercise
that right, in which event the merger agreement will be terminated and the
acquisition of FIDAC will not occur. Alternatively, we may waive that
right, in which event the acquisition of FIDAC will be completed pursuant
to the terms of the merger agreement. FIDAC, the Merger Sub and the
special committee must agree to any amendment of the terms of the merger
agreement, and any material amendment after approval of the merger by our
stockholders would require the approval of our stockholders.
Any such approval would require the preparation of a supplement to this
proxy statement/prospectus, a new solicitation of proxies and a new
meeting of our stockholders.
Q: IF ANNALY IS ENTITLED TO TERMINATE THE MERGER AGREEMENT, WOULD THE SPECIAL
COMMITTEE HAVE THE RIGHT TO CHANGE THE MATERIAL TERMS OF THE MERGER
AGREEMENT WITHOUT STOCKHOLDER APPROVAL?
A: No. As discussed above, the special committee's rights to terminate the
merger agreement under certain circumstances can be waived. However, a
change of any material term of the merger agreement would require the
approval of our stockholders.
Q: WHAT WILL DETERMINE WHETHER OUR RIGHTS TO TERMINATE THE MERGER AGREEMENT
ARE EXERCISED OR WAIVED?
A: If we are entitled to terminate the merger agreement, the special
committee will make a determination as to whether it is in the best
interests of our stockholders to proceed with or terminate the
transaction. In making this determination, the special committee will
consider a variety of factors, including:
o The reason we are entitled to terminate the merger agreement and
whether waiving this right could adversely affect our performance
and future prospects;
o The historical performance and future prospects of each of the
companies' businesses;
o Market conditions affecting both companies;
o The value of our common stock and its value over the short-term and
long-term;
o Alternatives to the acquisition available to each of the companies;
and
o The possibility of amending the merger agreement to obtain more
favorable terms; provided that any amendment of the merger agreement
would require the consent of the other party and any material
amendment would require the approval of each party's stockholders,
which would require the preparation of a supplement to the proxy
statement/prospectus, a new solicitation of proxies by us and a new
meeting of our stockholders.
6
Q: DID OUR FINANCIAL ADVISOR ISSUE A FAIRNESS OPINION IN CONNECTION WITH THE
ACQUISITION?
A: Yes. Lehman Brothers issued an opinion to our special committee, that the
consideration to be paid by us in the acquisition is fair from a financial
point of view to us. The fairness opinion delivered by Lehman Brothers is
dated as of the date of the merger agreement, and does not address the
fairness of the consideration to be paid in the transaction as of any
subsequent date, including any date on which the special committee
exercises or waives a termination. The special committee may request a new
fairness opinion or reaffirmation of the existing fairness opinion from
Lehman Brothers in connection with a decision to exercise or waive
termination rights, but they are not obligated under the terms of the
merger agreement to do so.
Q: DO I HAVE APPRAISAL RIGHTS?
A: No. Our stockholders will retain their shares of our common stock. Our
stockholders, other than the FIDAC shareholders, will not receive any new
securities in connection with the proposed acquisition. Our stockholders
will not have appraisal rights as a result of the acquisition.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the acquisition of FIDAC, need assistance
voting your shares or if you need additional copies of this proxy
statement/prospectus or the enclosed proxy card, you should contact:
Annaly Mortgage Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Facsimile: (212) 696-9809
Email: investor@annaly.com
Attention: Investor Relations
Q: WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANIES?
A: You can find more information about us and FIDAC from various sources
described under "Where You Can Find More Information."
Q: HOW WILL VOTING ON ANY OTHER BUSINESS BE CONDUCTED?
A: Other than the three proposals described in this proxy
statement/prospectus, we know of no other business to be considered at the
annual meeting. If any other matters are properly presented at the
meeting, your signed proxy card authorized Michael A.J. Farrell, our
Chairman of the Board, Chief Executive Officer, and President, and
Jennifer S. Karve, our Executive Vice President and Secretary, to vote on
those matters according to their best judgment.
7
Q: WHO WILL COUNT THE VOTE?
A: Representatives of Mellon Investor Services LLC, the independent Inspector
of Elections, will count the votes.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: It probably means your shares are registered differently and are in more
than one account. Sign and return all proxy cards to ensure that all your
shares are voted.
Q: HOW MANY SHARES CAN VOTE?
A: As of the record date, _______ shares of common stock were issued and
outstanding. Holders of our common stock are entitled to one vote per
share for each matter before the meeting.
Q: WHAT CONSTITUTES A "QUORUM"?
A: A quorum is a majority of the voting power of the shares entitled to vote
at the meeting. Since there were _________ eligible votes as of the record
date, we will need at least ________ votes present in person or by proxy
at the annual meeting for a quorum to exist.
Q: WHAT HAPPENS IF I ABSTAIN?
A: If you submit a properly signed proxy card, but you abstain from voting on
one or more proposals, you will still be considered present for purposes
of calculating a quorum. For purposes of determining approval of the
merger agreement, abstentions will be treated as present and entitled to
vote but will not be counted as a vote cast. Your abstention will not
count "for" or "against" the election of directors or the ratification of
Deloitte & Touche LLP as our auditors.
Q: WHAT ARE BROKER NON-VOTES AND HOW WILL THEY BE TREATED?
A: Broker non-votes are shares held by brokers or nominees for whom the
broker or nominee (1) lacks discretionary power to vote, and (2) never
received specific voting instructions from the beneficial owner of the
shares. For purposes of determining approval of the merger, broker
non-votes will be treated as not present and not entitled to vote. Broker
non-votes will not count "for" or "against" the election of directors or
the ratification of Deloitte & Touche LLP as our auditors.
Q: WHO CAN ATTEND THE ANNUAL MEETING?
A: All stockholders of record as of March 22, 2004 can attend the annual
meeting, although seating is limited. If your shares are held through a
broker and you would like to attend, please either (1) write Investor
Relations, Annaly Mortgage Management, Inc., 1211 Avenue of the Americas,
Suite 2902, New York, New York 10036 or email us at investor@annaly.com,
or (2) bring to the meeting a copy of your brokerage account
8
statement or an omnibus proxy (which you can get from your broker). In
addition, you must bring a valid, government-issued photo identification,
such as a driver's license or a passport. If you plan to attend, please
check the box on your proxy card and return it as directed on the proxy
card.
Security measures will be in place at the meeting to help ensure the
safety of attendees. Metal detectors similar to those used in airports
will be located at the entrance to the auditorium and briefcases, handbags
and packages will be inspected. No cameras or recording devices of any
kind, or signs, placards, banners or similar materials, may be brought
into the meeting. Anyone who refuses to comply with these requirements
will not be admitted.
Q: WHEN ARE STOCKHOLDER PROPOSALS DUE FOR THE 2005 ANNUAL MEETING?
A: If you are submitting a proposal to be included in next year's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of
1934, we must receive the proposal no later than December ___, 2004.
Q: HOW WILL WE SOLICIT PROXIES FOR THE ANNUAL MEETING?
A: We are soliciting proxies by mailing this proxy statement/prospectus and
proxy card to our stockholders. In addition to solicitation by mail, some
of our directors, officers and regular employees may, without extra pay,
make additional solicitations by telephone or in person. We have retained
Morrow & Co. Inc. to assist in the solicitation of proxies from banks,
brokerage firms, nominees, institutional holders and individual investors
for a fee of $7,500 plus reimbursement for expenses. We will pay the
solicitation costs, and will reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in
forwarding proxy materials to beneficial owners.
Q: HOW DO I OBTAIN A COPY OF OUR ANNUAL REPORT ON FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION?
A: Our Form 10-K is part of the Annual Report that is being mailed to you
with this proxy statement/prospectus. If you need another copy, please
write Investor Relations, Annaly Mortgage Management, Inc., 1211 Avenue of
the Americas, Suite 2902, New York, New York 10036 or email us at
investor@annaly.com. Our Form 10-K is also available on our website
(www.annaly.com). We make available on this website under "Financial
Reports & SEC Filings," free of charge, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports as soon as reasonably practicable after we electronically
file or furnish such materials to the Securities and Exchange Commission.
9
--------------------------------------------------------------------------------
SUMMARY
--------------------------------------------------------------------------------
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT
TO YOU. TO UNDERSTAND THE FIDAC ACQUISITION FULLY AND FOR A MORE COMPLETE
DESCRIPTION OF THE LEGAL TERMS OF THE FIDAC ACQUISITION, YOU SHOULD READ
CAREFULLY THIS ENTIRE DOCUMENT, INCLUDING THE ANNEXES, AND THE OTHER DOCUMENTS
TO WHICH WE HAVE REFERRED YOU. WHEN USED IN THIS PROXY STATEMENT/PROSPECTUS, THE
TERMS "ANNALY," "WE," "OUR" AND "US" REFER TO ANNALY MORTGAGE MANAGEMENT, INC.
FOR INFORMATION ON HOW TO OBTAIN THE DOCUMENTS THAT WE HAVE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, SEE "ADDITIONAL INFORMATION" ON THE INSIDE
FRONT COVER OF THIS PROXY STATEMENT/PROSPECTUS AND "WHERE YOU CAN FIND MORE
INFORMATION." FOR A DISCUSSION OF THE RISK FACTORS THAT YOU SHOULD CONSIDER IN
EVALUATING THE FIDAC ACQUISITION, SEE "RISK FACTORS."
THE COMPANIES
ANNALY MORTGAGE MANAGEMENT, INC.
We own and manage a portfolio of mortgage-backed securities, including
mortgage pass-through certificates, collateralized mortgage obligations and
other securities representing interests in or obligations backed by pools of
mortgage loans. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our mortgage-backed securities and other investment securities and the costs of
borrowing to finance our acquisition of mortgage-backed securities and other
investment securities. We have elected to be taxed as a real estate investment
trust, or REIT, under the Internal Revenue Code. We commenced operations on
February 18, 1997. We are self-advised and self-managed.
For additional information about us and our business, see "Where You Can
Find More Information."
Annaly Mortgage Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Facsimile: (212) 696-9809
Email: investor@annaly.com
Attention: Investor Relations
FIDAC (FIXED INCOME DISCOUNT ADVISORY COMPANY)
FIDAC is a registered investment advisor which, at December 31, 2003,
managed, assisted in managing or supervised approximately $13.6 billion in gross
assets for a wide array of clients, all of which assets on that date were
managed on a discretionary basis. At least 90% of FIDAC's shares are owned by
two of our directors, and the remaining shares of FIDAC are owned by other of
our officers. For additional information about FIDAC and its business, see
"Where You Can Find More Information."
10
Fixed Income Discount Advisory Company
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Facsimile: (212) 696-9809
Email: investor@annaly.com
Attention: Investor Relations
FDC MERGER SUB, INC.
We formed Merger Sub, solely for the purpose of effecting the acquisition.
To date, Merger Sub has not conducted any activities other than those incident
to its formation, the execution of the merger agreement and the preparation of
this proxy statement/prospectus. Merger Sub is our wholly owned subsidiary. We
will file an election to treat Merger Sub as a taxable REIT subsidiary. Upon
completion of the acquisition, Merger Sub will merge with and into FIDAC with
FIDAC as the surviving corporation. FIDAC will operate as our taxable REIT
subsidiary.
THE ACQUISITION
The merger agreement is attached as Annex A to this proxy
statement/prospectus. We encourage you to read the merger agreement carefully
and in its entirety. It is the principal document governing the acquisition.
WHAT YOU WILL RECEIVE IN THE ACQUISITION
Our stockholders will retain their shares of our common stock and will not
receive any additional securities. Each FIDAC shareholder will receive upon
completion of the acquisition approximately 2,935 shares of our common stock for
each share of FIDAC stock the shareholder owns and the right to receive
additional shares of our common stock in the future, if and to the extent that
FIDAC achieves specific performance goals for fiscal years 2004, 2005 and 2006,
for each share of FIDAC stock the shareholder owns. See "The Acquisition" and
"Risk Factors Related to the Acquisition."
11
ORGANIZATIONAL CHART OF FIDAC AND ANNALY BEFORE AND AFTER THE ACQUISITION
Before:
-------------------------------------- ------------------------------------
Annaly Mortgage Management, Inc. Fixed Income Discount Advisory
Company
-------------------------------------- ------------------------------------
|
|
--------------------------------------
FDC Merger Sub, Inc.
--------------------------------------
After:
--------------------------------------
Annaly Mortgage Management, Inc.
--------------------------------------
|
|
--------------------------------------
Fixed Income Discount Advisory
Company
--------------------------------------
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
Michael A.J. Farrell, on behalf of FIDAC, approached us in late 2002 about
his possible sale of FIDAC and the possibility of our acquiring FIDAC rather
than selling FIDAC to a third party. Our board of directors formed a special
committee of independent directors to consider this matter and the special
committee retained independent counsel and Lehman Brothers to act as its
financial advisor in connection with the proposed acquisition. Following due
diligence and negotiations between the special committee and representatives of
FIDAC, the special committee recommended that we acquire FIDAC.
At a joint meeting of our board of directors and the special committee on
December 30, 2003, Lehman Brothers presented information regarding:
o the financial information reviewed and analyzed by Lehman Brothers
in evaluating the fairness to us of the consideration to be paid by
us in the acquisition;
o a summary of the terms of our proposed acquisition of FIDAC;
o the potential pro forma impact on us of our proposed acquisition of
FIDAC, including the potential effect on earnings per share of our
common stock;
o valuation analysis, including analysis of consideration to be paid
after the completion of the acquisition if and to the extent that
FIDAC achieves specific performance targets;
12
o an update on the asset manager and mortgage REIT markets;
o valuation of FIDAC as a standalone entity, including projected
results treating FIDAC as a taxable C-corporation, equity payouts by
FIDAC and compensation analysis; and
o an overview of FIDAC, including historical financial statements, a
comparison of initial projections and revised projections, key
investment advisory relations and assets under management.
The members of the special committee, except Donnell Segalas who recused
himself, after due consideration:
o determined that it is advisable and in the best interests of our
stockholders to approve the merger agreement, subject to the special
committee's receipt of the opinion of Lehman Brothers that, as of
the date of the merger agreement, and based upon and subject to the
factors and assumptions set forth in the opinion, the consideration
to be paid by us to the FIDAC shareholders is fair to us from a
financial point of view;
o approved our acquisition of FIDAC and approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement; and
o recommended to the board of directors that the board of directors
adopt, and recommend that the stockholders approve the merger
agreement.
The members of the board of directors, except Donnell Segalas who recused
himself and Michael A.J. Farrell and Wellington J. Denahan who did not attend,
after due consideration:
o determined that the merger agreement, the acquisition and the other
transactions contemplated by the merger agreement are advisable and
in the best interests of us and our stockholders;
o approved our acquisition of FIDAC and approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement;
o directed that the merger agreement be submitted to a vote at a
meeting of our stockholders; and
o recommended that our stockholders approve the merger agreement.
In reaching their conclusions, the special committee considered a number
of positive and negative factors, including the following, no one of which was
determinative:
13
Positive Factors:
o the similar investment strategies of us and FIDAC and the
expectation that the transaction will increase our assets under
management and will enable us to take advantage of new opportunities
for growth;
o the potential for the transaction to broaden our investor base,
thereby improving our visibility and market presence and enhancing
our overall growth opportunities;
o the expectation that the acquisition would be accretive to our
earnings and book value; and
o the fact that the acquisition would alleviate some of the potential
conflicts of interest arising from the management and ownership of
FIDAC by our officers, directors and employees.
Negative Factors:
o uncertainty regarding how the transaction would affect the trading
in our common stock;
o the risk that certain of our stockholders might view us as a
different and less desirable investment vehicle for their capital;
o the risk that FIDAC's present and potential clients might view the
management of their assets by the subsidiary of a public company, as
FIDAC will be upon completion of the acquisition, as not desirable;
and
o the timing of receipt and the terms of approvals from appropriate
government entities, including the possibility of delay in obtaining
satisfactory approvals or the imposition of unfavorable terms or
conditions in the approvals.
See "The Acquisition--Our Reasons for the Merger."
FAIRNESS OPINION OF LEHMAN BROTHERS INC.
Lehman Brothers delivered its opinion to the special committee of our
board of directors that, as of December 31, 2003, and based upon and subject to
the factors and assumptions set forth therein, the consideration to be paid by
us for each share of FIDAC common stock is fair from a financial point of view
to us.
The full text of the written opinion of Lehman Brothers, dated December
31, 2003, which sets forth assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached as Annex B. Our stockholders should read the opinion in its
entirety. Lehman Brothers provided its opinion for the information and
assistance of the special committee of our board of directors in connection with
their consideration of the transactions contemplated by the merger agreement.
The Lehman Brothers
14
opinion is not a recommendation as to how any holder of our common stock should
vote with respect to the transactions.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
Our stockholders should note that some of our directors and officers have
interests in the acquisition that are different in certain respects from the
interests of our other stockholders. Michael A.J. Farrell, our Chairman of the
Board, Chief Executive Officer, President and director, Wellington J. Denahan,
our Vice Chairman, Chief Investment Officer and director, Kathryn F. Fagan, our
Chief Financial Officer and Treasurer, Jennifer S. Karve, our Executive Vice
President and Secretary, and other of our officers and employees are the
shareholders of FIDAC. Mr. Farrell, Ms. Denahan and our other officers and
employees are actively involved in managing mortgage-backed securities and other
fixed income assets on behalf of FIDAC.
Prior to the consummation of the proposed acquisition, our directors,
officers, and their affiliates own approximately less than 1% of our outstanding
shares of common stock. Following the consummation of the proposed acquisition,
our directors, executive officers and their affiliates will own approximately 2%
of our outstanding shares of common stock, without including any additional
shares of our common stock they may acquire as an earn-out.
See "The Acquisition--Interests of Certain Persons in the Acquisition."
CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE ACQUISITION
Each of Annaly's and FIDAC's obligation to complete the acquisition is
subject to the satisfaction or waiver of a number of conditions, including the
following:
o the merger agreement is approved at a meeting by the required vote
of our stockholders;
o we receive an opinion of counsel to the effect that FIDAC's
organization and intended method of operation, following the
acquisition, will enable FIDAC to meet the requirements for
qualification and taxation as a taxable REIT subsidiary under the
Internal Revenue Code;
o all necessary approvals, consents and filings required for the
acquisition have been obtained;
o there is no legal prohibition on completion of the acquisition;
o the parties' respective representations and warranties in the merger
agreement are true and correct, to the extent set forth in the
merger agreement; and
o the parties comply with their respective covenants and agreements in
the merger agreement, to the extent set forth in the merger
agreement.
Other conditions required to complete the acquisition have been met. These
include:
15
o each of Michael A.J. Farrell, Wellington J. Denahan, Jennifer S.
Karve, Kathryn F. Fagan, Jeremy Diamond, Ronald D. Kazel, Rose-Marie
Lyght, Kristopher R. Konrad and James P. Fortescue has entered into
an employment agreement with us, which includes non-compete
covenants;
o FIDAC shareholders execute concurrently with the merger agreement a
unanimous written consent approving the acquisition and merger
agreement; and
o Receipt by our special committee of an opinion of Lehman Brothers
that the merger consideration is fair to us from a financial point
of view.
TERMINATION OF THE MERGER AGREEMENT
We and FIDAC can jointly agree to terminate the merger agreement at any
time. In addition, we or FIDAC also may terminate the merger agreement if:
o the acquisition is not completed on or before May 31, 2004 (as long
as the failure to complete the acquisition before that date is not
the result of the failure by the terminating company to fulfill any
of its obligations under the merger agreement);
o government actions do not permit the completion of the acquisition,
so long as the terminating company has used its commercially
reasonable efforts to obtain all necessary governmental approvals
and lift any injunctions;
o our stockholders do not approve the acquisition at a meeting of
stockholders or any adjournment or postponement thereof; or
o the special committee or our board of directors resolves to withdraw
its approval or recommendation of the merger agreement or the
acquisition after determining in good faith, based upon the written
opinion of independent counsel, that a failure to withdraw or modify
its approval or recommendation of the merger agreement or the
acquisition will violate its fiduciary duties.
In addition, FIDAC may terminate the merger agreement if:
o we have breached any agreement, covenant, representation or warranty
set forth in the merger agreement and FIDAC has not waived such
breach or we have not cured such breach before the earlier of (1) 30
business days after we receive written notice of such breach and (2)
May 31, 2004.
In addition, we may terminate the merger agreement if:
o FIDAC shareholders take action to revoke or rescind their unanimous
written consent approving the merger and merger agreement; or
o FIDAC or any of the FIDAC shareholders has breached any agreement,
covenant, representation or warranty set forth in the merger
agreement and we have not waived such breach or any of the FIDAC
shareholders or FIDAC has not cured
16
such breach before the earlier of (1) 30 business days after FIDAC
receives written notice of such breach and (2) May 31, 2004.
TERMINATION FEES
The merger agreement does not provide for the payment of termination fees;
however, the merger agreement does not preclude liability for any willful breach
of the merger agreement.
NO SOLICITATION COVENANT
The merger agreement contains provisions prohibiting FIDAC and the FIDAC
shareholders from actively seeking an alternative transaction. The no
solicitation covenant generally prohibits FIDAC and the FIDAC shareholders, as
well as FIDAC's affiliates, from taking any action to solicit an acquisition
proposal. If FIDAC or any FIDAC shareholder receives an unsolicited offer or
becomes aware that a third party intends to make an unsolicited offer, FIDAC or
such FIDAC shareholder shall notify us of such unsolicited offer. See
"Description of the Merger Agreement--No Solicitation by FIDAC."
EMPLOYMENT AGREEMENTS
Each of Michael A.J. Farrell, Wellington J. Denahan, Jennifer S. Karve,
Kathryn F. Fagan, Jeremy Diamond, Ronald D. Kazel, Rose-Marie Lyght, Kristopher
R. Konrad and James P. Fortescue has executed a new or modified two year
employment agreement with us. The agreements become effective as of the closing
date of the acquisition and are null and void if such closing does not occur.
Such agreements will supersede any existing employment contracts with us and
FIDAC and prohibit the employee, for a term of one year following the
termination of employment with us, from working for a firm in direct or indirect
competition with us or FIDAC including a mortgage REIT or a money manager. Each
employment agreement provides for an annual base salary, to be reviewed each
year, and for a possible performance bonus to be approved by the compensation
committee of our board of directors. Upon termination of employment by us other
than for cause or by the employee for good reason, we shall pay the employee any
earned but unpaid annual base salary, awarded but unpaid performance bonus and a
severance payment, subject to reduction under certain circumstances, equal to
three times the greater of the employee's annual base salary and bonus
performance for the preceding year or the average for the three preceding years
of the employee's annual base salary and performance bonus.
VOTING ARRANGEMENTS
Each of the FIDAC shareholders agreed to vote the same percentage of his
or her shares of our common stock (1) in favor of the adoption of the merger
agreement as the percentage of all votes cast by our stockholders who are not
FIDAC shareholders that represent votes in favor of the adoption of the merger
agreement and the approval of the acquisition, (2) against such adoption and
approval as the percentage of all votes cast by our stockholders who are not
FIDAC shareholders that represent votes against such adoption and approval and
(3) neither for nor against such adoption and approval as the percentage of all
votes cast by our stockholders who are not FIDAC shareholders that count neither
as votes in favor of nor against such adoption and approval.
17
COMPARATIVE MARKET PRICE INFORMATION
Our shares are listed on the New York Stock Exchange under the symbol
"NLY." Shares of FIDAC are not publicly traded. The following table presents the
last reported sale price per share of our common stock, as reported on the New
York Stock Exchange Composite Transaction reporting system on December 31, 2003,
the last full trading day prior to the public announcement of the acquisition,
and on March 8, 2004, the last trading day for which this information could
be obtained prior to the date of this proxy statement/prospectus. Currently,
there is no public market for shares of FIDAC common stock.
DATE PRICE PER SHARE
December 31, 2003 $ 18.40
March 8, 2004 $ 20.72
You are encouraged to obtain current market quotations for shares of our
common stock.
REGULATORY REQUIREMENTS
Completion of the acquisition is subject to approval of the Federal Trade
Commission and the Antitrust Division of the Department of Justice pursuant to
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the
approval of which is currently being sought by us and FIDAC. We have made the
relevant filings or intend to make them as soon as practicable. See "The
Acquisition--Regulatory Matters."
VOTES REQUIRED; NO DISSENTER'S RIGHTS
The approval of a majority of the votes cast (provided that the total
votes cast on the proposal represents over 50% of the voting power of our
stockholders entitled to vote as of the record date) and present, in person or
by proxy, at a meeting at which a quorum is present is required to approve the
acquisition.
Under Maryland law, you are not entitled to any dissenters' or appraisal
rights in connection with the acquisition.
TAX CONSEQUENCES OF THE ACQUISITION
We have structured the transaction so that it is anticipated that the
merger of Merger Sub with and into FIDAC will be a reorganization for U.S.
federal income tax purposes. As a result, it is expected that the FIDAC
shareholders will recognize no gain or loss on the exchange and the basis of the
FIDAC shares in the hands of Annaly will carryover from the basis of those
shares in the hands of the historic FIDAC shareholders. The FIDAC shareholders
will have a tax basis in their Annaly shares equal to their tax basis in the
FIDAC shares converted in the merger.
18
ANNALY'S SUMMARY HISTORICAL CONDENSED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below is derived from our audited
financial statements for the fiscal years ended December 31, 1999, 2000, 2001,
2002, and 2003. The following selected financial data should be read in
conjunction with the more detailed information contained in the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003, which is incorporated by
reference into this proxy statement/prospectus.
FOR THE YEARS
ENDED DECEMBER 31,
2003 2002 2001 2000 1999
---------------------------------------------------------------------------
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Interest income $ 337,433 $ 404,165 $ 263,058 $ 109,750 $ 89,812
Interest expense 182,004 191,758 168,055 92,902 69,846
Net interest income $ 155,429 $ 212,407 $ 95,003 $ 16,848 $ 19,966
Gain on sale of mortgage-backed securities 40,907 21,063 4,586 2,025 454
General and administrative expenses
(G&A expense) 16,233 13,963 7,311 2,286 2,281
----------- ----------- ----------- ----------- -----------
Net income $ 180,103 $ 219,507 $ 92,278 $ 16,587 $ 18,139
=========== =========== =========== =========== ===========
Basic net income per average share $ 1.95 $ 2.68 $ 2.23 $ 1.18 $ 1.41
Diluted net income per average share $ 1.94 $ 2.67 $ 2.21 $ 1.15 $ 1.35
Dividends declared per share $ 1.95 $ 2.67 $ 1.75 $ 1.15 $ 1.38
BALANCE SHEET DATA:
Mortgage-Backed Securities, net $11,956,512 $11,551,857 $ 7,575,379 $ 1,978,219 $ 1,437,793
Total assets 12,990,286 11,659,084 7,717,314 2,035,029 1,491,322
Repurchase agreements 11,012,903 10,163,174 6,367,710 1,628,359 1,338,296
Total liabilities 11,841,066 10,579,018 7,049,957 1,899,386 1,388,050
Stockholders' equity 1,149,220 1,080,066 667,357 135,642 103,272
Number of common shares outstanding 96,074,096 84,569,206 59,826,975 14,522,978 13,581,316
OTHER DATA:
Average total assets $12,975,039 $10,486,423 $ 5,082,852 $ 1,652,459 $ 1,473,765
Average earning assets 12,007,333 9,575,365 4,682,780 1,564,491 1,461,254
Average borrowings 11,549,368 9,128,933 4,388,900 1,449,999 1,350,230
Average equity 1,122,633 978,107 437,376 117,727 117,685
Yield on average interest earning assets 2.81% 4.22% 5.62% 7.02% 6.15%
Cost of funds on average interest
bearing liabilities 1.58% 2.10% 3.83% 6.41% 5.17%
Interest rate spread 1.23% 2.12% 1.79% 0.61% 0.98%
ANNUALIZED FINANCIAL RATIOS:
Net interest margin (net interest
income/average total assets) 1.20% 2.03% 1.87% 1.02% 1.35%
G&A expense as a percentage of average
total assets 0.13% 0.13% 0.14% 0.14% 0.15%
G&A expense as a percentage of average
Equity 1.45% 1.43% 1.67% 1.94% 1.94%
Return on average total assets 1.39% 2.09% 1.82% 1.00% 1.23%
Return on average equity 16.04% 22.44% 21.10% 14.09% 15.41%
19
FIDAC SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below is derived from FIDAC's
unaudited financial statements for the fiscal years ended December 31, 2001 and
2002, and audited financial statements for the year ended December 31, 2003.
FIDAC's unaudited financial statements, in the opinion of management, reflect
all adjustments (consisting solely of normal recurring adjustments), which are
necessary to present fairly the results for the unaudited fiscal years. The
following selected financial data should be read in conjunction with the more
detailed information contained in the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this proxy statement/prospectus. Selected financial data
is not set forth for the fiscal years ended December 31, 2000 and 1999 because
FIDAC began to execute its business plan in full during its 2001 fiscal year, at
which point it began to experience meaningful revenue growth. Prior to that
time, FIDAC was still a development stage business. We believe that the
financial data for the fiscal years ended December 31, 2000 and 1999 does not
offer information which is relevant to an assessment of this merger or our
future prospects as consolidated entities. FIDAC has elected to be taxed as an
S-corporation since its inception. At the end of each taxable year, earnings
are distributed in the form of cash compensation or distributions of capital.
For the years
ended December 31,
--------------------------------
2003 2002 2001
--------------------------------
(dollars in thousands)
STATEMENT OF OPERATING DATA:
Investment advisory and service fees ...... $13,879 $ 6,122 $ 1,943
Interest income ........................... 16 16 6
Loss on investment ........................ -- (21) --
------- ------- -------
Total income .............................. 13,895 6,117 1,949
General and administrative expenses ....... 13,626 3,449 1,079
------- ------- -------
Net income before taxes ................... 269 2,668 870
Income taxes .............................. 207 251 91
------- ------- -------
Net income ................................ $ 62 $ 2,417 $ 779
======= ======= =======
BALANCE SHEET DATA:
Cash and Cash Equivalents ................. $ 600 $ 162 $ 312
Fees receivable ........................... 1,633 670 728
Other assets .............................. 568 85 60
Total assets .............................. 2,801 917 1,100
Total liabilities ......................... 1,206 893 275
Total Stockholders' equity ................ 1,595 24 825
20
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table presents certain unaudited historical per share and
combined pro forma per share data of us and FIDAC after giving effect to the
proposed business combination using the purchase method of accounting. The pro
forma data does not purport to be indicative of the results of future operations
or the results that would have occurred had the business combination been
consummated at the beginning of the periods presented. You should read the
information below in conjunction with the historical consolidated financial
statements and notes thereto of us and FIDAC included in other sections of this
proxy statement/prospectus and the unaudited pro forma combined condensed
financial data included elsewhere in this joint proxy statement/prospectus.
The unaudited pro forma per share data combines the results of operations
of us and FIDAC for the year ended December 31, 2003 are as follows:
Comparative Per Share Data
Annaly FIDAC Pro Forma
Historical Historical Combined
---------- ---------- --------
Income from continuing operations for twelve months
ended December 31, 2003
Basic $ 1.95 $ 92.81 $ 1.95
Diluted $ 1.94 $ 92.81 $ 1.94
Cash Dividends Paid
For the twelve months ended December 31, 2003 $ 1.95 $ 104.00 $ 1.95
Book Value
As of December 31, 2003 $ 11.96 $2,126.67 $ 11.98
PRO FORMA FINANCIAL STATEMENTS
We have not presented pro forma financial information under Article 11 of
Regulation S-X in this proxy statement/prospectus. On a financial basis, the
acquisition of FIDAC by us does not represent a transaction that is material to
us. Following the merger, FIDAC will not be a significant subsidiary of us.
Based on the results for calendar year 2003, FIDAC's revenues represent
approximately 3% of our revenues, FIDAC's gross assets represent less than 1% of
our gross assets, FIDAC's net income is de minimis compared to our net income
and FIDAC's total liabilities represent less than 1% of our total liabilities.
We believe that this proxy statement/prospectus provides adequate disclosure
regarding FIDAC. Following the merger, our public disclosure documents will
incorporate FIDAC's financial results as our consolidated subsidiary, but one
which is not a significant subsidiary for purposes of Regulation S-X. In view of
the incremental nature of the merger and the other information available in this
proxy statement/prospectus, we believe that the omitted financial information
regarding FIDAC would not be relevant and that the pro forma effect of the
proposed acquisition is immaterial.
MARKET PRICE DATA
Currently, there is no public market for shares of FIDAC common stock.
21
Shares of our common stock are listed on the New York Stock Exchange under
the symbol "NLY". The following table sets forth, for the periods indicated, the
high, low, and closing sales prices per share of common stock as reported on the
New York Stock Exchange composite tape and the cash dividends declared per share
of our common stock.
STOCK PRICES
HIGH LOW CLOSE
2003
First Quarter $19.55 $16.54 $17.47
Second Quarter $20.80 $17.43 $19.91
Third Quarter $21.10 $16.13 $16.42
Fourth Quarter $19.00 $15.65 $18.40
2002
First Quarter $17.62 $15.30 $16.98
Second Quarter $21.50 $16.20 $19.40
Third Quarter $20.40 $14.00 $18.45
Fourth Quarter $19.95 $15.25 $18.80
CASH DIVIDENDS
DECLARED PER SHARE
2003
First Quarter $0.60
Second Quarter $0.60
Third Quarter $0.28
Fourth Quarter $0.47
2002
First Quarter $0.63
Second Quarter $0.68
Third Quarter $0.68
Fourth Quarter $0.68
You are encouraged to obtain current market quotations for shares of our
common stock. Based on the closing price per share of our common stock on
March 8, 2004, the last trading day before the date of this proxy
statement/prospectus, the price per share of our common stock is $20.72 per
share.
22
--------------------------------------------------------------------------------
RISK FACTORS
--------------------------------------------------------------------------------
The following material risk factors, including the material risks
associated with the acquisition and related transactions, should be considered
by holders of our common stock in evaluating whether to approve the acquisition.
These factors should be considered in conjunction with the other information
included elsewhere in this proxy statement/prospectus and the risk factors
relating to an investment in our common stock that can be found in the annual
report on Form 10-K for the year ended December 31, 2003 which is incorporated
in this proxy statement/prospectus by reference.
RISKS RELATED TO THE ACQUISITION
BECAUSE THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE, YOU CANNOT BE
CERTAIN OF THE PRECISE VALUE OF THE FUTURE ADDITIONAL SHARES THAT FIDAC
SHAREHOLDERS MAY RECEIVE IN THE ACQUISITION.
You cannot be certain of the precise value of the total acquisition
consideration to be received by the FIDAC shareholders. Upon completion of the
acquisition, each share of FIDAC stock will be converted into the right to
receive approximately 2,935 shares of our common stock. FIDAC shareholders may
also receive additional shares of our common stock as an earn-out in 2005, 2006,
and 2007 worth up to $49,500,000 if FIDAC meets specific performance goals under
the merger agreement. We cannot calculate how many shares we will issue under
the earn-out provisions since that will vary depending upon whether and the
extent to which FIDAC achieves specific performance goals. Even if FIDAC
achieves specific performance goals for a fiscal year, the number of additional
shares to be issued to the FIDAC shareholders will vary depending on our average
share price for the first 20 trading days of the following fiscal year.
In addition, the price of our common stock and the value of shares of
FIDAC stock at the closing of the acquisition may vary from the respective
values on the date the merger agreement was executed and on the date of the
annual meeting. For example, during 2003, our common stock ranged from a low
sale price of $15.65 per share to a high sale price of $21.10 per share. These
variations may be the result of various factors, including:
o changes in the business, operations or prospects of us, FIDAC or the
post acquisition entities;
o governmental, regulatory and/or litigation developments;
o market assessments as to whether and when the acquisition will be
consummated;
o the timing of the consummation of the acquisition;
o changes in interest rates; and
o general stock market, economic and political conditions.
23
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT FROM
THOSE AFFECTING THE SHARES OF FIDAC.
Upon completion of the acquisition, FIDAC shareholders will become holders of
additional shares of our common stock. Our business differs from that of FIDAC,
and accordingly our future results of operations will be affected by factors
different from those currently affecting our results of our operations. For a
discussion of the business of FIDAC and of certain factors to consider in
connection with that business, see "Business of FIDAC."
UNCERTAINTIES ASSOCIATED WITH THE ACQUISITION OR OUR OWNERSHIP OF FIDAC MAY
CAUSE FIDAC TO LOSE CLIENTS.
FIDAC's clients may, in response to the announcement of the acquisition,
delay or defer decisions concerning their use of FIDAC products and services
because of uncertainties related to the consummation of the acquisition. FIDAC's
clients may also determine to withdraw assets under FIDAC's management, because
of uncertainties associated with the acquisition and/or because FIDAC will no
longer be an independently run company following the acquisition. Any of these
matters could have an adverse effect on our business, results of operations or
financial condition following the acquisition and the adverse effect may be
material.
RISKS RELATED TO THE COMBINED BUSINESSES
SOME MEMBERS OF OUR MANAGEMENT AND SOME MEMBERS OF OUR BOARD OF DIRECTORS HAVE
INTERESTS IN THE ACQUISITION THAT ARE DIFFERENT FROM OR IN ADDITION TO THE
INTERESTS THEY SHARE WITH YOU AS OUR STOCKHOLDERS.
The FIDAC shareholders will be receiving shares of our common stock upon
completion of the acquisition. The FIDAC shareholders also may receive
additional shares of our common stock if FIDAC reaches specific performance
targets for the fiscal years 2004, 2005, and 2006, and, therefore, the FIDAC
shareholders may have different interests from our other stockholders in the
performance of FIDAC. The special committee was formed because of, and our board
of directors was aware of, these different interests and considered them, among
other matters, in approving the merger agreement and the acquisition. In
addition, Michael A.J. Farrell, through his ownership of shares of FIDAC common
stock, upon completion of the acquisition, will control approximately 2% of the
outstanding voting power of our common stock, without including any additional
voting power he may acquire upon FIDAC's achievement of specific performance
goals for its 2004, 2005 and 2006 fiscal years.
A REIT CANNOT INVEST MORE THAN 20% OF ITS TOTAL ASSETS IN THE STOCK OR
SECURITIES OF ONE OR MORE TAXABLE REIT SUBSIDIARIES; THEREFORE, FIDAC CANNOT
CONSTITUTE MORE THAN 20% OF OUR TOTAL ASSETS.
A taxable REIT subsidiary is a corporation, other than a REIT or a
qualified REIT subsidiary, in which a REIT owns stock and which elects taxable
REIT subsidiary status. The term also includes a corporate subsidiary in which
the taxable REIT subsidiary owns more than a 35% interest. A REIT may own up to
100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary may earn income that would not be qualifying income if earned
directly by the parent REIT. Overall, at the close of any calendar quarter, no
more than
24
20% of the value of a REIT's assets may consist of stock or securities of one or
more taxable REIT subsidiaries.
As a result of the acquisition, FIDAC will become our taxable REIT
subsidiary. At that time, FIDAC will be our only taxable REIT subsidiary and the
stock and securities of FIDAC held by us is expected to represent less than 20%
of the value of our total assets. Furthermore, we intend to monitor the value of
our investments in the stock and securities of FIDAC (and any other taxable REIT
subsidiary in which we may invest) to ensure compliance with the above-described
20% limitation. We cannot assure you, however, that we will always be able to
comply with the 20% limitation so as to maintain REIT status.
TAXABLE REIT SUBSIDIARIES ARE SUBJECT TO TAX AT THE REGULAR CORPORATE RATES, ARE
NOT REQUIRED TO DISTRIBUTE DIVIDENDS, AND THE AMOUNT OF DIVIDENDS A TAXABLE REIT
SUBSIDIARY CAN PAY TO ITS PARENT REIT MAY BE LIMITED BY REIT GROSS INCOME TESTS.
A taxable REIT subsidiary must pay income tax at regular corporate rates
on any income that it earns. FIDAC will pay corporate income tax on its taxable
income, and its after-tax net income will be available for distribution to us.
Such income, however, is not required to be distributed.
Moreover, the annual gross income tests that must be satisfied to ensure
REIT qualification may limit the amount of dividends that we can receive from
FIDAC and still maintain our REIT status. Generally, not more than 25% of our
gross income can be derived from non-real estate related sources, such as
dividends from a taxable REIT subsidiary. If, for any taxable year, the
dividends we received from FIDAC, when added to our other items of non-real
estate related income, represented more than 25% of our total gross income for
the year, we could be denied REIT status, unless we were able to demonstrate,
among other things, that our failure of the gross income test was due to
reasonable cause and not willful neglect.
The limitations imposed by the REIT gross income tests may impede our
ability to distribute assets from FIDAC to us in the form of dividends. Certain
asset transfers may, therefore, have to be structured as purchase and sale
transactions upon which FIDAC recognizes taxable gain.
IF INTEREST ACCRUES ON INDEBTEDNESS OWED BY A TAXABLE REIT SUBSIDIARY TO ITS
PARENT REIT AT A RATE IN EXCESS OF A COMMERCIALLY REASONABLE RATE, OR IF
TRANSACTIONS BETWEEN A REIT AND A TAXABLE REIT SUBSIDIARY ARE ENTERED INTO ON
OTHER THAN ARM'S-LENGTH TERMS, THE REIT MAY BE SUBJECT TO A PENALTY TAX.
If interest accrues on an indebtedness owed by a taxable REIT subsidiary
to its parent REIT at a rate in excess of a commercially reasonable rate, the
REIT is subject to tax at a rate of 100% on the excess of (i) interest payments
made by a taxable REIT subsidiary to its parent REIT over (ii) the amount of
interest that would have been payable had interest accrued on the indebtedness
at a commercially reasonable rate. A tax at a rate of 100% is also imposed on
any transaction between a taxable REIT subsidiary and its parent REIT to the
extent the transaction gives rise to deductions to the taxable REIT subsidiary
that are in excess of the deductions that would have been allowable had the
transaction been entered into on arm's-length terms. We will
25
scrutinize all of our transactions with FIDAC in an effort to ensure that we do
not become subject to these taxes. We cannot assure you, however, that we will
be able to avoid application of these taxes.
RISKS RELATED TO FIDAC'S BUSINESS
A DECLINE IN THE VALUE OF SECURITIES OR LEVEL OF BORROWING ON FAVORABLE TERMS
COULD LEAD TO A DECLINE IN FIDAC'S ASSETS UNDER MANAGEMENT, REVENUES AND
EARNINGS.
FIDAC's revenue is derived from fees it receives from investment advisory
contracts with its clients. Under these contracts, the investment advisory fee
FIDAC receives is typically based on the gross market value of assets under
management. The gross assets FIDAC manages are increased by the borrowing of the
portfolios and funds. Accordingly, a decline in the value of securities
generally or the inability of the portfolio or the funds FIDAC manages to borrow
on favorable terms may cause FIDAC's revenues and income to decline by:
o causing the value of its assets under management to decrease, which
would result in FIDAC receiving lower investment advisory fees; or
o causing its clients to withdraw funds in favor of investments they
perceive offer greater opportunity or lower risk, which would also
result in FIDAC receiving lower investment advisory fees.
If FIDAC's revenues decline without a commensurate reduction in its
expenses, its net income will be reduced.
Declines in the value of securities could be the result of several factors
including economic downturn in the U.S. or foreign markets, political events,
defaults by major financial institutions or adverse public or investor
perceptions. The inability of the portfolio or the funds FIDAC manages to borrow
on favorable terms could result from several factors, including a narrowing of
the difference between short term and long term interest rates or disruptions
caused by rapid changes in interest rates. We cannot assure you that securities
markets will not move in a direction which results in a loss of FIDAC revenues
and earnings.
FIDAC COULD LOSE CLIENTS AND SUFFER A DECLINE IN FIDAC'S REVENUES AND EARNINGS
IF THE INVESTMENTS IT CHOOSES PERFORM POORLY, REGARDLESS OF THE TREND IN THE
VALUE OF SECURITIES.
Investment performance is one of the most important factors for the growth
of assets under FIDAC's management. Poor investment performance could impair
FIDAC's revenues and growth because:
o existing clients might withdraw funds in favor of better performing
products, which would result in FIDAC receiving lower investment
advisory fees;
o its ability to attract funds from existing and new clients might
diminish; or
26
o firms and individuals with which FIDAC has strategic alliances may
terminate their relationships, and future strategic alliances may be
unavailable.
The portfolios and funds FIDAC manages are generally similar in strategy
and risks to our investments, although FIDAC's clients are not generally
attempting to qualify as REITs. The performance of these portfolios and funds
are likely to be affected by the same factors that affect FIDAC's investment
returns. If FIDAC's revenues decline without a commensurate reduction in its
expenses, its net income will be reduced.
FIDAC'S CLIENTS CAN REMOVE THE ASSETS FIDAC MANAGES ON SHORT NOTICE.
FIDAC's investment advisory and administrative contracts are generally
terminable upon 90 days' notice, and depending on the client, investors may
redeem their investments in the funds from one day to one month with or without
written notice.
Institutional and individual clients, and firms with which FIDAC has
strategic alliances, can terminate their relationship with FIDAC, reduce the
aggregate amount of assets under management, or shift their funds to other types
of accounts with different rate structures for any of a number of reasons,
including investment performance, changes in prevailing interest rates and
financial market performance, particularly in the market for mortgage-backed
securities. If the yield on mortgage-backed securities declines without a
similar reduction in FIDAC's cost of financing, we would expect the pace of
redemptions of FIDAC managed funds and accounts to increase. The decrease in
revenues that could result from any such event could have a material adverse
effect on FIDAC's business.
THE INVESTMENT ADVISORY BUSINESS IS INTENSELY COMPETITIVE.
The investment advisory business is intensely competitive, with
competition based on a variety of factors including:
o the range of products offered;
o brand recognition and business reputation;
o investment performance;
o the continuity of client relationships and of assets under
management;
o the quality of service provided to clients;
o the level of fees and commissions charged for services;
o the level of commissions and other compensation paid;
o the level of expenses paid to financial intermediaries related to
administration and/or distribution; and
27
o financial strength.
FIDAC competes in all aspects of its business with a large number of
investment management firms, commercial banks, investment banks, broker-dealers,
insurance companies and other financial institutions. A number of factors
increase FIDAC's competitive risks:
o a number of FIDAC's competitors have greater capital and other
resources, and offer more comprehensive lines of products and
services, than FIDAC does;
o there are relatively few barriers to entry by new investment
advisory firms, and the successful efforts of new entrants into
FIDAC's lines of business of mortgage-backed securities, including
major banks, insurance companies and other financial institutions,
have resulted in increased competition;
o other industry participants may from time to time seek to recruit
FIDAC's investment professionals from FIDAC; and
o FIDAC competitors are seeking to expand market share in the products
and services it offers or intends to offer in the future.
This competitive pressure may reduce FIDAC's revenues and earnings.
FIDAC DEPENDS ON ACCESSING CLIENTS THROUGH INTERMEDIARIES.
FIDAC's ability to market its advisory and subadvisory services is highly
dependent on access to its base of securities firms, banks, insurance companies
and other intermediaries which generally offer competing investment products.
The inability to have adequate client access could have a material adverse
effect on FIDAC's business.
FIDAC's distribution extends globally, including into many foreign
markets, but the portfolios and funds FIDAC manages are denominated in U.S.
dollars. Foreign exchange rate changes could make U.S. dollar denominated
investments less attractive to foreign investors and result in withdrawals by
such investors or difficulty in attracting assets.
FIDAC IS SUBJECT TO EXTENSIVE REGULATION AND VIOLATIONS OF REGULATORY
REQUIREMENTS COULD IMPAIR ITS ABILITY TO OPERATE OR RESULT IN FINES OR DAMAGE TO
ITS REPUTATION.
As with all investment advisors, FIDAC's business is heavily regulated.
Noncompliance with applicable statutes or regulations could result in sanctions,
including:
o the revocation of licenses to operate its business;
o the suspension or expulsion from a particular jurisdiction or market
of FIDAC or its key personnel;
28
o the imposition of fines and censures; and
o reputational loss.
Any of these events could have a material adverse effect on FIDAC's
business.
FIDAC IS DEPENDENT ON ITS KEY PERSONNEL.
FIDAC is dependent on the efforts of its key officers and employees,
including Michael A.J. Farrell, FIDAC's Chief Executive Officer, and President,
Wellington J. Denahan, FIDAC's Executive Vice President and Chief Investment
Officer, Kathryn F. Fagan, FIDAC's Chief Financial Officer and Treasurer, and
Jennifer S. Karve, FIDAC's Executive Vice President and Portfolio Manager. The
loss of any of their services could have an adverse effect on FIDAC's
operations. Although we have employment agreements with each of them, we cannot
assure you they will remain employed with us. They have each executed a new
employment agreement with us that, upon the consummation of the acquisition,
replaces their existing employment agreements with us.
RISKS RELATED TO OUR BUSINESS
AN INCREASE IN THE INTEREST PAYMENTS ON OUR BORROWINGS RELATIVE TO THE INTEREST
WE EARN ON OUR INVESTMENT SECURITIES MAY ADVERSELY AFFECT OUR PROFITABILITY.
We earn money based upon the spread between the interest payments we earn
on our investment securities and the interest payments we must make on our
borrowings. If the interest payments on our borrowings increase relative to the
interest we earn on our investment securities, our profitability may be
adversely affected.
The interest payments on our borrowings may increase relative to the
interest we earn on our adjustable-rate investment securities for various
reasons discussed in this section.
DIFFERENCES IN TIMING OF INTEREST RATE ADJUSTMENTS ON OUR INVESTMENT SECURITIES
AND OUR BORROWINGS MAY ADVERSELY AFFECT OUR PROFITABILITY.
We rely primarily on short-term borrowings to acquire investment
securities with long-term maturities. Accordingly, if short-term interest rates
increase, this may adversely affect our profitability.
Most of the investment securities we acquire are adjustable-rate
securities. This means that their interest rates may vary over time based upon
changes in an objective index, such as:
o LIBOR. The interest rate that banks in London offer for deposits in
London of U.S. dollars.
o Treasury rate. A monthly or weekly average yield of benchmark U.S.
Treasury securities, as published by the Federal Reserve Board.
29
o CD Rate. The weekly average of secondary market interest rates on
six-month negotiable certificates of deposit, as published by the
Federal Reserve Board.
These indices generally reflect short-term interest rates. On December 31,
2003, approximately 73% of our investment securities were adjustable-rate
securities.
The interest rates on our borrowings similarly vary with changes in an
objective index. Nevertheless, the interest rates on our borrowings generally
adjust more frequently than the interest rates on our adjustable-rate investment
securities. For example, on December 31, 2003, our adjustable-rate investment
securities had a weighted average term to next rate adjustment of 23 months,
while our borrowings had a weighted average term to next rate adjustment of 90
days. 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 adjustable-rate
investment securities.
INTEREST RATE CAPS ON OUR INVESTMENT SECURITIES MAY ADVERSELY AFFECT OUR
PROFITABILITY.
Our adjustable-rate investment securities are typically subject to
periodic and lifetime interest rate caps. Periodic interest rate caps limit the
amount an interest rate can increase during any given period. Lifetime interest
rate caps limit the amount an interest rate can increase through maturity of an
investment security. Our borrowings are not subject to similar restrictions.
Accordingly, in a period of rapidly increasing interest rates, we could
experience a decrease in net income or experience a net loss because the
interest rates on our borrowings could increase without limitation while the
interest rates on our adjustable-rate investment securities would be limited by
caps.
BECAUSE WE ACQUIRE FIXED-RATE SECURITIES, AN INCREASE IN INTEREST RATES MAY
ADVERSELY AFFECT OUR PROFITABILITY.
While the majority of our investments consist of adjustable-rate
investment securities, we also invest in fixed-rate mortgage-backed securities.
In a period of rising interest rates, our interest payments could increase while
the interest we earn on our fixed-rate mortgage-backed securities would not
change. This would adversely affect our profitability. On December 31, 2003,
approximately 27% of our investment securities were fixed-rate securities.
AN INCREASE IN PREPAYMENT RATES MAY ADVERSELY AFFECT OUR PROFITABILITY.
The mortgage-backed securities we acquire are backed by pools of mortgage
loans. We receive payments, generally, from the payments that are made on these
underlying mortgage loans. When borrowers prepay their mortgage loans at rates
that are faster than expected, this results in prepayments that are faster than
expected on the mortgage-backed securities. These faster than expected
prepayments may adversely affect our profitability.
We often purchase mortgage-backed securities that have a higher interest
rate than the market interest rate at the time. In exchange for this higher
interest rate, we must pay a premium over the market value to acquire the
security. In accordance with accounting rules, we amortize this premium over the
term of the mortgage-backed security. If the mortgage-backed security is prepaid
in whole or in part prior to its maturity date, however, we must expense the
remaining
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unamortized portion of the premium that was prepaid at the time of the
prepayment. This adversely affects our profitability. On December 31, 2003,
approximately 97% of the mortgage-backed securities we owned were acquired at a
premium.
Prepayment rates generally increase when interest rates fall and decrease
when interest rates rise, but changes in prepayment rates are difficult to
predict. Prepayment rates also may be affected by conditions in the housing and
financial markets, general economic conditions and the relative interest rates
on fixed-rate and adjustable-rate mortgage loans.
We may seek to reduce prepayment risk by acquiring mortgage-backed
securities at a discount. If a discounted security is prepaid in whole or in
part prior to its maturity date, we will earn income equal to the amount of the
remaining discount. This will improve our profitability if the discounted
securities are prepaid faster than expected. On December 31, 2003, approximately
3% of the mortgage-backed securities we owned were acquired at a discount.
We also can acquire mortgage-backed securities that are less affected by
prepayments. For example, we can acquire CMOs, a type of mortgage-backed
security. CMOs divide a pool of mortgage loans into multiple tranches that allow
for shifting of prepayment risks from slower-paying tranches to faster-paying
tranches. This is in contrast to pass-through or pay-through mortgage-backed
securities, where all investors share equally in all payments, including all
prepayments. As discussed below, the Investment Company Act of 1940 (or the
Investment Company Act) imposes restrictions on our purchase of CMOs. On
December 31, 2003, approximately 23% of our mortgage-backed securities were CMOs
and approximately 77% of our mortgage-backed securities were pass-through or
pay-through securities.
While we seek to minimize prepayment risk to the extent practical, in
selecting investments we must balance prepayment risk against other risks and
the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
AN INCREASE IN INTEREST RATES MAY ADVERSELY AFFECT OUR BOOK VALUE.
Increases in interest rates may negatively affect the market value of our
investment securities. Our fixed-rate securities, generally, are more negatively
affected by these increases. In accordance with accounting rules, we reduce our
book value by the amount of any decrease in the market value of our investment
securities.
OUR STRATEGY INVOLVES SIGNIFICANT LEVERAGE.
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1,
although our ratio may at times be above or below this amount. We incur this
leverage by borrowing against a substantial portion of the market value of our
investment securities. By incurring this leverage, we can enhance our returns.
Nevertheless, this leverage, which is fundamental to our investment strategy,
also creates significant risks.
OUR LEVERAGE MAY CAUSE SUBSTANTIAL LOSSES.
Because of our significant leverage, we may incur substantial losses if
our borrowing costs increase. Our borrowing costs may increase for any of the
following reasons:
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o short-term interest rates increase;
o the market value of our investment securities decreases;
o interest rate volatility increases; or
o the availability of financing in the market decreases.
OUR LEVERAGE MAY CAUSE MARGIN CALLS AND DEFAULTS AND FORCE US TO SELL ASSETS
UNDER ADVERSE MARKET CONDITIONS.
Because of our leverage, a decline in the value of our investment
securities may result in our lenders initiating margin calls. A margin call
means that the lender requires us to pledge additional collateral to
re-establish the ratio of the value of the collateral to the amount of the
borrowing. Our fixed-rate mortgage-backed securities generally are more
susceptible to margin calls as increases in interest rates tend to more
negatively affect the market value of fixed-rate securities.
If we are unable to satisfy margin calls, our lenders may foreclose on our
collateral. This could force us to sell our investment securities under adverse
market conditions. Additionally, in the event of our bankruptcy, our borrowings,
which are generally made under repurchase agreements, may qualify for special
treatment under the Bankruptcy Code. This special treatment would allow the
lenders under these agreements to avoid the automatic stay provisions of the
Bankruptcy Code and to liquidate the collateral under these agreements without
delay.
LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS.
To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our investment securities, we may be unable to comply with these requirements,
ultimately jeopardizing our status as a REIT. For further discussion of these
asset and source of income requirements and the consequences of our failure to
continue to qualify as a REIT, please see "The Acquisition - Material Federal
Income Tax Consequences of the Acquisition."
WE MAY EXCEED OUR TARGET LEVERAGE RATIOS.
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1.
However, we are not required to stay within this leverage ratio. If we exceed
this ratio, the adverse impact on our financial condition and results of
operations from the types of risks described in this section would likely be
more severe.
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 any of the
following reasons:
o we determine that the leverage would expose us to excessive risk;
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o our lenders do not make funding available to us at acceptable rates;
or
o our lenders require that we provide additional collateral to cover
our borrowings.
WE MAY INCUR INCREASED BORROWING COSTS WHICH WOULD ADVERSELY AFFECT OUR
PROFITABILITY.
Currently, all of our borrowings are collateralized borrowings in the form
of repurchase agreements. If the interest rates on these repurchase agreements
increase, it would adversely affect our profitability.
Our borrowing costs under repurchase agreements generally correspond to
short-term interest rates such as LIBOR or a short-term Treasury index, plus or
minus a margin. The margins on these borrowings over or under short-term
interest rates may vary depending upon:
o the movement of interest rates;
o the availability of financing in the market; or
o the value and liquidity of our investment securities.
IF WE ARE UNABLE TO RENEW OUR BORROWINGS AT FAVORABLE RATES, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED.
Since we rely primarily on short-term borrowings, our ability to achieve
our investment objectives depends not only on our ability to borrow money in
sufficient amounts and on favorable terms, but also on our ability to renew or
replace on a continuous basis our maturing short-term borrowings. If we are not
able to renew or replace maturing borrowings, we would have to sell our assets
under possibly adverse market conditions.
WE HAVE NOT USED DERIVATIVES TO MITIGATE OUR INTEREST RATE AND PREPAYMENT RISKS.
Our policies permit us to enter into interest rate swaps, caps and floors
and other derivative transactions to help us mitigate our interest rate and
prepayment risks described above. However, we have determined in the past that
the cost of these transactions outweighs the benefits. In addition, we will not
enter into derivative transactions if we believe they will jeopardize our status
as a REIT. If we decide to enter into derivative transactions in the future,
these transactions may mitigate our interest rate and prepayment risks but
cannot insulate us from these risks.
OUR INVESTMENT STRATEGY MAY INVOLVE CREDIT RISK.
We may incur losses if there are payment defaults under our investment
securities.
To date, all of our mortgage-backed securities have been agency
certificates which, although not rated, carry an implied "AAA" rating. Agency
certificates are investment securities where Freddie Mac, Fannie Mae or Ginnie
Mae guarantees payments of principal or interest on the certificates.
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Even though we have only acquired "AAA" securities so far, pursuant to our
capital investment policy, we have the ability to acquire securities of lower
credit quality. Under our policy:
o 75% of our investments must have a "AA" or higher rating by S&P, an
equivalent rating by a similar nationally recognized rating
organization or our management must determine that the investments
are of comparable credit quality to investments with these ratings;
o the remaining 25% of our investments must have a "BBB" or higher
rating by S&P, or an equivalent rating by a similar nationally
recognized rating organization, or our management must determine
that the investments are of comparable credit quality to investments
with these ratings. Securities with ratings of "BBB" or higher are
commonly referred to as "investment grade" securities; and
o we seek to have a minimum weighted average rating for our portfolio
of at least "A" by S&P.
If we acquire mortgage-backed securities of lower credit quality, we may
incur losses if there are defaults under those mortgage-backed securities or if
the rating agencies downgrade the credit quality of those mortgage-backed
securities.
WE HAVE NOT ESTABLISHED A MINIMUM DIVIDEND PAYMENT LEVEL.
We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts such that all or substantially all of our taxable income
in each year (subject to certain adjustments) is distributed. This enables us to
qualify for the tax benefits accorded to a REIT under the Code. We have not
established a minimum dividend payment level and our ability to pay dividends
may be adversely affected for the reasons described in this section. All
distributions will be made at the discretion of our board of directors and will
depend on our earnings, our financial condition, maintenance of our REIT status
and such other factors as our board of directors may deem relevant from time to
time.
BECAUSE OF COMPETITION, WE MAY NOT BE ABLE TO ACQUIRE MORTGAGE-BACKED SECURITIES
AT FAVORABLE YIELDS.
Our net income depends, in large part, on our ability to acquire
mortgage-backed securities at favorable spreads over our borrowing costs. In
acquiring mortgage-backed securities, we compete with other REITs, investment
banking firms, savings and loan associations, banks, insurance companies, mutual
funds, other lenders and other entities that purchase mortgage-backed
securities, many of which have greater financial resources than us. As a result,
in the future, we may not be able to acquire sufficient mortgage-backed
securities at favorable spreads over our borrowing costs.
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WE ARE DEPENDENT ON OUR KEY PERSONNEL.
We are dependent on the efforts of our key officers and employees,
including Michael A.J. Farrell, our Chairman of the board of directors, Chief
Executive Officer, President and director, Wellington J. Denahan, our Vice
Chairman, Chief Investment Officer and director, Kathryn F. Fagan, our Chief
Financial Officer and Treasurer, and Jennifer S. Karve, our Executive Vice
President and Secretary. The loss of any of their services could have an adverse
effect on our operations. Although we have employment agreements with each of
them, we cannot assure you they will remain employed with us. They have each
executed a new employment agreement with us that, upon the consummation of the
acquisition, replaces their existing employment agreements with us.
SOME OF OUR DIRECTORS, OFFICERS, AND EMPLOYEES HAVE OWNERSHIP INTERESTS AND
MANAGE ASSETS FOR OTHER CLIENTS THAT CREATE POTENTIAL CONFLICTS OF INTEREST.
Some of our directors, officers, and employees have potential conflicts of
interest with us. The material potential conflicts are as follows:
Mr. Farrell, Ms. Denahan and other officers and employees are actively
involved in managing mortgage-backed securities and other fixed income assets
for institutional clients through FIDAC. FIDAC is a registered investment
adviser that on December 31, 2003 managed, assisted in managing or supervised
approximately $13.6 billion in gross assets on a discretionary basis for a wide
array of clients. FIDAC also manages other funds. These officers will continue
to perform services for FIDAC, the institutional clients, the Floating Rate
Fund, and other funds managed by FIDAC. Mr. Farrell, Ms. Denahan, Ms. Fagan, Ms.
Karve, and other of our officers and employees are the shareholders of FIDAC.
If the acquisition is not approved, these responsibilities may create
conflicts of interest for these officers and employees if they are presented
with corporate opportunities that may benefit us, the institutional clients, and
other funds managed by FIDAC, if applicable. If the acquisition is not approved,
our officers will continue to allocate investments among us, the institutional
clients, and other funds managed by FIDAC, if applicable, by determining the
entity or account for which the investment is most suitable. In making this
determination, our officers consider the investment strategy and guidelines of
each entity or account with respect to acquisition of assets, leverage,
liquidity, and other factors that our officers determine appropriate.
If the acquisition is not approved, our management expects to continue to
allocate rent and other office expenses between our affiliates and us. These
allocations may create conflicts of interest. Our management currently allocates
rent and other expenses 90% to us and 10% to FIDAC. Our audit committee must
approve any change in these allocation percentages. In addition, we may enter
into agreements, such as technology sharing or research agreements, with our
affiliates in the future. These agreements would present potential conflicts of
interest. Our management will obtain prior approval of our audit committee prior
to entering into any agreements with our affiliates.
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FEDERAL INCOME TAX RISKS RELATED TO OUR QUALIFICATION AS A REIT
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES.
We believe that since 1997 we have qualified for taxation as a REIT for
federal income tax purposes. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our
control. For example, to qualify as a REIT, at least 75% of our gross income
must come from real estate sources and 95% of our gross income must come from
real estate sources and certain other sources that are itemized in the REIT tax
laws. We are also required to distribute to stockholders at least 90% of our
REIT taxable income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain). Even a technical or inadvertent
mistake could jeopardize our REIT status. Furthermore, Congress and the Internal
Revenue Service, or IRS, might make changes to the tax laws and regulations, and
the courts might issue new rulings that make it more difficult or impossible for
us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first fail to qualify. If we fail to qualify as a REIT, we
would have to pay significant income taxes and would therefore have less money
available for investments or for distributions to our stockholders. This would
likely have a significant adverse effect on the value of our securities. In
addition, the tax law would no longer require us to make distributions to our
stockholders. For further discussion of the risks related to our qualification
as a REIT, please see "Risks Related to the Combined Businesses."
WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS.
As a REIT, we must distribute at least 90% of our REIT taxable income
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain). The required distribution limits the amount we have
available for other business purposes, including amounts to fund our growth.
Also, it is possible that because of the differences between the time we
actually receive revenue or pay expenses and the period we report those items
for distribution purposes, we may have to borrow funds on a short-term basis to
meet the 90% distribution requirement.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES.
Even if we qualify as a REIT, we may be subject to certain federal, state
and local taxes on our income and property. Any of these taxes would reduce our
operating cash flow.
RISKS OF OWNERSHIP OF OUR COMMON STOCK
ISSUANCES OF LARGE AMOUNTS OF OUR STOCK COULD CAUSE THE MARKET PRICE OF OUR
COMMON STOCK TO DECLINE.
As of March 4, 2004, 117,866,932 shares of our common stock were
outstanding. If we issue a significant number of shares of common stock or
securities convertible into common
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stock in a short period of time, there could be a dilution of the existing
common stock and a decrease in the market price of the common stock.
WE MAY CHANGE OUR POLICIES WITHOUT STOCKHOLDER APPROVAL.
Our board of directors and management determine all of our policies,
including our investment, financing and distribution policies. Although they
have no current plans to do so, they may amend or revise these policies at any
time without a vote of our stockholders. Policy changes could adversely affect
our financial condition, results of operations, the market price of our common
stock or our ability to pay dividends or distributions.
LIMITS ON OWNERSHIP OF OUR COMMON STOCK COULD HAVE ADVERSE CONSEQUENCES TO YOU
AND COULD LIMIT YOUR OPPORTUNITY TO RECEIVE A PREMIUM ON OUR STOCK.
To maintain our qualification as a REIT for federal income tax purposes,
not more than 50% in value of the outstanding shares of our capital stock may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
federal tax laws to include certain entities). Primarily to facilitate
maintenance of our qualification as a REIT for federal income tax purposes, our
charter will prohibit ownership, directly or by the attribution provisions of
the federal tax laws, by any person of more than 9.8% of the lesser of the
number or value of the issued and outstanding shares of our common stock and
will prohibit ownership, directly or by the attribution provisions of the
federal tax laws, by any person of more than 9.8% of the lesser of the number or
value of the issued and outstanding shares of any class or series of our
preferred stock. Our board of directors, in its sole and absolute discretion,
may waive or modify the ownership limit with respect to one or more persons who
would not be treated as "individuals" for purposes of the federal tax laws if it
is satisfied, based upon information required to be provided by the party
seeking the waiver and upon an opinion of counsel satisfactory to the board of
directors, that ownership in excess of this limit will not otherwise jeopardize
our status as a REIT for federal income tax purposes.
The ownership limit may have the effect of delaying, deferring or
preventing a change in control and, therefore, could adversely affect our
shareholders' ability to realize a premium over the then-prevailing market price
for our common stock in connection with a change in control.
OUR GOVERNING DOCUMENTS AND MARYLAND LAW IMPOSE LIMITATIONS ON THE
ACQUISITION OF OUR COMMON STOCK AND CHANGES IN CONTROL THAT COULD MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
MARYLAND BUSINESS COMBINATION ACT
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is any
person who beneficially owns 10% or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested stockholder unless the board of directors approved the transaction
prior to the party's becoming an interested stockholder. The five-year period
runs from the most recent date on which the
37
interested stockholder became an interested stockholder. The law also requires a
super majority stockholder vote for such transactions after the end of the
five-year period. This means that the transaction must be approved by at least:
o 80% of the votes entitled to be cast by holders of outstanding
voting shares; and
o two-thirds of the votes entitled to be cast by holders of
outstanding voting shares other than shares held by the interested
stockholder or an affiliate of the interested stockholder with whom
the business combination is to be effected.
As permitted by the Maryland General Corporation Law, we have elected not
to be governed by the Maryland business combination statute. We made this
election by opting out of this statute in our articles of incorporation. If,
however, we amend our articles of incorporation to opt back in to the statute,
the business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our stockholders' best interests.
MARYLAND CONTROL SHARE ACQUISITION ACT
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of the stockholders. Two-thirds of the shares eligible
to vote must vote in favor of granting the "control shares" voting rights.
"Control shares" are shares of stock that, taken together with all other shares
of stock the acquirer previously acquired, would entitle the acquirer to
exercise voting power in electing directors within one of the following ranges
of voting power:
o One-tenth or more but less than one third of all voting power;
o One-third or more but less than a majority of all voting power; or
o A majority or more of all voting power.
Control shares do not include shares of stock the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may compel
our board of directors to call a special meeting of stockholders to consider the
voting rights of the shares. If such a person makes no request for a meeting, we
have the option to present the question at any stockholders' meeting.
If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, we may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. We will determine the fair value of the shares,
without regard to voting rights, as of the date of either:
o the last control share acquisition; or
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o the meeting where stockholders considered and did not approve voting
rights of the control shares.
If voting rights for control shares are approved at a stockholders'
meeting and the acquirer becomes entitled to vote a majority of the shares of
stock entitled to vote, all other stockholders may obtain rights as objecting
stockholders and, thereunder, exercise appraisal rights. This means that you
would be able to force us to redeem your stock for fair value. Under Maryland
law, the fair value may not be less than the highest price per share paid in the
control share acquisition. Furthermore, certain limitations otherwise applicable
to the exercise of dissenters' rights would not apply in the context of a
control share acquisition. The control share acquisition statute would not apply
to shares acquired in a merger, consolidation or share exchange if we were a
party to the transaction. The control share acquisition statute could have the
effect of discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if our acquisition would be in our
stockholders' best interests.
REGULATORY RISKS
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT US.
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. If we fail to qualify for
this exemption, our ability to use leverage would be substantially reduced, and
we would be unable to conduct our business as described in this proxy
statement/prospectus.
The Investment Company Act exempts entities that are primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate. Under the current interpretation of the SEC staff,
in order to qualify for this exemption, we must maintain at least 55% of our
assets directly in these qualifying real estate interests. Mortgage-backed
securities that do not represent all of the certificates issued with respect to
an underlying pool of mortgages may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify for purposes of the 55%
requirement. Our ownership of these mortgage-backed securities, therefore, is
limited by the provisions of the Investment Company Act. In addition, in meeting
the 55% requirement under the Investment Company Act, we treat as qualifying
interests mortgage-backed securities issued with respect to an underlying pool
as to which we hold all issued certificates. If the SEC or its staff adopts a
contrary interpretation, we could be required to sell a substantial amount of
our mortgage-backed securities, under potentially adverse market conditions.
Further, in order to insure that we at all times qualify for the exemption from
the Investment Company Act, we may be precluded from acquiring mortgage-backed
securities whose yield is somewhat higher than the yield on mortgage-backed
securities that could be purchased in a manner consistent with the exemption.
The net effect of these factors may be to lower our net income.
COMPLIANCE WITH PROPOSED AND RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND
REGULATIONS ARE LIKELY TO INCREASE OUR COSTS.
The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by
the SEC and the New York Stock Exchange have increased the scope, complexity and
cost of corporate governance,
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reporting and disclosure practices. We believe that these rules and regulations
will make it more costly for us to obtain director and officer liability
insurance, and we may be required to accept reduced coverage or incur
substantially higher costs to obtain coverage. These rules and regulations could
also make it more difficult for us to attract and retain qualified members of
management and our board of directors, particularly to serve on our audit
committee.
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FORWARD-LOOKING STATEMENTS
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This proxy statement/prospectus contains or incorporates by reference
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking
statements which are based on various assumptions (some of which are beyond our
control) may be identified by reference to a future period or periods or by the
use of forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage-backed securities for purchase,
the availability of financing and, if available, the terms of any financing,
FIDAC's clients removal of assets FIDAC manages, FIDAC's regulatory
requirements, and competition in the investment management business. For a
discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
factors." We do not undertake, and specifically disclaim any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
For additional information about factors that could cause actual results
to differ materially from those described in the forward-looking statements,
please see the annual reports on Form 10-K and the quarterly reports on Form
10-Q that we have filed with the SEC.
All forward-looking statements in this proxy statement/prospectus
attributable to us or any person acting on its behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section.
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OUR ANNUAL MEETING
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We are furnishing this proxy statement/prospectus to our stockholders as
part of the solicitation of proxies by our board of directors for use at our
annual meeting.
DATE, TIME AND PLACE OF THE ANNUAL MEETING
We will hold our annual meeting on Thursday, May 27, 2004, at 9:30 a.m.,
local time, at the New York Marriott Marquis, 1535 Broadway, New York, New York
10036 in the Cantor Jolson room on the 9th floor.
PURPOSE OF THE ANNUAL MEETING
At the annual meeting, we are asking holders of record of our common stock
to consider and vote on the following proposals:
o to approve the Agreement and Plan of Merger, dated as of December
31, 2003, by and among Annaly, FIDAC, Merger Sub, and the
shareholders of FIDAC. The adoption of the merger agreement also
will constitute approval of the other transactions contemplated by
the merger agreement;
o to elect three directors for a term of three years each;
o to ratify the appointment of Deloitte & Touche LLP as our
independent auditors for the current fiscal year; and
o to act upon such other matters as may properly come before our
annual meeting or any adjournment or postponement thereof.
Our board of directors, upon the recommendation of a special committee
consisting entirely of independent directors formed to consider the transaction,
after due consideration:
o determined that the acquisition and the other transactions
contemplated by the merger agreement are advisable and fair to and
in the best interests of us and our stockholders;
o approved the acquisition and approved and adopted the merger
agreement and the transactions contemplated by the merger agreement;
o directed that the merger agreement be submitted to a vote at a
meeting of our stockholders; and
o recommended that our stockholders approve the merger agreement.
Our board of directors recommends that our stockholders vote FOR approval
of the merger agreement.
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Certain of our directors and officers will receive financial benefits in
connection with the acquisition. For a discussion of the interests of certain
persons in the acquisition, see "The Acquisition--Interests of Certain Persons
in the Acquisition."
STOCKHOLDER RECORD DATE
Only holders of record of our common stock at the close of business on
March 22, 2004, the record date, are entitled to notice of and to vote at the
annual meeting. On the record date, approximately __________ shares of our
common stock were issued and outstanding and held by approximately ___ holders
of record.
VOTING RIGHTS
Our stockholders are entitled to one vote per share of common stock held
as of the record date for the annual meeting.
QUORUM; EFFECT OF ABSTENTION AND BROKER "NON-VOTES"
A quorum will be present at the annual meeting if a majority of the votes
entitled to be cast are present, in person or by proxy. If a quorum is not
present at the annual meeting, we expect that the annual meeting will be
adjourned to solicit additional proxies. Holders of record of our common stock
on the record date are entitled to one vote per share.
Abstentions will be treated as shares that are present and entitled to
vote for purposes of determining the presence of a quorum. An abstention is the
voluntary act of not voting by a stockholder who is present at a meeting and
entitled to vote.
A broker "non-vote" occurs when a broker nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary power for that particular item and has not received
instructions from the beneficial owner. Under New York Stock Exchange rules,
brokers that hold shares of our common stock in street name for customers that
are the beneficial owners of those shares may not give a proxy to vote those
shares without specific instructions from those customers. Broker "non-votes"
will be treated as not present and not entitled to vote for purposes of
determining the presence of a quorum. If a stockholder owns shares through a
broker and attends the annual meeting, the stockholder should bring a letter
from that stockholder's broker identifying that stockholder as the beneficial
owner of the shares and acknowledging that you will vote your shares.
An abstention will not count "for" or "against" the election of directors
or the ratification of Deloitte & Touche LLP as our auditors. For purposes of
determining approval of the merger agreement, abstentions will be treated as
present and entitled to vote but will not be counted as a vote cast.
Broker non-votes will not count "for" or "against" the election of
directors or the ratification of Deloitte & Touche LLP as our auditors. For
purposes of determining approval of the merger agreement, broker non-votes will
be treated as not present and not entitled to vote.
43
VOTE REQUIRED FOR THE APPROVAL OF THE ACQUISITION
The approval of the holders of a majority of the vote cast (provided that
the total vote cast on the proposal represents over 50% of the voting power of
our shares entitled to vote as of the record date) and present, in person or by
proxy, at a meeting at which a quorum is present, is required to approve the
merger agreement.
VOTE REQUIRED FOR THE ELECTION OF DIRECTORS AND RATIFICATION OF AUDITORS
Directors will be elected by a plurality of the votes cast by the holders
of the shares of common stock voting in person or by proxy at the annual
meeting; and ratification of the appointment of our independent auditors will
require the affirmative vote of the holders of a majority of the votes cast at
the annual meeting.
VOTING OF PROXIES
All shares represented by properly executed proxies received in time for
the annual meeting will be voted at the annual meeting in the manner specified
by the stockholders giving those proxies. Properly executed proxies that do not
contain voting instructions will be voted for the approval of the merger
agreement.
Only shares affirmatively voted for the approval of the merger agreement,
including properly executed proxies that do not contain voting instructions,
will be counted as favorable votes for the approval of the merger agreement.
The individuals named as proxies by a stockholder may vote for one or more
adjournments of the annual meeting, including adjournments to permit further
solicitations of proxies. No proxy voted against the proposal to approve the
merger agreement will be voted in favor of any adjournment.
We do not expect that any matter other than the proposal to approve the
merger agreement will be brought before the annual meeting. If, however, other
matters are properly presented at the annual meeting, the individuals named as
proxies will vote in accordance with the recommendation of our board of
directors.
REVOCABILITY OF PROXIES
Submitting a proxy on the enclosed form does not preclude a stockholder
from voting in person at the annual meeting. A stockholder may revoke a proxy at
any time before it is voted by filing with us a duly executed revocation of
proxy, by submitting a duly executed proxy to us with a later date or by
appearing at the annual meeting and voting in person. Stockholders may revoke a
proxy by any of these methods, regardless of the method used to deliver a
stockholder's previous proxy. Attendance at the annual meeting without voting
will not itself revoke a proxy.
SOLICITATION OF PROXIES
We will pay the expenses incurred in connection with the printing and
mailing of this proxy statement/prospectus. In addition to solicitation by mail,
the directors, officers and
44
employees of us, who will not be specially compensated, may solicit proxies from
our stockholders by telephone, facsimile, telegram or other electronic means or
in person. Arrangements also will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of shares held of record by these persons,
and we will reimburse them for their reasonable out-of-pocket expenses.
We will mail a copy of this proxy statement/prospectus to each holder of
record of our common stock on the record date.
Stockholders have the option to vote over the internet or by telephone.
Please be aware that if you vote over the internet, you may incur costs such as
telephone and access charges for which you will be responsible.
In accordance with a notice sent to eligible stockholders who share a
single address, we are sending only one proxy statement/prospectus to that
address unless we received instructions to the contrary from any stockholder at
that address. This practice, known as "householding," is designed to reduce our
printing and postage costs. However, if a stockholder of record residing at such
an address wishes to receive a separate annual report or proxy statement in the
future, he or she may contact us at Annaly Mortgage Management, Inc., 1211
Avenue of the Americas, Suite 2902, New York, New York 10036, Attention:
Investor Relations or email us at INVESTOR@ANNALY.COM. If you are an eligible
stockholder of record receiving multiple copies of our annual report and proxy
statement, you can request householding by contacting us in the same manner. If
you own your shares through a bank, broker or other nominee, you can request
householding by contacting the nominee.
We have retained Morrow & Co. Inc. to assist in the solicitation of
proxies from banks, brokerage firms, nominees, institutional holders and
individual investors for a fee of $7,500 plus reimbursement for expenses.
POSTPONEMENT OR ADJOURNMENT OF MEETING
If a quorum is not present or represented, our bylaws permit a majority of
stockholders entitled to vote at the annual meeting, present in person or
represented by proxy, to postpone or adjourn the meeting, without notice other
than an announcement.
ANNUAL MEETING ADMISSION PROCEDURES
You should be prepared to present photo identification for admittance at
the annual meeting. In addition, if you are a record holder of common stock,
your name is subject to verification against the list of our record holders on
the record date prior to being admitted to the annual meeting. If you are not a
record holder but hold shares in street name, that is, with a broker, dealer,
bank or other financial institution that serves as your nominee, you should be
prepared to provide proof of beneficial ownership on the record date, or similar
evidence of ownership. If you do not provide photo identification or comply with
the other procedures outlined above upon request, you will not be admitted to
the annual meeting.
45
--------------------------------------------------------------------------------
BUSINESS OF ANNALY
--------------------------------------------------------------------------------
GENERAL
We own, manage, and finance a portfolio of investment securities,
including mortgage pass-through certificates, collateralized mortgage
obligations, or CMOs, agency callable debentures, and other securities
representing interests in or obligations backed by pools of mortgage loans. Our
principal business objective is to generate net income for distribution to our
stockholders from the spread between the interest income on our investment
securities and the cost of borrowings to finance our acquisition of investment
securities. We have elected and believe that we are organized and have operated
in a manner that enables us to be taxed as a real estate investment trust, or
REIT, under the Internal Revenue Code of 1986, as amended (or the Code). If we
qualify for taxation as a REIT, we generally will not be subject to federal
income tax on our taxable income that is distributed to our stockholders.
Therefore, substantially all of our assets consist of qualified REIT real estate
assets (of the type described in Section 856(c)(5)(B) of the Code). We are a
Maryland corporation that commenced operations on February 18, 1997. We are
self-advised and self-managed.
We have financed our purchases of investment securities with the net
proceeds of equity offerings and borrowings under repurchase agreements whose
interest rates adjust based on changes in short-term market interest rates.
ASSETS
To date, all of the securities that we have acquired have been either
agency mortgage-backed securities which, although not rated, carry an implied
"AAA" rating, or are Federal Home Loan Bank, or FHLB, Federal Home Loan Mortgage
Corporation, or FHLMC, or Federal National Mortgage Association, or FNMA,
debentures. Agency mortgage-backed securities are mortgage-backed securities for
which a government agency or federally chartered corporation, such as the FHLMC,
FNMA or Government National Mortgage Association, or GNMA, guarantees payments
of principal or interest on the securities. Similarly, the debentures issued by
the FHLB, FHLMC or FNMA are guaranteed by those respective agencies. Agency
mortgage-backed securities consist of agency pass-through certificates and CMOs
issued or guaranteed by an agency. Pass-through certificates provide for a
pass-through of the monthly interest and principal payments made by the
borrowers on the underlying mortgage loans. CMOs divide a pool of mortgage loans
into multiple tranches with different principal and interest payment
characteristics.
o Freddie Mac is a common abbreviation that refers to the FHLMC, a
privately-owned, government-sponsored enterprise created pursuant to
an act of Congress.
o Fannie Mae is a common abbreviation that refers to the FNMA, a
privately-owned, federally-chartered corporation organized under an
act of Congress.
o Ginnie Mae is a common abbreviation that refers to the GNMA, a
wholly-owned instrumentality of the United States within the
Department of Housing and Urban Development.
46
Even though we have only acquired "AAA" securities so far, pursuant to our
capital investment policy, we have the ability to acquire securities of lower
credit quality. Under our policy:
o 75% of our investments must have a "AA" or higher rating by Standard
& Poor's Corporation (or S&P), an equivalent rating by another
nationally recognized rating organization or our management must
determine that the investments are of comparable credit quality to
investments with these ratings;
o the remaining 25% of our investments must have a "BBB" or higher
rating by S&P, or an equivalent rating by another nationally
recognized rating organization, or our management must determine
that the investments are of comparable credit quality to investments
with these ratings. Securities with ratings of "BBB" or higher are
commonly referred to as "investment grade" securities; and
o we seek to have a minimum weighted average rating for our portfolio
of at least "A" by S&P.
We acquire both adjustable-rate and fixed-rate securities. Adjustable-rate
investment securities have interest rates that adjust periodically based upon
changes in an objective index of short-term interest rates, such as London
Interbank Offered Rate, or LIBOR, or a U.S. Treasury index. On December 31,
2003, approximately 73% of our investment securities were adjustable-rate
securities and approximately 27% were fixed-rate securities.
BORROWINGS
We borrow money primarily through repurchase agreements using our
investment securities as collateral. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 to 12:1, although the ratio may vary from time to
time depending upon market conditions and other factors our management deems
relevant. At December 31, 2003, our debt-to-equity ratio was 9.6:1.
We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate investment securities. Nevertheless, the interest rates on our
borrowings generally adjust more frequently than the interest rates on our
investment securities. In addition, our fixed-rate mortgage-backed securities do
not provide for any periodic rate adjustments. Accordingly, we could experience
net losses or a decrease in net profits in a period of rising interest rates.
STOCK LISTING
Our common stock is traded on the New York Stock Exchange under the symbol
"NLY."
PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER
Our principal executive offices are located at 1211 Avenue of the
Americas, Suite 2902, New York, New York 10036. Our telephone number is (212)
696-0100.
47
--------------------------------------------------------------------------------
BUSINESS OF FIDAC
--------------------------------------------------------------------------------
FIDAC, a registered investment advisor, conducts a fee-based asset
management business with a global distribution reach. At December 31, 2003,
FIDAC managed or assisted in the management of approximately $13.6 billion in
gross assets for both domestic and offshore clients. FIDAC's principle business
objective is to build assets under management in existing and future products
primarily through relationships with distribution partners and, to a lesser
extent, direct sales. FIDAC has elected to, and believes that it is organized
and has operated in a manner that enables it to, be taxed as an S-corporation
under the Code. FIDAC is a Delaware corporation that commenced operations in
1994. Following the completion of the acquisition, we and FIDAC will make an
election to treat FIDAC as a taxable REIT subsidiary. FIDAC generally receives
annual net investment advisory fees of approximately 10-15 basis points of the
gross assets it manages, assists in managing or supervises.
ASSETS
On behalf of its clients, FIDAC invests primarily in mortgage-backed
securities issued by U.S. government agencies, investment securities where a
government agency or federally chartered corporation, such as Freddie Mac,
Fannie Mae, Ginnie Mae or the FHLB, guarantees payments of principal or interest
on the certificates. Although not rated, these agency certificates carry an
implied "AAA" rating.
The assets FIDAC invests in on behalf of its clients fit into three basic
categories with different levels of volatility: monthly agency floaters,
adjustable rate securities and fixed rate pass through securities.
LEVERAGE
FIDAC uses leverage as a strategy to increase the return or the
investments of its clients. To manage the risks associated with leverage, FIDAC
uses the following strategies:
o Leveraging only liquid assets that are easily priced and have well
defined active markets;
o Diversifying counterparty risk by maintaining credit relationships
and open financing lines with many high quality lenders; and
o Utilizing and maintaining optimal levels of leverage to protect
against margin calls.
INVESTMENT ADVISORY SERVICES
FIDAC is a registered investment advisor and serves as an investment
advisor for a number of funds worldwide and for investment vehicles for
endowments and municipal entities. FIDAC's current investment strategy is to
invest in agency securities that carry an actual or implied AAA rating and to
use leverage to increase the return to investors. FIDAC may use
48
different investment strategies in the future. FIDAC generally aims to deliver
high current income and low net asset value volatility.
Accounts managed by FIDAC must have a $100 million minimum net worth and a
$2.5 million annual income, and must make a $20 million minimum equity deposit
with FIDAC.
CONSULTING SERVICES
FIDAC provides independent pricing for fixed income securities and other
assets.
PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER
FIDAC's principal executive offices are located at 1211 Avenue of the
Americas, Suite 2902, New York, New York 10036. Our telephone number is (212)
696-0100.
49
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FIDAC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
OVERVIEW
Fixed Income Discount Advisory Company, Inc., or FIDAC, was organized in
the State of Delaware by Michael A.J. Farrell, our Chairman of the Board, Chief
Executive Officer, President and director, and commenced operations in 1994.
FIDAC provides investment advisory services to domestic and offshore funds and
high net-worth individual and institutional clients pursuant to investment
management agreements by and between FIDAC and its clients. FIDAC also provides
accounting and valuation services to certain of its clients. FIDAC is a
registered investment adviser with the SEC.
FIDAC's principal business is providing investment management services to
institutions, investment funds and individuals. FIDAC also sponsors funds
distributed through third-party broker/dealers, financial institutions and
investment advisers.
FIDAC's revenue is primarily derived from investment adviser,
administration and service fees received from the FIDAC funds and investment
adviser fees received from separate investment portfolios and funds. Fees paid
to FIDAC are based primarily on the value of the investment portfolios and funds
managed by FIDAC and fluctuate with changes in the total value of the gross
assets under management. These fees are recognized over the period that these
gross assets are managed by FIDAC. FIDAC's major expense is employee
compensation.
FIDAC's discussion and analysis of its financial condition and results of
operations are based upon FIDAC's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States, or GAAP. The preparation of these financial statements requires
FIDAC to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosures of contingent
assets and liabilities. On an ongoing basis, FIDAC evaluates its estimates,
including those related to investments, deferred sales commissions, intangible
assets and income taxes. FIDAC bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under current
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily available
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
ASSETS UNDER MANAGEMENT
FIDAC's gross assets under management were $13.6 billion on December 31,
2003 which represents an approximately 86% increase over the $7.3 billion under
management on December 31, 2002. The increase was due to asset growth and
successful fund offerings. Gross assets under management on December 31, 2002
were $7.3 billion, which is an increase of approximately 143% from the $3
billion under management on December 31, 2001.
50
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations is based on the amounts reported in FIDAC's financial statements.
These financial statements are prepared in accordance with GAAP. In preparing
the financial statements, management is required to make various judgments,
estimates and assumptions that affect the reported amounts. Changes in these
estimates and assumptions could have a material effect our financial statements.
The following is a summary FIDAC's policies that is the most affected by
management's judgments, estimates and assumptions.
RECOGNITION OF INCOME - FIDAC earns investment advisory fees based on a
percentage of gross asset, repurchase agreement balances, or net assets in the
clients' portfolios and funds for which FIDAC provides investment advisory
services. These fees are recognized in the period such service is provided. The
fees are generally accrued and paid monthly in arrears.
RESULTS OF OPERATIONS
NET INCOME SUMMARY
FIDAC, since inception, has elected to be taxed as an S-corporation
election. Year end distributions are made in the form of compensation or
stockholder's distributions. Therefore, net income is usually minimal and not
the best indication of the performance of FIDAC.
NET INCOME SUMMARY
(dollars in the thousands)
For the years
ended December 31,
--------------------------------
2003 2002 2001
------- ------- -------
STATEMENT OF OPERATING DATA:
Investment advisory and service fees ...... $13,879 $ 6,122 $ 1,943
Interest income ........................... 16 16 6
Loss on investment ........................ -- (21) --
------- ------- -------
Total income .............................. 13,895 6,117 1,949
General and administrative expenses ....... 13,626 3,449 1,079
------- ------- -------
Net income before taxes ................... 269 2,668 870
Income taxes .............................. 207 251 91
------- ------- -------
Net income ................................ $ 62 $ 2,417 $ 779
======= ======= =======
BALANCE SHEET DATA:
Cash and Cash Equivalents ................. $ 600 $ 162 $ 312
Fees receivable ........................... 1,633 670 728
Other assets .............................. 568 85 60
Total assets .............................. 2,801 917 1,100
Total liabilities ......................... 1,206 893 275
Total Stockholders' equity ................ 1,595 24 825
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INVESTMENT ADVISORY AND SERVICE FEES
For the years ended December 31, 2003, 2002, and 2001, FIDAC's investment
advisory and service fees totaled $13.9 million, $6.1 million, and $1.9 million.
FIDAC's revenue is derived from fees it receives from investment advisory
contracts with its clients. Under these contracts, the investment advisory fee
FIDAC receives is typically based on the market value of gross assets under
management. The gross assets under management at December 31, 2003, 2002, and
2001 were $13.6 billion, $7.3 billion, and $3.0 billion. For the year ended
December 31, 2003, fee income increased by $7.8 million and gross assets under
management increased by $6.3 billion, with the introduction of three new funds
and the growth in existing funds. For the year ended December 31, 2002, fee
income increased by $4.2 million and gross assets under management increased by
$4.3 billion. This increase also was the result of the introduction of new funds
and substantial growth in the existing fund.
GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended December 31, 2003, 2002, and 2001, general and
administrative expenses, or G&A expenses, totaled $13.6 million, $3.4 million,
and $1.1 million. The majority of the G&A expenses is compensation. Compensation
totaled $13.0 million, $2.7 million, and $886,000 for the years ended December
31, 2003, 2002, and 2001. FIDAC has elected to be taxed as an S-corporation
since its inception. At the end of each taxable year, earnings are distributed
in the form of cash compensation or distributions of capital. For the year ended
December 31, 2003, compensation expenses increased $10.3 million as compared to
December 31, 2002. Of the $10.3 million, $3.3 million was a common stock grant
in the form of compensation to employees of FIDAC. In addition to the grant of
common stock, compensation increased based on FIDAC's increased revenue stream.
Compensation expenses increased by $1.8 million for the year ended December 31,
2002 as compared to the year ended December 31, 2001.
LIQUIDITY
The following table summarizes the effect on FIDAC's liquidity and cash
flows from contractual obligations at December 31, 2003. FIDAC is not a party to
our non-cancelable office lease.
2004 2005 2006 2007 2008 Thereafter
---- ---- ---- ---- ---- ----------
(dollars in thousands)
Contractual obligations 0 0 0 0 0 0
Long-term lease obligations 0 0 0 0 0 0
Total 0 0 0 0 0 0
OFF-BALANCE SHEET ARRANGEMENTS
FIDAC does not invest in any off-balance sheet vehicles that provide
financing, liquidity, market or credit risk support or engage in any leasing
activities that expose FIDAC to any liability that is not reflected in the
Consolidated Financial Statements.
52
STOCKHOLDERS' EQUITY
Total stockholders' equity was $1.6 million, $24,000 and $825,000 at
December 31, 2003, 2002, and 2001. The distribution of common stock to FIDAC
employees in 2003 represented 20% of the value of FIDAC as of March 31, 2003, or
$3.3 million. In the absence of a readily ascertainable market value, management
based its estimated value on an independent valuation of FIDAC performed by a
third party. The increase in stockholders' equity at December 31, 2003 was
partially offset by the stockholders' distributions for the year of $1.8
million.
INCOME TAXES
For federal and state income tax purposes, FIDAC has elected to be taxed
as an S-corporation. As an S-corporation, FIDAC is not subject to federal income
tax but rather the shareholders of FIDAC are subject to tax directly on their
allocable share of taxable income. An S-corporation may be subject to state and
local taxes based upon the particular rules of the state and local jurisdiction.
FIDAC is subject to certain state and local taxes. The tax provision for state
and local taxes for the years ended December 31, 2003, 2002, and 2001 was
$91,000, $251,000, and $207,000, respectively.
53
--------------------------------------------------------------------------------
THE FIDAC ACQUISITION
--------------------------------------------------------------------------------
THE DISCUSSION IN THIS PROXY STATEMENT/PROSPECTUS OF THE FIDAC ACQUISITION
AND THE PRINCIPAL TERMS OF THE MERGER AGREEMENT IS SUBJECT TO, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO, THE MERGER AGREEMENT, A COPY OF WHICH IS
ATTACHED AS ANNEX A TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS.
GENERAL DESCRIPTION OF THE ACQUISITION
Pursuant to the merger agreement, Merger Sub, our wholly owned subsidiary
created solely for the purpose of effectuating the acquisition, will merge with
and into FIDAC. As a result of the acquisition, Merger Sub will cease to exist
and FIDAC will survive the acquisition and will operate as our wholly owned
subsidiary. Upon the consummation of the acquisition, FIDAC shareholders will
receive 2,935 shares of our common stock for each share of FIDAC common stock
they own. In the aggregate, approximately 2,201,080 shares of our common stock
will be issued in connection with the completion of the acquisition. Upon
completion of the acquisition, former FIDAC shareholders will hold approximately
2% of the economic interest and total voting power of our stockholders. In
addition, FIDAC shareholders will receive the right to receive additional shares
of our stock worth up to $49,500,000, upon the achievement by FIDAC of specific
performance goals for fiscal years 2004, 2005 and 2006. The number of additional
shares, if any, to be issued to the FIDAC shareholders cannot be determined at
this time because it will vary depending upon whether and the extent to which
FIDAC achieves specific performance goals. Even if FIDAC achieves specific
performance goals for a fiscal year, the number of additional shares to be
issued to the FIDAC shareholders will vary depending on our average share price
for the first 20 trading days of the following fiscal year.
BACKGROUND OF THE ACQUISITION
Michael A.J. Farrell, our Chairman, Chief Executive Officer and President,
founded FIDAC in 1994. Michael A.J. Farrell serves as Chief Executive Officer
and President of FIDAC. Wellington J. Denahan, our Vice Chairman and Chief
Investment Officer, serves as Executive Vice President and Chief Investment
Officer of FIDAC. Jennifer S. Karve, our Executive Vice President and Secretary,
serves as Executive Vice President and Portfolio Manager of FIDAC. Kathryn F.
Fagan, our Chief Financial Officer and Treasurer, serves as Chief Financial
Officer and Treasurer of FIDAC. Rose-Marie Lyght serves as a Vice President of
both us and FIDAC. Jeremy Diamond and Ronald D. Kazel each serve as an Executive
Vice President of both us and FIDAC. Kristopher R. Konrad and James P. Fortescue
each serve as a Senior Vice President of both us and FIDAC. All of FIDAC's
shareholders serve as our directors, officers or employees. We and FIDAC have
shared office space since 1997 pursuant to a facilities sharing arrangement
agreement.
Michael A.J. Farrell, on behalf of FIDAC, approached us in late 2002 about
his possible sale of FIDAC and the possibility of our acquiring FIDAC rather
than selling FIDAC to a third party. Our board of directors formed a special
committee of independent directors to consider this matter and the special
committee retained independent counsel and Lehman Brothers to act as its
financial advisor in connection with the proposed acquisition. Following due
diligence and
54
negotiations between the special committee and representatives of FIDAC, the
special committee recommended that we acquire FIDAC.
At a meeting on December 16, 2002, the independent directors of our board
of directors discussed the desirability of our possibly acquiring FIDAC. The
independent directors agreed that a resolution be submitted to the board of
directors authorizing the formation of a special committee of independent
directors to, among other things, consider, evaluate and negotiate the terms of
the potential acquisition of FIDAC. The independent directors agreed that the
special committee be authorized to take such actions, at our expense, including
engaging financial advisors and counsel as the special committee deemed
necessary or appropriate to consider, evaluate and negotiate the terms of the
potential acquisition of FIDAC.
In December 2002, the board of directors authorized the formation of a
special committee of independent directors to consider, evaluate and negotiate
the terms of the potential acquisition of FIDAC and, if an acquisition was
agreed to and recommended by the special committee and the board of directors,
to submit the potential acquisition to our stockholders for their approval.
Spencer Browne, Kevin Brady, Jonathan Green, John Lambiase and Donnell Segalas,
our independent directors, were appointed to the special committee.
In February 2003, the special committee retained independent counsel.
At its meeting on February 20, 2003, the special committee discussed their
responsibilities as independent directors in considering the potential
acquisition of FIDAC. The special committee discussed retaining a financial
advisor and authorized its counsel to contact the candidates for financial
advisor identified by the special committee.
In March 2003, the special committee received preliminary information
regarding FIDAC. At its meeting on March 25, 2003, the special committee
determined that it would treat the information regarding FIDAC as a proposal to
acquire FIDAC and agreed to engage a financial advisor to assist the special
committee in evaluating the potential acquisition of FIDAC.
In March and April 2003, the counsel to the special committee contacted
the financial advisor candidates identified by the special committee regarding
representing the special committee in connection with the potential acquisition
of FIDAC.
In April 2003, the special committee interviewed candidates for financial
advisors. On May 19, 2003, the special committee engaged Lehman Brothers as its
financial advisor.
On July 11, 2003, a due diligence session in connection with our potential
acquisition of FIDAC was held and attended by a member of the special committee,
FIDAC shareholders and counsel and financial advisors to each of the special
committee and FIDAC. The attendees discussed FIDAC's business and strategic
development, client servicing, investment process, finances, technology and
systems and legal, tax and regulatory matters.
At its meeting on August 5, 2003, the special committee unanimously agreed
that it would be in the best interests of us and our stockholders for us to
acquire FIDAC if the acquisition can be consummated on acceptable terms and
conditions. At this meeting, Lehman Brothers presented information regarding:
55
o the mortgage REIT market and the investment advisor market;
o recent asset management mergers and acquisitions (including
analysis of market reaction, retention payments and comparable
companies and transactions);
o an overview of FIDAC;
o a valuation of FIDAC as a standalone entity;
o an overview of us; and
o structural and other issues to be considered by the special
committee in connection with the possible acquisition.
At its meeting on August 25, 2003, the special committee received
supplemental information from Lehman Brothers, based on comments and questions
from the special committee, relating to the possible acquisition of FIDAC. The
special committee discussed the importance of trying to structure a transaction
that is tax-free, accretive to us and priced correctly.
At its meeting on September 16, 2003, the special committee discussed the
effect of our financial results on the preliminary valuation analysis of us, and
potentially on FIDAC, and directed Lehman Brothers to review its preliminary
valuations in connection with our potential acquisition of FIDAC. Donnell
Segalas, a member of the special committee, informed the special committee of
his intent to recuse himself from voting on any matters related to the possible
acquisition of FIDAC due to his possible appointment as one of our executives.
At its meeting on October 15, 2003, the special committee heard an updated
report prepared by Lehman Brothers regarding the investment advisor market, the
revised valuation of us, an updated overview of FIDAC, a valuation of FIDAC as a
standalone entity, and an overview of pricing and other considerations to be
considered by the special committee. The meeting was reconvened on October 17,
2003. The members of the special committee, except for Donnell Segalas who
recused himself, agreed to present an acquisition proposal to FIDAC, including a
stock-for-stock acquisition and the payment of a percentage of the acquisition
consideration based upon the achievement of certain performance targets, and
directed its advisors to undertake the necessary work.
On November 13, 2003, Lehman Brothers received a counter-proposal for our
acquisition of FIDAC from RBC Capital Markets, or RBC, financial advisor to
FIDAC.
At its meeting on November 25, 2003, the special committee discussed
FIDAC's counter-proposal regarding our potential acquisition of FIDAC. Lehman
Brothers presented information regarding:
o the investment advisor market;
o revised valuation of us;
56
o updated overview of FIDAC;
o valuation of FIDAC as a standalone entity; and
o an overview of pricing and other considerations to be
considered by the special committee in connection with the
possible acquisition.
The special committee agreed to resubmit its initial acquisition proposal
to FIDAC after consultation with the two members of the special committee who
did not attend the meeting. On December 3, 2003, after the special committee
received the approval of the two members of the special committee who did not
attend the meeting, Lehman Brothers resubmitted the special committee's initial
acquisition proposal to RBC.
On December 5, 2003, a member of the special committee, FIDAC shareholders
and counsel and financial advisors to each of the special committee and FIDAC
met to discuss our proposed acquisition of FIDAC. The attendees discussed
valuations of us and FIDAC and the structure of our proposed acquisition of
FIDAC, including the payment of less than fifty percent of the consideration
upon completion of the acquisition, with the remainder to be paid upon the
achievement by FIDAC of specific performance targets following the acquisition.
On December 8, 2003, Lehman Brothers received a second counter-proposal
for our acquisition of FIDAC from RBC.
At its meeting on December 9, 2003, the special committee reviewed FIDAC's
counter-proposal. Lehman Brothers presented information regarding:
o asset management companies comparable to FIDAC;
o revised projections of gross assets under management by FIDAC
supplied by FIDAC;
o a valuation of FIDAC as a standalone entity;
o key terms included in the various acquisition proposals made
by us and FIDAC;
o compensation and salary projections for the FIDAC shareholders
for both before and following the proposed acquisition; and
o the potential accretion/dilution effect on us of different
pricing structures.
The members of the special committee, except for Donnell Segalas who
recused himself, agreed to submit a revised counter-proposal to FIDAC. On
December 10, 2003, Lehman Brothers delivered a revised counter-proposal to RBC
which included the payment of less than fifty percent of the total
consideration, including any amount to be paid as an earn-out, upon completion
of the acquisition.
On December 15, 2003, Lehman Brothers received a third counter-proposal
for our acquisition of FIDAC from RBC.
57
At a joint meeting of our board of directors and the special committee on
December 30, 2003, Lehman Brothers presented information regarding:
o the financial information reviewed and analyzed by Lehman
Brothers in evaluating the fairness to us of the consideration
to be paid by us in the acquisition;
o a summary of the terms of our proposed acquisition of FIDAC;
o the potential pro forma impact on us of our proposed
acquisition of FIDAC, including the potential effect on
earnings per share of our common stock;
o valuation analysis, including analysis of consideration to be
paid after the completion of the acquisition if and to the
extent that FIDAC achieves specific performance targets;
o an update on the asset manager and mortgage REIT markets;
o valuation of FIDAC as a standalone entity, including projected
results treating FIDAC as a taxable C-corporation, equity
payouts by FIDAC and compensation analysis; and
o an overview of FIDAC, including historical financial
statements, a comparison of initial projections and revised
projections, key investment advisory relations and gross
assets under management.
The members of the special committee, except Donnell Segalas who recused
himself, after due consideration:
o determined that it is advisable and in the best interests of our
stockholders to approve the merger agreement, subject to the special
committee's receipt of the opinion of Lehman Brothers that, as of
the date of the merger agreement, and based upon and subject to the
factors and assumptions set forth in the opinion, the consideration
to be paid by us to the FIDAC shareholders is fair to us from a
financial point of view;
o approved our acquisition of FIDAC and approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement; and
o recommended to the board of directors that the board of directors
adopt, and recommend that the stockholders approve, our acquisition
of FIDAC and the merger agreement.
58
The members of the board of directors, except Donnell Segalas who recused
himself and Michael A.J. Farrell and Wellington J. Denahan who did not attend,
after due consideration:
o determined that the merger agreement, the acquisition and the other
transactions contemplated by the merger agreement are advisable and
in the best interests of us and our stockholders;
o approved our acquisition of FIDAC and approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement;
o directed that the merger agreement be submitted to a vote at a
meeting of our stockholders; and
o recommended that our stockholders approve the merger agreement.
On December 31, 2003, the special committee received the opinion of Lehman
Brothers that, as of December 31, 2003, and based upon and subject to the
factors and assumptions set forth in the opinion, the consideration to be paid
by us to the FIDAC shareholders is fair to us from a financial point of view
(the written opinion of Lehman Brothers is attached as Annex B to this proxy
statement/prospectus). We, FIDAC, Merger Sub and the FIDAC shareholders executed
the merger agreement as of December 31, 2003.
At its meeting on January 1, 2004, the special committee reviewed the
merger agreement as executed. The members of the special committee, except
Donnell Segalas who recused himself, confirmed, ratified and approved the
resolutions adopted by the special committee at the joint meeting of the special
committee and the board of directors held on December 30, 2003, and confirmed,
ratified and approved in all respects the merger agreement as executed.
In reaching their conclusions, the special committee considered a number
of positive and negative factors, including the following, no one of which was
determinative.
OUR REASONS FOR THE ACQUISITION
The following discussion of the information and factors considered by the
special committee and our board of directors is not intended to be exhaustive,
but includes all material factors considered by the special committee and the
board of directors.
OUR SPECIAL COMMITTEE
In reaching its decision to approve the terms of the merger agreement and
the transactions contemplated by the merger agreement and to recommend that our
board of directors approve the merger agreement and the transactions
contemplated by the merger agreement and declare the advisability of the same,
the special committee consulted with our management as well as its legal counsel
and financial advisor and carefully considered the following material factors,
no one of which was determinative:
59
o the similar investment strategies of us and FIDAC and the
expectation that the transaction will increase our gross assets
under management and will enable us to take advantage of new
opportunities for growth;
o the potential for the transaction to broaden our investor base,
thereby improving our visibility and market presence and enhancing
our overall growth opportunities;
o the expectation that the acquisition would be accretive to our
earnings and book value;
o the fact that the acquisition would alleviate some of the potential
conflicts of interest arising from the management and ownership of
FIDAC by our officers, directors and employees;
o that following the acquisition we would increase our visibility in
the marketplace, which could generate greater research coverage and
institutional investment as well as potentially increase the trading
volume of shares of our common stock;
o the terms and conditions of the merger agreement, including our
right under specific conditions to terminate the merger agreement if
the special committee or our board of directors withdraws, or
resolves to withdraw, its approval or recommendation of the merger
agreement or the acquisition;
o the analysis and presentation of Lehman Brothers and the opinion of
Lehman Brothers that, as of December 31, 2003, and based upon and
subject to the factors and assumptions set forth in the opinion, the
consideration to be paid by us to the FIDAC shareholders is fair to
us from a financial point of view (the written opinion of Lehman
Brothers is attached as Annex B to this proxy statement/prospectus);
and
o the likelihood that the transactions contemplated by the merger
agreement would be successfully completed.
The special committee considered the following negative factors relating
to the acquisition:
o the uncertainty regarding how the acquisition would affect the
trading in our common stock;
o the risk that our stockholders might view us as a different and less
desirable investment vehicle for their capital;
o the risk that FIDAC's present and potential clients might view the
management of their assets by the subsidiary of a public company, as
FIDAC will be upon completion of the acquisition, as not desirable;
and
60
o the timing of receipt and the terms of approvals from appropriate
government entities, including the possibility of delay in obtaining
satisfactory approvals or the imposition of unfavorable terms or
conditions in the approvals.
The special committee also considered the following factors relating to
the acquisition:
o review and analysis of FIDAC's business, financial condition,
earnings, risks and prospects;
o comparisons of historical financial measures for us and FIDAC,
including earnings, return on capital and cash flow, and comparisons
of historical operational measures for us and FIDAC;
o current industry, economic and market conditions and their potential
effect on our investor based and on FIDAC's business and strategies;
and
o the interests that certain of our executive officers, directors and
employees may have with respect to the acquisition. See "-Interests
of Certain Persons in the Acquisition."
This discussion of the information and factors that the special committee
considered in making its decision is not intended to be exhaustive but includes
all material factors considered by the special committee. In view of the wide
variety of factors considered in connection with its evaluation of the
acquisition and the complexity of those matters, the special committee did not
find it useful to, and did not attempt to, quantify, rank or otherwise assign
relative weights to these factors. In addition, the individual members of the
special committee may have given different weights to different factors.
The special committee believed that, overall, the positive factors of the
acquisition to us and our stockholders substantially outweighed the risks
related to the acquisition. As a result, the special committee recommended to
our board of directors that the merger agreement and the transactions
contemplated by the merger agreement be adopted and approved and, if adopted and
approved by our board of directors, that the merger agreement be submitted to
our stockholders for their approval.
BOARD OF DIRECTORS
In reaching its decision to approve and adopt the merger agreement and the
transactions contemplated by the merger agreement, and recommend that
stockholders approve the merger agreement, our board of directors consulted with
our management, as well as with the special committee's legal counsel and with
Lehman Brothers, financial advisor to the special committee, and carefully
considered the following material factors:
o the conclusions and recommendation of the special committee;
o the factors referred to above as having been taken into account by
the special committee; and
61
o our directors having received the opinion of Lehman Brothers that,
as of December 31, 2003, and based upon and subject to the factors
and assumptions set forth in the opinion, the consideration to be
paid by us to FIDAC shareholders in the acquisition is fair from a
financial point of view to us (the written opinion of Lehman
Brothers is attached as Annex B to this proxy statement/prospectus).
This discussion of the information and factors that our board of directors
considered in making its decision is not intended to be exhaustive but includes
all material factors considered by our board of directors. In view of the wide
variety of factors considered in connection with its evaluation of the
transaction and the complexity of those matters, our board of directors did not
find it useful to, and did not attempt to, quantify, rank or otherwise assign
relative weights to these factors. In addition, the individual members of our
board of directors may have given different weight to different factors.
Our board of directors believed that, overall, the potential benefits of
the transaction to us and our stockholders outweighed the risks.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND OUR BOARD OF DIRECTORS
At its meeting on December 30, 2003, the special committee, except Mr.
Donnell Segalas who recused himself, after due consideration:
o determined that it is advisable and in the best interests of our
stockholders to approve the merger agreement, subject to the special
committee's receipt of the opinion of Lehman Brothers that, as of
the date of the merger agreement, and based upon and subject to the
factors and assumptions set forth in the opinion, the consideration
to be paid by us to the FIDAC shareholders in the acquisition is
fair to us from a financial point of view;
o approved our acquisition of FIDAC and approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement; and
o recommended to the board of directors that the board of directors
adopt, and recommend that the stockholders approve the merger
agreement.
At its meeting on December 30, 2003, the members of the board of
directors, except Donnell Segalas who recused himself and Michael A.J. Farrell
and Wellington J. Denahan who did not attend, after due consideration:
o determined that the merger agreement, the acquisition and the other
transactions contemplated by the merger agreement are advisable and
in the best interests of us and our stockholders;
o approved our acquisition of FIDAC and approved and adopted the
merger agreement and the transactions contemplated by the merger
agreement;
62
o directed that the merger agreement be submitted to a vote at a
meeting of our stockholders; and
o recommended that our stockholders approve the merger agreement.
OUR BOARD OF DIRECTORS RECOMMENDS THAT HOLDERS OF OUR COMMON STOCK VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT.
Two of our directors and certain of our officers and employees will
receive financial and other benefits in connection with the acquisition. For a
discussion of the interests of certain persons in the acquisition, see
"--Interests of Certain Persons in the Acquisition."
CERTAIN FINANCIAL PROJECTIONS
We do not make, as a matter of course, public forecasts or projections as
to future revenues, earnings, or other financial statement data. However, in
connection with the discussions concerning the proposed transaction, in 2003
members of our management and FIDAC management furnished to our board of
directors and the special committee as well as to Lehman Brothers certain
projected financial data for the 2004 fiscal year.
OPINION OF ANNALY MORTGAGE MANAGEMENT INC.'S FINANCIAL ADVISOR
The special committee engaged Lehman Brothers to act as its financial
advisor and render its opinion with respect to the fairness, from a financial
point of view, to us of the consideration to be paid by us in the proposed
merger. On December 31, 2003, Lehman Brothers rendered its opinion to the
special committee that as of such date, and based upon and subject to certain
matters stated in that opinion, from a financial point of view, the
consideration to be paid by us in the proposed merger was fair to us.
THE FULL TEXT OF THE LEHMAN BROTHERS OPINION IS ATTACHED AS ANNEX B TO
THIS DOCUMENT. STOCKHOLDERS MAY READ THAT OPINION FOR A DISCUSSION OF THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, FACTORS CONSIDERED AND LIMITATIONS UPON
THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN CONNECTION WITH THE RENDERING OF
THAT OPINION. THE LEHMAN BROTHERS OPINION WAS PROVIDED FOR THE INFORMATION AND
ASSISTANCE OF THE SPECIAL COMMITTEE IN CONNECTION WITH ITS CONSIDERATION OF THE
PROPOSED MERGER. THE LEHMAN BROTHERS OPINION IS NOT INTENDED TO BE AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF ANNALY AS TO HOW THAT
STOCKHOLDER SHOULD VOTE IN CONNECTION WITH THE PROPOSED MERGER. LEHMAN BROTHERS
WAS NOT REQUESTED TO OPINE AS TO, AND THE LEHMAN BROTHERS OPINION DOES NOT
ADDRESS, ANNALY'S UNDERLYING BUSINESS DECISION TO PROCEED WITH OR EFFECT THE
PROPOSED MERGER.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
o the merger agreement and the specific terms of the proposed
transaction, including the aggregate amount of compensation that
Annaly expects to pay under management contracts;
63
o publicly available information concerning Annaly that Lehman
Brothers believed to be relevant to its analysis, including Annaly's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002 and Quarterly Reports on Form 10-Q for the quarter ended June
30, 2003 and September 30, 2003;
o financial and operating information with respect to the business,
operations and prospects of FIDAC furnished to Lehman Brothers by
FIDAC, including
o certain projections of future financial performance of FIDAC
prepared by management of FIDAC and provided to Lehman
Brothers on August 12, 2003, September 16, 2003, November 13,
2003 and on November 24, 2003; and
o certain updated projections of future financial performance of
FIDAC prepared by management of FIDAC and presented to Lehman
Brothers on December 29, 2003 (the Updated Projections),
o financial and operating information with respect to the business,
operations and prospects of Annaly furnished to Lehman Brothers by
Annaly, including financial projections of Annaly prepared by
management of Annaly (the Annaly Projections);
o a trading history of Annaly common stock from December 26, 2001 to
December 29, 2003 and a comparison of that trading history with
those of other companies that Lehman Brothers deemed relevant;
o a comparison of the historical financial results and present
financial condition of FIDAC with those of other companies that
Lehman Brothers deemed relevant;
o a comparison of the historical financial results and present
financial condition of Annaly with those of other companies that
Lehman Brothers deemed relevant;
o the potential pro forma impact of the proposed merger on the future
financial performance of Annaly, including the cost savings expected
by managements of FIDAC and Annaly to result from a combination of
the businesses of FIDAC and Annaly (or Expected Cost Savings), and
the potential effect of the proposed merger on Annaly's pro forma
earnings per share, in both the scenario where the contingent merger
consideration is paid and the scenario where the contingent merger
consideration is not paid; and
o a comparison of the financial terms of the proposed merger with the
financial terms of certain other transactions that Lehman Brothers
deemed relevant.
In addition, Lehman Brothers had discussions with the managements of
Annaly and FIDAC concerning their respective businesses, operations, assets,
liabilities, financial conditions and prospects and undertook such other
studies, analyses and investigations as Lehman Brothers deemed appropriate.
64
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by Lehman
Brothers without assuming any responsibility for independent verification of
such information and further relied upon the assurances of the managements of
FIDAC and Annaly that they are not aware of any facts or circumstances that
would make such information inaccurate or misleading. With respect to the
financial projections of FIDAC, Lehman Brothers was advised by FIDAC that the
Updated Projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of FIDAC as to the
future financial performance of FIDAC and, accordingly, Lehman Brothers assumed
that FIDAC would perform on a stand alone basis substantially in accordance with
such projections. Furthermore, Lehman Brothers discussed the Updated Projections
with the management of FIDAC and the special committee, and it was agreed that
the Updated Projections were the appropriate stand alone projections for FIDAC
to use in performing Lehman Brothers' analysis. With respect to the Annaly
Projections, upon advice of Annaly, Lehman Brothers assumed that such
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Annaly as to the future
financial performance of Annaly and that Annaly would perform on a stand alone
basis substantially in accordance with such projections. For purposes of its
analysis, Lehman Brothers also considered certain projections prepared by
management of Annaly which give pro forma effect to the proposed merger
(including the reclassification of certain employees of both FIDAC and Annaly to
FIDAC and the related impact on the total compensation to be paid by Annaly and
FIDAC to their respective employees as a result of such reclassification).
Lehman Brothers discussed these pro forma projections with the management of
FIDAC and with the special committee, and it was agreed that such projections
were also appropriate to use in performing Lehman Brothers' analysis. With
respect to the Expected Cost Savings that the managements of FIDAC and Annaly
expect to result from a combination of the businesses of Annaly and FIDAC, upon
advice of FIDAC and Annaly, Lehman Brothers assumed that such cost savings will
be realized substantially in accordance with such estimates.
In arriving at its opinion, Lehman Brothers did not conduct a physical
inspection of the properties and facilities of FIDAC or Annaly and did not make
or obtain any evaluations or appraisals of the assets or liabilities of FIDAC or
Annaly. Upon advice of FIDAC and Annaly and their respective legal and
accounting advisors, Lehman Brothers assumed that (i) Annaly's organization and
intended method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code, (ii) the merger will
qualify as a reorganization under Section 368(a) of the Code, (iii) FIDAC's
organization and intended method of operation after the merger will enable it to
meet the requirements for qualification and taxation as a taxable REIT
subsidiary under the Code, and (iv) the Agreement will constitute a plan of
reorganization under Sections 354 and 361 of the Code. Lehman Brothers' opinion
necessarily was based upon market, economic and other conditions as they existed
on, and could be evaluated as of, the date of such opinion. Lehman Brothers was
not requested to opine as to, and its opinion does not in any manner address,
(i) Annaly's underlying business decision to proceed with or effect the proposed
merger or (ii) the reasonableness of the terms of the management contracts.
In connection with rendering its opinion, Lehman Brothers performed
certain financial, comparative and other analyses described below. In arriving
at its opinion, Lehman Brothers did not ascribe a specific range of value to
Annaly or FIDAC, but rather made its determination as to
65
the fairness, from a financial point of view, to Annaly of the consideration to
be paid by Annaly in the proposed merger on the basis of financial and
comparative analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the application of those methods to the particular
circumstances, and therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Lehman Brothers
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, Lehman Brothers believes that this
analyses must be considered as a whole and that considering any portion of such
analyses and factors, without considering all analyses and factors as a whole,
could create a misleading or incomplete view of the process underlying its
opinion. In its analyses, Lehman Brothers made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Annaly and FIDAC. None of
Annaly, FIDAC, Lehman Brothers or any other person assumes responsibility if
future results are materially different from those discussed. Any estimates
contained in these analyses were not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.
The following is a summary of the material financial analyses used by
Lehman Brothers in connection with providing its opinion to the special
committee. Certain of the summaries of financial analyses include information
presented in tabular format. In order to fully understand the financial analyses
used by Lehman Brothers, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Accordingly, the analyses listed in the tables and described
below must be considered as a whole. Considering any portion of such analyses
and of the factors considered, without considering all analyses and factors,
could create a misleading or incomplete view of the process underlying the
Lehman Brothers opinion.
STOCK TRADING HISTORY
Lehman Brothers considered historical data with regard to the trading
price of Annaly common stock for the period from December 28, 2001 to December
29, 2003 and the relative stock price performances of a mortgage REIT composite
consisting of:
- Anworth Mortgage Asset Corp.;
- Apex Mortgage Capital, Inc.;
- Capstead Mortgage Corp.;
- Friedman Billings Ramsey Group, Inc.;
- Impac Mortgage Holdings, Inc.;
- MFA Mortgage Investments;
- NovaStar Financial, Inc.;
- Redwood Trust, Inc.;
- Thornburg Mortgage Inc.
66
During the period from December 28, 2001 to December 29, 2003, the closing
price of Annaly common stock ranged from $15.56 to $21.15. Lehman Brothers
compared this price range to the price range for the mortgage REIT composite as
part of its evaluation of the fairness of the consideration to be paid.
Because FIDAC is a privately held company, an analysis of its trading
history was not possible.
CALCULATION OF TRANSACTION VALUE
Lehman Brothers reviewed the terms of the merger agreement. They noted
that the initial consideration of $40.5 million of Annaly common stock for 100%
of the shares of FIDAC common stock implied an issuance of 2,179,763 shares of
Annaly common stock based upon the closing price of Annaly common stock of
$18.58 on Tuesday, December 30, 2003. Lehman Brothers also performed an analysis
of the total consideration to be paid under the terms of the earn out agreement
assuming various revenue and pre-tax margin levels. Lehman Brothers also noted
the range of multiples of pre-tax earnings implied by such total consideration
amounts.
--------------------------------------------------------------------------------
$40.5 Million Paid At Close/Maximum of $49.5 Million Paid as Earn-Out
--------------------------------------------------------------------------------
($ IN MILLIONS)
Targets Implied Multiple
---------------- of Pre-Tax
Pre-Tax Implied Pre-Tax Earnings Cumulative Earn Out Payments Cumulative Total Payments Earnings at
Year Ended Revenue Margin at 80%-100% of Targets to Date at 80%-100%(1) to Date at 80%-100%(2) at 80%-100%
---------- ------- ------ ---------------------- ---------------------- ---------------------- ----------------
12/31/2004 $24.8 40% $7.94 - $9.92 $18.22 - $22.77 $58.72 - $63.27 7.4x - 6.4x
12/31/2005 $36.7 40% $11.74 - $14.68 $28.91 - $36.14 $69.41 - $76.64 5.9x - 5.2x
12/31/2006 $41.4 40% $13.25 - $16.56 $39.60 - $49.50 $80.10 - $90.00 6.0x - 5.4x
------------------------------------------------------------------------------------------------------------------------------------
1. The earn out structure calls for a Year 1 payment of $22.77 million and
Year 2 and 3 payments of $13.365 million if 100% of each year's earn out
target is reached.
2. Cumulative total payments to date include the initial consideration of
$40.5 million paid at closing.
PRO FORMA FINANCIAL IMPACT
Lehman Brothers performed an illustrative pro forma analysis of the
financial impact of the merger on Annaly, using Annaly management's earnings
estimates for Annaly for 2004. Lehman Brothers performed this analysis with two
Annaly share count assumptions, the first assumed Annaly management's projected
share count and the second assumed Annaly's issuance of an additional 15 million
shares prior to December 31, 2003. In each case all of the following assumptions
remained the same. Net income growth rates after 2004 were assumed to be 5% for
Annaly, based on Annaly management's estimates. Lehman Brothers used FIDAC
management's financial projections for FIDAC incorporating the potential pro
forma impact of the proposed merger on the future financial performance of
Annaly and FIDAC, including the cost savings expected by managements of FIDAC
and Annaly to result from a combination of the businesses of FIDAC and Annaly,
as well as certain projections prepared by the management of Annaly which give
pro forma effect to the proposed merger (including the reclassification of
certain employees of both FIDAC and Annaly to FIDAC and the related impact on
total compensation to be paid by Annaly and FIDAC to their respective employees
as a result of such
67
reclassification). In calculating the impact of the proposed merger on the pro
forma income statement of the combined entity, the following assumptions were
made: (i) the consideration paid to FIDAC shareholders in the proposed merger
would be $40.5 million in 2004, $22.77 million in 2005, $13.365 million in 2006,
and $13.365 million in 2007; (ii) Lehman Brothers calculated the implied price
to 2004 earnings multiple for Annaly based upon Annaly's closing stock price on
December 30, 2003 and Annaly management's earnings estimate for 2004, they then
applied this multiple to the Annaly earnings estimates for 2004, 2005 and 2006
provided by the management of Annaly to arrive at a price per Annaly share used
to calculate the number of shares issued as consideration in each year, and;
(iii) capital generated by the taxable REIT subsidiary would be reinvested by
the REIT with an assumed rate of return of 9%. Based on these assumptions and
under each of the share count assumptions, the illustrative pro forma analyses
indicated that the proposed merger would be accretive to Annaly earnings per
share in 2004, 2005 and 2006.
ASSUMING PROJECTED SHARE COUNT
--------------------------------------------------------------------------------
$40.5 Million Paid At Close/$49.5 Million as Earn-Out
--------------------------------------------------------------------------------
($ IN THOUSANDS) 2004 2005 2006
--------------------------------------------------------------------------------
TRS STANDALONE
--------------------------------------------------------------------------------
FIDAC Revenue $ 25,355 $ 37,093 $ 41,740
Implied Annaly Fee Income (12.5 bps of AUM) 16,311 16,475 16,640
Shared Expense (2,882) (3,617) (3,783)
FIDAC Salaries (Non-marketing Employees) (16,170) (21,954) (26,037)
FIDAC Salaries (Marketing Employees) (2,284) (2,723) (3,016)
All Other Expenses (654) (829) (912)
-------------------------------------------------------------------------------
FIDAC Adj. Earnings Pre Tax 19,677 24,444 24,633
-------------------------------------------------------------------------------
Tax (8,107) (10,071) (10,149)
-------------------------------------------------------------------------------
TRS Net Income $ 11,570 $ 14,373 $ 14,484
===============================================================================
NLY Standalone
===============================================================================
Annaly Shares (000's): 96,007 96,007 96,007
Annaly Projected Stand Alone EPS: $ 2.11 $ 2.21 $ 2.32
Implied Annaly Net Income: $202,190 $212,300 $222,915
REIT Investment of TRS Capital 0 1,041 2,335
Decrease in Salaries 12,562 13,656 14,852
Decrease in Shared Expenses 2,593 3,255 3,404
FIDAC Advisory Fee (12.5bps of AUM) (16,311) (16,475) (16,640)
-------------------------------------------------------------------------------
Adjusted REIT Income: $201,034 $213,777 $226,866
===============================================================================
-------------------------------------------------------------------------------
Combined Net Income $212,604 $228,150 $241,350
===============================================================================
Beginning Shares Outs. (000's) 96,007 98,186 99,408
Acquisition Shares Issued (000's) 2,180 0 0
Additional Shares Issued as Earnout: 0 1,222 683
Pro Forma Shares Outs. (000's): 98,186 99,408 100,092
Pro Forma EPS $ 2.17 $ 2.30 $ 2.41
-------------------------------------------------------------------------------
Accretion/(Dilution) 2.8% 3.8% 3.9%
$ per Share $ 0.06 $ 0.08 $ 0.09
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Annaly Standalone Per Share Dividend $ 2.11 $ 2.21 $ 2.32
Annaly ProForma Per Share Dividends $ 2.05 $ 2.15 $ 2.27
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Inputs and Assumptions
--------------------------------------------------------------------------------
Acquisition Price: $90,000
Paid at Close (45.00% of Purchase Price): 45.0% $40,500
Value of Earn Out: $49,500
Earn Out (no. of years): 3
Annual Earn Out Payment:
Year 1 $22,770
Year 2 $13,365
Year 3 $13,365
Shares Outstanding (000's): 96,007
Acquisition Shares Issued (000's): 2,180
Annaly Management Fee (% of AUM) 12.5 bps
2003 2004 2005 2006
--------- --------- --------- ---------
Estimated Purchase Price Per Share: $18.58 $18.63 $19.56 $20.54
Consensus Median EPS Estimates: 8.8x 8.8x 8.8x
NLY EPS (Rateshock Scenarios):
2003 Act Q1, Q2 & Q3 $1.50
2003E Q4 $0.38
2003E EPS: $1.88
2004E EPS: $2.11
NLY Growth Rate: 5.0%
REIT Investment of TRS Capital Return: 9.00%
68
ASSUMING ADDITIONAL 15 MILLION SHARE ISSUANCE
$40.5 Million Paid At Close/$49.5 Million as Earn-Out
--------------------------------------------------------------------------------
($ IN THOUSANDS)
--------------------------------------------------------------------------------
TRS STANDALONE 2004 2004 2006
------------------------------------------------------------------------------------
FIDAC Revenue $ 25,355 $ 37,093 $ 41,740
Implied Annaly Fee Income (12.5 bps of AUM) 16,311 16,475 16,640
Shared Expense (2,882) (3,617) (3,783)
FIDAC Salaries (Non-marketing Employees) (16,170) (21,954) (26,037)
FIDAC Salaries (Marketing Employees) (2,284) (2,723) (3,016)
All Other Expenses (654) (829) (912)
------------------------------------------------------------------------------------
FIDAC Adj. Earnings Pre Tax 19,677 24,444 24,633
------------------------------------------------------------------------------------
Tax (8,107) (10,071) (10,149)
------------------------------------------------------------------------------------
TRS Net Income $ 11,570 $ 14,373 $ 14,484
====================================================================================
NLY Standalone
====================================================================================
Annaly Shares (000's): 111,007 111,007 111,007
Annaly Projected Stand Alone EPS: $ 2.11 $ 2.21 $ 2.32
Implied Annaly Net Income: $233,780 $245,469 $257,743
REIT Investment of TRS Capital 0 1,041 2,335
Decrease in Salaries 12,562 13,656 14,852
Decrease in Shared Expenses 2,593 3,255 3,404
FIDAC Advisory Fee (12.5 bps of AUM) (16,311) (16,475) (16,640)
------------------------------------------------------------------------------------
Adjusted REIT Income: $232,624 $246,946 $261,694
====================================================================================
------------------------------------------------------------------------------------
Combined Net Income $244,194 $261,320 $276,178
====================================================================================
Beginning Shares Outs. (000's): 111,007 113,186 114,408
Acquisition Shares Issued (000's): 2,180 0 0
Additional Shares Issued as Earnout: 0 1,222 683
Pro Forma Shares Outs. (000's): 113,186 114,408 115,092
Pro Forma EPS $ 2.16 $ 2.28 $ 2.40
------------------------------------------------------------------------------------
Accretion/(Dilution) 2.4% 3.3% 3.3%
$ per Share $ 0.05 $ 0.07 $ 0.08
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Annaly Standalone Per Share Dividend $ 2.11 $ 2.21 $ 2.32
Annaly ProForma Per Share Dividend $ 2.06 $ 2.16 $ 2.27
------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Inputs and Assumptions
--------------------------------------------------------------------------------
Acquisition Price: $90,000
Paid at Close (45.00% of Purchase Price): 45.0% $40,500
Value of Earn Out: $49,500
Earn Out (no. of years): 3
Annual Earn Out Payment:
Year 1 $22,770
Year 2 $13,365
Year 3 $13,365
Shares Outstanding (000's): 96,007
Additional Equity Issued at 12/2003 (000's) 15,000
Acquisition Shares Issued (000's): 2,180
Annaly Management Fee (% of AUM) 12.5 bps
2003 2004 2005 2006
--------- --------- --------- ---------
Estimated Purchase Price Per Share: $18.58 $18.63 $19.56 $20.54
Consensus Median EPS Estimates: 8.8x 8.8x 8.8x
NLY EPS (Rateshock Scenarios):
2003 Act Q1, Q2 & Q3 $1.50
2003E Q4 $0.38
2003E EPS: $1.88
2004E EPS: $2.11
NLY Growth Rate: 5.0%
REIT Investment of TRS Capital Return: 9.00%
COMPARABLE COMPANIES ANALYSIS
In order to assess how the public market values shares of publicly traded
companies similar to FIDAC, Lehman Brothers reviewed and compared specific
financial and operating data relating to FIDAC with the public market statistics
of certain companies Lehman Brother deemed comparable and examined various
trading statistics and information. As part of this comparable companies
analysis, Lehman Brothers examined public market data including stock price
performance for the six month period that ended on December 29, 2003. Lehman
Brothers calculated and analyzed each company's current stock price to its
historical and projected earnings per share (commonly referred to as a price
earnings ratio, or P/E) and each company's enterprise value to its historical
and projected earnings before interest, taxes, depreciation and amortization
(EBITDA); and each companies enterprise value to assets under management. The
enterprise value of each company was obtained by adding its short and long term
debt to the sum of the market value of its common equity and subtracting its
cash and cash equivalents. The projected earnings per share were obtained from
I/B/E/S and the remaining information was obtained from publicly available
financial information at or for the quarter ended September 30, 2003 and SNL
Financial's online database. The stock price data used for this analysis was the
closing price for the selected companies on December 29, 2003.
In choosing comparable companies to analyze, Lehman Brothers selected
fixed income asset managers it deemed relevant. The fixed income asset managers
included: Federated Investors, BlackRock Inc., Nuveen Investments and Eaton
Vance.
Lehman Brothers selected these companies because their businesses and
operating profiles are reasonably similar to those of FIDAC. No comparable
company identified above is identical to FIDAC. A complete analysis involves
complex considerations and judgments
69
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect public trading values
of such comparable companies; mathematical analyses (such as determining the
median) is not by itself a meaningful method of using selected company data. SNL
Financial is a recognized data service that collects, standardizes and
disseminates relevant corporate, financial, market and mergers and acquisitions
data for companies in the industries it covers.
CONTINGENT CONSIDERATION IS NOT PAID PARTIAL CONTINGENT CONSIDERATION IS PAID
-----------------------------------------------------------------------------------------------
ENTERPRISE VALUE TO ENTERPRISE VALUE TO 2004 ENTERPRISE VALUE TO PRICE TO 2004
($ IN MILLIONS) 2003 ESTIMATED EBITDA STRESSED EBITDA 2004 ESTIMATED EBITDA ESTIMATED EPS
-----------------------------------------------------------------------------------------------
PEER GROUP MEDIAN RANGE 10.2x - 12.2x 9.1x - 11.1x 9.1x - 11.1x 15.2x - 17.2x
FIDAC DATA $6.0 $4.6 $9.1 $5.3
IMPLIED VALUATION $61.2 - $73.2 $41.7 - 50.9 $82.9 - $101.1 $80.0 - $ 90.6
VALUE PAID TO FIDAC
SHAREHOLDERS VS. LEVEL OF
PERFORMANCE $40.5(1) $40.5(1) $63.27(2) $63.27(2)
1. As of YE2003 and YE2004 assuming Stressed EBITDA, the Company would not
qualify for the earn out payments and so would be paid only the initial
consideration of $40.5 million.
2. These earnings multiples imply the Company has achieved its 2004 earnings
targets and so the FIDAC shareholders would be paid the initial
consideration of $40.5 million and the first earn out payment of $22.77
million for a total of $63.27 million.
Lehman Brothers considered the peer group median range of multiples of
enterprise value to 2003 estimated EBITDA and enterprise value to 2004 Stressed
EBITDA as benchmarks for valuation of FIDAC in the case that FIDAC does not
achieve its earn out targets and as a result contingent merger consideration is
not paid. 2004 Stressed EBITDA represents the EBITDA that FIDAC would earn
assuming no new equity originations beyond December 31, 2003. In these cases,
Lehman Brothers notes that the implied equity value of FIDAC ranged from $41.7
to $73.2 million.
Lehman Brothers considered the peer group median range of multiples of
enterprise value to 2004 estimated EBITDA and price to 2004 estimated earnings
per share as benchmarks for valuation of FIDAC in the case that FIDAC does
achieve its earn out targets and as a result contingent consideration is paid.
In these cases, Lehman Brothers notes that the implied equity value of FIDAC
ranged from $80.0 to $101.1 million.
However, because of the inherent differences between the mortgage
portfolio, business, operations and prospects of FIDAC and the mortgage
portfolio, business, operations and prospects of the companies included in the
peer group, Lehman Brothers believed it was inappropriate to, and therefore did
not, rely solely on the quantitative results of the comparable company analysis
and accordingly also made qualitative judgments concerning differences
70
between the financial and operating characteristics and prospects of FIDAC and
the companies included in the peer group that would affect the public trading
values of each.
DISCOUNTED CASH FLOW ANALYSIS
Lehman Brothers performed a discounted cash flow analysis to estimate a
range of the present value of FIDAC, assuming FIDAC management's earnings
estimates for FIDAC to 2006 grown at 5% thereafter. The cash flows were modeled
assuming that FIDAC continues to operate as an independent subsidiary of Annaly
and that management's estimates of one-time costs resulting from the proposed
merger are accurate. The valuation range was determined by calculating FIDAC's
earnings for each year from January 1, 2004 through December 31, 2023. The
earnings stream was then discounted back to January 1, 2004 using a discount
rate of 12.0%, which rate Lehman Brothers viewed as the appropriate range for a
company with FIDAC's risk characteristics. To this value Lehman Brothers then
applied a 10% premium and discount to arrive at a benchmarks for valuation of
FIDAC in the case that FIDAC does achieve its earn out targets and as a result
contingent consideration is paid. In this case, Lehman Brothers noted that the
implied equity value of FIDAC ranged from $89.2 to $109.0 million.
FULL CONTINGENT CONSIDERATION IS PAID
-------------------------------------
DISCOUNTED CASH FLOW
($ IN MILLIONS) (8% TERMINAL GROWTH RATE)
+ / - 10%
-------------------------------------
IMPLIED VALUATION $89.2 - $109.01
VALUE PAID TO FIDAC SHAREHOLDERS VS.
LEVEL OF PERFORMANCE $90.0
Together the comparable companies analysis and the discounted cash flow
analysis indicated a range of implied values for the increasing levels of
contingent merger consideration which assisted Lehman Brothers in considering
the fairness of the consideration to be paid by Annaly at varying levels of
FIDAC performance.
GENERAL
The special committee selected Lehman Brothers as its financial advisors
because of its reputation as an internationally recognized investment banking
and advisory firm with substantial experience in transactions similar to the
proposed merger. As part of its investment banking and financial advisory
business, Lehman Brothers is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. Lehman Brothers provides a full range of financial advisory and
securities services. Lehman Brothers and its affiliates have received fees for
the rendering of such services and, Lehman Brothers and its affiliates also may
provide such services to FIDAC, Annaly, or the combined entity and their
affiliates in the future for which it would expect to receive fees. In the
ordinary course of its business, Lehman Brothers (or its affiliates) may
actively trade the debt and equity securities of
71
Annaly or its affiliates for its own accounts or for the accounts of its
customers and, accordingly, may at any time hold or short positions in such
securities.
Under the terms of the engagement letter, dated May 13, 2003, the special
committee engaged Lehman Brothers to act as its financial advisor in connection
with the proposed merger. Pursuant to its engagement letter with Lehman
Brothers, Annaly agreed to pay Lehman Brothers a fee of $250,000 upon
engagement, a further $150,000 progress fee and $600,000 upon the delivery of
its opinion. Under this engagement letter, Annaly also agreed to reimburse
Lehman Brothers for its reasonable out of pocket expenses incurred in connection
with the engagement and to indemnify Lehman Brothers from and against certain
liabilities, including liabilities under the federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION
Some members of our management and some members of our board of directors
have interests in the acquisition that are different from or in addition to the
interests they share with you as our stockholders. The FIDAC shareholders, all
of whom are our directors, officers or employees, will be receiving shares of
our common stock as a result of the acquisition. The FIDAC shareholders also
have the right to receive additional shares of our common stock if FIDAC reaches
specific performance targets for the years 2004, 2005, and 2006, and, therefore,
the FIDAC shareholders have different interests from our other stockholders in
the performance of FIDAC. The special committee was formed because of, and our
board of directors was aware of, these different interests and considered them,
among other matters, in approving the merger agreement and the acquisition. In
addition, Michael A.J. Farrell, through his ownership of shares of FIDAC common
stock, upon completion of the transaction, will control approximately 2% of the
outstanding voting power of our common stock.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
We have structured the transaction so that it is anticipated that the
merger of Merger Sub with and into FIDAC will be a reorganization for U.S.
federal income tax purposes.
ACCOUNTING TREATMENT
The acquisition will be accounted for as a purchase of FIDAC by us using
the purchase method of accounting. We were determined to be the accounting
acquiror based on a number of factors, including, among other things, (1) that
we would have 100% of the voting rights in FIDAC and (2) that the board of
directors of FIDAC will be comprised of a majority from our board of directors.
REGULATORY MATTERS
Certain regulatory requirements imposed by U.S. regulatory authorities
must be complied with before the acquisition is completed. We and FIDAC are not
aware of any material governmental consents or approvals that are required prior
to the completion of the acquisition other than those described below. It is
possible that any of the regulatory authorities with which filings are made may
seek regulatory concessions as conditions for granting approval of the
acquisition. Under the merger agreement, we and FIDAC have each agreed to use
our
72
commercially reasonable efforts to complete the acquisition, including to gain
clearance from antitrust and competition authorities and to obtain other
required approvals.
We and FIDAC conduct operations in a number of jurisdictions where other
regulatory filings or approvals may be required or advisable in connection with
the completion of the acquisition. Under the merger agreement, we are required
to obtain these approvals prior to completing the acquisition, unless the
failure to obtain the approvals would not have a material adverse effect after
completion of the acquisition. We and FIDAC are currently reviewing whether
filings or approvals may be required or advisable in those jurisdictions that
may be material to us and FIDAC and have made or will make regulatory filings in
those jurisdictions.
Although we do not expect regulatory authorities to raise any significant
objections in connection with their review of the acquisition, we cannot assure
you that we will obtain all required regulatory approvals or that these
regulatory approvals will not contain terms, conditions or restrictions that
would be detrimental to us after the completion of the acquisition.
APPRAISAL RIGHTS
Our stockholders will not have any appraisal rights as a result of the
acquisition.
73
--------------------------------------------------------------------------------
DESCRIPTION OF THE MERGER AGREEMENT
--------------------------------------------------------------------------------
The following summaries of the transaction agreements are qualified by
reference to the complete text of the merger agreement, which is attached as
Annex A to this proxy statement/prospectus and is incorporated by reference in
this proxy statement/prospectus.
STRUCTURE OF THE ACQUISITION
We elected to acquire FIDAC by means of a merger of FIDAC into our new
subsidiary, Merger Sub. Subject to the terms and conditions of the merger
agreement, Merger Sub will be merged with and into FIDAC, with FIDAC as the
surviving corporation. The name of the surviving corporation will be Fixed
Income Discount Advisory Company. FIDAC will become our wholly owned subsidiary
as a result of the merger.
CLOSING; COMPLETION OF THE ACQUISITION
The completion of the acquisition will occur no later than the second
business day after the satisfaction or waiver of the conditions set forth in the
merger agreement or at another date or time as may be agreed to in writing by
the parties. If the merger agreement is approved at the annual meeting of our
stockholders, we and FIDAC currently expect to complete the acquisition as soon
as practicable following receipt of the approval of our stockholders.
MERGER CONSIDERATION
When the acquisition is completed, for each share of FIDAC he or she owns,
each of the FIDAC shareholders will receive approximately 2,935 shares of our
common stock, the number of shares of our common stock equal to $40.5 million
divided by the closing price of our common stock on December 31, 2003, which was
$18.40, divided by the number of shares of FIDAC common stock issued and
outstanding immediately before completion of the acquisition.
As part of the merger consideration, the FIDAC shareholders may be
entitled to additional shares of our common stock if FIDAC meets specific
performance goals. The periods during which the performance goals will be
measured are the 2004, 2005 and 2006 fiscal years. We refer to the payment of
this additional consideration as an earn-out. For each annual period, whether an
earn-out payment is due and its amount shall be determined as follows:
o in each year, the revenues and pre-tax margin of FIDAC will be
compared to specified revenue and margin targets;
o if the actual revenue and pre-tax margin equal or exceed the
targets, then a full earn-out payment for that annual period will be
due;
o if either or both of the actual results fall short of its target, a
partial payment is possible under limited circumstances. To have a
partial payment, the percentage of the revenue target achieved
multiplied by the percentage of the pre-tax margin target achieved
must equal or exceed 80%. If this product equals or exceeds 80%,
74
then a partial earn-out payment for that period will be due at a
level equal to the product of those two percentages. For example, if
the product of the percentage of revenue achieved and the percentage
of margin achieved is 85%, then an 85% payment will be due; and
o if no payment or only a partial payment is made for either the first
or second annual period, any unpaid amounts will be carried forward
and added to the amount available for payment in the next annual
period.
The total maximum value of the merger consideration for the three annual
earn-out periods is $49,500,000. Of this amount, $22,770,000 is the value for
the first annual period, $13,365,000 is the total maximum value for the second
annual period and $13,365,000 is the total maximum value of the third annual
period. The values for the second and third periods may increase if unearned
amounts are carried over from prior periods.
The number of our shares of common stock to be issued as an earn-out
payment for an annual period will be determined by dividing the value for such
period by the average volume weighted average price for our shares over the
first consecutive 20 trading days following that annual period. If only a
partial payment is due, only a portion of the value for such period will be used
in determining the number of shares.
The revenues and pre-tax margins of FIDAC will be determined on a
stand-alone basis in accordance with generally accepted accounting principles as
in effect as of the date of the completion of the acquisition and as
consistently applied by FIDAC, subject to various adjustments.
Holders of shares of FIDAC common stock will not receive certificates
representing fractional shares of our common stock issued as consideration for
the merger. Instead, each holder of shares of FIDAC common stock otherwise
entitled to a fractional share interest in our common stock will be paid an
amount in cash equal to such fractional interest multiplied by the price per
share of our common stock used to calculate the consideration paid upon
completion of the acquisition and any earn-out consideration, if any, paid upon
the achievement by FIDAC of specific performance goals for the 2004, 2005 and
2006 fiscal years.
Upon completion of the merger, the outstanding shares of FIDAC common
stock will evidence only the right to receive the merger consideration, and the
FIDAC shares will be cancelled and will cease to exist.
EXCHANGE OF STOCK CERTIFICATES FOR OUR STOCK CERTIFICATES
We have appointed Mellon Investor Services, LLC to act as exchange agent
for the purpose of paying the merger consideration. We will make available to
the exchange agent, upon or before the completion of the acquisition and upon or
before the date of payment of any additional merger consideration, if any,
shares of our common stock for that purpose.
As soon as reasonably practicable after the completion of the merger, the
exchange agent will mail to each holder of record of outstanding FIDAC common
stock, a letter of notification
75
describing (1) the merger consideration to be issued to the holder and (2) the
procedures for surrendering stock certificates in exchange for new certificates
representing our common stock.
BOARD OF DIRECTORS AND OFFICERS OF FIDAC
The directors of FIDAC immediately following completion of the acquisition
will consist of the current members of our board of directors: Kevin P. Brady,
Spencer I. Browne, Wellington J. Denahan, Michael A.J. Farrell, Jonathan D.
Green, John A. Lambiase and Donnell A. Segalas. Each of these individuals will
hold office until the earlier of the director's resignation or removal or until
a successor is duly elected and qualified, as the case may be. The officers of
FIDAC immediately prior to the completion of the merger will be the initial
officers of FIDAC following completion of the merger, each to hold office until
the earlier of the officer's resignation or removal or until a successor is duly
elected and qualified, as the case may be.
REIT QUALIFICATION
We and FIDAC will elect to treat FIDAC as a taxable REIT subsidiary
immediately following the completion of the acquisition. We will maintain
ownership of 100% of Merger Sub common stock and any other equity securities of
Merger Sub at all times prior to the completion of the merger.
REPRESENTATIONS AND WARRANTIES OF ANNALY AND FIDAC
The merger agreement contains customary representations and warranties by
each of us and FIDAC relating to, among other things:
o due organization and good standing;
o authorization to enter into the merger agreement and, subject to the
approval of our stockholders, the required stockholder approvals to
complete the merger;
o enforceability of the merger agreement;
o required governmental and third-party consents;
o no breach of organizational documents or material agreements as a
result of the merger agreement or the completion of the acquisition;
o payment of fees of brokers, finders and investment bankers; and
o capital structure.
The merger agreement also contains additional customary representations
and warranties made by FIDAC relating to, among other things:
o accuracy of information contained in financial statements;
76
o validity and enforceability of accounts receivable;
o accuracy of information contained in the documents to be filed with
the SEC or any other regulatory authority;
o absence of defaults under certain contracts;
o tax matters (including qualification as an S-corporation);
o ownership of our common stock;
o permits and licenses;
o compliance with laws;
o no changes since January 1, 2003;
o no legal proceedings;
o no dissenters' rights;
o intellectual property;
o enforceability of material and investment management contracts;
o compliance with reporting requirements of regulatory entities;
o absence of key-man life insurance;
o employee matters, including absence of certain employee benefit
plans;
o derivative instruments; and
o investment advisory activities.
The merger agreement also contains additional customary representations
and warranties made by us relating to, among other things, receipt of the
opinion of our financial advisor, Merger Sub capital stock and actions taken by
Merger Sub.
The merger agreement contains customary representations by each of the
FIDAC shareholders relating to, among other things:
o acquisition of the merger consideration with an investment purpose;
o accredited investor status;
o reliance on exemptions from the registration requirements of the
United States federal and state securities laws;
77
o furnishment of information and materials relating to our business,
finances and operations and to the issuance of the merger
consideration;
o no governmental review of the merger consideration;
o restrictions on the transfer or resale of the merger consideration,
including restrictive legends;
o authorization to enter into the merger agreement;
o ownership of FIDAC capital stock; and
o no obligations or agreements to sell shares of FIDAC common stock to
any person or entity other than us.
CONDUCT OF BUSINESS OF ANNALY AND FIDAC PENDING THE MERGER
Under the merger agreement, we and FIDAC have each agreed that, during the
period before the completion of the acquisition, except as expressly
contemplated by the merger agreement, neither we nor FIDAC will without the
other's prior written consent:
o amend its organizational documents; or
o take any action, or omit to take any action, reasonably expected to
terminate or jeopardize our continuing status as a REIT or FIDAC's
ability to qualify as a taxable REIT subsidiary following the
completion of the acquisition or would subject FIDAC or FIDAC's
shareholders to any U.S. federal income or excise tax.
In addition, pending the merger, FIDAC has agreed that, without our prior
written consent or except as otherwise contemplated by the merger agreement or
except in the ordinary course of business, it will not, among other things:
o authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities or equity
equivalents (including any stock options or stock appreciation
rights);
o split, combine or reclassify any shares of its capital stock or
declare, set aside or pay any dividend or make any other
distribution, or redeem or otherwise acquire any securities or any
securities of any of its subsidiaries, except that FIDAC may make
S-corporation distributions in the ordinary course with respect to
the year ended December 31, 2003 and a dividend before the
completion of the merger up to an aggregate amount of 38% of the
federal taxable income of FIDAC for the period January 1, 2004
through the completion of the merger;
78
o change any of the accounting principles or practices used by it and
maintain its books and records other than in accordance with GAAP
consistently applied, except as required as a result of a change in
law or in GAAP;
o enter into any additional agreement with an affiliate (other than us
or any of our subsidiaries);
o increase any compensation or enter into or amend any employment,
severance or other arrangement with a FIDAC shareholder, any officer
or director of FIDAC or an employee of FIDAC earning more than
$100,000 per annum, other than as required by law or any contract or
existing plan or in connection with new hires;
o revoke FIDAC's election to be taxed as an S-corporation or take, or
fail to use commercially reasonable efforts to not allow, any action
other than the conversion of FIDAC common stock pursuant to the
merger agreement that would result in the termination of FIDAC's
status as a validly electing S-corporation; or
o adopt any new employee benefit plan or materially amend any existing
plans or rights, other than as required by law.
In addition, pending the merger, we have has agreed that, without FIDAC's
written consent or except as otherwise expressly contemplated by the merger
agreement, we will not take, or agree in writing or otherwise to take, any
action that requires the approval of our stockholders.
ADDITIONAL COVENANTS PENDING COMPLETION OF THE MERGER
Each of the parties has agreed that it will, among other things:
o use commercially reasonable efforts not to take any action that
would result in any of the conditions to the merger not being
satisfied;
o take all necessary actions in case at any time after the completion
of the merger any further action is necessary to carry out the
purposes of the merger agreement;
o use commercially reasonable efforts to obtain consents, approvals or
waivers of all third parties and regulatory authorities necessary,
proper or advisable for the completion of the transactions
contemplated by the merger agreement (other than with respect to
investment management contracts, for which FIDAC will use
commercially reasonable efforts to obtain consents);
o consult with each other with respect to the obtaining of all
permits, consents, approvals and authorizations of all regulatory
authority and other third parties necessary or advisable to
consummate the transactions contemplated by the merger agreement and
apprising the other parties of the status of matters relating to the
completion of the transactions contemplated by the merger agreement;
79
o consult with each other and give each other reasonable advance
notice before issuing any press release or otherwise making any
public statements with respect to the transactions contemplated by
the merger agreement;
o cooperate in the prompt preparation and the filing with the SEC of
the registration statement on Form S-4 of which this proxy
statement/prospectus forms a part; and
o promptly advise the other parties upon learning of any change or
event having or that would reasonably be expected to have,
individually or in the aggregate, a material adverse effect on it or
that it believes would, or would be reasonably expected to, cause or
constitute a material breach of any of its representations,
warranties or covenants contained in the merger agreement that would
reasonably be expected to result in a failure of certain conditions
set forth in the merger agreement to be satisfied.
We have agreed further that we will, among other things:
o include in this proxy statement/prospectus the recommendation of our
board of directors and the special committee that our stockholders
approve the merger agreement; and
o take all actions necessary in accordance with applicable law and our
articles of incorporation, as amended, and bylaws to convene a
meeting of our stockholders as promptly as practicable to consider
and vote, as required, upon the merger agreement.
FIDAC has agreed further that it will not, among other things, take any
action to revoke or rescind the unanimous approval of the FIDAC shareholders of
the merger agreement and the acquisition.
RESTRICTIONS ON TRANSFER OF THE MERGER CONSIDERATION
Each FIDAC shareholder is subject to certain restrictions on his or her
ability to resell any of our shares received as consideration for the merger. In
general, our shares received at the completion of the merger are restricted for
three years, shares received as an earn-out payment for the annual period of
2004 are restricted for two years and shares received as earn-out payments for
the annual periods of 2005 and 2006 are restricted for one year following the
respective dates of receipt. Limited exceptions to these restrictions are
available, including for sales to cover tax obligations on imputed interest on
the earn-out payments, for hedging transactions that do not violate our insider
trading policy or impair the value of any consideration for the merger held in
escrow or as approved by a majority of our independent directors. To facilitate
implementation of these trading restrictions all shares received in the merger
will be held by a mutually agreed custodian until the restrictions applicable to
those shares lapse.
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ESCROW AGREEMENT
We and each of the FIDAC shareholders agreed to use commercially
reasonable efforts to negotiate and agree upon, prior to the completion of the
merger, an escrow agreement. The escrow agreement will provide that a mutually
agreed escrow agent hold all of our shares issued upon the completion of the
merger and any earn-out payment made during the 14-month period following
completion of the merger (except that some of our shares may be released for the
limited purpose of enabling a seller to cover tax obligations for imputed
interest or with the approval of a majority of our independent directors). At
the end of the 14-month period, the escrowed shares will be released and will no
longer serve as recourse for the indemnities of the FIDAC shareholders arising
from any taxes due for any period prior to the completion of the merger,
breaches of FIDAC's representations and covenants and breaches of the FIDAC
shareholders' representations and covenants, unless we have made indemnification
claims during that 14-month period and have exercised our right to require that
some or all of the shares be retained in escrow until resolution of those
claims. The value of our shares to be held in escrow at the end of the 14-month
period shall be equal to 150% of the then outstanding indemnification claims.
REGISTRATION RIGHTS
The merger agreement grants the FIDAC shareholders registration rights for
each earn-out payment, if any. For each earn-out payment, FIDAC shareholders
owning more than 5% of our outstanding shares issued as an earn-out payment may
demand that we register the shares issued as an earn-out payment on a shelf
registration statement. We have agreed to maintain the shelf registration
statements for affiliates for five years following the date of each earn-out
payment. If at the end of such five year period, the registration statement for
any shares issued as an earn-out payment is deregistered, the affiliates shall
have one additional right to require a shelf registration statement for those
shares.
The merger agreement grants the FIDAC shareholders with "piggyback"
registration rights on certain registrations by us of our common stock. However,
our underwriting committee or the managing underwriter may exclude any or all of
such "piggyback" shares from an offering if they believe their inclusion would
hurt the marketing of the deal or otherwise be detrimental.
PRE-MERGER DIVIDENDS
Under the merger agreement, FIDAC is permitted to declare a dividend and
distribute to the FIDAC shareholders 38% of the aggregate amount of the federal
taxable income of FIDAC for the period January 1, 2004 through the date of the
completion of the merger, as reasonably estimated by FIDAC. The dividend is
intended to permit the FIDAC shareholders to pay their federal income taxes
arising from their ownership of FIDAC during the period it is an S-corporation
from January 1, 2004 through the date of the completion of the merger.
CONDITIONS TO THE MERGER
Neither we nor FIDAC may rely on the failure of any condition to be
satisfied if such failure was caused by such party's failure to use commercially
reasonable efforts to effect the merger.
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CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER
The obligations of us and FIDAC to complete the merger are subject to the
satisfaction or, where permissible, waiver of the following conditions:
o approval of the merger and merger agreement by our stockholders and
FIDAC shareholders;
o approval by the New York Stock Exchange for listing the shares of
our common stock to be issued in the merger, subject to official
notice of issuance;
o all necessary filings pursuant to any applicable antitrust law shall
have been made and any applicable waiting period shall have expired;
o except as would not reasonably be expected to have a material
adverse effect, as described below, all approvals, consents and
authorizations of, filings and registrations with, and applications
and notifications to all third parties and regulatory authorities
required for the completion of the merger will have been obtained or
made and will be in full force and effect and all waiting periods
required by applicable law will have expired;
o no statute, rule, regulation, executive order, decree, ruling or
injunction will have been enacted, entered, promulgated or enforced
by any regulatory authorities that has the effect of making the
completion of the merger illegal or prevents or prohibits completion
of the merger and no action by any regulatory authorities shall have
been instituted or threatened which questions the validity or
legality of the merger and which could reasonably be expected to
damage us or FIDAC if the merger is consummated; and
o we, the representative of the FIDAC shareholders appointed pursuant
to the merger agreement and the escrow agent will have executed the
escrow agreement.
As used in the merger agreement, "material adverse effect," when used in
reference to Annaly or FIDAC, means any change or effect that, individually or
in the aggregate, is or would reasonably be expected to be materially adverse to
(1) the business, results of operations or financial condition of Annaly or
FIDAC, as applicable, and its subsidiaries, taken as a whole, other than any
change or effect arising out of a decline or deterioration in the economy in
general or the industry in which Annaly or FIDAC, as applicable, and its
subsidiaries operate, or (2) the ability of Annaly or FIDAC, as applicable, to
consummate the transactions contemplated by the merger agreement without
material delay.
CONDITIONS TO THE OBLIGATIONS OF ANNALY TO EFFECT THE MERGER
Our obligations to complete the merger are subject to the satisfaction or,
where permissible, waiver of the following conditions:
82
o material accuracy of the representations and warranties of FIDAC
contained in the merger agreement;
o performance by FIDAC and each FIDAC shareholder in all material
respects of its obligations under the merger agreement;
o receipt by Annaly of a certificate of a senior officer of FIDAC
certifying to each of the foregoing;
o material accuracy of the representations and warranties of each
FIDAC shareholder contained in the merger agreement;
o receipt by Annaly of a certificate from each FIDAC shareholder
certifying the material accuracy of the representations and
warranties of such FIDAC shareholder contained in the merger
agreement;
o no event or events shall have occurred between the date of the
merger agreement and the date of completion of the merger which,
individually or in the aggregate, had a material adverse effect on
the business, operations, results of operations or financial
condition of FIDAC;
o receipt by Annaly of an opinion from Morrison & Foerster LLP, dated
as of the closing date, to the effect that FIDAC's organization and
intended method of operation will enable it to meet the requirements
for qualification and taxation as a taxable REIT subsidiary; and
o receipt by Annaly of an audited balance sheet of FIDAC as at
December 30, 2003 and the related audited statements of income, cash
flow and stockholders' equity (including footnotes).
CONDITIONS TO THE OBLIGATIONS OF FIDAC TO EFFECT THE MERGER
The obligations of FIDAC to complete the merger are subject to the
satisfaction or, where permissible, waiver of the following conditions:
o material accuracy of the representations and warranties of us
contained in the merger agreement;
o performance by us in all material respects of its obligations under
the merger agreement; and
o receipt by FIDAC of a certificate of a senior officer of us
certifying to each of the foregoing.
83
TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE
The merger agreement may be terminated at any time before completion of
the merger, whether before or after approval of the merger agreement and the
merger by our stockholders or the FIDAC shareholders, as follows:
o by mutual written consent of us and FIDAC;
o by either us or FIDAC if:
o any regulatory authority issues an order, decree, ruling or
takes any other action permanently restraining, enjoining or
otherwise prohibiting the merger, and the order, decree,
ruling or other action becomes final and nonappealable, except
that a party may not terminate the merger agreement pursuant
to this provision if that party has failed to fulfill its
obligations to use commercially reasonable efforts to take all
actions and to do all things reasonably necessary, proper or
advisable under applicable laws and regulations to complete
the acquisition;
o the merger is not completed prior to May 31, 2004, except that
neither we nor FIDAC may terminate the merger agreement if its
breach is the reason that the merger has not been completed;
or
o the required approval of the merger agreement by our
stockholders is not obtained at a meeting of our stockholders;
or
o if, prior to the completion of the merger, our board of
directors or the special committee has determined in good
faith, based upon the written opinion of counsel, that the
failure to withdraw or modify its approval or recommendation
of the merger and merger agreement will violate their
fiduciary duties and, based on such determination, has
resolved to effect such withdrawal or modification.
o by us:
o if, prior to the completion of the merger, FIDAC shareholders
take action to revoke or rescind their approval of the merger
and the merger agreement; or
o upon a violation or breach by FIDAC or any FIDAC shareholder
of any agreement, covenant, representation or warranty so that
the conditions to the completion of the merger and the merger
agreement would be incapable of being satisfied and such
violation or breach has not been waived by us nor cured by
FIDAC or such FIDAC shareholder prior to the
84
earlier of (1) 30 business days after the giving of written
notice to FIDAC or such FIDAC shareholder of the breach and
(2) May 31, 2004.
o by FIDAC:
o upon a violation or breach by us of any agreement, covenant,
representation or warranty contained in the merger agreement
so that the conditions to the completion of the merger would
be incapable of being satisfied, and such violation or breach
has not been waived by FIDAC nor cured by us prior to the
earlier of (1) 30 business days after the giving of written
notice to us of the breach and (2) May 31, 2004.
EFFECT OF TERMINATION
Except for provisions in the merger agreement regarding brokers' fees and
miscellaneous provisions, if the merger agreement is terminated as described
above, the merger agreement will become void and have no effect without any
liability on the part of us, FIDAC, or affiliates, directors, officers or
shareholders, except that a party will not be relieved from liability for any
willful breach of the merger agreement.
EXPENSES
Each party to the merger agreement will bear its own expenses in
connection with the transactions contemplated by the merger agreement, except
that if the merger is consummated, FIDAC shall pay the expenses incurred by
FIDAC and the FIDAC shareholders excluding any tax liability incurred by any of
the FIDAC shareholders as a result of the merger.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
The merger agreement may be amended in writing by action of the special
committee, Merger Sub and FIDAC at any time before or after approval of the
merger by our stockholders. However, after approval by our stockholders is
obtained, no amendment may be made which by law requires the further approval of
our stockholders without obtaining such further approval. If the merger
agreement is amended after the mailing of this proxy statement/prospectus and
your vote is required to such amendment, we will resolicit your vote.
At any time before the completion of the merger, the parties may, in
writing:
o extend the time for the performance of any of the obligations or
other acts of the other parties;
o waive any inaccuracies in the representations and warranties of the
other parties contained in the merger agreement or in any document
delivered under the merger agreement; or
o waive compliance with any of the agreements or conditions of the
other parties contained in the merger agreement.
85
INDEMNIFICATION
Under the merger agreement, from and after the completion of the
acquisition, each FIDAC shareholder, severally and not jointly, in proportion to
their percentage ownership of FIDAC, will indemnify, defend and hold harmless us
against all losses, expenses, claims, damages or liabilities caused by (i) any
inaccuracy or breach of any representation or warranty made by FIDAC or the
FIDAC shareholders contained in the merger agreement or other documents
delivered pursuant to the merger agreement (excluding a breach of FIDAC's tax
representations and covenants or a breach of the representations of each FIDAC
shareholder as to his or her ownership of shares of FIDAC common stock) or (ii)
any breach, non-compliance or nonfulfillment by FIDAC or the FIDAC shareholders
of any covenant, agreement or undertaking to be complied with or performed by
them pursuant to the merger agreement or other document delivered pursuant to
the merger agreement. This general indemnity is subject to a deductible of
$700,000, as a result of which the FIDAC shareholders are only required to
indemnify us to the extent that our claims under the general indemnity exceed
the $700,000 deductible. This general indemnity is subject to a cap equal to our
shares issued to the FIDAC shareholders upon completion of the merger or as an
earn-out payment during the 14-month period following the completion of the
merger and our sole recourse against the FIDAC shareholders under this general
indemnity is limited to these shares.
In addition, under the merger agreement, the FIDAC shareholders each,
severally and not jointly, in proportion to their percentage ownership of FIDAC,
indemnify us and FIDAC against any damages arising from (1) any taxes incurred
by FIDAC for any period prior to the completion of the merger, (2) breaches of
FIDAC's tax representations and covenants and (3) breaches of the
representations of each FIDAC shareholder as to his or her ownership of shares
of FIDAC common stock. This additional indemnity is not subject to any
deductible or cap and is not taken into account for determining when the
$700,000 deductible for the general indemnity described above is met.
Under the merger agreement, from and after the merger, we will indemnify,
defend and hold harmless the FIDAC shareholders against all losses, expenses,
claims, damages or liabilities caused by any inaccuracy or breach of any
representation or warranty or any breach, non-compliance or nonfulfillment by us
of any covenant or agreement contained in the merger agreement or other document
delivered pursuant to the merger agreement. However, because the FIDAC
shareholders also serve as our officers and, as such, are responsible for the
day-to-day management of our business, we shall have no liability or obligation
to FIDAC or any FIDAC shareholder arising from the breach of any representation,
warranty, covenant or agreement predicated upon (1) information provided by
FIDAC or any FIDAC shareholder, (2) information known to either FIDAC or any
FIDAC shareholder but not provided by FIDAC or such FIDAC shareholder to us or
(3) failure of any FIDAC shareholder to provide any services that we could
reasonably have expected such FIDAC shareholder to provide in his or her
capacity as a director, officer, or employee of us.
NO SOLICITATION BY FIDAC
The merger agreement contains provisions prohibiting FIDAC and the FIDAC
shareholders from actively seeking an alternative transaction. The no
solicitation covenant
86
generally prohibits FIDAC and the FIDAC shareholders, as well as FIDAC's
affiliates, from taking any action to solicit an acquisition proposal. If FIDAC
or any of the FIDAC shareholders receives an unsolicited offer or becomes aware
that a third party intends to make an unsolicited offer, FIDAC or such FIDAC
shareholder shall notify us of such unsolicited offer.
87
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REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Fixed Income Discount Advisory Company
We have audited the accompanying statement of financial condition of Fixed
Income Discount Advisory Company (the "Company") as of December 31, 2003 and
the related statements of operations, changes in stockholders' equity, and cash
flows for the year ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2003 and the
results of its operations and its cash flows for the year ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 5, 2004
88
FIXED INCOME DISCOUNT ADVISORY COMPANY
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2003
(dollars in thousands, except per share data)
ASSETS:
Cash and cash equivalents $ 600
Fees receivable 1,633
Prepaid expenses and other assets 568
------
Total assets $2,801
======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses $1,206
------
Total liabilities 1,206
------
Stockholders' equity:
Common stock, par value $1.00, 750 shares issued and outstanding 1
Additional paid-in capital 1,594
------
Total stockholders' equity 1,595
------
Total liabilities and stockholders' equity $2,801
======
See notes to financial statements.
89
FIXED INCOME DISCOUNT ADVISORY COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(dollars in thousands, except per share data)
Revenues:
Investment advisory and service fees $13,879
Interest income on cash equivalents 16
-------
Total revenues 13,895
-------
Expenses:
Compensation and benefits 12,972
Operating expenses 654
-------
Total expenses 13,626
-------
Net income before provision for state and local taxes 269
Provision for state and local taxes 207
-------
Net income $ 62
=======
Net income per weighted average shares outstanding $ 92.81
=======
Weighted average number of shares outstanding 668
=======
See notes to financial statements.
90
FIXED INCOME DISCOUNT ADVISORY COMPANY
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2003
(dollars in thousands)
Common Stock Par Additional Paid-In Retained
Value $1.00 Capital Earnings Total
-----------------------------------------------------------------------
BALANCES, DECEMBER 31, 2002 $ 1 $ 7 $ 16 $ 24
Net income 62 62
Issuance of common stock 3,280 3,280
Stockholder distributions (1,693) (78) (1,771)
-----------------------------------------------------------------------
BALANCES, DECEMBER 31, 2003 $ 1 $1,594 -- $1,595
=======================================================================
See notes to financial statements.
91
FIXED INCOME DISCOUNT ADVISORY COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62
Adjustments to reconcile net income to net cash provided by operating activities:
Stock grant 3,280
Increase in fees receivable (963)
Increase in prepaid and other assets (566)
Increase in accounts payable and accrued expenses 313
-------
Net cash provided by operating activities 2,126
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stockholder distributions (1,688)
-------
Net cash used in financing activities (1,688)
-------
Net increase in cash and cash equivalents 438
Cash and cash equivalents, beginning of year 162
-------
Cash and cash equivalents, end of year $ 600
=======
Supplemental disclosure of financing activity:
Stock grant, at fair value $ 3,280
=======
Supplemental disclosure of cash flow information:
Cash paid for state and local taxes $ 426
=======
See notes to financial statements.
92
FIXED INCOME DISCOUNT ADVISORY COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Fixed Income Discount Advisory Company (the "Company" or FIDAC) was
organized in the state of Delaware and commenced operations in 1994. The Company
provides investment advisory services to domestic and offshore funds, high
net-worth individual and institutional clients (the "Clients") pursuant to
investment management agreements by and between the Company and its clients. The
Company also provides accounting and valuation services to certain clients.
The Company is a registered investment adviser with the Securities
and Exchange Commission.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
CASH AND CASH EQUIVALENTS -Cash and cash equivalents include cash on hand and
money market funds. The carrying amount of cash equivalents approximates fair
value.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Estimates, by their nature, are based on
judgment and available information. Actual results could differ from the
estimates.
The financial statements include a stock compensation expense of $3.3 million
whose value, in the absence of a readily ascertainable market value, has been
estimated by management based on an independent valuation of the Company
performed by a third party. Because of the inherent uncertainty of valuation and
assumptions utilized, the estimated value and resulting compensation expense may
differ significantly from the value that would have been used has a ready market
for the common stock of the Company existed, and the difference could be
material.
INVESTMENT ADVISORY FEES - The Company earns investment advisory fees based on a
percentage of gross asset, repurchase agreement balances, or net assets in the
Clients' portfolios and funds for which the Company provides investment advisory
services. These fees are recognized in the period such service is provided. The
fees are generally accrued and paid monthly in arrears.
CONCENTRATIONS - The Company's revenues are generated from the limited number of
Clients. A significant decrease in the net asset values of these Clients could
cause a significant decline in revenues and would adversely affect operating
results. For the year ended December 31, 2003, revenues from three Clients
account for approximately 81% of the Company's revenues. A significant decrease
in the asset values or redemptions in these Clients could cause a significant
decline in revenues and would adversely affect operating results.
INCOME TAXES -For federal and state income tax purposes, FIDAC has elected to be
taxed as an S corporation. An S corporation generally is not subject to federal
income tax. An S corporation may be subject to state and local taxes based upon
the particular rules of the state and local jurisdiction. As an S corporation,
FIDAC is not subject to federal income tax but rather the shareholders of FIDAC
are subject to tax directly on their allocable share of taxable income. FIDAC is
subject to certain state and local taxes.
2. INVESTMENT MANAGEMENT FEES
In connection with the Company's investment advisory services for certain
Clients, the Company enters into distribution service agreements with third
parties pursuant to which such parties facilitate and promote distribution of
shares of the Clients. For such services, the Company pays a portion of its
investment advisory fees. The investment advisory fees reflected in the
statement of operations is net of distribution fees paid to those parties of
$1.6 million for the year ended December 31, 2003.
93
In addition, in connection with the company's investment advisory services
for certain Clients, the Clients reimburse the Company for certain operating
costs incurred on behalf of the Clients. The Company's operating expenses
reflected in the statement of operations are net of such reimbursements. For the
year ended December 31, 2003, the reimbursed expenses amounted to $437,000.
3. COMMON STOCK
During the year ended December 31, 2003 common stock of the Company was
granted and distributed in the form of compensation to employees of the Company.
The distribution represents 20% ownership interest of the Company and was valued
at $3,280,000 at the time of distribution. Such compensation expense is included
in compensation and benefits in the statement of operations.
4. RELATED PARTY TRANSACTION
Officers and employees of the Company actively purchase and manage an
investment portfolio of Mortgage-Backed Securities on behalf of Annaly Mortgage
Management, Inc. ("Annaly"). These individuals are also shareholders of Annaly.
Michael A.J. Farrell, on behalf of FIDAC, approached Annaly about the
possibility of Annaly acquiring FIDAC. Annaly's board of directors formed a
special committee of independent directors to consider this matter and the
special committee retained independent counsel and Lehman Brothers Inc. to act
as its financial advisor in connection with the proposed acquisition. Following
negotiations between FIDAC and the special committee, the special committee
determined that Annaly should acquire FIDAC and Annaly entered into a Merger
Agreement, dated December 31, 2003, by and among, Annaly, FIDAC, FDC Merger Sub,
Inc., and the FIDAC stockholders (the "Merger Agreement"). A copy of the Merger
Agreement has been filed as an exhibit to Annaly's Form 8-K filed which is
incorporated by reference into the prospectus.
Pursuant to the Merger Agreement, FIDAC will be merged into a newly formed
wholly owned subsidiary of Annaly. The closing of the merger is subject to a
number of conditions, including the approval of Annaly's stockholders.
Under the Merger Agreement with Annaly, the purchase price will be payable
in shares of Annaly's common stock. Upon the consummation of the merger, Annaly
will issue shares of common stock worth $40.5 million, based upon a valuation of
shares of Annaly's common stock as of December 31, 2003, to the stockholders of
FIDAC. The Merger Agreement includes an earn out feature, under which Annaly
will pay up to an additional $49.5 million, which will be payable in shares of
Annaly's common stock, to the stockholders of FIDAC if FIDAC meets certain
revenue and pre-tax profit margin targets over the next three years as described
in the Merger Agreement.
Annaly currently allocates rent and other general and administrative
expenses in the amounts of 90% and 10% to Annaly and FIDAC, respectively. The
amount allocated to FIDAC is $110,030 for the year ended December 31, 2003 and
is included in operating expenses in the statement of operations. The amount
payable to Annaly at December 31, 2003 is $33,782, which is included in accounts
payable and accrued expenses.
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5. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations for
the year ended December 31, 2003.
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2003 2003 2003 2003
(dollars in thousands, except per share data)
--------------------------------------------------------
Revenues:
Investment advisory and service fees $ 2,168 $ 3,648 $ 4,021 $ 4,042
Interest income on cash equivalents 1 2 3 10
--------------------------------------------------------
Total revenues 2,169 3,650 4,024 4,052
--------------------------------------------------------
Expenses:
Compensation and benefits 1,188 4,756 1,151 5,877
Operating expenses 139 284 245 (14)
--------------------------------------------------------
Total expenses 1,327 5,040 1,396 5,863
--------------------------------------------------------
Net income (loss) before provision for state
and local taxes 842 (1,390) 2,628 (1,811)
Provision for state and local taxes 62 64 64 17
--------------------------------------------------------
Net income (loss) $ 780 ($1,454) $ 2,564 ($1,828)
========================================================
Net income (loss) per weighted average shares
outstanding $ 1,560 ($2,170) $ 3,419 ($2,437)
========================================================
Weighted average number of shares outstanding
500 670 750 750
========================================================
95
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DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
GENERAL
Our authorized capital stock consists of 500 million shares of common
stock, par value $.01 per share. Pursuant to our articles of incorporation, as
amended, our board of directors has the right to classify or reclassify any
unissued shares of common stock into one or more classes or series of common
stock or preferred stock. As of March 4, 2004, we had 117,866,932 shares of
common stock outstanding, not including 1,034,759 shares of common stock
issuable upon the exercise of options granted pursuant to our Long-Term
Incentive Plan.
COMMON STOCK
The statements below describing the common stock are in all respects
subject to and qualified in their entirety by reference to our articles of
incorporation, as amended, by-laws, as amended and restated, and any articles
supplementary to our articles of incorporation, as amended.
VOTING
Each of our common stockholders is entitled to one vote for each share
held of record on each matter submitted to a vote of common stockholders.
Our by-laws, as amended and restated, provide that annual meetings of our
stockholders will be held each calendar year on the date determined by our
President, and special meetings may be called by a majority of our board of
directors, our Chairman, a majority of our independent directors, our President
or generally by stockholders entitled to cast at least 25% of the votes which
all stockholders are entitled to cast at the meeting. Our articles of
incorporation, as amended, may be amended in accordance with Maryland law.
DIVIDENDS; LIQUIDATION; OTHER RIGHTS
Common stockholders are entitled to receive dividends when declared by our
board of directors out of legally available funds. The right of common
stockholders to receive dividends is subordinate to the rights of preferred
stockholders or other senior stockholders. If we have a liquidation, dissolution
or winding up, our common stockholders will share ratably in all of our assets
remaining after the payment of all of our liabilities and the payment of all
liquidation and other preference amounts to preferred stockholders and other
senior stockholders. Common stockholders have no preemptive or other
subscription rights, and there are no conversion rights, or redemption or
sinking fund provisions, relating to the shares of common stock.
CLASSIFICATION OR RECLASSIFICATION OF COMMON STOCK OR PREFERRED STOCK
Our articles of incorporation, as amended, authorize our board of
directors to reclassify any unissued shares of common or preferred stock into
other classes or series of shares, to establish the number of shares in each
class or series and to set the preferences, conversion and other rights, voting
powers, restrictions, limitations, and restrictions on ownership, limitations as
96
to dividends or other distributions, qualifications, and terms or conditions of
redemption for each class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
To ensure that we meet the requirements for qualification as a REIT, our
articles of incorporation, as amended, prohibit anyone from acquiring or
holding, directly or constructively, ownership of a number of shares of any
class of our capital stock in excess of 9.8% of the outstanding shares. For this
purpose the term "ownership" generally means either direct ownership or
constructive ownership in accordance with the constructive ownership provisions
of Section 544 of the Code, as modified in Section 856(h) of the Code.
The constructive ownership provisions of Section 544 of the Code,
generally attribute ownership of securities owned by a corporation, partnership,
estate or trust proportionately to its stockholders, partners or beneficiaries;
attribute ownership of securities owned by family members to other members of
the same family; and set forth rules for attributing securities constructively
owned by one person to another person (i.e., "reattribution"). To determine
whether a person holds or would hold capital stock in excess of the 9.8%
ownership limit, a person will be treated as owning not only shares of capital
stock actually owned, but also any shares of capital stock attributed to that
person under the attribution rules described above. Accordingly, a person who
individually owns less than 9.8% of the shares outstanding may nevertheless be
in violation of the 9.8% ownership limit.
Any transfer of shares of capital stock that would cause us to be
disqualified as a REIT or that would (a) create a direct or constructive
ownership of shares of capital stock in excess of the 9.8% ownership limit, or
(b) result in the shares of capital stock being beneficially owned (within the
meaning of Section 856(a) of the Code) by fewer than 100 persons (determined
without reference to any rules of attribution), or (c) result in us being
"closely held" within the meaning of Section 856(h) of the Code, will be null
and void, and the intended transferee, or purported transferee, will acquire no
rights to those shares. These restrictions on transferability and ownership will
not apply if our board of directors determines that it is no longer in our best
interests to continue to qualify as a REIT.
Any purported transfer of shares of capital stock that would result in a
purported transferee owning (directly or constructively) shares of capital stock
in excess of the 9.8% ownership limit due to the unenforceability of the
transfer restrictions described above will constitute "excess securities."
Excess securities will be transferred by operation of law to a trust that we
will establish for the exclusive benefit of a charitable organization, until
such time as the trustee of the trust retransfers the excess securities. The
trustee will be a banking institution designated by us that is not affiliated
with the purported transferee or us. While the excess securities are held in
trust, the purported transferee will not be entitled to vote or to share in any
dividends or other distributions with respect to the securities. Subject to the
9.8% ownership limit, excess securities may be transferred by the trust to any
person (if such transfer would not result in excess securities) at a price not
to exceed the price paid by the purported transferee (or, if no consideration
was paid by the purported transferee, the fair market value of the excess
securities on the date of the purported transfer), at which point the excess
securities will automatically cease to be excess securities.
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Upon a purported transfer of excess securities, the purported transferee
shall cease to be entitled to distributions, voting rights and other benefits
with respect to the shares of capital stock except the right to payment of the
purchase price for the shares of capital stock on the retransfer of securities
as provided above. Any dividend or distribution paid to a purported transferee
on excess securities prior to our discovery that shares of capital stock have
been transferred in violation of our articles of incorporation, as amended,
shall be repaid to us upon demand. If these transfer restrictions are determined
to be void, invalid or unenforceable by a court of competent jurisdiction, then
the purported transferee of any excess securities may be deemed, at our option,
to have acted as an agent on our behalf in acquiring the excess securities and
to hold the excess securities on our behalf.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Any person who acquires shares in violation of our articles of
incorporation, as amended, or any person who is a purported transferee such that
excess securities results, must immediately give written notice or, in the event
of a proposed or attempted transfer that would be void as set forth above, give
at least 15 days prior written notice to us of such event and shall provide us
such other information as we may request in order to determine the effect, if
any, of the transfer on our status as a REIT. In addition, every record owner of
5.0% or more (during any period in which the number of record stockholders is
2,000 or more) or 1.0% or more (during any period in which the number of record
stockholders is greater than 200 but less than 2,000) or 1/2% or more (during
any period in which the number of record stockholders is 200 or less) of the
number or value of our outstanding shares must send us an annual written notice
by January 30 stating the name and address of the record owner and the number of
shares held and describing how the shares are held. Further, each stockholder is
required to disclose to us in writing information with respect to the direct and
constructive ownership of shares as the board of directors deems reasonably
necessary to comply with the REIT provisions of the Code, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
Our board of directors may increase or decrease the 9.8% ownership limit.
In addition, to the extent consistent with the REIT provisions of the Code, our
board of directors may, pursuant to our articles of incorporation, as amended,
waive the 9.8% ownership limit for a purchaser of our stock. In connection with
any such waiver, we may require that the stockholder requesting the waiver enter
into an agreement with us providing that we may repurchase shares from the
stockholder under certain circumstances to ensure compliance with the REIT
provisions of the Code. The repurchase would be at fair market value as set
forth in the agreement between us and the stockholder. The consideration
received by the stockholder in the repurchase might be characterized as the
receipt by the stockholder of a dividend from us, and any stockholder entering
into an agreement with us should consult its tax advisor. At present, we do not
intend to waive the 9.8% ownership limit for any purchaser.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of our capital stock to receive a premium
for their shares that might otherwise exist in the absence of such provisions.
Such provisions also may make us an unsuitable
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investment vehicle for any person seeking to obtain ownership of more than 9.8%
of the outstanding shares of our capital stock.
CLASSIFICATION OF BOARD OF DIRECTORS, VACANCIES AND REMOVAL OF DIRECTORS
Our by-laws, as amended and restated, provide for a staggered board of
directors. Our by-laws, as amended and restated, provide for between three and
fifteen directors divided into three classes, with terms of three years each.
The number of directors in each class and the expiration of each class term is
as follows:
Class I 2 Directors Expires 2006
Class II 2 Directors Expires 2004
Class III 3 Directors Expires 2005
At the 2004 annual meeting an additional director will be elected to serve
as a Class II director. Following the 2004 annual meeting there will be three
Class II directors whose terms will each expire in 2007. At each annual meeting
of our stockholders, successors of the class of directors whose term expires at
that meeting will be elected for a three-year term and the directors in the
other two classes will continue in office. A classified board of directors may
delay, defer or prevent a change in control or other transaction that might
involve a premium over the then prevailing market price for our common stock or
other attributes that our stockholders may consider desirable. In addition, a
classified board of directors could prevent stockholders who do not agree with
the policies of our board of directors from replacing a majority of the board of
directors for two years, except in the event of removal for cause.
Our by-laws, as amended and restated, provide that any vacancy on our
board of directors may be filled by a majority of the remaining directors. Any
individual so elected director will hold office for the unexpired term of the
director he or she is replacing. Our by-laws, as amended and restated, provide
that a director may be removed at any time only for cause upon the affirmative
vote of at least two-thirds of the votes entitled to be cast in the election of
directors, but only by a vote taken at a stockholder meeting. These provisions
preclude stockholders form removing incumbent directors, except for cause and
upon a substantial affirmative vote, and filling the vacancies created by such
removal with their own nominees.
INDEMNIFICATION
Our articles of incorporation, as amended, obligate us to indemnify our
directors and officers and to pay or reimburse expenses for them before the
final disposition of a proceeding to the maximum extent permitted by Maryland
law. The Corporations and Associations Article of the Annotated Code of Maryland
(or the Maryland General Corporation Law) permits a corporation to indemnify its
present and former directors and officers against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (1) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (a) was committed in bad faith, or (b) was the result of active
and deliberate dishonesty, or (2) the director or officer actually received an
improper personal benefit in money, property or services, or (3) in the case of
any criminal
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proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful.
LIMITATION OF LIABILITY
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (1) it is proved that the person actually received an improper
benefit or profit in money, property or services, or (2) a judgment or other
final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty or was committed in bad faith and was material to the cause of action
adjudicated in the proceeding. Our articles of incorporation, as amended,
provide for elimination of the liability of our directors and officers to us or
our stockholders for money damages to the maximum extent permitted by Maryland
law from time to time.
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VOTING
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You will only be entitled to vote at the meeting if you were a holder of
record of our common stock at the close of business on the record date, March
22, 2004. There were _____ shares of common stock outstanding on the record
date, and each stockholder will be entitled to one vote at the meeting for each
share registered in the stockholder's name on the record date. Holders of common
stock are not entitled to cumulate their votes on any matter to be considered at
the meeting. The presence at the meeting, in person or by proxy, of the holders
of a majority of the total number of shares of common stock outstanding on the
record date constitutes a quorum for the transaction of business at the meeting.
All properly executed proxies delivered pursuant to this solicitation and
not revoked will be voted at the annual meeting in accordance with the
directions given. With respect to the proposal to approve the merger agreement,
you may vote in favor of the proposal or against the proposal, or you may
abstain from voting. Regarding the election of directors to serve until the 2007
annual meeting of stockholders, in voting by proxy, you may vote in favor of all
nominees, withhold your vote as to all nominees or withhold your vote as to
specific nominees. With respect to the proposal to ratify the appointment of
Deloitte & Touche LLP as our independent auditors for the current fiscal year,
you may vote in favor of the proposal or against the proposal, or you may
abstain from voting. You should specify your choices on the enclosed form of
proxy.
If you do not provide specific instructions on all the matters to be acted
upon, the shares represented by a signed proxy will be voted FOR the approval of
the merger agreement, FOR the election of all nominees and FOR the proposal to
ratify the appointment of Deloitte & Touche LLP as our independent auditors for
the current fiscal year.
The approval of the holders of a majority of the votes cast (provided that
the total votes cast on the proposal represents over 50% of the voting power of
our stockholders entitled to vote as of the record date) and present, in person
or by proxy, at a meeting at which a quorum is present, is required to approve
the merger agreement. Directors will be elected by a plurality of
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the votes cast by the holders of the shares of common stock voting in person or
by proxy at the annual meeting. Ratification of the appointment of our
independent auditors will require the affirmative vote of the holders of a
majority of the votes cast.
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VOTING ARRANGEMENTS
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Each of the FIDAC shareholders agreed to vote the same percentage of his
or her shares of our common stock (1) in favor of the adoption of the merger
agreement and the approval of the acquisition as the percentage of all votes
cast by our stockholders who are not FIDAC shareholders that represent votes in
favor of the adoption of the merger agreement and the approval of the
acquisition, (2) against such adoption and approval as the percentage of all
votes cast by our stockholders who are not FIDAC shareholders that represent
votes against such adoption and approval and (3) neither for nor against such
adoption and approval as the percentage of all votes cast by our stockholders
who are not FIDAC shareholders that count neither as votes in favor of nor
against such adoption and approval.
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EMPLOYMENT AGREEMENTS
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Each of the following of our employees has executed a new employment
agreement with us that, upon the consummation of the acquisition, replaces their
respective existing employment agreements with us and/or FIDAC to the extent
such employee has an employment agreement with us and/or FIDAC.
MICHAEL A.J. FARRELL
We have executed a two-year employment agreement with Michael A.J. Farrell
to engage him in the position of Chairman, Chief Executive Officer and
President. The term of the agreement shall automatically extend for successive
one-year periods unless either party provides notice of intent not to extend the
term. The agreement becomes effective as of the closing date of the acquisition
and is null and void if such closing does not occur. The agreement supersedes
Mr. Farrell's prior employment contracts with us and FIDAC and prohibits him,
for a term of one year following the termination of employment by us for cause
or by Mr. Farrell other than for good reason, from working for businesses that
compete with us or FIDAC as specified in the merger agreement. Under the
agreement, Mr. Farrell shall receive an initial annual base salary of
$2,430,000, to be reviewed each year, and is entitled to a performance bonus to
be approved by the compensation committee. Upon termination of employment by us
other than for cause or by Mr. Farrell for good reason, we shall pay Mr. Farrell
any earned but unpaid annual base salary, awarded but unpaid performance bonus
and a severance payment equal to three times the greater of Mr. Farrell's annual
base salary and bonus performance for the preceding year or the average for the
three preceding years of Mr. Farrell's annual base salary and performance bonus.
WELLINGTON J. DENAHAN
We have executed a two-year employment agreement with Wellington J.
Denahan to engage Ms. Denahan in the position of Vice Chairman and Chief
Investment Officer. The term of the agreement shall automatically extend for
successive one-year periods unless either party
101
provides notice of intent not to extend the term. The agreement becomes
effective as of the closing date of the acquisition and is null and void if such
closing does not occur. The agreement supersedes Ms. Denahan's prior employment
contracts with us and FIDAC and prohibits her, for a term of one year following
the termination of employment by us for cause or by Ms. Denahan other than for
good reason, from working for businesses that compete with us or FIDAC as
specified in the merger agreement. Under the agreement, Ms. Denahan shall
receive an initial annual base salary of $1,945,000, to be reviewed each year,
and is entitled to a performance bonus to be approved by the compensation
committee. Upon termination of employment by us other than for cause or by Ms.
Denahan for good reason, we shall pay Ms. Denahan any earned but unpaid annual
base salary, awarded but unpaid performance bonus and a severance payment equal
to three times the greater of Ms. Denahan's annual base salary and bonus
performance for the preceding year or the average for the three preceding years
of Ms. Denahan's annual base salary and performance bonus.
KATHRYN F. FAGAN
We have executed a two-year employment agreement with Kathryn F. Fagan to
engage her in the position of Chief Financial Officer and Treasurer. The term of
the agreement shall automatically extend for successive one-year periods unless
either party provides notice of intent not to extend the term. The agreement
becomes effective as of the closing date of the acquisition and is null and void
if such closing does not occur. The agreement supersedes Ms. Fagan's prior
employment contracts with us and FIDAC and prohibits her, for a term of one year
following the termination of employment by us for cause or by Ms. Fagan other
than for good reason, from working for businesses that compete with us or FIDAC
as specified in the merger agreement. Under the agreement, Ms. Fagan shall
receive an initial annual base salary of $972,000, to be reviewed each year, and
is entitled to a performance bonus to be approved by the compensation committee.
Upon termination of employment by us other than for cause or by Ms. Fagan for
good reason, we shall pay Ms. Fagan any earned but unpaid annual base salary,
awarded but unpaid performance bonus and a severance payment equal to three
times the greater of Ms. Fagan's annual base salary and bonus performance for
the preceding year or the average for the three preceding years of Ms. Fagan's
annual base salary and performance bonus.
JENNIFER S. KARVE
We have executed a two-year employment agreement with Jennifer S. Karve to
engage her in the position of Executive Vice President and Corporate Secretary.
The term of the agreement shall automatically extend for successive one-year
periods unless either party provides notice of intent not to extend the term.
The agreement becomes effective as of the closing date of the acquisition and is
null and void if such closing does not occur. The agreement supersedes Ms.
Karve's prior employment contracts with us and FIDAC and prohibits her, for a
term of one year following the termination of employment by us for cause or by
Ms. Karve other than for good reason, from working for businesses that compete
with us or FIDAC as specified in the merger agreement. Under the agreement, Ms.
Karve shall receive an initial annual base salary of $972,000, to be reviewed
each year, and is entitled to a performance bonus to be approved by the
compensation committee. Upon termination of employment by us other than for
cause or by Ms. Karve for good reason, we shall pay Ms. Karve any earned but
unpaid annual base salary, awarded but unpaid performance bonus and a severance
payment equal to
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three times the greater of Ms. Karve's annual base salary and bonus performance
for the preceding year or the average for the three preceding years of Ms.
Karve's annual base salary and performance bonus.
JAMES P. FORTESCUE
We have executed a two-year employment agreement with James P. Fortescue
to engage him in the position of Senior Vice President, Repurchase Agreement
Manager. The term of the agreement shall automatically extend for successive
one-year periods unless either party provides notice of intent not to extend the
term. The agreement becomes effective as of the closing date of the acquisition
and is null and void if such closing does not occur. The agreement prohibits
him, for a term of one year following the termination of employment by us for
cause or by Mr. Fortescue other than for good reason, from working for
businesses that compete with us or FIDAC as specified in the merger agreement.
Under the agreement, Mr. Fortescue shall receive an initial annual base salary
of $500,000, to be reviewed each year, and is entitled to a performance bonus to
be approved by the compensation committee. Upon termination of employment by us
other than for cause or by Mr. Fortescue for good reason, we shall pay Mr.
Fortescue any earned but unpaid annual base salary, awarded but unpaid
performance bonus and a severance payment equal to three times the greater of
Mr. Fortescue's base salary and bonus performance for the preceding year or the
average for the three preceding years of Mr. Fortescue's annual base salary and
performance bonus.
JEREMY DIAMOND
We have executed a two-year employment agreement with Jeremy Diamond to
engage him in the position of Executive Vice President, Research. The term of
the agreement shall automatically extend for successive one-year periods unless
either party provides notice of intent not to extend the term. The agreement
becomes effective as of the closing date of the acquisition and is null and void
if such closing does not occur. The agreement prohibits him, for a term of one
year following the termination of employment by us for cause or by Mr. Diamond
other than for good reason, from working for businesses that compete with us or
FIDAC as specified in the merger agreement. Under the agreement, Mr. Diamond
shall receive an initial annual base salary of $300,000, to be reviewed each
year, and is entitled to a performance bonus to be approved by the compensation
committee. Upon termination of employment by us other than for cause or by Mr.
Diamond for good reason, we shall pay Mr. Diamond any earned but unpaid annual
base salary, awarded but unpaid performance bonus and a severance payment equal
to three times the greater of Mr. Diamond's annual base salary and bonus
performance for the preceding year or the average for the three preceding years
of Mr. Diamond's annual base salary and performance bonus.
RONALD D. KAZEL
We have executed a two-year employment agreement with Ronald D. Kazel to
engage him in the position of Executive Vice President, Business Development.
The term of the agreement shall automatically extend for successive one-year
periods unless either party provides notice of intent not to extend the term.
The agreement becomes effective as of the closing date of the acquisition and is
null and void if such closing does not occur. The
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agreement prohibits him, for a term of one year following the termination of
employment by us for cause or by Mr. Kazel other than for good reason, from
working for businesses that compete with us or FIDAC as specified in the merger
agreement. Under the agreement, Mr. Kazel shall receive an initial annual base
salary of $300,000, to be reviewed each year, and is entitled to a performance
bonus to be approved by the compensation committee. Upon termination of
employment by us other than for cause or by Mr. Kazel for good reason, we shall
pay Mr. Kazel any earned but unpaid annual base salary, awarded but unpaid
performance bonus and a severance payment equal to three times the greater of
Mr. Kazel's annual base salary and bonus performance for the preceding year or
the average for the three preceding years of Mr. Kazel's annual base salary and
performance bonus.
ROSE-MARIE LYGHT
We have executed a two-year employment agreement with Rose-Marie Lyght to
engage her in the position of Vice President, Portfolio Manager. The term of the
agreement shall automatically extend for successive one-year periods unless
either party provides notice of intent not to extend the term. The agreement
becomes effective as of the closing date of the acquisition and is null and void
if such closing does not occur. The agreement prohibits her, for a term of one
year following the termination of employment by us for cause or by Ms. Lyght
other than for good reason, from working for businesses that compete with us or
FIDAC as specified in the merger agreement. Under the agreement, Ms. Lyght shall
receive an initial annual base salary of $250,000, to be reviewed each year, and
is entitled to a performance bonus to be approved by the compensation committee.
Upon termination of employment by us other than for cause or by Ms. Lyght for
good reason, we shall pay Ms. Lyght any earned but unpaid annual base salary,
awarded but unpaid performance bonus and a severance payment equal to three
times the greater of Ms. Lyght's annual base salary and bonus performance for
the preceding year or the average for the three preceding years of Ms. Lyght's
annual base salary and performance bonus.
KRISTOPHER R. KONRAD
We have executed a two-year employment agreement with Kristopher R. Konrad
to engage him in the position of Senior Vice President, Portfolio Manager. The
term of the agreement shall automatically extend for successive one-year periods
unless either party provides notice of intent not to extend the term. The
agreement becomes effective as of the closing date of the acquisition and is
null and void if such closing does not occur. The agreement prohibits him, for a
term of one year following the termination of employment by us for cause or by
Mr. Konrad other than for good reason, from working for businesses that compete
with us or FIDAC as specified in the merger agreement. Under the agreement, Mr.
Konrad shall receive an initial annual base salary of $500,000, to be reviewed
each year, and is entitled to a performance bonus to be approved by the
compensation committee. Upon termination of employment by us other than for
cause or by Mr. Konrad for good reason, we shall pay Mr. Konrad any earned but
unpaid annual base salary, awarded but unpaid performance bonus and a severance
payment equal to three times the greater of Mr. Konrad's annual base salary and
bonus performance for the preceding year or the average for the three preceding
years of Mr. Konrad's annual base salary and performance bonus.
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ELECTION OF DIRECTORS
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At the annual meeting, the stockholders will vote to elect three class II
directors, whose terms will expire at our annual meeting of stockholders in
2007, subject to the election and qualification of their successors or to their
earlier death, resignation or removal.
The persons named in the enclosed proxy will vote to elect Kevin P. Brady,
Donnell A. Segalas, and E. Wayne Nordberg as class II directors, unless you
withhold the authority of these persons to vote for the election of any or all
of the nominees by marking the proxy to that effect. Messrs. Brady and Segalas
are currently directors and Mr. Nordberg is a nominee for a new seat on the
board of directors.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR KEVIN P. BRADY, DONNELL A.
SEGALAS, AND E. WAYNE NORDBERG AS DIRECTORS TO HOLD OFFICE UNTIL OUR ANNUAL
MEETING OF STOCKHOLDERS IN 2007 AND UNTIL THEIR RESPECTIVE SUCCESSORS ARE DULY
ELECTED AND QUALIFIED. THE PERSONS NAMED IN THE ENCLOSED PROXY WILL VOTE YOUR
PROXY IN FAVOR OF THESE NOMINEES UNLESS YOU SPECIFY A CONTRARY CHOICE IN YOUR
PROXY.
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DIRECTORS
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We have three classes of directors. Our class I directors will serve until
our annual meeting of stockholders in 2006; our class II directors to be elected
at this year's meeting will serve until our annual meeting of stockholders in
2007; and our class III directors will serve until our annual meeting of
stockholders in 2005. Set forth below are the names and certain information on
each of our directors and E. Wayne Nordberg, a nominee to become a director.
CLASS I DIRECTORS
Spencer I. Browne, age 54, was elected on January 28, 1997 to serve as a
director of us. Mr. Browne has held various executive and management positions
with several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
director of Asset Investors Corporation (AIC), a New York Stock Exchange traded
company he co-founded in 1986. He also served as President, Chief Executive
Officer and a director of Commercial Assets, Inc., an American Stock Exchange
traded company affiliated with AIC, from its formation in October 1993 until
September 1996. In addition, from June 1990 until March 1996, Mr. Browne served
as President and a director of M.D.C. Holdings, Inc., a New York Stock Exchange
traded company and the parent company of a major homebuilder in Colorado. Mr.
Browne also has served as a director of Altiva Financial Corporation since
November 1996 and Convergent Communications, Inc. since December 1999.
Wellington J. Denahan, age 40, was elected on December 5, 1996 to serve as
Vice Chairman of the Board and a director of us with responsibility for managing
our portfolio. She has been Senior Vice President of FIDAC, from March 1995 to
the present, Treasurer since July 1994 and Chief Investment Officer since
February 1997. From July 1994 through March 1995
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she was a Vice President of FIDAC. Ms. Denahan has been the portfolio manager
for the U.S. Dollar Floating Rate Fund since its inception in August 1994. Prior
to joining FIDAC, from March 1992 to July 1994, Ms. Denahan had been Vice
President responsible for asset selection and financing at Citadel Funding
Corporation. Prior to joining Citadel she had been a trader on the
mortgage-backed securities desk at Schroder Wertheim and Co., Inc. She has
attended the New York Institute of Finance for intense mortgage-backed
securities studies.
CLASS II DIRECTORS
Kevin P. Brady, age 48, was elected on January 28, 1997 to serve as a
director. Mr. Brady is the founder and CEO of TaxStream, a software and
consulting firm that specializes in financial accounting. Mr. Brady founded
TaxStream in December 1993. From July 1986 through November 1993, Mr. Brady
worked for PricewaterhouseCoopers in New York City where he concentrated on
financial reporting and international tax planning for multinational
corporations and held a number of senior management positions. Prior to joining
PricewaterhouseCoopers, Mr. Brady worked in the corporate tax department of
Merck & Co.
Donnell A. Segalas, age 46, was elected on January 28, 1997 to serve as a
director of us. Mr. Segalas is a principle at Pinnacle Asset Management L.P. Mr.
Segalas sits on both the investment and executive committees. On a day-to-day
basis Mr. Segalas manages new business, distribution and special projects for
Pinnacle Asset Management L.P. Prior to joining Pinnacle Asset Management L.P.,
Mr. Segalas was Executive Vice President for alternative investments at Phoenix
Investment Partners Ltd., a NYSE asset management firm. Prior to joining Phoenix
Investment Partners, Ltd., Mr. Segalas was a managing director at the Far Hills
Group where he was in charge of the Private Equity and Venture Capital
fund-raising group. In 1997, he co-founded a leveraged buyout firm, Maplewood
Partners, L.L.C. Prior to his joining Maplewood Partners, Mr. Segalas was a
Managing Director at Rodman & Renshaw, Inc. in the mortgage-backed securities
department from 1994 to June 1997. In December 1995, Mr. Segalas was also given
the additional responsibility to manage Rodman & Renshaw's Structured Finance
Group. From 1990 to 1994, Mr. Segalas served as Senior Vice President in the
mortgage-backed securities department at Tucker Anthony, Inc., where he
co-managed the firm's structured finance group. Prior to that time, Mr. Segalas
had been a Senior Vice President at Smith Barney, Inc. and Corporate Vice
President at Drexel Burnham Lambert.
E. Wayne Nordberg, age 65, has been nominated by our Nominating/Corporate
Governance Committee to serve as our director. Since June 2002, Mr. Nordberg has
been a senior director at Ingalls & Snyder LLC and since 2000, President of the
office of investments for LaFayette College Endowment Fund. From October 1998 to
May 2002, Mr. Nordberg was Vice Chairman of KBW Asset Management, Inc. Prior to
joining KBW Asset Management, Inc., Mr. Nordberg served in various capacities
with Lord, Abbett & Co., from 1988 to 1998 where in 1996 he was named
Partner-Equity Investments, and a director of all 30 Lord Abbett mutual funds.
Mr. Nordberg sits on the board of directors of PetroQuest Energy, Inc. and
serves as Chairman of the compensation committee of the board of directors of
PetroQuest Energy, Inc. Mr. Nordberg graduated from Lafeyette College.
106
CLASS III DIRECTORS
Michael A. J. Farrell, age 52, was elected on December 5, 1996 to serve as
Chairman of the Board and Chief Executive Officer of us. Mr. Farrell was
appointed our President effective January 1, 2002. Since November 1994, he has
been the President and CEO of FIDAC. He is a member of the boards of directors
of the U.S. Dollar Floating Rate Fund and the Tellus Asia Recovery Fund. Prior
to founding FIDAC, from February 1992 to July 1994, Mr. Farrell served as
President of Citadel Funding Corporation. From April 1990 to January 1992, Mr.
Farrell was a managing director for Schroder Wertheim & Co. Inc. in the fixed
income department. In addition to being the former Chairman of the Primary
Dealers Operations Committee of the Public Securities Association (from 1981
through 1985) and its mortgage-backed securities division, he is a former member
of the Executive Committee of its Primary Dealers Division. Prior to his
employment with Schroder Wertheim, Mr. Farrell had been President of L.F.
Rothschild Mortgage Capital, Inc., Vice President of Trading at Morgan Stanley
and Co., Inc., and Senior Vice President of Merrill Lynch and Co., Inc. Mr.
Farrell began his career at E.F. Hutton and Company in 1971. Mr. Farrell has 27
years of experience in fixed income trading, management and operations.
Jonathan D. Green, age 57, was elected on January 28, 1997 to serve as a
director of us. Jonathan D. Green is President and Chief Executive Officer of
Rockefeller Group International, Inc. a privately held corporation with
interests in real estate ownership, management, and development, real estate
services and telecommunications. Mr. Green joined The Rockefeller Group in 1980
as assistant vice president and real estate counsel. In 1983 he was appointed
vice president, secretary and general counsel and in 1990 was elected chief
corporate officer. On July 6, 1995 he was named president and chief executive
officer of Rockefeller Group Development Corporation and Rockefeller Center
Management Corporation, both subsidiaries of The Rockefeller Group. In October
2002 Mr. Green was named President and Chief Executive Officer of Rockefeller
Group International, Inc. In addition, Mr. Green continues to serve as President
and CEO of Rockefeller Group Development Corporation. Mr. Green oversees the
activities of the company's four subsidiaries which include Rockefeller Group
Development Corporation, Cushman & Wakefield, Rockefeller Group
Telecommunications Services and Rockefeller Group Business Centers. As the
President and CEO of Rockefeller Group Development Corporation, he is actively
involved in the day-to-day operations of that company's commercial and
industrial properties ranging from office towers to suburban office parks,
foreign trade zones and high tech data centers in various stages of development.
Before joining The Rockefeller Group, Mr. Green was affiliated with the New York
City law firm of Thacher, Proffitt & Wood. Mr. Green is also a member of the
board of directors of Rockefeller Group International, Inc., Cushman &
Wakefield, Inc., Chicago Title Insurance Co., and the Realty Advisory Board on
Labor Relations, Inc. He also serves on the Mayor's Midtown Citizens Committee,
the board of directors of the Museum for African Art, the Leadership Council of
Lafayette College, the Board of Governors for The Real Estate Board of New York,
and the Real Estate Roundtable. Mr. Green graduated from Lafayette College and
the New York University School of Law.
John A. Lambiase, age 64, was elected on January 28, 1997 to serve as a
director of us. Mr. Lambiase was managing director in global operations at
Salomon Brothers from 1985 through his retirement in 1991. Mr. Lambiase joined
Salomon in 1979 as director of internal
107
audit. Mr. Lambiase has served as Chairman of the Mortgage-Backed Securities
Clearance Corporation, a member of the board of directors of Prudential Home
Mortgage and a member of the Board of the National Securities Clearance
Corporation, and was a founding director and Chairman of the Participation Trust
Company. Mr. Lambiase also served on Salomon's Credit Committee. Prior to
joining Salomon, from 1972 through 1979, Mr. Lambiase was President of Loeb
Rhodes Wall Street Settlement Corporation with responsibility for securities
clearance of over 130 member firms. Prior to Loeb Rhodes, Mr. Lambiase had been
the Chief Financial Officer and a General Partner of W.E. Hutton. Mr. Lambiase
is a Certified Public Accountant.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
COMPENSATION COMMITTEE
The members of our compensation committee are Spencer I. Browne, John A.
Lambiase, and Donnell A. Segalas. The compensation committee administers our
Long-Term Stock Incentive Plan, or Incentive Plan, and recommends changes to
that Plan to our board of directors when appropriate. The compensation committee
also approves compensation for our officers.
AUDIT COMMITTEE
The members of our audit committee are Kevin P. Brady, Jonathan D. Green,
and John A. Lambiase. Each of members of our audit committee are independent
directors and Mr. Lambiase has been designated as our audit committee's
financial expert. The audit committee recommends to our board of directors the
engagement or discharge of independent public accountants, reviews the plan and
results of the auditing engagement with our Chief Financial Officer and our
independent public accountants, and reviews with our Chief Financial Officer the
scope and nature of our internal auditing system.
Consistent with New York Stock Exchange audit committee structure and
membership requirements, the members of the audit committee are all independent
directors. The audit committee operates under a written charter adopted by our
board of directors.
NOMINATING/CORPORATE GOVERNANCE COMMITTEE
The members of our nominating/corporate governance committee are Jonathan
D. Green, Kevin P. Brady, and Donnell A. Segalas. Each of the members of our
nominating/corporate governance committee meets the independence requirements of
the New York Stock Exchange. The nominating/corporate governance committee
recommends to the board of directors persons to be nominated as directors or to
be elected to fill vacancies on the board of directors. The nominating/corporate
governance committee will consider nominees recommended by our stockholders.
These recommendations should be submitted in writing to our Secretary. A copy of
the charter of our nominating/corporate governance committee is available on or
website (WWW.ANNALY.COM).
Our nominating/corporate governance committee currently considers the
following factors in making its recommendations to the board of directors:
background, skills, expertise, accessibility and availability to serve
effectively on the board of directors. Our
108
nominating/corporate governance committee also conducts inquiries into the
background and qualifications of potential candidates.
Our nominating/corporate governance committee utilizes a variety of
methods for identifying and evaluating nominees for director. Our
nominating/corporate governance committee regularly assesses the appropriate
size of the board of directors, and whether any vacancies on the board of
directors are expected due to retirement or otherwise. In the event that
vacancies are anticipated, or otherwise arise, our nominating/corporate
governance committee considers various potential candidates for director.
Candidates may come to the attention of our nominating/corporate governance
committee through current members of our board of directors, professional search
firms, stockholders or other persons. These candidates are evaluated at regular
or special meetings of our nominating/corporate governance committee, and may be
considered at any point during the year. As described above, our
nominating/corporate governance committee considers properly submitted
stockholder nominations for candidates for the board of directors. Following
verification of the stockholder status of persons proposing candidates,
recommendations are aggregated and considered by our nominating/corporate
governance committee at a regularly scheduled meeting. If any materials are
provided by a stockholder in connection with the nomination of a director
candidate, such materials are forwarded to our nominating/corporate governance
committee. Our nominating/corporate governance committee also reviews materials
provided by professional search firms or other parties in connection with a
nominee who is not proposed by a stockholder. In evaluating such nominations,
our nominating/corporate governance committee seeks to achieve a balance of
knowledge, experience and capability on the board of directors.
E. Wayne Nordberg was selected by our nominating/corporate governance
committee after considering a number of candidates including persons suggested
by independent directors, management, and search firms. Mr. Nordberg was
recommended by some of our independent directors and members of management. We
pay fees to one or more search firms from time to time to assist in the
identification and evaluation of qualified candidates.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Interested persons may communicate their complaints or concerns by sending
written communications to the board of directors, committees of the board of
directors and individual directors by mailing those communications to:
Annaly Mortgage Management, Inc.
[Addressee*]
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Facsimile: (212) 696-9809
Email: investor@annaly.com
Attention: Investor Relations
* Audit and Compliance Committee of the Board of Directors
109
* Compensation and Management Development Committee of the Board of
Directors
* Nominating/Corporate Governance Committee of the Board of Directors
* Name of individual director
These communications are sent by us directly to the specified addressee.
We require each member of the board of directors to attend our annual
meeting of stockholders except for absences due to causes beyond the reasonable
control of the director. There were seven directors at the time of the 2003
annual meeting of Stockholders and all seven attended the meeting.
MEETINGS
During our fiscal year ended December 31, 2003, our board of directors
held five meetings. During 2003, the compensation committee held two meetings,
the audit committee held four meetings, and the nominating/corporate governance
committee held one meeting. Each director attended at least 75% of the aggregate
number of meetings held by our board of directors and 75% of the aggregate
number of meetings of each committee on which the director served. Our directors
COMPENSATION OF DIRECTORS
We paid an annual director's fee, effective January 1, 2003, for the year
2003 to each director who is not an officer or employee, or independent
director, equal to $50,000, a fee of $500 for each meeting of our board of
directors or any committee attended by each independent director (or $250 for
any meeting at which the director participates by conference telephone call),
and reimbursement of costs and expenses of all directors for attending these
meetings.
Our Incentive Plan provides that each independent director, upon
appointment to our board of directors, receives a non-discretionary automatic
grant of non-qualified stock options for the purchase of 5,000 shares of common
stock; these options vest in four equal installments over a period of four years
from the date of grant. In addition, each independent director is entitled to
receive on June 26 of each year that he or she serves as a director options to
purchase an additional 1,250 shares of common stock; these options vest on the
date of grant. The exercise price for each option is the fair market value of
our common stock as of the date on which the option is granted. Independent
directors also are entitled to receive discretionary awards under the Incentive
Plan.
--------------------------------------------------------------------------------
MANAGEMENT
--------------------------------------------------------------------------------
NAME POSITION
--------------------------------------------------------------------------------
Michael A.J. Farrell Chairman of the Board, Chief Executive
Officer, and President
110
Wellington J. Denahan Vice Chairman of the Board and Chief
Investment Officer
Kathryn F. Fagan Chief Financial Officer and Treasurer
Jennifer S. Karve Executive Vice President and Secretary
James P. Fortescue Senior Vice President and Repurchase
Agreement Manager
Biographical information on Mr. Farrell and Ms. Denahan is provided above.
Certain biographical information for Ms. Fagan, Ms. Karve and Mr. Fortescue is
set forth below.
Kathryn F. Fagan, age 37, was employed by us on April 1, 1997 in the
positions of Chief Financial Officer and Treasurer. From June 1, 1991 to
February 28, 1997, Ms. Fagan was Chief Financial Officer and Controller of First
Federal Savings & Loan Association of Opelousas, Louisiana. First Federal is a
publicly owned savings and loan that converted to the stock form of ownership
during her employment period. Ms. Fagan's responsibilities at First Federal
included all financial reporting, including reports for internal use and reports
required by SEC and the Office of Thrift Supervision. Her duties also included
asset/liability management, internal control compliance and the management of
First Federal's investment portfolio. During the period from September 1988 to
May 1991, Ms. Fagan was employed as a bank and savings and loan auditor by John
S. Dowling & Company, a corporation of Certified Public Accountants. Ms. Fagan
is a Certified Public Accountant and has a Masters Degree in Business
Administration.
Jennifer S. Karve, age 33, was employed by us on December 5, 1996 in the
positions of Secretary and Investment Officer. She currently serves as our
Executive Vice President and Secretary. She joined FIDAC at its inception in
July 1994 and became Vice President in March 1995. Ms. Karve has been a
portfolio manager for the U.S. Dollar Floating Rate Fund since its inception in
August 1994. She has designed several software systems for FIDAC including
portfolio management systems, mortgage-backed security pricing systems, exposure
reporting systems, and accounting systems. Prior to joining FIDAC, she worked
for Citadel Funding Corporation where she assisted in the management of the
funding of mortgage-backed security portfolios.
James P. Fortescue, age 30, was employed by us on December 5, 1996. Mr.
Fortescue is our Senior Vice President. Mr. Fortescue also serves as a Senior
Vice President of FIDAC. He started with FIDAC in June of 1995 where he was in
charge of finding financing on mortgage-backed and corporate bonds for regional
dealers, as well as maintaining a pricing service for a major broker dealer. In
September of 1996 he took over all financing activities for the U.S. Dollar
Floating Rate Fund which included trading and structuring all liabilities,
coordinating trade settlements with broker dealer back offices, and maintaining
the relationships with these dealers. Mr. Fortescue has been in charge of
liability management for us since our inception, and continues to oversee all
financing activities for FIDAC. Mr. Fortescue holds a Bachelors Degree in
Finance from Siena College.
111
--------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF ANNALY
--------------------------------------------------------------------------------
The following table sets forth certain information as of March 2, 2004
relating to the beneficial ownership of our common stock by (i) all persons that
we know beneficially own more than 5% of our outstanding common stock, (ii) each
of our executive officers and directors, and (iii) all of our executive officers
and directors as a group. We do not know of any person who beneficially owns
more than 5% of our outstanding common stock. Knowledge of the beneficial
ownership of our common stock is drawn from statements filed with the SEC
pursuant to Section 13(d) or 13(g) of the Securities Act of 1934, as amended.
Except as otherwise indicated, to our knowledge, each stockholder listed below
has sole voting and investment power with respect to the shares beneficially
owned by the stockholder.
SHARES BENEFICIALLY OWNED
-------------------------------------------------------------------
PRO FORMA
PRO FORMA OWNERSHIP PERCENT AFTER
BENEFICIAL OWNER NUMBER PERCENT AFTER ACQUISITION(1) ACQUISITION(1)
-----------------------------------------------------------------------------------------------------------------
Michael A.J. Farrell(2) 279,003 * 2,039,872 1.75%
Wellington J. Denahan(3) 176,844 * 396,952 *
Kathryn F. Fagan(4) 74,217 * 114,927 *
Jennifer S. Karve(5) 61,850 * 127,882 *
James P. Fortescue(6) 38,375 * 60,385 *
Kevin P. Brady(7)(12) 45,089 * 45,089 *
Spencer I. Browne(8) 38,245 * 38,245 *
Jonathan D. Green(9) 46,189 * 46,189 *
John Lambiase(10) 62,689 * 62,689 *
Donnell A. Segalas(11) 83,789 * 83,789 *
E. Wayne Nordberg(13) 0 * 0 *
All Executive Officers and
Directors as a Group
(11 persons) (2)(3)(4)(5)(6) 906,290 * 3,016,019 2.59%
(7)(8)(9)(10)(11)(12)(13)
* Represents beneficial ownership of less than one percent of the common
stock.
(1) The information in these columns is presented as if the acquisition of
FIDAC had occurred and is intended to show the impact of the acquisition
on the amount of securities held by the persons listed on this table.
These columns do not include any additional shares of our common stock
issuable in the future under the merger agreement upon the achievement by
FIDAC of specific performance goals.
(2) Includes 127,813 shares of common stock subject to vested options granted
under the Incentive Plan to Mr. Farrell that were exercisable as of March
2, 2004 or have or will first become exercisable within 60 days after such
date.
112
(3) Includes 50,361 shares of common stock subject to vested options granted
under the Incentive Plan to Ms. Denahan that were exercisable as of March
2, 2004 or have or will first become exercisable within 60 days after such
date.
(4) Includes 25,438 shares of common stock subject to vested options granted
under the Incentive Plan to Ms. Fagan that were exercisable as of March 2,
2004 or have or will first become exercisable within 60 days after such
date.
(5) Includes 27,390 shares of common stock subject to vested options granted
under the Incentive Plan to Ms. Karve that were exercisable as of March 2,
2004
(6) Includes 5,000 shares of common stock subject to options granted under the
Incentive Plan to Mr. Fortescue that were exercisable as of March 2, 2004
or have or will first become exercisable within 60 days after such date.
(7) Includes 13,689 shares of common stock subject to vested options granted
under the Incentive Plan to each of Messrs. Brady and Green that were
exercisable as of March 2, 2004 or have or will first become exercisable
within 60 days after such date.
(8) Includes 2,500 shares of common stock subject to options granted under the
Incentive Plan to Mr. Browne that were exercisable as of March 2, 2004 or
have or will first become exercisable within 60 days after such date.
(9) Includes 32,689 shares of common stock subject to options granted under
the Incentive Plan to Mr. Green that were exercisable as of March 2, 2004
or have or will first become exercisable within 60 days after such date.
(10) Includes 19,189 shares of common stock subject to options granted under
the Incentive Plan to Mr. Lambiase that were exercisable as of March 2,
2004 or have or will first become exercisable within 60 days after such
date.
(11) Includes 25,689 shares of common stock subject to options granted under
the Incentive Plan to Mr. Segalas that were exercisable as of March 2,
2004 or have or will first become exercisable within 60 days after such
date.
(12) Includes 1,500 shares of common stock held by certain members of Mr.
Brady's immediate family.
(13) Mr. Nordberg has been nominated to serve as a director and will be voted
upon for election at the annual meeting.
--------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF FIDAC
--------------------------------------------------------------------------------
The following table sets forth certain information as of March 2, 2004
relating to the beneficial ownership of FIDAC's common stock by (i) all persons
that we know beneficially own more than 5% of FIDAC's outstanding common stock,
(ii) each of FIDAC's executive officers and directors, and (iii) all of FIDAC's
executive officers and directors as a group. Except as otherwise indicated, to
our knowledge, each stockholder listed below has sole voting and investment
power with respect to the shares beneficially owned by the stockholder.
113
SHARES BENEFICIALLY OWNED
--------------------------
BENEFICIAL OWNER NUMBER PERCENT
--------------------------------------------------------------------------------
Michael A.J. Farrell 600 80%
Wellington J. Denahan 75 10%
Kathryn F. Fagan 15 2%
Jennifer S. Karve 22.5 3%
James P. Fortescue 7.5 1%
Jeremy Diamond 7.5 1%
Ronald D. Kazel 7.5 1%
Rose-Marie Lyght 7.5 1%
Kristopher R. Konrad 7.5 1%
All Executive Officers and Directors as a Group
(8 persons) 750 100%
--------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
The table below sets forth the aggregate compensation we paid or accrued
during our fiscal years ended December 31, 2003, 2002, and 2001, to our Chief
Executive Officer and our four highest paid other executive officers serving in
their positions at December 31, 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION AWARDS
-------------------------------------------------------
NAME AND SECURITIES
PRINCIPAL POSITION RESTRICTED UNDERLYING
SALARY BONUS STOCK OPTIONS
YEAR ($) ($) AWARDS(2)($) (#)
------------------------------------------------------------------------------------------------------------------
Michael A.J. Farrell 2003 $2,430,000 $420,798 $0 200,000
Chairman of the Board, Chief 2002 $2,391,250 $850,000 $0 0
Executive Officer, and President 2001 $925,000 $750,000 $0 0
Wellington J. Denahan 2003 $1,969,000 $775,678 $0 150,000
Vice Chairman and 2002 $1,913,959 $750,000 $0 0
Portfolio Manager 2001 $718,750 $500,000 $0 0
Kathryn F. Fagan 2003 $984,000 $368,319 $0 50,000
Chief Financial Officer and 2002 $949,750 $250,000 $0 0
Treasurer 2001 $316,667 $150,000 $0 0
Jennifer S. Karve 2003 $984,000 $368,319 $0 50,000
Executive Vice President and 2002 $948,016 $250,000 $0 0
Secretary 2001 $266,667 $125,000 $0 0
James P. Fortescue 2003 $500,000 $250,000 $0 20,000
Senior Vice President and 2002 $491,667 $200,000 $0 0
Repurchase Agreement Manager 2001 $194,066 $100,000 $0 0
114
(1) None of the executive officers received perquisites or benefits that
totaled the lesser of $50,000 or 10% of his or her salary plus bonus
payments. Bonuses were paid in January 2004.
(2) At December 31, 2003, Mr. Farrell, Ms. Denahan, Ms. Fagan, Ms. Karve, and
Mr. Fortescue, held 151,190, 126,483, 41,779, 34,460, and 33,375 shares of
restricted stock, respectively, with values (based on the closing market
price of our common stock on December 31, 2003, which was $18.40 per
share) of $2,781,896, $2,327,287, $768,734, $634,064, $614,100,
respectively. We pay dividends on the restricted stock when and as paid on
our common stock.
EXERCISES AND VALUES OF OPTIONS
The following table sets forth certain information regarding options
exercised during the calendar year 2003, and held at year end, by our executive
officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END OPTIONS AT FY-END
ACQUIRED ON (#) ($)(1)
EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($)(1) UNEXERCISABLE UNEXERCISABLE
---------------------------------------------------------------------------------------------------------------------
Michael A.J. Farrell 25,099 $248,194 127,813/207,500 $1,292,727/$164,450
Wellington J. Denahan 10,486 $101,175 92,496/155,000 $937,784/$116,800
Kathryn F. Fagan 12,500 $126,893 32,438/53,375 $323,044/$56,803
Jennifer S. Karve 15,850 $163,825 27,390/52,750 $270,818/$50,265
James P. Fortescue 11,875 117,313 5,000/21,875 $57,480/$28,213
----------
(1) Based on the closing sale price of our common stock on the New York Stock
Exchange on December 31, 2003 ($18.40 per share).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This section discusses certain direct and indirect relationships and
transactions involving us and any director or executive officer. Last year, the
board of directors adopted governance principles for determining whether a
director would qualify as an independent director under the new, more
restrictive rules proposed by the New York Stock Exchange. In accordance with
115
those principles, the board of directors has determined that all of its
non-employee directors are independent directors.
We have entered into a merger agreement to acquire FIDAC. FIDAC is owned
by Michael A.J. Farrell, our Chairman of the Board, Chief Executive Officer and
President, Wellington J. Denahan, our Vice Chairman and Chief Investment
Officer, Kathryn F. Fagan, our Chief Financial Officer and Treasurer, Jennifer
S. Karve, our Executive Vice President and Secretary, and other of our officers
and employees. The acquisition is described in this proxy statement/prospectus.
A. Alexandra Denahan, our controller, is the sister of Wellington J.
Denahan, our Vice Chairman of the Board and Chief Investment Officer. A.
Alexandra Denahan, is employed by us and earns compensation in excess of $60,000
annually.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is comprised solely of the following
non-employee directors: Messrs. Browne, Lambiase, and Segalas. None of them has
served as an officer or employee of us or any affiliate or has any other
business relationship or affiliation with us, except his service as a director.
EQUITY COMPENSATION PLAN INFORMATION
We have adopted the Incentive Plan for executive officers, key employees
and nonemployee directors. The Incentive Plan authorizes the compensation
committee of our board of directors to grant awards, including incentive stock
options, or ISOs, as defined under Section 422 of the Internal Revenue Code, or
Code, and options not so qualified, NQSOs. The Incentive Plan authorizes the
granting of options or other awards for an aggregate of the greater of 500,000
shares or 9.5% of the outstanding shares of our common stock.
The following table provides information as of December 31, 2003,
concerning shares of our common stock authorized for issuance under our existing
Incentive Plan.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE INCENTIVE PLAN
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (EXCLUDING PREVIOUSLY
PLAN CATEGORY OUTSTANDING OPTIONS OPTIONS ISSUED)
--------------------------- -------------------------- ------------------------- -----------------------
Incentive Plan approved by 1,063,259 $14.28 8,063,780(1)
shareholders
Incentive Plan not approved
by shareholders -- -- --
---------- ------ ----------
Total 1,063,259 $14.28 8,063,780
========== ====== ==========
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----------
(1) The Incentive Plan authorizes the granting of options or other awards for
an aggregate of the greater of 500,000 or 9.5% of the outstanding shares
on a fully diluted basis of our common stock.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-OF-CONTROL
ARRANGEMENTS
We currently have employment agreements with Mr. Farrell, Ms. Denahan, Ms.
Fagan, and Ms. Karve. These employment agreements described below in this
section will continue to be the employment agreements for Mr. Farrell, Ms.
Denahan, Ms. Fagan, and Ms. Karve in the event the merger agreement is not
approved by our stockholders. If the merger agreement is approved the employment
agreements described above will be effective for Mr. Farrell, Ms. Denahan, Ms.
Fagan, and Ms. Karve. Each employment agreement is automatically extended for an
additional year at the end of each year, unless the officer or we provide a
prior written notice to the contrary.
Each employment agreement provides for annual base salaries to Mr.
Farrell, Ms. Denahan, Ms. Fagan, and Ms. Karve based upon our book value. Mr.
Farrell's employment agreement provides for an annual base salary equal to 0.25%
of our book value, Ms. Denahan's employment agreement provides for an annual
base salary equal to 0.20% of our book value. Ms. Fagan's and Ms. Karve's
employment agreements each provide for annual base salaries equal to 0.10% of
our book value. Our book value is defined in the employment agreements as the
aggregate amounts reported on our balance sheet as "Stockholders' Equity,"
excluding any adjustments for valuation reserves (i.e., changes in the value of
our portfolio of investments as a result of mark-to-market valuation changes).
Our board of directors may evaluate base salaries quarterly and upon the
raising of additional equity, and they may, at their discretion, raise the base
salary caps for our executive officers. The 2004 annual base salary for Mr.
Farrell was set at $2,400,000. The 2004 annual base salary for Ms. Denahan was
set at $1,900,000. The 2004 annual base salary for each of Ms. Fagan and Ms.
Karve was set at $972,000. Our board of directors has waived the base salary
caps for our executive officers for 2003 and 2004. Base salaries can also be
lowered at management's discretion based upon, among other things, our cash flow
needs.
Pursuant to the employment agreements, the executive officers are also
entitled to participate in our benefit plans, including the Incentive Plan. In
addition, our board of directors has established a bonus incentive compensation
plan for our executive officers. This program permits our board of directors, in
its discretion, to award cash bonuses annually to our executive officers. Each
employment agreement provides for the officer to receive his or her base salary
and bonus compensation to the date of the termination of employment by reason of
death, disability or resignation and to receive base compensation to the date of
the termination of employment by reason of a termination of employment for cause
as defined in the employment agreement. Each employment agreement also provides
for the subject officer to receive, in the event that we terminate the officer's
employment without cause, or if the officer resigns for "good reason", an
amount, 50% payable immediately and 50% payable in monthly installments over the
succeeding twelve months, equal to three times the greater of the officer's
combined maximum salary base and actual bonus compensation for the preceding
fiscal year or the average for the three preceding years of the officer's
combined actual base salary and bonus
117
compensation, subject in each case to a maximum amount of 1% of our book equity
value (exclusive of valuation adjustments) and a minimum amount of $250,000.
Section 280G of the Code may limit our ability to deduct these payments for
Federal income tax purposes. In the event that any payments, distributions, or
benefits provided or to be provided to the officer are determined to be subject
to the excise tax imposed by Section 4999 of Code, he or she is entitled to
receive a payment on an after-tax basis equal to the excise tax imposed. Each
employment agreement also contains a "non-compete" provision prohibiting the
officer from managing, controlling, participating in or operating a competing
REIT for a period of one year following termination of employment following our
termination of the officer without cause or resignation of the subject officer
for "good reason." Providing services to our affiliate FIDAC is expressly
excluded from operation of the "non-compete" provision. In addition, all
outstanding options and other awards granted to an officer under our Incentive
Plan immediately vest upon his or her termination without cause or termination
for "good reason." "Good reason" under the employment agreements includes
certain events resulting in a change of control of us. "Change of Control"
includes a merger or consolidation of us, a sale of all or substantially all of
our assets, changes in the identity of a majority of the members of our board of
directors (other than due to the death, disability or age of a director) or
acquisitions of more than 9.8% of the combined voting power of our capital
stock, subject to certain limitations. Each agreement requires that the officer
act in accordance with provisions of Maryland law relating to corporate
opportunities.
REPORT OF COMPENSATION COMMITTEE
The compensation structure for our executive officers and directors has
been developed with consideration for the following objectives:
INCENTIVES FOR MANAGEMENT TO MAXIMIZE PERFORMANCE. We have designed our
compensation policy to provide the proper incentives to management to maximize
our performance in order to serve the best interests of our stockholders. We
have sought to achieve this objective through the granting of stock options
under the Incentive Plan, the award of compensation pursuant to our bonus
incentive compensation program, and employment agreements with our executive
officers where compensation is dependent upon our book value.
To date, our executive officers, pursuant to the Incentive Plan, have been
granted options to purchase, in the aggregate, 1,019,991 shares of common stock
with exercise prices ranging from $4.00 to $17.97. These options vest in equal
installments over four, five or ten year periods from the date of grant.
Our board of directors also has adopted a bonus incentive compensation
program for executive officers. This program permits the compensation committee,
in its discretion, to award bonuses to our officers and employees based upon
individual performance, our overall performance, or such other factors as the
compensation committee determines to be appropriate. Bonuses may be paid in the
form of cash, stock options or other forms of compensation as determined
appropriate by the compensation committee. In 2003, bonuses were awarded in the
form of cash and were paid in January 2004. The primary factor considered in
these awards was our performance and growth during 2003 in view of the interest
rate environment and the overall economy.
118
Pursuant to employment agreements entered into between us and our
executive officers, base compensation for the officers is calculated as a
percentage of our book value. This arrangement was established based upon our
view that successful performance by us would result in our ability to raise
additional capital.
LONG-TERM COMMITMENT OF MANAGEMENT. The committee believes that the
long-term commitment of its current management team is a crucial factor in our
future performance. This team includes Mr. Farrell, Ms. Denahan and Ms. Karve,
who have worked together at FIDAC since March 1995 and at us since its
incorporation in November 1996 and its commencement of operations in February
1997, and Ms. Fagan, who has worked at us since April 1997. To ensure the
long-term commitment of its management team, we, with the approval of our board
of directors entered into employment agreements with Mr. Farrell, Ms. Denahan,
Ms. Fagan, and Ms. Karve. Each of these agreements provides for a term through
December 31, 2005 with automatic one-year extensions unless we or the officer
provides written notice to the contrary.
CONSISTENT WITH THE FOREGOING, WE HAVE STRUCTURED OUR EXECUTIVE
COMPENSATION POLICIES TO PROMOTE THE LONG-TERM COMMITMENT OF MANAGEMENT. IN
ADDITION, AS INDICATED ABOVE, OVER 99% OF THE STOCK OPTIONS GRANTED BY US SINCE
INCEPTION HAVE BEEN OPTIONS WITH VESTING PERIODS OF THREE, FOUR AND FIVE YEARS.
COMPARABILITY WITH COMPETITORS' COMPENSATION STRUCTURES. In assisting us
to develop guidelines for its compensation structure, including the bonus
incentive program, the compensation consultant engaged by us looked to the
compensation structures of other publicly held mortgage REITs and other publicly
held companies in the financial services industry. We believe our management
compensation structure is consistent, generally, with the management
compensation structure of comparable companies. We will continue to monitor
whether our compensation structure is consistent with the compensation structure
of its competitors.
CEO COMPENSATION. Mr. Farrell's total compensation for 2003 was
established pursuant to his employment agreement which is described under the
caption "Employment Agreements, Termination of Employment and Change-Of-Control
Arrangements." Mr. Farrell's compensation was established using substantially
the same criteria used to determine compensation levels for our other executive
officers which are discussed in this report. Effective January 1, 2002, Mr.
Farrell's salary was set at $2,430,000. For 2003, we determined to pay Mr.
Farrell a bonus of $420,798 (which was paid in January 2004). Mr. Farrell's
compensation for 2003 was related to our progress over the last year in
achieving strong financial results and his commitment for us to be a leader in
integrity and corporate governance.
COMPENSATION OF NON-EMPLOYEE DIRECTORS. Upon the recommendation of our
compensation consultant, we granted to each of our non-employee directors during
2003 options to purchase 1,250 shares vesting immediately and options to
purchase 15,000 shares vesting over five years.
The foregoing report has been furnished by the current members of the
compensation committee:
Spencer I. Browne John A. Lambiase Donnell A. Segalas
119
PERFORMANCE ANALYSIS
The following graph provides a comparison of our cumulative total
stockholder return and the cumulative stockholder return of the Standard &
Poor's Composite-500 Stock Index, or S&P 500, and the BBG REIT Mortgage Index,
BBG Index, an industry index of 11 tax-qualified mortgage REITs. The comparison
is for the period from December 31, 1998 to December 31, 2003 and assumes the
reinvestment of any dividends. The initial price of our common stock shown in
the graph below is based upon the price to public of $8.25 on December 31, 1998.
Upon written request, we will provide stockholders with a list of the REITs
included in the BBG Index. The historical information set forth below is not
necessarily indicative of future performance.
[PERFORMANCE CHART OMITTED]
12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
---------- ---------- ---------- ---------- ---------- ----------
Annaly 100 140 158 263 330 348
S&P 500 Index 100 122 112 99 78 99
BBG REIT Index 100 119 128 195 225 265
120
THE FOLLOWING IS THE REPORT OF THE AUDIT COMMITTEE WITH RESPECT TO OUR
AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003. THE
INFORMATION CONTAINED IN THIS REPORT SHALL NOT BE DEEMED TO BE "SOLICITING
MATERIAL" OR TO BE "FILED" WITH THE SECURITIES AND EXCHANGE COMMISSION, NOR
SHALL SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, EXCEPT TO THE EXTENT THAT WE SPECIFICALLY INCORPORATES BY REFERENCE
IN SUCH FILING.
--------------------------------------------------------------------------------
THE AUDIT COMMITTEE
--------------------------------------------------------------------------------
Since our inception, we have had an audit committee composed entirely of
non-employee directors. The members of the audit committee meet the independence
and experience requirements of the New York Stock Exchange. Mr. Lambiase has
been designated as the audit committee's financial expert and is an independent
director. In 2003, the Committee met four times. The Committee has adopted a
charter outlining the practices it follows. Any changes in the charter or key
practices will be reflected on our website at WWW.ANNALY.COM.
During the year 2003, at each of its meetings, the audit committee met
with the senior member of the our financial management team and our independent
auditors. The audit committee's agenda is established by the audit committee's
chairman. The audit committee had private sessions, at each of its meetings,
with the independent auditors at which candid discussions of financial
management, accounting and internal control issues took place.
The audit committee engaged Deloitte & Touche LLP as our independent
auditors and reviewed with our financial manager and the independent auditors,
overall audit scope and plans, the results of internal and external audit
examination, evaluations by the auditors of our internal controls and the
quality of our financial reporting.
Management has reviewed the audited financial statements with the audit
committee including a discussion of the quality, not just the acceptability, of
the accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements. In addressing the quality of
management's accounting judgments, members of the audit committee asked for and
received management's representations that our audited financial statements have
been prepared in conformity with generally accepted accounting principles in the
United States of America, and have expressed to both management and auditors
their general preference for conservative policies when a range of accounting
options is available.
In its meetings with representatives of the independent auditors, the
audit committee asks them to address, and discusses their responses to several
questions that the audit committee believes are particularly relevant to its
oversight. These questions include:
o Are there any significant accounting judgments made by management in
preparing the financial statements that would have been made
differently had the auditors themselves prepared and been
responsible for the financial statements?
o Based on the auditors' experience, and their knowledge of us, do our
financial statements fairly present to investors, with clarity and
completeness, our financial
121
position and performance for the reporting period in accordance with
generally accepted accounting principles, and SEC disclosure
requirements?
o Based on the auditors' experience, and their knowledge of us, have
we implemented internal controls and internal audit procedures that
are appropriate?
The audit committee believes that, by thus focusing its discussions with
the independent auditors, it can promote a meaningful dialogue that provides a
basis for its oversight judgments.
The audit committee also discussed with the independent auditors other
matters required to be discussed by the auditors with the audit committee under
Statement on Auditing Standards No. 61, as amended by Statement on Auditing
Standards No. 90 (communications with audit committees). The audit committee
received and discussed with the auditors their annual written report on their
independence from us and our management, which is made under Independence
Standards Board Standard No. 1 (independence discussions with audit committees),
and considered with the auditors whether the provision of non-audit services is
compatible with the auditors' independence.
In performing all of these functions, the audit committee acts only in an
oversight capacity and, necessarily, in its oversight role, the audit committee
relies on the work and assurances of our management, which has the primary
responsibility for financial statements and reports, and of the independent
auditors, who, in their report, express an opinion on the conformity of our
annual financial statements to generally accepted accounting principles.
In reliance on these reviews and discussions, and the report of the
independent auditors, the audit committee has recommended to our board of
directors, and our board of directors has approved, that the audited financial
statements be included in our Annual Report on Form 10-K for the year ended
December 31, 2003, for filing with the Securities and Exchange Commission.
The foregoing report has been furnished by the current members of the
audit committee:
Kevin P. Brady Jonathan D. Green John A. Lambiase
--------------------------------------------------------------------------------
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
The accounting firm of Deloitte & Touche LLP, D&T, has served as our
independent auditors since our formation in November 1996. During this time, it
has performed accounting and auditing services for us. We expect that
representatives of D&T will be present at the meeting, will have the opportunity
to make a statement and will be available to respond to appropriate questions.
If the appointment of D&T is not ratified, our audit committee will reconsider
the appointment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT AUDITORS FOR THE YEAR
2004.
122
RELATIONSHIP WITH INDEPENDENT AUDITORS
In addition to performing the audit of our financial statements, D&T
provided tax services for us during 2003. The aggregate fees billed for 2003 and
2002 for each of the following categories of services are set forth below:
AUDIT FEES: The aggregate fees billed by D&T for audit and review of our
2003 financial statements were $277,750. The aggregate fees billed by D&T for
audit and review of our 2002 financial statements were $252,500.
AUDIT RELATED FEES: The aggregate fees billed by D&T for audit related
services during 2003 were $180,000. The aggregate fees billed by D&T for audit
related services during 2002 were $95,000. The audit related services in 2003
and 2002 principally include due diligence and accounting consultation relating
to our public offerings.
TAX FEES: The fees billed by D&T for tax services during 2003 were $7,000
and during 2002 were $8,000. Fees for tax services include tax compliance, tax
advice, and tax planning.
ALL OTHER FEES: Fees for all other services to D&T not described above
totaled $0 for 2003 and $0 for 2002.
The audit committee has also adopted policies and procedures for
pre-approving all non-audit work performed by D&T after January 1, 2003.
Specifically, the audit committee pre-approved the use of D&T for the following
categories of non-audit services: merger and acquisition due diligence and audit
services; tax services; internal control reviews; employee benefit plan audits;
and reviews and procedures that we request D&T to undertake to provide
assurances on matters not required by laws or regulations. In each case, the
audit committee also set a specific annual limit on the amount of such services
which we would obtain from D&T, and required management to report the specific
engagements to the audit committee on a quarterly basis, and also obtain
specific pre-approval from the audit committee for any engagement over five
percent of the total amount of revenues estimated to be paid by us to D&T during
the then current fiscal year. Our audit committee approved the hiring of D&T to
provide all of the services detailed above prior to D&T's engagement.
--------------------------------------------------------------------------------
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
--------------------------------------------------------------------------------
We believe that, during the fiscal year ended December 31, 2003, all
filing requirements under Section 16(a) of the Securities Exchange Act of 1934,
as amended, applicable to our officers, directors and beneficial owners of more
than ten percent of our common stock were complied with on a timely basis,
except that Donnell A. Segalas, one of our independent directors, whose Form 4
statement of changes in beneficial ownership was due on August 7, 2003, was
filed on August 8, 2003.
123
--------------------------------------------------------------------------------
ACCESS TO FORM 10-K
--------------------------------------------------------------------------------
On written request, we will provide without charge to each record or
beneficial holder of our common stock as of March 22, 2004 a copy of our annual
report on Form 10-K for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission. You should address your request to Investor
Relations, Annaly Mortgage Management, Inc., 1211 Avenue of the Americas, Suite
2902, New York, New York 10036 or email your request to us at
investor@annaly.com.
We make available on our website, WWW.ANNALY.COM, under "Financial Reports
& SEC Filings," free of charge, our annual reports on Form 10-K, quarterly
reports on From 10-Q, current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after we electronically file or
furnish such materials to the SEC.
--------------------------------------------------------------------------------
LEGAL MATTERS
--------------------------------------------------------------------------------
The validity of the shares of our common stock offered by this proxy
statement/prospectus will be passed upon by McKee Nelson LLP, Washington, D.C.
Morrison & Foerster LLP will pass upon FIDAC's ability to meet the
requirements for qualification and taxation as a taxable REIT subsidiary
following the completion of the acquisition.
--------------------------------------------------------------------------------
EXPERTS
--------------------------------------------------------------------------------
The financial statements of us incorporated herein by reference from the
Annual Report on Form 10-K for the year ended December 31, 2003 and the
financial statements of FIDAC included herein for the year ended December 31,
2003, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports, which are incorporated by reference and included
herein, respectively, and have been so incorporated and included, respectively,
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
--------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
--------------------------------------------------------------------------------
For a stockholder proposal to be included in the proxy statement for our
2005 annual meeting, including a proposal for the election of a director, the
proposal must have been received by us at our principal offices no later than
December ___, 2004.
--------------------------------------------------------------------------------
OTHER MATTERS
--------------------------------------------------------------------------------
As of the date of this proxy statement/prospectus, the board of directors
does not know of any matter that will be presented for consideration at the
annual meeting other than as described in this proxy statement/prospectus.
124
--------------------------------------------------------------------------------
WHERE YOU CAN FIND MORE INFORMATION
--------------------------------------------------------------------------------
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information that we file with the SEC at the SEC's public reference room at
Public Reference Room, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549.
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. These SEC filings are also available to the public from
commercial document retrieval services and at the Internet worldwide web site
maintained by the SEC at http://www.sec.gov. Reports, proxy statements and other
information concerning us may also be inspected at the offices of the New York
Stock Exchange, which is located at 20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" information in this proxy
statement/prospectus, which means that we can disclose important information to
you by referring you to other documents filed separately with the SEC. The
information incorporated by reference in this proxy statement/prospectus is
considered part of this proxy statement/prospectus, except for any information
superseded by information contained directly in this proxy statement/prospectus
or in later filed documents incorporated by reference in this proxy
statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
set forth below that we previously filed with the SEC. These documents contain
important business and financial information about us that is not included in or
delivered with this proxy statement/prospectus.
o Our Annual Report on Form 10-K for the year ended December 31, 2003
as filed on March 9, 2004;
o Our Current Report on Form 8-K as filed on January 2, 2004;
o Our Current Report on Form 8-K as filed on January 16, 2004; and
o The description of our common stock included in our registration
statement on Form 8-A, as amended.
This proxy statement/prospectus also incorporates by reference all
additional documents that may be filed by us with the SEC under Section 13(a),
13(c), 14 or 15(d) of the Exchange Act between the date of this proxy
statement/prospectus and the date of the our annual meeting. These include
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as proxy statements.
If you are a stockholder in us, we may have sent you some of the documents
incorporated by reference, but you can also obtain any of them through us, the
SEC or the SEC's Internet web site as described above. Documents incorporated by
reference are available from us without charge, excluding all exhibits, except
that, if we have specifically incorporated by reference an exhibit in this proxy
statement/prospectus, the exhibit will also be provided without charge. You
125
may obtain documents incorporated by reference in this proxy
statement/prospectus by requesting them in writing or by telephone from us at
the following addresses:
Annaly Mortgage Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, NY 10036
Phone: (212) 696-0100
Facsimile: (212) 696-9809
Email: investor@annaly.com
Attention: Investor Relations
If you would like to request documents, please do so by May 10, 2004, in
order to receive them before the annual meeting.
You can also get more information by visiting our website at
http://www.annaly.com. Website materials from this website and other websites
mentioned in this proxy statement/prospectus are not incorporated by reference
in this proxy statement/prospectus. If you are viewing this proxy
statement/prospectus in electronic format, each of the URLs mentioned in this
proxy statement/prospectus is an active textual reference only.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus. We have not authorized anyone to
provide you with information that is different from what is contained in this
proxy statement/prospectus. Therefore, if anyone does give you information of
this sort, you should not rely on it. If you are in a jurisdiction where offers
to exchange or sell, or solicitations of offers to exchange or purchase, the
securities offered by this proxy statement/prospectus or the solicitation of
proxies is unlawful, or if you are a person to whom it is unlawful to direct
these types of activities, then the offer presented in this proxy
statement/prospectus does not extend to you. This proxy statement/prospectus is
dated ___________ ____, 2004. You should not assume that the information
contained in this proxy statement/prospectus is accurate as of any date other
than that date. Neither the mailing of this proxy statement/prospectus to our
stockholders nor the issuance of our common stock in the acquisition creates any
implication to the contrary.
126
--------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 31, 2003
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ANNALY MORTGAGE MANAGEMENT, INC.,
FIXED INCOME DISCOUNT ADVISORY COMPANY,
FDC MERGER SUB, INC.
AND THE PERSONS SIGNATORY HERETO
DATED AS OF DECEMBER 31, 2003
ARTICLE I THE MERGER.................................................................................2
SECTION 1.1 The Merger........................................................................2
SECTION 1.2 Closing...........................................................................2
SECTION 1.3 Effective Time....................................................................2
SECTION 1.4 Effects of the Merger.............................................................2
SECTION 1.5 Articles and By-Laws..............................................................3
SECTION 1.6 Board and Officers of the Surviving Corporation...................................3
SECTION 1.7 Merger Consideration; Conversion of Shares; Cancellation of Shares................3
SECTION 1.8 Closing Merger Consideration......................................................4
SECTION 1.9 Contingent Merger Consideration...................................................4
SECTION 1.10 Initial Determination of Adjusted Revenue and Adjusted Margin.....................9
SECTION 1.11 Final Determination of Contingent Merger Consideration...........................10
SECTION 1.12 Exchange Procedures..............................................................11
SECTION 1.13 Certain Adjustments..............................................................13
SECTION 1.14 REIT Provisions..................................................................14
SECTION 1.15 Escrow...........................................................................14
ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT..................................................15
SECTION 2.1 Organization and Qualification of Parent.........................................16
SECTION 2.2 Corporate Authorization..........................................................16
SECTION 2.3 Consents and Approvals; No Violations............................................16
SECTION 2.4 Opinion of Parent Financial Advisor..............................................17
SECTION 2.5 Brokers..........................................................................17
SECTION 2.6 Capitalization of Parent and Its Subsidiaries....................................17
SECTION 2.7 Merger Sub Actions...............................................................18
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................18
SECTION 3.1 Organization and Qualification of the Company....................................18
SECTION 3.2 Corporate Authorization..........................................................19
SECTION 3.3 Reports; Financial Statements....................................................19
SECTION 3.4 Accounts Receivable..............................................................20
SECTION 3.5 Consents and Approvals; No Violations............................................20
SECTION 3.6 Brokers..........................................................................21
i
SECTION 3.7 Information......................................................................21
SECTION 3.8 Capitalization of the Company....................................................21
SECTION 3.9 No Defaults......................................................................21
SECTION 3.10 Taxes............................................................................22
SECTION 3.11 Ownership of Parent Capital Stock................................................23
SECTION 3.12 Permits and Licenses.............................................................23
SECTION 3.13 Compliance with Laws.............................................................24
SECTION 3.14 Absence of Certain Changes or Events.............................................24
SECTION 3.15 Litigation; Regulatory Action....................................................25
SECTION 3.16 Transactions with Affiliates.....................................................25
SECTION 3.17 No Dissenters' Rights............................................................25
SECTION 3.18 Technology and Intellectual Property.............................................26
SECTION 3.19 Material Contracts...............................................................26
SECTION 3.20 No Default Under Contracts.......................................................27
SECTION 3.21 Investment Management Contracts..................................................27
SECTION 3.22 Key Man Life Insurance...........................................................28
SECTION 3.23 Employees........................................................................28
SECTION 3.24 Derivative Instruments...........................................................29
SECTION 3.25 Business; Registrations..........................................................29
SECTION 3.26 Certain Additional Representations and Warranties as to the Company Funds........29
ARTICLE IV REPRESENTATION AND WARRANTIES OF THE SELLERS..............................................31
SECTION 4.1 Investment Purpose...............................................................31
SECTION 4.2 Accredited Investor Status.......................................................31
SECTION 4.3 Reliance on Exemptions...........................................................31
SECTION 4.4 Information......................................................................31
SECTION 4.5 No Governmental Review...........................................................31
SECTION 4.6 Transfer or Resale...............................................................31
SECTION 4.7 Legends..........................................................................32
SECTION 4.8 Authorization; Enforcement; Validity.............................................32
SECTION 4.9 Ownership of Company Shares......................................................32
SECTION 4.10 No Other Agreements to Sell......................................................32
ARTICLE V COVENANTS.................................................................................33
ii
SECTION 5.1 Conduct of Business of the Company...............................................33
SECTION 5.2 Conduct of Business of Parent....................................................34
SECTION 5.3 Other Actions....................................................................34
SECTION 5.4 No Solicitation..................................................................34
SECTION 5.5 Additional Agreements; Reasonable Efforts........................................35
SECTION 5.6 Public Announcements.............................................................36
SECTION 5.7 Preparation of the Proxy Statement...............................................36
SECTION 5.8 Access to Information............................................................38
SECTION 5.9 Merger Sub Actions...............................................................38
SECTION 5.10 Advice of Changes................................................................38
SECTION 5.11 Restrictions on Transfer.........................................................38
SECTION 5.12 Indemnification; Directors' and Officers' Insurance..............................40
SECTION 5.13 Registration Rights..............................................................40
SECTION 5.14 Pre-Closing Dividend.............................................................48
SECTION 5.15 Client Consents..................................................................48
SECTION 5.16 Escrow Agent.....................................................................48
ARTICLE VI CONDITIONS TO CONSUMMATION OF THE MERGER..................................................48
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Merger......................48
SECTION 6.2 Conditions to the Obligations of Parent..........................................49
SECTION 6.3 Conditions to the Obligations of the Company.....................................50
SECTION 6.4 Frustration of Closing Conditions................................................50
ARTICLE VII TERMINATION; AMENDMENT; WAIVER............................................................51
SECTION 7.1 Termination......................................................................51
SECTION 7.2 Effect of Termination............................................................52
SECTION 7.3 Amendment........................................................................52
SECTION 7.4 Extension; Waiver................................................................52
ARTICLE VIII TAX MATTERS...............................................................................52
SECTION 8.1 Tax Returns......................................................................52
SECTION 8.2 Assistance and Cooperation.......................................................53
SECTION 8.3 Contests and Payment Procedures..................................................53
ARTICLE IX INDEMNIFICATION...........................................................................54
SECTION 9.1 Indemnification by Sellers.......................................................54
SECTION 9.2 Indemnification by Parent........................................................55
iii
SECTION 9.3 Indemnification Procedures.......................................................55
SECTION 9.4 General Indemnification Provisions...............................................57
ARTICLE X MISCELLANEOUS.............................................................................59
SECTION 10.1 Survival.........................................................................59
SECTION 10.2 Set-Off..........................................................................59
SECTION 10.3 Expenses; Transfer Taxes.........................................................60
SECTION 10.4 Entire Agreement; Assignment.....................................................60
SECTION 10.5 Notices..........................................................................60
SECTION 10.6 Governing Law; Consent to Jurisdiction; Jury Waiver..............................61
SECTION 10.7 Enforcement......................................................................62
SECTION 10.8 Descriptive Headings; Schedules, Interpretation..................................62
SECTION 10.9 Parties in Interest..............................................................63
SECTION 10.10 Severability.....................................................................63
SECTION 10.11 Counterparts.....................................................................63
SECTION 10.12 Sellers' Representative..........................................................63
iv
Cross Reference
Term in Agreement
-----------------------------------------------------------------
Abstention Percentage 5.7(d)
Acquired Business 1.9(d)(ii)
Actual Compensation Amount 1.9(d)(iii)
Adjusted Company Revenue 1.9(d)(iv)
Adjusted Annual Expenses 1.9(d)(v)
Adjusted Margin 1.9(d)(vi)
Affiliate 3.11
Affirmative Percentage 5.7(d)
Agreement Preamble
Allocable Share 9.1(c)
Annaly Factor 1.9(d)(vii)
Annaly Support Expenses 1.9(d)(viii)
Annual Assets under Management 1.9(d)(ix)
Annual Expenses 1.9(d)(x)
Annual Financial Statements 1.10(a)
Annual Period 1.9(d)(i)
Applicable Percentage 1.9(d)(xi)
Average Price 1.9(d)(xii)
Average Shareholders' Equity 1.9(d)(xvii)
Basic Survival Period 10.1(b)
Calculated Compensation Amount 1.9(d)(xiii)
Certificate 1.7(b)
Certificate of Merger 1.3
CFTC 3.25(b)
Client 3.21(b)(i)
Client Consents 5.15
Closing 1.2
Closing Date 1.2
Closing Merger Consideration 1.8(a)
Closing Price 1.8(b)
Code Preamble
Company Preamble
Company 2002 Balance Sheet 3.3(a)(i)(B)
Company 2002 Financial Statements 3.3(a)(i)(B)
Company Board Preamble
Company Common Stock 1.7(a)
Company Disclosure Schedule Art. III Preamble
Company Financial Statements 3.3(a)(i)
Company Funds 3.26
Company Interim Balance Sheet 3.3(a)(i)(A)
Company Interim Financial Statements 3.3(a)(i)(A)
Company Material Adverse Effect 3.1(b)
Company Regulatory Approvals 3.5(a)
Company Securities 3.8
Company Shareholder Approval 3.2
Company Shareholders Preamble
v
Cross Reference
Term in Agreement
-----------------------------------------------------------------
Company Shares 1.7(a)
Contingent Merger Consideration 1.9(d)(xiv)
Contingent Payment Date 1.9(d)(xv)
Control 10.8(b)(ii)
Controlled By 10.8(b)(ii)
Custodian 5.11(b)
Damages 9.4(e)
Delaware Law Preamble
Demand Notice 5.13(a)(i)
Earn-out Condition 1.9(b)
Earn-out Statement 1.10(b)
Effective Time 1.3
ERISA 3.23(b)
Escrow Agent 1.15(a)
Escrow Agreement 1.15(a)
Escrowed Shares 1.15(d)
Exchange Act 2.3(a)
Exchange Agent 1.12(a)
Excluded Provisions 9.4(a)
Family Member 3.4
Final Order 1.15(b)
First Annual Period 1.9(d)(i)
First Year Carryover 1.9(d)(xvi)
Form S-3 5.13(a)
Form S-4 5.7(a)
GAAP 1.9(d)(iv)
HSR Act 2.3(a)
Immediate Family 1.7(d)
Implied Annaly Revenue 1.9(d)(xvii)
Indemnified party 9.3(a)
Indemnification Threshold 9.4(a)
Independent Auditors 1.11(a)
Initial Escrowed Shares 1.15(a)
Initiating Holders 5.13(a)
Intellectual Property 3.18
Investment Advisers Act 3.19
Investment Company Act 3.19
Investment Management Contract 3.21(b)(ii)
IRS 3.10(a)
Knowledge 10.8(c)
Litigation 3.15
Margin Percentage 1.9(d)(xviii)
Material Contract 3.19
Maximum Number 1.15(e)
Merger Preamble
Merger Consideration 1.7(a)
Merger Securities 4.1
vi
Cross Reference
Term in Agreement
-----------------------------------------------------------------
Merger Sub Preamble
Merger Sub Common Stock 1.14
NASD 2.3(a)
Negative Percentage 5.7(d)
NYSE 1.8(b)
Operating Margin Target 1.9(b)
Parent Preamble
Parent Board Preamble
Parent Closing Price 1.8(b)
Parent Common Stock 1.8(a)
Parent Financial Advisor Preamble
Parent Material Adverse Effect 2.1(b)
Parent SEC Reports Art. II Preamble
Parent Securities 2.6
Parent Shareholder Approval 2.2
Parent Shareholders Preamble
Parent Shares 1.8(a)
Parent Special Committee Preamble
Parent Special Meeting 5.7(c)
Parent Stock Options 2.6
Period End Price 1.15(e)
Permitted Transfer 5.11(f)(ii)
Permitted Withdrawals 1.15(c)
Person 10.8(b)(iii)
Plan 3.23(b)
Pre-Closing Period 5.14
Proportional Earn-out Condition 1.9(b)
Proxy Statement/Prospectus 5.6(a)
Record Holder 1.7(b)
Registration Expenses 5.13(f)
Regulatory Entity 2.3(a)
Reference Date 5.11(a)
REIT 5.1(e)
Release Price 9.4(f)
Released Party 10.12(d)
Representative 10.12(a)
Retained Securities 1.15(b)
Revenue Percentage 1.9(d)(xix)
Revenue Target 1.9(b)
Rule 144 4.6
Rule 145 5.11(e)
SEC Art. II Preamble
Second Annual Period 1.9(d)(i)
Second Period Amount 1.9(d)(xx)
Second Year Carryover 1.9(d)(xxi)
Securities Act 2.3(a)
Seller Preamble
vii
Cross Reference
Term in Agreement
-----------------------------------------------------------------
Selling Expenses 5.13(f)
Shelf Registration Statement 5.13(a)
SRO 2.3(a)
Surviving Corporation 1.1
Tax Returns 3.10(d)
Taxes 3.10(d)
Third Annual Period 1.9(d)(i)
Third Period Amount 1.9(d)(xxii)
Third Party Claim 9.3(a)
Total Compensation Amount 1.9(d)(xxiii)
Transfer 5.11(f)(i)
Under common control with 10.8(b)(ii)
Valuation Price 9.4(f)
VWAP 1.9(d)(xxiv)
viii
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 31, 2003 (this
"Agreement"), by and among ANNALY MORTGAGE MANAGEMENT, INC., a Maryland
corporation ("Parent"), FDC MERGER SUB, INC., a Delaware corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), FIXED INCOME DISCOUNT ADVISORY
COMPANY, a Delaware corporation (the "Company") and each of the persons who are
signatories hereto (hereinafter referred to individually as a "Seller" and
collectively as the "Sellers").
WHEREAS, it is proposed that Merger Sub will merge with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation, in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law"), upon the terms and subject to the conditions set
forth herein;
WHEREAS, a special committee (the "Parent Special Committee") comprised of
all of the members of the Board of Directors of Parent (the "Parent Board") who
are not directors, officers, employees or affiliates of the Company, has
received the written opinion of Lehman Brothers Inc. (the "Parent Financial
Advisor") that, based on and subject to the various assumptions and
qualifications set forth in such opinion, as of the date of such opinion, the
Merger Consideration (as hereinafter defined) is fair to Parent from a financial
point of view;
WHEREAS, the Parent Special Committee has determined that it is in the best
interests of the shareholders of Parent (the "Parent Shareholders") (other than
the Company and its affiliates) to approve this Agreement and the transactions
contemplated hereby, including the Merger, and has recommended to the Parent
Board that the Parent Board adopt, and recommend that the Parent Shareholders
approve, this Agreement and the transactions contemplated hereby, including the
Merger;
WHEREAS, the Parent Board has determined that it is in the best interests
of the Parent Shareholders to approve this Agreement and the transactions
contemplated hereby, including the Merger, has determined that the Merger is
advisable, and has adopted, and resolved to recommend that the Parent
Shareholders approve as required by the rules of the New York Stock Exchange
(the "NYSE") (with the shares of Parent Common Stock (as defined) held by the
Sellers voted in direct proportion to the shares of Parent Common Stock held by
the Parent Shareholders who are not Sellers) this Agreement and the transactions
contemplated hereby, including the Merger, upon the terms and subject to the
conditions of this Agreement;
WHEREAS, the Board of Directors of the Company (the "Company Board") has
determined that it is in the best interests of the shareholders of the Company
(the "Company Shareholders") to approve this Agreement and the transactions
contemplated hereby, including the Merger, has declared the Merger advisable,
and has adopted, and resolved to recommend that the Company Shareholders
approve, this Agreement and the transactions contemplated hereby, including the
Merger, upon the terms and subject to the conditions of this Agreement;
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WHEREAS, the Company Shareholders, concurrently with the execution of this
Agreement, have executed a unanimous written consent of the Company Shareholders
approving this Agreement and the transactions contemplated hereby, including the
Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and that this Agreement will constitute a
plan of reorganization under Sections 354 and 361 of the Code; and
WHEREAS, in order to induce Parent to enter into this Agreement, certain
shareholders, directors and executive officers of the Company have entered into
employment agreements (which include non-competition covenants that constitute
an integral part of the consideration hereunder by the Sellers);
NOW, THEREFORE, in consideration of the promises and the representations,
warranties, covenants and agreements herein contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, intending to be legally bound hereby, Parent, the Company, the
Sellers and Merger Sub hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Delaware Law, at the Effective
Time (as defined), Merger Sub shall be merged with and into the Company. As a
result of the Merger, the separate corporate existence of Merger Sub shall
cease, and the Company shall continue as the surviving corporation of the Merger
(the "Surviving Corporation").
SECTION 1.2 CLOSING. The closing of the Merger (the "Closing") will take
place at the offices of Morrison & Foerster LLP, 1290 Avenue of the Americas,
New York, NY, at 10:00 a.m. on a mutually agreeable date to be specified by the
parties hereto, which (subject to satisfaction or waiver of all of the
conditions set forth in Article VI) shall be no later than the second business
day after satisfaction or waiver of the conditions set forth in Section 6.1(a)
and Section 6.1(b) (the "Closing Date"), unless otherwise agreed in writing by
the parties hereto.
SECTION 1.3 EFFECTIVE TIME. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VI, the parties hereto shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware, in such form as is required by, and executed in
accordance with, the relevant provisions of Delaware Law (the date and time of
such filing being the "Effective Time").
SECTION 1.4 EFFECTS OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving
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Corporation, and all debts, liabilities, obligations, restrictions, disabilities
and duties of the Company and Merger Sub shall become the debts, liabilities,
obligations, restrictions, disabilities and duties of the Surviving Corporation.
SECTION 1.5 ARTICLES AND BY-LAWS. As of the Effective Time, the Certificate
of Incorporation and By-Laws of the Company, in each case as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation and By-Laws of the Surviving Corporation.
SECTION 1.6 BOARD AND OFFICERS OF THE SURVIVING CORPORATION. The directors
of Merger Sub immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation following the Merger, each to hold office
until the earlier of such person's resignation or removal or until a successor
is duly elected and qualified, as the case may be. The officers of the Company
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation following the Merger, each to hold office until the
earlier of such person's resignation or removal or until a successor is duly
elected and qualified, as the case may be.
SECTION 1.7 MERGER CONSIDERATION; CONVERSION OF SHARES; CANCELLATION OF
SHARES. (a) Each share of common stock of the Company (the "Company Common
Stock" or "Company Shares") issued and outstanding immediately prior to the
Effective Time shall be canceled, and shall by virtue of the Merger and without
any action on the part of the holder thereof, be converted automatically into
the right to receive the Closing Merger Consideration and the Contingent Merger
Consideration (collectively, the "Merger Consideration") subject to and upon the
terms and conditions provided herein.
(b) At the Effective Time, all shares of the Company Common Stock
converted pursuant to Section 1.7(a) shall automatically be canceled and retired
and cease to exist, and each holder of a certificate ("Certificate")
representing any such shares of Company Common Stock (each, a "Record Holder")
shall cease to have any rights with respect thereto, except the right to receive
the Closing Merger Consideration in accordance with Section 1.8 and the
Contingent Merger Consideration in accordance with Section 1.9.
(c) Each share of common stock, without par value per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable share
of common stock, par value $.01, of the Surviving Corporation.
(d) The right of a Record Holder to receive the Closing Merger
Consideration in accordance with Section 1.8 and the Contingent Merger
Consideration (if any) in accordance with Section 1.9 may not be transferred or
assigned except consistent with applicable law and (i)by operation of law, (ii)
by will or the laws of descent or distribution, (iii) to the Record Holder's
spouse, parent, descendents or siblings (collectively, the "Immediate Family"),
(iv) to a trust, the sole beneficiaries of which are the Record Holder and/or
the Record Holder's Immediate Family, (v) to an entity wholly owned by the
Record Holder and/or the Record Holder's Immediate Family, (vi) to Parent or
(vii) upon dissolution of an entity to its beneficial owners. Permitted
transfers will be recognized by Parent only upon receipt of written notice and
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such documents as Parent may require, including, without limitation, such
transferee's agreement to be bound by the terms and conditions of this
Agreement. Until such recognition, Parent may treat the party recorded on its
books as a Record Holder as the absolute owner of the right to receive the
Closing Merger Consideration and the Contingent Merger Consideration (if any).
SECTION 1.8 CLOSING MERGER CONSIDERATION. (a) For each share of Company
Common Stock canceled pursuant to Section 1.7(a), the Record Holder thereof
shall be entitled to receive a number of validly issued, fully paid and
nonassessable shares of common stock of the Parent (the "Parent Common Stock" or
"Parent Shares") equal to (i) $40,500,000 divided by (ii) the Parent Closing
Price (as defined) divided by (iii) the number of shares of Company Common Stock
canceled pursuant to Section 1.7(a) (subject to further adjustment (if any)
required pursuant to Section 1.13(a)) (the "Closing Merger Consideration").
(b) As used in this Agreement, (i) the "Parent Closing Price" shall
equal the Closing Price of Parent Common Stock for the trading day prior to
January 2, 2004, and (ii) the "Closing Price" of Parent Common Stock on any
trading day shall mean the closing price per share of the Parent Common Stock on
the NYSE (as reported on the NYSE Composite Tape).
(c) The issuance and delivery to a Record Holder of the Closing Merger
Consideration is subject to compliance with the exchange procedures set forth in
Section 1.12.
SECTION 1.9 CONTINGENT MERGER CONSIDERATION. (a) For each share of Company
Common Stock canceled pursuant to Section 1.7(a), the Record Holder thereof
shall be entitled to receive, on each Contingent Payment Date, the Contingent
Merger Consideration (if any) that is payable with respect to the Annual Period
immediately preceding such Contingent Payment Date; subject, however, to
Parent's obligation to make payment of any Contingent Merger Consideration at
the time and to the extent required pursuant to Sections 1.11(c) and (d) below.
(b) Schedule 1.9(b) sets forth, for each Annual Period, a "Revenue
Target" and an "Operating Margin Target." For each Annual Period, the condition
(the "Earn-out Condition") to the full amount of the Contingent Merger
Consideration becoming due is that (i) the Adjusted Company Revenue for such
Annual Period equal or exceed the Revenue Target for such Annual Period and (ii)
the Adjusted Margin for such Annual Period equal or exceed the Operating Margin
Target for such Annual Period. For any Annual Period, the Earn-out Condition
will be deemed not to have been satisfied if either the applicable Revenue
Target in clause (i) or Operating Margin Target in clause (ii) of the
immediately preceding sentence has not been equaled or exceeded. For each Annual
Period, the condition (the "Proportional Earn-out Condition") to a portion of
the Contingent Merger Consideration becoming due is that the Applicable
Percentage (as defined below) for such Annual Period equals or exceeds 0.8.
(c) The issuance and delivery to a Record Holder of the Contingent
Merger Consideration is subject to compliance with the exchange procedures set
forth in Section 1.12.
(d) For the purpose of determining the Contingent Merger Consideration
(if any), the following terms shall have the meanings assigned to them in this
Section 1.9:
(i) The "First Annual Period" means the 12 month period ending
December 31, 2004; the "Second Annual Period" means the 12 month period ending
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December 31, 2005; and the "Third Annual Period" means the 12 month period
ending December 31, 2006. "Annual Period" shall refer to any of the foregoing
periods as the context may require and "Annual Periods" shall refer collectively
to all three such periods.
(ii) "Acquired Business" means any new investment advisory
account relationships, asset management relationships, managed accounts or
similar investment management service relationships that the Surviving
Corporation acquires after the Effective Time and for which it pays any form of
consideration to a third party, including, without limitation, any cash or cash
equivalents or other marketable securities, any equity interests or carried
interests, any assumption of debt or provision of credit support, any finders'
fees, any compensation arrangements or anything else of value that constitutes
consideration to such third party for the transfer of such account or other
relationships to the Surviving Corporation or any of its subsidiaries; provided,
however, that any investment advisory account relationship, asset management
relationship, managed account or similar investment management service
relationship or other account relationship acquired by the Surviving Corporation
after the Effective Time as a result of its marketing activities, the marketing
activities of its agents or distributors (which may be entitled to receive a
portion of any management or other fees generated by such relationship) or
otherwise, and which does not involve an up-front payment of consideration to a
third party not exceeding $200,000 (excluding reimbursement of out-of-pocket
costs and expenses) shall not constitute an Acquired Business.
(iii) "Actual Compensation Amount" means, with respect to any
Annual Period, an amount equal to the actual amount of compensation, salaries,
bonus payments and employee benefit expenses paid to or accrued for the benefit
of employees of the Surviving Corporation during such Annual Period; provided
that the Actual Compensation Amount shall not include any compensation,
salaries, bonus payments and employee benefit expenses directly attributable to
any Acquired Business.
(iv) "Adjusted Company Revenue" means, with respect to any Annual
Period, the aggregate amount of revenue earned by the Surviving Corporation
during such Annual Period in accordance with generally accepted accounting
principles ("GAAP"), as consistently applied by the Surviving Corporation less
an amount equal to the Implied Annaly Revenue for such Annual Period; provided
that Adjusted Company Revenue shall not include any revenues of the Surviving
Corporation that are attributable to any Acquired Business unless the inclusion
of revenues attributable to a particular Acquired Business is approved by a
majority of the members of the Parent Board who are not Sellers or officers or
employees of the Surviving Corporation, which approval may be conditional on the
Representative's agreement (on behalf of the Sellers) to one or more adjustments
as such members may propose to the Revenue Targets, Operating Margin Targets
and/or other terms and conditions of this Section 1.9.
(v) "Adjusted Annual Expenses" means, with respect to an Annual
Period, the Annual Expenses for such Annual Period, minus the Annaly Support
Expenses for such Annual Period.
(vi) "Adjusted Margin" means, with respect to an Annual Period, a
decimal amount (expressed as a percentage) equal to (i) the Adjusted Company
Revenue for such
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Annual Period minus the Adjusted Annual Expenses for such Annual Period, divided
by (ii) the Adjusted Company Revenue for such Annual Period.
(vii) "Annaly Factor" means, with respect to an Annual Period,
(i) the Implied Annaly Revenue for such Annual Period divided by (ii) the sum of
the Adjusted Company Revenue for such Annual Period and the Implied Annaly
Revenues for such Annual Period.
(viii) "Annaly Support Expenses" means, with respect to an Annual
Period, (i) the Annual Expenses multiplied by (ii) the Annaly Factor.
(ix) "Annual Assets under Management" means, with respect to an
Annual Period, the sum of the total assets (excluding plant, property and
equipment and other similar non-investment assets) at Parent as at the end of
its fiscal quarters as reported in its quarterly financial reports included in
its Form 10-Q's filed for the first three fiscal quarters of such Annual Period
and as at the end of its fiscal year as reported in its annual financial reports
included in its Form 10-K filed for such Annual Period, divided by 4.
(x) "Annual Expenses" means, with respect to any Annual Period,
all expenses incurred by the Surviving Corporation during such Annual Period in
accordance with GAAP as consistently applied by the Surviving Corporation,
provided that (A) Annual Expenses shall not include: (x) any professional fees
and expenses incurred in connection with the consummation of the Merger
contemplated hereby, (y) any operating expenses directly attributable to an
Acquired Business, and (z) any provision for federal, state or city income taxes
(or similar taxes based on the Surviving Corporation's net income); and (B) the
aggregate amount of compensation expenses included in Annual Expenses shall not
exceed the Total Compensation Amount for such Annual Period.
(xi) "Applicable Percentage" means, with respect to an Annual
Period, the percentage (expressed as a decimal) equal to the product of (i) the
Revenue Percentage for such Annual Period and (ii) the Margin Percentage for
such Annual Period.
(xii) "Average Price" for an Annual Period means the average of
the VWAPs of Parent Common Stock for the first 20 consecutive trading days
following the end of such Annual Period.
(xiii) "Calculated Compensation Amount" means, with respect to
any Annual Period, an amount equal to the sum of (i) 0.5 multiplied by the
Adjusted Company Revenue for such Annual Period and (ii) 0.45 multiplied by the
Implied Annaly Revenue for such Annual Period.
(xiv) "Contingent Merger Consideration" means:
(A) with respect to the First Annual Period, (i) if the
Earn-out Condition for such Annual Period has been
satisfied, a number of fully paid and nonassessable shares
of Parent Common Stock equal to (x) $22,770,000 divided by
(y) the Average Price for the First Annual Period divided by
(z) the number of shares of Company Common Stock
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canceled pursuant to Section 1.7(a) (subject to further
adjustment (if any) required pursuant to Section 1.13(b));
and (ii) if the Earn-out Condition for the First Annual
Period has not been satisfied, but the Proportional Earn-out
Condition for such Annual Period has been satisfied, a
number of fully paid and nonassessable shares of Parent
Common Stock equal to (w) $22,770,000 multiplied by (x) the
Applicable Percentage divided by (y) the Average Price for
the First Annual Period divided by (z) the number of shares
of Company Common Stock canceled pursuant to Section 1.7(a)
(subject to further adjustment (if any) required pursuant to
Section 1.13(b)), and (iii) if neither the Earn-out
Condition nor the Proportional Earn-out Condition for the
First Annual Period has been satisfied, zero;
(B) with respect to the Second Annual Period, (i) if the
Earn-out Condition for the Second Annual Period has been
satisfied, a number of fully paid and nonassessable shares
of Parent Common Stock equal to (x) the Second Period Amount
divided by (y) the Average Price for the Second Annual
Period divided by (z) the number of shares of Company Common
Stock canceled pursuant to Section 1.7(a) (subject to
further adjustment (if any) required pursuant to Section
1.13(b)), (ii) if the Earn-out Condition for the Second
Annual Period has not been satisfied, but the Proportional
Earn-out Condition for such Annual Period has been
satisfied, a number of fully paid and nonassessable shares
of Parent Common Stock equal to (w) the Second Period Amount
multiplied by (x) the Applicable Percentage divided by (y)
the Average Price for the Second Annual Period divided by
(z) the number of shares of Company Common Stock canceled
pursuant to Section 1.7(a) (subject to further adjustment
(if any) required pursuant to Section 1.13(b)), and (iii) if
neither the Earn-out Condition nor the Proportional Earn-out
Condition for the Second Annual Period has been satisfied,
zero; and
(C) with respect to the Third Annual Period, (i) if the
Earn-out Condition for the Third Annual Period has been
satisfied, a number of fully paid and nonassessable shares
of Parent Common Stock equal to (x) the Third Period Amount
divided by (y) the Average Price for the Third Annual Period
divided by (z) the number of shares of Company Common Stock
canceled pursuant to Section 1.7(a) (subject to further
adjustment (if any) required pursuant to Section 1.13(b)),
(ii) if the Earn-out Condition for the Third Annual Period
has not been satisfied, but the Proportional Earn-out
Condition for such Annual Period has been satisfied, a
number of fully paid and nonassessable shares of Parent
Common Stock equal to (w) the Third Period Amount multiplied
by (x) the Applicable Percentage divided by (y) the Average
Price for the Third Annual Period divided by (z) the number
of shares of Company Common Stock canceled pursuant to
Section 1.7(a) (subject to further adjustment (if any)
required pursuant to Section 1.13(b)), and
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(iii) if neither the Earn-out Condition nor the Proportional
Earn-out Condition for the Third Annual Period has been
satisfied, zero.
(xv) "Contingent Payment Date" means, with respect to an Annual
Period, three business days after Parent's delivery of the Earn-out Statement
(as defined below) for such Annual Period.
(xvi) "First Year Carryover" means the amount (if any) by which
(i) $22,770,000 exceeds (ii) the product of $22,770,000 and the Applicable
Percentage for the First Annual Period.
(xvii) "Implied Annaly Revenue" means, for any Annual Period, the
product of (i) .00125 (12.5 basis points) and (ii) the greater of (A) Average
Assets under Management at the Parent for such Annual Period and (B) ten (10)
times the Average Shareholders' Equity for such Annual Period. The parties
acknowledge that the only circumstances under which it is expected that clause
(B) of this definition might exceed clause (A) of this definition is where
Parent has reduced its leverage and that any such reduction, should it occur,
shall be effected by Parent in the ordinary course of its business in a manner
consistent with its past practices or at a level below the specified guidelines
of the Parent with notice provided to the Parent Board. For purposes of this
definition, "Average Shareholders' Equity" means, for an Annual Period, the sum
of the Parent's Shareholders' Equity as reported in its quarterly financial
reports included in its Form 10-Q's filed for the first three fiscal quarters of
such Annual Period and in its annual financial reports included in its Form 10-K
filed for such Annual Period, divided by four (4).
(xviii) "Margin Percentage" means, with respect an Annual Period,
the lesser of (i) 1.00 and (ii) the percentage (expressed as a decimal) that the
Adjusted Margin for such Annual Period represents of the Operating Margin Target
for such Annual Period.
(xix) "Revenue Percentage" means, with respect to an Annual
Period, the lesser of (i) 1.00 and (ii) the percentage (expressed as a decimal)
that the Adjusted Company Revenue for such Annual Period represents of the
Revenue Target for such Annual Period.
(xx) "Second Period Amount" means (i) $13,365,000 if the Earn-out
Condition has been satisfied in the First Annual Period, (ii) $36,135,000 if
neither the Earn-out Condition nor the Proportional Earn-out Condition has not
been satisfied in the First Annual Period and (iii) the sum of (x) $13,365,000
and (y) the First Year Carryover, if the Earn-out Condition has not been
satisfied in the First Annual Period, but the Proportional Earn-out Condition
has been satisfied in the First Annual Period.
(xxi) "Second Year Carryover" means the amount (if any) by which
(i) the Second Period Amount exceeds (ii) the product of the Second Period
Amount and the Applicable Percentage for the Second Annual Period.
(xxii) "Third Period Amount" means (i) $13,365,000 if the
Earn-out Condition has been satisfied in the Second Annual Period; (ii)
$26,730,000 if the Earn-out Condition has been satisfied in the First Annual
Period and neither the Earn-out Condition nor the Proportional Earn-out
Condition has been satisfied in the Second Annual Period; (iii)
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$49,500,000 if the Earn-out Condition has not been satisfied in both the First
Annual Period and the Second Annual Period and the Proportional Earn-out
Condition has not been satisfied in both the First Annual Period and the Second
Annual Period; (iv) the sum of (x) $26,730,000 and (y) the First Year Carryover,
if the Earn-out Condition is not satisfied in the First Annual Period, but the
Proportional Earn-out Condition has been satisfied in the First Annual Period
and neither the Earn-out Condition nor the Proportional Earn-out Condition has
been satisfied in the Second Annual Period and (v) the sum of (x) $13,365,000
and (y) the Second Year Carryover, if the Earn-out Condition has not been
satisfied in the Second Annual Period, but the Proportional Earn-out Condition
has been satisfied in the Second Annual Period.
(xxiii) "Total Compensation Amount" means, with respect to any
Annual Period, an amount equal to the lesser of (i) the Actual Compensation
Amount and (ii) the Calculated Compensation Amount.
(xxiv) "VWAP" of Parent Common Stock on any trading day shall
mean the volume weighted average price of the Parent Common Stock as reported by
Bloomberg LP for such trading day.
(e) OPERATION OF SURVIVING CORPORATION. Until the end of the Third
Annual Period, Parent will cause the Surviving Corporation to be operated as a
separate business unit which shall conduct its business so that the investment
management fees arising out of its business are separated from all other fees
earned by Parent and its other subsidiaries or to maintain separate financial
records and books of account so as to enable the Surviving Corporation to have a
record of the investment management, consulting or other revenues and fees
arising out of its business that is separate from all other fees earned by
Parent and its other subsidiaries. Notwithstanding anything contained herein to
the contrary, until the end of the Third Annual Period Parent shall cause the
business of the Surviving Corporation in all material respects to be operated in
its ordinary course of business, consistent with past practices of the Company,
unless the Representative shall have consented in writing to any operations that
do not comply with the foregoing; provided that Parent will not be required to
obtain any such consent from the Representative with respect to any such
operations at any time that the Representative no longer represents Sellers
having an aggregate Allocable Share equal to at least 75%.
SECTION 1.10 INITIAL DETERMINATION OF ADJUSTED REVENUE AND ADJUSTED MARGIN.
(a) For each Annual Period, Parent will prepare, and have audited and certified
by its independent accountants, an income statement and balance sheet for the
Surviving Corporation (the "Annual Financial Statements"), which Annual
Financial Statements shall be prepared in accordance with GAAP, as consistently
applied by Parent.
(b) For each Annual Period, Parent shall prepare a statement of the
Contingent Merger Consideration (the "Earn-out Statement") in which it shall set
forth its determination of Adjusted Company Revenue and Adjusted Margin for such
Annual Period. It is agreed that, for purposes of this Agreement, the
determination of Adjusted Company Revenue and Adjusted Margin shall be derived
from the Annual Financial Statements and the financial books and records of the
Surviving Corporation, Parent and its affiliates (including the work papers of
Parent's independent accountants) to the extent necessary to determine all
appropriate adjustments and eliminations; provided, however, that for purposes
of any calculation or
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determination of Adjusted Company Revenue or Adjusted Margin, GAAP as in effect
as of the Effective Date and as consistently applied by the Company will be
applied.
SECTION 1.11 FINAL DETERMINATION OF CONTINGENT MERGER CONSIDERATION. (a) On
or prior to 60 days after the end of an Annual Period, Parent shall deliver to
the Representative (as defined below) the Earn-out Statement setting forth
Parent's determination of the Adjusted Company Revenue and the Adjusted Margin
of the Surviving Corporation for the Annual Period, together with a calculation
of the Contingent Merger Consideration (if any) due for such Annual Period. If
the Record Holders do not agree that the Earn-out Statement correctly states the
Adjusted Company Revenue or the Adjusted Margin for the Annual Period, or
properly calculates the Contingent Merger Consideration, the Representative
shall promptly (but not later than 30 days after the delivery of the Earn-out
Statement) give written notice to Parent of any exceptions thereto (in
reasonable detail describing the nature of the disagreement asserted). If the
Representative and Parent reconcile their differences in writing within 30 days
after written notice of any exceptions is delivered to Parent, the Earn-out
Statement shall be adjusted accordingly and shall thereupon become binding,
final and conclusive upon all of the parties hereto and enforceable in a court
of law. If the Representative and Parent are unable to reconcile their
differences in writing within 30 days after written notice of any exceptions is
delivered to Parent, the items in dispute shall be submitted to the New York
City office of a mutually-acceptable accounting firm selected from among the
four largest accounting firms in the United States in terms of gross revenues
(the "Independent Auditors") for final determination, and the Earn-out Statement
shall be deemed adjusted in accordance with the findings of the Independent
Auditors and shall become final and conclusive upon all of the parties hereto
and enforceable in a court of law. The Independent Auditors shall consider only
the items in dispute and shall be instructed to act within 20 days (or such
longer period as the Representative and Parent may agree) to resolve all items
in dispute. If the Representative does not give notice of any exception within
30 days after the delivery of the Earn-out Statement, or if the Representative
gives written notification of the Company Shareholders' acceptance of the
Earn-out Statement prior to the end of such 30 day period, the amounts set forth
in the Earn-out Statement shall thereupon become binding, final and conclusive
upon all of the parties hereto and enforceable in a court of law. For purposes
of this Section 1.11, the members of the Parent Board and the Audit Committee of
the Parent Board who are not Sellers or officers or employees of the Surviving
Corporation shall take all action on behalf of Parent.
(b) The books and records of the Surviving Corporation and Parent
shall be made available during normal business hours upon reasonable advance
notice at the principal office of the Surviving Corporation or Parent, whichever
is applicable, (x) to the parties hereto, with respect to the Surviving
Corporation, (y) to the Representative and its advisors, with respect to Parent
and (z) with respect to the Surviving Corporation and Parent, to the Independent
Auditors to the extent required to make or review the calculations required
under Section 1.11(a). The parties hereto shall cause the Surviving Corporation
and Parent to make arrangements to make available to the Independent Auditors
and the Representative any back-up materials generated by the Surviving
Corporation, Parent and/or their respective representatives in preparing the
Earn-out Statement and/or to support a position which is contrary to the
decision taken by the other party with respect to the Earn-out Statement.
(c) If the resolution of any such dispute under Section 11.1(a)
results in any
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Contingent Merger Consideration becoming due that would not otherwise have been
due based on the Earn-out Statement as originally presented by Parent, then
Parent shall pay such Contingent Merger Consideration no later than three
business days after the date on which such dispute has been resolved pursuant to
Section 11.1(a).
(d) If, with respect to any Annual Period, Parent fails to deliver the
Earn-out Statement within the 60 day period specified in Section 1.11(a) above,
the Representative gives written notice to the Parent of such failure and such
failure remains unremedied until the fifteenth day following Parent's receipt of
such notice, then Parent shall be obligated to pay to the Sellers the amount of
Contingent Merger Consideration that would have been due had the Earn-out
Condition with respect to such Annual Period been satisfied; provided that if
such Earn-out Statement is delivered within 90 days after such fifteenth day,
then the parties shall apply Section 1.11(a) to reach a final determination of
the Contingent Merger Consideration for such Annual Period and if the amount so
determined is less than the amount theretofore paid pursuant to this Section
1.11(d), each of the Sellers shall be obligated to return to Parent promptly
following Parent's written demand to the Representative the portion of the
Contingent Merger Consideration that such Seller received in excess of the
amount so determined.
SECTION 1.12 EXCHANGE PROCEDURES. (a) Prior to the Effective Time, Parent
shall appoint a commercial bank or trust company reasonably satisfactory to the
Company to act as exchange agent in the Merger (the "Exchange Agent"). At or
prior to the Effective Time, Parent shall deposit with the Exchange Agent, in
trust for the benefit of the Record Holders, the Closing Merger Consideration
issuable pursuant to Section 1.8 in exchange for outstanding shares of Company
Common Stock in the Merger pursuant to Section 1.8. Parent agrees to make
available to the Exchange Agent from time to time, as needed, cash sufficient to
pay cash in lieu of fractional shares pursuant to Section 1.12(g) and any
dividends and other distributions pursuant to Section 1.12(f).
(b) At the Effective Time, the stock transfer books of the Company
shall be closed and thereafter there shall be no further registration of
transfers of the Company Common Stock on the records of the Company. From and
after the Effective Time, the Record Holders of Certificates representing
ownership of the Company Common Stock outstanding immediately prior to the
Effective Time shall cease to have rights with respect to such Company Common
Stock, except as otherwise provided for herein. The shares of Parent Common
Stock issuable in the Merger shall be deemed to have been issued at the
Effective Time. On or after the Effective Time, any Certificates presented to
the Exchange Agent or Parent for any reason shall be converted into the
applicable Closing Merger Consideration with respect to the shares of Company
Common Stock formerly represented thereby, any cash in lieu of fractional shares
of Parent Common Stock to which the holders thereof are entitled pursuant to
Section 1.12(g) and any dividends or other distributions to which the holders
thereof are entitled pursuant to Section 1.12(f) without interest.
(c) As soon as reasonably practicable after the Effective Time, Parent
and the Surviving Corporation shall cause the Exchange Agent to mail to each
Record Holder of a Certificate (i) a letter of transmittal which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent, and
which letter shall be in such form and have such other provisions as Parent may
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reasonably specify, and (ii) instructions for effecting the surrender of such
Certificates in exchange for the Closing Merger Consideration. Upon surrender of
a Certificate to the Exchange Agent together with such letter of transmittal,
duly executed and completed in accordance with the instructions thereto, and
such other documents as may reasonably be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor (A)
shares of Parent Common Stock representing, in the aggregate, the whole number
of shares that such holder has the right to receive pursuant to Section 1.8, and
(B) a check in the amount equal to the cash that such holder has the right to
receive pursuant to the provisions of this Article I, including cash in lieu of
any fractional shares of applicable Parent Common Stock pursuant to Section
1.12(g) and any dividends or other distributions pursuant to Section 1.12(f)
(after giving effect to any required tax withholdings from cash payments), and
in each case the Certificate so surrendered shall forthwith be canceled. No
interest will be paid or will accrue on any cash payable pursuant to this
Article I, including cash payable pursuant to Section 1.12(f) or Section
1.12(g).
(d) A Record Holder is not entitled to receive Contingent Merger
Consideration (if any) until he or she exchanges his or her Certificates in
accordance with Section 1.12(c) or otherwise complies with Section 1.12(e).
(e) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the Person claiming such Certificate
to be lost, stolen or destroyed and the agreement by such Person to provide an
indemnity against any claim that may be made against Parent, any of its
affiliates, the Surviving Corporation or the Exchange Agent with respect to such
Certificate, the Exchange Agent will deliver in exchange for such lost, stolen
or destroyed Certificate the applicable Closing Merger Consideration with
respect to the shares of Company Common Stock formerly represented thereby, any
cash in lieu of fractional shares of Parent Common Stock, and unpaid dividends
and distributions on shares of Parent Common Stock deliverable in respect
thereof, pursuant to this Agreement.
(f) No dividends or other distributions declared or made with respect
to shares of Parent Common Stock with a record date after the Effective Time
shall be paid to the Record Holder of any unsurrendered Certificate with respect
to the shares of Parent Common Stock that such holder would be entitled to
receive upon surrender of such Certificate and no cash payment in lieu of
fractional shares of Parent Common Stock shall be paid to any such Record Holder
pursuant to Section 1.12(g) until such Record Holder shall surrender such
Certificate in accordance with this Section 1.12. Subject to the effect of
applicable Laws, following surrender of any such Certificate, there shall be
paid to such Record Holder of shares of Parent Common Stock issuable in exchange
therefor, without interest, (a) promptly after the time of such surrender, the
amount of any cash payable in lieu of fractional shares of Parent Common Stock
to which such holder is entitled pursuant to Section 1.12(g) and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock, and
(b) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with respect
to such shares of Parent Common Stock.
(g) (i) No certificates or scrip or shares of Parent Common Stock
representing
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fractional shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates and such fractional share interests will not entitle
the owner thereof to vote or to have any rights of a stockholder of Parent or a
holder of shares of Parent Common Stock.
(ii) Notwithstanding any other provision of this Agreement, each
Record Holder who would otherwise have been entitled to receive, as part of the
Merger Consideration, a fraction of a share of Parent Common Stock shall receive
from Parent, in lieu thereof, cash (without interest) in an amount equal to the
product of (i) such fractional part of a share of Parent Common Stock multiplied
by (ii) (A) in the case of the Closing Merger Consideration, the Parent Closing
Price and (B) in the case of any Contingent Merger Consideration, the Average
Price for such Contingent Merger Consideration.
(h) None of Parent, Merger Sub, the Company, the Surviving Corporation
or the Exchange Agent shall be liable to any Person in respect of any Closing
Merger Consideration or Contingent Merger Consideration, any dividends or
distributions with respect thereto or any cash in lieu of fractional shares of
applicable Parent Common Stock, in each case delivered to a public official
pursuant to any applicable abandoned property, escheat or similar Law. If any
Certificate shall not have been surrendered prior to six months after the
Effective Time (or immediately prior to such earlier date on which any Closing
Merger Consideration, any dividends or distributions payable to the holder of
such Certificate or any cash payable in lieu of fractional shares of Parent
Common Stock pursuant to this Article I, would otherwise escheat to or become
the property of any public official pursuant to any applicable abandoned
property, escheat or similar law), any such Closing Merger Consideration,
dividends or distributions in respect thereof or such cash, to the extent
permitted by applicable law, shall be delivered to Parent, upon demand, and any
holders of Company Common Stock who have not theretofore complied with the
provisions of this Article I shall thereafter look only to Parent as general
creditor thereof for satisfaction of their claims for the payment of such
Closing Merger Consideration, dividends or distributions in respect thereof or
such cash (without any interest thereon).
(i) The Exchange Agent or the Surviving Corporation shall be entitled
to deduct and withhold from the Closing Merger Consideration and the Contingent
Merger Consideration (if any) otherwise payable pursuant to Sections 1.8(a) and
1.9(a) of this Agreement to any Record Holder such amounts as the Exchange Agent
or Merger Sub is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Exchange Agent or the
Surviving Corporation, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the Record Holder in respect of which
such deduction and withholding was made by the Exchange Agent or the Surviving
Corporation.
(j) No dissenters' or appraisal rights shall be available with respect
to the Merger.
SECTION 1.13 CERTAIN ADJUSTMENTS. (a) In the event that, subsequent to the
date of this Agreement but prior to the Effective Time, the shares of Parent
Common Stock issued and outstanding shall, through a reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar change in the capitalization of Parent, increase or
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decrease in number or be changed into or exchanged for a different kind or
number of securities, then an appropriate and proportionate adjustment shall be
made to the Parent Closing Price used to calculate the Closing Merger
Consideration.
(b) For the purposes of determining the Contingent Merger
Consideration for any Annual Period, if the shares of Parent Common Stock issued
and outstanding shall, through a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
similar change in the capitalization of Parent, increase or decrease in number
or be changed into or exchanged for a different kind or number of securities,
(i) during the period of 20 trading days used to calculate the Average Price
with respect to such Annual Period, then an appropriate and proportionate
adjustment shall be made to the VWAPs of Parent Common Stock for each trading
day in such period occurring prior to the effectiveness of such increase or
decrease and such adjusted VWAPs shall, together with the VWAPs for the days in
such period, be used to calculate the Average Price with respect to such
Contingent Merger Consideration, and (ii) following the period of 20 trading
days used to calculate the Average Price with respect to such Annual Period but
prior to the Contingent Payment Date for such Contingent Merger Consideration,
then an appropriate and proportionate adjustment shall be made to the Average
Price used to calculate the Contingent Merger Consideration for such Annual
Period.
SECTION 1.14 REIT PROVISIONS. Parent shall maintain ownership of 100% of
the common stock of Merger Sub (the "Merger Sub Common Stock") and any other
equity securities of Merger Sub at all times prior to the Effective Time. Parent
shall make an election as provided in Section 856(l)(1) of the Code, together
with the Surviving Corporation, to treat the Surviving Corporation as a "taxable
REIT subsidiary" immediately following the Effective Time.
SECTION 1.15 ESCROW. (a) The parties agree that all Merger Securities that
are paid as part of the Closing Merger Consideration and all Merger Securities
that are paid as part of the Contingent Merger Consideration at any time during
the Basic Survival Period (all such Merger Securities being collectively
referred to as the "Initial Escrowed Shares") shall be deposited with an escrow
agent (the "Escrow Agent") selected by and mutually acceptable to the parties
and shall be held and distributed by such Escrow Agent pursuant to the terms of
a mutually acceptable escrow agreement among Parent, the Representative and the
Escrow Agent (the "Escrow Agreement").
(b) The parties agree that the Escrow Agreement shall provide that (i)
the Merger Securities held hereunder may be released to the Sellers for
Permitted Withdrawals (as defined below); (ii) all Merger Securities other than
Retained Securities (as defined below) held in escrow at the end of the Basic
Survival Period shall be released and transferred to the Custodian referred to
in Section 5.11 below; and (iii) from time to time during the Basic Survival
Period the Parent may, in connection with any indemnification claims made by it
in good faith under Section 9.1, designate all or any portion of the Merger
Securities then held in escrow as "Retained Securities" by giving written notice
to the Escrow Agent and the Representative along with a reasonable description
of the facts or events giving rise to the claim; provided that the aggregate
number of Retained Securities as of the end of the Basic Survival Period shall
not exceed the Maximum Number (as defined below). The Escrow Agreement shall
further provide that Retained Securities shall continue to be held in escrow
until the earlier of (i) mutual written agreement of the Representative and the
Parent and (ii) a release of the Retained Securities
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pursuant to a final, non-appealable order of a court of competent jurisdiction
(a "Final Order") but only to the extent of such Damages claimed by Parent;
provided, that promptly following any Final Order delivered after the expiration
of the Basic Survival Period and the payment of the portion of the Returned
Securities applicable to such Final Order to Parent, any remaining Retained
Securities that have not been designated for any other pending claim shall be
released to Sellers. The Escrow Agreement shall further provide that (i) Parent
shall disburse (or cause to be disbursed) to each Seller with respect to the
Merger Securities held under the Escrow Agreement all cash dividends payable
with respect thereto (other than cash dividends that constitute a dividend or
other distribution paid in the event of a dissolution, liquidation or winding up
of Parent or a return of capital and such cash dividends shall not be retained
in escrow or be subject to the Escrow Agreement), and (ii) any securities or
cash received (other than cash dividends that do not constitute a dividend or
other distribution paid in the event of a dissolution, liquidation or winding up
of Parent or a return of capital) as the result of ownership of the Merger
Securities, including, but not by way of limitation, warrants, options and
securities received as a stock dividend, stock split or combination, or as a
result of a recapitalization, reorganization, exchange, substitution or other
similar change in Parent's capital structure, shall be retained in escrow in the
same manner and subject to the same conditions and restrictions as the Merger
Securities with respect to which they were issued. For so long as any Escrowed
Shares are held in escrow, the Sellers shall be the record and beneficial owners
of such shares, and will have the right to vote or not vote such shares.
(c) As used in this Agreement, "Permitted Withdrawals" mean
withdrawals of Merger Securities (i) to the extent necessary to generate
proceeds to cover any Tax obligations of a Seller for imputed interest on the
Contingent Merger Consideration, or (ii) made with the approval of a majority of
the members of the Parent Board who are not Sellers or officers or employees of
the Surviving Corporation.
(d) As used in this Agreement, "Escrowed Shares" means, at any time,
the portion of the Initial Escrowed Shares that remains on deposit with the
Escrow Agent pursuant to the Escrow Agreement.
(e) As used in this Agreement, the "Maximum Number" means the number
of Merger Shares that, when multiplied by the Period End Price, results in an
amount equal to (or not exceeding by more than the Period End Price) 150% of the
aggregate amount of Damages that have been claimed by Parent in accordance with
Article IX prior to, and remain outstanding as of, the end of the Basic Survival
Period; and "Period End Price" means the VWAP of the Parent Common Stock on the
last day of the Basic Survival Period (or if such day is not a trading day for
Parent Common Stock, then on the first day prior thereto that is such a trading
day).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as set forth in the forms, reports and documents filed by Parent
with the Securities and Exchange Commission (the "SEC") since January 1, 2002
(the "Parent SEC Reports"),
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Parent represents and warrants to the Company and the Sellers as follows, in
each case as of the date of this Agreement, unless otherwise set forth herein or
in the Parent SEC Reports:
SECTION 2.1 ORGANIZATION AND QUALIFICATION OF PARENT. (a) Parent and each
of its subsidiaries is a corporation or other legal entity duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized and has all requisite corporate or other power, as the
case may be, and authority to own, lease and operate its properties and to carry
on its businesses as now being conducted.
(b) Each of Parent and its subsidiaries is duly qualified or licensed
and in good standing (with respect to jurisdictions which recognize such
concept) to do business in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except in such jurisdictions where the
failure to be so duly qualified or licensed and in good standing would not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect. The term "Parent Material Adverse Effect" means any
change or effect that individually or in the aggregate is or would reasonably be
expected to be materially adverse to (i) the business, results of operations or
financial condition of Parent and its subsidiaries, taken as a whole, other than
any change or effect arising out of a decline or deterioration in the economy in
general or the industry in which Parent and its subsidiaries operate, or (ii)
the ability of Parent to consummate the transactions contemplated hereby without
material delay.
SECTION 2.2 CORPORATE AUTHORIZATION. Parent has all necessary corporate
power and authority to execute and deliver this Agreement and, subject, in the
case of the Merger, to the approval by the Parent Shareholders and the
satisfaction of any other conditions set forth in this Agreement, to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by the Parent Board (based on the unanimous
recommendation of the Parent Special Committee), and no other corporate
proceedings on the part of either of them is necessary to authorize this
Agreement or to consummate the transactions contemplated hereby (other than,
with respect to the Merger, the approval and adoption of this Agreement by
Parent Shareholders as required by the rules of the NYSE at the Parent Special
Meeting (as defined) (with the shares of Parent Common Stock held by the Sellers
voted in direct proportion to the shares of Parent Common Stock held by the
Parent Shareholders who are not Sellers) (the "Parent Shareholder Approval")
prior to the consummation of the Merger in accordance with Delaware Law). This
Agreement has been duly and validly executed and delivered by Parent and,
assuming the due authorization, execution and delivery hereof by each of the
Company, Merger Sub and the Sellers, constitutes the valid, legal and binding
agreement of Parent, enforceable against Parent in accordance with its terms.
SECTION 2.3 CONSENTS AND APPROVALS; NO VIOLATIONS. (a) Except for such
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Securities Act of 1933, as
amended (the "Securities Act"), the Exchange Act of 1934, as amended (the
"Exchange Act"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the rules and regulations of NYSE, state securities or
"blue sky" laws and the filing and recordation of the Certificate of Merger as
required by Delaware and such other filings, permits, authorizations, consents
and approvals the failure of
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which to be obtained or made would not, in the aggregate, reasonably be expected
to have a Parent Material Adverse Effect, no filing or registration with or
notice to, and no permit, authorization, consent or approval of, any court or
tribunal of competent jurisdiction in any jurisdiction or any foreign, federal,
state or municipal governmental, regulatory or other administrative agency,
department, commission, board, bureau, political subdivision or other authority
or instrumentality including the National Association of Securities Dealers,
Inc. ("NASD"), the SEC and any applicable domestic or foreign industry
self-regulatory organization, including stock exchanges ("SRO") (each a
"Regulatory Entity" and collectively, "Regulatory Entities") is necessary in
connection with the execution and delivery by Parent of this Agreement or the
consummation by Parent of the transactions contemplated hereby.
(b) The execution, delivery and performance by Parent of this
Agreement and all other agreements, documents, certificates or other instruments
contemplated hereby, the fulfillment of and compliance with the respective terms
and provisions hereof and thereof, and the consummation by Parent of the
transactions contemplated hereby and thereby, do not and will not: (i) conflict
with, or violate any provision of, the Articles of Incorporation or By-laws of
Parent; (ii) subject to obtaining the Parent Shareholder Approval, to complying
with the applicable requirements, if any, of the Securities Act, Exchange Act,
state securities or "blue sky" laws, the HSR Act, the NYSE and the NASD, and to
filing and recording the Certificate of Merger as required by Delaware Law,
conflict with or violate any law applicable to Parent, or any of its assets;
(iii) conflict with, result in any breach of, or constitute a default under (or
an event that with notice or lapse of time or both would become a default) or
result in the termination or acceleration of, or create in another person or
entity, a put right, purchase obligation or similar right under, any agreement
to which Parent is a party or by which Parent, or any of its assets, may be
bound; or (iv) result in or require the creation or imposition of, or result in
the acceleration of, any indebtedness or any encumbrance of any nature upon, or
with respect to, Parent or any of the assets now owned or hereafter acquired by
Parent, except for any such conflict or violation described in clause (ii)
above, any such conflict, breach, default, or termination, acceleration or
creation of any right described in clause (iii) above, or any such creation,
imposition or acceleration described in clause (iv) above which, individually or
in the aggregate, would not reasonably be expected to have a Parent Material
Adverse Effect.
SECTION 2.4 OPINION OF PARENT FINANCIAL ADVISOR. The Parent Financial
Advisor has delivered to the Parent Special Committee its written opinion, dated
the date of this Agreement, to the effect that, based on, and subject to the
various assumptions and qualifications set forth in such opinion, as of the date
of such opinion, the Merger Consideration (consisting of the Closing Merger
Consideration and Contingent Merger Consideration) is fair to Parent from a
financial point of view, a signed copy of which opinion has been delivered to
the Company.
SECTION 2.5 BROKERS. Other than the Parent Financial Advisor, no broker,
finder, investment banker or other intermediary is entitled to any brokerage,
finder's or other similar fee or commission or expense reimbursement in
connection with the transactions contemplated by this Agreement based upon
arrangements made by and on behalf of Parent or any of its affiliates.
SECTION 2.6 CAPITALIZATION OF PARENT AND ITS SUBSIDIARIES. As of November
12, 2003, the authorized capital stock of Parent consists of 500,000,000 shares
of capital stock, all of which are classified as Common Stock, par value $.01
per share, of which
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96,013,214 shares are issued and outstanding, and since such date and through
the date hereof no Parent Shares have been issued other than upon the exercise
of an option granted by Parent to purchase Parent Common Stock ("Parent Stock
Options"). Other than Parent Shares, no capital stock of Parent has ever been
issued or outstanding. All outstanding shares of capital stock of Parent are
duly authorized, validly issued, fully paid and nonassessable. As of September
30, 2003, there are outstanding Parent Stock Options in respect of 1,118,534
Parent Shares at the exercise prices set forth in the Parent SEC Reports. Except
as set forth above, there are outstanding (A) no shares of capital stock or
other voting securities of Parent, (B) no securities of Parent or its
subsidiaries convertible into or exchangeable or exercisable for shares of
capital stock or voting securities of Parent, (C) no options, calls or other
rights (including warrants or other contractual rights, including contingent
rights) to acquire from Parent or its subsidiaries, and no obligations of Parent
or its subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, any capital stock, voting securities or securities convertible into or
exchangeable or exercisable for capital stock or voting securities of Parent and
(D) no equity equivalents, interests in the ownership or earnings of Parent or
its subsidiaries or other similar rights (including stock appreciation rights)
(collectively, "Parent Securities"). There are no outstanding obligations of
Parent or any of its subsidiaries to repurchase, redeem or otherwise acquire any
Parent Securities or any capital stock, voting securities or other ownership
interests in any subsidiary of Parent.
SECTION 2.7 MERGER SUB ACTIONS. As of the date hereof, the authorized
capital stock of Merger Sub consists of 1,000 shares of Merger Sub Common Stock,
all of which are issued, outstanding and owned by Parent free and clear of all
liens, charges or encumbrances of any nature whatsoever. Merger Sub has not
incurred any obligations or conducted any business except as necessary and
appropriate to effect the consummation of the Merger in accordance with this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered by the Company to
Parent prior to the execution and delivery of this Agreement (the "Company
Disclosure Schedule"), the Company represents and warrants to Parent as follows,
in each case as of the date of this Agreement, unless otherwise set forth herein
or in the Company Disclosure Schedule:
SECTION 3.1 ORGANIZATION AND QUALIFICATION OF THE COMPANY. (a) The Company
is a corporation, duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is organized and has all requisite
corporate or other power, as the case may be, and authority to own, lease and
operate its properties and to carry on its businesses as now being conducted.
(b) The Company is duly qualified or licensed and in good standing
(with respect to jurisdictions which recognize such concept) to do business in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except in such jurisdictions where the failure to
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be so duly qualified or licensed and in good standing would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. The term "Company Material Adverse Effect" means any change or effect
that individually or in the aggregate is or would reasonably be expected to be
materially adverse to (i) the business, results of operations or financial
condition of the Company, other than any change or effect arising out of a
decline or deterioration in the economy in general or the industry in which the
Company operates, or (ii) the ability of the Company to consummate the
transactions contemplated hereby without material delay.
(c) The Company has no subsidiaries.
(d) The Company does not hold equity securities of any issuer. Except
as set forth in Section 3.1 of the Company Disclosure Schedule, the Company does
not own or control any equity partnership or membership interests directly or
indirectly in any partnership, limited liability company, joint venture or
similar entity.
SECTION 3.2 CORPORATE AUTHORIZATION. The Company has all necessary
corporate power and authority to execute and deliver this Agreement, and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Company Board and no other corporate
proceedings on the part of the Company Board is necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. Concurrently
with the execution of this Agreement, the Company is delivering to Parent a copy
of a written consent duly executed by all of the Company Shareholders, pursuant
to which the Company Shareholders have unanimously approved this Agreement and
the Merger in accordance with the applicable requirements of Delaware Law (the
"Company Shareholder Approval"). No other approval is required to be obtained by
the Company in order to execute and deliver this Agreement and to consummate the
transaction contemplated hereby, including the Merger, except for such approvals
as may be required under the HSR Act. This Agreement has been duly and validly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery hereof by each of Parent, Merger Sub and the Sellers,
constitutes the valid, legal and binding agreement of the Company, enforceable
against the Company in accordance with its terms.
SECTION 3.3 REPORTS; FINANCIAL STATEMENTS. (a) (i) The Company has
previously delivered to Parent the following financial statements (collectively,
the "Company Financial Statements"):
(A) the unaudited balance sheet of the Company as at
November 30, 2003 (the "Company Interim Balance Sheet") and
the related statement of income for the eleven-month period
then ended (together with the Company Interim Balance Sheet,
the "Company Interim Financial Statements");
(B) the unaudited balance sheet of the Company as at
December 31, 2002 (the "Company 2002 Balance Sheet") and the
related unaudited statement of income for the twelve-month
period then ended (together
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with the Company 2002 Balance Sheet, the "Company 2002
Financial Statements").
(ii) The Company Financial Statements (A) are in accordance with
the books and records of the Company, (B) fairly present in all material
respects the financial condition of the Company as at the respective dates
indicated and the results of operations of the Company for the respective
periods indicated, and (C) have been prepared in accordance with GAAP, except
for the absence of complete footnote disclosure as required by GAAP and subject,
in the case of the Company Interim Financial Statements, to normal and recurring
year-end adjustments, which adjustments could not reasonably be expected to be,
individually or in the aggregate, material in magnitude.
(b) The Company has no obligations or liabilities of any nature
(whether or not accrued, contingent, matured or unmatured and whether or not
required to be reflected in financial statements in accordance with GAAP, and
whether due or to become due) other than (i) those set forth or adequately
provided for in the Company Interim Balance Sheet, (ii) those incurred in the
ordinary course of business consistent with past practice since January 1, 2003,
(iii) those that individually or in the aggregate do not exceed $50,000 and (iv)
those set forth on Section 3.3 of the Company Disclosure Schedule.
SECTION 3.4 ACCOUNTS RECEIVABLE. Other than as disclosed in Section 3.4 of
the Company Disclosure Schedule, all of the accounts receivable of the Company
shown or reflected on the Company Interim Financial Statements are valid and
enforceable claims for services fully performed and subject to no set-off or
counterclaim. Other than as disclosed in Section 3.4 of the Company Disclosure
Schedule, the Company has no accounts or loans receivable from any Person which
is affiliated with the Company or from any officer or employee of the Company or
any Family Member of any Seller. For purposes of this Agreement, "Family Member"
means, with respect to any individual, such individual's spouse, former spouse,
parents, grandparents, children, grandchildren or siblings (and estates, trusts,
partnerships or other entities and legal relationships of which a substantial
majority in interest of the beneficiaries, owners, investors, partners, members
or participants at all times in question are, directly or indirectly, one or
more of the Persons described above and/or such individuals).
SECTION 3.5 CONSENTS AND APPROVALS; NO VIOLATIONS. (a) Except as set forth
in Section 3.5 of the Company Disclosure Schedule and except for such filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the HSR Act (collectively, with the approvals
set forth in Section 3.5 of the Company Disclosure Schedule, the "Company
Regulatory Approvals") and the filing and recordation of the Certificate of
Merger as required by Delaware Law, no filing or registration with or notice to,
and no permit, authorization, consent or approval of, any Regulatory Entity is
necessary in connection with the execution and delivery by the Company of this
Agreement or the consummation by the Company of the transactions contemplated
hereby.
(b) Except as set forth in Section 3.5 of the Company Disclosure
Schedule, the execution, delivery and performance by the Company of this
Agreement and all other agreements, documents, certificates or other instruments
contemplated hereby, the fulfillment of and compliance with the respective terms
and provisions hereof and thereof, and the
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consummation by the Company of the transactions contemplated hereby and thereby,
do not and will not: (i) conflict with, or violate any provision of, the
Certificate of Incorporation or By-laws of the Company; (ii) subject to
obtaining the Company Regulatory Approvals, and to filing and recording the
Certificate of Merger as required by Delaware Law, conflict with or violate any
law applicable to the Company, or any of its assets; (iii) conflict with, result
in any breach of, or constitute a default under (or an event that with notice or
lapse of time or both would become a default) or result in the termination or
acceleration of, or create in another Person a put right, purchase obligation or
similar right under, any agreement to which the Company is a party or by which
the Company, or any of its assets, may be bound; or (iv) result in or require
the creation or imposition of, or result in the acceleration of, any
indebtedness or any encumbrance of any nature upon, or with respect to, the
Company or any of the assets now owned or hereafter acquired by the Company.
SECTION 3.6 BROKERS. Other than RBC Capital Markets, no broker, finder,
investment banker or other intermediary is entitled to any brokerage, finder's
or other similar fee or commission or expense reimbursement in connection with
the transactions contemplated by this Agreement based upon arrangements made by
and on behalf of the Company or any of its affiliates.
SECTION 3.7 INFORMATION. None of the information supplied or to be supplied
by the Company in writing specifically for inclusion or incorporation by
reference in (i) the Proxy Statement (as defined in Section 5.7(a) of this
Agreement) or (ii) any other documents to be filed with the SEC or any other
Regulatory Entity prior to the Effective Time will, at the respective times
filed with the SEC or such other Regulatory Entity and, in addition, in the case
of the Proxy Statement, at the date it or any amendment or supplement is mailed
to the Parent Shareholders contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
SECTION 3.8 CAPITALIZATION OF THE COMPANY. The authorized capital stock of
the Company consists of 3,000 shares of capital stock, all of which are
classified as Common Stock, of which 750 shares are issued and outstanding. All
outstanding shares of capital stock of the Company are duly authorized, validly
issued, fully paid and nonassessable. Except as set forth above or as set forth
in Section 3.8 of the Company Disclosure Schedule, there are outstanding (A) no
shares of capital stock or other voting securities of the Company, (B) no
securities of the Company convertible into or exchangeable or exercisable for
shares of capital stock or voting securities of the Company, (C) no options,
calls or other rights (including warrants or other contractual rights, including
contingent rights) to acquire from the Company or its subsidiaries, and no
obligations of the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, any capital stock, voting securities or securities
convertible into or exchangeable or exercisable for capital stock or voting
securities of the Company and (D) no equity equivalents, interests in the
ownership or earnings of the Company or other similar rights (including stock
appreciation rights) (collectively, "Company Securities"). Except as set forth
in Section 3.8 of the Company Disclosure Schedule, there are no outstanding
obligations of the Company to repurchase, redeem or otherwise acquire any the
Company Securities.
SECTION 3.9 NO DEFAULTS. The Company is not in default or violation (and no
event
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has occurred which with notice or the lapse of time or both would constitute a
default or violation) of any term, condition or provision of (i) its Certificate
of Incorporation or By-laws, (ii) any note, bond, mortgage, indenture, letter of
credit, other evidence of indebtedness, franchise, permit, guarantee, lease,
license, contract, agreement or other instrument or obligation to which the
Company is a party or by which its properties or assets is bound, to the
Company's knowledge, or (iii) any order, writ, injunction, decree, law, statute,
rule or regulation applicable to the Company or any of its properties or assets.
SECTION 3.10 TAXES. (a) The Company has duly and timely filed or caused to
be filed all Tax Returns required to be filed by it and has paid in full or
fully reserved against in the Company Financial Statements all Taxes,
assessments and deficiencies due or claimed to be due by it to foreign, federal,
state or local taxing authorities. Such Tax Returns are correct in all material
respects, and the Company is not required to pay any Taxes for the periods
covered by such Tax Return except as set forth in Section 3.10 of the Company
Disclosure Schedule. Except as set forth in Section 3.10 of the Company
Disclosure Schedule, the Tax Returns filed by the Company have not been, and are
not being, to the knowledge of the Company, examined by the Internal Revenue
Service (the "IRS") or other applicable taxing authorities for any period.
Except as set forth in Section 3.10 of the Company Disclosure Schedule, all
Taxes or estimates thereof that are due as of December 31, 2003, or are claimed
or asserted by any taxing authority to be due as of such date, have been (a)
timely and appropriately paid so as to avoid penalties for underpayment or (b)
accrued for on the balance sheet as of December 31, 2003, as contained in the
Company Financial Statements. Except as set forth in Section 3.10 of the Company
Disclosure Schedule, the provisions for income and other Taxes payable reflected
in the Company Financial Statements make adequate provision for all then accrued
and unpaid Taxes of the Company. There are no tax liens (other than liens for
Taxes which are not yet due and payable) on any of the properties of the
Company, nor are there any pending or threatened examinations or Tax claims
asserted. Except jurisdictions in which the Company has filed Tax Returns, no
claim has ever been made by a taxing authority that the Company is or may be
subject to taxation by that jurisdiction. True and correct copies of all Tax
Returns since January 1, 2000 and all notices from foreign, federal, state and
local taxing authorities, Tax examination reports and statements of deficiencies
assessed against or agreed to by the Company in the Company's possession have
been delivered to Parent. The Company has not been nor is it in violation (nor
has any action been taken or omission occurred which, with notice or lapse of
time or both, would be in violation) of any applicable law relating to the
payment of withholding of Taxes. The Company has duly and timely withheld from
salaries, wages and other compensation and paid over to the appropriate taxing
authorities all amounts required to be so withheld and paid over for all periods
under all applicable laws. Except as set forth in Section 3.10 of the Company
Disclosure Schedule, the Company has never been a member of an "affiliated
group" as defined in Section 1504(a) of the Code and is not the owner of an
interest in a partnership, joint venture, trust, limited liability company or
other entity or organization. No closing agreement pursuant to Section 7121 of
the Code (or any predecessor provision) or any similar provision of any state,
local, or foreign law has been entered into by or with respect to the Company or
any assets of the Company. The Company has not agreed to and is not required to
make any adjustment pursuant to Section 481(a) of the Code (or any predecessor
provision) by reason of any change in any accounting method of the Company. The
Company does not have any application pending with any taxing authority
requesting permission for any changes in the Company accounting method, and the
IRS has not proposed any such adjustment or change in
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accounting method. The Company is not a party to any tax sharing agreement or
arrangement or indemnity agreement. The Company has not been a United States
real property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.
(b) The Company has been a validly electing S corporation within the
meaning of Sections 1361 and 1362 of the Code at all times during its existence
and the Company will be an S corporation up to and including the day before the
Closing Date. Except as set forth in Section 3.10 of the Company Disclosure
Schedule, the Company would not be liable for any tax under Section 1374 of the
Code if its assets were sold for their fair market value as of the Closing Date.
(c) The Company has not made and is not obligated to make any payment
(including any transfer of property or provision of any benefit) in connection
with the transactions contemplated by this Agreement which, alone or aggregated
with any other payment, would be an excess parachute payment within the meaning
of Section 280(G) of the Code.
(d) As used in this Agreement, "Taxes" shall mean any and all taxes,
levies, duties, tariffs, imposts, and other charges of any kind (together with
any and all interest, penalties, additions to tax and additional amounts imposed
with respect thereto) imposed by any taxing authority, including, without
limitation: taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital stock,
payroll, employment, social security, workers' compensation, unemployment
compensation, or net worth; taxes or other charges in the nature of excise,
withholding, ad valorem, stamp, transfer, value added, or gains taxes and
customs duties, tariffs, and similar charges. "Tax Returns" shall mean any
return, declaration, report, claim for refund or information return or statement
relating to Taxes filed with a taxing authority, including any schedule or
attachment thereto, and including any amendment thereof.
SECTION 3.11 OWNERSHIP OF PARENT CAPITAL STOCK. Except as listed on Section
3.11 of the Company Disclosure Schedule, as of the date hereof, neither the
Company nor, to its knowledge, any of its affiliates, (i) beneficially owns (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, or (ii)
is party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of Parent or securities convertible into or exchangeable for shares of
capital stock of Parent. As used in this Agreement, "affiliate" shall have the
meaning set forth in Rule 144 (as defined).
SECTION 3.12 PERMITS AND LICENSES. (a) The Company has in effect all
permits, licenses, exemptions, orders, and approvals necessary for it to own,
lease, or operate its material assets and to carry on its business as now
conducted, except for those permits, licenses, exemptions, orders, and approvals
the absence of which would not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect, and there has occurred no
suspension, revocation or cancellation under any such permits, licenses,
exemptions, orders and approvals.
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(b) Except as set forth in Section 3.12 of the Company Disclosure
Schedule, all officers, directors, and employees of the Company that are
required, as a result of their positions with the Company, to be registered or
licensed with the SEC or the NASD are currently registered or licensed in the
appropriate capacity with the SEC or the NASD and all such registrations and
licenses are in full force and effect and no suspension or cancellation of any
of them is pending or, to the knowledge of the Company, threatened.
SECTION 3.13 COMPLIANCE WITH LAWS. (a) Except as set forth in Section 3.13
of the Company Disclosure Schedule, the Company is not in violation of any
federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, suitability requirements, permits, licenses, authorizations,
orders or approvals applicable to its business or employees conducting its
business.
(b) Except as set forth in Section 3.13 of the Company Disclosure
Schedule, the Company has not received any notification from any Regulatory
Entity or the staff thereof (i) asserting that the Company is not in compliance
with any federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, suitability requirements, or orders which such
Regulatory Entity enforces, (ii) threatening in writing to revoke any permits,
licenses, authorizations, order or approvals, or (iii) requiring the Company (x)
to enter into or consent to the issuance of a cease and desist order, formal
agreement, directive or memorandum of understanding, or (y) to adopt any board
resolution or similar undertaking, which restricts materially the conduct of its
business, or in any material manner relates to its capital adequacy, its credit
or reserve policies, its management, or the payment of dividends.
SECTION 3.14 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
Schedule 3.14 to the Company Disclosure Schedule, since January 1, 2003, the
Company has conducted its business only in the ordinary course and there has not
been:
(a) any circumstance, event, occurrence, change or effect that has
had, individually or in the aggregate, a Company Material Adverse Effect, nor
has there been any circumstance, event, occurrence, change or effect that with
the passage of time would reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect;
(b) any authorization, declaration, setting aside or payment of any
dividend or other distribution (whether in cash, shares or property) with
respect to the Company Shares;
(c) any split, combination or reclassification of any of the Company
Shares;
(d) any damage, destruction or loss, whether or not covered by
insurance, that has or would reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect;
(e) any incurrence, assumption or guarantee by the Company of any
outstanding amount of indebtedness for borrowed money other than in the ordinary
course of business in accordance with its customary practices;
(f) any transaction or commitment made, or any contract or agreement
entered into, by the Company relating to its assets or business (including the
acquisition or
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disposition of any assets) or any loss or relinquishment by the Company of any
material contract or other material right, other than transactions and
commitments made, and contracts or agreements entered into, in the ordinary
course of business in accordance with their customary practices;
(g) any material modifications or amendments to any Investment
Management Contracts or Material Contracts;
(h) any increase in (or commitment, oral or written, to increase) the
rate or terms (including, without limitation, any acceleration of the right to
receive payment) of compensation payable or to become payable by the Company to
any Seller who is also a director, officer, employee or consultant of the
Company, or any new written employment agreements with any of such Persons or
any new commitments (oral or written) with any Seller, other than as required by
law or any contract or existing plan.
(i) any increase in (or commitment, oral or written, to increase) the
rate or terms (including, without limitation, any acceleration of the right to
receive payment) of any bonus, severance, insurance, pension or other employee
benefit plan or contract, payment or arrangement made to, for or with any
Seller, other than, with respect to the Sellers, in the ordinary course of
business;
(j) any action or event taken by the Company that if taken or suffered
after the date hereof would violate Section 5.1 of this Agreement;
(k) any suspension of any license or permit issued to the Company or
any impairment of its right to conduct its business; or
(l) any change made prior to the date of this Agreement in accounting
methods, principles or practices by the Company materially affecting its assets,
liabilities or business, except insofar as may have been required by a change in
GAAP.
SECTION 3.15 LITIGATION; REGULATORY ACTION. Except as set forth in Section
3.15 of the Company Disclosure Schedule: (i) there is no litigation, suit,
claim, action, proceeding or investigation ("Litigation") before any court,
arbitrator, mediator or Regulatory Entity is pending against the Company and, to
the Company's knowledge, no such Litigation has been threatened in writing or
orally to the Company; (ii) neither the Company nor any of its properties is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with any Regulatory Entity; and (iii) the
Company has not been notified by any Regulatory Entity to the effect that such
Regulatory Entity is contemplating issuing or requesting any such order, decree,
agreement, memorandum of understanding or similar submission.
SECTION 3.16 TRANSACTIONS WITH AFFILIATES. Except as disclosed in Section
3.16 of the Company Disclosure Schedule, from January 1, 2003 through the date
hereof there have been no transactions, agreements, arrangements or
understandings between the Company, on the one hand, and the Company's
affiliates (other than Parent), on the other hand.
SECTION 3.17 NO DISSENTERS' RIGHTS. Nothing in the Certificate of
Incorporation or the By-laws of the Company provides or would provide to any
Person, including without
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limitation the Company Shareholders, upon execution of this Agreement or any
other agreements, documents, certificates or other instruments contemplated
hereby and consummation of the transactions contemplated hereby and thereby
(including the Merger), rights of dissent and appraisal of any kind.
SECTION 3.18 TECHNOLOGY AND INTELLECTUAL PROPERTY. Except as set forth in
Section 3.18 of the Company Disclosure Schedule, the Company has (and upon
consummation of the transactions contemplated hereby will have) ownership of, or
such other rights by license, lease or other agreement in and to, all items of
intangible property used in the conduct of its business as presently conducted,
including, without limitation, trademarks and service marks, trade names, brand
names, patents, copyrights, proprietary rights, logos, names, trademark
applications, service mark applications and patent applications, including all
rights to use the name "Fixed Income Discount Advisory Company" and "FIDAC"
(collectively the "Intellectual Property"), as necessary to conduct the business
of the Company as presently conducted. The Company has not infringed upon or
violated any trademark, trade name, copyright, patent, trade secret right or
other proprietary right of others, nor, to the knowledge of the Company, has any
other Person infringed on a continuing basis any rights that the Company has in
the Intellectual Property. The Company owns or licenses all computer software
developed or currently used by it which is material to the conduct of its
business as currently conducted and, to the knowledge of the Company, has the
right to use such software without infringing upon the intellectual property
rights (including trade secrets rights) of any third party. The Company has not
received written notice of any claim respecting any such violation or
infringement.
SECTION 3.19 MATERIAL CONTRACTS. Section 3.19 of the Company Disclosure
Schedule sets forth as of the date hereof a complete and accurate list of all
leases for real property, all material leases for personal property and all
material agreements, contracts, licenses, commitments and instruments to which
the Company is a party or by which the Company or any of its assets or
properties is bound or subject (each a "Material Contract" and collectively, the
"Material Contracts"). Each Material Contract (excluding for these purposes,
Investment Management Contracts, as hereinafter defined) is in full force and
effect, and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, except, in each case, to the extent
certain of the liability limitation provisions therein may be contrary to public
policy as expressed in the Securities Act, the Exchange Act, the Investment
Company Act of 1940, as amended (the "Investment Company Act"), the Investment
Advisers Act of 1940, as amended (the "Investment Advisers Act") and state "blue
sky" laws, and the rules and regulations promulgated thereunder, and as limited
by the effects of bankruptcy, insolvency, reorganization, moratorium or other
laws relating to or affecting creditors' rights generally and general principles
of equity. True, correct and complete copies of all Material Contracts have been
previously delivered by the Company to Parent. Except for Investment Management
Contracts and Material Contracts, the Company is not on the date hereof a party
to or bound by and none of its assets or properties is or may be subject to:
(a) any contract or agreement not fully performed for the purchase by
the Company for its own account of any commodity, material, services or
equipment, including, without limitation, fixed assets, for a price in excess of
$50,000;
(b) any contract containing covenants limiting the freedom of the
Company to
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engage or compete (geographically or otherwise) in any line of business or with
any Person;
(c) any agreement, oral or written, or understanding (i) for cash
payments for client solicitations, or (ii) in respect of the sale or
distribution of shares of the Company Funds;
(d) any license agreement (as licensor or licensee) providing for
future payments in excess of $50,000 which by its terms does not terminate or is
not terminable without penalty by the Company upon notice of 60 days or less;
(e) any indenture, mortgage, promissory note, loan agreement, guaranty
or other agreement or commitment for the borrowing of money, by the Company in
excess of $100,000;
(f) any contract or agreement involving payments based on profits or
revenues of the Company; or
(g) any other contract or agreement which creates future payment
obligations of the Company in excess of $100,000 and which by its terms does not
terminate or is not terminable without penalty by the Company upon notice of 60
days or less.
SECTION 3.20 NO DEFAULT UNDER CONTRACTS. Neither the Company nor the manner
in which it conducts its business is in breach or violation of, or in default
under (with or without the giving of notice or the passage of time), any term or
provision of any Material Contract (excluding, for purposes of this Section
3.20, any Investment Management Contract) to which it is a party or by which it
is or may be bound or to which any of its properties or assets is or may be
subject, the effect of which breach, violation or default, either individually
or in the aggregate, has or would reasonably be expected to have a Company
Material Adverse Effect. To the Company's knowledge, no other party is in
material default of any such Material Contract.
SECTION 3.21 INVESTMENT MANAGEMENT CONTRACTS. (a) Section 3.21 of the
Company Disclosure Schedule sets forth a list of (i) all Clients as of the date
hereof and (ii) the net assets in the account of each Client as of September 30,
2003. Each such Client is a party to an Investment Management Contract with the
Company. The Company is in compliance with the terms of each Investment
Management Contract and is not in default or breach under (with or without the
giving of notice or the passage of time) any of the terms of any Investment
Management Contract. Each Investment Management Contract is in full force and
effect with respect to the Company and constitutes a legal, valid and binding
obligation of such party thereto, enforceable against such party in accordance
with its terms, except, in each case, to the extent certain of the liability
limitation provisions therein may be contrary to public policy as expressed in
the Securities Act, the Exchange Act, the Investment Company Act, the Investment
Advisers Act and state "blue sky" laws, and the rules and regulations
promulgated thereunder, and as limited by the effects of bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting creditors'
rights generally and general principles of equity. Except as set forth in
Section 3.21 of the Company Disclosure Schedule, no Investment Management
Contract will become cancellable as a result of the Merger. Each Investment
Management Contract reflects all significant terms of the investment management
arrangement between the parties thereto and represents the entire material
understanding of the parties thereto with reference to
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the transactions contemplated thereby. True, correct and complete copies of each
Investment Management Contract, including a current fee schedule, have been
delivered to Parent. Except as set forth in Section 3.21 of the Company
Disclosure Schedule, the Company has not received notice that any Client intends
or has threatened to terminate its Investment Management Contract.
(b) As used in this Agreement:
(i) "Client" means any client to which the Company provides
investment management, investment advisory, including sub-advisory services,
underwriting, distribution or administrative services on the date of this
Agreement (as the term is used in the Advisers Act Rule 203(b)(3)-1); and
(ii) "Investment Management Contract" means a contract or
agreement in effect on the date hereof or entered into after the date hereof,
relating to the Company's rendering of investment management or investment
advisory services, including sub-advisory services, underwriting or distribution
services or any administrative services to any Person.
SECTION 3.22 KEY MAN LIFE INSURANCE. The Company does not maintain key man
life insurance for any of its employees or executives
SECTION 3.23 EMPLOYEES. (a) Except as set forth in Section 3.23 of the
Company Disclosure Schedule, the Company is not a party to or bound by any
contract, arrangement, commitment or understanding as of the date hereof, with
respect to the employment of any directors, executive officers, key employees or
material consultants (other than oral contracts of employment at will).
(b) The Company does not sponsor any (i) life, health, accident,
disability or any other "employee welfare benefit plan", as defined in Section
3(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), (ii) pension, profit sharing, deferred compensation, retirement,
bonus, or any other "employee pension benefit plan", as defined in Section 3(2)
of ERISA or (iii) any other deferred compensation, severance, bonus, restricted
stock or restricted property, stock option or stock purchase plans, or any
similar employee benefit plans (each a "Plan" and collectively, the "Plans"),
whether or not such plans or obligations are of a legally binding nature or are
in the nature of informal understandings.
(c) The Company does not maintain, or contribute to, any
"multiemployer plan."
(d) Within the preceding five years neither the Company nor any other
trade or business (whether or not incorporated) which is under common control
with the company (as defined in Section 4001 of ERISA) has terminated, withdrawn
from, or discontinued contributions to, any multiemployer pension benefit plan
or a pension benefit plan to which more than one employer contributes, subject
to Title IV of ERISA.
(e) Neither the Company nor any other trade or business (whether or
not incorporated) which is under common control with the Company (as defined in
Section 4001 of ERISA) has terminated any single employer pension benefit plan
subject to Title IV of ERISA.
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SECTION 3.24 DERIVATIVE INSTRUMENTS. As of the date hereof, there are no
swaps, caps, floors, futures, forward contracts, option agreements, and any
other derivative financial instruments, contracts or arrangements entered into
for the account of the Company. Any swaps, caps, floors, futures, forward
contracts, option agreements, and any other derivative financial instruments,
contracts or arrangements entered into for the account of a Client of the
Company were entered into in accordance with, in all material respects, the
applicable Investment Management Agreement.
SECTION 3.25 BUSINESS; REGISTRATIONS. (a) The Company is duly registered as
an investment adviser under the Investment Advisers Act and is duly registered,
licensed or qualified as an investment adviser in all jurisdictions where such
registration, licensing or qualification is required in order to conduct its
business. Except as set forth in Section 3.25 of the Company Disclosure
Schedule, the Company is in compliance in all material respects with all
applicable foreign, federal and state laws requiring registration, licensing or
qualification as an investment adviser. The Company has delivered or made
available to Parent true, correct and complete copies of its most recent Form
ADV, as amended to date, and has made available true, correct and complete
copies of all foreign and state registration forms, as amended to date. The
information contained in such forms was true, correct and complete in all
material aspects at the time of filing and has been amended or modified as
required by applicable law.
(b) The Company is not, nor as of the Closing will it be, an
"investment company," within the meaning of the Investment Company Act, which is
required to be registered as such under such Act. The Company is not, nor as of
the Closing will it be, a "broker" or "dealer" within the meaning of the
Exchange Act. The Company is not, nor as of the Closing will it be, a commodity
trading advisor or a commodity pool operator which is required to be registered
as such with the Commodity Futures Trading Commission (the "CFTC") or the
National Futures Association. Copies of all inspection reports or similar
documents furnished to the Company by the SEC, the CFTC or state or foreign
regulatory authorities since January 1, 1998 are listed on Section 3.25 of the
Company Disclosure Schedule and have been provided to Parent. The Company is not
required to disclose any information to clients under Rule 206(4)-4 promulgated
under the Investment Advisers Act.
(c) Each Seller and each other Person "associated" (as defined under
the Investment Advisers Act) with the Company holds all permits, licenses,
certificates of authority, exemptions, orders, and approvals that are required
in connection with the conduct of the business as presently conducted. Such
permits and licenses are in full force and effect, except where the failure to
be in full force and effect would not have a Company Material Adverse Effect.
SECTION 3.26 CERTAIN ADDITIONAL REPRESENTATIONS AND WARRANTIES AS TO THE
COMPANY FUNDS. With respect to the representations and warranties in this
Section 3.26 as to the funds for which the Company provides advisory or
management services and which are sponsored by the Company (excluding those
collective vehicles where the Company's services are limited to advisory and
sub-advisory services) (the "Company Funds"), such representations and
warranties are to the knowledge of the Company.
(a) Section 3.26 of the Company Disclosure Schedule sets forth a true,
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complete and correct list, as of the date hereof, of each Company Fund for which
the Company acts as investment adviser, sub-adviser or manager (including any
entities organized under the laws of jurisdictions outside the United States).
Each Company Fund is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization and has the requisite
corporate, trust or partnership power and authority, and possesses all rights,
licenses, authorizations and approvals, from Regulatory Entities or otherwise,
necessary to entitle it to use its name, to own, lease or otherwise hold its
properties and assets and to carry on its business as it is now conducted and to
perform its obligations under any agreements to which it is a party, and is duly
qualified, licensed or registered to do business in each jurisdiction where it
is required to do so under applicable law. The Company has delivered or made
available to Parent a list of all such jurisdictions where each Company Fund is
qualified.
(b) None of the Company Funds is, or as of the Closing will be, an
"investment company," within the meaning of the Investment Company Act, which is
required to be registered as such under such Act. None of the Company Funds is,
or as of the Closing will be, a "broker" or "dealer" within the meaning of the
Exchange Act. None of the Company Funds is, or as of the Closing will be, a
commodity trading advisor or a commodity pool operator which is required to be
registered as such with the CFTC or the National Futures Association. Copies of
all inspection reports or similar documents furnished to any Company Fund by the
SEC, the CFTC or state or foreign regulatory authorities since January 1, 1998
are listed on Section 3.26 of the Company Disclosure Schedule and have been
provided to Parent. None of the Company Funds is required to disclose any
information to clients under Rule 206(4)-4 promulgated under the Investment
Advisers Act.
(c) Each of the Company Funds is in compliance in all material
respects with all applicable laws, and any rules and regulations of any
self-regulatory organization having jurisdiction over such Company Fund.
(d) Each of the Company Funds has been operated in compliance in all
material respects with its respective objectives, policies and restrictions,
including those set forth in the applicable prospectus and registration
statement, if any, for that Company Fund or governing instruments for a Client.
(e) Each Company Fund has issued its shares or interests pursuant to
valid exemptions under the Securities Act and applicable state securities or
"blue sky" laws. The offerings and sales of the shares and interests in the
Company Funds complied with applicable law. Each Company Fund's investments have
been made in accordance with its investment policies and restrictions set forth
in its registration statement in effect at the time the investments were made
and at all times when the investments were held. No stop order suspending the
effectiveness of any registration statement has been issued and no proceedings
for that purpose have been instituted or, to the knowledge of the Company, are
contemplated.
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ARTICLE IV
REPRESENTATION AND WARRANTIES OF THE SELLERS
Each Seller represents and warrants to Parent as follows, with respect to
only itself and in each case as of the date of this Agreement.
SECTION 4.1 INVESTMENT PURPOSE. Such Seller is acquiring the Parent Shares
comprising the Merger Consideration (the "Merger Securities") for its own
account and not with a view toward, or for resale in connection with, the sale
or distribution thereof.
SECTION 4.2 ACCREDITED INVESTOR STATUS. Such Seller is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D.
SECTION 4.3 RELIANCE ON EXEMPTIONS. Such Seller understands that the Merger
Securities are being offered and issued in reliance on specific exemptions from
the registration requirements of the United States federal and state securities
laws and that Parent is relying in part upon the truth and accuracy of, and such
Seller's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Seller set forth herein in order to
determine the availability of such exemptions and the eligibility of such Seller
to acquire the Merger Securities.
SECTION 4.4 INFORMATION. Such Seller and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of Parent and materials relating to the issuance of the Merger Securities that
have been requested by such Seller. Such Seller and its advisors, if any, have
been afforded the opportunity to ask questions of Parent. Such Seller
understands that its investment in the Merger Securities involves a high degree
of risk. Such Seller has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Merger Securities.
SECTION 4.5 NO GOVERNMENTAL REVIEW. Such Seller understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Merger Securities
or the fairness or suitability of the investment in the Merger Securities, nor
have such authorities passed upon or endorsed the merits of the offering of the
Merger Securities.
SECTION 4.6 TRANSFER OR RESALE. Such Seller understands that: (i) the
Merger Securities have not been and are not being registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (A) subsequently registered thereunder, (B)
such Seller shall have delivered to Parent an opinion of counsel, in a generally
acceptable form, to the effect that such Merger Securities to be sold, assigned
or transferred may be sold, assigned or transferred pursuant to an exemption
from such registration, or (C) such Seller provides Parent with assurance,
reasonably acceptable to Parent, that such Merger Securities can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the Securities
Act, (or a successor rule thereto) ("Rule 144"); (ii) any sale of the Merger
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the
Merger Securities
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under circumstances in which the Seller (or the person through whom the sale is
made) may be deemed to be an underwriter (as that term is defined in the
Securities Act) may require compliance with some other exemption under the
Securities Act or the rules and regulations of the SEC thereunder; (iii) neither
Parent nor any other Person is under any obligation to register the Merger
Securities under the Securities Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder, except as provided in
Sections 5.7 and 5.13; and (iv) the transferability of the Merger Securities is
subject to the additional restrictions on transfer set forth in Section 5.11.
SECTION 4.7 LEGENDS. Such Seller understands that the certificates or other
instruments representing the Merger Securities shall bear a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES
LAWS OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
SECTION 4.8 AUTHORIZATION; ENFORCEMENT; VALIDITY. This Agreement has been
duly and validly executed and delivered by such Seller and, assuming the due
authorization, execution and delivery hereof by each of the Parent, the Company
and Merger Sub, constitutes the valid, legal and binding agreement of Seller,
enforceable against Seller in accordance with its terms, except as limited by
the effects of bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting creditors' rights generally and general principals of
equity.
SECTION 4.9 OWNERSHIP OF COMPANY SHARES. Such Seller is the lawful owner,
of record and beneficially, of the Company Shares purportedly owned by such
Seller (which are those Company Shares listed opposite such Seller's name on
Schedule A) and has good and marketable title to such Company Shares, free and
clear of any and all liens, charges or encumbrances of any nature whatsoever,
except for Taxes not yet due and payable and as set forth in the Restricted
Stock Agreements applicable to each Seller. Except as set forth in the
Restricted Stock Agreements applicable to each Seller, there are no restrictions
on the transferability of the Company Shares held by such Seller imposed by any
agreement to which either the Company or such Seller is a party and no Person
has any preemptive or other purchase rights with respect to the sale of any
Company Shares held by such Seller.
SECTION 4.10 NO OTHER AGREEMENTS TO SELL. Such Seller has no legal
obligation, absolute or contingent, to any Person or entity other than Parent to
sell its Company Shares, to effect any merger, consolidation or other
reorganization the Company or to enter into any agreement with respect thereto.
Such Seller has not made a commitment or entered into
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negotiations to sell or transfer any part of the assets of the Company other
than in the ordinary course of its business.
ARTICLE V
COVENANTS
SECTION 5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as expressly
contemplated or permitted by this Agreement or as set forth in Section 5.1 of
the Company Disclosure Schedule, during the period from the date hereof to the
Effective Time, the Company will conduct its operations only in the ordinary
course of business consistent with past practice, and shall use commercially
reasonable efforts to preserve intact its current business organizations, keep
available the service of its current officers and preserve its relationships
with customers, suppliers and others having business dealings with them. Without
limiting the generality of the foregoing, and except (x) as otherwise
contemplated by this Agreement, (y) as set forth in Section 5.1 of the Company
Disclosure Schedule, or (z) in the ordinary course of business consistent with
past practice, from and after the date hereof and prior to the earlier of (i)
the Effective Time or (ii) termination of this Agreement, the Company will not,
without the prior written consent of Parent:
(a) amend its Certificate of Incorporation or By-laws;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other securities or equity equivalents (including any stock
options or stock appreciation rights);
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock,
make any other actual, constructive or deemed distribution in respect of any
shares of its capital stock or otherwise make any payments to its shareholders
in their capacity as such or redeem or otherwise acquire any of its securities,
except for S-corporation distributions in the ordinary course with respect to
the year ended December 31, 2003 and except as provided in Section 5.14 below;
(d) except as may be required as a result of a change in law or in
GAAP, change any of the accounting principles or practices used by it and
maintain its books and records other than in accordance with GAAP consistently
applied;
(e) take any action, or omit to take any action, which action or
omission could reasonably be expected to terminate or jeopardize Parent's
continuing status as a real estate investment trust ("REIT") or the Surviving
Corporation's ability to qualify as a taxable REIT subsidiary following the
Merger or would subject Parent or the Surviving Corporation to any U.S. federal
income or excise Tax;
(f) enter into any agreement with an affiliate (other than the Parent
or any of its subsidiaries), except in accordance with the terms of any contract
or compensation
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arrangement in effect on the date hereof;
(g) increase any compensation or enter into or amend any employment,
severance or other arrangement with any Seller, any officer or director of the
Company, or any employee of the Company earning more than $100,000 per annum,
other than as required by law or any contract or existing plan or in connection
with new hires;
(h) revoke the Company's election to be taxed as an S corporation
within the meaning of Sections 1361 and 1362 of the Code, or take, or fail to
use commercially reasonable efforts to not allow, any action other than the
conversion of the Company Common Stock pursuant to this Agreement that would
result in the termination of the Company's status as a validly electing S
corporation within the meaning of Sections 1361 and 1362 of the Code;
(i) other than as required by law, adopt any new employee benefit plan
or materially amend any existing plans or rights; and
(j) take, or agree in writing or otherwise to take, (i) any of the
actions described in Sections 5.1(a) through 5.1(f) to the extent that such
actions would be prohibited thereby, or (ii) any action which would result in
any of the material conditions to the Merger set forth herein not being
satisfied;
SECTION 5.2 CONDUCT OF BUSINESS OF PARENT. Except (x) as otherwise
contemplated by this Agreement or (y) in the ordinary course of business
consistent with past practice, from and after the date hereof and prior to the
earlier of (i) the Effective Time or (ii) termination of this Agreement, the
Parent will not, without the prior written consent of Company:
(a) amend its Certificate of Incorporation or By-laws;
(b) take any action, or omit to take any action, which action or
omission could reasonably be expected to terminate or jeopardize Parent's
continuing status as a REIT or the Surviving Corporation's ability to qualify as
a taxable REIT subsidiary following the Merger or would subject Company or the
Sellers to any U.S. federal income or excise Tax;
(c) take, or agree in writing or otherwise to take, any action that
requires the approval of the Parent Shareholders;
(d) take, or agree in writing or otherwise to take, (i) any of the
actions described in Sections 5.2(a) through 5.2(c) to the extent that such
actions would be prohibited thereby, or (ii) any action which would result in
any of the material conditions to the Merger set forth herein not being
satisfied.
SECTION 5.3 OTHER ACTIONS. Parent, the Company and the Sellers shall use
commercially reasonable efforts not to take any action that would result any of
the conditions to the Merger set forth in Article VI not being satisfied.
SECTION 5.4 NO SOLICITATION. The Company and each of the Sellers shall not,
and the Company shall cause its affiliates not to, directly or indirectly,
solicit any inquiries or proposals or enter into or continue any discussions,
negotiations or agreements relating to the
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sale or exchange of any Company Shares or the merger, consolidation or other
reorganization of the Company with, or any direct or indirect disposition of a
significant amount of the Company's assets or business to, any person other than
Parent or its subsidiaries or provide any assistance or any information to or
otherwise cooperate with any person in connection with any such inquiry,
proposal or transaction. In the event that the Company or any Seller receives an
unsolicited offer for such a transaction or becomes aware that a third party
intends to make such an offer, the Company or such Seller will provide Parent
with notice thereof as soon as practicable after receipt, including the identity
of the prospective purchaser or soliciting party.
SECTION 5.5 ADDITIONAL AGREEMENTS; REASONABLE EFFORTS. (a) Subject to the
terms and conditions herein provided, each of the parties hereto agrees to use
commercially reasonable efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, all things reasonably necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including (i) contesting any legal
proceeding challenging the Merger and (ii) the execution of any additional
instruments necessary or convenient to consummate the transactions contemplated
hereby. Subject to the terms and conditions of this Agreement, each party hereto
agrees to use commercially reasonable efforts to cause the Effective Time to
occur as soon as practicable after the Parent Shareholder Approval with respect
to the Merger. In case at any time after the Effective Time any further action
is necessary to carry out the purposes of this Agreement, the proper officers
and directors of each party hereto shall take all such necessary action. The
Company, the Sellers, Merger Sub and Parent each will use commercially
reasonable efforts to obtain consents, approvals or waivers of all third parties
and Regulatory Entities necessary, proper or advisable for the consummation of
the transactions contemplated by this Agreement (other than any consents,
approvals or waivers of any third party or Regulatory Entities with respect to
any Investment Management Contract); provided, that nothing contained herein
shall require the Sellers, the Company, Merger Sub or Parent to agree to hold
separate or to divest or dispose of any of such entity's respective businesses,
properties or assets or cease engaging in any business or otherwise take any
action which, individually or in the aggregate, could reasonably be expected to
impair the ability of the Surviving Corporation in any material respect to own
and operate the respective assets and businesses of the Company, or the Parent
to continue to own the assets and engage in the businesses which it currently
owns or engages in, after giving effect to the Merger. Notwithstanding anything
to the contrary contained in this Section 5.5, neither Parent, the Company nor
the Sellers will be required to pay any money, furnish any consideration, modify
any agreement or incur any liability or obligation in order to satisfy its
obligations to obtain consents, approvals or waivers of any third party (other
than a Regulatory Entity) under this Section 5.5.
(b) The parties hereto agree that they will consult with each other
with respect to the obtaining of all permits, consents, approvals and
authorizations of all Regulatory Entities and other third parties necessary or
advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other apprised of the status of matters relating to
completion of the transactions contemplated hereby.
(c) Subject to applicable laws governing the exchange of information,
each of the Company and Parent will, upon request, furnish the other party with
all information concerning itself, its subsidiaries, directors, officers and
shareholders and such other matters as
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may be reasonably necessary or advisable in connection with any filing, notice
or application made by or on behalf of such other party or any of its
subsidiaries to any third party or Regulatory Entity.
(d) The Company and Parent shall promptly advise each other upon
receiving any communication from any Regulatory Entity whose consent or approval
is required for consummation of the transactions contemplated by this Agreement.
(e) With respect to the exercise or enforcement of any of the rights
or remedies of Parent pursuant to this agreement, the members of the Parent
Board and the Audit Committee of the Parent Board who are not Sellers or
officers or employees of the Surviving Corporation shall make all determinations
and take all actions on behalf of Parent.
(f) The Sellers acknowledge that all Company employees participate in
Plans maintained by Parent and that there is no requirement to transition such
Company employees from Plans maintained by the Company.
(g) Each of the Sellers has entered into as of the date hereof an
employment agreement with the Parent which agreement shall become effective at
the Effective Time.
SECTION 5.6 PUBLIC ANNOUNCEMENTS. The Company and Parent will consult with
each other and give each other reasonable advance notice before issuing any
press release or otherwise making any public statements with respect to the
transactions contemplated hereby, including the Merger. Each party hereto shall
incorporate in the press release or other public statement such information as
shall reasonably be requested to be included therein by the other party hereto.
Notwithstanding the foregoing, either party hereto may, without the prior
consent of the other party, issue any press release or make any public
announcement that may be required by law or the rules or requirements of any
Regulatory Entity, if it has used its commercially reasonable efforts to consult
with the other party but has been unable to do so in a timely manner.
SECTION 5.7 PREPARATION OF THE PROXY STATEMENT. (a) After the date hereof,
Parent shall (in cooperation with Merger Sub, the Company and the Sellers)
promptly prepare and Parent shall file with the SEC as soon as practicable a
Registration Statement on Form S-4 (the "Form S-4") under the Securities Act,
with respect to the Merger Securities issuable in the Merger, a portion of which
Registration Statement shall also serve as the proxy statement with respect to
the meeting of the Parent Shareholders in connection with the Merger (the "Proxy
Statement/Prospectus"). The parties will cause the Form S-4 and the Proxy
Statement/Prospectus to comply as to form in all material respects with the
applicable provisions of the Securities Act, the Exchange Act and the rules and
regulations promulgated thereunder. Parent shall use commercially reasonable
efforts, and the Company and the Sellers will cooperate with Parent, to have the
Form S-4 declared effective by the SEC as promptly as practicable. Parent shall
use its commercially reasonable efforts to obtain, prior to the effective date
of the Form S-4, all necessary state securities law or "blue sky" permits or
approvals required to carry out the transactions contemplated by this Agreement.
The Proxy Statement and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the meeting of the Parent Shareholders, and
the Form S-4 and each amendment or supplement
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thereto, at the time it is filed or becomes effective, will not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the Company,
Parent and the Sellers agrees that the written information provided by it
specifically for inclusion in the Proxy Statement/Prospectus and each amendment
thereto, at the time of mailing thereof and at the time of the meeting of the
Parent Shareholders, or, in the case of the Form S-4 or any amendment or
supplements thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Parent
will advise the Company and Merger Sub promptly after it receives notice
thereof, of the time when the Form S-4 has become effective or any supplement or
amendment has been filed, the issuance of any stop order, the suspension of the
qualification of the Merger Securities Shares issuable in connection with the
Merger for offering or sale in any jurisdiction, or any request by the SEC for
additional information. Parent shall use its commercially reasonable efforts to
cause the Proxy Statement/Prospectus to be mailed to the Parent Shareholders at
the earliest practicable date as permitted by the SEC. If any time prior to the
Effective Time any event relating to or affecting the Parent, the Company or the
Sellers shall occur as a result of which it is necessary, in the opinion of
counsel for the Parent or the counsel of the Company, to supplement or amend the
Proxy Statement/Prospectus in order to make such document not misleading in
light of the circumstances existing at the time approval of the stockholders of
Parent is sought, Parent, the Company and the Sellers, respectively, will notify
the others thereof. If Parent determines that such an amendment or supplement is
required, the Company and the Sellers will cooperate with Parent in filing, and
Parent will prepare and file, an amendment or supplement with the SEC and, if
required by law or NYSE rule or applicable state securities authorities such
that such document, as so supplemented or amended, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances existing at
such time, not misleading, and Parent will, as required by law, disseminate to
the Parent Shareholders such amendment or supplement.
(b) Parent covenants that the Proxy Statement/Prospectus shall include
the recommendation of the Parent Board and of the Parent Special Committee that
the Parent Shareholders approve the Merger, this Agreement and the other
transactions contemplated hereby.
(c) Parent will take all action necessary in accordance with
applicable law and its charter documents and by-laws to convene a meeting of its
shareholders (the "Parent Special Meeting") as promptly as practicable to
consider and vote upon or otherwise to obtain the consent of its shareholders,
as required, to the transactions contemplated hereby. Subject to Sections 5.3
and 5.7(b), Parent and the Parent Board shall each take all lawful action and
shall use commercially reasonable efforts to solicit such consent, including,
without limitation, timely mailing of the Proxy Statement.
(d) During the period from the date hereof through the earlier of (x)
the date on which the Merger is consummated or (y) the date on which this
Agreement is terminated according to its terms, the Company and the Sellers,
shall cast or cause to be cast all votes attributable to the Parent Shares owned
of record by the Company or the Sellers, at any annual or
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special meeting of shareholders of Parent, including any adjournments or
postponements thereof, or in connection with any written consent or other vote
of shareholders of Parent, so that the percentage of such Parent Shares voted in
favor of the adoption of this Agreement and the approval of the Merger is the
same as the Affirmative Percentage, the percentage of such Parent Shares voted
against such adoption and approval is the same as the Negative Percentage and
the percentage of such Parent Shares present but abstaining (and voting neither
in favor of nor against such adoption and approval) is the same as the
Abstention Percentage. For purposes hereof, the "Affirmative Percentage" equals
the percentage of all votes cast by Parent Shareholders who are not Sellers that
represent votes in favor of the adoption of the Agreement and Approval of the
Merger; "Negative Percentage" equals the percentage of all votes cast by Parent
Shareholders who are not Sellers that represent votes against such adoption and
approval; and "Abstention Percentage" equals the percentage of all votes cast by
Parent Shareholders who are not Sellers that count neither as votes in favor of
nor against such adoption and approval.
(e) The Sellers covenant to take no action to revoke or rescind the
Company Shareholder Approval prior to the Effective Time.
SECTION 5.8 ACCESS TO INFORMATION. Between the date hereof and the
Effective Time, the Company, upon reasonable notice and during ordinary business
hours, will grant Parent and its authorized representatives reasonable access to
its employees, offices and other facilities and books and records as Parent may,
from time to time, reasonably request in connection with the completion of the
transactions contemplated hereby.
SECTION 5.9 MERGER SUB ACTIONS. Prior to the Effective Time, Parent agrees
that Merger Sub shall not issue any shares of its capital stock. Merger Sub
shall take, and Parent shall use its commercially reasonable efforts to cause
Merger Sub to take, all actions necessary and appropriate to consummate the
Merger, subject to the terms and conditions of this Agreement. Merger Sub shall
not, and Parent shall cause Merger Sub not to, incur any obligations or conduct
any business except as necessary and appropriate to effect the consummation of
the Merger in accordance with this Agreement.
SECTION 5.10 ADVICE OF CHANGES. The Company and the Sellers, on the one
hand, and Parent, on the other, shall promptly advise the other party upon
learning of any change or event having, or that would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on it or which
it believes would or would be reasonably expected to cause or constitute a
material breach of any of its representations, warranties or covenants contained
herein that would reasonably be expected to result in a failure of the
conditions set forth in Sections 6.2 and 6.3 to be satisfied.
SECTION 5.11 RESTRICTIONS ON TRANSFER. In addition to, and without
limiting, Sections 4.6 and 4.7 hereof, each Seller agrees to the additional
transfer restrictions set forth in this Section 5.11 with respect to the Merger
Securities to be issued to such Seller:
(a) Except for Permitted Transfers, such Seller shall not sell or
otherwise Transfer: (i) the Closing Merger Consideration for a period of three
years from the Closing Date; (ii) the Contingent Merger Consideration (if any)
with respect to the First Annual Period for a period of two years from the
sixty-third day following the end of an Annual Period (or, if any
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such date is not a business day, the first business day following such date)
(the "Reference Date") for such Annual Period; and (iii) the Contingent Merger
Consideration (if any) with respect to the Second and Third Annual Periods for a
period of one year from the Reference Date for such Annual Periods.
(b) The parties shall identify a mutually acceptable third party to
act as custodian of the Merger Securities during the periods referred to in
Section 5.11(a) (the "Custodian"). Any Escrowed Shares released by the Escrow
Agent at the end of the Basic Survival Period as contemplated by Section 1.15(b)
above shall be delivered into the possession of the Custodian. Any Contingent
Merger Consideration paid by Parent after the end of the Basic Survival Period
shall be delivered into the possession of the Custodian. All Merger Securities
so delivered to the Custodian shall continue to be held by the Custodian until:
(i) the transfer restrictions provided for in clause (a) above with respect to
such Merger Securities have lapsed; or (ii) Transferred pursuant to any
Permitted Transfer except for those referred to in clause (i) in the definition
thereof.
(c) Parent shall disburse (or cause to be disbursed) to each Seller
with respect to the Merger Securities held in the possession of the Custodian
all cash dividends received as a result of the ownership of the Merger
Securities.
(d) Any securities received as the result of ownership of the Merger
Securities, including, but not by way of limitation, warrants, options and
securities received as a stock dividend, stock split or combination, or as a
result of a recapitalization, reorganization, exchange, substitution or other
similar change in Parent's capital structure, shall be retained by the Custodian
in the same manner and subject to the same conditions and restrictions as the
Merger Securities with respect to which they were issued.
(e) Each Seller that is an affiliate of the Company for the purposes
of Rule 145 promulgated under the Securities Act ("Rule 145") further agrees
that, without limiting any of the other provisions of this Section 5.11 or this
Agreement, such Seller will not effect any resales of any Merger Securities it
receives hereunder except to the extent such resales comply with the provisions
of paragraph (d) of Rule 145. For purposes of this provision, the Company has
identified the following Sellers as affiliates of the Company: Michael A.J.
Farrell, Wellington J. Denahan, Kathryn F. Fagan and Jennifer A. Karve.
(f) As used in this Section 5.11:
(i) "Transfer" of the Merger Securities shall be construed
broadly and shall include any issuance, sale, assignment, transfer,
participation, gift, bequest, distribution, or other disposition thereof, or any
pledge or hypothecation thereof, placement of a lien thereon or grant of a
security interest therein or other encumbrance thereon, including any direct or
indirect transfer of any of the economic benefits or risks of ownership of such
Merger Securities, in each case whether voluntary or involuntary or by operation
of law or otherwise; and
(ii) "Permitted Transfers" shall mean any Transfers made by a
Seller (i) to a transferee described in clauses (i) through (vi) of Section
1.7(d) hereof; (ii) to the extent necessary to generate proceeds to cover any
Tax obligations of a Seller for imputed interest on
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the Contingent Merger Consideration; (iii) pursuant to a tender in response to a
tender offer; (iv) pursuant to a merger or consolidation in which Parent is
acquired (v) with the approval of a majority of the members of the Parent Board
who are not Sellers or officers or employees of the Surviving Corporation; and
(vi) pursuant to hedging transactions, provided that such hedging (a) does not
impair the value of the Merger Consideration with respect to such Seller's
indemnification obligations pursuant to Article IX hereof and (b) is not in
violation of or prohibited by Parent's insider trading policy as from time to
time in effect.
SECTION 5.12 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a) From
and after the Effective Time, Parent agrees that it shall cause the Surviving
Corporation to provide exculpation and indemnification for each Person who is
now or has been at any time prior to the date hereof or who becomes such prior
to the Effective Time, an officer or director or employee of the Company, at
least to the same extent provided under the Certificate of Incorporation or
By-laws of the Company, as in effect on the date hereof; provided, that such
exculpation and indemnification covers actions on or prior to the Effective
Time, including, without limitation, all transactions contemplated by this
Agreement. Parent shall, or shall cause the Surviving Corporation to and the
Surviving Corporation shall advance expenses as incurred to the fullest extent
Parent or the Surviving Corporation would have been required to do so under the
Certificate of Incorporation or By-laws of the Company, as in effect on the date
hereof, provided the Person to whom expenses are advanced provides an
undertaking to repay such advances if it is finally determined by a court of
competent jurisdiction that such person is not entitled to indemnification.
Parent shall cause the Surviving Corporation to and the Surviving Corporation
shall maintain in effect for a period of six years, the current errors and
omissions policies maintained by the Company with respect to claims arising from
facts or events that occurred on or before the Effective Time, including without
limitation, in respect of the transactions contemplated by this Agreement;
provided, that Parent shall not be required to pay or to cause the Surviving
Corporation to pay aggregate annual premiums for insurance under this Section
5.12 in excess of 200% of the aggregate annual premium paid by the Company as of
the date of this Agreement for such purpose, but in such case Parent shall cause
the Surviving Corporation to purchase such coverage as the Surviving Corporation
may reasonably obtain for such amount.
(b) If the Surviving Corporation or any of its respective successors
or assigns (i) consolidates with or merges into any other Person and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any Person, then, and in each such case the successors and assigns of such
entity shall assume the obligations set forth in this Section 5.12, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each director and officer covered hereby.
SECTION 5.13 REGISTRATION RIGHTS.
(a) SHELF REGISTRATIONS.
(i) With respect to the Contingent Merger Consideration received
on each Contingent Payment Date (or after such date pursuant to Sections 1.9
through 1.11), the Sellers owning 5 % or more of the Contingent Merger
Consideration then outstanding (the "Initiating
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Holders") may deliver at any time to Parent a written request (a "Demand
Notice") for Parent to file a registration statement on Form S-3 (the "Form
S-3") registering under the Securities Act the resale of all or any portion of
the Contingent Merger Consideration then outstanding (collectively, the "Shelf
Registration Statement"). Such Shelf Registration Statement will state that the
Sellers named as selling shareholders therein may sell, subject to the
limitations set forth in this Agreement and any other limitations arising under
applicable law, all or any part of the Merger Securities issued to them from
time to time in transactions on the exchange on which such Merger Securities are
listed (or, if such shares are listed on the Nasdaq National Market, in such
market), in negotiated transactions, through the writing of options on the
shares, through a combination of such methods of sale, or in any other manner,
as appropriate, at prices related to market prices prevailing at the time of
sale, or at negotiated prices. In any such request made pursuant to this Section
5.13, each Seller shall specify the number of shares of Contingent Merger
Consideration to be registered. Any such request shall be delivered to Parent
and the other Sellers in accordance with the provisions of Section 10.5 of this
Agreement. Upon the receipt of such notice from the Initiating Holders that they
have requested a Shelf Registration Statement, each of such other Sellers shall
be entitled for a period of 30 days from the date of receipt of such notice to
deliver a written request to Parent specifying the number of such Seller's
shares of Contingent Merger Consideration to be included in such Shelf
Registration Statement.
(ii) Upon receipt of a Demand Notice, Parent shall file the Shelf
Registration Statement within 45 days of such receipt. Parent will use its
commercially reasonable efforts to cause such Shelf Registration Statement to
become effective as promptly as practicable and to cause each prospectus
contained therein to continue to meet the requirements of Section 10(a) of the
Securities Act until the shares of Contingent Merger Consideration to which such
prospectus relates have been deregistered. At any time after two years following
the Contingent Payment Date pursuant to which any Merger Securities were issued,
Parent may deregister any such Merger Securities registered under a Shelf
Registration Statement that are held by a Seller all of whose shares may then be
sold without registration under paragraph (k) of Rule 144. At any time after 5
years following the Contingent Payment Date pursuant to which any Merger
Securities were issued, Parent may, on one occasion only, deregister any such
Merger Securities registered under a Shelf Registration Statement that are held
by a Seller who is eligible to sell such Merger Securities pursuant to the
volume limitations described in paragraph (e)(1) of Rule 144 and subject to the
other conditions of such Rule; provided that if any such Merger Securities are
so deregistered, the Sellers holding such Merger Securities shall have one
additional right to require a Shelf Registration Statement in accordance with
and subject to the terms of this Section 5.13(a) to cover such Merger
Securities.
(iii) Notwithstanding the foregoing, in no event shall Parent be
required to effect more than a total of one Shelf Registration Statement in
connection with each payment of Contingent Merger Consideration; provided that
such obligation shall be deemed satisfied only when a Shelf Registration
Statement covering all shares requested to be included in such Shelf
Registration has become effective; and provided further that in establishing any
such Shelf Registration Statement Parent, at its option, may combine thereunder
any prior registrations effected pursuant to this Section 5.13(a) as permitted
under Rule 429 promulgated under the Securities Act (or any successor rule).
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(b) INCIDENTAL REGISTRATIONS.
(i) If Parent at any time (other than pursuant to Sections
5.13(a) hereof) proposes to register any of its shares of Common Stock under the
Securities Act for sale to the public, for its own account (except with respect
to registration statements on Forms S-4 or S-8, another form not available for
registering shares for sale to the public for cash), each such time it will give
written notice to each Seller of its intention so to do at least 20 days prior
to the filing of the registration statement. Upon the written request of any
Seller, given within 20 days after the such Seller's receipt of any such notice,
to register all or any portion of the Contingent Merger Consideration then held
by such Seller, Parent will use its commercially reasonable efforts to cause
such Contingent Merger Consideration to be included in the securities to be
covered by the registration statement proposed to be filed by Parent, all to the
extent requisite to permit the sale or other disposition by such Seller (in
accordance with its written request) of the shares so registered; provided that
Parent's obligation under this sentence is subject the terms and conditions set
forth in Section 5.13(b)(ii) below. In the event that any registration pursuant
to this Section 5.13(b)(i) shall be, in whole or in part, an underwritten public
offering, any request by a Seller pursuant to this Section 5.13(b)(i) to
register shares shall specify that either (i) such shares are to be included in
the underwriting on the same terms and conditions as the shares of Common Stock
otherwise being sold through underwriters under such registration or (ii) such
shares are to be sold in the open market without any underwriting, on terms and
conditions comparable to those normally applicable to offerings of common stock
in reasonably similar circumstances.
(ii) The right of a Seller to have any of its Contingent Merger
Consideration included in any underwriting offering referred to in Section
5.13(b)(i) is subject to the following limitations:
(A) If the underwriting or similar committee of the Board of
Directors of Parent shall determine, in consultation with
the managing underwriter, that the inclusion of such
Contingent Merger Consideration would adversely affect the
marketing of the securities to be sold by Parent or is
otherwise detrimental to or inadvisable for Parent, then
Parent based on such determination may exclude all or any
portion of such Contingent Merger Consideration from such
registration statement; and
(B) If no such determination is made by the underwriting
committee, the managing underwriters may nevertheless reduce
(pro rata among the requesting Sellers) the Contingent
Merger Consideration to that has been requested to be
included if and to the extent that the managing underwriter
shall be of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold by Parent
therein; provided that, without limiting the generality of
the foregoing, it is further acknowledged and agreed that
Parent (based on the advice of such committee and/or the
managing underwriters) or the managing underwriters may
determine (in making their determination under clauses (A)
or (B) above) that due to the expedited manner in which an
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offer is proceeding or may proceed it is impractical to give
any notice to the Sellers thereby and that the Contingent
Merger Consideration of the Sellers shall be excluded from
such offering without any such notice being given to the
Sellers and without Parent being in breach of any of its
obligations hereunder.
(c) Notwithstanding anything to the contrary contained in this Section
5.13, in the event that there is an underwritten offering of securities of
Parent pursuant to a registration covering shares and a Seller who is an
affiliate of Parent does not elect to sell his or her shares to the underwriters
of Parent's securities in connection with such offering, such affiliate shall
agree to be bound by customary selling restrictions in connection with such
offering, the term of which shall be no less than 90 days from the date such
offering is completed.
(d) If and whenever Parent is required by the provisions of Section
5.13 hereof to use its commercially reasonable efforts to effect the
registration of any shares under the Securities Act, Parent will, as
expeditiously as possible:
(i) prepare and file with the Commission a registration statement
on Form S-3 or other form of general applicability satisfactory to the managing
underwriter selected as herein provided with respect to such securities, if any,
and use its commercially reasonable efforts to cause such registration statement
to become and remain effective for the period required hereby;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and as comply with the provisions of
the Securities Act with respect to the disposition of all shares covered by such
registration statement in accordance with the Sellers' intended method of
disposition set forth in such registration statement for such period;
(iii) furnish to each Seller and to each underwriter such number
of copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons may reasonably request
in order to facilitate the public sale or other disposition of the shares
covered by such registration statement;
(iv) use its commercially reasonable efforts to register or
qualify the shares covered by such registration statement under the securities
or blue sky laws of such jurisdictions as the Sellers or the managing
underwriter shall reasonably request; PROVIDED, HOWEVER, that Parent shall not
for any such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process in any such jurisdiction;
(v) promptly notify each Seller under such registration statement
and each underwriter, at any time when a prospectus relating thereto is required
to be delivered under the Securities Act, of the happening of any event as a
result of which the prospectus contained in such registration statement, as then
in effect, includes an untrue statement of a material fact or
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omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing;
(vi) in the case of Sections 5.13(b) only, use its best efforts
to furnish, at the request of any Seller, on the date that shares are delivered
to the underwriters for sale pursuant to such registration: (i) an opinion dated
such date of counsel representing Parent for the purposes of such registration,
addressed to the underwriters and to such Seller, stating that such registration
statement has become effective under the Securities Act and that (A) to the best
knowledge of such counsel, no stop order suspending the effectiveness thereof
has been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, (B) the registration
statement, the related prospectus, and each amendment or supplement thereof,
comply as to form in all material respects with the requirements of the
Securities Act and the applicable rules and regulations of the Commission
thereunder (except that such counsel need not express any opinion as to
financial statements contained therein) and (C) to such other effects as may
reasonably be requested by counsel for the underwriters or by such Seller or its
counsel, and (ii) a letter dated such date from the independent public
accountants retained by Parent, addressed to the underwriters and to such
Seller, stating that they are independent public accountants within the meaning
of the Securities Act and that, in the opinion of such accountants, the
financial statements of Parent included in the registration statement or the
related prospectus, or any amendment or supplement thereof, comply as to form in
all material respects with the applicable accounting requirements of the
Securities Act, and such letter shall additionally cover such other financial
matters (including information as to the period ending no more than five
business days prior to the date of such letter) with respect to the registration
in respect of which such letter is being given as such underwriters or such
Seller may reasonably request; and
(vii) make available for inspection by each Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such Seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of Parent, and cause Parent's officers, directors and employees
to supply all information reasonably requested by any such Seller, underwriter,
attorney, accountant or agent in connection with such registration statement.
For purposes of Section 5.13(a) and (b) hereof, the period of distribution
of shares in such firm commitment underwritten public offering shall be deemed
to extend until each underwriter has completed the distribution of all
securities purchased by it and the period of distribution of shares in any other
registration shall be deemed to extend until the sale of all shares covered
thereby.
(e) In connection with each registration hereunder, the Sellers
participating therein will furnish to Parent in writing such information with
respect to themselves and the proposed distribution by them as shall be
reasonably necessary in order to assure compliance with federal and applicable
state securities laws.
(f) In connection with each registration pursuant to Section 5.13(b)
hereof covering an underwritten public offering, Parent agrees to enter into a
written agreement with the managing underwriter selected in the manner herein
provided in such form and containing such
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provisions as are customary in the securities business for such an arrangement
between major underwriters and companies of Parent's size and investment
stature, and containing the provisions applicable to Parent set forth herein.
(g) All expenses incurred by Parent in complying with Section 5.13
above, including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel and independent public accountants
for Parent, fees incurred in connection with the state securities or "blue sky"
laws, fees of the National Association of Securities Dealers, Inc., transfer
taxes, fees of transfer agents and registrars and costs of issuance, but
excluding any Selling Expenses, are herein called "Registration Expenses". All
underwriting discounts and selling commissions applicable to the sale of shares
are herein called "Selling Expenses." Parent will pay all Registration Expenses
in connection with each registration statement filed pursuant to this Agreement.
All Selling Expenses in connection with any registration statement filed
pursuant to this Agreement shall be borne by the participating Sellers in
proportion to the number of shares sold by each, or by such persons other than
Parent (except to the extent Parent shall be a Seller) as they may agree.
(h) No Seller may sell Merger Securities under this Section 5.13 in
violation of any contractual restrictions on resale to which such Seller is
subject pursuant to this Agreement.
(i) As a condition to any Seller participating in any registration
statement pursuant to this Section 5.13, such Seller shall be required to (i)
complete such selling shareholder questionnaires as are customarily required to
be completed by selling shareholders in connection with their participation in a
resale shelf registration statement and (ii) to the extent no already provided
for in this Section 5.13, make such representations and warranties, and agree to
such covenants as are customarily made and agreed to by selling shareholders in
connection with being granted and/or exercising rights to require an issuer to
register shares for public resale in the manner contemplated hereby.
(j) Parent shall use commercially reasonable efforts to cause the
Contingent Merger Securities to be approved for listing with any securities
exchange on which the Parent Common Stock is then listed, subject to official
notice of issuance.
(k) (i) In the event of a registration of any of the shares under the
Securities Act pursuant to this Section 5.13, Parent will indemnify and hold
harmless each Seller participating therein and underwriter of such shares
thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the Securities Act, against any and all
losses, claims, damages or liabilities, joint or several, to which such Seller
or underwriter or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
such Seller, each such underwriter and each such controlling
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person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, (1) that the indemnity agreement contained in this
Section 5.13(k) shall not apply to amounts paid in settlement of any such loss,
claim, damage or liability if such settlement is effected without the consent of
Parent (which consent will not be unreasonably withheld or delayed) and (2) that
Parent will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made in
conformity with information furnished by such Seller, such underwriter or such
controlling person in writing specifically for use in such registration
statement or prospectus.
(ii) In the event of a registration of any of the shares under
the Securities Act pursuant to this Section 5.13, each Seller of such shares
thereunder, severally and not jointly, will indemnify and hold harmless Parent
and each person, if any, who controls Parent within the meaning of the
Securities Act, each officer of Parent who signs the registration statement,
each director of Parent and each underwriter from any and all losses, claims,
damages or liabilities, joint or several, to which Parent or such officer or
director or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such shares were registered, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
Parent and each such officer, director, underwriter and controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
and PROVIDED, HOWEVER, (1) that the indemnity agreement contained in this
Section 5.13(k) shall not apply to amounts paid in settlement of any such loss,
claim, damage or liability if such settlement is effected without the consent of
the indemnifying Seller (which consent will not be unreasonably withheld or
delayed) and (2) that such Seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such Seller, as such, furnished in writing to Parent by such
Seller specifically for use in such registration statement or prospectus;
PROVIDED, FURTHER, HOWEVER, that the liability of each Seller hereunder shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of the shares
sold by such Seller under such registration statement bears to the total public
offering price of all securities sold thereunder, but not to exceed the proceeds
received by such Seller from the sale of shares covered by such registration
statement.
(iii) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party other than under this Section 5.13(k). In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying
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party of the commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its election so
to assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 5.13(k) for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected; PROVIDED, HOWEVER, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the defense of
such action, with the expenses and fees of such separate counsel and other
expenses related to such participation to be reimbursed by the indemnifying
party as incurred.
(l) In order to provide for just and equitable contribution in
circumstances in which the benefits of the indemnity agreements provided for in
Section 5.13(k) are for any reason held to be unavailable to the underwriters,
Parent or each Seller of shares, then Parent will contribute to the damages paid
by the several underwriters or each Seller of shares, the underwriters will
contribute to the damages paid by Parent or each Seller of the shares, as the
case may be, and each Seller of shares will contribute to the damages paid by
the underwriters or Parent, as the case may be; PROVIDED that no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any party who was not
guilty of such fraudulent misrepresentation and no Seller shall be required to
contribute any amount in excess of the proceeds received by such Seller from the
sale of shares covered by such registration statement less the aggregate amount
of any damages which such Seller and its controlling persons have otherwise been
required to pay in respect of the same or any substantially similar claim. In
determining the amount of contribution to which the respective parties are
entitled, there shall be considered the relative benefits received by each party
from the offering of the shares (taking into account the portion of the proceeds
of the offering realized by each), the parties' relative knowledge and access to
information concerning the matter with respect to which the claim was asserted,
the opportunity to correct and prevent any statement or omission, and any other
equitable considerations appropriate in the circumstances. Parent, the
underwriters and each Seller of shares will agree that it would not be equitable
if the amount of such contribution were determined by pro rata or per capita
allocation (even if the underwriters were treated as one entity for such
purpose). No underwriter or person controlling such underwriter shall be
obligated to make contribution hereunder which in the aggregate exceeds the
total public offering price of the stock purchased by such underwriter under the
underwriting agreement, less the aggregate amount of any damages which such
underwriter and its controlling persons have otherwise been required to pay in
respect of the same or any substantially similar claim. The underwriters'
obligations to contribute shall be several in proportion to their respective
underwriting obligations and not joint. For purpose of this Section 5.13(l),
each person, if any, who controls an underwriter within the meaning of Section
15 of the Securities Act shall have the same rights to contribution as such
underwriter; each director of Parent, each officer of Parent who signed the
registration statement, and each person who controls each Seller of shares
within the meaning of Section 15 of the Securities Act
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shall have the same rights to contribution as each Seller of shares.
(m) Notwithstanding anything herein to the contrary, the
indemnification and contribution obligations under Section 5.13(k) and 5.13(l)
above shall not be subject to any of the limitations (including deductibles and
caps) provided for in Section 9.4 hereof.
(n) Notwithstanding anything herein to the contrary, a Seller may
assign its rights under this Section 5.13 to any transferee referred to in and
which complies with the provisions of Section 1.7(d).
SECTION 5.14 PRE-CLOSING DIVIDEND. On or before the Closing Date, the
Company shall declare a dividend and distribute to the Company Shareholders of
record at such time the aggregate amount of 38% of the federal taxable income of
the Company for the period January 1, 2004 through the Closing Date (the
"Pre-Closing Period") as reasonably estimated by the Company. Such estimate of
the federal taxable income of the Company for the Pre-Closing Period shall be
prepared in a manner consistent with the way that the Company has prepared its
Form 1120-S in the past and shall also be prepared consistent with the manner in
which the Company will compute line 21 of its Form 1120-S for the Pre-Closing
Period. The Company shall prepare its estimate of its federal taxable income for
the Pre-Closing Period 10 business days prior to the date of such distribution
and shall present such estimate together with any relevant supporting
documentation to Parent for its review. If Parent has any concerns as to the
amount of such income or the amount of such distribution, the parties shall
endeavor in good faith to resolve any such differences within the 10 day period
before such distribution is to take place. The amount of such distribution shall
be allocated among the Company Shareholders of the Company in proportion to the
number of Company Shares held by each as of the record date of such
distribution.
SECTION 5.15 CLIENT CONSENTS. To the extent that the rights of the Company
under any Investment Management Contract, may not be assigned without the
consent or approval of another party thereto, and/or in the case of the Company
Funds, the shareholders and independent trustees thereof, the Sellers shall
cause the Company to use commercially reasonable efforts to obtain any such
consent prior to the Closing (collectively, the "Client Consents"), including,
without limitation, (i) following the procedures for obtaining "negative
consents" where appropriate, in accordance with the Investment Advisers Act and
the Investment Company Act and (ii) obtaining approval of any Company Fund
boards and shareholders if required with respect to such Company Funds. In
connection with the foregoing, the Company shall keep the Parent reasonably
updated with respect to the effort to obtain the Client Consents.
Notwithstanding anything to the contrary contained in this Section 5.15, neither
the Company nor the Sellers will be required to pay any money, furnish any
consideration, modify any agreement or incur any liability or obligation in
order to satisfy its obligations under this Section 5.15.
SECTION 5.16 ESCROW AGENT. Between the date hereof and Closing, each of the
Sellers and the Parent shall use commercially reasonable efforts to negotiate
and agree upon the Escrow Agreement and to duly execute and deliver the Escrow
Agreement at Closing.
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ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER.
The respective obligations of the Company, Parent and the Sellers to effect the
transactions contemplated hereby are subject to the satisfaction or waiver at or
prior to the Effective Time of the following conditions:
(a) this Agreement and the Merger shall have been approved at the
Parent Special Meeting by Parent Shareholders representing a majority of the
outstanding Parent Shares entitled to vote at the Parent Special Meeting;
(b) the Company Shareholder Approval executed concurrently with this
Agreement shall remain in full force and effect;
(c) All necessary filings, if any, pursuant to the HSR Act and any
applicable foreign antitrust law or rule shall have been made and all applicable
waiting periods thereunder shall have expired or been terminated.
(d) the Merger Securities to be issued on the Closing Date shall have
been approved for listing on the NYSE, subject to official notice of issuance;
(e) except as would not reasonably be expected to have a Material
Adverse Effect, all approvals, consents and authorizations of, filings and
registrations with, and applications and notifications to all third parties and
Regulatory Entities required for the consummation of the Merger shall have been
obtained or made and shall be in full force and effect and all waiting periods
required by applicable law shall have expired;
(f) no existing or future statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
enforced by any Regulatory Entity which has the effect of making the
consummation of either of the Merger illegal or prevents or prohibits
consummation of the Merger, and no action by any Regulatory Entity shall have
been instituted or threatened which questions the validity or legality of the
Merger or the transactions contemplated hereby and which could reasonably be
expected to damage Parent or the Company if the transactions contemplated
hereunder are consummated;
(g) Parent, the Representative and the Escrow Agent shall have entered
into the Escrow Agreement.
SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF PARENT. The obligation of
Parent to effect the Merger and the transactions contemplated hereby is also
subject to the satisfaction or waiver at or prior to the Effective Time of the
following conditions:
(a) The representations and warranties of the Company and the Sellers
shall be true and correct as of the date of this Agreement and as of the Closing
Date with the same effect as though made on and as of the Closing Date, except
to the extent such representations and warranties speak as of a specific date
and except to the extent the breaches of all the
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representations and warranties, if any (excluding, for this purpose, any
qualifications as to materiality therein or in the Company Disclosure Schedule),
in the aggregate, do not have a Company Material Adverse Effect. At the Closing,
the Company shall have delivered to Parent a certificate signed by a senior
officer to the foregoing effect with respect to the representations and
warranties of the Company and each Seller shall have delivered to Parent a
certificate signed by such Seller to the foregoing effect with respect to the
representations and warranties of such Seller.
(b) The obligations of the Company and the Sellers to be performed at
or before the Effective Time pursuant to the terms of this Agreement shall have
been duly performed in all material respects (excluding, for this purpose, any
qualification as to materiality therein), and at the Closing the Company shall
have delivered to Parent a certificate signed by a senior officer to that
effect.
(c) There shall not have occurred any one or more events with respect
to the Company between the date of this Agreement and the Closing Date which,
individually or in the aggregate, had a material adverse effect on the business,
operations, results of operations or financial condition of the Company.
(d) Parent shall have received an opinion of Morrison & Foerster LLP
in form and substance reasonably acceptable to Parent dated the Closing Date, to
the effect that, on the basis of facts, representations and assumptions set
forth or referred to in such opinion, following the Merger, the Surviving
Corporation's organization and intended method of operation will enable it to
meet the requirements for qualification and taxation as a taxable REIT
subsidiary under Section 856(l) of the Code (with customary assumptions and
qualifications and based on customary representations).
(e) The Company shall have delivered to Parent an audited balance
sheet of the Company as at December 30, 2003 and the related audited statements
of income, cash flow and stockholders' equity for the year then ended (including
footnotes thereto).
SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligation of
the Company to effect the Merger and the transactions contemplated hereby is
also subject to the satisfaction or waiver at or prior to the Effective Time of
the following conditions:
(a) The representations and warranties of Parent shall be true and
correct as of the date of this Agreement and as of the Closing Date with the
same effect as though made on and as of the Closing Date, except to the extent
such representations and warranties speak as of a specific date and except to
the extent the breaches of all the representations and warranties, if any
(excluding, for this purpose, any qualifications as to materiality therein), in
the aggregate, do not have a Parent Material Adverse Effect. At the Closing,
Parent shall have delivered to the Company a certificate signed by a senior
officer to that effect.
(b) The obligations of Parent to be performed at or before the
Effective Time pursuant to the terms of this Agreement shall have been duly
performed in all material respects, and at the Closing Parent shall have
delivered to the Company a certificate signed by a senior officer to that
effect.
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SECTION 6.4 FRUSTRATION OF CLOSING CONDITIONS. Neither the Company nor
Parent may rely on the failure of any condition set forth in Sections 6.1
through 6.3 to be satisfied if such failure was caused by such party's failure
to use its commercially reasonable efforts to consummate the Merger and the
transactions contemplated hereby, as required by and subject to Section 5.5.
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
SECTION 7.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether before or after approval by the shareholders of Parent at the Parent
Special Meeting or by the Company Shareholders:
(a) by mutual written consent of the Company and Parent;
(b) by the Company or Parent if (i) any Regulatory Entity shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action is or shall have become final and nonappealable;
provided that no party may terminate this Agreement pursuant to this paragraph
if such party has failed to fulfill its obligations under Section 5.5 of this
Agreement; (ii) the Merger has not been consummated prior to May 31, 2004;
provided that the right to terminate this Agreement under this Section
7.1(b)(ii) shall not be available to any party to this Agreement whose failure
or whose affiliate's failure to perform any material covenant or obligation
under this Agreement has been the primary cause of or resulted in the failure of
the Merger to occur on or before such date; and (iii) the approval of this
Agreement by the Parent Shareholders as provided in Section 6.1(a) shall not
have been obtained at the Parent Special Meeting or any adjournment or
postponement thereof;
(c) by the Company or Parent if, prior to the Effective Time, the
Parent Special Committee or the Parent Board shall have determined in good
faith, based upon the written opinion of independent counsel, that the failure
to withdraw or modify the Parent Special Committee or the Parent Board's
approval or recommendation of this Agreement or the Merger will violate their
fiduciary duties and, based on such determination, the Parent Special Committee
or the Parent Board shall have resolved to effect such withdrawal or
modification;
(d) by Parent, if prior to the Effective Time, the Company
Shareholders take action to revoke or rescind the Company Shareholder Approval;
(e) by Parent if there has been a violation or breach by the Company
or any Seller of any agreement, covenant, representation or warranty contained
in this Agreement that has prevented or would prevent the satisfaction of the
conditions set forth in Section 6.2 at the time of such breach or violation and
such violation or breach has not been waived by Parent nor cured by the Company
or such Seller prior to the earlier of (i) 30 business days after the giving of
written notice to the Company of such breach and (ii) May 31, 2004; or
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(f) by the Company if there has been a violation or breach by Parent
of any agreement, covenant, representation or warranty contained in this
Agreement that has prevented or would prevent the satisfaction of the conditions
set forth in Section 6.3 at the time of such breach or violation and such
violation or breach has not been waived by the Company nor cured by Parent prior
to the earlier of (i) 30 business days after the giving of written notice to
Parent of such breach and (ii) May 31, 2004.
The party desiring to terminate this Agreement pursuant to this Section 7.1
shall give written notice of such termination to the other party.
SECTION 7.2 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability on the part of
any party hereto or its affiliates, directors, officers or shareholders, other
than the provisions of this Section and Sections 2.5 and 3.6 and Article X which
shall remain in full force and effect and survive any termination of this
Agreement. Nothing contained in this Section shall relieve any party from
liability for any willful breach of any representation, warranty, agreement,
covenant or other provision of this Agreement or any agreement made as of the
date hereof or subsequent thereto pursuant to this Agreement.
SECTION 7.3 AMENDMENT. This Agreement may be amended by action taken by the
Parent Special Committee, the Company and Merger Sub at any time before or after
approval of the Merger by the Parent Shareholders, but, after any such approval,
no amendment shall be made which requires the approval of such Parent
Shareholders under applicable law without such approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of the parties
hereto.
SECTION 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
Company and the Seller, on the one hand, and Parent or Merger Sub, on the other,
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties, (ii) waive any inaccuracies in the representations
and warranties of the other parties contained herein or in any document,
certificate or writing delivered pursuant hereto, or (iii) waive compliance by
the other parties with any of the agreements or conditions contained herein. Any
agreement on the part of any party hereto to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of such
party and expressly referring to this Agreement. The failure of any party hereto
to assert any of its rights hereunder shall not constitute a waiver of such
rights.
ARTICLE VIII
TAX MATTERS
SECTION 8.1 TAX RETURNS. (a) Except as otherwise provided in Section
8.1(b), Parent shall prepare (or cause to be prepared) all Tax Returns of the
Company for any taxable year ended after the Closing Date. With respect to any
Tax Return relating to taxable periods which include periods preceding the
Closing Date, Parent shall prepare (or cause to be prepared)
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such Tax Return in a manner consistent with past practices of the Company and
shall provide the Representative with a reasonable opportunity to review such
Tax Return at least 20 days prior to the filing thereof.
(b) The Sellers shall prepare, or cause to be prepared, and file, or
cause to be filed, all income Tax Returns of the Company required to be filed by
the Company for any taxable year ended on or prior to the Closing Date in a
manner consistent with past practices of the Company. The Sellers shall provide
Parent with a reasonable opportunity to review such Tax Returns at least 20 days
prior to the filing thereof. To the extent permitted by applicable law, the
Sellers shall include any income, gain, loss, deduction or other tax items for
such periods on their Tax Returns in a manner consistent with the Schedule K-1s
furnished by the Company to the Sellers for such periods.
SECTION 8.2 ASSISTANCE AND COOPERATION. From and after the Closing Date,
the Company, each of the Sellers and Parent shall:
(a) assist in all reasonable respects (and cause their respective
affiliates to assist) the other parties in preparing any Tax Returns of the
Company which another party is responsible for preparing and filing;
(b) cooperate in all reasonable respects in preparing for any audits
of, or disputes with taxing authorities regarding, any Tax Returns of the
Company;
(c) make available to the other parties and to any taxing authority as
reasonably requested all information, records, and documents relating to Taxes
of the Company;
(d) provide timely notice to the other parties in writing of any
pending or threatened tax audits or assessments of the Company for taxable
periods for which another party may have a liability under Article VIII;
(e) furnish the other parties with copies of all correspondence
received from any taxing authority in connection with any tax audit or
information request with respect to the Company with respect to any such taxable
period; and
(f) make available to each Seller and to any taxing authority as
reasonably requested all information, records, and documents of the Company in
connection with any matter relating to Taxes of such Seller.
SECTION 8.3 CONTESTS AND PAYMENT PROCEDURES. (a) Notwithstanding anything
to the contrary in this Agreement, the Representative shall, in consultation
with Parent, control, manage and be responsible for any audit, contest, claim,
proceeding or inquiry with respect to Taxes for any Pre-Closing Period and shall
have the right to settle or contest any such audit, contest, claim, proceeding
or inquiry; provided, however, that if any such settlement would materially and
adversely impact a Tax Return of the Surviving Corporation or Parent with
respect to the period beginning the day after the Closing Date, Parent and the
Representative shall mutually agree on the terms of such settlement.
(b) Parent shall control, manage and solely be responsible for any
audit,
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contest, claim, proceeding or inquiry with respect to any item relating to Taxes
not covered by Section 8.3(a).
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 INDEMNIFICATION BY SELLERS. (a) From and after the Closing
Date, each of the Sellers, severally and not jointly, hereby covenants and
agrees to indemnify, defend and hold harmless Parent, and its subsidiaries and
affiliates, from and against such Seller's Allocable Share (as defined in this
Section 9.1) of any and all Damages incurred in connection with or arising out
of or resulting from (i) any inaccuracy or breach of any representation or
warranty made by the Company or the Sellers in or pursuant to this Agreement,
the Company Disclosure Schedule or any other document, instrument, certificate
or writing delivered pursuant hereto, including, without limitation, the
representations and warranties made by the Company in Article III hereof and the
Sellers in Article IV hereof, or (ii) any breach, non-compliance or
nonfulfillment by the Company or the Sellers of any covenant, agreement or
undertaking to be complied with or performed by them contained in or pursuant to
this Agreement or any other document, instrument, certificate or writing
delivered pursuant hereto. Notwithstanding the foregoing, the representations
and warranties contained in Article IV hereof, and the covenants, agreements and
undertakings made in this Agreement, to the extent such covenants, agreements
and undertakings are covenants, agreements and undertakings of the Sellers (as
opposed to the Company), are made severally by each Seller as to such Seller
only, and any Seller who has breached any such representation, warranty or
covenant as to himself or herself (but only such Seller) shall be liable for
Damages arising from the breach thereof.
(b) In addition to the indemnification provided in Section 9.1(a)
above, from and after the Closing Date, each of the Sellers, severally and not
jointly, hereby covenants and agrees to pay, or cause to be paid, and to
indemnify, defend and hold harmless Parent and the Surviving Corporation from
and against, such Seller's Allocable Share of all Taxes imposed on Parent or the
Surviving Corporation with respect to taxable periods ending on or prior to the
Closing Date or periods which include the Closing Date to the extent
attributable to the income, business, property, assets, operations or reporting
requirements of the Company prior to the Closing Date (including, without
limitation, all Taxes referred to in the Company Disclosure Schedule as possible
of assessment for taxable periods prior to the Closing Date or arising or
resulting from, or attributable to, any of the transactions or actions
contemplated pursuant to this Agreement). If a Tax audit is commenced or any Tax
is claimed for any period of the Company prior to the Closing Date, such Tax
audit or claim shall be treated as a lawsuit or enforcement action for purposes
of Section 9.3 hereof; provided, that the Sellers shall be solely responsible
for their Allocable Share of all liabilities and expenses arising therefrom
(including, without limitation, Taxes, interest and penalties).
(c) Each Seller acknowledges that Parent has entered into this
Agreement in reliance upon, among other things, the indemnification provisions
contained in this Section 9.1, and the Sellers agree that such provisions
constitute reasonable and necessary protection for Parent in the context of the
transactions provided for herein. As used herein, the "Allocable
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Share" of any Seller of the Damages payable by the Sellers pursuant to this
Article IX shall be the percentage of the total Company Shares being sold
pursuant to this Agreement as specified opposite such Seller's name on Schedule
A hereto.
SECTION 9.2 INDEMNIFICATION BY PARENT. (a) From and after the Closing Date,
Parent hereby covenants and agrees to indemnify, defend and hold harmless the
Sellers, from and against any and all Damages incurred in connection with or
arising out of or resulting from any breach or inaccuracy of any representation
or warranty, or any breach, non-compliance or nonfulfillment by Parent of any
covenant, agreement or undertaking to be complied with or performed by it
contained in or made pursuant to this Agreement or any other document,
instrument, certificate or writing delivered pursuant hereto.
(b) The Sellers acknowledge and agree that each Seller is a director,
officer or employee of Parent, that the Sellers are the officers of Parent
responsible for the day-to-day management of Parent (subject to oversight by the
Parent Board) and the representations and warranties made herein by Parent and
the covenants and obligations of Parent contained herein are, to a significant
degree, made in reliance on information or services provided or to be provided
by the Sellers. Accordingly, Parent, the Company and each Seller expressly agree
that, notwithstanding anything to the contrary in Section 9.2(a), Parent shall
have no liability or obligation to the Company or any Seller arising out of or
in connection with the breach of any representation, warranty, covenant or
agreement (including under this Article IX) contained herein to the extent that
such breach is predicated upon (i) information provided by the Company or any
Seller, (ii) information that was known to either the Company or any Seller, but
not provided by the Company or such Seller to Parent or (iii) the failure of any
Seller to provide any services that Parent could reasonably have expected such
Seller to provide in his or her capacity as a director, officer or employee of
Parent (unless such failure results from such Seller's complying with any
instructions given by the Parent Board or any committee thereof). The parties
acknowledge that this Section 9.2(b) has been included herein solely for
purposes of determining the scope of Parent's indemnification obligations under
Section 9.2(a), and shall not be the basis for any other claims arising under
this Agreement.
SECTION 9.3 INDEMNIFICATION PROCEDURES. (a) In order for a party (the
"indemnified party") to be entitled to any indemnification provided for under
this Agreement in respect of, arising out of or involving, a claim made by any
Person against the indemnified party (a "Third Party Claim"), such indemnified
party must notify the indemnifying party in writing of the Third Party Claim
within 10 Business Days after receipt by such indemnified party of written
notice of the Third Party Claim; provided, however, that failure to give such
notification shall not affect the indemnification provided hereunder except to
the extent the indemnifying party shall have been materially prejudiced as a
result of such failure. Thereafter, the indemnified party shall deliver to the
indemnifying party, promptly following the indemnified party's receipt thereof,
copies of all notices and documents (including court papers) received by the
indemnified party relating to the Third Party Claim.
(b) If a Third Party Claim is made against an indemnified party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses, to assume the defense thereof with counsel selected by the
indemnifying party. Should the indemnifying party so elect to assume the defense
of a Third Party Claim, the indemnifying party
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shall not be liable to the indemnified party for any legal expenses subsequently
incurred by the indemnified party in connection with the defense thereof. If the
indemnifying party assumes such defense, the indemnified party shall have the
right to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the indemnifying party, it being
understood that the indemnifying party shall control such defense. The
indemnifying party shall be liable for the fees and expenses of counsel employed
by the indemnified party for any period during which the indemnifying party has
not assumed the defense thereof. If the indemnifying party chooses to defend or
prosecute a Third Party Claim, all the indemnified parties shall cooperate in
the defense or prosecution thereof. Such cooperation shall include the retention
and (upon the indemnifying party's request) the provision to the indemnifying
party of records and information that are reasonably relevant to such Third
Party Claim, and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder.
(c) Notwithstanding clause (b) above, the indemnifying party shall not
have the right to assume the defense of any Third Party Claim if (i) the
indemnified party shall have been advised by counsel that there are one or more
legal or equitable defenses available to the indemnified party which are
different from or in addition to those available to the indemnifying party, and,
in the reasonable opinion of the indemnified party, counsel for the indemnifying
party could not adequately represent the interests of the indemnified party
because such interests would be in conflict with those of the indemnifying
party, or (ii) if an indemnified party determines in good faith that there is a
reasonable probability that a Third Party claim may adversely affect it or its
subsidiaries or affiliates other than as a result of monetary damages for which
it would be entitled to indemnification under this Agreement, then the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise or settle such Third Party Claim, and the
indemnifying party shall be responsible for the reasonable fees and expenses of
counsel employed by the indemnified party in defending, compromising or settling
such Third Party Claim; provided that the indemnifying party's liability with
respect to any settlement or compromise shall be subject to Sections 9.3(d) and
9.4 below.
(d) Whether or not the indemnifying party assumes the defense of a
Third Party Claim, the indemnified party shall not admit any liability with
respect to, or settle, compromise or discharge, such Third Party Claim without
the indemnifying party's prior written consent (which consent shall not be
unreasonably withheld). If the indemnifying party assumes the defense of a Third
Party Claim, the indemnified party shall agree to any settlement, compromise or
discharge of a Third Party Claim that the indemnifying party may recommend and
that by its terms obligates the indemnifying party to pay the full amount of the
liability in connection with such Third Party Claim, and which releases the
indemnified party completely in connection with such Third Party Claim; provided
that the indemnifying party shall not agree, without the indemnified party's
consent, to the entry of any judgment, order, writ, settlement, compromise or
decree that provides for injunctive or other nonmonetary relief affecting the
indemnified party.
(e) In the event any indemnified party should have a claim against any
indemnifying party under Section 9.1 or 9.2 that does not involve a Third Party
Claim being asserted against or sought to be collected from such indemnified
party, the indemnified party shall deliver notice of such claim with reasonable
promptness to the indemnifying party, along
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with a description of the nature and basis of the claim in reasonable detail.
(f) With respect to any claim made by an indemnified party under
Sections 9.1 or 9.2, the indemnified party shall provide to the indemnifying
party all information and documentation reasonably necessary to support and
verify any claim that the indemnified party believes gives rise to the claim
hereunder and shall give the indemnifying party reasonable access to all books,
records and personnel in the possession or under the control of the indemnified
party that would have bearing on such claim.
SECTION 9.4 GENERAL INDEMNIFICATION PROVISIONS. (a) Notwithstanding any of
the provisions of this Agreement, Parent shall not be entitled to make claims
for Damages under Sections 9.1(a) hereof unless and until the aggregate of such
claims exceeds $700,000 (the "Indemnification Threshold") and then only to the
extent of such excess; provided, however, that the Indemnification Threshold
shall not be applicable to claims by Parent for Damages arising from a breach by
a Seller of any provisions of Sections 3.10 and 4.9 and Article VIII hereof (the
"Excluded Provisions") or from an indemnification obligation arising under
Section 9.1(b) hereof and any claim arising from a breach of any Excluded
Provisions or from an indemnification obligation arising under Section 9.1(b)
hereof shall not be taken into account for purposes of determining when the
Indemnification Threshold has been met. Notwithstanding any of the provisions of
this Agreement, in no event shall the aggregate indemnification obligations of
the Sellers pursuant to Section 9.1(a) (except for any indemnification
obligations arising from any breach of the Excluded Provisions) exceed the value
of the Escrowed Shares as determined pursuant to Section 9.4(f) below.
Notwithstanding anything herein to the contrary, all indemnification obligations
of the Sellers pursuant to Section 9.1(a) (except for any indemnification
obligations arising from any breach of the Excluded Provisions) shall be
satisfied exclusively from the Escrowed Shares held under the Escrow Agreement
and Parent shall have no other recourse against the Sellers with respect to such
claims.
(b) Parent shall be entitled to make claims for Damages under Section
9.1(a) with respect to a breach of any Excluded Provision and under Section
9.1(b) without such Damages having to exceed any threshold. The aggregate
indemnification obligations of the Sellers with respect to the claims referred
to in the immediately preceding sentence shall not be subject to any limitation.
However, Parent shall not have any right, in connection with any such claims, to
retain (or cause to be retained) under the Escrow Agreement any Merger
Securities beyond the end of the Basic Survival Period unless Parent has
properly made such a claim during the Basic Survival Period, it being further
agreed that to the extent any such claims are made by Parent after the end of
the Basic Survival Period, Parent shall have only a general unsecured claim
against the Sellers with respect thereto.
(c) The parties further agree that the possession of any Merger
Securities by the Custodian pursuant to Section 5.11(b) is solely for the
purpose of implementing the trading restrictions provided for therein and that
any Merger Securities so held do not constitute additional collateral securing
the performance of the Sellers' indemnification obligations under Section 9.1.
(d) In the event that any time subsequent to an indemnification
payment hereunder the Damages to the indemnified party are reduced by tax
benefits or recovery,
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settlement or otherwise under any insurance coverage or third party claim, the
amount of such reduction (less any cost, expense, premium or tax paid) will be
promptly repaid to the indemnifying party.
(e) For purposes of this Article IX, "Damages" means costs, losses,
liabilities, damages, lawsuits, deficiencies, claims, Taxes and expenses
(whether or not arising out of third-party claims or governmental examinations,
inspections or audits), including, without limitation, interest, penalties,
reasonable attorneys' fees and all amounts paid in investigation, defense or
settlement of any of the foregoing; provided, however, that "Damages" shall not
include punitive damages except to the extent of any punitive damages recovered
by third parties. The term "Damages" is not limited to matters asserted by third
parties against either the Sellers or against Parent or the Company, but
includes Damages incurred or sustained by the Sellers or by Parent or by the
Company in the absence of third party claims.
(f) To the extent that any Escrowed Shares are applied in satisfaction
of the Sellers' obligation to indemnify Parent for any Damages, the amount of
such Damages deemed to have been satisfied thereby shall be determined as
follows: (i) if Parent elects to retain such Escrowed Shares, then the amount of
Damages deemed satisfied thereby shall equal the aggregate value of such
Escrowed Shares based on the VWAP for the Parent Common Stock on the trading day
on which such Escrowed Shares were released to Parent (or, if such day is not a
trading day, then on the first day thereafter that is a trading day) (the
"Release Price") and (ii) if Parent elects not to retain such Escrowed Shares,
then Parent shall be obligated (subject to compliance with applicable securities
laws) to use its commercially reasonable efforts to sell such Escrowed Shares in
which case the amount of Damages deemed satisfied thereby shall equal the
greater of (x) the actual net proceeds received by Parent from the sale of such
Escrowed Shares and (y) the value of such Escrowed Shares based on the Valuation
Price (as defined below). By no later than the first business day following the
day on which Parent receives any Escrowed Shares to be applied as contemplated
by this Section 9.4(f), Parent shall provide written notice to the
Representative indicating whether or not it has elected to retain such Escrowed
Shares; provided that if Parent elects not to retain such Escrowed Shares, then
Parent shall be obligated (subject to compliance with applicable securities
laws) to proceed in a commercially reasonable manner to sell such Escrowed
Shares and, provided further that if any of such Escrowed Shares remain unsold
by the 30th day after such notice is given, then for purposes of clause (ii)(x)
in the first sentence of this Section 9.4(f), such Escrowed Shares shall be
deemed to have been sold at the VWAP on such 30th day (or, if such day is not a
trading day, on the first trading day thereof), except that in such case Parent
and the Representative may agree to additional adjustments to the amounts
determined under this Section 9.4(f). As used in this Section 9.4(f), the
"Valuation Price" shall mean (A) if the Release Price is greater than the Parent
Closing Price, an amount equal to 90% of the Release Price and (B) if the
Release Price is equal to or less than the Parent Closing Price, an amount equal
to 80% of the Release Price. If Parent elects to sell any Escrowed Shares
pursuant to clause (ii) of this Section 9.4(f), and the amount of Damages that
would have been deemed satisfied pursuant to clause (i) of this Section 9.4(f)
if Parent had elected to retain such Escrowed Shares exceeds the amount of
Damages deemed to be satisfied under such clause (ii), then Parent shall be
entitled under the Escrow Agreement to receive additional Retained Securities,
to the extent available, for satisfaction of a Damage claim equal to such excess
and the provisions of this Section 9.4(f) shall apply anew to any such
additional Escrowed Shares received by Parent.
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(g) The indemnification provided in this Article IX shall be (in the
absence of fraud) the sole and exclusive remedy for Damages available to
Sellers, the Company, Parent, its subsidiaries and affiliates for breach of any
of the terms, conditions, representations or warranties contained herein. As
between the Sellers, on the one hand, and Parent and its affiliates, including
without limitation after the Closing, the Company, on the other hand, the rights
and obligations set forth in this Agreement will be (in the absence of fraud)
the exclusive rights and obligations with respect to this Agreement, the events
giving rise to this Agreement and the transactions provided for herein or
contemplated hereby. Notwithstanding the foregoing, nothing contained in this
Article IX shall prevent any party hereto from seeking and obtaining, as and to
the extent permitted by applicable law, specific performance by the other party
hereto of any of its obligations under this Agreement or injunctive relief
against another party's activities in breach of this Agreement or any document
or agreement executed in connection herewith.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 SURVIVAL. (a) All representations, warranties, covenants and
obligations of the Company and the Sellers contained in this Agreement, the
Company Disclosure Schedule or in any document, instrument, certificate or other
writing delivered pursuant hereto shall survive the Closing and the consummation
of the transactions contemplated hereby, subject in the case of the
representations and warranties to the time limitations set forth in Section
10.1(b).
(b) Notwithstanding anything to the contrary in Section 10.1(a), (i)
the representations and warranties contained in Section 3.10, 3.24(b) and
Article IV hereof which shall survive until the expiration of the applicable
statute of limitations with respect to the matters contained therein, (ii) the
representations and warranties contained in Section 4.9 shall survive
indefinitely and (iii) all other representations and warranties contained herein
shall survive for a period of 14 months from the Closing Date (the "Basic
Survival Period"). Notwithstanding anything in this Agreement to the contrary,
any Damages as to which a notice of claim has been given in writing prior to the
expiration of the applicable period set forth above in this Section 10.1 shall
survive until payment on other final resolution of such claim.
(c) All statements contained in the Company Disclosure Schedule or in
any certificate delivered at the Closing pursuant to the transactions
contemplated hereby shall be deemed to be representations and warranties of the
applicable party hereto contained herein. The right to indemnification,
reimbursement or other remedy based upon such representations, warranties,
covenants and obligations shall not be affected by any investigation conducted
with respect to, or any knowledge acquired (or capable of being acquired) at any
time, whether before or after the execution and delivery of this Agreement or
the Closing Date, with respect to the accuracy or inaccuracy of or compliance
with any such representation, warranty, covenant or obligation (except as
provided in Section 9.2(b)). The waiver of any condition based upon the accuracy
of any representation or warranty, or on the performance of or compliance with
any covenant or obligation, will not affect the right to indemnification,
reimbursement or other remedy based upon such representations, warranties,
covenants and obligations.
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SECTION 10.2 SET-OFF. Without limiting any other rights that Parent may
have pursuant to this Agreement, Parent shall be entitled to set-off against any
amount payable by it to any of the Sellers pursuant to this Agreement any amount
determined by a final, non-appealable decision or order of any court of
competent jurisdiction to be owed by the Company and/or the Sellers to Parent or
any of its affiliates pursuant to this Agreement and/or the amount of any
Damages against which Parent, or its affiliates is either (i) acknowledged in
writing (as to both liability and amount) by the Representative or (ii)
determined by a final, non-appealable decision or order of any court of
competent jurisdiction to be entitled to be indemnified by the Sellers pursuant
to this Agreement.
SECTION 10.3 EXPENSES; TRANSFER TAXES. All expenses incurred in connection
with the transactions contemplated by this Agreement, shall be paid by the party
incurring such expenses, except that if the Merger is consummated, the expenses
of the Company and the Sellers incurred in connection with the transactions
contemplated by this Agreement shall be paid by the Surviving Corporation;
provided, however, that each of the Sellers, respectively, shall be responsible
for any transfer Taxes imposed on such Seller by reason of the Merger and any
deficiency, interest or penalty asserted with respect thereto.
SECTION 10.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the
documents and instruments referred to herein) (i) constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof and (ii)
shall not be assigned by operation of law or otherwise.
SECTION 10.5 NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand (including recognized
courier service) or mailed, certified or registered mail with postage prepaid,
or communicated by facsimile transmission (receipt confirmed), as follows:
if to Parent or Merger Sub:
Annaly Mortgage Management, Inc.
1211 Avenue of the Americas
Suite 2902
New York, New York 10036
Facsimile No: (212) 696-9809
Attention: Spencer Browne
with a copy to:
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York 10104-0050
Facsimile No: (212) 468-7900
Attention: James R. Tanenbaum
A-60
if to the Company:
Fixed Income Discount Advisory Company
1211 Avenue of the Americas
Suite 2902
New York, New York 10036
Facsimile No: (212) 696-9809
Attention: Michael A.J. Farrell
with a copy to:
Dechert LLP
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103
Facsimile No: (212) 696-9809
Attention: Christopher G. Karras
if to the Seller:
Michael A.J. Farrell
c/o Fixed Income Discount Advisory Company
1211 Avenue of the Americas
Suite 2902
New York, New York 10036
Facsimile No: (212) 696-9809
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
Each such notice, request, demand, application, service of process and other
communication shall be deemed to have been given (i) as of the date faxed or
delivered (which, with respect to a recognized courier service, shall be deemed
to mean the business day following the date sent), (ii) as of the fifth business
day after the date mailed, or (iii) if given by any other means, only when
actually received by the addressee.
SECTION 10.6 GOVERNING LAW; CONSENT TO JURISDICTION; JURY WAIVER. Except
for matters that are necessarily governed by Delaware Law, including the
provisions of Article I hereof and the fiduciary duties of the Company Board,
and by the Maryland Corporations and Associations Code, including the fiduciary
duties of the Parent Board and the Parent Special Committee, which matters will
be governed by the laws of the States of Delaware and Maryland, respectively,
this Agreement shall be governed by and construed in accordance with the laws of
the State of New York without regard to the principles of conflicts of law
thereof. Each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any court of the State of New York or the United States
District Court for the Southern District of New York, in each case in the
Borough of Manhattan, in the event any dispute arises out of this Agreement or
any of the transactions contemplated hereby, (ii) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court, and (iii) agrees
A-61
that it will not bring any action relating to this Agreement in any court other
than a court of the State of New York or the United States District Court for
the Southern District of New York, in each case in the Borough of Manhattan.
Each party hereto waives, to the fullest extent permitted by applicable law, any
right it may have to a trial by jury in respect of any action or proceeding
arising out of or relating to this Agreement.
SECTION 10.7 ENFORCEMENT. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the State of New York
or the United States District Court for the Southern District of New York, in
each case in the Borough of Manhattan, in addition to any other remedy to which
any party is entitled at law or in equity.
SECTION 10.8 DESCRIPTIVE HEADINGS; SCHEDULES, INTERPRETATION.
(a) The descriptive headings herein are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement. Any matter disclosed pursuant to any Section
of the Company Disclosure Schedule shall be deemed to qualify each
representation and warranty of the Company, so long as the relevance of such
matter to such representations and warranties is reasonably apparent on the face
of the information disclosed.
(b) As used in this Agreement, (i) the term "includes" and the word
"including" and words of similar import shall be deemed to be followed by the
words "without limitation"; (ii) "control" (including its correlative meanings,
"controlled by" and "under common control with") shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of
management or policies of a person, whether through the ownership of securities
or partnership or other interests, by contract or otherwise; (iii) "Person"
means, as applicable, a natural person, firm, partnership, limited liability
company, joint venture, corporation, association, business enterprise, joint
stock company, unincorporated association, trust, Regulatory Entity (as defined
in Section 2.3 hereof) or any other entity, whether acting in an individual,
fiduciary or other capacity; (iv) words in the singular shall be held to include
the plural and vice versa and words of one gender shall be held to include the
other gender as the context requires; (v) the terms "hereof," "herein," and
"herewith" and words of similar import shall, unless otherwise stated, be
construed to refer to this Agreement as a whole and not to any particular
provision of this Agreement, and Article, Section, paragraph, Schedule and
Exhibit references are to the Articles, Sections, paragraphs, Schedules and
Exhibit to this Agreement unless otherwise specified; (vi) the word "or" shall
not be exclusive; and (vii) the terms "subsidiary" and "affiliate", as used
herein with reference to the Company, shall be deemed not to include Parent and
its subsidiaries, and the term "affiliate", as used herein with reference to
Parent, shall be deemed not to include the Company and its subsidiaries and
affiliates, other than Parent and its subsidiaries.
(c) As used in this Agreement, the phrases "to the Company's
knowledge", "to the knowledge of the Company" or phrases of similar import shall
mean the knowledge,
A-62
collectively, of the following individuals: Michael A.J. Farrell, Wellington J.
Denahan, Jennifer A. Karve and Kathryn F. Fagan; provided that for purposes of
the foregoing, the knowledge of any such individual shall be deemed to consist
of (i) any fact or matter of which such individual is actually aware and (ii)
any fact or matter which such individual, acting prudently, could be expected to
discover or become aware of through the conduct of a reasonable inquiry.
SECTION 10.9 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns, and except as provided in Article IX, nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 10.10 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 10.11 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
SECTION 10.12 SELLERS' REPRESENTATIVE. (a) Each Seller hereby irrevocably
appoints Michael A.J. Farrell as such Seller's Representative (the
"Representative"), attorney-in-fact and agent, with full power of substitution
to act on behalf of such Seller in any litigation or arbitration involving this
Agreement and to do or refrain from doing all such further acts and things, and
to execute all such documents, as such Representative shall deem necessary or
appropriate in connection with any of the transactions contemplated under this
Agreement, including, without limitation, the power:
(i) to take all action, on behalf of such Seller, necessary or
desirable in connection with the waiver of any condition to the obligations of
the Sellers to consummate the transactions contemplated by this Agreement;
(ii) to take all action, on behalf of such Seller, necessary or
desirable with respect to Section 1.9 through 1.11;
(iii) to act for such Seller with regard to matters pertaining to
indemnification referred to in this Agreement, including the power to compromise
any claim on behalf of such Seller, to bring and transact matters of litigation
and to refer matters to arbitration;
(iv) to terminate this Agreement, on behalf of such Seller, if
the Sellers are entitled to do so;
A-63
(v) to give and receive all notices and communications to, on
behalf of such Seller, be given or received under this Agreement and to receive
service of process in connection with any claims under this Agreement, including
service of process in connection with arbitration; and
(vi) to take all actions which under this Agreement may be taken
by the Representative and to do or refrain from doing any further act or deed on
behalf of such Seller which Representative deems necessary or appropriate in his
or its sole discretion relating to the subject matter of this Agreement
(including the engagement of attorneys, accountants, financial advisors and
agent at the expense of the Sellers) as fully and completely as such Seller
could do if personally present.
(b) If Michael A.J. Farrell (or any substitute Representative) dies or
otherwise becomes incapacitated and unable to serve as Representative,
Wellington T. Denahan shall become Representative. The death or incapacity of
any Seller shall not terminate the agency and power of attorney granted hereby
to the Representative. The appointment of Representative shall be deemed coupled
with an interest and shall be irrevocable.
(c) Prior to the Closing, Sellers holding a majority of the Company
Common Stock held by all Sellers may on one or more occasions designate a
substitute Representative at which time the individual then acting as
Representative shall no longer be the Representative and the substitute
Representative shall be the Representative for all purposes under this
Agreement. Following the Closing, Sellers holding a majority of the Parent
Common Stock held by all Sellers may on one or more occasions designate a
substitute Representative at which time the individual then acting as
Representative shall no longer be the Representative and the substitute
Representative shall be the Representative for all purposes under this
Agreement.
(d) Each Seller further agrees:
(i) that in all matters in which action by Representative is
required or permitted, Representative is authorized to act on behalf of such
Seller, notwithstanding any dispute or disagreement among the Sellers or between
the Sellers and Representative, and Parent shall be entitled to rely on any and
all action taken by Representative under this Agreement without any liability
to, or obligation to inquire of, any of the Sellers;
(ii) that the power and authority of Representative, as described
in this Agreement, shall continue in force until all rights and obligations of
the Sellers under this Agreement shall have terminated, expired or been fully
performed;
(iii) to hereby forever release and discharge the Representative,
the officers, directors, partners or employees of Representative, any of its or
their respective Affiliates and any legal counsel and accountants for the
Representative (collectively, the "Released Party") of and from any and all
claims and demands of every kind and nature, known and unknown, suspected and
unsuspected, disclosed and undisclosed, for damages actual and consequential,
past, present and future, arising out of or in any way connected with the
actions of the Released Party in connection with fulfilling the role of
Representative as contemplated by this Agreement; and
A-64
(iv) to the extent permitted by Law, to indemnify and hold
harmless the Released Party against any losses, claims, expense, cause of
action, damages or liabilities (joint or several) to which the Released Party
may become subject in connection with fulfilling the role of Representative as
contemplated by this Agreement; and to reimburse any Person intended to be
indemnified pursuant to this section for any legal or other expenses as
reasonably incurred by such Person in connection with investigating or defending
any such loss, claim, damage, liability or action.
A-65
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly
executed on its behalf as of the day and year first above written.
ANNALY MORTGAGE MANAGEMENT, INC.:
By: /s/ SPENCER BROWNE
---------------------------------------
Name: Spencer Browne
Title: Director
FIXED INCOME DISCOUNT ADVISORY COMPANY:
By: /s/ MICHAEL A.J. FARRELL
---------------------------------------
Name: Michael A.J. Farrell
Title: Director, President & CEO
FDC MERGER SUB, INC.:
By: /s/ SPENCER BROWNE
---------------------------------------
Name: Spencer Browne
Title: Director
MICHAEL A.J. FARRELL:
By: /s/ MICHAEL A.J. FARRELL
---------------------------------------
WELLINGTON J. DENAHAN:
By: /s/ WELLINGTON J. DENAHAN
---------------------------------------
JENNIFER A. KARVE:
By: /s/ JENNIFER A. KARVE
---------------------------------------
KATHRYN F. FAGAN:
By: /s/ KATHRYN F. FAGAN
---------------------------------------
A-66
JEREMY DIAMOND:
By: /s/ JEREMY DIAMOND
---------------------------------------
RONALD D. KAZEL:
By: /s/ RONALD D. KAZEL
---------------------------------------
ROSE-MARIE LYGHT:
By: /s/ ROSE-MARIE LYGHT
---------------------------------------
KRISTOPHER R. KONRAD:
By: /s/ KRISTOPHER R. KONRAD
---------------------------------------
JAMES P. FORTESCUE:
By: /s/ JAMES P. FORTESCUE
---------------------------------------
A-67
SCHEDULE 1.9(B)
EARN-OUT CONDITION
--------------------------------------------------------------------------------
ANNUAL PERIOD REVENUE TARGET OPERATING MARGIN TARGET
($ IN MILLIONS) ($ IN MILLIONS)
--------------------------------------------------------------------------------
01/01/2004 - 12/31/2004 24.8 40%
--------------------------------------------------------------------------------
01/01/2005 - 12/31/2005 36.7 40%
--------------------------------------------------------------------------------
01/01/2006 - 12/31/2006 41.4 40%
--------------------------------------------------------------------------------
SCHEDULE A
OWNERSHIP OF
SELLER COMPANY SHARES ALLOCABLE SHARE
------ -------------- ---------------
MICHAEL A.J. FARRELL 600 80%
WELLINGTON J. DENAHAN 75 10%
JENNIFER A. KARVE 22.5 3%
KATHRYN F. FAGAN 15 2%
JEREMY DIAMOND 7.5 1%
RONALD D. KAZEL 7.5 1%
ROSE-MARIE LYGHT 7.5 1%
KRISTOPHER R. KONRAD 7.5 1%
JAMES P. FORTESCUE 7.5 1%
--- ---
TOTAL: 750 100%
--------------------------------------------------------------------------------
ANNEX B
FAIRNESS OPINION OF LEHMAN BROTHERS INC.
--------------------------------------------------------------------------------
LEHMAN BROTHERS
December 31, 2003
Annaly Mortgage Management, Inc.
Special Committee of the Board of Directors
1211 Avenue of the Americas
New York, NY, 10035
Members of the Special Committee of the Board:
We understand that Annaly Mortgage Management, Inc. ("Parent"), Fixed
Income Discount Advisory Company (the "Company"), the stockholders and
management of which consist entirely of members of the management of Parent, and
FDC Merger Sub, Inc., a wholly owned subsidiary of Parent ("Merger Sub"), intend
to enter into an agreement pursuant to which Merger Sub will merge with and into
the Company (the "Proposed Transaction" or the "Merger"). We further understand
that, upon the effectiveness of such Merger, each share of common stock of the
Company (the "Company Common Stock") issued and outstanding immediately prior to
the effective time of the Merger will be converted into the right to receive (1)
the Closing Merger Consideration (as defined below) and (2) the Contingent
Merger Consideration (as defined below) (collectively, the "Consideration").
"Closing Merger Consideration" equals a number of shares of common stock of
Parent (the "Parent Common Stock") equal to (i) $40,500,000 divided by (ii) the
closing price of Parent Common Stock for the trading day prior to announcement
of the Proposed Transaction divided by (iii) the number of shares of Company
Common Stock outstanding immediately prior to the effective time of the Merger.
"Contingent Merger Consideration" equals a number of shares of Parent Common
Stock that become payable if certain revenue targets and operating margin
targets related to the Company's business are achieved during the 12 month
periods ending December 31, 2004, 2005 and 2006, but in the aggregate will not
exceed $49,500,000 of shares of Parent Common Stock. We also understand that
Parent intends to modify and/or enter into new employment and/or compensation
arrangements with certain members of the Company (collectively, the "Management
Contracts") in connection with the Proposed Transaction. We further understand
that after giving effect to the Proposed Transaction Parent will continue to
qualify as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). The terms and conditions of the Proposed
Transaction are set forth in more detail in the Agreement and Plan of Merger,
dated December 31, 2003 (the "Agreement"), among Parent, the Company, Merger Sub
and the other parties thereto.
B-1
We have been requested by the Special Committee of the Board of Directors
of Parent to render our opinion with respect to the fairness, from a financial
point of view, to Parent of the Consideration to be paid by Parent in the
Proposed Transaction. We have not been requested to opine as to, and our opinion
does not in any manner address, (i) Parent's underlying business decision to
proceed with or effect the Proposed Transaction or (ii) the reasonableness of
the terms of the Management Contracts.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement
and the specific terms of the Proposed Transaction, including the aggregate
amount of compensation that Parent expects to pay under the Management
Contracts, (2) publicly available information concerning Parent that we believe
to be relevant to our analysis, including Parent's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002, and Parent's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003, (3) financial and operating
information with respect to the business, operations and prospects of the
Company furnished to us by the Company, including (i) certain projections of
future financial performance of the Company prepared by management of the
Company and provided to us on August 12, 2003, September 16, 2003, November 13,
2003 and on November 24, 2003, and (ii) certain updated projections of future
financial performance of the Company prepared by management of the Company and
presented to us on December 29, 2003 (the "Updated Projections"), (4) financial
and operating information with respect to the business, operations and prospects
of Parent furnished to us by Parent, including financial projections of Parent
prepared by management of Parent (the "Parent Projections"), (5) a trading
history of Parent Common Stock from December 26, 2001 to the present and a
comparison of that trading history with those of other companies that we deemed
relevant, (6) a comparison of the historical financial results and present
financial condition of the Company with those of other companies that we deemed
relevant, (7) a comparison of the historical financial results and present
financial condition of Parent with those of other companies that we deemed
relevant, (8) the potential pro forma impact of the Proposed Transaction on the
future financial performance of Parent, including the cost savings expected by
managements of the Company and Parent to result from a combination of the
businesses of the Company and Parent (the "Expected Cost Savings"), and the
potential effect of the Proposed Transaction on Parent's pro forma earnings per
share, in both the scenario where the Contingent Merger Consideration is paid
and the scenario where the Contingent Merger Consideration is not paid, and (9)
a comparison of the financial terms of the Proposed Transaction with the
financial terms of certain other transactions that we deemed relevant. In
addition, we have had discussions with the managements of Parent and the Company
concerning their respective businesses, operations, assets, liabilities,
financial conditions and prospects and have undertaken such other studies,
analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of managements of the Company and Parent
that they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of the Company, we have been advised by the Company that the Updated Projections
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company and, accordingly, have assumed that the
Company would perform
B-2
on a stand alone basis substantially in accordance with such projections.
Furthermore, we have discussed the Updated Projections with the management of
the Company and the Special Committee, and it has been agreed that the Updated
Projections are the appropriate stand alone projections for the Company to use
in performing our analysis. With respect to Parent Projections, upon advice of
Parent we have assumed that such projections have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Parent as to the future financial performance of Parent and that
Parent would perform on a stand alone basis substantially in accordance with
such projections. For purposes of our analysis, we also have considered certain
projections prepared by management of Parent which give pro forma effect to the
Proposed Transaction (including the reclassification of certain employees of
both the Company and Parent to the Company and the related impact on the total
compensation to be paid by Parent and the Company to their respective employees
as a result of such reclassification). We have discussed these pro forma
projections with the management of the Company and the Special Committee, and it
has been agreed that such projections are also appropriate to use in performing
our analysis. With respect to the Expected Cost Savings that the managements of
the Company and Parent expect to result from a combination of the businesses of
Parent and the Company, upon advice of the Company and Parent, we have assumed
that such cost savings will be realized substantially in accordance with such
estimates.
In arriving at our opinion, we have not conducted a physical inspection of
the properties and facilities of the Company or Parent and have not made or
obtained any evaluations or appraisals of the assets or liabilities of the
Company or Parent. Upon advice of the Company and Parent and their respective
legal and accounting advisors, we have assumed that (i) Parent's organization
and intended method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code, (ii) the Merger will
qualify as a reorganization under Section 368(a) of the Code, (iii) the
Company's organization and intended method of operation after the Merger will
enable it to meet the requirements for qualification and taxation as a taxable
REIT subsidiary under the Code, and (iv) the Agreement will constitute a plan of
reorganization under Sections 354 and 361 of the Code. Our opinion necessarily
is based upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Consideration to be paid
by Parent in the Proposed Transaction is fair to Parent.
We have acted as financial advisor to the Special Committee of the Board
of Directors of Parent in connection with the Proposed Transaction and will
receive a fee for our services, a portion of which has been paid and a
substantial portion of which is contingent upon the rendering of our opinion. In
addition, Parent has agreed to indemnify us for certain liabilities that may
arise out of the rendering of this opinion. In the ordinary course of our
business, we may trade in the securities of Parent for our own account and for
the accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
This opinion is for the use and benefit of the Special Committee of the
Board of Directors of Parent and is rendered to the Special Committee of the
Board of Directors in connection with its consideration of the Proposed
Transaction. This opinion is not intended to be and does not
B-3
constitute a recommendation to any shareholder of Parent as to how such
shareholder should vote with respect to the Merger.
Very truly yours,
LEHMAN BROTHERS
B-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 2-418 of the Corporations and Associations Article of the
Annotated Code of Maryland (or Maryland General Corporation Law) provides that a
Maryland corporation may indemnify any director or officer of a corporation who
is made a party to any proceeding by reason of service in that capacity unless
it is established that the act or omission of the director or officer was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty; or the person
actually received an improper personal benefit in money, property or services;
or, in the case of any criminal proceeding, the person had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be against
judgments, penalties, fines, settlements, and reasonable expenses actually
incurred by the director or officer in connection with the proceeding, but if
the proceeding was one by or in the right of the corporation, indemnification
may not be made in respect of any proceeding in which the director or officer
shall have been adjudged to be liable to the corporation. Such indemnification
may not be made unless authorized for a specific proceeding after a
determination has been made, in the manner prescribed by the law, that
indemnification is permissible in the circumstances because the director or
officer has met the applicable standard of conduct. On the other hand, unless
limited by the corporation's charter, the director or officer must be
indemnified for expenses if he has been successful in the defense of the
proceeding or as otherwise ordered by a court. The law also prescribes the
circumstances under which the corporation may advance expenses to, or obtain
insurance or similar protection for, directors and officers.
Our articles of incorporation, as amended, provide that our directors and
officers will, and our agents in the discretion of our board of directors may,
be indemnified to the fullest extent required or permitted from time to time by
the laws of Maryland.
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages except to the
extent that (i) it is proved that the person actually received an improper
benefit or profit in money, property or services for the amount of the benefit
or profit in money, property or services actually received, or (ii) a judgment
or other final adjudication is entered in a proceeding based on a finding that
the person's action, or failure to act, was the result of active and deliberate
dishonesty or committed in bad faith and was material to the cause of action
adjudicated in the proceeding. Our articles of incorporation, as amended,
contain a provision providing for elimination of the liability of our directors
and officers to us or our stockholders for money damages to the maximum extent
permitted by Maryland law.
We maintain policies of insurance under which our directors and officers
are insured, within the limits and subject to the limitations of the policies,
against expenses in connection with the defense of actions, suits or proceedings
resulting from such director or officer being or
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having been a director or officer, and certain liabilities which might be
imposed as a result of these actions, suits or proceedings.
Item 21. Exhibits.
(a) Exhibits. The following is a list of Exhibits to this Registration
Statement:
Exhibit Exhibit Description
Number
3.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with the
SEC on August 5, 1997).
3.2 Articles of Amendment and Restatement of the Articles of
Incorporation of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the SEC on August 5,
1997).
3.3 Articles of Amendment of the Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3 (Registration Statement 333-74618) filed
with the SEC on June 12, 2002).
3.4 By-laws of the Registrant, as amended (incorporated by reference
to Exhibit 3.3 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the SEC on August 5,
1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with the
SEC on September 17, 1997).
4.2 Specimen Preferred Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-3
(Registration Statement No. 333-74618) filed with the SEC on
December 5, 2001).
5.1 Opinion of McKee Nelson LLP (including consent of such firm).*
8.1 Tax Opinion of Morrison & Foerster LLP (including consent of such
firm).*
10.1 Agreement and Plan of Merger, dated as of December 31, 2003, by
and among the Registrant, Fixed Income Discount Advisory Company,
FDC Merger Sub, Inc., Michael A.J. Farrell, Wellington J. Denahan,
Jennifer S. Karve, Kathryn F. Fagan, Jeremy Diamond, Ronald D.
Kazel, Rose-Marie Lyght, Kristopher R. Konrad, and James P.
Fortescue (included in Part I as Annex A to the accompanying proxy
statement/prospectus).
10.2 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Michael A.J. Farrell.
10.3 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Wellington J. Denahan.
10.4 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Kathryn F. Fagan.
10.5 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Jennifer S. Karve.
10.6 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and James P. Fortescue.
10.7 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Jeremy Diamond.
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10.8 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Ronald D. Kazel.
10.9 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Rose-Marie Lyght.
10.10 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Kristopher R. Konrad.
23.1 Consent of Deloitte & Touche LLP as to the Registrant.
23.2 Consent of Deloitte & Touche LLP as to FIDAC.
23.3 Consent of McKee Nelson LLP (included in Exhibit 5.1).*
23.4 Consent of Morrison & Foerster LLP (included in Exhibit 8.1).*
24.1 Power of Attorney (included on the signature page of the
Registration Statement).
99.1 Consent of E. Wayne Nordberg.
99.2 Consent of Lehman Brothers Inc.
99.3 Form of Proxy*
* To be filed by amendment
(c) Fairness Opinion.
The opinion of Lehman Brothers, Inc. is included in Part I Annex B to the
accompanying proxy statement/prospectus.
Item 22. Undertakings.
(a) 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;
(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 set forth 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 Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the
II-3
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(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 such post-effective amendment
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.
(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.
(b) The undersigned registrant hereby undertakes 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 such securities at
that time shall be deemed to be the initial BONA FIDE offering
thereof.
(c) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by ARTICLE 3
of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such interim
financial information.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a
II-4
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(e) (1) The undersigned registrant hereby undertakes as follows: That
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed
to be an underwriter within the meaning of RULE 145(C), the
issuer undertakes that such reoffeering prospectus will
contain the information called for by the applicable
registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information
called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (e)(1) immediately preceding, or
(ii) that purports to meet the requirements of SECTION
10(A)(3) of the Act and is used in connection with an offering
of securities subject to RULe 415, will be filed as a part of
an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933,
each such post-effective amendment 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.
(f) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement
through the date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became
effective.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on March 9, 2004.
ANNALY MORTGAGE MANAGEMENT, INC.
By: /s/ Michael A.J. Farrell
---------------------------------
Michael A.J. Farrell
Chairman of the board of directors,
Chief Executive Officer and President
Each person whose signature appears below hereby authorizes Michael A.J.
Farrell and Wellington J. Denahan, and each of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendment, including post-effective amendments to this registration statement,
and to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ Kevin P. Brady Director March 9, 2004
------------------------------
Kevin P. Brady
/s/ Spencer I. Browne Director March 9, 2004
------------------------------
Spencer I. Browne
/s/ Kathryn F. Fagan Chief Financial Officer and March 9, 2004
------------------------------ Treasurer (principal financial
Kathryn F. Fagan and accounting officer)
/s/ Wellington J. Denahan Vice Chairman of the board of March 9, 2004
------------------------------ directors and Director
Wellington J. Denahan
/s/ Michael A.J. Farrell Chairman of the board of directors, March 9, 2004
------------------------------ Chief Executive Officer, President and
Michael A.J. Farrell Director (principal executive officer)
/s/ Jonathan D. Green Director March 9, 2004
------------------------------
Jonathan D. Green
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/s/ John A. Lambiase Director March 9, 2004
------------------------------
John A. Lambiase
/s/ Donnell A. Segalas Director March 9, 2004
------------------------------
Donnell A. Segalas
II-7
EXHIBIT INDEX
Exhibit Exhibit Description
Number
3.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with the
SEC on August 5, 1997).
3.2 Articles of Amendment and Restatement of the Articles of
Incorporation of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the SEC on August 5,
1997).
3.3 Articles of Amendment of the Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Post-Effective Amendment No. 1 to the Registration
Statement on Form S-3 (Registration Statement 333-74618) filed
with the SEC on June 12, 2002).
3.4 By-laws of the Registrant, as amended (incorporated by reference
to Exhibit 3.3 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the SEC on August 5,
1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with the
SEC on September 17, 1997).
4.2 Specimen Preferred Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-3
(Registration Statement No. 333-74618) filed with the SEC on
December 5, 2001).
5.1 Opinion of McKee Nelson LLP (including consent of such firm).*
8.1 Tax Opinion of Morrison & Foerster LLP (including consent of such
firm).*
10.1 Agreement and Plan of Merger, dated as of December 31, 2003, by
and among the Registrant, Fixed Income Discount Advisory Company,
FDC Merger Sub, Inc., Michael A.J. Farrell, Wellington J. Denahan,
Jennifer S. Karve, Kathryn F. Fagan, Jeremy Diamond, Ronald D.
Kazel, Rose-Marie Lyght, Kristopher R. Konrad, and James P.
Fortescue (included in Part I as Annex A to the accompanying proxy
statement/prospectus).
10.2 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Michael A.J. Farrell.
10.3 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Wellington J. Denahan.
10.4 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Kathryn F. Fagan.
10.5 Amended and Restated Employment Agreement, dated as of December
31, 2003, by and between the Registrant and Jennifer S. Karve.
10.6 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and James P. Fortescue.
10.7 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Jeremy Diamond.
10.8 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Ronald D. Kazel.
10.9 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Rose-Marie Lyght.
10.10 Employment Agreement, dated as of December 31, 2003, by and
between the Registrant and Kristopher R. Konrad.
23.1 Consent of Deloitte & Touche LLP as to the Registrant.
23.2 Consent of Deloitte & Touche LLP as to FIDAC.
23.3 Consent of McKee Nelson LLP (included in Exhibit 5.1).*
23.4 Consent of Morrison & Foerster LLP (included in Exhibit 8.1).*
24.1 Power of Attorney (included on the signature page of the
Registration Statement).
99.1 Consent of E. Wayne Nordberg.
99.2 Consent of Lehman Brothers Inc.
99.3 Form of Proxy*
* To be filed by amendment