As filed with the Securities and Exchange Commission on July 21, 2004
Registration No. 333-106606
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Post-Effective
Amendment No. 1
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MFA MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
350 Park Avenue, 21st Floor
Maryland New York, New York 10022 13-3974868
(State or other (212) 207-6400 (I.R.S. Employer
jurisdiction of (Address, including zip code, and Identification No.)
incorporation or telephone number, including area
organization) code, of registrant's principal
executive offices)
------------------------
Stewart Zimmerman
Chairman of the Board, Chief Executive Officer and President
MFA Mortgage Investments, Inc.
350 Park Avenue
21st Floor
New York, New York 10022
(212) 207-6400
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Timothy W. Korth, Esq. Jay L. Bernstein, Esq.
MFA Mortgage Investments Inc. Clifford Chance US LLP
350 Park Avenue 31 West 52nd Street
21st Floor New York, New York 10019
New York, New York 10022 Tel: (212) 878-8000
Tel: (212) 207-6400 Fax: (212) 878-8375
Fax: (212) 207-6420
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time or at one time after the effective date of this post-effective amendment
No. 1 to the registration statement as the registrant shall determine.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The registrant hereby amends this post-effective amendment to 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 post-effective amendment to this registration statement shall
thereafter become effective in accordance with Section 8(c) of the Securities
Act of 1933 or until this post-effective amendment to this registration
statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(c), may determine.
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The information in this prospectus is not complete and may be changed. We have
filed a post-effective amendment to the registration statement relating to the
securities described in this prospectus with the Securities and Exchange
Commission. We may not sell these securities, or accept offers to buy them,
until the post-effective amendment to the registration statement is declared
effective by the Securities and Exchange Commission. This prospectus is not an
offer to sell these securities, and we are not soliciting an offer to buy these
securities, in any jurisdiction where the offer or sale is not permitted.
Subject To Completion
Prospectus, Dated July 21, 2004
PROSPECTUS
$306,278,750
MFA MORTGAGE INVESTMENTS, INC.
Common Stock and Preferred Stock
Through this prospectus, we may offer, from time to time, shares of our:
o common stock;
o preferred stock; or
o any combination of the foregoing.
We will provide specific terms of each issuance of these securities in
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you decide to invest.
This prospectus may not be used to consummate sales of these securities
unless it is accompanied by a prospectus supplement.
Our common stock is listed on the New York Stock Exchange under the symbol
"MFA."
To ensure we qualify as a real estate investment trust, no person may own
more than 9.8% of the outstanding shares of any class of our common stock or our
preferred stock, unless our board of directors waives this limitation.
See "Risk Factors" beginning on page 4 of this prospectus for a
description of risks that should be considered by purchasers of these
securities.
We may offer these securities in amounts, at prices and on terms to be set
forth in one or more prospectus supplements. We may sell these securities to or
through underwriters, dealers or agents or we may sell these securities directly
to investors on our own behalf.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July , 2004
You should rely only on the information contained in or incorporated by
reference into this prospectus and any related prospectus supplement. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus, the related prospectus supplement
and the documents incorporated by reference herein is accurate only as of its
respective date or dates or on the date or dates which are specified in these
documents. Our business, financial condition, results of operations and
prospects may have changed since those dates.
TABLE OF CONTENTS
Page
ABOUT THIS PROSPECTUS........................................................1
MFA MORTGAGE INVESTMENTS, INC................................................1
RISK FACTORS.................................................................4
USE OF PROCEEDS.............................................................11
RATIO OF EARNINGS TO FIXED CHARGES..........................................11
DESCRIPTION OF STOCK........................................................11
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS..................................17
PLAN OF DISTRIBUTION........................................................31
EXPERTS.....................................................................33
LEGAL MATTERS...............................................................33
WHERE YOU CAN FIND MORE INFORMATION.........................................33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................33
FORWARD-LOOKING STATEMENTS
This 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 the Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (or the Exchange Act). When used,
statements which are not historical in nature, including those containing words
such as "anticipate," "estimate," "should," "expect," "believe," "intend" and
similar expressions, are intended to identify forward-looking statements and, as
such, may involve known and unknown risks, uncertainties and assumptions.
These forward-looking statements are subject to various risks and
uncertainties, including, but not limited to, those relating to:
o changes in the prepayment rates on the mortgage loans securing our
mortgage-backed securities (or MBS);
o changes in interest rates and the market value of our MBS;
o our ability to use borrowings to finance our assets;
o changes in government regulations affecting our business;
o our ability to maintain our qualification as a real estate
investment trust (or a REIT) for federal income tax purposes; and
o risks associated with investing in real estate assets, including
changes in business conditions and the general economy.
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These and other risks, uncertainties and factors, including those
discussed under "Risk Factors" in this prospectus or described in reports that
we file from time to time with the Securities and Exchange Commission (or the
SEC), including our annual report on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, could cause our actual results to differ
materially from those projected in any forward-looking statements we make. All
forward-looking statements speak only as of the date they are made and we do not
undertake, and specifically disclaim, any obligation to update or revise any
forward-looking statements to reflect events or circumstances occurring after
the date of such statements.
ii
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. Under this process, we may offer and
sell any combination of common stock and preferred stock in one or more
offerings for total proceeds of up to $306,278,750. This prospectus provides you
with a general description of the securities we may offer. Each time we offer to
sell securities, we will provide a supplement to this prospectus that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. We encourage you to read this prospectus and the related prospectus
supplement, as well as the information which is incorporated by reference
herein, in their entirety. You should carefully consider the factors set forth
under "Risk Factors" in this prospectus before making an investment decision to
purchase any of our securities. All references to "we," "us" or "our company" in
this prospectus mean MFA Mortgage Investments, Inc.
MFA MORTGAGE INVESTMENTS, INC.
Our Business
We are primarily engaged in the business of investing, on a leveraged
basis, in adjustable-rate and hybrid MBS. Our assets consist primarily of MBS
guaranteed by an agency of the U.S. Government, such as the Government National
Mortgage Association (or Ginnie Mae), or a federally chartered corporation, such
as Fannie Mae or the Federal Home Loan Mortgage Corporation (or Freddie Mac),
high quality MBS rated "AAA" by at least one nationally recognized rating
agency, MBS-related receivables and cash.
Investment Strategy
The MBS we acquire are primarily secured by pools of adjustable-rate and
hybrid mortgage loans on single-family residences. Our investment policy
requires that at least 50% of our assets consist of adjustable-rate MBS that are
either issued or guaranteed by an agency of the U.S. government, such as Ginnie
Mae, or a federally chartered corporation, such as Fannie Mae or Freddie Mac, or
are rated in one of the two highest rating categories by at least one nationally
recognized rating agency.
The mortgage loans securing our MBS are primarily comprised of hybrids,
which have interest rates that are fixed for a specified period and, thereafter,
generally reset annually. Interest rates on the adjustable-rate and hybrid
mortgage loans securing our MBS are based on an index rate, such as the one-year
constant maturity treasury rate, the London Interbank Offered Rate or the 11th
District Cost of Funds Index, and, with respect to the adjustable rate mortgage
loans securing our MBS, are generally adjusted on an annual basis; however, some
may be adjusted more frequently. The maximum adjustment, in any year, of the
adjustable-rate mortgage loans securing our MBS is usually limited to 1% or 2%.
Generally, adjustable-rate mortgage loans have a lifetime cap on interest rate
changes of 5% to 6% over the initial interest rate. We may also invest in
mortgage loans and MBS that are not guaranteed by a federal agency or
corporation and/or that have fixed interest rates.
Financing Strategy
We typically utilize repurchase agreements to finance the acquisition of
our MBS and other assets. A repurchase agreement, although structured as a sale
and repurchase obligation, operates as a financing (i.e., borrowing) under which
we pledge our securities as collateral to secure a loan with the repurchase
agreement counterparty (or lender). The amount we borrow under our repurchase
agreements is limited to a specified percentage, generally not more than 97%, of
the estimated market value of our pledged collateral. Our repurchase agreements
take the form of a sale of our pledged collateral to a lender at an agreed upon
price in return for such lender's simultaneous agreement to resell the same
securities back to us at a future date (i.e., the maturity of the borrowing) at
a higher price. The difference between the sale price we receive and repurchase
price we pay is the cost, or interest expense, of borrowing under our repurchase
agreements. We retain beneficial ownership of our pledged collateral, while the
lender maintains custody of such collateral. At
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the maturity of a repurchase agreement, we are required to repay the loan and
concurrently receive back our pledged collateral from the lender or, with the
consent of the lender, we may renew such agreement at the then prevailing
financing rate. Our repurchase agreements may require us to pledge cash or
additional assets to the lender in the event the estimated fair value of our
existing pledged collateral declines below a specified percentage. Our pledged
collateral may fluctuate in value due to, among other things, principal
repayments, market changes in interest rates and credit quality. To date, we
have not had any margin calls on our repurchase agreements that we were not able
to satisfy with either cash or additional pledged collateral.
Our repurchase agreements generally have maturities ranging from one to 36
months in duration. Should the lender under a repurchase agreement decide not to
renew such agreement at maturity, we would be required either to refinance
elsewhere or be in a position to satisfy (i.e., pay off) this obligation. If,
during the term of a repurchase agreement, a lender should file for bankruptcy,
we might experience difficulty recovering our pledged collateral and may have an
unsecured claim against the lender's assets for the difference between the
amount loaned to us and the estimated fair value of the collateral pledged to
such lender. To reduce our exposure, we enter into repurchase agreements only
with financial institutions whose holding or parent company's long-term debt
rating is "A" or better as determined by at least one nationally recognized
rating agency, where applicable. If this minimum criterion is not met, we will
not enter into repurchase agreements with that lender without the specific
approval of our board of directors. In the event an existing lender is
downgraded below "A," we will seek the approval of our board of directors before
entering into additional repurchase agreements with that lender. We generally
seek to diversify our exposure by entering into repurchase agreements with at
least four separate lenders with a maximum loan from any lender of no more than
three times our stockholders' equity.
We may use derivative transactions and other hedging strategies to help
mitigate our prepayment and interest rate risks if it is determined that the
cost of these transactions is justified by their potential benefit. Through
March 31, 2004, our use of hedging instruments has been limited to purchased
interest rate caps (or Cap Agreements). A Cap Agreement is a contract whereby
the purchaser pays a fee in exchange for the right to receive payments equal to
the principal (i.e., notional amount) times the difference between a specified
interest rate and a future interest rate during a defined "active" period of
time. The timing and amount of future hedging transactions, if any, will depend
on market conditions, including, but not limited to, the interest rate
environment, our assessment of future changes in interest rates and the market
availability and cost of entering into such hedging transactions. See "Risk
Factors -- Our use of derivatives to mitigate our prepayment and interest rate
risks may not be effective."
When fully invested, our policy is to generally maintain as an
assets-to-equity ratio of less than 11 to 1.
Other Assets and Related Financings
In addition to our MBS portfolio, at March 31, 2004, we also held
controlling and non-controlling interests in entities that either directly or
indirectly own three multi-family apartment properties, containing a total of
521 rental units, located in Georgia, North Carolina and Nebraska.
Each of these multi-family apartment properties is financed with a
long-term fixed-rate mortgage loan. The borrowers on these mortgage loans are
separate corporations, limited partnerships or limited liability companies. Each
of these mortgage loans is made to the applicable ownership entity on a
nonrecourse basis (subject to customary nonrecourse exceptions), which means
generally that the lender's final source of
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repayment in the event of a default is the foreclosure of the underlying
property securing the mortgage loan.
Advisory Businesses
We provide external advisory services as a sub-advisor to America First
Apartment Investors, Inc., a Maryland corporation (or AFAI), with respect to
AFAI's acquisition and disposition of MBS and the maintenance of AFAI's MBS
portfolio. We may grow our third-party advisory revenue over time.
Compliance with REIT Requirements and Investment Company Act of 1940
We have elected to be treated as a REIT for federal income tax purposes.
In order to maintain our status as a REIT, we must comply with a number of
requirements under federal income tax law that are discussed under "Federal
Income Tax Considerations" in this prospectus. In addition, we at all times
intend to conduct our business so as to maintain our exempt status under, and
not to become regulated as an investment company for purposes of, the Investment
Company Act of 1940, as amended (or the Investment Company Act). If we fail to
maintain our exempt status under the Investment Company Act, we would
be unable to conduct our business as described in this prospectus. See "Risk
Factors -- Loss of Investment Company Act exemption would adversely affect us."
General Information
We were incorporated on July 24, 1997 under Maryland law. Our principal
executive offices are located at 350 Park Avenue, 21st Floor, New York, New York
10022. Our telephone number is (212) 207-6400. Our common stock and 8.50% Series
A Cumulative Redeemable preferred stock are listed on the New York Stock
Exchange (or the NYSE) under the symbols "MFA" and "MFA PrA," respectively. We
maintain a website at www.mfa-reit.com. Information contained on our website is
not, and should not be interpreted to be, part of this prospectus.
3
RISK FACTORS
An investment in our securities involves a number of risks. Before making
an investment decision to purchase any of our securities, you should carefully
consider all of the risks described in this prospectus, as well as the other
information contained in, or incorporated by reference into, this prospectus or
the related prospectus supplement. If any of these risks actually occur, our
business, financial condition and results of operations could be materially
adversely affected. If this were to occur, the value of our securities could
decline significantly and you may lose all or part of your investment.
Rapid prepayment rates of the mortgages underlying our MBS may adversely affect
our profitability.
The MBS that we acquire are primarily secured by pools of adjustable-rate
and hybrid mortgage loans on single-family residences. When we acquire a
particular MBS, we anticipate that the underlying mortgages will prepay at a
projected rate generating an expected yield. When homeowners prepay their
mortgage loans faster than anticipated, it results in a faster prepayment rate
our portfolio and this may adversely affect our profitability. Prepayment rates
on the related MBS in 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 often purchase MBS that have a higher interest rate than the prevailing
market interest rate. In exchange for a higher interest rate, we typically pay a
premium over par value to acquire these securities. In accordance with
accounting rules, we amortize this premium over the life of the related MBS.
If the mortgage loans securing our MBS prepay at a rapid rate, we will have to
amortize this premium on an accelerated basis which may adversely affect our
profitability. Our investment policies allow us to acquire MBS at an average
portfolio purchase price of up to 103.5% of par value. As of March 31, 2004, the
amortized cost of our portfolio of MBS was approximately 102.3% of par value.
As the holder of MBS, we receive a portion of our investment principal
when underlying mortgages are prepaid. In order to continue to earn a return on
this repaid principal, we must reinvest it in additional MBS or other assets.
However, if interest rates have declined, we may earn a lower return on the new
investment as compared to the original MBS.
An increase in our borrowing costs relative to the interest we receive on
our MBS may adversely affect our profitability.
We earn money based upon the spread between the interest we receive on our
MBS, net of amortization of purchase premiums, and the interest we pay on our
borrowings. We rely primarily on short-term borrowings to acquire MBS with
long-term maturities. Even though most of our MBS have interest rates that
adjust based on short-term rate changes, the interest we pay on our borrowings
may increase relative to the interest we earn on our
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MBS. If the interest payments on our borrowings increase relative to the
interest we earn on our MBS, our profitability may be adversely affected.
o Changes in interest rates, cyclical or otherwise, may adversely affect
our profitability.
Interest rates are highly sensitive to many factors, including fiscal and
monetary policies and domestic and international economic and political
considerations, as well as other factors beyond our control. The interest rates
on our borrowings generally adjust more frequently than the interest rates on
our MBS. During a period of rising interest rates, our borrowing costs could
increase at a faster pace than our interest earnings from MBS. If this happens,
we could experience a decrease in net income or incur a net loss during these
periods, which may negatively impact our dividend. Further, an increase in
short-term interest rates without a corresponding increase in long-term interest
rates (i.e., a flattening of the yield curve) could also have a negative impact
on the market value of our securities.
o Hybrid mortgage loans have fixed interest rates for an initial period which
may reduce our profitability if short-term interest rates increase.
The mortgage loans securing our MBS are primarily comprised of hybrids,
which have interest rates that are fixed for a specified period and, thereafter,
generally reset annually. Accordingly, in a period of rising interest rates, our
financing costs could increase while the interest we earn on our MBS would be
limited by the number of underlying hybrid mortgage loans with fixed interest
rates. This would adversely affect our profitability.
o Interest rate caps on the mortgage loans underlying our MBS may adversely
affect our profitability if short-term interest rates increase.
The mortgage loans underlying our MBS are typically subject to periodic and
lifetime interest rate caps. Periodic interest rate caps amount an interest rate
can increase during any given period. Lifetime limit the interest rate caps
limit the amount an interest rate can increase through maturity of an individual
MBS. Our borrowings are not subject to similar restrictions. 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 could increase without
limitation while any increases in the interest rates on the mortgages underlying
our MBS would be limited.
Our business strategy involves a significant amount of borrowing that exposes us
to additional risks.
We borrow against a substantial portion of the market value of our MBS and
use the borrowed funds to acquire additional investment assets. Our operating
policies allow us to generally maintain an assets-to-equity ratio of less than
11 to 1. The use of borrowing, or "leverage," to finance our MBS and other
assets involves a number of risks, including the following:
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o If we are unable to renew our borrowings at favorable rates, it may
force us to sell assets and our profitability may be adversely affected.
Since we rely primarily on short-term borrowings, such as repurchase
agreements, to finance our MBS, our ability to achieve our investment
objectives depends on our ability to borrow money in sufficient amounts
and on favorable terms and on our ability to renew or replace maturing
short-term borrowings on a continuous basis. If we are not able to renew
or replace maturing borrowings, we would be forced to sell some of our
assets under possibly adverse market conditions, which may adversely
affect our profitability.
o A decline in the market value of our assets may result in margin calls
that may force us to sell assets under adverse market conditions.
As interest rates rise, the market value of interest-bearing assets,
such as MBS, will decline. A decline in the market value of our MBS may
result in our lenders initiating margin calls that require us to pledge
additional collateral to re-establish the ratio of the value of the
collateral to the amount of our borrowings. If we are unable to satisfy
margin calls, our lenders may foreclose on our collateral. This could
force us to sell our MBS under adverse market conditions.
o Our use of repurchase agreements to borrow money may give our lenders
greater rights in the event of bankruptcy.
We use repurchase agreements for most of our borrowing. Borrowings
made under repurchase agreements may qualify for special treatment under
the U.S. Bankruptcy Code (or the Bankruptcy Code). This may make it
difficult for us to recover our pledged assets if a lender files for
bankruptcy. In addition, if we ever file for bankruptcy, lenders under our
repurchase agreements may be able to avoid the automatic stay provisions
of the Bankruptcy Code and take possession of, and liquidate, our
collateral under these agreements without delay.
We may experience a decline in the market value of our assets.
The market value of our interest-bearing assets, such as MBS or hedging
instruments, may move inversely with changes in interest rates. A decline in the
market value of our MBS may limit our ability to borrow or result in lenders
initiating margin calls under our repurchase agreements. As a result, we could
be required to sell some of our investments under adverse market conditions in
order to maintain liquidity. If these sales were made at prices lower than the
amortized cost of such investments, we would incur losses. A default under our
repurchase agreements could also result in a liquidation of the underlying
collateral and a resulting loss of the difference between the value of the
collateral and the amount borrowed.
Our profitability may be limited by restrictions on our use of leverage.
As long as we earn a positive margin between our borrowing costs and the
interest and other income we earn on our assets, we can generally increase our
profitability by using greater amounts of leverage. However, the amount of
leverage that we use may be limited because our lenders might not make funding
available to us at acceptable rates or they may require that we provide
additional collateral to cover our borrowings.
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Our use of derivatives to mitigate our prepayment and interest rate risks may
not be effective.
Our policies permit us to enter into interest rate swaps, caps and floors
and other derivative transactions to help us mitigate our prepayment and
interest rate risks. No hedging strategy, however, can completely insulate us
from the prepayment and interest rate risks to which we are exposed.
Furthermore, certain of the federal income tax requirements that we must satisfy
in order to qualify as a REIT limit our ability to hedge against such risks. We
will not enter into derivative transactions if we believe that they will
jeopardize our status as a REIT.
We may change our policies without stockholder approval.
Our board of directors establishes all of our fundamental operating
policies, including our investment, financing and distribution policies, and any
revisions to such policies would require the approval of our board of directors.
Although our board of directors has no current plans to do so, it 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 preferred stock or our ability to pay
dividends or distributions.
We have not established a minimum dividend payment level.
We intend to pay dividends on our common stock in an amount equal to at
least 90% of our taxable income before deductions of dividends paid and
excluding net capital gains in order to maintain our status as a REIT for
federal income tax purposes. Dividends will be declared and paid 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. We have not
established a minimum dividend payment level for our common stock and our
ability to pay dividends may be adversely affected for the reasons set forth in
this section of, and the information incorporated by reference into, this
prospectus.
We are dependent on our executives and employees.
As a self-advised REIT, we are dependent on the efforts of our key
officers and employees, including Stewart Zimmerman, Chairman of the Board,
Chief Executive Officer and President; William Gorin, Executive Vice President
and Chief Financial Officer; Ronald Freydberg, Executive Vice President and
Chief Portfolio Officer; Timothy W. Korth, General Counsel, Senior Vice
President-Business Development and Secretary; and Teresa D. Covello, Senior
Vice President, Chief Accounting Officer and Treasurer. The loss of any of their
services could have an adverse effect on our operations.
The economic return from our investments and interests in real estate will be
affected by a number of factors.
Our indirect interests in multi-family apartment properties expose us to
risks associated with investing in real estate. These risks include the
possibility that the properties will not perform in accordance with our
expectations. In addition, the economic returns from our interests in these
properties may be affected by a number of factors, many of which are beyond our
direct control. These factors include general and local economic conditions, the
relative supply of apartments and other housing in the applicable market area,
interest rates on mortgage loans, the need for and costs of repairs and
maintenance of the properties, government regulations and the cost of complying
with them, taxes and inflation.
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The concentration of real estate in a geographical area may make us vulnerable
to adverse changes in local economic conditions.
We do not have specific limitations on the total percentage of our real
estate investments that may be located in any one geographical area.
Consequently, real estate investments that we own may be located in the same or
a limited number of geographical regions. As a result, adverse changes in the
economic conditions of the geographic regions in which our real estate
investments are concentrated may have an adverse effect on real estate values,
rental rates and occupancy rates. Any of these could reduce the income we earn
from, or the market value of, these real estate investments.
Our interests in real estate may be illiquid and their value may decrease.
Our indirect interests in multi-family apartment properties are relatively
illiquid. Our ability to sell these assets, and the price we receive upon their
sale, will be affected by the number of potential buyers, the number of
competing properties on the market in the area and a number of other market
conditions. As a result, we cannot make any assurances that we will be able to
sell these interests without incurring a loss.
Owning real estate may subject us to liability for environmental contamination.
The owner or operator of real property may become liable for the costs of
removal or remediation of hazardous substances released on its property. Various
federal, state and local laws often impose such liability without regard to
whether the owner or operator knew of, or was responsible for, the release of
such hazardous substances. We cannot make any assurances that the multifamily
apartment properties in which we currently hold indirect interests, or those we
may acquire in the future, will not be contaminated. The costs associated with
the remediation of any such contamination may be significant and may exceed the
value of the property causing us to lose our entire investment. In addition,
environmental laws may materially limit the use of the properties underlying our
real estate investments and future laws, or more stringent interpretations or
enforcement policies of existing environmental requirements, may increase our
exposure to environmental liability.
Compliance with the requirements of the Americans with Disabilities Act of 1990
could be costly.
Under the Americans with Disabilities Act of 1990, all public
accommodations must meet federal requirements for access and use by disabled
persons. A determination that one or more of the multifamily apartment
properties in which we currently hold indirect interests does not comply with
the Americans with Disabilities Act of 1990 could result in liability for both
government fines and damages to private parties. If we were to make additional
capital contributions to the entities that hold these multifamily apartment
properties in order to fund unanticipated major modifications at these
properties to bring them into compliance with the Americans with Disabilities
Act of 1990, it could adversely affect our profitability.
Because of competition, we may not be able to acquire investment assets at
favorable prices.
Our profitability depends, in large part, on our ability to acquire MBS or
other investment assets at favorable prices. In acquiring our investment assets,
we compete with a variety of institutional investors including other REITs,
insurance companies, mutual funds, pension funds, investment banking firms,
banks and other financial institutions. Many of the entities with which we
compete have greater financial and other resources than us. In addition, many of
our competitors are not subject to REIT tax compliance or required to maintain
an exemption from the Investment Company Act.
8
As a result, we may not be able to acquire MBS or other investment assets for
investment or we may have to pay more for these assets than we otherwise would.
Issuances of large amounts of our common stock could cause our price to decline.
As of July 21, 2004, 78,220,946 shares of our common stock were
outstanding. This prospectus may be used for the issuance of additional shares
of common stock or shares of preferred stock that are convertible into common
stock. If we issue a significant number of shares of common stock or convertible
preferred 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.
One of our directors has ownership interests in other companies that create
potential conflicts of interest.
One of our directors owns an equity interest in America First Companies
L.L.C. (or America First). A subsidiary of America First provides on-site
management for the multi-family apartment properties in which we hold
investments and earns fees based on the gross revenues of these properties. This
director also serves on the board of directors of AFAI and, through America
First, has an interest in America First Apartment Advisory Corporation, AFAI's
external advisor. Because of the ownership in America First held by this
director, our agreements with America First and its subsidiaries may not be
considered to have been negotiated at arm's-length. This relationship may also
cause a conflict of interest in other situations where we are negotiating with
America First.
Our status as a REIT
We believe that we qualify for taxation as a REIT for federal income tax
purposes and plan to operate so that we can continue to meet the requirements
for qualification and taxation as a REIT. If we qualify as a REIT, we generally
will not be subject to federal income tax on our income that we distribute
currently to our stockholders. Many of the REIT requirements, however, are
highly technical and complex. The determination that we are a REIT requires an
analysis of various factual matters and circumstances, some of which may not be
totally within our control and some of which involve questions of
interpretation. For example, to qualify as a REIT, as least 95% of our gross
income must come from specific passive sources, like mortgage interest, that are
itemized in the REIT tax laws. In addition, the composition of our assets must
meet certain requirements at the close of each quarter. There can be no
assurance that the Internal Revenue Service (or the IRS) or a court would agree
with any conclusions or positions we have taken in interpreting the REIT
requirements. We also are required to distribute to our stockholders at least
90% of our REIT taxable income (excluding capital gains). Such distribution
requirement limits the amount of cash 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. Even a technical or inadvertent mistake could jeopardize our REIT
status. Furthermore, Congress and the 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 for federal income tax purposes, 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 failed to
qualify. If we failed to qualify as a REIT, we would have to pay significant
income taxes. This likely would have a significant adverse effect on the value
of our securities. In addition, we would no longer be required to pay any
dividends to stockholders.
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Even if we qualify as a REIT for federal income tax purposes, we are
required to pay certain federal, state and local taxes on our income and
property. Any of these taxes will reduce our operating cash flow.
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 borrowings would be substantially reduced and
we would be unable to conduct our business as described in this 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 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.
Therefore, our ownership of these mortgage-backed securities is limited by the
provisions of the Investment Company Act. 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.
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USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds from the sale of the securities offered by this
prospectus and the related prospectus supplement to acquire additional MBS
consistent with our investment policy and for general corporate purposes, which
may include, among other things, the repayment of our repurchase agreements.
Pending investment, we may hold the net proceeds in interest-bearing bank
accounts or in readily marketable, interest-bearing securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges for
the periods shown:
For the Three
Months Ended For the Year Ended December 31,
March 31, --------------------------------------------------
2004 2003 2002 2001(1) 2000 1999
---- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges......... 2.32x 2.02x 1.88x 1.04x 1.17x 1.30x
----------
(1) Includes the effect of a non-recurring charge of approximately $12.5
million (of which approximately $11.3 million was non-cash, stock-based
compensation) relating to our January 2001 acquisition of our former
external advisor.
The ratios of earnings to fixed charges were computed by dividing earnings
as adjusted by the sum of fixed charges. For this purpose, earnings consist of
net income from continuing operations, fixed charges and distributed income of
corporate, partnership or limited liability company entities in which we own
interests. Fixed charges consist of interest expense. As of March 31, 2004, we
had not issued any preferred stock.
DESCRIPTION OF STOCK
General
Our amended and restated articles of incorporation provide that we may
issue up to 500 million shares of capital stock, all with a par value of $0.01
per share. As of July 21, 2004, 370 million of these authorized shares were
classified as common stock, 5 million shares were classified as preferred stock
and 125 million shares were classified as excess stock. As of July 21, 2004, we
had 78,220,946 shares of common stock, not including 1,262,250 shares of common
stock issuable upon the exercise of outstanding options granted pursuant to our
2004 Equity Compensation Plan, 2,000,000 shares of 8.50% Series A Cumulated
Redeemable preferred stock and no shares of excess stock outstanding.
Pursuant to our amended and restated articles of incorporation, our board
of directors is authorized to classify and reclassify any unissued shares of any
series of our capital stock, to provide for the issuance of shares in other
classes or series (including preferred stock in one or more series), to
establish the number of shares in each class or series and to fix the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms and conditions of
redemption of each class or series.
The statements below describing our capital stock are in all respects
subject to, and qualified in their entirety by reference to, our amended and
restated articles of incorporation, our by-laws and any articles supplementary
to our amended and restated articles of incorporation.
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Common Stock
All shares of our common stock offered hereby will be validly issued,
fully paid and nonassessable. Holders of our common stock will be entitled to
receive distributions on their shares of common stock if, as and when our board
of directors authorizes and declares distributions out of legally available
funds. However, rights to distributions may be subordinated to the rights of
holders of our preferred stock, when preferred stock is issued and outstanding,
or subject to the provisions of our amended and restated articles of
incorporation regarding excess stock. See "-- Restrictions on Ownership and
Transfer" below. In the event of our liquidation, dissolution or winding up,
each outstanding share of our common stock will entitle its holder to a
proportionate share of the assets that remain after we pay our liabilities and
any preferential distributions owed to preferred stockholders.
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a vote of the common stockholders. There is no cumulative
voting in the election of directors.
Holders of shares of our common stock have no preference, conversion,
sinking fund, redemption, appraisal or exchange rights or any preemptive rights
to subscribe for any of our securities. All shares of our common stock have
equal dividend, distribution, liquidation and other rights.
We may be dissolved if our board of directors, by resolution adopted by a
majority of the entire board of directors, declares the dissolution advisable
and directs that the proposed dissolution be submitted for consideration at
either an annual or special meeting of stockholders. Dissolution will occur once
it is approved by the affirmative vote of a majority of stockholders entitled to
cast votes on the matter.
Preferred Stock
We may issue preferred stock in one or more series with any rights and
preferences which may be authorized by our board of directors. The preferred
stock, when issued, will be validly issued, fully paid and non-assessable.
Because our board of directors has the power to establish the preferences,
powers and rights of each series of preferred stock, our board of directors may
afford the holders of any series of preferred stock preferences, powers and
rights, voting or otherwise, senior to the rights of the holders of our common
stock.
On July 21, 2004, there were 2,000,000 shares of 8.50% Series A Cumulative
Redeemable preferred stock outstanding. A description of our 8.50% Series A
Cumulative Redeemable preferred stock is set forth in our registered statement
on Form 8-A, filed with the SEC on April 23, 2004, and is incorporated herein by
reference.
The rights, preferences, privileges and restrictions of each series of
preferred stock will be fixed by the articles supplementary relating to such
series. We will distribute a prospectus supplement with regard to each series of
preferred stock. The prospectus supplement, relating to each such series, will
specify the terms of the preferred stock, as follows:
o the title and stated par value of the preferred stock;
o the number of shares offered, the liquidation preference per share
and the offering price per share of the preferred stock;
o the dividend rate(s), period(s) and payment date(s) or method(s) of
calculation applicable to the preferred stock;
o the date from which dividends on the preferred stock will
accumulate, if applicable;
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o the voting rights, if applicable, of the preferred stock;
o the provision for a sinking fund, if any, for the preferred stock;
o the provision for or any restriction on redemption or repurchase, if
applicable, of the preferred stock;
o any listing of the preferred stock on any securities exchange;
o the terms and provisions, if any, upon which the preferred stock
will be convertible into common stock, including the conversion
price (or manner of calculation) and conversion period;
o a discussion of certain material federal income tax considerations
applicable to the preferred stock;
o the relative ranking and preferences of the preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs;
o any limitation on issuance of any series of preferred stock ranking
senior to or on a parity with the series of preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs;
o any limitations on direct or beneficial ownership and restrictions
on transfer of the preferred stock, in each case as may be
appropriate to preserve our status as a REIT; and
o any other specific terms, preference rights, limitations or
restrictions of the preferred stock.
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT, our capital stock must be
beneficially owned by 100 or more persons for at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year.
Also, not more than 50% of the number or value of the outstanding shares of our
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Internal Revenue Code of 1986, as amended (or the Code), to
include certain exempt entities) during the last half of a taxable year.
Our amended and restated articles of incorporation provide that, subject
to certain exceptions, no stockholder or "group" (as defined in Section 13(d)(3)
of the Exchange Act) may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% of the number or value of the outstanding
shares of our capital stock (or the Ownership Limit). Our board of directors may
waive the Ownership Limit if it is presented with evidence satisfactory to it
that the waiver will not jeopardize our status as a REIT. As a condition to any
such waiver, our board of directors may require opinions of counsel satisfactory
to it and must receive an undertaking from the applicant with respect to
preserving our REIT status. The Ownership Limit will not apply if our board of
directors and the stockholders determine that it is no longer in our best
interests to continue to qualify as a REIT.
If shares of common stock and/or preferred stock in excess of the
Ownership Limit, or shares which would cause us to be beneficially owned by
fewer than 100 persons or cause us to become "closely held" under Section 856(h)
of the Code, are issued or transferred to any person, the issuance or transfer
shall be void as to the number of shares in excess of the Ownership Limit and
the intended transferee will
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acquire no rights to such shares of common stock and/or preferred stock. Shares
issued or transferred that would cause any stockholder (or a Prohibited Owner)
to own more than the Ownership Limit or cause us to become "closely held" under
Section 856(h) of the Code will constitute shares of excess stock. All excess
stock will be automatically transferred, without action by the Prohibited Owner,
to a trust for the exclusive benefit of one or more charitable beneficiaries
that we select, and the Prohibited Owner will not acquire any rights in the
shares of excess stock. Such automatic transfer shall be deemed to be effective
as of the close of business on the day prior to the date of the transfer causing
a violation. The trustee of the trust shall be appointed by us and must be
independent of us and the Prohibited Owner. The Prohibited Owner shall have no
right to receive dividends or other distributions with respect to, or be
entitled to vote, any excess stock held in the trust. Any dividend or other
distribution paid prior to the discovery by us that excess stock has been
transferred to the trust must be paid by the recipient of the dividend or
distribution to the trustee upon demand for the benefit of the charitable
beneficiary, and any dividend or other distribution authorized but unpaid shall
be paid when due to the trust. The trust shall have all dividend and voting
rights with respect to the shares of excess stock held in the trust, which
rights shall be exercised for the exclusive benefit of the charitable
beneficiary. Any dividend or distribution so paid to the trust shall be held in
trust for the charitable beneficiary.
Within 20 days of our receipt of notice that excess stock has been
transferred to the trust, the trustee will sell the excess stock held in the
trust to a person, designated by the trustee, whose ownership of the shares will
not violate the ownership limitations set forth in our articles of
incorporation. Upon such sale, any interest of the charitable beneficiary in the
excess stock sold shall terminate and the trustee shall distribute the net
proceeds of the sale to the Prohibited Owner and to the charitable beneficiary
as follows. The Prohibited Owner shall receive the lesser of (a) the price paid
by the Prohibited Owner for the excess stock or, if the Prohibited Owner did not
give value for the excess stock in connection with the event causing the excess
stock to be held in the trust (e.g., a gift, devise or other such transaction),
the Market Price (as defined in our amended and restated articles of
incorporation) of the excess stock on the day of the event causing the excess
stock to be held in the trust and (b) the price per share received by the
trustee from the sale or other disposition of the excess stock held in the
trust. Any net sale proceeds in excess of the amount payable to the Prohibited
Owner shall be paid immediately to the charitable beneficiary. If, prior to our
discovery that excess stock has been transferred to the trust, the excess stock
is sold by a Prohibited Owner, then the excess stock shall be deemed to have
been sold on behalf of the trust and, to the extent that the Prohibited Owner
received an amount for the excess stock that exceeds the amount that such
Prohibited Owner was entitled to receive pursuant to the aforementioned
requirement, the excess shall be paid to the trustee upon demand.
The Ownership Limit provision will not be automatically removed even if
the REIT provisions of the Code are changed so as to no longer contain any
ownership concentration limitation or if the ownership concentration is
increased. Any change in the Ownership Limit would require an amendment to our
amended and restated articles of incorporation. Such an amendment will require
the affirmative vote of holders owning a majority of the outstanding common
stock and any other class of capital stock with such voting rights. In addition
to preserving our status as a REIT, the Ownership Limit may have the effect of
precluding an acquisition of control of our company without the approval of our
board of directors.
All certificates representing shares of our common stock or preferred
stock will refer to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions
of the Code, more than 5% of the number or value of our outstanding shares (or
1% if there are more than 200 but fewer than 2,000 stockholders of record or
0.5% if there are less than 200 stockholders of record) must file a written
statement with us containing the information specified in our amended and
restated articles of
14
incorporation within 30 days after January 1 of each year. In addition, each
stockholder shall upon demand be required to disclose to us in writing such
information with respect to the direct, indirect and constructive ownership of
shares as our board of directors deems necessary to determine our status as a
REIT and to ensure compliance with the Ownership Limit.
Classification of Board, Vacancies and Removal of Directors
Our amended and restated articles of incorporation provide that our board
of directors is divided into three classes. Directors of each class serve for
terms of three years each, with the terms of each class beginning in different
years. The number of directors in each class and the expiration of the current
term of each class term is as follows:
Class I 2 Directors Expires 2005
Class II 2 Directors Expires 2006
Class III 3 Directors Expires 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 shares of our common or preferred 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 amended and restated articles of incorporation provide that any
vacancy on our board of directors may be filled by a majority of stockholders or
a majority of the remaining directors. Any individual elected director by the
stockholders will hold office for the remainder of the term of the director he
or she is replacing. Any individual elected by the remaining directors will hold
office until the next annual meeting of our stockholders, at which time the
stockholders shall elect a director to hold office for the balance of the term
then remaining. Our amended and restated articles of incorporation provide that
a director may be removed at any time only for cause upon the affirmative vote
of at least 80% of the votes entitled to be cast in the election of directors.
These provisions preclude stockholders from removing incumbent directors, except
for cause and upon a substantial affirmative vote, and filling the vacancies
created by the removal with their own nominees.
Indemnification
Our amended and restated articles of incorporation 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 Maryland General Corporation Law (or the MGCL) 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 a party
by reason of their service in those or other capacities, unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful.
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Limitation of Liability
The MGCL 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
(a) it is proved that the person actually received an improper benefit or profit
in money, property or services or (b) a judgment or other final adjudication is
entered in a proceeding based on a finding that the person's action, or failure
to act, was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding. Our amended and restated
articles of incorporation 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.
Maryland Business Combination Act
The MGCL 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,
directly or indirectly, 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 our board of directors approved the transaction prior to the party
becoming an interested stockholder. The five-year period runs from the most
recent date on which the interested stockholder became an interested
stockholder. The law also requires a supermajority stockholder vote for these
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 66% 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.
The business combination statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating these
offers, even if our acquisition would be in our stockholders' best interests.
Maryland Control Share Acquisition Act
The MGCL 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 stockholder vote. Two-thirds of the shares eligible to vote
(excluding all interested shares) 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.
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If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), that person
may compel our board of directors to call a special meeting of stockholders to
consider the voting rights of the shares. If that 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 exceptions, 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
o any 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 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 appraisal 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 increasing the difficulty of consummating
any such offers, even if our acquisition would be in our stockholders' best
interests.
Transfer Agent and Registrar
Mellon Investor Services LLC, 44 Wall Street, 6th Floor, New York, New
York 10005, is the transfer agent and registrar for our stock. Its telephone
number is (800) 777-3674 and its internet address is www.melloninvestor.com.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following description of the material U.S. federal income tax
considerations relates to our taxation and qualification as a REIT and the
ownership and disposition of our capital stock. This discussion is not
exhaustive of all possible tax considerations and does not provide a detailed
discussion of any state, local, foreign or other tax laws or considerations.
Your tax consequences may vary depending on your particular situation and this
discussion does not purport to discuss all aspects of taxation that may be
relevant to a stockholder in light of his or her personal investment or tax
circumstances or to a stockholder subject to special treatment under the federal
income tax laws, except to the extent discussed under the headings "--Taxation
of Tax-Exempt Stockholders" and "--Taxation of Non-U.S. Stockholders."
Stockholders subject to special treatment include, without limitation, insurance
companies, financial institutions, broker-dealers, tax-exempt organizations,
those holding common stock as part of a conversion transaction, a hedge or
hedging transaction or as a position in a straddle for tax purposes, foreign
corporations or partnerships, and persons who are not citizens or residents of
the United States.
In the opinion of Clifford Chance US LLP, our counsel, commencing with our
taxable year ended December 31, 1998, we have been organized and operated in
conformity with the requirements for qualification as a REIT under the Code and
that our proposed method of operation will enable us to continue to so qualify.
Counsel's opinion will rely, with respect to all taxable periods beginning prior
to January 1, 2002, solely on an opinion issued by Kutak Rock LLP, which
previously served as our counsel. Investors should be aware that opinions of
counsel are not binding on the IRS or a court and there cannot be any assurance
that the IRS or a court will not take a contrary position. It also must be
emphasized that counsel's opinion is based on various assumptions and is
conditioned upon numerous representations made by us as to factual matters,
including representations regarding the nature of our assets and income and the
past, present and future conduct of our business. Moreover, our taxation and
qualification as a REIT depend upon our ability to meet on a continuous basis
the annual operating results, asset ownership tests, distribution requirements,
diversity of stock ownership and the various other qualification tests imposed
by the Code described below, the results of which will not be reviewed by our
counsel. Therefore, no assurance can be given that the actual results of our
operations for any given taxable year will satisfy the requirements for
qualification and taxation as a REIT. See "--Failure to Qualify" below.
This discussion is based on the Code, current, temporary and proposed
regulations promulgated under the Code, the legislative history of the Code,
current administrative interpretations and practices of the IRS and court
decisions, all as of the date of this prospectus. The administrative
interpretations and practices of the IRS upon which this summary is based
include its practices and policies as expressed in private letter rulings which
are not binding on the IRS, except with respect to the taxpayers who requested
and received such rulings. In each case, these sources are relied upon as of the
date of this prospectus. No assurance can be given that future legislation,
regulations, administrative interpretations and practices
17
and court decisions will not significantly change current law, or adversely
affect existing interpretations of existing law, on which the information in
this section is based. Even if there is no change in applicable law, no
assurance can be provided that the statements made in the following discussion
will not be challenged by the IRS or sustained by a court if so challenged.
Each prospective stockholder is advised to consult with its own tax advisor
to determine the impact of its personal tax situation on the anticipated tax
consequences of the ownership and sale of our capital stock. This includes the
federal, state, local, foreign and other tax consequences of the ownership and
sale of our capital stock and the potential changes in applicable tax laws.
Taxation of Our Company as a REIT -- General
We elected to be taxed as a REIT under Sections 856 through 860 of the
Code, commencing with our taxable year ended December 31, 1998. We believe that
we were organized and have operated in a manner so as to qualify as a REIT under
the Code and we intend to continue to be organized and operate in such a manner.
No assurance, however, can be given that we in fact have qualified or will
remain qualified as a REIT.
The sections of the Code that relate to the qualification and taxation of
REITs are highly technical and complex. The following describes the material
aspects of the sections of the Code that govern the federal income tax treatment
of a REIT and its stockholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated under the Code,
and administrative and judicial interpretations of the Code.
Qualification and taxation as a REIT depend upon our ability to meet on a
continuing basis, through actual annual operating results, the various
requirements under the Code and, as described in this prospectus, with regard
to, among other things, the source of our gross income, the composition of our
assets, our distribution levels and our diversity of stock ownership. While we
intend to operate so that we qualify as a REIT, given the highly complex nature
of the rules governing REITs, the ongoing importance of factual determinations
and the possibility of future changes in our circumstances or in the law, no
assurance can be given that we so qualify or will continue to so qualify.
Provided we qualify for taxation as a REIT, we generally will not be
subject to federal corporate income tax on our net income that is currently
distributed to our stockholders. This treatment substantially eliminates the
"double taxation" that generally results from an investment in a corporation.
Double taxation means taxation once at the corporate level when income is earned
and once again at the stockholder level when such income is distributed. The
Jobs and Growth Tax Reconciliation Act of 2003 (or the 2003 Act) was recently
enacted by Congress and signed by President Bush. Among other provisions, the
2003 Act generally lowers the rate at which stockholders who are individual U.S.
stockholders (as defined herein) are taxed on corporate dividends to a maximum
of 15% (the same as long-term capital gains) for the 2003 through 2008 tax
years, thereby substantially reducing, though not completely eliminating, the
double taxation that has historically applied to corporate dividends. With
limited exceptions, however, dividends received from us or other entities that
are taxed as REITs will continue to be taxed at rates applicable to ordinary
income, which pursuant to the 2003 Act, will be as high as 35% through 2010.
Even if we qualify as a REIT, we will nonetheless be subject to federal
taxation in the following circumstances:
o We will be required to pay tax at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
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o We may be subject to the "alternative minimum tax" on our items of tax
preference, if any.
o If we have (a) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers
in the ordinary course of business or (b) other nonqualifying income
from foreclosure property, we will be required to pay tax at the
highest corporate rate on this income. In general, foreclosure
property is property acquired through foreclosure after a default on a
loan secured by the property or on a lease of the property.
o We will be required to pay a 100% tax on any net income from
prohibited transactions. In general, prohibited transactions are sales
or other taxable dispositions of assets, other than foreclosure
property, held for sale to customers in the ordinary course of
business.
o If we fail to satisfy the 75% or 95% gross income tests, as described
below, but have, nevertheless, maintained our qualification as a REIT,
we will be subject to a tax equal to the gross income attributable to
the greater of either (a) the amount by which 75% of our gross income
exceeds the amount qualifying under the 75% test for the taxable year
or (b) the amount by which 90% of our gross income exceeds the amount
of our income qualifying under the 95% test for the taxable year
multiplied in either case by a fraction intended to reflect our
profitability.
o We will be required to pay a 4% excise tax on the amount by which our
annual distributions to our stockholders is less than the sum of (a)
85% of our ordinary income for the year, (b) 95% of our REIT capital
gain net income for the year and (c) any undistributed taxable income
from prior periods.
o If we acquire an asset from a C corporation (i.e., generally a
corporation subject to full corporate level tax) in a transaction in
which the basis of the asset in our hands is determined by reference
to the basis of the asset in the hands of the C corporation, and we
subsequently sell or otherwise dispose of the asset within the
ten-year period beginning on the date on which we acquired the asset,
then we would be required to pay tax at the highest regular corporate
tax rate on this gain to the extent of the excess of (a) the fair
market value of the asset over (b) our adjusted tax basis in the
asset, in each case, determined as of the date on which we acquired
the asset. The results described in this paragraph assume that the C
corporation will not elect in lieu of this treatment to be subject to
an immediate tax when the asset is acquired.
o We will generally be subject to tax on the portion of any "excess
inclusion income" derived from an investment in residual interests in
real estate mortgage investment conduits (or REMICs) to the extent our
stock is held by specified tax exempt organizations not subject to tax
on unrelated business taxable income.
o We will be subject to a 100% tax on any "redetermined rents,"
"redetermined deductions" or "excess interest." In general,
redetermined rents are rents from real property that are overstated as
a result of services furnished by a "taxable REIT subsidiary" of our
company to any of our tenants. See "Taxable REIT Subsidiaries."
Redetermined deductions and excess interest represent amounts that are
deducted by a taxable REIT subsidiary of our Company for amounts paid
to us that are in excess of the amounts that would have been deducted
based on arm's length negotiations.
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Requirements for Qualification as a REIT
General. The Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) that issues transferable shares or transferable certificates to its
owners;
(3) that would be taxable as a regular corporation, but for its election
to be taxed as a REIT;
(4) that is not a financial institution or an insurance company under the
Code;
(5) that is owned by 100 or more persons;
(6) not more than 50% in value of the outstanding stock of which is owned,
actually or constructively, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of each
year (or the 5/50 Rule); and
(7) that meets other tests, described below, regarding the nature of its
income and assets, and the amount of its distributions.
The Code provides that conditions (1) through (4), inclusive, must be met
during the entire year and that condition (5) must be met during at least 335
days of a taxable year of twelve months or during a proportionate part of a
shorter taxable year. Conditions (5) and (6) do not apply to the first taxable
year for which an election is made to be taxed as a REIT.
Our amended and restated articles of incorporation provide for restrictions
regarding ownership and transfer of our stock. These restrictions are intended
to assist us in satisfying the share ownership requirements described in
conditions (5) and (6) above. These restrictions, however, may not ensure that
we will, in all cases, be able to satisfy the share ownership requirements
described in conditions (5) and (6) above. If we fail to satisfy these share
ownership requirements, our status as a REIT may terminate. If, however, we
complied with the rules contained in applicable regulations that require a REIT
to determine the actual ownership of its shares and we do not know, or would not
have known through the exercise of reasonable diligence, that we failed to meet
the requirement described in condition (6) above, we would not be disqualified
as a REIT.
In addition, a corporation may not qualify as a REIT unless its taxable
year is the calendar year. We have a calendar taxable year.
Ownership of a Partnership Interest. The Treasury regulations provide that
if we are a partner in a partnership, we will be deemed to own our proportionate
share of the assets of the partnership and to be entitled to our proportionate
share of the gross income of the partnership. The character of the assets and
gross income of the partnership generally retains the same character in our
hands for purposes of satisfying the gross income and asset tests described
below.
Qualified REIT Subsidiaries. A "qualified REIT subsidiary" is a
corporation, all of the stock of which is owned by a REIT. Under the Code, a
qualified REIT subsidiary is not treated as a separate corporation from the
REIT. Rather, all of the assets, liabilities and items of income, deduction and
credit of the qualified REIT subsidiary are treated as the assets, liabilities
and items of income, deduction and credit of the REIT for purposes of the REIT
income and asset tests described below.
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Taxable REIT Subsidiaries. A "taxable REIT subsidiary" is a corporation
which, together with a REIT, owns an interest in such corporation, makes
an election to be treated as a taxable REIT subsidiary. A taxable REIT
subsidiary may earn income that would be nonqualifying income if earned directly
by a REIT and is generally subject to full corporate level tax. A REIT may own
up to 100% of the stock of a taxable REIT subsidiary.
Certain restrictions imposed on taxable REIT subsidiaries are intended to
ensure that such entities will be subject to appropriate levels of federal
income taxation. First, a taxable REIT subsidiary may not deduct interest
payments made in any year to an affiliated REIT to the extent that such payments
exceed, generally, 50% of the taxable REIT subsidiary's adjusted taxable income
for that year (although the taxable REIT subsidiary may carry forward to, and
deduct in, a succeeding year the disallowed interest amount if the 50% test is
satisfied in that year). In addition, if a taxable REIT subsidiary pays
interest, rent or another amount to a REIT that exceeds the amount that would be
paid to an unrelated party in an arm's length transaction, the REIT generally
will be subject to an excise tax equal to 100% of such excess. We had made a
taxable REIT subsidiary election with respect to our ownership interest in
Retirement Centers Corporation (or RCC), which election was effective, for
federal income tax purposes, as of March 30, 2002. During the time RCC was our
taxable REIT subsidiary, we and RCC engaged in certain transactions pursuant to
which RCC made interest and other payments to us. We believe that such
transactions were entered into at arm's length. However, no assurance can be
given that any such payments would not result in the limitation on interest
deductions or 100% excise tax provisions being applicable to us and RCC. We,
together with RCC, revoked RCC's election to be a taxable REIT subsidiary in
January 2003. As a result, effective January 2003, RCC became a qualified REIT
subsidiary.
Income Tests. We must meet two annual gross income requirements to qualify
as a REIT. First, each year we must derive at least 75% of our gross income,
excluding gross income from prohibited transactions, from investments relating
to real property or mortgages on real property, including "rents from real
property" and mortgage interest, or from specified temporary investments.
Second, each year we must derive at least 95% of our gross income, excluding
gross income from prohibited transactions, from investments meeting the 75% test
described above, or from dividends, interest and gain from the sale or
disposition of stock or securities. For these purposes, the term "interest"
generally does not include any interest of which the amount received depends on
the income or profits of any person. An amount will generally not be excluded
from the term "interest," however, if such amount is based on a fixed percentage
of gross receipts or sales.
Any amount includable in our gross income with respect to a regular or
residual interest in a REMIC is generally treated as interest on an obligation
secured by a mortgage on real property for purposes of the 75% gross income
test. If, however, less than 95% of the assets of a REMIC consist of real estate
assets, we will be treated as receiving directly our proportionate share of the
income of the REMIC, which would generally include non-qualifying income for
purposes of the 75% gross income test. In addition, if we receive interest
income with respect to a mortgage loan that is secured by both real property and
other property and the principal amount of the loan exceeds the fair market
value of the real property on the date the mortgage loan was made by us,
interest income on the loan will be apportioned between the real property and
the other property, which apportionment would cause us to recognize income that
is not qualifying income for purposes of the 75% gross income test.
To the extent interest on a loan is based on the cash proceeds from the
sale or value of property, such income would be treated as gain from the sale of
the secured property, which generally should qualify for purposes of the 75% and
95% gross income tests.
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We inevitably may have some gross income from various sources that fails to
constitute qualifying income for purposes of one or both of the gross income
tests, such as qualified hedging income which would constitute qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test.
However, we intend to maintain our REIT status by carefully monitoring any such
potential nonqualifying income.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any year, we may still qualify as a REIT if we are entitled to relief under the
Code. Generally, we may be entitled to relief if:
o the failure to meet the gross income tests was due to reasonable cause
and not due to willful neglect;
o a schedule of the sources of our income is attached to our federal
income tax return; and
o any incorrect information on the schedule was not due to fraud with
the intent to evade tax.
It is not possible to state whether in all circumstances we would be
entitled to rely on these relief provisions. If these relief provisions do not
apply to a particular set of circumstances, we would fail to qualify as a REIT.
As discussed above in "--Taxation of Our Company as a REIT--General," even if
these relief provisions apply and we retain our status as a REIT, a tax would be
imposed with respect to our income that does not meet the gross income tests. We
may not always be able to maintain compliance with the gross income tests for
REIT qualification despite periodically monitoring our income.
Asset Tests. At the close of each quarter of each calendar year, we also
must satisfy four tests relating to the nature and diversification of our
assets. First, at least 75% of the value of our total assets must be real estate
assets, cash, cash items and government securities. For purposes of this test,
real estate assets include real estate mortgages, real property, interests in
other REITs and stock or debt instruments held for one year or less that are
purchased with the proceeds of a stock offering or a long-term public debt
offering. Second, not more than 25% of our total assets may be represented by
securities, other than those securities includable in the 75% asset class.
Third, not more than 20% of the value of our total assets may be represented by
securities in one or more taxable REIT subsidiaries. Fourth, of the investments
included in the 25% asset class and except for investments in REITs, qualified
REIT subsidiaries and taxable REIT subsidiaries, the value of any one issuer's
securities that we hold may not exceed 5% of the value of our total assets, and
we may not own more than 10% of the total vote or value of the outstanding
securities of any one issuer (except in the case of the 10% value test, certain
"straight debt" securities). The 20% value test for securities in taxable REIT
subsidiaries and the value test for securities of any one issuer only apply for
taxable years beginning after December 31, 2000.
We currently own 100% of RCC. RCC elected to be taxed as a REIT for its
taxable year ended December 31, 2001 and jointly elected, together with us, to
be treated as a taxable REIT subsidiary effective as of March 30, 2002. In
January 2003, we, together with RCC, revoked RCC's election to be treated as a
taxable REIT subsidiary. As a result, effective January 2003, RCC became a
qualified REIT subsidiary. We believe that RCC met all of the requirements for
taxation as a REIT with respect to its taxable year ended December 31, 2001 and
as a taxable REIT subsidiary commencing as of March 30, 2002 through January
2003; however, the sections of the Code that relate to qualification as a REIT
are highly technical and complex and there are certain requirements that must be
met in order for RCC to have qualified as a taxable REIT subsidiary effective
March 30, 2002. Since RCC has been subject to taxation as a REIT or a taxable
REIT subsidiary, as the case may be, at the close of each quarter of our taxable
years beginning with our taxable year ended December 31, 2001, we believe that
our ownership interest in RCC has not caused us to fail to satisfy the 10% value
test. In addition, we believe that we have at all times prior to October 1, 2002
owned less than 10% of the voting securities of RCC. No
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assurance, however, can be given that RCC in fact qualified as a REIT for its
taxable year ended December 31, 2001 or as a taxable REIT subsidiary as of March
30, 2002, that the nonvoting preferred stock of RCC owned by us would not be
deemed to be "voting stock" for purposes of the asset tests or, as a result of
any of the foregoing, that we have qualified or will continue to qualify as a
REIT.
Any regular or residual interests we hold in a REMIC are generally treated
as a real estate asset for purposes of the asset tests described above. If,
however, less than 95% of the assets of a REMIC consist of real estate assets,
we will be treated as holding our proportionate share of the assets of the REMIC
which generally would include assets not qualifying as real estate assets.
After meeting the asset tests at the close of any quarter, we will not lose
our status as a REIT if we fail to satisfy the asset tests at the end of a later
quarter solely by reason of changes in asset values. In addition, if we fail to
satisfy the asset tests because we acquire assets during a quarter, we can cure
this failure by disposing of sufficient nonqualifying assets within 30 days
after the close of that quarter.
Although we plan to take steps to ensure that we satisfy the various asset
tests for any quarter for which testing is to occur, there can be no assurance
that such steps will always be successful. If we fail to timely cure any
noncompliance with these asset tests, we would fail to qualify as a REIT.
Foreclosure Property. REITs generally are subject to tax at the maximum
corporate rate on any income from foreclosure property (other than income that
would be qualifying income for purposes of the 75% gross income test), less
deductible expenses directly connected with the production of such income.
"Foreclosure property" is defined as any real property (including interests in
real property) and any personal property incident to such real property:
o that is acquired by a REIT as the result of such REIT having bid on
such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law,
after there was a default (or default was imminent) on a lease of such
property or on an indebtedness owed to the REIT that such property
secured;
o for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated; and
o for which the REIT makes a proper election to treat such property as
foreclosure property.
We intend to make elections when available to treat property as foreclosure
property to the extent necessary or advisable to maintain REIT qualification.
Property acquired by us will not be eligible for the election to be treated
as foreclosure property if the related loan was acquired by us at a time when
default was imminent or anticipated. In addition, income received with respect
to such ineligible property may not be qualifying income for purposes of the 75%
or 95% gross income tests.
Prohibited Transaction Income. Any gain realized by us on the sale of any
asset other than foreclosure property, held as inventory or otherwise held
primarily for sale to customers in the ordinary course of business will be
prohibited transaction income and subject to a 100% penalty tax. Prohibited
transaction income may also adversely affect our ability to satisfy the gross
income tests for qualification as a REIT. Whether an asset is held as inventory
or primarily for sale to customers in the ordinary course of a trade or business
depends on all the facts and circumstances surrounding the particular
transaction.
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While the regulations provide standards which, if met, would not cause a sale of
an asset to result in prohibited transaction income, we may not be able to meet
these standards in all circumstances.
Hedging Transactions. We may enter into hedging transactions with respect
to one or more of our assets or liabilities. Our hedging transactions could take
a variety of forms, including interest rate swaps or cap agreements, options,
futures contracts, forward rate agreements, or similar financial instruments. To
the extent that we enter into hedging transactions to reduce our interest rate
risk on indebtedness incurred to acquire or carry real estate assets, any income
or gain from the disposition of hedging transactions should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test.
Annual Distribution Requirements. To qualify as a REIT, we are required to
distribute dividends, other than capital gain dividends, to our stockholders in
an amount at least equal to the sum of (a) 90% of our "REIT taxable income" and
(b) 90% of our after-tax net income, if any, from foreclosure property, minus
(c) the excess of the sum of certain items of non-cash income over 5% of our
"REIT taxable income." In general, "REIT taxable income" means taxable ordinary
income without regard to the dividends paid deduction.
We are generally required to distribute income in the taxable year in
which it is earned, or in the following taxable year. If dividend distributions
are declared during the last three months of the taxable year, payable to
stockholders of record on a specified date during such period and paid during
January of the following year, such distributions are treated as paid by us and
received by our stockholders on December 31 of the year in which they are
declared. In addition, at our election, a distribution for a taxable year may be
declared before we timely file our tax return and paid on or before our first
regular dividend payment following such declaration, provided such payment is
made during the 12-month period following the close of such taxable year. Such
distributions are taxable to holders of capital stock in the year in which paid,
even though they related to our prior year for purposes of our 90% distribution
requirement. To the extent that we do not distribute all of our net capital gain
or distribute at least 90%, but less than 100% of our "REIT taxable income," we
will be subject to tax at regular corporate tax rates.
From time to time, we may not have sufficient cash or other liquid assets
to meet the above distribution requirement due to timing differences between the
actual receipt of cash and payment of expenses and the inclusion of income and
deduction of expenses in arriving at our taxable income. If these timing
differences occur, in order to meet the REIT distribution requirements, we may
need to arrange for short-term, or possibly long-term, borrowings, or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, we may be able to rectify a failure to meet a
distribution requirement for a year by paying "deficiency dividends" to our
stockholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being subject
to tax on amounts distributed as deficiency dividends. We will be required,
however, to pay interest based upon the amount of any deduction claimed for
deficiency dividends. In addition, we will be subject to a 4% excise tax on the
excess of the required distribution over the amounts actually distributed if we
should fail to distribute each year at least the sum of 85% of our ordinary
income for the year, 95% of our capital gain net income for the year and any
undistributed taxable income from prior periods.
Recordkeeping Requirements. We are required to maintain records and request
on an annual basis information from specified stockholders. These requirements
are designed to assist in determining the actual ownership of our outstanding
stock and maintaining our qualification as a REIT.
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Excess Inclusion Income. If we are deemed to have issued debt obligations
having two or more maturities, the payments on which correspond to payments
on mortgage loans owned by us, such arrangement will be treated as a "taxable
mortgage pool" for federal income tax purposes. If all or a portion of our
Company is considered a taxable mortgage pool, our status as a REIT generally
should not be impaired; however, a portion of our taxable income may be
characterized as "excess inclusion income" and allocated to our stockholders.
In addition, if we hold residual interests in real estate mortgage conduits, a
portion of our taxable income may be characterized as "excess inclusion income"
and allocated to our stockholders. Any excess inclusion income:
o could not be offset by unrelated net operating losses of a
stockholder;
o would be subject to tax as "unrelated business taxable income" to a
tax-exempt stockholder;
o would be subject to the application of federal income tax withholding
(without reduction pursuant to any otherwise applicable income tax
treaty) with respect to amounts allocable to Non-U.S. stockholders;
and
o would be taxable (at the highest corporate tax rate) to us, rather
than our stockholders, to the extent allocable to our stock held by
disqualified organizations (generally, tax-exempt entities not subject
to unrelated business income tax, including governmental
organizations).
Failure to Qualify. If we fail to qualify for taxation as a REIT in any
taxable year and the relief provisions of the Code described above do not apply,
we will be subject to tax, including any applicable alternative minimum tax, and
possibly increased state and local taxes, on our taxable income at regular
corporate rates. Such taxation would reduce the cash available for distribution
by us to our stockholders. Distributions to our stockholders in any year in
which we fail to qualify as a REIT will not be deductible by us and we will not
be required to distribute any amounts to our stockholders. Additionally, if we
fail to qualify as a REIT, distributions to our stockholders will be subject to
tax to the extent of our current and accumulated earnings and profits and, in
the case of stockholders who are individual U.S. stockholders, at preferential
rates pursuant to the 2003 Act and, subject to certain limitations of the Code,
corporate stockholders may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, we would also be
disqualified from taxation as a REIT for the four taxable years following the
year during which we lost our qualification. It is not possible to state whether
in all circumstances we would be entitled to statutory relief.
Taxation of Taxable U.S. Stockholders
When using the term "U.S. stockholders," we mean a beneficial owner of
shares of our common stock who is, for U.S. federal income tax purposes:
o a citizen or resident of the United States;
o a corporation or other entity treated as a corporation for U.S.
federal income tax purposes created or organized in or under the laws
of the United States or of any state thereof or in the District of
Columbia, unless regulations provide otherwise;
o an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
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o a trust whose administration is subject to the primary supervision of
a U.S. court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.
If a partnership holds shares of our capital stock, the tax treatment of a
partner in the partnership will generally depend upon the status of the partner
and the activities of the partnership. If you are a partner of a partnership
holding shares of our capital stock, you should consult with your own tax
advisor regarding the consequences of the ownership and disposition of shares of
our capital stock.
Distributions. Distributions out of our current or accumulated earnings and
profits, other than capital gain dividends, will be taxable to U.S. stockholders
as ordinary income. For this purpose, our earnings and profits will be allocated
first to our outstanding preferred stock and then to our outstanding common
stock. Provided we qualify as a REIT, dividends paid by us will not be eligible
for the dividends received deduction generally available to U.S. stockholders
that are corporations. Dividends received from REITs are generally not eligible
to be taxed at the preferential qualified dividend income rates applicable to
individual U.S. stockholders who receive dividends from taxable C corporations
pursuant to the 2003 Act. An exception applies, however, and individual U.S.
stockholders are taxed at such rates on dividends designated by and received
from REITs, to the extent that the dividends are attributable to (i) "REIT
taxable income" that the REIT previously retained in the prior year, and on
which it was subject to corporate level tax, (ii) dividends received by the REIT
from taxable domestic C corporations, and certain foreign corporations or (iii)
income from sales of appreciated property acquired from C corporations in
carryover basis transactions that has been subject to tax.
To the extent that we make distributions in excess of our current and
accumulated earnings and profits, these distributions will be treated as a
tax-free return of capital to each U.S. stockholder, and will reduce the
adjusted tax basis which each U.S. stockholder has in its shares of our capital
stock by the amount of the distribution, but not below zero. Return of capital
distributions in excess of a U.S. stockholder's adjusted tax basis in our
capital stock will be taxable as capital gain, provided that the shares have
been held as capital assets, and will be taxable as long-term capital gain if
the shares have been held for more than one year. Dividends declared in October,
November or December of any year and paid to a stockholder of record on a
specified date in any of those months will be treated as both paid by us and
received by the stockholder on December 31 of that year, provided that the
dividend is actually paid in January of the following year. Stockholders may not
include on their own income tax returns any of our net operating losses or
capital losses.
Distributions designated as net capital gain dividends will be taxable to
U.S. stockholders as long-term capital gains to the extent they do not exceed
our actual net capital gains for the taxable year, without regard to the period
for which the U.S. stockholder has held its stock. Long-term capital gains are
generally taxable at maximum federal tax rates of 15% (through 2008) in the case
of U.S. stockholders who are individuals and 35% for corporations. Capital gains
attributable to the sale of depreciable real property held for more than 12
months are subject to a 25% maximum federal income tax rate for individual U.S.
stockholders who are individuals, to the extent of previously claimed
depreciation deductions. U.S. stockholders that are corporations may be required
to treat up to 20% of certain capital gain dividends as ordinary income.
We may elect to retain, rather than distribute as a capital gain dividend,
all or a portion of our net capital gains. If this election is made, we would
pay tax on such retained capital gains. In such a case, U.S. stockholders would
generally:
o include their proportionate share of the undistributed net capital
gains in their taxable income;
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o receive a credit for their proportionate share of the tax paid by us
with respect to such retained capital gains; and
o increase the adjusted basis of their stock by the difference between
the amount of their capital gain and their share of the tax paid by
us.
Passive Activity Losses and Investment Interest Limitations. Distributions
made by us and gain arising from the sale or exchange by a U.S. stockholder of
common stock will not be treated as passive activity income. As a result, U.S.
stockholders will not be able to apply any "passive losses" against income or
gain relating to our capital stock. Distributions made by us, to the extent they
do not constitute a return of capital, generally will be treated as investment
income for purposes of computing the investment interest limitation.
Dispositions of Stock. If you are a U.S. stockholder and you sell or
dispose of your shares of our capital stock, you will recognize gain or loss for
federal income tax purposes in an amount equal to the difference between the
amount of cash and the fair market value of any property you receive on the sale
or other disposition and your adjusted tax basis in the shares of our capital
stock. In general, capital gains recognized by individuals and other
non-corporate U.S. stockholders upon the sale or disposition of shares of our
common stock will, pursuant to the 2003 Act, be subject to a maximum federal
income tax rate of 15% for taxable years through 2008, if the shares are held
for more than 12 months, and will be taxed at ordinary income rates (of up to
35% through 2010) if the shares are held for 12 months or less. Gains recognized
by U.S. stockholders that are corporations are subject to federal income tax at
a maximum rate of 35%, whether or not classified as long-term capital gains.
Capital losses recognized by a U.S. stockholder upon the disposition of our
common stock if held for more than one year at the time of disposition will be
considered long-term capital losses, and are generally available only to offset
capital gain income of the U.S. stockholder but not ordinary income (except in
the case of individuals, who may offset up to $3,000 of ordinary income each
year). In addition, any loss upon a sale or exchange of shares of our common
stock by a U.S. stockholder who has held the shares for six months or less,
after applying holding period rules, will be treated as a long-term capital loss
to the extent of distributions received from us that are required to be treated
by the U.S. stockholder as long-term capital gain.
If a U.S. stockholder recognizes a loss upon a subsequent disposition of
shares of our common stock in an amount that exceeds a prescribed threshold, it
is possible that the provisions of recently adopted Treasury regulations
involving "reportable transactions" could apply, with a resulting requirement to
separately disclose the loss generating transaction to the IRS. While these
regulations are directed towards "tax shelters," they are written quite broadly,
and apply to transactions that would not typically be considered tax shelters.
In addition, legislative proposals have been introduced in Congress, that, if
enacted, would impose significant penalties for failure to comply with these
requirements. You should consult your tax advisors concerning any possible
disclosure obligation with respect to the receipt or disposition of shares of
our common stock, or transactions that might be undertaken directly or
indirectly by us. Moreover, you should be aware that we and other participants
in transactions involving us (including their advisors) might be subject to
disclosure or other requirements pursuant to these regulations.
Backup Withholding. We will report to our U.S. stockholders and the IRS the
amount of dividends paid during each calendar year and the amount of any tax
withheld. Under the backup withholding rules, a U.S. stockholder may be subject
to backup withholding with respect to dividends paid unless the holder is a
corporation or comes within other exempt categories and, when required,
demonstrates this fact, or provides a taxpayer identification number or social
security number, certifies as to no loss of exemption from backup withholding,
and otherwise complies with applicable requirements of the backup withholding
rules. A U.S. stockholder that does not provide his or her correct taxpayer
27
identification number or social security number may also be subject to penalties
imposed by the IRS. Backup withholding is not an additional tax. Any amount paid
as backup withholding will be creditable against the U.S. stockholder's income
tax liability. In addition, we may be required to withhold a portion of capital
gain distributions to any U.S. stockholders who fail to certify their
non-foreign status.
Taxation of Tax-Exempt Stockholders
The IRS has ruled that amounts distributed as dividends by a REIT do not
constitute unrelated business taxable income when received by a tax-exempt
entity. Based on that ruling, provided that a tax-exempt U.S. stockholder has
not held its shares of capital stock as "debt financed property" within the
meaning of the Code, the shares are not otherwise used in an unrelated trade or
business and the REIT has not incurred any "excess inclusion income," as
described above, dividend income on such shares and income from the sale of such
shares should not be unrelated business taxable income to a tax-exempt U.S.
stockholder. Generally, debt financed property is property the acquisition or
holding of which was financed through a borrowing by the tax-exempt U.S.
stockholder.
For tax-exempt U.S. stockholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an
investment in our shares will constitute unrelated business taxable income
unless the organization is able to claim properly a deduction for amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in our shares. These prospective investors should
consult their tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension-held REIT" may be treated as unrelated business taxable income as to
any pension trust which:
o is described in Section 401(a) of the Code;
o is tax-exempt under Section 501(a) of the Code; and
o holds more than 10%, by value, of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
A REIT is a "pension-held REIT" if:
o it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Code provides that stock owned by a qualified trust
is treated, for purposes of the 5/50 Rule, as owned by the
beneficiaries of the trust, rather than by the trust itself; and
o either at least one qualified trust holds more than 25%, by value, of
the interests in the REIT, or one or more qualified trusts, each of
which owns more than 10%, by value, of the interests in the REIT,
holds in the aggregate more than 50%, by value, of the interests in
the REIT.
The percentage of any REIT dividend treated as unrelated business taxable
income is equal to the ratio of:
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o the unrelated business taxable income earned by the REIT, treating the
REIT as if it were a qualified trust and therefore subject to tax on
unrelated business taxable income, to
o the total gross income (less direct expenses related thereto) of the
REIT.
If, for any year, this percentage is less than 5%, no portion of REIT
dividends will be subject to tax as unrelated business income as a result of the
REIT being classified as a "pension-held REIT." As a result of the limitations
on the transfer and ownership of stock contained in our articles of
incorporation, we do not expect to be classified as a "pension-held REIT."
Taxation of Non-U.S. Stockholders
The rules governing federal income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (or Non-U.S. stockholders) are complex and no attempt will be made
herein to provide more than a summary of such rules.
Prospective Non-U.S. stockholders should consult their tax advisors to
determine the impact of foreign, federal, state and local income tax laws with
regard to the acquisition and holding of shares of our capital stock and of our
electing to be taxed as a REIT, including any reporting requirements.
Distributions to Non-U.S. stockholders that are not attributable to gain
from sales or exchanges by us of U.S. real property interests and are not
designated as capital gain dividends or retained capital gains will be treated
as dividends of ordinary income to the extent that they are made out of our
current or accumulated earnings and profits. Such distributions will generally
be subject to a withholding tax equal to 30% of the distribution unless an
applicable tax treaty reduces or eliminates that tax. However, if income from an
investment in our capital stock is treated as effectively connected with the
Non-U.S. stockholder's conduct of a U.S. trade or business, the Non-U.S.
stockholder generally will be subject to federal income tax at graduated rates,
in the same manner as U.S. stockholders are taxed with respect to such
distributions (and also may be subject to the 30% branch profits tax in the case
of a Non-U.S. stockholder that is a corporation). We expect to withhold U.S.
income tax at the rate of 30% on the gross amount of any distributions made to a
Non-U.S. stockholder unless (a) a lower treaty rate applies and any required
form, such as IRS Form W-8BEN, evidencing eligibility for that reduced rate is
filed by the Non-U.S. stockholder with us or (b) the Non-U.S. stockholder files
an IRS Form W-8ECI with us claiming that the distribution is effectively
connected income.
Any portion of the dividends paid to Non-U.S. stockholders that is
treated as excess inclusion income from a REMIC will not be eligible for
exemption from the 30% withholding tax or a reduced treaty rate. In addition, if
Treasury regulations are issued allocating our excess inclusion income from
taxable mortgage pools among our stockholders, some percentage of our dividends
would not be eligible for exemption from the 30% withholding tax or a reduced
treaty withholding tax rate in the hands of Non-U.S. stockholders.
Distributions by us in excess of our current and accumulated earnings and
profits will not be taxable to a Non-U.S. stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's common
stock, but rather will reduce the adjusted basis of such stock. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. stockholder's common stock, such
distributions will give rise to tax liability if the Non-U.S. stockholder would
otherwise be subject to tax on any gain from the sale or disposition of its
stock, as described below. Because it generally cannot be determined at the time
a distribution is made whether or not such distribution will be in excess of our
current and accumulated earnings and profits, the entire
29
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, amounts so withheld are refundable to the extent it
is subsequently determined that such distribution was, in fact, in excess of our
current and accumulated earnings and profits. We also may be required to
withhold 10% of any distribution in excess of our current and accumulated
earnings and profits. Consequently, although we intend to withhold at a rate of
30% on the entire amount of any distribution, to the extent that we do not do
so, any portion of a distribution not subject to withholding at a rate of 30%
may be subject to withholding at a rate of 10%.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges of a U.S. real property interest,
which includes certain interests in real property, but generally does not
include mortgage loans, will be taxed to a Non-U.S. stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980 (or
FIRPTA). We hold both assets that constitute U.S. real property interests and
assets that do not. To the extent our assets do not constitute U.S. real
property interests, distributions by us from the sales of such assets should not
be subject to tax under the FIRPTA rules. Under FIRPTA, distributions
attributable to gain from sales of U.S. real property interests are taxed to a
Non-U.S. stockholder as if such gain were effectively connected with a U.S.
trade or business of such stockholder. Non-U.S. stockholders thus would be taxed
at the normal capital gain rates applicable to U.S. stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA also may
be subject to the 30% branch profits tax in the hands of a Non-U.S. stockholder
that is a corporation. We are required to withhold 35% of any distribution that
could be designated by us as a capital gains dividend, even if such
distributions are not from the sale by us of U.S. real property interests, and,
therefore, not subject to tax under FIRPTA. The amount withheld is creditable
against the Non-U.S. stockholder's FIRPTA tax liability and, to the extent it
exceeds such Non-U.S. stockholder's tax liability, will be refundable.
Gain recognized by a Non-U.S. stockholder upon a sale of capital stock
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT," which is a REIT in which at all times during a specified testing period
less than 50% in value of the stock was held directly or indirectly by non-U.S.
persons. Although we currently believe that we are a "domestically controlled
REIT," because our capital stock is publicly traded, no assurance can be given
that we will remain a "domestically controlled REIT." Even if we do not qualify
as a "domestically controlled REIT," an alternative exemption to tax under
FIRPTA might be available if either (a) we are not (and have not been for the
five year period prior to the sale) a U.S. real property holding corporation (as
defined in the Code and applicable Treasury Regulations to generally include a
corporation, 50% or more of the assets of which consist of U.S. real property
interests) or (b) the selling Non-U.S. stockholder owns, actually or
constructively, 5% or less of our stock throughout a specified testing period
and our shares are regularly traded (as defined in applicable Treasury
Regulations) on an established securities market.
Gain not subject to FIRPTA will be taxable to a Non-U.S. stockholder if (a)
the Non-U.S. stockholder's investment in the stock is effectively connected with
a U.S. trade or business, in which case the Non-U.S. stockholder will be subject
to the same treatment as U.S. stockholders with respect to such gain or (b) the
Non-U.S. stockholder is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and other conditions are met,
in which case the nonresident alien individual will be subject to a 30% tax on
the individual's capital gains. If the gain on the sale of the common stock were
to be subject to taxation under FIRPTA, the Non-U.S. stockholder would be
subject to the same treatment as U.S. stockholders with respect to such gain
(subject to applicable alternative minimum tax, a special alternative minimum
tax in the case of nonresident alien individuals and the possible application of
the 30% branch profits tax in the case of non-U.S. corporations).
30
State, Local and Foreign Taxation
We may be required to pay state, local and foreign taxes in various state,
local and foreign jurisdictions, including those in which we transact business
or make investments, and our stockholders may be required to pay state, local
and foreign taxes in various state, local and foreign jurisdictions, including
those in which they reside. Our state, local and foreign tax treatment may not
conform to the federal income tax consequences summarized above. In addition,
your state, local and foreign tax treatment may not conform to the federal
income tax consequences summarized above. Consequently, you should consult your
tax advisor regarding the effect of state, local and foreign tax laws on the
holding of our capital stock.
Possible Legislative or Other Actions Affecting REITs
The rules dealing with federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the tax law, which may have retroactive
application, could adversely affect us and our stockholders. It cannot be
predicted whether, when, in what forms or with what effective dates, the tax law
applicable to us or our stockholders will be changed.
PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and any
accompanying prospectus supplements to or through one or more underwriters or
dealers or we may sell these securities to investors directly or through agents.
Each prospectus supplement, to the extent applicable, will describe the number
and terms of the securities to which such prospectus supplement relates, the
name or names of any underwriters or agents with whom we have entered into
arrangements with respect to the sale of such securities, the public offering or
purchase price of such securities and the net proceeds we will receive from such
sale. Any underwriter or agent involved in the offer and sale of our securities
will be named in the applicable prospectus supplement. Underwriters and agents
in any distribution contemplated hereby, including but not limited to "at the
market" equity offerings, may from time to time include Cantor Fitzgerald & Co.
and/or UBS Securities LLC. We may sell securities directly to investors on our
own behalf in those jurisdictions where we are authorized to do so.
Underwriters may offer and sell the securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or at negotiated prices. We also may,
from time to time, authorize dealers or agents to offer and sell any of these
securities on the terms and conditions described in the applicable prospectus
supplement. In connection with the sale of any of these securities, underwriters
may receive compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from purchasers of the securities
for whom they may act as agent. Underwriters may sell these securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents.
Securities may also be sold in one or more of the following transactions:
(a) block transactions (which may involve crosses) in which a broker-dealer may
sell all or a portion of the securities as agent but may position and resell all
or a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker-dealer as principal and resale by the broker-dealer for
its own account pursuant to a prospectus supplement; (c) a special offering, an
exchange distribution or a secondary distribution in accordance with applicable
NYSE or other stock exchange rules; (d) ordinary brokerage transactions and
transactions in which a broker-dealer solicits purchasers; (e) sales "at the
market" to or through a market maker or into an existing trading market, on an
exchange or otherwise, for shares; and (f) sales in other ways not involving
market makers or established trading markets, including direct sales to
purchasers. Broker-dealers may also receive compensation from purchasers of
these securities which is not expected to exceed that customary in the types of
transactions involved.
31
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts or
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Dealers and agents
participating in the distribution of these securities may be deemed to be
underwriters and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with us, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Unless otherwise
set forth in the accompanying prospectus supplement, the obligations of any
underwriters to purchase any of these securities will be subject to certain
conditions precedent.
In connection with the offering of the securities described in this
prospectus and any applicable prospectus supplement, certain underwriters, and
selling group members and their respective affiliates, may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the securities being offered. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the SEC pursuant to which these persons may bid for or purchase securities for
the purpose of stabilizing their market price.
The underwriters in an offering of these securities may also create a
"short position" for their account by selling more securities in connection with
the offering than they are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position by either
purchasing the securities in the open market following completion of the
offering or by exercising any over-allotment option granted to them by us. In
addition, the managing underwriter may impose "penalty bids" under contractual
arrangements with other underwriters, which means that they can reclaim from an
underwriter (or any selling group member participating in the offering) for the
account of the other underwriters, the selling concession for the securities
that is distributed in the offering but subsequently purchased for the account
of the underwriters in the open market. Any of the transactions described in
this paragraph or comparable transactions that are described in any applicable
prospectus supplement may result in the maintenance of the price of our
securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph or in any
applicable prospectus supplement are required to be taken by any underwriters
and, if they are undertaken, may be discontinued at any time.
Our common stock and 8.50% Series A Cumulative Redeemable preferred stock
are listed on the NYSE under the symbols "MFA" and "MFA PrA", respectively. Any
underwriters or agents to or through which our securities are sold by us may
make a market in our common stock or preferred stock, but these underwriters or
agents will not be obligated to do so and any of them may discontinue any market
making at any time without notice. No assurance can be given as to the liquidity
of or trading market for any of our securities, including our common stock.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our affiliates in the ordinary course of business.
Underwriters have from time to time in the past provided, and may from time to
time in the future provide, investment banking services to us for which they
have in the past received, and may in the future receive, customary fees.
32
EXPERTS
Our consolidated financial statements appearing in our annual report on
Form 10-K for the year ended December 31, 2003 have been audited by Ernst
& Young LLP, independent registered public accounting firm, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
Our consolidated financial statements as of December 31, 2002 and for the
years ended December 31, 2002 and 2001 incorporated in this prospectus by
reference to our annual report on Form 10-K for the year ended December 31, 2003
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the securities offered by this prospectus is being passed
upon for us by Clifford Chance US LLP, New York, New York. The opinion of
counsel as described under "Federal Income Tax Considerations" is being rendered
by Clifford Chance US LLP, which opinion is subject to various assumptions and
is based on current tax law. Alan L. Gosule, a partner at Clifford Chance US
LLP, is a member of our board of directors and owns 2,586 shares of our common
stock.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the materials we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the Public Reference Room. Our SEC filings are also available to the public
on the internet from the SEC's website at www.sec.gov. This site contains
reports, proxy statements and other information regarding issuers that file
documents electronically with the SEC. Our common stock is listed on the NYSE
under the symbol "MFA" and all reports, proxy statements and other information
filed by us with the NYSE may be inspected at the NYSE's offices at 20 Broad
Street, New York, New York 10005.
We have filed a registration statement, of which this prospectus is a
part, covering the securities offered hereby. As allowed by SEC rules, this
prospectus does not include all of the information contained in the registration
statement and the exhibits, financial statements and schedules thereto. We refer
you to the registration statement, and the exhibits, financial statements and
schedules thereto, for further information. This prospectus is qualified in its
entirety by such other information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
o incorporated documents are considered part of this prospectus;
o we can disclose important information to you by referring you to
those documents; and
o information that we file with the SEC will automatically update and
supersede the information in this prospectus and any information
that was previously incorporated in this prospectus.
We filed the following documents with the SEC (File No. 1-13991) under the
Exchange Act and incorporate them by reference into this prospectus:
o Our annual report on Form 10-K for the fiscal year ended December
31, 2003;
33
o Our quarterly report on Form 10-Q for the fiscal quarter ended March
31, 2004;
o Our current reports on Form 8-K filed with the SEC on February 12,
2004 and April 23, 2004;
o Our definitive Proxy Statement filed with the SEC on April 21, 2004;
o The description of our common stock contained in our registration
statement on Form 8-A filed with the SEC on March 26, 1998,
including all amendments and reports filed for the purpose of
updating such description; and
o The description of our 8.50% Series A Cumulative Redeemable
preferred stock contained in our registration statement on Form 8-A
filed with the SEC on April 23, 2004.
Any documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the termination
of the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference into this prospectus and
to be part hereof from the date of filing those documents. Any documents we file
pursuant to these sections of the Exchange Act after the date of the initial
registration statement that contains this prospectus and prior to the
effectiveness of the registration statement will automatically be deemed to be
incorporated by reference into this prospectus and to be part hereof from the
date of filing those documents.
Any statement contained in this prospectus or in any document
incorporated, or deemed to be incorporated, by reference into this prospectus
shall be deemed to be modified or superseded for purposes of this prospectus to
the extent that a statement contained in this prospectus or in any subsequently
filed document that also is or is deemed to be incorporated by reference into
this prospectus modifies or supersedes such statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus and the related registration statement.
Nothing in this prospectus shall be deemed to incorporate information furnished
by us but not filed with the SEC pursuant to Items 9 or 12 of Form 8-K or Items
2.02 or 7.01 of the revised Form 8-K.
You can obtain any of our filings incorporate by reference into this
prospectus from us or from the SEC on the SEC's website at the address listed
above. We will provide without charge to each person to whom this prospectus is
delivered, upon written or oral request, a copy of these filings or portions of
these filings by writing or telephoning:
Mr. Timothy W. Korth
General Counsel, Senior Vice President - Business Development
and Secretary
MFA Mortgage Investments, Inc.
350 Park Avenue, 21st Floor
New York, New York 10022
(212) 207-6400
34
PART II
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be borne by the registrant
in connection with the offerings described in this registration statement. All
such expenses other than the SEC registration fee are estimates.
SEC registration fee......................... $ 40,450
Legal fees and expenses(1)................... 50,000
Accounting fees and expenses(1).............. 15,000
Printing(1).................................. 10,000
Miscellaneous(1)............................. 5,000
---------
Total ...................................... $ 120,450
----------
(1) Estimated
Item 15. Indemnification of Officers and Directors.
As permitted by MGCL, Article Eighth, Paragraph (a)(5) of our Amended and
Restated Articles of Incorporation provides for indemnification of our directors
and officers, as follows:
We may provide any indemnification permitted by the general laws of
Maryland and shall indemnify current and former directors, officers,
agents and employees as follows: (A) the Corporation shall indemnify its
directors and officers, whether serving the Corporation, or at its
request, any other entity, to the full extent required or permitted by the
general laws of the State of Maryland now or hereafter in force, including
the advance of expenses under the procedures and to the full extent
permitted by law and (B) the Corporation shall indemnify other employees
and agents, whether serving the Corporation or at its request any other
entity, to such extent as shall be authorized by the board of directors or
the Corporation's Bylaws and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The board of directors may take
such action as is necessary to carry out these indemnification provisions
and is expressly empowered to adopt, approve and amend from time to time
such Bylaws, resolutions or contracts implementing such provisions or such
further indemnification arrangements as may be permitted by law. No
amendment of the Charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such
amendment or repeal or shall limit or eliminate the rights granted under
indemnification agreements entered into by the Corporation and its
directors, officers, agents and employees.
Our Bylaws contain indemnification procedures that implement those of our
Articles of Incorporation. The MGCL permits a corporation to indemnify its
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to such
proceeding and was (i) committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services, or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the action or omission was unlawful.
II-1
As permitted by the MGCL, Article Eighth, Paragraph (a)(6) of our Articles
of Incorporation provides for limitation of liability of our directors and
officers as follows:
To the fullest extent permitted by Maryland statutory or decisional law,
as amended or interpreted, no current and former director or officer of
the Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate
the benefits provided to directors and officers under this provision with
respect to any act or omission which occurred prior to such amendment or
repeal.
The MGCL 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) the person actually received an improper benefit or profit in money,
property or services or (ii) a judgment or other final adjudication is entered
in a proceeding based on a finding that the person's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the proceeding.
As permitted under Section 2-418(k) of the MGCL, we have purchased and
maintain insurance on behalf of our directors and officers against any liability
asserted against such directors and officers in their capacities as such.
Item 16. Exhibits.
Exhibit Description
3.1 Amended and Restated Articles of Incorporation of the registrant
(incorporated herein by reference to Form 8-K, dated April 10, 1998,
filed by the registrant pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
3.2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the registrant, dated August 6, 2002 (incorporated
herein by reference to Form 8-K, dated August 13, 2002, filed by the
registrant pursuant to the Securities Exchange Act of 1934 (Commission
File No. 1-13991)).
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the registrant, dated August 16, 2002 (incorporated
herein by reference to Exhibit 3.3 of the Form 10-Q, dated September
30, 2002, filed by the registrant pursuant to the Securities Exchange
Act of 1934 (Commission File No. 1-13991)).
3.4 Articles Supplementary of the registrant, dated April 22, 2004,
designating the registrant's 8.50% Series A Cumulative Redeemable
Preferred Stock (incorporated herein by reference to Exhibit 3.4 of
the Form 8-A, dated April 23, 2004, filed by the registrant pursuant
to the Securities Act of 1934 (Commission File No. 1-13991)).
3.5 Amended and Restated Bylaws of the registrant (incorporated herein by
reference to the Form 8-K, dated August 13, 2002, filed by the
registrant pursuant to the Securities Exchange Act of 1934 (Commission
File No. 1-13991)).
4.1 Specimen of Common Stock Certificate of the registrant (incorporated
herein by reference to Exhibit 4.1 of the Registration Statement on
Form S-4, dated February 12, 1998, filed by the registrant pursuant to
the Securities Act of 1933 (Commission File No. 333-46179)).
4.2 Specimen of Stock Certificate representing the 8.50% Series A
Cumulative Redeemable Preferred Stock of the registrant
(incorporated herein by reference to Exhibit 4 of the Form 8-A,
dated April 23, 2004, filed by the registrant pursuant to the
Securities Act of 1934 (Commission File No. 1-13991)).
5.1 Opinion of Clifford Chance US LLP.*
8.1 Opinion of Clifford Chance US LLP as to tax matters.*
10.1 MFA Mortgage Investments, Inc. 2004 Equity Compensation Plan.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Clifford Chance US LLP (included in Exhibits 5.1 and 8.1).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.*
---------------
*Previously filed
II-2
Item 17. 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;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this 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 this 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 SEC pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
provided, however that paragraphs (a)(1)(i) and (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the registrant pursuant
to Section 13 or 15(d) of the Exchange Act that are incorporated by reference in
this registration statement.
(2) That, for the purposes of determining any liability under the
Securities Act, 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 offered 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, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this 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) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
II-3
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 the controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this
post-effective amendment to the 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 July 21, 2004.
MFA MORTGAGE INVESTMENTS, INC.
By: /s/ Stewart Zimmerman
-------------------------------------
Name: Stewart Zimmerman
Title: Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/Stewart Zimmerman
-----------------------------
Stewart Zimmerman Chairman of the Board, Chief July 21, 2004
Executive Officer and President
*
-----------------------------
William S. Gorin Chief Financial Officer July 21, 2004
*
-----------------------------
Stephen Blank Director July 21, 2004
*
-----------------------------
Michael L. Dahir Director July 21, 2004
*
-----------------------------
Alan Gosule Director July 21, 2004
*
-----------------------------
George H. Krauss Director July 21, 2004
*By /s/ Stewart Zimmerman Attorney-In-Fact July 21, 2004
--------------------------
Stewart Zimmerman
II-5
EXHIBIT INDEX
Exhibit
Number Exhibit Description
------ -------------------
3.1 Amended and Restated Articles of Incorporation of the registrant
(incorporated herein by reference to Form 8-K, dated April 10, 1998,
filed by the registrant pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
3.2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the registrant, dated August 6, 2002 (incorporated
herein by reference to Form 8-K, dated August 13, 2002, filed by the
registrant pursuant to the Securities Exchange Act of 1934
(Commission File No. 1-13991)).
3.3 Articles of Amendment to the Amended and Restated Articles of 3.3
Incorporation of the registrant, dated August 16, 2002 (incorporated
herein by reference to Exhibit 3.3 of the Form 10-Q, dated September
30, 2002, filed by the registrant pursuant to the Securities
Exchange Act of 1934 (Commission File No. 1-13991)).
3.4 Articles Supplementary of the registrant, dated April 22, 2004,
designating the registrant's 8.50% Series A Cunulative Redeemable
Preferred Stock (incorporated herein by reference to Exhibit 3.4 of
the Form 8-A, dated April 23, 2004, filed by the registrant to the
Securities Act of 1934 (Commission File No. 1-13991)).
3.5 Amended and Restated Bylaws of the registrant (incorporated herein
by reference to the Form 8-K, dated August 13, 2002, filed by the
registrant pursuant to the Securities Exchange Act of 1934
(Commission File No. 1-13991)).
4.1 Specimen of Common Stock Certificate of the registrant (incorporated
herein by reference to Exhibit 4.1 of the Registration Statement on
Form S-4, dated February 12, 1998, filed by the registrant pursuant
to the Securities Act of 1933 (Commission File No. 333-46179)).
4.2 Specimen of Stock Certificate representing the 8.50% Series A
Cumulative Redeemable Preferred Stock of the registrant
(incorporated herein by reference to Exhibit 4 of the Form 8-A,
dated April 23, 2004, filed by the registrant pursuant to the
Securities Act of 1934 (Commission File No. 1-13991)).
5.1 Opinion of Clifford Chance US LLP.*
8.1 Opinion of Clifford Chance US LLP as to tax matters.*
10.1 MFA Mortgage Investments, Inc. 2004 Equity Compensation Plan.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Clifford Chance US LLP (included in Exhibits 5.1 and
8.1).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.*
--------------------
*Previously filed
II-6