-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pn/xa1ylRQ+WW44V2gR+con7YVMPxmE2cwRdUb2mmT4IDmUmaATvHA+Qj3MqGU3q sXEKagmAqabcQgYbSIK/YQ== 0000929624-97-001435.txt : 19971124 0000929624-97-001435.hdr.sgml : 19971124 ACCESSION NUMBER: 0000929624-97-001435 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19971121 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APEX MORTGAGE CAPITAL INC CENTRAL INDEX KEY: 0001045956 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 954650863 FILING VALUES: FORM TYPE: S-11/A SEC ACT: SEC FILE NUMBER: 333-36069 FILM NUMBER: 97726634 BUSINESS ADDRESS: STREET 1: 865 FIGUEROA STREET CITY: LOS ANGELES STATE: CA ZIP: 90017 BUSINESS PHONE: 2132440461 MAIL ADDRESS: STREET 1: 275 BATTERY STREET SUITE 2600 STREET 2: 275 BATTERY STREET SUITE 2600 CITY: 275 BATTSAN FRANCISC STATE: CA ZIP: 94111 S-11/A 1 AMENDMENT #3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997 REGISTRATION NO. 333-36069 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 3 TO FORM S-11/A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- APEX MORTGAGE CAPITAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS) --------------- 865 SOUTH FIGUEROA STREET, SUITE 1800, LOS ANGELES, CALIFORNIA 90017; (213) 244-0440 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- PHILIP A. BARACH CHIEF EXECUTIVE OFFICER APEX MORTGAGE CAPITAL, INC. 865 SOUTH FIGUEROA STREET, SUITE 1800 LOS ANGELES, CALIFORNIA 90017 (213) 244-0000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: PETER T. HEALY, ESQ. KENNETH T. COTE, ESQ. O'MELVENY & MYERS LLP JONATHAN B. MILLER, ESQ. EMBARCADERO CENTER WEST BROWN & WOOD LLP 275 BATTERY STREET, SUITE 2600 ONE WORLD TRADE CENTER SAN FRANCISCO, CALIFORNIA 94111 NEW YORK, NEW YORK 10048 TELEPHONE: (415) 984-8833 TELEPHONE: (212) 839-5300 FACSIMILE: (415) 984-8701 FACSIMILE: (212) 839-5599 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE The Registration Statement contains two forms of prospectus, one to be used in connection with a United States underwritten offering (the "U.S. Prospectus"), and one to be used in connection with a concurrent international underwritten offering (the "International Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The Prospectuses will be identical in all respects except for the front cover page, the section entitled "Underwriting" and the outside back cover page. The form of the U.S. Prospectus is included herein and the form of the front cover page, "Underwriting" section and outside back of the International Prospectus are included following the back cover page of the U.S. Prospectus as pages X-1 through X-6. 1 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 21, 1997 PROSPECTUS 10,000,000 SHARES APEX MORTGAGE CAPITAL, INC. COMMON STOCK ----------- All of the shares of common stock (the "Common Stock") offered hereby are being sold by Apex Mortgage Capital, Inc. (the "Company"). Of the 10,000,000 shares of Common Stock offered hereby, 8,000,000 shares of Common Stock are being offered initially in the United States by the U.S. Underwriters (the "U.S. Offering") and the remaining 2,000,000 shares of Common Stock are being offered concurrently by the International Managers initially outside of the United States (the "International Offering" and, collectively, the "Offering"). The initial public offering price and the underwriting discount per share are identical for each Offering. At the request of the Company, the U.S. Underwriters have reserved an aggregate of up to 500,000 shares of Common Stock for sale at the initial public offering price to directors, officers and employees of the Company, The TCW Group, Inc. and its affiliates. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $14.00 and $16.00 per share. See "Underwriting" for information relating to the determination of the initial public offering price. The Common Stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "AXM." LOGO ----------- SEE "RISK FACTORS" COMMENCING ON PAGE 16 FOR MATERIAL RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE RISKS INCLUDE: . The lack of prior experience in managing . The Manager may be and operating a REIT entitled to a could adversely affect significant termination the Company's results fee which, if paid, of operations. would materially adversely affect the cash available for distribution to the Company's stockholders. . The Company does not currently have any borrowing arrangements or commitments from any lenders and may therefore be unable to implement its business strategy. . The Company is recently formed and its current assets consist of $1,500 in cash. . The Company's policies . Interest rate and strategies may be fluctuations may changed without the decrease net interest consent of income from Mortgage stockholders. Assets. . The Company has no identified Mortgage . The Company intends to Assets to purchase and significantly leverage may be unable to its Mortgage Assets, acquire Mortgage Assets which may result in on favorable terms. operating losses. . Failure to maintain REIT status would substantially reduce the amount of cash available for distribution to the Company's stockholders. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------ Per Share............ $ $ $ - ------------------------------------------------------------------------------ Total(3)............. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $750,000, payable by the Company. (3) The Company has granted to the U.S. Underwriters and the International Managers options, exercisable within 30 days of the date hereof, to purchase up to 1,200,000 and 300,000 additional shares of Common Stock, respectively, solely to cover over-allotments, if any. If such over- allotment options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by the Underwriters and subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about December , 1997. ----------- MERRILL LYNCH & CO. PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY INCORPORATED SUTRO & CO. INCORPORATED ----------- The date of this Prospectus is , 1997. Certain persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Such transactions may include stabilizing the purchase of shares of Common Stock to cover syndicate short positions and the imposition of penalty bids. For a description of these activities, see "Underwriting." ---------------- CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "INTEND," "CONTINUE," OR "BELIEVES" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS. SOME IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENTS INCLUDE CHANGES IN INTEREST RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR LEGAL CONDITIONS; DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF THE COMPANY FROM THOSE ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED AND THE EFFECTIVENESS OF THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE OF RISK WILL BE INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS. THE COMPANY HAS PROVIDED HYPOTHETICAL EXAMPLES OF THE MAGNITUDE OF THE COMPENSATION PAYABLE TO THE MANAGER AND THE SIGNIFICANCE OF THE FEE PAYABLE TO THE MANAGER UPON TERMINATION OR NON-RENEWAL OF THE MANAGEMENT AGREEMENT BY THE COMPANY WITHOUT CAUSE. EXAMPLES RELATING TO COMPENSATION PAYABLE TO THE MANAGER ARE SET FORTH ON PAGE 53 OF THIS PROSPECTUS. EXAMPLES RELATING TO THE FEE PAYABLE TO THE MANAGER UPON TERMINATION OR NON-RENEWAL OF THE MANAGEMENT AGREEMENT ARE SET FORTH ON PAGES 16 AND 51 OF THIS PROSPECTUS. THESE ARE HYPOTHETICAL EXAMPLES ONLY AND ARE NOT PROJECTIONS. SUCH EXAMPLES ALSO CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE BASED UPON CERTAIN ASSUMPTIONS. ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE MATERIALLY DIFFERENT FROM THOSE ASSUMED. 2 TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY........................................................ 4 The Company.............................................................. 4 Summary Risk Factors..................................................... 5 The Manager.............................................................. 8 Industry Trends.......................................................... 10 Business and Strategy.................................................... 11 Mortgage Assets.......................................................... 11 Management Policies and Programs......................................... 12 Asset Acquisition Policy................................................. 12 Capital and Leverage Policy.............................................. 12 Credit Risk Management Policy............................................ 13 Asset/Liability Management Policies...................................... 13 Interest Rate Risk Management Policy.................................... 13 Prepayment Risk Management Policy....................................... 14 Dividend Policy and Distributions........................................ 14 The Offering............................................................. 15 RISK FACTORS.............................................................. 16 Lack of Prior Experience................................................. 16 No Current Borrowing Arrangements........................................ 16 Control by the Company's Board of Directors of the Company's Operating Policies and Investment Strategies...................................... 17 No Current Mortgage Assets............................................... 17 Possible Significant Termination Fee Payable to the Manager.............. 17 Nominal Capitalization................................................... 18 Interest Rate Fluctuations May Decrease Net Interest Income.............. 18 Failure to Successfully Manage Interest Rate Risk May Adversely Affect Results of Operations................................................... 18 Substantial Leverage and Potential Net Interest and Operating Losses in Connection With Borrowings.............................................. 19 Failure to Maintain REIT Status Would Result in the Company Being Subject to Tax as a Regular Corporation and Substantially Reduce Cash Available for Distribution to Stockholders........................................ 20 Increased Levels of Prepayments from Mortgage Assets May Adversely Affect Net Interest Income..................................................... 21 Dependence on the Manager and Its Personnel for Successful Operations.... 21 Conflicts of Interest Between the Company and the Manager and Its Affiliates.............................................................. 21 Investment in Short-Term Investments Pending Acquisition of Mortgage Assets May Initially Adversely Affect Results of Operations............. 22 Failure to Maintain An Exemption from the Investment Company Act Would Adversely Affect Results of Operations.................................. 22 Absence of Public Market and No Assurance That a Public Market Will Develop................................................................. 23 Interest Rate Fluctuations May Adversely Affect the Market Price of the Common Stock............................................................ 23 Value of Mortgage Assets May Be Adversely Affected by Defaults on Underlying Mortgage Obligations......................................... 23 Active Formation and Operation of Competing Mortgage REITs May Adversely Affect the Market Price of the Common Stock............................. 23 Adverse Tax Treatment of Excess Inclusion Income......................... 23
PAGE ---- Value of Mortgage Loans May Be Adversely Affected by Characteristics of Underlying Property and Borrower Credit................................. 24 Effect of Future Offerings of Debt and Equity on Market Price of the Common Stock............................................................ 25 Restrictions on Ownership of the Common Stock............................ 25 USE OF PROCEEDS........................................................... 27 DIVIDEND AND DISTRIBUTION POLICY.......................................... 27 CAPITALIZATION............................................................ 28 LIQUIDITY AND CAPITAL RESOURCES........................................... 28 BUSINESS AND STRATEGY..................................................... 29 General.................................................................. 29 Strategy................................................................. 29 Competition for Mortgage Assets.......................................... 31 Description of Mortgage Assets........................................... 32 Management Policies and Programs......................................... 38 Asset Acquisition Policy................................................. 38 Capital and Leverage Policy.............................................. 38 Credit Risk Management Policy............................................ 41 Asset/Liability Management Policies...................................... 42 Interest Rate Risk Management Policy.................................... 42 Prepayment Risk Management Policy....................................... 43 Mortgage Loan Securitization Techniques.................................. 43 Other Policies........................................................... 44 Future Revisions in Policies and Strategies.............................. 44 Legal Proceedings........................................................ 44 MANAGEMENT OF THE COMPANY................................................. 45 Directors and Executive Officers ........................................ 45 Executive Compensation................................................... 48 Stock Options............................................................ 48 Stock Options Outstanding................................................ 49 THE MANAGER............................................................... 50 The Management Agreement................................................. 52 Manager Compensation..................................................... 54 Expenses................................................................. 55 Certain Relationships; Conflicts of Interest............................. 57 Limits of Responsibility................................................. 58 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 59 FEDERAL INCOME TAX CONSEQUENCES........................................... 60 ERISA CONSIDERATIONS...................................................... 69 DESCRIPTION OF CAPITAL STOCK.............................................. 69 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS................................................................... 72 UNDERWRITING.............................................................. 75 LEGAL MATTERS............................................................. 78 EXPERTS................................................................... 78 ADDITIONAL INFORMATION.................................................... 78 GLOSSARY.................................................................. 79 AUDITORS' REPORT.......................................................... F-1 BALANCE SHEET............................................................. F-2
3 PROSPECTUS SUMMARY The following summary should be read in conjunction with and is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Certain capitalized and other terms used herein shall have the meanings assigned to them in the Glossary beginning on page 79. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment options are not exercised. This Prospectus contains forward-looking statements that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the information set forth under the heading "Risk Factors" and within the Prospectus generally. THE COMPANY Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was formed on September 15, 1997, primarily to acquire United States agency and other highly rated, adjustable-rate, single-family real estate mortgage securities and mortgage loans. The Company intends to structure its portfolio to maintain a minimum weighted average rating (including deemed comparable ratings for unrated mortgage assets based on a comparison to rated mortgage assets with like characteristics) of at least AA or Aa by Standard & Poor's Ratings Services ("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's"), respectively (collectively, the "Rating Agencies"). The Company will use its equity capital and borrowed funds to seek to generate income based on the difference between the yield on its mortgage assets and the cost of its borrowings. The Company will elect to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). The Company will not generally be subject to federal taxes on its income to the extent that it distributes its net income to its stockholders and maintains its qualification as a REIT. See "Federal Income Tax Consequences-- Requirements for Qualification as a REIT--Distribution Requirement." The goal of the Company is to be an efficient investor in mortgage assets. The Company anticipates that it will acquire mortgage assets primarily in the secondary mortgage market through the operational experience and market relationships of TCW Investment Management Company (the "Manager") and its Affiliates. See "Business and Strategy--Management Policies and Programs--Asset Acquisition Policy" and "The Manager." The day-to-day operations of the Company will be managed by the Manager subject to the direction and oversight of the Company's Board of Directors, a majority of whom will be unaffiliated with The TCW Group, Inc. ("TCW" and, together with its subsidiaries and Affiliates, the "TCW Group") or the Manager. The Manager is a wholly-owned subsidiary of TCW. The Manager was established in 1992 and the TCW Group began operations in 1971 through one of its affiliates. The Company's investment management team will be selected members of the TCW Group's Mortgage-Backed Securities Group (the "MBS Group"), all of whom have over ten years of experience in raising and managing mortgage capital. See "Management of the Company--Directors and Executive Officers" and "The Manager." The Company has elected to be externally managed by the Manager, which has not previously managed a REIT, to take advantage of the existing operational systems, expertise and economies of scale associated with the Manager's current business operations. In addition, the TCW Group, which is the existing stockholder of the Company, currently owns the Manager and will benefit from any management fees payable to the Manager. There can be no assurance that the past experience of the executive officers of the Company and the Manager will be appropriate to the business of the Company. Further, the experience of the Manager and the TCW Group should not be viewed as a reliable gauge of the potential success of the Company. See "Risk Factors--Lack of Prior Experience." The Company has no ownership interest in the Manager. The Company's mortgage assets will consist primarily of adjustable-rate mortgage securities ("Mortgage Securities"), including adjustable-rate collateralized mortgage obligations ("CMOs"), bearing interest rates that adjust periodically based on changes in short-term market interest rates. However, fixed-rate mortgage assets may also be acquired generally in combination with hedging instruments, including interest rate derivative instruments, to obtain investment characteristics similar to adjustable-rate Mortgage Securities. The Company 4 generally intends to hold its mortgage assets to maturity. In addition, the Company may from time to time, depending on market conditions, acquire whole loans ("Mortgage Loans") from mortgage conduits and mortgage loan originators, which the Company may use as collateral to create its own Mortgage Securities. Pending full investment in the desired mix of Mortgage Securities and Mortgage Loans, funds will be committed to certain short-term investments ("Short-Term Investments" and, together with Mortgage Securities and Mortgage Loans, "Mortgage Assets"). The Company will finance the purchase of its Mortgage Assets with the net proceeds of the Offering and short-term borrowings (primarily reverse repurchase agreements) of up to 92% of total Mortgage Assets. The Company will attempt to structure its borrowings to have interest rate indices and interest rate adjustment periods that generally correspond (in the aggregate for the entire portfolio, and not on an asset-by-asset basis) to the interest rate adjustment indices and interest rate adjustment periods of its Mortgage Assets. In general, the Company intends to hedge the lifetime cap risk associated with its adjustable-rate Mortgage Assets. The Company's policy initially will be to seek to limit the effective interest rate on substantially all of its liabilities to a rate equal to the weighted average lifetime cap of its adjustable-rate Mortgage Assets. Under current market conditions, the Company does not intend to enter into transactions to hedge its periodic cap risk. The Company currently intends to manage the periodic cap risk through its leverage and asset/liability policies. This may negatively impact earnings during periods of rapidly rising short-term interest rates. However, the Company believes this is the most cost-efficient hedging strategy in the current market environment. See "Risk Factors--Interest Rate Fluctuations May Decrease Net Interest Income." SUMMARY RISK FACTORS Each prospective purchaser of the Common Stock offered hereby should review "Risk Factors" beginning on page 16 for a discussion of material risks that should be considered before investing in the Common Stock, including the following: . Lack of Prior Experience. The lack of prior experience of the Company and the Manager in managing and operating a REIT could adversely affect the Company's business, financial condition and results of operations. . No Current Borrowing Arrangements. The Company does not currently have any borrowing arrangements or commitments from any lenders. If the Company does not obtain financing arrangements on terms and conditions satisfactory to the Company, the Company will not have access to sufficient capital to finance the Company's business strategy as described herein. . Control by the Company's Board of Directors of the Company's Operating Policies and Investment Strategies. The Company's investment, financing and operating policies and strategies will be determined by the Company's Board of Directors and may be changed at any time without the consent or approval of the Company's stockholders. Such changes may adversely affect the Company's results of operations. . No Current Mortgage Assets. The Company has not identified any Mortgage Assets to purchase with the net proceeds of the Offering. The Company's Net Income will depend on the Manager's ability to acquire Mortgage Assets on acceptable terms and at favorable spreads over the Company's borrowing costs. If the Manager is unable to acquire Mortgage Assets on favorable terms and conditions, the Company's results of operations will be adversely affected. . Possible Significant Termination Fee Payable to the Manager. The Manager may be entitled to a significant termination fee if the Company does not renew, or elects to terminate, the Management Agreement which, if paid, would materially adversely affect the cash available for distribution to the Company's stockholders and may result in material net operating losses for the period. See "The Manager--Management Agreement." 5 . Nominal Capitalization. The Company is recently formed and currently has only nominal capitalization, consisting of $1,500 in cash. Consequently, the Company's operations are dependent on the net proceeds of the Offering and borrowings in order to commence its business operations. See "Capitalization." . Interest Rate Fluctuations May Decrease Net Interest Income. The Company's operations will be affected substantially by prevailing market interest rates and borrowing costs, which are determined in large part by market conditions and governmental policies beyond the control of the Company and the Manager. To the extent the Company's cost of borrowings rise more rapidly than the yields on its Mortgage Assets funded by such borrowings, the Company's net interest income may be reduced or a net loss may result. . Substantial Leverage and Potential Net Interest and Operating Losses in Connection With Borrowings. The Company intends to increase the size of its Mortgage Asset portfolio by employing a leveraging strategy of borrowing up to 92% against its total Mortgage Asset portfolio to finance the acquisition of additional Mortgage Assets. The Company will experience negative cash flow and incur losses if borrowing costs exceed the income on its Mortgage Assets. . Failure to Maintain REIT Status Would Result in Company Being Subject to Tax as a Regular Corporation. The Company must at all times maintain substantially all of its investments in, and otherwise conduct its business in a manner consistent with, the REIT Provisions of the Code. If the Company fails to qualify as a REIT, it would be treated as a regular corporation and would be subject to income tax that would result in a substantial reduction of cash available for distribution to stockholders of the Company. . Litigation. A mortgage company with a similar name recently sent a demand to the Company requesting that the Company not operate under the name "Apex Mortgage Capital." Such demand threatened litigation if the Company did not change its name. If any litigation is commenced, the Company may be required to change its name and thereby incur expenses, may be required to pay damages or may incur substantial litigation costs even if the Company is successful. As a result of such threatened litigation, the Company's results of operations may be adversely affected. . Failure to Successfully Manage Interest Rate Risks May Adversely Affect Results of Operations. Developing an objective interest rate risk strategy is complex and no strategy can completely insulate the Company from risks associated with interest rate changes. Hedging strategies involve risk and may not be successful in reducing the Company's exposure to changing interest rates. . Increased Levels of Prepayments from Mortgage Assets May Adversely Affect Net Interest Income. In the event that the Company's Mortgage Assets are prepaid prior to maturity, the Company may (i) have held the Mortgage Assets while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate, (ii) need to write-off capitalized premium amounts, and (iii) be unable to acquire new Mortgage Assets to replace the prepaid Mortgage Assets. Mortgage prepayment rates vary depending on market interest rates. Changes in prepayments could cause declines in the Company's Net Income. . Dependence on the Manager and Its Personnel for Successful Operations. The Company will be dependent on the Manager, and its operations will depend initially entirely upon the contributions of Philip Barach, Jeffrey Gundlach, Daniel Osborne, Joseph Galligan and other key personnel of the Manager. The loss of any key person could have a material adverse effect on the Company's business. . Conflicts of Interest Between the Company and the Manager and Its Affiliates. Affiliates of the Manager invest and will continue to invest in Mortgage Securities on behalf of their clients. As a 6 consequence, there may be a conflict of interest between the operations of the Manager and the operations of its Affiliates in the acquisition and disposition of Mortgage Securities. Such conflicts may result in decisions and/or allocations of Mortgage Securities by Affiliates of the Manager that are not in the best interests of the Company. In addition, the Manager may advise other mortgage-related entities unaffiliated with the Company. . Initial Investment in Short-Term Investments. Following the closing of the Offering, the Company will initially invest a substantial portion of the net proceeds from the Offering in Short-Term Investments pending acquisition of other Mortgage Assets. The Company's results of operations initially may be adversely affected pending purchase of Mortgage Securities and Mortgage Loans and implementation of its Capital and Leverage Policy. The Company anticipates that it may take up to 15 months to fully implement its leveraging strategy. 7 THE MANAGER The Manager will be responsible for the day-to-day operations of the Company and will perform such services and activities relating to the Mortgage Assets and operations of the Company as may be appropriate. At all times, the Manager will be subject to the direction and oversight of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. The Manager will be primarily involved in two activities: (i) asset/liability management--acquisition, financing, hedging, management and disposition of Mortgage Assets, including credit and prepayment risk management; and (ii) capital management--structuring, analysis, capital raising and investor relations activities. In conducting these activities, the Manager will formulate operating strategies for the Company, arrange for the acquisition of Mortgage Assets by the Company, arrange for various types of financing for the Company, monitor the performance of the Company's Mortgage Assets and provide certain administrative and managerial services in connection with the operation of the Company. The Manager will be required to manage the business affairs of the Company in conformity with the policies that are approved and monitored by the Company's Board of Directors. The Manager will be required to prepare regular reports for the Company's Board of Directors, which will review the Company's acquisitions of Mortgage Assets, portfolio composition and characteristics, credit quality, performance and compliance with policies previously approved by the Company's Board of Directors. See "The Manager--The Management Agreement" and "Business and Strategy--Management Policies and Programs." The Manager has not previously managed a REIT. In particular, the Manager has not previously managed a highly-leveraged pool of Mortgage Assets nor does the Manager have experience in complying with the asset limitations imposed by the REIT Provisions of the Code. Although management of the Company and the Manager have experience in managing mortgage capital, there can be no assurance that the past experience of the executive officers of the Company and the Manager will be appropriate to the business of the Company. Further, the experience of the Manager and the TCW Group should not be viewed as a reliable gauge of the potential success of the Company. See "Risk Factors--Lack of Prior Experience." Pursuant to a management agreement (the "Management Agreement") between the Company and the Manager, the Company will pay the Manager annual base management compensation based on Average Net Invested Capital, payable monthly in arrears, equal to 3/4 of 1% of the Average Net Invested Capital of the Company. "Average Net Invested Capital" means for any period (i) the arithmetic average of the sum of the gross proceeds of the offerings of its equity securities by the Company, after deducting any underwriting discounts and commissions and other expenses and costs relating to such offerings, plus the Company's retained earnings (taking into account any losses incurred) and any non-cash charges or reserves, including depreciation, mark-to-market adjustments and unrealized credit loss, computed by taking the average of such values at the end of each month during such period, plus (ii) any unsecured debt approved by the Unaffiliated Directors (defined as directors who are not affiliated with, employed by, or officers or directors of the Manager or the TCW Group or employed by or officers of the Company) to be included in Average Net Invested Capital. Accordingly, incurring collateralized debt to finance specific investment purchases does not increase Average Net Invested Capital. The Company will also pay the Manager, as incentive compensation for each fiscal quarter, an amount equal to 30% of the Net Income of the Company, before incentive compensation, in excess of the amount that would produce an annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate (average of weekly average yield to maturity for U.S. Treasury securities (adjusted to a constant maturity of 10 years), as published weekly by the Federal Reserve Board during a quarter) plus 1%. A deduction for the Company's interest expenses for borrowed funds is taken into account in calculating Net Income. "Return on Equity" is computed for any quarter by dividing the Company's Net Income for the quarter by its Average Net Worth for the quarter and has no necessary correlation with the actual distributions received by stockholders or with an individual investor's actual return on investment. The incentive compensation calculation and payment to the Manager will be made quarterly in arrears, and will be subject to an annual adjustment commencing in the second full calendar year of the operations of the Company. See "The Manager--Manager Compensation" for a more detailed explanation 8 of the management compensation arrangements and the "Glossary" for definitions of the terms "Average Net Worth," "Net Income" and "Return on Equity." The Company believes that this compensation arrangement benefits stockholders because it ties the Manager's compensation to Return on Equity and, in periods of low earnings, the Manager's incentive compensation is reduced or eliminated, thereby lowering the Company's operating expenses. The Company will enter into the Management Agreement with the Manager at the closing of the Offering for an initial term of two years. Thereafter, the Management Agreement may be renewed for additional one-year terms at the discretion of the Unaffiliated Directors, unless terminated by the Manager upon written notice. Except in the case of a termination or non-renewal by the Company for cause, upon termination or non-renewal of the Management Agreement by the Company, the Company is obligated to pay the Manager a termination or non-renewal fee equal to the fair market value of the Management Agreement without regard to the Company's termination or non-renewal right as determined by an independent appraisal. The selection of the independent appraiser shall be subject to the approval of the Unaffiliated Directors. The payment of such a termination or non-renewal fee by the Company would adversely affect the cash available for distribution to the Company's stockholders and may have a material adverse effect on the Company's operations. See "The Manager--The Management Agreement" and "Risk Factors--Possible Significant Termination Fee Payable to the Manager." Prior to the Offering, the structure and relationships of the Company, the Manager and their respective shareholders is as follows: LOGO (1) TCW Asset Management Company ("TAMCO") is the owner of the initial 100 shares of Common Stock of the Company currently outstanding. See "Security Ownership of Certain Beneficial Owners and Management." Following the completion of the Offering, TAMCO will continue to own only 100 shares of Common Stock of the Company. The remaining 10,000,000 shares of Common Stock will be acquired in the Offering. (2) TAMCO is a direct subsidiary of The TCW Group, Inc. (3) TCW Investment Management Company is a direct subsidiary of The TCW Group, Inc. (4) Upon the closing of the Offering, the Company will enter into a Management Agreement with TCW Investment Management Company. See "The Manager--The Management Agreement." 9 INDUSTRY TRENDS The Company believes that there is a shift of investment capital and Mortgage Assets out of traditional lending and savings institutions and into the development and growth of new forms of mortgage banking and investment companies, including those that qualify as REITs under the Code. The Company believes that traditional mortgage investment companies, such as banks, thrifts and insurance companies, provide less attractive investment structures for investing in Mortgage Assets because of the costs associated with regulation and corporate level taxation. Additionally, with the development of highly competitive national mortgage markets (which the Company believes is partly due to the expansion of government-sponsored enterprises such as Fannie Mae, FHLMC and GNMA), local and regional mortgage originators have lost market share to more efficient mortgage originators who compete nationally. The growth of the secondary mortgage market, including new securitization techniques, has also resulted in financing structures that can be utilized efficiently to fund leveraged mortgage portfolios and better manage interest rate risk. As a REIT, the Company can generally pass- through earnings to stockholders without incurring an entity-level federal income tax, thereby potentially allowing the Company to pay higher dividends than traditional financial institutions and mortgage banking competitors that are subject to federal income tax on their earnings. See "Federal Income Tax Consequences--Taxation of the Company." The residential mortgage market has experienced considerable growth over the past 15 years with total residential mortgage debt outstanding growing from approximately $965 billion in 1980 to approximately $3.9 trillion in 1996, according to the Mortgage Market Statistical Annual for 1997. In addition, the total residential mortgage debt securitized into Mortgage Securities has grown from approximately $110 billion in 1980 to approximately $1.9 trillion in 1996, according to the same source. The Company believes that the current size of the residential mortgage market will provide it with significant opportunities with respect to the purchase of Mortgage Assets. 10 BUSINESS AND STRATEGY The Company's principal business objective is to produce net interest income on its Mortgage Assets while maintaining a cost efficient organizational structure in order to generate Net Income for distribution to its stockholders. To achieve its business objective and generate dividend yields that provide a competitive rate of return for stockholders, the Company's strategy is to: . purchase primarily single-family Mortgage Assets, the majority of which are currently expected to have adjustable interest rates based on changes in short-term market interest rates; . manage the credit risk of its Mortgage Assets through, among other activities, (i) carefully selecting Mortgage Assets to be acquired, (ii) complying with the Company's policies with respect to credit risk concentration which, among other things, will require the Company to maintain a Mortgage Asset portfolio with a weighted average rating generally equivalent to AA (or a comparable rating) or better, (iii) actively monitoring the ongoing credit quality and servicing of its Mortgage Assets, and (iv) maintaining appropriate capital levels and allowances for possible credit losses; . finance purchases of Mortgage Assets with the net proceeds of equity offerings and, to the extent permitted by the Company's Capital and Leverage Policy, to utilize leverage to increase potential returns to stockholders through borrowings (primarily reverse repurchase agreements) with interest rates that will also reflect changes in short- term market interest rates; . seek to structure its borrowings to have interest rate adjustment indices and interest rate adjustment periods that, on an aggregate hedged basis, generally correspond to the interest rate adjustment indices and interest rate adjustment periods of its adjustable-rate Mortgage Assets; . utilize interest rate caps, swaps and similar financial instruments to mitigate the risk of the cost of its variable-rate liabilities exceeding the earnings on its Mortgage Assets during a period of rising interest rates; . seek to minimize prepayment risk primarily by structuring a diversified portfolio with a variety of prepayment characteristics; and . apply securitization techniques designed to enhance the value and liquidity of the Company's Mortgage Assets acquired in the form of Mortgage Loans by securitizing them into Mortgage Securities tailored to the Company's investment objectives. See "Business and Strategy--Management Policies and Programs" below for further discussion of the Company's strategies. There can be no assurance that the Company will successfully implement its strategies. See "Risk Factors" for a discussion of factors that could adversely affect the Company's ability to successfully implement its strategies. MORTGAGE ASSETS The Company will primarily acquire United States agency and other High Quality adjustable-rate Mortgage Assets. "High Quality" shall mean either (i) Mortgage Securities that are rated A or above by at least one of the Rating Agencies or (ii) Mortgage Securities that are unrated, but are either obligations of the United States or obligations guaranteed by the United States government or an agency or instrumentality of the United States government. The Company intends to acquire Mortgage Assets in the secondary mortgage market through the operational experience and market relationships of the Manager and its Affiliates. The Mortgage Assets to be purchased by the Company will consist primarily of Mortgage Securities and Mortgage Loans secured by single-family residential real estate. The Company expects that primarily all of its Mortgage Assets will bear interest at adjustable rates. However, fixed-rate Mortgage Assets may also be acquired 11 generally in combination with hedging instruments to obtain investment characteristics similar to adjustable-rate Mortgage Assets. The Company anticipates that a significant portion of the Mortgage Assets it acquires will not be fully indexed (i.e., will bear interest at initial "teaser" rates). The Company will generally not acquire Inverse Floaters, REMIC Residuals or First Loss Subordinated Bonds. The Company may acquire mortgage derivative securities, including, but not limited to, interest only, principal only or other Mortgage Securities that receive a disproportionate share of interest income, or principal, either as an independent stand-alone investment opportunity or to assist in the management of prepayment and other risks (collectively, "Mortgage Derivative Securities"), but only on a limited basis due to the greater risk of loss associated with Mortgage Derivative Securities. See "Risk Factors--Failure to Successfully Manage Interest Rate Risks May Adversely Affect Results of Operations." MANAGEMENT POLICIES AND PROGRAMS ASSET ACQUISITION POLICY The Company will only acquire Mortgage Assets that are consistent with its balance sheet guidelines and risk management objectives. Since the intention of the Company is generally to hold its Mortgage Assets until maturity, the Company generally will not seek to acquire Mortgage Assets with investment returns that are attractive only in a limited range of scenarios. The Company believes that future interest rates and mortgage prepayment rates are very difficult to predict. Therefore, the Company will seek to acquire Mortgage Assets that it believes will provide competitive returns over a broad range of interest rate and prepayment scenarios. The Company will acquire Mortgage Assets that it believes will maximize returns on capital invested, after considering (i) the amount and nature of the anticipated cash flow from the Mortgage Assets, (ii) the Company's ability to pledge Mortgage Assets to secure collateralized borrowings, (iii) the increase in the Company's capital requirement determined by the Company's Capital and Leverage Policy resulting from the purchase and financing of Mortgage Assets, (iv) the costs of financing, hedging, managing, securitizing and reserving for Mortgage Assets, and (v) the Company's credit risk management policy. Prior to acquisition of a Mortgage Asset, potential returns on capital employed are assessed over the life of the Mortgage Asset and in a variety of interest rate, yield spread, financing cost, credit loss and prepayment scenarios. CAPITAL AND LEVERAGE POLICY The Company's goal is to strike a balance between the under-utilization of leverage, which reduces potential returns to stockholders, and the over- utilization of leverage, which could reduce the Company's ability to meet its obligations during periods of adverse market conditions. The Company has established a Capital and Leverage Policy that limits its ability to acquire additional Mortgage Assets during times when the capital base of the Company is less than a required amount defined in the Capital and Leverage Policy. In this way, the use of balance sheet leverage is better controlled. The capital base required for the purpose of the Capital and Leverage Policy is equal to the market value of the Company's total Mortgage Assets less the book value of total collateralized borrowings. The actual capital base, as so defined, represents the approximate liquidation value of the Company and approximates the market value of the Mortgage Assets that can be pledged or sold to meet over-collateralization requirements for the Company's borrowings. The unpledged portion of the Company's actual capital base is available to be pledged or sold as necessary to maintain over-collateralization levels for the Company's borrowings. Under current market conditions, the Company will seek to maintain a capital base of at least 10% of Mortgage Assets as an operating policy; if the capital base falls below 8%, the Company will not acquire net additional Mortgage Assets. In addition, in the event the Company's capital base falls below 8%, the Manager will present a plan to the Company's Board of Directors designed to bring the Company back to its target capital-to-assets ratio. It is anticipated that in many circumstances this goal will be achieved over time without active management through the natural process of mortgage principal repayments and increases in the market values of Mortgage Assets as their coupon rates adjust upwards to market levels. 12 CREDIT RISK MANAGEMENT POLICY The Company will review credit risk and other risks of loss associated with each Mortgage Asset acquisition that is not guaranteed by Fannie Mae, FHLMC or GNMA and determine the appropriate allocation of capital to apply to such investment. In addition, the Company will attempt to diversify its Mortgage Asset portfolio to avoid undue geographic, insurer and other types of concentrations. The Company's Board of Directors will monitor the overall risk of the Mortgage Asset portfolio and determine appropriate levels of provision for loss. The Company anticipates that at least 75% of its Mortgage Assets will be comprised of High Quality adjustable-rate Mortgage Securities. In addition, the Company anticipates further that at least 50% of its Mortgage Assets will be invested in Mortgage Securities that are either rated AAA or have a comparable rating by at least one of the Rating Agencies or are obligations of or are guaranteed by the United States government or an agency or instrumentality thereof. The Company anticipates that its investment in Mortgage Loans or other Mortgage Securities that are not High Quality under the criteria set forth above ("Other Mortgage Assets") will be limited to 25% of its Mortgage Assets. However, the Company's investment in Other Mortgage Assets will be restricted to Mortgage Assets that are unrated or whose ratings have not been updated, but are determined by the Manager to be of comparable quality to a High Quality Mortgage Security. This determination will be made on the basis of credit or other enhancement features that meet the High Quality credit criteria as determined by the Manager and approved by the Company's Board of Directors, including approval by a majority of the Unaffiliated Directors. The Company intends to structure its Mortgage Asset portfolio to maintain a minimum weighted average rating (including the Manager's deemed comparable ratings for unrated Mortgage Assets based on a comparison to rated Mortgage Securities with like characteristics) of at least AA (or a comparable rating) by at least one of the Rating Agencies. However, there can be no assurance that such structure will be achieved. The Company will not be obligated to liquidate any Mortgage Assets to achieve its desired weighted average rating. Compliance with the credit risk management policy guidelines shall be determined at the time of purchase of Mortgage Assets (based on the most recent valuation utilized by the Company) and will not be affected by events subsequent to such purchase, including, without limitation, changes in characterization, value or rating of any specific Mortgage Assets or economic conditions or events generally affecting any Mortgage Assets of the type held by the Company. ASSET/LIABILITY MANAGEMENT POLICIES Interest Rate Risk Management Policy To the extent consistent with its election to qualify as a REIT, the Company will follow an interest rate risk management policy intended to mitigate the negative effects of major interest rate changes. The Company intends to minimize its interest rate risk from borrowings by attempting to match the maturity of its borrowings to the interest rate adjustment periods on its Mortgage Assets. Under normal market conditions, the Company will attempt to keep the difference between the weighted average time to "reset" on its Mortgage Assets to the weighted average time to reset on its borrowings to 90 days or less, taking into account all hedging transactions, although there can be no assurance that the Company will be able to so limit such "reset" periods. This interest rate risk management policy will be reviewed by the Company's Board of Directors if the Company incurs long-term non-callable borrowings and as market conditions change. In addition to "reset" periods, the Company also intends to manage differences in interest rate indices between its Mortgage Assets and borrowings. See "Risk Factors--Failure to Successfully Manage Interest Rate Risks May Adversely Affect Results of Operations." The Company's interest rate risk management policy is formulated with the intent to offset the potential adverse effects resulting from rate adjustment limitations on its Mortgage Assets and the differences between interest rate adjustment indices and interest rate adjustment periods of its adjustable-rate Mortgage Assets and 13 related borrowings. The Company anticipates being able to adjust the average maturity period of such borrowings on an ongoing basis by changing the mix of maturities and interest rate adjustment periods as borrowings come due and are renewed. Through use of these procedures, the Company will seek to minimize differences between interest rate adjustment periods of adjustable-rate Mortgage Assets and related borrowings that may occur. In general, the Company intends to mitigate the lifetime cap risk associated with its adjustable-rate Mortgage Assets. The policy will be to attempt to limit the effective interest rate on substantially all of the Company's liabilities as a whole to a rate equal to the weighted average lifetime cap of its adjustable-rate Mortgage Assets. Under current market conditions, the Company does not intend to enter into transactions to mitigate its periodic cap risk. The Company intends to manage this risk through its leverage and asset/liability policies. In all of its interest rate risk management transactions, the Company will follow certain procedures designed to limit credit exposure to Counter-parties, including entering into contracts only with Counter-parties rated investment grade by a nationally recognized rating service. See "Business and Strategy-- Management Policies and Programs--Asset/Liability Management Policies" and "-- Interest Rate Risk Management Policy." In addition, all hedging transactions will be monitored for compliance with the REIT Provisions of the Code and other applicable laws. Prepayment Risk Management Policy The Company's prepayment risk management policy is formulated with the purpose of mitigating the potential adverse effects resulting from faster than anticipated prepayment rates on its Mortgage Assets. The Company intends to invest in Mortgage Assets that on a portfolio basis do not have significant purchase price premiums. Under normal market conditions, the Company will seek to keep the aggregate capitalized purchase premium of the Mortgage Assets portfolio to 3% or less. Although the Company believes that it has developed a cost-effective set of asset/liability management policies to help mitigate interest rate and prepayment risks, no strategy can completely insulate the Company from the effects of interest rate changes, prepayments and defaults by Counter-parties. Further, certain of the federal income tax requirements that the Company must satisfy to qualify as a REIT limit its ability to fully hedge its interest rate and prepayment risks. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Gross Income Tests." DIVIDEND POLICY AND DISTRIBUTIONS To maintain its qualification as a REIT, the Company intends to make annual distributions to its stockholders of at least 95% of Taxable Income (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principals ("GAAP")), determined without regard to the deduction for dividends paid and by excluding any net capital gains. Any Taxable Income remaining after the distribution of regular quarterly dividends will be distributed annually in a special dividend on or prior to the date of the first regular quarterly dividend payment of the following taxable year. The dividend policy is subject to revision at the discretion of the Company's Board of Directors. All distributions in excess of those required for the Company to maintain REIT status will be made by the Company at the discretion of the Board of Directors and will depend on the taxable earnings of the Company, its financial condition and such other factors as the Board of Directors deems relevant. The Company's Board of Directors has not established a minimum dividend level. 14 THE OFFERING Common Stock Offered: U.S. Offering.................... 8,000,000(1) International Offering........... 2,000,000(1) Total........................ 10,000,000(1) Common Stock to be Outstanding After the Offering....................... 10,000,100 shares(1)(2) Purchase of the Company's initial Use of Net Proceeds................. portfolio of Mortgage Assets(3) Proposed NYSE Symbol................ "AXM"
- -------- (1) Assumes that the Underwriters' options to purchase up to an additional 1,500,000 shares to cover over-allotments are not exercised. See "Underwriting." (2) Includes 100 shares of Common Stock issued to TCW Capital Investment Corporation (and subsequently transferred to TAMCO) in connection with the initial organization of the Company. Excludes 1,000,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option Plan. Options to acquire 300,000 shares of Common Stock have been granted to the executive officers of the Company and employees of the TCW Group and options to acquire 100,000 shares of Common Stock have been granted to the Unaffiliated Directors. See "Management of the Company--Stock Options." (3) The Company may require up to six months to have the net proceeds of the Offering fully invested in Mortgage Assets and up to an additional nine months to fully implement the leveraging strategy to increase the Mortgage Asset investments to its desired level. Pending full investment in the desired mix of Mortgage Assets, funds will be committed to Short-Term Investments that are expected to provide a lower net return than the Company hopes to achieve from its intended primary Mortgage Asset investments. See "Risk Factors--Investment in Short-Term Investments Pending Acquisition of Mortgage Assets May Initially Adversely Affect Results of Operations." 15 RISK FACTORS Before investing in the shares of Common Stock offered hereby, prospective investors should give special consideration to the information set forth below, in addition to the information set forth elsewhere in this Prospectus. The following risk factors are interrelated and, consequently, investors should treat such risk factors as a whole. This Prospectus may contain forward-looking statements that may be identified by the use of forward- looking terminology such as "may," "will," "should," "expect," "anticipate," "estimate," "intend," "continue," or "believes" or the negative thereof or other variations thereon or comparable terminology. The matters set forth under "Risk Factors" constitute cautionary statements identifying important factors with respect to any forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. An investment in the Company involves various risks, including the risk that an investor can lose capital. There is no guarantee that the Company can successfully implement its business strategy, reach its investment objectives or achieve a positive return for stockholders. In addition to the information set forth elsewhere in this Prospectus, the following risk factors should be considered. LACK OF PRIOR EXPERIENCE Neither the Company nor the Manager have previously managed or operated a REIT or other public company. In particular, the Manager has not previously managed a highly-leveraged pool of Mortgage Assets nor does the Manager have experience in complying with the asset limitations imposed by the REIT Provisions of the Code. This lack of prior experience could adversely affect the Company's business, financial conditions and results of operations. The Company will commence substantive operations upon the closing of the Offering and, accordingly, has not yet developed any financial or operating history or experienced interest rate fluctuations or market conditions. NO CURRENT BORROWING ARRANGEMENTS The Company does not currently have any borrowing arrangements or commitments from any lenders. If the Company does not obtain financing arrangements, it will not have access to sufficient capital to finance its business strategy. The Company will rely on short-term borrowings to fund acquisitions of Mortgage Assets. Accordingly, the ability of the Company to achieve its investment objectives depends on its ability to borrow money in sufficient amounts and on favorable terms and on its ability to renew or replace on a continuous basis maturing short-term borrowings. In addition, the Company may be dependent upon a few lenders to provide the primary credit facilities for its Mortgage Asset purchases. Any failure to obtain or renew adequate funding under these facilities or other financings on favorable terms could have a material adverse effect on the Company's operations. In the event the Company is not able to renew or replace maturing borrowings, it could be required to sell Mortgage Assets under adverse market conditions and could incur permanent capital losses as a result. In addition, in such event, the Company may be required to terminate hedge positions, which could result in further losses. Any event or development such as a sharp rise in interest rates or increasing market concern about the value or liquidity of a type or types of Mortgage Assets in which the Company's Mortgage Asset portfolio is concentrated will reduce the market value of the Mortgage Assets, which would likely cause lenders to require additional collateral. A number of such factors in combination may cause difficulties for the Company, including a possible liquidation of a major portion of its Mortgage Assets at disadvantageous prices with consequent losses, which would have a material adverse effect on the Company and could render it insolvent. Substantially all of the Company's Mortgage Assets can be expected to be pledged to secure reverse repurchase agreements, bank borrowings or other credit arrangements. Therefore, such Mortgage Assets may not 16 be available to the stockholders in the event of the liquidation of the Company, except to the extent that the market value thereof exceeds the amounts due to the Company's creditors. The market value of the Mortgage Assets will fluctuate as a result of numerous market factors (including interest rates and prepayment rates) as well as the supply of and demand for such Mortgage Assets. In the event of the bankruptcy of a counter-party with whom the Company has a reverse repurchase agreement, the Company might experience difficulty recovering its pledged Mortgage Assets, which may adversely affect the Company's results of operations. CONTROL BY THE COMPANY'S BOARD OF DIRECTORS OF THE COMPANY'S OPERATING POLICIES AND INVESTMENT STRATEGIES The Company has established the operating policies and strategies set forth in this Prospectus as the operating policies and strategies of the Company. However, these policies and strategies may be modified or waived by the Board of Directors without the consent or approval of the Company's stockholders. The ultimate effect of any such changes is uncertain. See "Business and Strategy." NO CURRENT MORTGAGE ASSETS The Company has not identified any Mortgage Assets to purchase with the net proceeds of the Offering. The Company's Net Income will depend on its ability to acquire Mortgage Assets on acceptable terms and at favorable spreads over the Company's borrowing costs. If the Company is unable to acquire Mortgage Assets, its results of operations will be adversely affected. In acquiring Mortgage Assets, the Company will compete with other REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, other lenders, Fannie Mae, FHLMC, GNMA and other entities purchasing Mortgage Assets, some of which have greater financial resources than the Company. In addition, there are several REITs similar to the Company, and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of Mortgage Assets suitable for purchase by the Company. Increased competition for the acquisition of eligible Mortgage Assets or a diminution in the supply could result in higher prices and, thus, lower yields on such Mortgage Assets that could further narrow the yield spread over borrowing costs. The availability of Mortgage Assets meeting the Company's criteria is dependent upon, among other things, the size of and level of activity in the residential real estate lending market, which depend on various factors, including the level of interest rates, regional and national economic conditions and inflation and deflation in residential real estate values. To the extent the Company is unable to acquire a sufficient volume of Mortgage Assets meeting its criteria, the Company's results of operations would be adversely affected. POSSIBLE SIGNIFICANT TERMINATION FEE AVAILABLE TO THE MANAGER The Manager may be entitled to a significant termination fee if the Company does not renew, or elects to terminate, the Management Agreement, which, if paid, would materially adversely affect the cash available for distribution to the Company's stockholders and may result in material net operating losses for the period. Based on certain estimates and assumptions, the termination fee may be as high as $28 million. See "The Manager--The Management Agreement." Since the fair market value of the Management Agreement would be determined by an independent appraiser at a future date based upon then applicable facts and circumstances, no such termination or non-renewal fee can be estimated with mathematical certainty. Any termination or non-renewal fee paid may be materially greater than the hypothetical example set forth above and the Company can provide no assurance at this time as to the amount of any such fee. See "Risk Factors--Possible Significant Termination Fee Payable to the Manager." 17 NOMINAL CAPITALIZATION The Company was recently organized and currently has only nominal capitalization, currently equal to $1,500 in cash. Consequently, the Company's operations are dependent on the net proceeds of the Offering in order to commence its business operations. Because the Company is only nominally capitalized, it will not be able to withstand a period of adverse earnings as well as more established and better capitalized companies. See "Capitalization." INTEREST RATE FLUCTUATIONS MAY DECREASE NET INTEREST INCOME Adjustable-rate Mortgage Assets are typically subject to periodic and lifetime interest rate caps that limit the amount an adjustable-rate Mortgage Asset's interest rate can change during any given period, as well as the minimum rate payable. The Company's borrowings will not be subject to similar restrictions. Hence, in a period of increasing interest rates, interest rates on its borrowings could increase without limitation by caps, while the interest rates on its Mortgage Assets could be so limited. This problem will be magnified to the extent the Company acquires Mortgage Assets that are not fully indexed. Further, some adjustable-rate Mortgage Assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in receipt by the Company of less cash income on its adjustable-rate Mortgage Assets than is required to pay interest on the related borrowings. These factors could lower the Company's net interest income or cause a net loss during periods of rising interest rates, which would negatively impact the Company's financial condition, cash flows and results of operations. The Company intends to fund a substantial portion of its acquisitions of adjustable-rate Mortgage Assets with borrowings that have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the Mortgage Assets. Thus, the Company anticipates that in most cases the interest rate indices and repricing terms of its Mortgage Assets and its funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods, especially during the 1979-1982 and 1994 interest rate environments, when the spread between such indices was volatile. During periods of changing interest rates, such interest rate mismatches could negatively impact the Company's Net Income, dividend yield and the market price of the Common Stock. SUBSTANTIAL LEVERAGE AND POTENTIAL NET INTEREST AND OPERATING LOSSES IN CONNECTION WITH BORROWINGS The Company intends to employ a leveraging strategy of increasing the size of its Mortgage Asset portfolio by borrowing against its existing Mortgage Assets to acquire additional Mortgage Assets. By leveraging its Mortgage Assets in this manner, the Company expects that 90% of its total Mortgage Assets typically may be financed with borrowed funds. If the ratio of the Company's borrowings to total Mortgage Assets exceeds 92%, then, except as limited by the sources of income tests applicable to the Company as a REIT, the Company will not acquire net additional Mortgage Assets until the capital base exceeds 8%. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Gross Income Tests." The Company is also permitted under its Bylaws to have unsecured borrowings of up to 300% of its net assets. If the returns on the Mortgage Assets purchased with borrowed funds fail to cover the cost of the borrowings, the Company's results of operations would be adversely affected. A majority of the Company's borrowings are expected to be in the form of collateralized borrowings, primarily reverse repurchase agreements, which will be "marked to market" based on the market value of the Mortgage Assets pledged to secure the specific borrowings at a given time. Certain of the Company's Mortgage Assets may be cross-collateralized to secure multiple borrowing obligations of the Company to a particular lender. The Company's leveraging strategy may create instability in the Company's operations. A decline in the market value of such Mortgage Assets could limit the Company's ability to borrow or result in lenders initiating margin calls. The Company could be required to sell Mortgage Assets under adverse market conditions in order to maintain liquidity. If these sales were made at prices lower than the carrying value of the Mortgage Assets, 18 the Company would experience losses. A default by the Company under its collateralized borrowings could also result in a liquidation of the collateral, including any cross-collateralized Mortgage Assets, and resulting loss of the difference between the value of the collateral and the amount borrowed. To the extent the Company is compelled to liquidate Mortgage Assets qualifying as Qualified REIT Real Estate Assets to repay borrowings, its compliance with the REIT rules regarding asset and sources of income requirements could be negatively affected, ultimately jeopardizing the Company's status as a REIT. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT." FAILURE TO MAINTAIN REIT STATUS WOULD RESULT IN THE COMPANY BEING SUBJECT TO TAX AS A REGULAR CORPORATION AND SUBSTANTIALLY REDUCE CASH AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS Limitation on Mortgage Assets to Comply with REIT Requirements. In order to maintain its qualification as a REIT for federal income tax purposes, the Company must continually satisfy certain tests with respect to the sources of its income, the nature and diversification of its Mortgage Assets, the amount of its distributions to stockholders and the ownership of its stock. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT." Among other things, these restrictions may limit the Company's ability to acquire certain types of assets that it otherwise would consider desirable, limit the ability of the Company to securitize Mortgage Loans for sale to third parties, and require the Company to make distributions to its stockholders at times when it may deem it more advantageous to utilize the funds available for distribution for other corporate purposes (such as the purchase of additional assets or the repayment of debt) or at times that the Company may not have funds readily available for distribution. Even if the Company qualifies for taxation as a REIT, it may be subject to certain federal taxes based on certain activities, which could result in decreased cash available for distribution to stockholders. See "Federal Income Tax Consequences--Taxation of the Company." Limitations Imposed by REIT Requirements on Hedging and Investments May Limit Company's Ability to Hedge. The REIT Provisions of the Code may substantially limit the ability of the Company to hedge its Mortgage Assets and the related Company borrowings. The Company must limit its income in each year from "Qualified Hedges" (together with any other income generated from other than Qualified REIT Real Estate Assets) to less than 25% of the Company's gross income. In addition, the Company must limit its aggregate income from hedging and services from all sources (other than from Qualified REIT Real Estate Assets or Qualified Hedges) to less than 5% of the Company's gross income each year. As a result, the Company may have to limit its use of certain hedging techniques that might otherwise have been advantageous. Any limitation on the Company's use of hedging techniques may result in greater interest rate risk. If the Company were to receive income in excess of the 25% or 5% limitation, it could incur payment of a penalty tax equal to the amount of income in excess of those limitations, or in the case of a willful violation, loss of REIT status for federal income tax purposes. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Gross Income Tests." The Company must also ensure that at the end of each calendar quarter at least 75% of the value of its assets consists of cash, cash items, government securities and Qualified REIT Real Estate Assets, and of the investments in securities not included in the foregoing, the Company does not hold more than 10% of the outstanding voting securities of any one issuer and no more than 5% by value of the Company's assets consists of the securities of any one issuer. Failure to comply with any of the foregoing tests would require the Company to dispose of a portion of its assets within 30 days after the end of the calendar quarter or face loss of REIT status and adverse tax consequences. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT-- Asset Tests." Distribution Requirements to Maintain REIT Status May Require the Company to Borrow Funds to Make Distributions. The Company's operations may from time to time generate Taxable Income in excess of its Net Income for financial reporting purposes (such as from amortization of capitalized purchase premiums). The Company may also experience circumstances in which its Taxable Income is in excess of cash flow available for distribution to stockholders. To the extent that the Company does not otherwise have funds available, either situation could result in the Company's inability to distribute substantially all of its Taxable Income as required to maintain 19 its REIT status. In either situation, the Company could be required to borrow funds in order to make the required distributions that could increase borrowing costs and reduce the yield to stockholders, to sell a portion of its Mortgage Assets at disadvantageous prices in order to raise cash for distributions, or make a distribution in the form of a return of capital, which would have the effect of reducing the equity of the Company. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT-- Distribution Requirement." Disqualification as a REIT May Result in Substantial Tax Liability. If the Company should not qualify as a REIT in any tax year, it would be taxed as a regular domestic corporation and, among other consequences, distributions to the Company's stockholders would not be deductible by it in computing its taxable income. Any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to the Company's stockholders. In addition, the unremedied failure of the Company to be treated as a REIT for any one year would disqualify the Company from being treated as a REIT for four subsequent years. See "Federal Income Tax Consequences-- Termination or Revocation of REIT Status." LITIGATION A mortgage company with a similar name recently sent a demand to the Company requesting that the Company not operate under the name "Apex Mortgage Capital." Such demand threatened litigation if the Company did not change its name. The Company is currently considering the merits of such claim and no decision has been made as to how the Company will respond. If any litigation is commenced, the Company may be required to change its name and thereby incur expenses, may be required to pay damages or may incur substantial litigation costs even if the Company is successful. As a result of such threatened litigation the Company's results of operations may be adversely affected. FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE RISKS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS The Company will follow a policy intended to minimize the impact of interest rate changes. However, developing an objective interest rate risk strategy is complex and no strategy can completely insulate the Company from risks associated with interest rate changes. In addition, hedging strategies typically involve transaction costs that increase dramatically as the period covered by the hedging transaction increases and that also increase during periods of rising and fluctuating interest rates. The REIT Provisions of the Code may substantially limit the Company's ability to engage in these hedging transactions, and may prevent the Company from effectively implementing hedging strategies that it determines, absent such restrictions, would best insulate it from the risks associated with changing interest rates. In the event that the Company purchases interest rate caps or other interest rate derivatives to hedge against lifetime and periodic rate or payment caps, and the provider of interest rate derivatives becomes financially unsound or insolvent, the Company may be forced to unwind its interest rate derivatives with such provider and may take a loss on such interest rate derivatives. Further, the Company could suffer the adverse consequences that the hedging transaction was intended to protect against. The adjustable-rate Mortgage Assets that the Company intends to acquire are generally subject to periodic and lifetime interest rate caps. The Company may purchase Mortgage Derivative Securities to seek to mitigate the negative impacts of those interest-rate caps in a rising interest rate environment. Hedging techniques will be based, in part, on assumed levels of prepayments of the Company's Mortgage Assets. If prepayments are slower than assumed, the life of Mortgage Assets will be longer and the effectiveness of the Company's hedging techniques will be reduced. Hedging techniques involving the use of Mortgage Derivative Securities are highly complex and may produce volatile returns. The hedging activity of the Company will also be limited by the asset and sources of income requirements applicable to the Company as a REIT. See "Federal Income Tax Consequences--Asset Tests" and "--Gross Income Tests." The financial futures contracts and options thereon in which the Company may invest are subject to periodic margin calls that would result in additional costs to the 20 Company. Financial futures held at fiscal year end are also required to be "marked to market" and valued for tax purposes, which could result in taxable income to the Company with no corresponding cash available for distribution. There can be no assurance that these hedging techniques will have a beneficial impact on the Net Income of the Company and the dividend yield of the Common Stock. INCREASED LEVELS OF PREPAYMENTS FROM MORTGAGE ASSETS MAY ADVERSELY AFFECT NET INTEREST INCOME Prepayments of Mortgage Assets could adversely affect the Company's results of operations in several ways. The Company anticipates that a substantial portion of its adjustable-rate Mortgage Assets may bear initial "teaser" interest rates that are lower than their "fully indexed" rates (the applicable index plus a margin). In the event that such an adjustable-rate Mortgage Asset is prepaid prior to or soon after the time of adjustment to a fully indexed rate, the Company will have held the Mortgage Asset while it was less profitable and lost the opportunity to receive interest at the fully indexed rate over the expected life of the adjustable-rate Mortgage Asset. In addition, the prepayment of any Mortgage Asset that had been purchased at a premium by the Company would result in the immediate write-off of any remaining capitalized premium amount and consequent reduction of the Company's net interest income by such amount. Finally, in the event that the Company is unable to acquire new Mortgage Assets to replace the prepaid Mortgage Assets, its financial condition, cash flow and results of operations could be materially adversely affected. Prepayment rates generally increase when prevailing interest rates fall below the interest rates on existing Mortgage Assets. Prepayment experience also may be affected by the geographic location of the real estate securing the Mortgage Assets, the assumability of the Mortgage Assets, the ability of the borrower to obtain or convert to a fixed-rate Mortgage Loan, conditions in the housing and financial markets, and general economic conditions. The level of prepayments is also subject to the same seasonal influences as the residential real estate industry, with prepayments generally being greatest in the summer months and lower in the winter months. DEPENDENCE ON THE MANAGER AND ITS PERSONNEL FOR SUCCESSFUL OPERATIONS The Company will be wholly dependent for the selection, structuring and monitoring of its Mortgage Assets and associated borrowings on the diligence and skill of its officers and the officers and employees of the Manager, primarily Messrs. Barach, Gundlach, Galligan and Osborne. The Company does not anticipate having employment agreements with its senior officers, or requiring the Manager to employ specific personnel or dedicate employees solely to the Company and there are no restrictions on any competing business activities of such individuals if they are no longer employed by the TCW Group. The Company is also dependent on other key personnel and on its ability to continue to attract, retain and motivate qualified personnel. The loss of any key person could have a material adverse effect on the Company's business, financial condition, cash flow and results of operations. See "Management of the Company--Directors and Executive Officers" and "The Manager." CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE MANAGER AND ITS AFFILIATES Affiliates of Manager Will Continue to Invest in Mortgage Securities. The TCW Group has informed the Company that it has, and expects to continue to purchase and manage Mortgage Securities in the future for third-party accounts. The TCW Group will have no obligation to make investment opportunities available to the Company. As a result, there may be a conflict of interest between the operations of the Manager and the operations of its Affiliates in the acquisition and disposition of Mortgage Securities. In addition, the TCW Group may from time to time purchase Mortgage Securities for its own account. Such conflicts may result in decisions and/or allocations of Mortgage Securities by Affiliates of the Manager that are not in the best interests of the Company. Affiliates of the Manager Will Invest in Competing Entities. The TCW Group has informed the Company that it has purchased, and expects to continue to purchase, equity securities in companies organized for purposes substantially similar to those of the Company, including competing mortgage REITs, in the normal course of its investment management business. Any investment by the TCW Group in competing entities may adversely affect the market price of the Common Stock. 21 Manager May Try to Maximize Incentive Compensation and Thereby Increase Risk to the Company's Mortgage Portfolio. In addition to its base management compensation, the Manager will have the opportunity to earn incentive compensation under the Management Agreement for each fiscal quarter in an amount equal to 30% of the Net Income of the Company (before payment of such incentive compensation) in excess of the amount that would produce an annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%. See "The Manager--Manager Compensation." The Company's ability to achieve the performance level required for the Manager to earn the incentive compensation is dependent upon the level and volatility of interest rates, the Company's ability to react to changes in interest rates and to utilize successfully the operating strategies described herein, and other factors, many of which are not within the Manager's control. In evaluating Mortgage Assets for investment and in other management strategies, an undue emphasis on the maximization of income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive compensation could result in increased risk to the value of the Company's Mortgage Asset portfolio. Conflicts Relating to the Manager Rendering Services to Others. The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or Affiliates from engaging in any business or rendering services of any kind to any other person, including, without limitation, the purchase of, or rendering advice to others purchasing Mortgage Assets that meet the Company's policies and criteria. Notwithstanding the foregoing, members of the MBS Group of the TCW Group, or any equivalent or successor group of the TCW Group, during their employment by the TCW Group will not provide any active management services to a residential mortgage REIT, other than the Company, that invests primarily in high quality Mortgage Securities comparable to the Mortgage Securities in which the Company will invest. In addition, the Management Agreement does not impose a minimum time commitment that the Manager and its personnel must devote to providing services to the Company. The Manager may also advise other mortgage-related entities, including REITs, that invest in residential or commercial mortgages or other residential and non-residential mortgage securities. The ability of the Manager and its employees to engage in other business activities could reduce the time and effort spent by the Manager and its employees on the management of the Company. See "The Manager--The Management Agreement." INVESTMENT IN SHORT-TERM INVESTMENTS PENDING ACQUISITION OF MORTGAGE ASSETS MAY INITIALLY ADVERSELY AFFECT RESULTS OF OPERATIONS The Company's results of operations initially may be adversely affected pending purchase of Mortgage Assets and implementation of its Capital and Leverage Policy, particularly in the several-month period following the closing of the Offering during which time the Company will be primarily invested in short-term government securities and other Short-Term Investments. The Company anticipates that it may take up to 15 months to fully implement its Capital and Leverage Policy. FAILURE TO MAINTAIN AN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD ADVERSELY AFFECT RESULTS OF OPERATIONS The Company at all times intends to conduct its business so as not to become regulated as an investment company under the Investment Company Act. Accordingly, the Company does not expect to be subject to the restrictive provisions of the Investment Company Act. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring "mortgages and other liens on and interests in real estate" ("Qualifying Interests in Real Estate"). Under the current interpretation of the staff of the Commission, in order to qualify for this exemption, the Company must, among other things, maintain at least 55% of its assets directly in Mortgage Loans, qualifying Pass-Through Certificates and certain other Qualifying Interests in Real Estate. In addition, unless certain Mortgage Securities represent all the certificates issued with respect to an underlying pool of Mortgage Loans, such Mortgage Securities may be treated as securities separate from the underlying Mortgage Loans and, thus, may not qualify as Qualifying Interests in Real Estate for purposes of the 55% requirement. The Company's ownership of certain Mortgage Assets, therefore, may be limited by the provisions of the Investment Company Act. However, if the Company fails to qualify for exemption from registration as an investment company, its ability to use leverage would be substantially reduced, and it would be unable to conduct its business as described herein. Any such failure to qualify for such exemption would have a material adverse effect on the Company. 22 ABSENCE OF PUBLIC MARKET AND NO ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP Prior to the Offering, there has not been a public market for the Common Stock, and there can be no assurance that a regular trading market for the shares of Common Stock offered hereby will develop or, if developed, that any such market will be sustained. In the absence of a public trading market, an investor may be unable to liquidate its investment in the Company. The initial public offering price will be determined by the Company and representatives of the Underwriters. There can be no assurance that the price at which the shares of Common Stock will sell in the public market after the closing of the Offering will not be lower than the price at which they are sold by the Underwriters. See "Underwriting." INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON STOCK In the event that a public market for the Common Stock exists, it is likely that the market price of the shares of the Common Stock will be influenced by any variation between the net yield on the Company's Mortgage Assets and prevailing market interest rates. The Company's earnings will be derived primarily from any positive spread between the yield on its Mortgage Assets and the cost of its borrowings. Such positive spread will not necessarily be larger in high interest rate environments than in low interest rate environments. However, in periods of high interest rates, the Net Income of the Company and, therefore, the dividend yield on the Common Stock, may be less attractive compared with alternative investments, which could negatively impact the price of the Common Stock. If the anticipated or actual net yield on the Company's Mortgage Assets declines or if prevailing market interest rates rise, thereby decreasing the positive spread between the net yield on its Mortgage Assets and the cost of its borrowings, the market price of the Common Stock may be adversely affected. VALUE OF MORTGAGE ASSETS MAY BE ADVERSELY AFFECTED BY DEFAULTS ON UNDERLYING MORTGAGE OBLIGATIONS The Company will bear the risk of loss on any Mortgage Securities it purchases in the secondary mortgage market or otherwise. However, such Mortgage Securities will generally be structured with one or more types of credit enhancement. Such forms of credit enhancement are intended to provide protection against risk of loss due to default on the underlying Mortgage Loan, or bankruptcy, fraud and special hazard losses. To the extent third parties have been contracted to insure against these types of losses, the Company would be dependent in part upon the creditworthiness and claims-paying ability of the insurer and the timeliness of reimbursement in the event of a default on the underlying obligations. Further, the insurance coverage for various types of losses is limited in amount, and losses in excess of the limitation would be borne by the Company. ACTIVE FORMATION AND OPERATION OF COMPETING MORTGAGE REITS MAY ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON STOCK In addition to existing companies, other companies may be organized for purposes similar to that of the Company, including companies organized as REITs focused on purchasing High Quality Mortgage Assets. A proliferation of such companies may increase the competition for equity capital and thereby adversely affect the market price of the Common Stock. In addition, adverse publicity affecting this sector of the capital market or significant operating failures of a competitor may adversely affect the market price of the Common Stock. ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME In general, dividend income that a Tax-Exempt Entity receives from the Company should not constitute unrelated trade or business income as defined in Section 512 of the Code ("UBTI"). If, however, excess inclusion income were realized by the Company and allocated to stockholders, such income cannot be offset by net operating losses and, if the stockholder is a Tax-Exempt Entity, is fully taxable as UBTI under Section 512 of the Code and, as to foreign stockholders, would be subject to federal income tax withholding without reduction pursuant to any otherwise applicable income tax treaty. See "Federal Income Tax Consequences--Taxation of Stockholders" and "--Taxation of Tax- Exempt Entities" for discussions of the treatment of excess inclusion income. Excess inclusion income would be generated if the Company were to issue debt obligations with two or 23 more maturities and the terms of the payments on such obligations bore a relationship to the payments that the Company received on its Mortgage Assets securing those debt obligations. The Company intends to arrange its borrowings in a manner to avoid generating significant amounts of excess inclusion income. The Company does, however, intend to enter into one or more master reverse repurchase agreements (i) pursuant to which the Company will issue various reverse repurchase agreements that will have differing maturity dates, and (ii) that will afford the counter-party lender the right to sell any of the Company's Mortgage Securities that have been pledged to the counter-party if the Company were to default on its obligations to that counter-party lender. There can be no assurance that the Service might not successfully maintain that any such borrowing arrangements would give rise to excess inclusion income that would be allocated among stockholders in some appropriate fashion. See "Federal Income Tax Consequences--Taxation of Stockholders." Furthermore, certain types of Tax-Exempt Entities, such as voluntary employee benefit associations and entities that have borrowed to acquire their shares of Common Stock, may be required to treat a portion of or all of the dividends they may receive from the Company as UBTI. See "Federal Income Tax Consequences--Taxation of Tax-Exempt Entities." VALUE OF MORTGAGE LOANS MAY BE ADVERSELY AFFECTED BY CHARACTERISTICS OF UNDERLYING PROPERTY AND BORROWER CREDIT Mortgage Loan Credit Risks. A portion of the Company's Mortgage Assets (subject to the 25% policy on Other Mortgage Assets) may consist of Mortgage Loans. During the time it holds any Mortgage Loans, the Company will be subject to increased credit risks, including risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). In the event of a default on any Mortgage Loan held by the Company, the Company will bear the risk of loss of principal to the extent of any deficiency between the value of the secured property, less any payments from an insurer or guarantor, and the amount owing on the Mortgage Loan. Mortgage Loans in default will also cease to be eligible collateral for borrowings, and will have to be financed by the Company out of other funds until ultimately liquidated. Although the Company intends to establish reserves in amounts it believes are adequate to cover these risks, in view of the Company's lack of operating history, there can be no assurance that reserves that are established will be sufficient to offset losses on Mortgage Loans in the future. Even assuming that properties secured by any Mortgage Loans held by the Company provide adequate security for such Mortgage Loans, substantial delays could be encountered in connection with the foreclosure of defaulted Mortgage Loans, with corresponding delays in the receipt of related proceeds by the Company. State and local statutes and rules may delay or prevent the Company's foreclosure on or sale of the mortgaged property and may prevent it from receiving proceeds sufficient to repay all amounts due on the related Mortgage Loan. Some properties that may collateralize the Company's Mortgage Loans may have unique characteristics or may be subject to seasonal factors that could materially prolong the time period required to resell the property. Inability to Securitize Mortgage Loans May Result in Additional Risk Respecting Borrower Defaults. The Company may acquire and accumulate (subject to the 25% limitation on Other Mortgage Assets) Mortgage Loans as part of its investment strategy until a sufficient quantity has been acquired for securitization into Mortgage Securities. There can be no assurance that the Company will be successful in securitizing the Mortgage Loans. During the accumulation period, the Company will be subject to risks of borrower defaults and bankruptcies, fraud losses and special hazard losses. In the event of any default under Mortgage Loans held by the Company, the Company will bear the risk of loss of principal to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the Mortgage Loan. Also during the accumulation period, the costs of financing the Mortgage Loans through reverse repurchase agreements and other borrowings and lines of credit with warehouse lenders could exceed the interest income on the Mortgage Loans. It may not be possible or economical for the Company to complete the securitization of all Mortgage Loans that it acquires, in which case the Company will continue to hold the Mortgage Loans and bear the risks of borrower defaults and special hazard losses. Possible Limitation of Remedies for Sellers' Breach of Representations and Warranties with Respect to Mortgage Loans. It is expected that when the Company acquires Mortgage Loans, the seller will represent and 24 warrant to the Company that there has been no fraud or misrepresentation during the origination of the Mortgage Loans and will agree to repurchase any Mortgage Loan with respect to which there is fraud or misrepresentation. Although the Company expects that it will generally have recourse to the seller based on the seller's representations and warranties to the Company, the Company will be at risk for loss to the extent the seller does not perform its repurchase obligations. EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE COMMON STOCK The Company may in the future increase its capital resources by making additional offerings of equity and debt securities, including classes of preferred stock, Common Stock, commercial paper, medium-term notes, CMOs and senior or subordinated notes. All debt securities, and other borrowings, and classes of preferred stock will be senior to the Common Stock in a liquidation of the Company. The effect of additional equity offerings may be the dilution of the equity of stockholders of the Company or the reduction of the price of shares of the Common Stock, or both. The Company is unable to estimate the amount, timing or nature of additional offerings as they will depend upon market conditions and other factors. RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK Ability to Issue Preferred Stock May Limit Dividend Rights to Holders of the Common Stock. The authorized capital stock of the Company includes preferred stock issuable in one or more series. The issuance of preferred stock could have the effect of making an attempt to gain control of the Company more difficult by means of a merger, tender offer, proxy contest or otherwise. The preferred stock, if issued, would have a preference on dividend payments that could affect the ability of the Company to make dividend distributions to the common stockholders. See "Description of Capital Stock." 9.8% Ownership Restriction May Limit Market Activity. In order that the Company may meet the requirements for qualification as a REIT at all times, the Charter prohibits any person from acquiring or holding, directly or indirectly, shares of capital stock in excess of 9.8% in value of the aggregate of the outstanding shares of capital stock or in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of capital stock of the Company. The Charter further prohibits (i) any person from beneficially or constructively owning shares of capital stock that would result in the Company being "closely held" under Section 856(h) of the Code or otherwise cause the Company to fail to qualify as a REIT, and (ii) any person from transferring shares of capital stock if such transfer would result in shares of capital stock being owned by fewer than 100 persons. If any transfer of shares of capital stock occurs which, if effective, would result in any transfer or ownership limitations, then that number of shares of capital stock in excess or in violation of the above transfer or ownership limitations, the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole shares) shall be automatically transferred to a Trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries, and the intended transferee shall not acquire any rights in such shares. Subject to certain limitations, the Company's Board of Directors may increase or decrease the ownership limitations or waive the limitations for individual investors. See "Description of Capital Stock--Repurchase of Shares and Restrictions on Transfer." Requirement That Stockholders Give Notice of 5% Ownership May Limit Market Activity. Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) of all classes or series of the Company's capital stock, within 30 days after the end of each taxable year, is required to give written notice to the Company stating the name and address of such owner, the number of shares of each class and series of stock beneficially owned and a description of the manner in which such shares are held. Each such owner shall provide to the Company such additional information as the Company may request in order to determine the effect, if any, of such beneficial ownership on the Company's status as a REIT and to ensure compliance with the ownership limitations. The foregoing provisions may inhibit market activity and the resulting opportunity for the holders of the Common Stock to receive a premium for their Common Stock that might otherwise exist in the absence of such provisions. Such provisions also may make the Company an unsuitable investment vehicle for any person seeking to obtain ownership of more than 9.8% of the outstanding shares of the Company's Common Stock. 25 Provisions of Maryland Law Restricting Takeovers May Limit Takeover Attempts That May Be Beneficial to Stockholders. Certain provisions of the Maryland General Corporation Law relating to "business combinations" and a "control share acquisition" and of the Charter and Bylaws of the Company may also have the effect of delaying, deterring or preventing a takeover attempt or other change in control of the Company that would be beneficial to stockholders and might otherwise result in a premium over then prevailing market prices. Although the Bylaws of the Company contain a provision exempting the acquisition of Common Stock by any person from the control share acquisition statute, there can be no assurance that such provision will not be amended or eliminated at any time in the future. See "Certain Provisions of Maryland Law and of the Company's Charter and Bylaws." 26 USE OF PROCEEDS The net proceeds from the Offering are estimated to be approximately $ ($ if the Underwriters' over-allotment options are exercised in full), assuming an initial public offering price of $15.00 per share of Common Stock. The net proceeds from the Offering will be used by the Company to purchase its initial portfolio of Mortgage Assets. The Company may require up to six months to have the net proceeds of the Offering fully invested in Mortgage Assets and up to an additional nine months to fully implement the Capital and Leverage Policy to increase the Mortgage Asset investments to its desired level. Pending full investment in the desired mix of Mortgage Assets, funds will be committed to Short-Term Investments that are expected to provide a lower net return than the Company hopes to achieve from its intended primary Mortgage Asset investments. DIVIDEND AND DISTRIBUTION POLICY The Company intends to distribute substantially all of its net Taxable Income (which does not ordinarily equal net income as calculated in accordance with GAAP) to stockholders in each year. The Company intends to declare four regular quarterly dividends. In addition, Taxable Income, if any, not distributed through regular quarterly dividends will be distributed annually, at or near year end, in a special dividend. The dividend policy is subject to revision at the discretion of its Board of Directors. All distributions will be made by the Company at the discretion of its Board of Directors and will depend on the earnings and financial condition of the Company, maintenance of REIT status and such other factors as the Company's Board of Directors deems relevant. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Distribution Requirement." In order to qualify as a REIT under the Code, the Company must make distributions to its stockholders each year in an amount at least equal to (i) 95% of its Taxable Income (before deduction of dividends paid less any net capital gain), plus (ii) 95% of the excess of the net income from Foreclosure Property over the tax imposed on such income by the Code, minus (iii) any excess non-cash income. The "Taxable Income" of the Company for any year means the taxable income of the Company for such year (excluding any net income derived either from property held primarily for sale to customers or from Foreclosure Property) subject to certain adjustments provided in the REIT Provisions of the Code. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Distribution Requirement." It is anticipated that distributions generally will be taxable as ordinary income to stockholders of the Company, although a portion of such distributions may be designated by the Company as capital gain or may constitute a return of capital. The Company will furnish annually to each of its stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains. For a discussion of the federal income tax treatment of distributions by the Company, see "Federal Income Tax Consequences-- Taxation of Stockholders." 27 CAPITALIZATION The capitalization of the Company, as of September 15, 1997 and as adjusted to reflect the sale of the shares of Common Stock offered hereby at an assumed initial public offering price per share at the mid-point of the offering range set forth on the cover page of this Prospectus, is as follows:
AS ACTUAL ADJUSTED(1)(2) ------ -------------- Preferred Stock, par value $.01 Authorized--50,000,000 shares--no shares issued and outstanding........................................... $ -- $ -- Common Stock, par value $.01 Authorized--100,000,000 shares--100 shares issued and outstanding (as adjusted, 10,000,100 shares issued)............... 1 Additional Paid-in Capital............................. 1,499 ------ ----- Total.................................................. $1,500 $ ====== =====
- -------- (1) Before deducting offering expenses estimated to be $750,000, payable by the Company, and assuming no exercise of the Underwriters' over-allotment options to purchase up to an additional 1,500,000 shares of Common Stock. (2) Does not include 1,000,000 shares of Common Stock reserved for issuance upon exercise of options granted under the Company's 1997 Stock Option Plan. See "Management of the Company--Stock Options." LIQUIDITY AND CAPITAL RESOURCES The Company has been organized to operate so as to qualify as a REIT under Sections 856 through 860 of the Code and, as such, anticipates distributing annually at least 95% of its Taxable Income. Cash for such distributions will be generated from the Company's operations. See "Dividend and Distribution Policy" and "Federal Income Tax Consequences--Gross Income Tests--Distribution Requirement." The principal sources of funds will be the net proceeds of the Offering and borrowings (primarily reverse repurchase agreements) or the issuance of debt or additional equity securities. The Company anticipates that it will incur short-term borrowings immediately after the net proceeds of the Offering have been invested in the portfolio of Mortgage Assets. The Company's income will consist primarily of interest and other revenues from its investments in Mortgage Assets. The Company believes that the net proceeds of the Offering, combined with the cash flow from operations and the utilization of borrowings, will be sufficient to enable the Company to meet anticipated liquidity requirements. If the Company's cash resources are at any time insufficient to satisfy the Company's liquidity requirements, the Company may be required to liquidate Mortgage Assets or sell debt or additional equity securities. There is no assurance that financing will be available to the Company on favorable terms, or at all. See "Risk Factors--No Current Borrowing Arrangements." 28 BUSINESS AND STRATEGY GENERAL The Company was incorporated in Maryland on September 15, 1997 and, upon the closing of the Offering, will commence its business of purchasing and holding a portfolio of adjustable-rate Mortgage Assets. The Company intends to generate income for distribution to its stockholders primarily from the Net Income on its Mortgage Assets qualifying as Qualified REIT Real Estate Assets. The Company's Net Income will result primarily from the difference between (i) the interest income on its Mortgage Asset investments and (ii) the borrowing and financing costs of the Mortgage Assets. The Company's principal executive offices are located at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017, and its telephone number is (213) 244-0440. STRATEGY To achieve its business objective and generate dividend yields that provide a competitive rate of return for its stockholders, the Company's strategy is to: . purchase primarily single-family Mortgage Assets, the majority of which are currently expected to have adjustable interest rates based on changes in short-term market interest rates; . manage the credit risk of its Mortgage Assets through, among other activities (i) carefully selecting Mortgage Assets to be acquired, (ii) complying with the Company's policies with respect to credit risk concentration which, among other things, require the Company to maintain a Mortgage Asset portfolio with a weighted average rating generally equivalent to AA (or a comparable rating) or better, (iii) actively monitoring the ongoing credit quality and servicing of its Mortgage Assets, and (iv) maintaining appropriate capital levels and allowances for possible credit losses; . finance purchases of Mortgage Assets with the net proceeds of equity offerings and, to the extent permitted by the Company's Capital and Leverage Policy, to utilize leverage to increase potential returns to stockholders through borrowings (primarily reverse repurchase agreements) with interest rates that will also reflect changes in short- term market interest rates; . seek to structure its borrowings to have interest rate adjustment indices and interest rate adjustment periods that, on an aggregate hedged basis, generally correspond to the interest rate adjustment indices and interest rate adjustment periods of its adjustable-rate Mortgage Assets; . utilize interest rate caps, swaps and similar financial instruments to mitigate the risk of the cost of its variable-rate liabilities exceeding the earnings on its Mortgage Assets during a period of rising interest rates; . seek to minimize prepayment risk primarily by structuring a diversified portfolio with a variety of prepayment characteristics; and . apply securitization techniques designed to enhance the value and liquidity of the Company's Mortgage Assets acquired in the form of Mortgage Loans by securitizing them into Mortgage Securities that are tailored to the Company's objectives. There can be no assurance that the Company will successfully implement its strategies. See "Risk Factors" for a discussion of factors that could adversely affect the Company's ability to successfully implement its strategies. Although there can be no assurance, the Company believes that it will be able to generate competitive earnings and dividends while holding Mortgage Assets of high credit quality and maintaining a disciplined risk- control profile. The Company will also strive to increase its return to stockholders over time by: (i) seeking to raise additional capital in order to increase its ability to invest in additional Mortgage Assets; (ii) striving to lower its effective borrowing costs through seeking direct funding with collateralized lenders, in addition to using Wall Street intermediaries, and investigating the possibility of using collateralized commercial paper and medium-term note programs; and (iii) improving the efficiency of its balance sheet structure by investigating the issuance of uncollateralized subordinated debt and other forms of capital. 29 Investment Policy. The Company's investment strategy will be to create a diversified portfolio primarily of High Quality adjustable-rate Mortgage Securities that, in the aggregate, will preserve the capital base of the Company and generate income for distribution to its stockholders. The Company's Mortgage Assets will be held primarily for investment. The Company intends generally to buy and hold Mortgage Assets to maturity and, therefore, will seek to have a low portfolio turnover rate. The Company's ability to sell Mortgage Assets for gain is restricted by the REIT Provisions of the Code and the rules, regulations and interpretations of the Service thereunder. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT-- Gross Income Tests." The Company anticipates that at least 75% of total Mortgage Assets will be High Quality adjustable-rate Mortgage Securities and Short-Term Investments. The Mortgage Securities will consist of (i) privately issued mortgage Pass- Through Certificates as well as Agency Certificates, (ii) certain CMOs and (iii) Other Mortgage Securities, including certain Mortgage Derivative Securities. The Company further anticipates that at least 50% of the Company's total Mortgage Assets will be Agency Certificates or carry a AAA or comparable rating from at least one of the Rating Agencies. The Company will generally not acquire Inverse Floaters, REMIC Residuals or First Loss Subordinated Bonds. The Company may acquire interest only, principal only or other Mortgage Derivative Securities that receive a disproportionate share of interest income or principal, either as an independent stand-alone investment opportunity or to assist in the management of prepayment and other risks, but only on a limited basis due to the greater risk of loss associated with Mortgage Derivative Securities. See "Risk Factors--Failure to Successfully Manage Interest Rate Risks May Adversely Affect Results of Operations." The remainder of the Company's investment portfolio, composing not more than 25% of its total Mortgage Assets, may consist of unrated or rated Mortgage Assets that are determined by the Manager to be of comparable quality to High Quality Mortgage Securities, including (i) adjustable-rate Mortgage Loans secured by first liens on single-family (one-to-four units) residential properties, (ii) Pass-Through Certificates or CMOs backed by Mortgage Loans on single-family properties and (iii) Other Mortgage Securities. The Company intends to securitize substantially all Mortgage Loans it acquires into High Quality Mortgage Securities that are Qualified REIT Real Estate Assets that will then be held for investment. Substantially all of the Company's Mortgage Assets will constitute Qualified REIT Real Estate Assets. The Company intends to purchase Mortgage Assets from broker-dealers and banks that regularly make markets in Mortgage Securities. The Company also intends to purchase Mortgage Securities from a variety of Suppliers of Mortgage Assets (typically mortgage bankers, savings and loans, investment banking firms, home builders and other firms involved in originating and packaging Mortgage Loans). In acquiring Mortgage Assets, the Company will compete with other REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, other lenders, Fannie Mae, FHLMC, GNMA and other entities purchasing Mortgage Assets, some of which have greater financial resources than the Company. There are several REITs similar to the Company and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of Mortgage Assets suitable for purchase by the Company. There can be no assurance that the Company will be able to acquire sufficient Mortgage Assets from Suppliers of Mortgage Assets at spreads above the Company's cost of funds. The Company's Board of Directors has adopted the investment policies set forth in this Prospectus as its initial investment policies. The policies may be changed at any time by the Board of Directors (subject to approval by a majority of Unaffiliated Directors) without the consent of stockholders. See "Risk Factors--Control by the Company's Board of Directors of the Company's Operating Policies and Investment Strategies." The Company's Board of Directors will establish and approve (including approval by a majority of Unaffiliated Directors) at least annually the investment policies of the Company, which will include investment criteria that each Mortgage Asset must satisfy to be eligible for investment by the Company. The Manager must use such criteria in determining whether to acquire Mortgage Assets on behalf of the Company. The Company will not purchase any Mortgage Assets from its Affiliates other than Mortgage Securities that may be purchased from a taxable subsidiary of the Company that may be formed in connection with the securitization of Mortgage Loans. 30 The Company does not intend to enter into any servicing or administrative agreements (other than the Management Agreement) with the Manager or any entities affiliated with the Manager. Any changes in this policy would be subject to approval by the Company's Board of Directors, including by a majority of the Unaffiliated Directors. See "Risk Factors--Control by the Board of Directors of the Company's Operating Policies and Investment Strategies." Financing Policy. The Company intends to finance its purchase of Mortgage Assets initially through equity from the net proceeds of the Offering and, thereafter, primarily by borrowing against existing Mortgage Assets and using the net proceeds to acquire additional Mortgage Assets. See "Use of Proceeds" and "Management Policies and Programs--Capital and Leverage Policy." The borrowings are expected to be in the form of reverse repurchase agreements (a borrowing device evidenced by an agreement to sell securities or other Mortgage Assets to a third-party and a simultaneous agreement to repurchase them at a specified future date and price, the price difference constituting interest on the borrowing), loan agreements, Dollar-Roll Agreements (an agreement to sell a security for delivery on a specified future date and a simultaneous agreement to repurchase the same or a substantially similar security on a specified future date), warehouse lines of credit and other credit facilities. The Company's borrowings generally will be secured by its Mortgage Assets. The Company's income will be increased through the use of such borrowings if the cost of the borrowings is less than the interest earned on the Mortgage Assets purchased with or securing the borrowed funds. However, during any periods in which this spread is negative, and the Company's borrowing costs exceed its interest income on Mortgage Assets purchased with or securing the borrowed funds, the Company could experience losses. See "Risk Factors--Substantial Leverage and Potential Net Interest and Operating Losses in Connection with Borrowings" and "--Interest Rate Fluctuations May Decrease Net Interest Income." Hedging Policy. The Company intends to enter into hedging transactions to mitigate the effects of interest rate fluctuations on its portfolio of Mortgage Assets and related debt. See "Business and Strategy--Asset/Liability Management Policies--Interest Rate Risk Management Policy." These transactions may include interest rate swaps, the purchase of interest rate caps and futures contracts and options on futures contracts and the trading of forward contracts to mitigate the effects of fluctuations in interest rates. The Company may also purchase Mortgage Derivative Securities and Excess Servicing Rights secured by interests in real property as a hedging strategy. The Company will not acquire any Mortgage Derivative Securities or Excess Servicing Rights that do not qualify as Qualified REIT Real Estate Assets. Accordingly, income from Mortgage Derivative Securities and Excess Servicing Rights acquired by the Company will be qualifying income under the 75% and 95% sources of income tests applicable to the Company as a REIT. The Company intends to carefully monitor its income from hedging activity in Mortgage Assets that are not Qualified REIT Real Estate Assets, and may have to limit such activity in order to comply with the REIT Provisions of the Code and to ensure that it does not realize excessive hedging income that could result in the Company's disqualification as a REIT. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Gross Income Tests." The Manager. The Manager will manage the day-to-day operations of the Company, subject to the direction and oversight of the Company's Board of Directors. The Manager's key officers have experience in raising and managing mortgage capital, mortgage finance and the purchase and administration of Mortgage Assets, however, the Manager has not previously managed or operated a REIT. See "Management of the Company-- Directors and Executive Officers" and "The Manager" for biographies and a description of the prior business experience of the executive officers of the Manager, and "Risk Factors--Lack of Prior Experience" and "--Dependence on the Manager and Its Personnel for Successful Operations." COMPETITION FOR MORTGAGE ASSETS The Company believes that the principal competition in the business of acquiring and holding Mortgage Assets are financial institutions such as banks, savings and loans, life insurance companies, institutional investors such as mutual funds and pension funds, and certain other mortgage REITs. The Company anticipates that it 31 will be able to compete effectively and generate competitive rates of return for stockholders due to the Manager's experience in managing mortgage capital, access to and experience in secondary mortgage markets, relative freedom to securitize its Mortgage Assets, relatively low level of operating costs, ability to utilize prudent amounts of leverage through accessing the wholesale market for collateralized borrowings, freedom from certain forms of regulation and the tax advantages of its REIT status. DESCRIPTION OF MORTGAGE ASSETS The Company intends to invest principally in the following types of Mortgage Assets subject to the operating restrictions described in "--Management Policies and Programs" below. Pass-Through Certificates General. The Company's investments in Mortgage Assets are expected to be concentrated in Pass-Through Certificates. The Pass-Through Certificates to be acquired by the Company will consist primarily of Pass-Through Certificates issued by Fannie Mae, FHLMC and GNMA, as well as High Quality privately issued adjustable-rate mortgage pass-through certificates. The Pass-Through Certificates to be acquired by the Company will represent interests in mortgages that will be secured primarily by liens on single-family (one-to- four units) residential properties. The Company may also acquire, within the 25% investment limitation on Other Mortgage Assets, unrated or rated Pass- Through Certificates that represent interests in mortgages secured by liens on single-family properties that are determined by the Manager and the Board of Directors to be of comparable quality to High Quality Mortgage Securities. Pass-Through Certificates backed by adjustable-rate Mortgage Loans are subject to lifetime interest rate caps and to periodic interest rate caps that limit the amount an interest rate can change during any given period. The Company's borrowings are generally not subject to similar restrictions. In a period of increasing interest rates, the Company could experience a decrease in Net Income or incur losses because the interest rates on its borrowings could exceed the interest rates on ARM Pass-Through Certificates owned by the Company. The impact on Net Income of such interest rate changes will depend on the adjustments features of the Mortgage Assets owned by the Company, the maturity schedules of the Company's borrowings and related hedging. Privately Issued ARM Pass-Through Certificates. Privately issued ARM Pass- Through Certificates are structured similarly to the Fannie Mae, FHLMC and GNMA pass-through certificates discussed below and are issued by originators of and investors in Mortgage Loans, including savings and loan associations, savings banks, commercial banks, mortgage banks and special purpose subsidiaries of such institutions. Privately issued ARM Pass-Through Certificates are usually backed by a pool of conventional adjustable-rate Mortgage Loans and are generally structured with credit enhancement such as pool insurance or subordination. However, privately issued ARM Pass-Through Certificates are typically not guaranteed by an entity having the credit status of Fannie Mae, FHLMC or GNMA guaranteed obligations. Existing Fannie Mae ARM Programs. Fannie Mae is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act (12 U.S.C. (S) 1716 et seq.). Fannie Mae provides funds to the mortgage market primarily by purchasing Mortgage Loans on homes from local lenders, thereby replenishing their funds for additional lending. Fannie Mae established its first ARM programs in 1982 and currently has several ARM programs under which ARM certificates may be issued, including programs for the issuance of securities through REMICs under the Code. Each Fannie Mae ARM Pass-Through Certificate issued to date has been issued in the form of a Pass-Through Certificate representing a fractional undivided interest in a pool of ARMs formed by Fannie Mae. The ARMs included in each pool are fully amortizing conventional Mortgage Loans secured by a first lien on either one-to-four family residential properties or multifamily properties. The original terms to maturities of the Mortgage Loans generally do not exceed 40 years. Currently, Fannie Mae has issued several different series of ARMs. All of Fannie Mae's series of ARMs are in its lender (or "swap"), mortgage- backed securities program where individual lenders swap pools of Mortgage Loans that they originated or purchased for a Fannie Mae 32 security backed by those same Mortgage Loans. Each series bears an initial interest rate and a margin tied to an index based on all Mortgage Loans in the related pool, less a fixed percentage representing servicing compensation and Fannie Mae's guarantee fee. The specified index used in each series has included the One-Year U.S. Treasury Rate published by the Federal Reserve Board, the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San Francisco and other indices. In addition, the majority of series of Fannie Mae ARMs issued to date have had a monthly, semi-annual or annual interest rate adjustment. Adjustments to the interest rates on Fannie Mae ARMs are typically subject to lifetime caps. In addition, some pools contain ARMs that are subject to semi-annual or annual interest rate change limitations, frequently 1% to 2%, respectively. Some pools contain ARMs that provide for limitations on the amount by which monthly payments may be increased, but have no limitation on the frequency or magnitude of changes to the mortgage interest rate of the ARM except for the lifetime cap. In cases where an increase in the rate cannot be covered by the amount of the scheduled payment, the uncollected portion of interest is deferred and added to the principal amount of the ARM. In such cases, interest paid on the Fannie Mae Certificates is a monthly pass-through of the amount of interest on each ARM rather than a weighted average pass- through rate of interest. Fannie Mae guarantees to the registered holder of a Fannie Mae Certificate that it will distribute amounts representing scheduled principal and interest (at the rate provided by the Fannie Mae Certificate) on the Mortgage Loans in the pool underlying the Fannie Mae Certificate, whether or not received, and the full principal amount of any such Mortgage Loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. The obligations of Fannie Mae under its guarantees are solely those of Fannie Mae and are not backed by the full faith and credit of the United States. If Fannie Mae were unable to satisfy such obligations, distributions to holders of Fannie Mae Certificates would consist solely of payments and other recoveries on the underlying Mortgage Loans and, accordingly, monthly distributions to holders of Fannie Mae Certificates would be affected by delinquent payments and defaults on such Mortgage Loans. Existing FHLMC ARM Programs. The Federal Home Loan Mortgage Corporation is a corporate instrumentality of the United States created pursuant to an Act of Congress (Title III of the Emergency Home Finance Act of 1970, as amended, 12 U.S.C. (S) 1451-1459), on July 24, 1970. The principal activity of FHLMC currently consists of the purchase of Conforming Mortgage Loans or participation interests therein and the resale of the loans and participations so purchased in the form of guaranteed Mortgage Securities. FHLMC established its first regular ARM program in 1986 and currently has several regular ARM programs available for the issuance of ARM certificates and a number of special programs that may be offered to Mortgage Loan sellers. All of the Mortgage Loans evidenced by FHLMC Certificates are conventional Mortgage Loans, and therefore are not guaranteed or insured by, and are not obligations of, the United States or any agency or instrumentality thereof, other than FHLMC. Each FHLMC Certificate issued to date has been issued in the form of a Pass- Through Certificate representing an undivided interest in a pool of ARMs purchased by FHLMC. The ARMs included in each pool are fully amortizing, conventional Mortgage Loans with original terms to maturity of up to 40 years secured by first liens on one-to-four unit family residential properties or multi-family properties. An ARM certificate issued by FHLMC may be issued under one of two Cash Programs (comprised of Mortgage Loans purchased from a number of sellers) or Guarantor Programs (comprised of Mortgage Loans purchased from one seller in exchange for participation certificates representing interests in the Mortgage Loans purchased.) The interest rate paid on FHLMC Certificates adjusts annually on the first day of the month following the month in which the interest rates on the underlying Mortgage Loans adjust. The interest rates paid on ARM certificates issued under FHLMC's standard ARM programs adjust annually in relation to the One-Year U.S. Treasury Rate published by the Federal Reserve Board. The specified index used in each FHLMC series has also included the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San Francisco and other indices. Interest rates paid on FHLMC Certificates equal the applicable index rate plus a specified number of basis points ranging typically from 125 to 250 basis points. In addition, the majority of series of FHLMC Mortgage Securities issued to date have had a monthly, semi-annual or annual interest adjustment. Adjustments in the interest rates paid are generally limited to an annual increase or decrease of either 1% or 2% and to a lifetime cap of 5% or 6% over 33 the initial interest rate. Certain FHLMC programs include Mortgage Loans that allow the borrower to convert the adjustable mortgage interest rate of his ARM to a fixed rate. ARMs that are converted into fixed-rate Mortgage Loans are repurchased by FHLMC or by the seller of such Mortgage Loans to FHLMC, at the unpaid principal balance thereof, plus accrued interest to the due date of the last adjustable rate interest payment. Some FHLMC pools contain ARMs that provide for limitations on the amount by which monthly payments may be increased but have no limitation on the frequency or magnitude of changes to the mortgage interest rate of the ARM except for the lifetime cap. In cases where an increase in the rate cannot be covered by the amount of the scheduled payment, the uncollected portion of interest is deferred and added to the principal amount of the ARM. In such cases, interest paid on the FHLMC Certificates is a monthly pass-through of the amount of interest on each ARM rather than a weighted average pass-through rate of interest. FHLMC guarantees to each holder of its ARM certificates the timely payment of interest at the applicable pass-through rate and ultimate collection of all principal on the holder's pro rata share of the unpaid principal balance of the related ARMs, but does not guarantee the timely payment of scheduled principal of the underlying Mortgage Loans. The obligations of FHLMC under its guarantees are solely those of FHLMC and are not backed by the full faith and credit of the United States. If FHLMC were unable to satisfy such obligations, distributions to holders of FHLMC Certificates would consist solely of payments and other recoveries on the underlying Mortgage Loans and, accordingly, monthly distributions to holders of FHLMC Certificates would be affected by delinquent payments and defaults on such Mortgage Loans. Existing GNMA ARM Programs. GNMA is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development ("HUD"). Section 306(g) of Title III of the National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of the principal of and interest on certificates that represent an interest in a pool of Mortgage Loans insured by the FHA under the Housing Act or Title V of the Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States Code and other loans eligible for inclusion in mortgage pools underlying GNMA Certificates. Section 306(g) of the Housing Act provides that "the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty under this subsection." An opinion, dated December 12, 1969, of an Assistant Attorney General of the United States, states that such guarantees under Section 306(g) of mortgage-backed certificates of the type that may be purchased by the Company or pledged as security for a series of Mortgage Securities are authorized to be made by GNMA and "would constitute general obligations of the United States backed by its full faith and credit." The interest rate paid on the certificates issued under GNMA's standard ARM program adjusts annually in relation to the One-Year U.S. Treasury Rate published by the Federal Reserve Board. Interest rates paid on GNMA Certificates typically equal the index rate plus 150 basis points. Adjustments in the interest rate are generally limited to an annual increase or decrease of 1% and to a lifetime cap of 5%. CMOs The Company may, from time to time, invest in variable-rate and short-term fixed-rate CMOs. CMOs ordinarily are issued in series, each of which consists of several serially maturing classes ratably secured by a single pool of Mortgage Loans or Pass-Through Certificates. Generally, principal payments received on the mortgage-related assets securing a series of CMOs, including prepayments on such mortgage-related assets, are applied to principal payments on one or more classes of the CMOs of such series on each principal payment date for such CMOs. Scheduled payments of principal of and interest on the mortgage-related assets and other collateral securing a series of CMOs are intended to be sufficient to make timely payments of interest on such CMOs and to retire each class of such CMOs by its stated maturity. CMOs may be subject to certain rights of issuers thereof to redeem such CMOs prior to their stated maturity dates, which may have the effect of diminishing the Company's anticipated return on its investment. The Company will not acquire any CMOs that do not qualify as Qualified REIT Real Estate Assets. 34 Mortgage Warehouse Participations The Company also may from time to time acquire Mortgage Warehouse Participations as an additional means of diversifying its sources of income. The Company anticipates that such investments, together with its investments in Other Mortgage Assets, will not in the aggregate exceed 25% of its total Mortgage Assets. These investments are participations in lines of credit to Mortgage Loan originators that are secured by recently originated Mortgage Loans that are in the process of being sold to investors. Mortgage Warehouse Participations do not qualify as Qualified REIT Real Estate Assets. Accordingly, this activity will be limited by the REIT Provisions of the Code. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT." Other Mortgage Securities General. The Company may acquire Other Mortgage Securities or interests therein if it determines that it will be beneficial to do so and it will not adversely affect qualification of the Company as a REIT. Such Other Mortgage Securities may include non-High Quality Mortgage Assets and other Mortgage Securities collateralized by single-family Mortgage Loans, Mortgage Warehouse Participations, Mortgage Derivative Securities, Subordinated Interests and other mortgage-backed and mortgage-collateralized obligations, other than Pass-Through Certificates and CMOs. Mortgage Derivative Securities. The Company may acquire Mortgage Derivative Securities on a limited basis as market conditions warrant, either as an independent stand-alone investment opportunity or to assist in the management of prepayment and other risks. Mortgage Derivative Securities provide for the holder to receive interest only, principal only, or interest and principal in amounts that are disproportionate to those payable on the underlying Mortgage Loans. Payments on Mortgage Derivative Securities are highly sensitive to the rate of prepayments on the underlying Mortgage Loans. In the event of more rapid than anticipated prepayments on such Mortgage Loans, the rates of return on interests in Mortgage Derivative Securities representing the right to receive interest only or a disproportionately large amount of interest ("Interest Only Derivatives") would be likely to decline. Conversely, the rates of return on Mortgage Derivative Securities representing the right to receive principal only or a disproportionate amount of principal ("Principal Only Derivatives") would be likely to increase in the event of rapid prepayments. The Company presently intends to acquire Mortgage Derivative Securities, including Principal and Interest Only Derivatives. Interest Only Derivatives may be an effective hedging device since they generally increase in value as Mortgage Securities representing interests in adjustable-rate mortgages decrease in value. The Company also may invest in other types of floating-rate derivatives that are currently available in the market. The Company also may invest in other Mortgage Derivative Securities that may in the future be developed if the Board of Directors, including a majority of Unaffiliated Directors, determines that such investments would be advantageous to the Company. The Company will generally not acquire Inverse Floaters, First Loss Subordinated Bonds, REMIC Residuals or other CMO Residuals. However, the Company may retain residual interests in its own securitizations of Mortgage Loans. Moreover, the Company will not purchase any Mortgage Derivative Securities that do not qualify as Qualified REIT Real Estate Assets. Subordinated Interests. The Company also may acquire Subordinated Interests, which are classes of Mortgage Securities that are junior to other classes of such series of Mortgage Securities in the right to receive payments from the underlying Mortgage Loans. The subordination may be for all payment failures on the Mortgage Loans securing or underlying such series of Mortgage Securities. The subordination will not be limited to those resulting from certain types of risks, such as those resulting from war, earthquake or flood, or the bankruptcy of a borrower. The subordination may be for the entire amount of the series of Mortgage Securities or may be limited in amount. Any Subordinated Interests acquired by the Company will be limited in amount and bear yields that the Company believes are commensurate with the risks involved. The market for Subordinated Interests is not 35 extensive and may be illiquid. In addition, the Company's ability to sell Subordinated Interests will be limited by the REIT Provisions of the Code. Accordingly, the Company intends to purchase Subordinated Interests for investment purposes only. Although publicly offered Subordinated Interests generally will be rated, the risks of ownership will be substantially the same as the ownership of unrated Subordinated Interests because the rating does not address the possibility that the Company might suffer a lower than anticipated yield or fail to recover its initial investment. The Company will only purchase Subordinated Interests that are consistent with its credit risk management policy and will not purchase any Subordinated Interests that do not qualify as Qualified REIT Real Estate Assets. Mortgage Loans General. The Company intends to acquire and accumulate Mortgage Loans as part of its investment strategy until a sufficient quantity has been accumulated for securitization into High Quality Mortgage Securities. The Company anticipates that the Mortgage Loans acquired by it and not yet securitized, together with its investments in Other Mortgage Assets, will not constitute more than 25% of the Company's total Mortgage Assets at any time. All Mortgage Loans will be acquired with the intention of securitizing them into High Quality Mortgage Securities. However, there can be no assurance that the Company will be successful in securitizing the Mortgage Loans. After a pool of Mortgage Loans has been securitized, the Mortgage Loans will no longer be considered Other Mortgage Assets. To meet the Company's investment criteria, the Mortgage Loans to be acquired by the Company will generally conform to the underwriting guidelines established by Fannie Mae, FHLMC or other credit insurers. Applicable banking laws generally require that an appraisal be obtained in connection with the original issuance of Mortgage Loans by the lending institution. The Company does not intend to obtain additional appraisals at the time of acquiring Mortgage Loans. The Mortgage Loans may be originated by or purchased from various Suppliers of Mortgage Assets throughout the United States, such as savings and loan associations, banks, mortgage bankers, home builders, insurance companies and other mortgage lenders. The Company may acquire Mortgage Loans directly from originators and from entities holding Mortgage Loans originated by others. The Board of Directors of the Company has not established any limits upon the geographic concentration of Mortgage Loans to be acquired by the Company or the credit quality of Suppliers of Mortgage Assets. See "Risk Factors-- Interest Rate Fluctuations May Decrease Net Interest Income" and "--No Current Mortgage Assets." The Company anticipates that it will acquire primarily ARMs. The interest rate on ARMs is typically tied to an index (such as the One-Year U.S. Treasury Rate published by the Federal Reserve Board, the 11th District Cost of Funds Index published by the Federal Home Loan Bank of San Francisco or LIBOR) and is adjustable periodically at various intervals. Such Mortgage Loans may be subject to lifetime or periodic interest rate or payment caps. Conforming and Nonconforming Mortgage Loans. The Company may acquire both Conforming and Nonconforming Mortgage Loans for securitization. Conforming Mortgage Loans comply with the requirements for inclusion in a loan guarantee program sponsored by Fannie Mae, FHLMC or GNMA. Under current regulations, the maximum principal balance allowed on Conforming Mortgage Loans ranges from $214,600 for one-unit residential loans ($321,000 for such residential loans secured by mortgage properties located in either Alaska or Hawaii) to $412,450 for four-unit residential loans ($618,875 for such residential loans secured by mortgaged properties located in either Alaska or Hawaii). Nonconforming Mortgage Loans are Mortgage Loans that do not qualify in one or more respects for purchase by Fannie Mae or FHLMC under their standard programs. The Company expects that a majority of Nonconforming Mortgage Loans it purchases will be nonconforming primarily because they have original principal balances which exceed the requirements for FHLMC or Fannie Mae programs. Commitments to Mortgage Loan Sellers. The Company may issue commitments ("Commitments") to originators and other sellers of Mortgage Loans who follow policies and procedures that generally comply with Fannie Mae and FHLMC regulations and guidelines and that comply with all applicable federal and state laws 36 and regulations for Mortgage Loans secured by single-family (one-to-four units) residential properties. In addition, Commitments may be issued for Agency Certificates as well as privately issued Pass-Through Certificates and Mortgage Loans. Commitments will obligate the Company to purchase Mortgage Assets from the holders of the Commitments for a specific period of time, in a specific aggregate principal amount and at a specified price and margin over an index. Although the Company may commit to acquire Mortgage Loans prior to funding, all Mortgage Loans are to be fully funded prior to their acquisition by the Company. Following the issuance of Commitments, the Company will be exposed to risks of interest rate fluctuations similar to those risks on its adjustable-rate Mortgage Assets. Securitization of Mortgage Loans. The Mortgage Loans will be acquired by the Company and held until a sufficient quantity has been accumulated for securitization. During the accumulation period, the Company will be subject to risks of borrower defaults and bankruptcies, fraud losses and special hazard losses (such as those occurring from earthquakes or floods) that are not covered by standard hazard insurance. In the event of a default on any Mortgage Loan held by the Company, the Company will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral underlying the Mortgage Loan and the principal amount of the Mortgage Loan. No assurance can be given that any such mortgage, fraud or hazard insurance will adequately cover a loss suffered by the Company. Also during the accumulation period, the costs of financing the Mortgage Loans through reverse repurchase agreements and other borrowings and lines of credit with warehouse lenders could exceed the interest income on the Mortgage Loans. It may not be possible or economical for the Company to complete the securitization for all Mortgage Loans that the Company acquires, in which case the Company will continue to bear the risks of borrower defaults and special hazard losses. Protection Against Mortgage Loan Risks. It is anticipated that each Mortgage Loan purchased will have a commitment for mortgage pool insurance from a mortgage insurance company with a claims-paying ability in one of the two highest rating categories by either of the Rating Agencies. Mortgage pool insurance insures the payment of certain portions of the principal and interest on Mortgage Loans. In lieu of mortgage pool insurance, the Company may arrange for other forms of credit enhancement such as letters of credit, subordination of cash flows, corporate guaranties, establishment of reserve accounts or over-collateralization. The Company expects that all Mortgage Loans to be acquired will be reviewed by a mortgage pool insurer or other qualified Mortgage Loan underwriter to ensure that the credit quality of the Mortgage Loans meets the insurer's guidelines. The Company intends to rely primarily upon the credit evaluation of such third-party mortgage pool insurer or underwriter issuing the commitment rather than make its own independent credit review in determining whether to purchase a Mortgage Loan. Credit losses covered by the pool insurance policies or other forms of credit enhancement are restricted to the limits of their contractual obligations and may be lower than the principal amount of the Mortgage Loan. The pool insurance or credit enhancement will be issued when the Mortgage Loan is subsequently securitized, and the Company will be at risk for credit losses on that Mortgage Loan prior to its securitization. In addition to credit enhancement, the Company anticipates that it will also obtain a commitment for special hazard insurance on the Mortgage Loans, if available at a reasonable cost, to mitigate casualty losses that are not usually covered by standard hazard insurance, such as vandalism, war, earthquake and floods. This special hazard insurance is not in force during the accumulation period, but is activated instead at the time the Mortgage Loans are pledged as collateral for the Mortgage Securities. It is expected that when the Company acquires Mortgage Loans, the seller will generally represent and warrant to the Company that there has been no fraud or misrepresentation during the origination of the Mortgage Loans and generally agree to repurchase any Mortgage Loan with respect to which there is fraud or misrepresentation. The Company will provide similar representations and warranties when the Company sells or pledges the Mortgage Loans as collateral for Mortgage Securities. If a Mortgage Loan becomes delinquent and the pool insurer is able to prove that there was a fraud or misrepresentation in connection with the origination of the Mortgage Loan, the pool insurer will not be liable for the portion of the loss attributable to such fraud or misrepresentation. Although the Company will generally have recourse to the seller based on the seller's 37 representations and warranties to the Company, the Company will generally be at risk for loss to the extent the seller does not perform its repurchase obligations. MANAGEMENT POLICIES AND PROGRAMS Asset Acquisition Policy The Company will only acquire those Mortgage Assets that are consistent with the Company's balance sheet guidelines and risk management objectives. Since the intention of the Company is generally to hold its Mortgage Assets until maturity, the Company will generally not seek to acquire Mortgage Assets with investment returns that are attractive only in a limited range of scenarios. The Company believes that future interest rates and mortgage prepayment rates are very difficult to predict. Therefore, the Company will seek to acquire Mortgage Assets that it believes will provide competitive returns over a broad range of interest rate and prepayment scenarios. The Company will acquire Mortgage Assets that it believes will maximize returns on capital invested, after considering (i) the amount and nature of the anticipated cash flow from the Mortgage Assets, (ii) the Company's ability to pledge Mortgage Assets to secure collateralized borrowings, (iii) the increase in the Company's capital requirement determined by the Company's Capital and Leverage Policy resulting from the purchase and financing of Mortgage Assets, (iv) the costs of financing, hedging, managing, securitizing and reserving for Mortgage Assets, and (v) the Company's credit risk management policy. Prior to acquisition of a Mortgage Asset, potential returns on capital employed are assessed over the life of the Mortgage Asset and in a variety of interest rate, yield spread, financing cost, credit loss and prepayment scenarios. The Company will also give consideration to balance sheet management and risk diversification issues. A specific Mortgage Asset that is being evaluated for potential acquisition is deemed more or less valuable to the Company to the extent it serves to increase or decrease certain interest rate or prepayment risks that may exist in the balance sheet, to diversify or concentrate credit risk, and to meet the cash flow and liquidity objectives the Company may establish for the balance sheet from time to time. The Company will evaluate the addition of a potential Mortgage Asset and its associated borrowings and hedges to the balance sheet and the impact that the potential Mortgage Asset would have on the risk in, and returns generated by, the Company's balance sheet as a whole over a variety of scenarios. The Company will focus primarily on the acquisition of adjustable-rate Mortgage Assets, and believes that currently such products are more attractive for the Company's purposes than are fixed-rate Mortgage Assets. Although the cost of hedging a fixed-rate Mortgage Asset to meet the Company's asset/liability management goals is usually significant, the Company may purchase fixed-rate Mortgage Assets (generally in combination with hedging instruments) in the future should the potential returns on capital invested, after hedging and all other costs, exceed the returns available from other Mortgage Assets or if the purchase of such Mortgage Assets would serve to reduce or diversify the risks of the Company's balance sheet. The Company may also purchase the stock of other mortgage REITs or similar companies when it believes that such purchase will yield relatively attractive returns on capital employed. When the stock market valuations of such companies are low in relation to the market value of their assets, such stock purchases can be a way for the Company to acquire an interest in a pool of Mortgage Assets at an attractive price. The Company does not, however, presently intend to invest in the securities of other issuers for the purpose of exercising control or to underwrite securities of other issuers. The Company intends to acquire new Mortgage Assets, and will also seek to expand its capital base in order to further increase the Company's ability to acquire new Mortgage Assets, when the potential returns from new Mortgage Assets appear attractive relative to the return expectations of stockholders (as expressed principally by the effective dividend yield of the Common Stock). The Company may in the future acquire Mortgage Assets by offering its debt or equity securities in order to acquire such Mortgage Assets. 38 The Company generally intends to hold Mortgage Assets to maturity. In addition, the REIT Provisions of the Code limit in certain respects the ability of the Company to sell Mortgage Assets. See "Federal Income Tax Consequences--Taxation of the Company." The Company may decide to sell Mortgage Assets from time to time, however, for a number of reasons including, without limitation, to dispose of a Mortgage Asset as to which credit risk concerns have arisen, to reduce interest rate risk, to substitute one type of Mortgage Asset for another to improve yield or to maintain compliance with the 55% requirement under the Investment Company Act, and generally to restructure the balance sheet when the Company deems such action advisable. The Company will select any Mortgage Assets to be sold according to the particular purpose such sale will serve. The Company's Board of Directors has not adopted a policy that would restrict the Company's authority to determine the timing of sales or the selection of Mortgage Assets to be sold. As a requirement for maintaining REIT status, the Company must distribute to stockholders annually aggregate dividends equaling at least 95% of its Taxable income. See "Federal Income Tax Consequences-- Distribution Requirement." The Company will make additional distributions of capital when the return expectations of the stockholders (as expressed principally by the effective dividend yield of its Common Stock) appear to exceed returns potentially available to the Company through making new investments in Mortgage Assets. Subject to the limitations of applicable securities and state laws, the Company can distribute capital by making purchases of its own Common Stock, through paying down or repurchasing any outstanding uncollateralized debt obligations, or through increasing the Company's dividend to include a return of capital. Capital and Leverage Policy General. The Company's goal is to strike a balance between the under- utilization of leverage, which reduces potential returns to stockholders, and the over-utilization of leverage, which could reduce the Company's ability to meet its obligations during adverse market conditions. As described below, the Company has established a Capital and Leverage Policy that limits its ability to acquire additional Mortgage Assets during times when the actual capital base of the Company is less than a required amount defined in such Policy, currently an 8% equity ratio. In this way, the use of balance sheet leverage is better controlled. The actual capital base for the purpose of the Capital and Leverage Policy is equal to the market value of total Mortgage Assets less the book value of total collateralized borrowings. The actual capital base, as so defined, represents the approximate liquidation value of the Company and approximates the market value of Mortgage Assets less the book value of total collateralized borrowings. The actual capital base, as so defined, represents the approximate liquidation value of the Company and approximates the market value of Mortgage Assets that can be pledged or sold to meet over- collateralization requirements for the Company's borrowings. The unpledged portion of the Company's actual capital base is available to be pledged or sold as necessary to maintain over-collateralization levels for the Company's borrowings. Acquisition of Mortgage Assets. The Company is prohibited from acquiring net additional Mortgage Assets during periods when the actual capital base of the Company is less than the minimum amount required under the Capital and Leverage Policy (except when such asset acquisitions may be necessary to maintain REIT status or the Company's exemption from the Investment Company Act). In addition, if the actual capital base falls below the requirement of the Capital and Leverage Policy, the Manager is required to submit to the Company's Board of Directors a plan designed to bring the Company back to its target capital-to-assets ratio. It is anticipated that in many circumstances this goal will be achieved over time without active management through the natural process of mortgage principal repayments and increases in the market values of Mortgage Assets as their coupon rates adjust upwards to market levels. The Company anticipates that the actual capital base is likely to temporarily exceed the capital requirement during periods following new equity offerings, including the Offering, and during periods of falling interest rates and that the actual capital base is likely to fall below the Capital and Leverage Policy requirements during periods of rising interest rates. The first component of the Company's Capital and Leverage Policy requirements is the current aggregate overcollateralization amount, or "haircut," lenders will require the Company to hold as capital. The haircut for each Mortgage Asset is determined by the lender based on the risk characteristics and liquidity of the particular 39 Mortgage Asset. Haircut levels on individual borrowings generally range from 3% for Agency Certificates to 20% for certain Privately Issued Certificates, and are likely to average between 3% and 10% for the Company as a whole. Should the market value of the pledged Mortgage Assets decline, the Company will be required to deliver additional collateral to the lenders in order to maintain a constant over-collateralization level on its borrowings. The second component of the Company's Capital and Leverage Policy requirements is the "liquidity capital cushion." The liquidity capital cushion is an additional amount of capital in excess of the haircut maintained by the Company in order to help it meet the demands of the lenders for additional collateral should the market value of its Mortgage Assets decline. The liquidity capital cushions assigned to the Company's portfolio of Mortgage Assets are based on the Company's assessment of each Mortgage Asset's market price volatility, credit risk, liquidity and attractiveness for use as collateral by lenders. This process relies on the Company's ability to identify and weigh the relative importance of these and other factors. Consideration is also given to hedges associated with the Mortgage Assets and any effect such hedges may have on reducing net market price volatility, concentration or diversification of credit and other risks in the balance sheet as a whole and the net cash flows that can be expected to arise from the interaction of the various components of the Company's balance sheet. The Company anticipates that at least 50% of the Mortgage Assets shall be invested in Agency Certificates, AAA (or comparably) rated adjustable-rate Mortgage Securities or Mortgage Assets with similar liquidity characteristics. The Company's Board of Directors will review on a periodic basis various analyses by the Manager of the risks inherent in the Company's balance sheet, including an analysis of the effects of various scenarios on the Company's net cash flows, earnings, dividends, liquidity and net market value. Should the Company's Board of Directors determine that the minimum required capital base set by the Capital and Leverage Policy is either too low or too high, the Board of Directors will raise or lower the capital requirement accordingly. Under current market conditions, the Company will seek to maintain its aggregate minimum capital base at approximately 10% of the market value of its Mortgage Assets. This percentage will fluctuate over time as the composition of the balance sheet changes, haircut levels required by lenders change, the market value of the Mortgage Assets change and as liquidity capital cushion percentages set by the Company's Board of Directors are adjusted over time. However, the Company's aggregate minimum capital requirement will not fall below 8% of its Mortgage Assets, taking into account callable debt such as repurchase agreements subject to margin calls. The Company's policy for aggregate minimum capital requirements will be reviewed by its Board of Directors upon issuance of any non-callable debt and as market conditions change. The Company's Borrowings. Pursuant to the Company's overall business strategy, a substantial portion of the Company's borrowings will be short-term or adjustable-rate. The Company's borrowings are expected to be primarily reverse repurchase agreements, but in the future may also be obtained through loan agreements, warehouse lines of credit, Dollar-Roll Agreements, and other credit facilities with institutional lenders and issuance of debt securities such as commercial paper, medium-term notes, CMOs and senior or subordinated notes. The Company intends to enter into financing transactions only with institutions that it believes are sound credit risks and to follow other internal policies designed to limit its credit and other exposure to financing institutions. The Company will only enter into repurchase agreements transactions with counter-parties rated investment grade by a nationally recognized rating service. The Company anticipates that, upon repayment of each borrowing in the form of a reverse repurchase agreement, the collateral will immediately be used for borrowing in the form of a new reverse repurchase agreement. The Company has not at the present time entered into any commitment agreements under which a lender would be required to enter into any reverse repurchase agreements during a specified period of time, nor does the Company presently plan to have liquidity facilities with commercial banks. See "Risk Factors--No Current Borrowing Arrangements." The Company, however, may enter into such commitment agreements in the future if deemed favorable to the Company. The Company will enter into reverse repurchase agreements primarily with national broker- dealers, commercial banks and other lenders that typically offer such financing. The Company will enter into collateralized borrowings only with financial institutions meeting credit standards approved by the Company's Board of Directors, including a majority of Unaffiliated Directors, and monitor the financial condition of such institutions on a regular basis. 40 A reverse repurchase agreement, although structured as a sale and repurchase obligation, acts as a financing under which the Company effectively pledges its Mortgage Assets as collateral to secure a short-term loan. Generally, the other party to the agreement will make the loan in an amount equal to a percentage of the market value of the pledged collateral. At the maturity of the reverse repurchase agreement, the Company is required to repay the loan and, correspondingly, receives back its collateral. While used as collateral, Mortgage Assets continue to pay principal and interest that inure to the benefit of the Company. In the event of the insolvency or bankruptcy of the Company, certain reverse repurchase agreements may qualify for special treatment under the Bankruptcy Code, the effect of which would be, among other things, to allow the creditor under such agreements to avoid the automatic stay provisions of the Bankruptcy Code and to foreclose on the collateral agreements without delay. In the event of the insolvency or bankruptcy of a lender during the term of a reverse repurchase agreement, the lender may be permitted under applicable insolvency laws, to repudiate the contract, and the Company's claim against the lender for damages therefrom may be treated simply as one of an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depositary institution subject to the Federal Deposit Insurance Act, the Company's ability to exercise its rights to recover its securities under a reverse repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages actually suffered by the Company. The Company expects that substantially all of its borrowing agreements will require the Company to deposit additional collateral in the event the market value of existing collateral declines, which may require the Company to sell Mortgage Assets to reduce the borrowings. The Company liquidity management policy is designed to maintain a cushion of equity sufficient to provide required liquidity to respond to the effects under its borrowing arrangements of interest rate movements and changes in market value of its Mortgage Assets, as described above. However, a major disruption of the reverse repurchase or other market relied on by the Company for short-term borrowings would have a material adverse effect on the Company unless the Company were able to arrange alternative sources of financing on comparable terms. See "Risk Factors-- Substantial Leverage and Potential Net Interest and Operating Losses in Connection With Borrowings" and "--Interest Rate Fluctuations May Decrease Net Interest Income." CREDIT RISK MANAGEMENT POLICY The Company will review credit risk and other risks of loss associated with each investment. In addition, the Company will seek to diversify the Company's portfolio of Mortgage Assets to avoid undue geographic, insurer, industry and certain other types of concentrations. The Company's Board of Directors will monitor the overall portfolio risk and determine appropriate levels of provision for loss. With respect to its Mortgage Securities, the Company will be exposed to various levels of credit and special hazard risk, depending on the nature of the underlying Mortgage Assets and the nature level of credit enhancements supporting such securities. Each of the Mortgage Assets acquired by the Company will have some degree of protection from normal credit losses. Agency Certificates are covered by credit protection in the form of a 100% guarantee from a government sponsored entity (Fannie Mae, FHLMC or GNMA). Privately Issued Certificates represent interests in pools of residential mortgage loans with partial credit enhancement. Credit loss protection for Privately Issued Certificates is achieved through the subordination of other interests in the pool to the interest held by the Company, through pool insurance or through other means. The degree of credit protection varies substantially among Privately Issued Certificates. The Company anticipates that at least 50% of the Company's total Mortgage Assets will be Agency Certificates or carry a AAA or have a comparable rating from one of the Rating Agencies. The Company further anticipates that at least 75% of the Company's total Mortgage Assets will be comprised of Agency Certificates or have at least an A rating from one of the Rating Agencies. The Company anticipates that Other Mortgage Assets will not constitute more than 25% of the Mortgage Asset portfolio's value; such investments will not be 41 made by the Company unless they are determined by the Manager to be of comparable quality to a High Quality Mortgage Security. The Company intends to structure its portfolio to maintain a minimum weighted average rating (including the Manager's deemed comparable ratings for unrated Mortgage Assets based on a comparison to rated Mortgage Securities with like characteristics) of at least AA (or a comparable rating) by at least one of the Rating Agencies. However, there can be no assurance that such structure will be achieved and the Company is not obligated to liquidate any assets to achieve its desired weighted average rating. The Company will review the quality of the Mortgage Loans at the time of acquisition and on an ongoing basis. During the time it holds Mortgage Loans, the Company will be subject to risks of borrower defaults and bankruptcies and special hazard losses (such as those occurring from earthquakes or floods) that are not covered by standard hazard insurance. However, the Company will generally obtain credit enhancements such as mortgage pool or special hazard insurance for its Mortgage Loans, and individual Mortgage Loans may be covered by FHA insurance, VA guarantees or private mortgage insurance and, to the extent securitized into Agency Certificates, by such government sponsored entity obligations or guarantees. Compliance with the credit risk management policy guidelines shall be determined at the time of purchase of Mortgage Assets (based on the most recent valuation utilized by the Company) and will not be affected by events subsequent to such purchase, including, without limitation, changes in characterization, value or rating of any specific Mortgage Assets or economic conditions or events generally affecting any Mortgage Assets of the type held by the Company. ASSET/LIABILITY MANAGEMENT POLICIES Interest Rate Risk Management Policy. To the extent consistent with its election to qualify as a REIT, the Company will follow an interest rate risk management policy intended to mitigate the negative effects of major interest rate changes. The Company intends to minimize its interest rate risk from borrowings by attempting to match the maturity of its debts to the interest rate adjustment periods on its Mortgage Assets. Under normal market conditions, the Company will attempt to keep the difference between the weighted average time to "reset" on its Mortgage Assets to the weighted average time to reset on its debts to 90 days or less, taking into account all hedging transactions, although there can be no assurance that the Company will be able to limit such "reset" periods. This policy will be reviewed by the Company's Board of Directors if the Company incurs long-term non-callable borrowings and as market conditions change. In addition to "reset" periods, the Company also intends to manage differences in interest rate indices between its Mortgage Assets and borrowings. See "Risk Factors--Failure to Successfully Manage Interest Rate Risks May Adversely Affect Results of Operations." The Company's interest rate risk management policy is formulated with the intent to offset the potential adverse effects resulting from rate adjustment limitations on its Mortgage Assets and the differences between interest rate adjustment indices and interest rate adjustment periods of its adjustable-rate Mortgage Assets and related borrowings. The Company's anticipates being able to adjust the average maturity period of such borrowings on an ongoing basis by changing the mix of maturities and interest rate adjustment periods as borrowings come due and are renewed. Through use of these procedures, the Company will seek to minimize any differences between interest rate adjustment periods of adjustable-rate Mortgage Assets and related borrowings that may occur. In general, the Company intends to mitigate lifetime cap risk associated with its adjustable-rate Mortgage Assets. The policy will be to attempt to limit the effective interest rate on substantially all of the Company's liabilities as a whole to a rate equal to the weighted average lifetime cap of its adjustable-rate Mortgage Assets. Under current market conditions, the Company does not intend to enter into transactions to mitigate its periodic cap risk. The Company will manage this risk through its leverage and asset/liability policies. The Company intends to purchase from time to time interest rate caps, interest rate swaps and similar instruments to attempt to mitigate the risk of the cost of its variable-rate liabilities increasing at a faster rate than the earnings on its Mortgage Assets during a period of rising rates. In this way, the Company intends generally 42 to hedge as much of the interest rate risk as is in its best interests, given the cost of such hedging transactions and the need to maintain the Company's status as a REIT. This determination may result in the Company bearing a level of interest rate risk that could otherwise be hedged when the Company believes, based on all relevant facts, that bearing such risk is advisable. The Company may also, to the extent consistent with its compliance with the REIT Provisions of the Code and Maryland law, utilize financial futures contracts, options and forward contracts as a hedge against future interest rate changes. The Company will not invest in financial futures contracts or options thereon that would cause the Manager or the Company to have to register under the Commodities Exchange Act. The Company's hedging strategy may lower the earnings and dividends of the Company in the short-term in order to further the objective of maintaining competitive levels of earnings and dividends over the long-term. The Company does not intend to hedge for speculative purposes. The Company may elect to conduct a portion of its hedging operations through one or more subsidiary corporations that would not be a Qualified REIT Subsidiary and would be subject to federal and state income taxes. In order to comply with the nature of asset tests applicable to the Company as a REIT, the value of the securities of any such subsidiary held by the Company must be limited to less than 5% of the value of the Company's total Mortgage Assets as of the end of each calendar quarter and no more than 10% of the voting securities of any such subsidiary may be owned by the Company. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Asset Tests." A taxable subsidiary would not elect REIT status and would distribute any net profit after taxes to the Company and its other stockholders. Any dividend income received by the Company from any such taxable subsidiary (combined with all other income generated from the Company's Mortgage Assets, other than Qualified REIT Real Estate Assets) must not exceed 25% of the gross income of the Company. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Gross Income Tests." Prepayment Risk Management Policy. The Company will seek to minimize the effects of faster or slower than anticipated prepayment rates through structuring a diversified portfolio with a variety of prepayment characteristics, investing in Mortgage Assets with prepayment prohibitions and penalties, investing in certain Mortgage Security structures that have prepayment protections, and balancing Mortgage Assets purchased at a premium with Mortgage Assets purchased at a discount. The Company intends to invest in Mortgage Assets that on a portfolio basis do not have significant purchase price premiums. Under normal market conditions, the Company will seek to keep the aggregate capitalized purchase premium of the portfolio to 3% or less. In addition, the Company may in the future purchase Principal Only Derivatives to a limited extent as a hedge against prepayment risks. Prepayment risk will be monitored by the Manager and the Company's Board of Directors through periodic review of the impact of a variety of prepayment scenarios on the Company's revenues, net earnings, dividends, cash flows and net balance sheet market value. The Company believes that it has developed a cost-effective asset/liability management program to mitigate interest rate and prepayment risks. However, no strategy can completely insulate the Company from interest rate changes, prepayment risks and defaults by Counter-parties. Further, as noted above, certain of the federal income tax requirements that the Company must satisfy to qualify as a REIT limit the Company's ability to fully hedge its interest and prepayment risks. The Company will monitor carefully, and may have to limit, its asset/liability management program to assure that it does not realize excessive hedging income, or hold hedging Mortgage Assets having excess value in relation to total Mortgage Assets, which would result in the Company's disqualification as a REIT or, in the case of excess hedging income, the payment of a penalty tax for failure to satisfy certain REIT income tests under the Code, provided such failure was for reasonable cause. See "Federal Income Tax Consequences--Requirements for Qualification as a REIT." In addition, asset/liability management involves transaction costs that increase dramatically as the period covered by the hedging protection increases. Therefore, the Company may be prevented from effectively hedging its interest rate and prepayment risks. MORTGAGE LOAN SECURITIZATION TECHNIQUES The Company will seek to contract with conduits, financial institutions, mortgage bankers, investment banks and others to purchase Mortgage Loans that they are originating. The Company anticipates that it will have 43 sufficient purchasing power in some circumstances to induce origination firms to originate Mortgage Loans to the Company's specifications. The Company intends to enhance the value and liquidity of all the Mortgage Loans it acquires by securitizing the Mortgage Loans into Mortgage Securities in the manner which will best meet its own needs. In addition to creating Mortgage Securities from the Mortgage Loans in its portfolio, the Company may also from time to time "re-securitize" portions of its Mortgage Securities portfolio. In a resecuritization transaction, Mortgage Securities rather than Mortgage Loans are used as collateral to create new Mortgage Securities. This would typically be done as the Mortgage Loans underlying the securities improve in credit quality through seasoning, as values rise on the underlying properties or when the credit quality of a junior class of Mortgage Security improves due to prepayment of more senior classes. Such transactions can result in improved credit ratings, higher market values and lowered borrowing costs. The Company may conduct its securitization activities through one or more taxable or Qualified REIT Subsidiaries formed for such purpose. The Company does not intend to conduct its securitization activities through the Manager or the Manager's Affiliates. OTHER POLICIES The Company may purchase stock in other mortgage REITs or stock in similar companies when the Company believes that such purchases will yield relatively attractive returns on capital employed. When the stock market valuations of such companies are low in relation to the market value of their assets, the Company believes that such stock purchases can be a way for the Company to acquire an interest in a pool of Mortgage Assets at an attractive price. The Company does not, however, presently intend to invest in the securities of other issuers for the purpose of exercising control or to underwrite securities of other issuers. The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act. The Company does not currently intend to (i) originate Mortgage Loans or (ii) offer securities in exchange for real property. FUTURE REVISIONS IN POLICIES AND STRATEGIES The Company's Board of Directors has established the investment policies, the operating policies and the strategies set forth in this Prospectus. The Board of Directors has the power to modify or waive such policies and strategies without the consent of the stockholders to the extent that the Board of Directors (including a majority of the Unaffiliated Directors) determines that such modification or waiver is in the best interests of stockholders. Among other factors, developments in the market that affect the policies and strategies mentioned herein or which change the Company's assessment of the market may cause the Company's Board of Directors to revise its policies and strategies. However, if such modification or waiver relates to the relationship of, or any transaction between, the Company and the Manager or any Affiliate of the Manager, the approval of a majority of the Unaffiliated Directors is also required. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or the Manager is a party or to which any property of the Company or the Manager is subject. The Company recently received a demand from a company with a similar name requesting that the Company not operate under the name "Apex Mortgage Capital." See "Risk Factors--Litigation". From time to time the TCW Group is involved in litigation in connection with its operations, including litigation involving the operations of the MBS Group. Such litigation has included certain senior officers of the TCW Group, including certain of the officers of the Company and the Manager, as defendants. The Company believes that there are no legal proceedings that would materially adversely affect the Manager's or the Company's executive officers' ability to manage the Company. 44 MANAGEMENT OF THE COMPANY DIRECTORS AND EXECUTIVE OFFICERS The executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Philip A. Barach............ 45 President and Chief Executive Officer Vice Chairman of the Board, Chief Invest- Jeffrey E. Gundlach......... 39 ment Officer Daniel K. Osborne........... 32 Executive Vice President, Chief Operating Officer and Chief Financial Officer Joseph J. Galligan.......... 38 Senior Vice President Michael E. Cahill........... 46 Secretary
Philip A. Barach. Mr. Barach is President, Chief Executive Officer and a Director of the Company. Mr. Barach is also a Group Managing Director and Chief Investment Officer of Investment Grade Fixed Income of the TCW Group and the Manager. Mr. Barach is a member of the TCW Group's MBS Group. Mr. Barach joined TCW in 1987 after being employed by Sun Life Insurance Company, where he was Senior Vice President and Chief of Investments. Previously, Mr. Barach served as head of Fixed Income Investments for the State of California Retirement System. Mr. Barach attended the Hebrew University of Jerusalem, where he received a B.A. degree in International Relations and an M.B.A. degree in Finance. Jeffrey E. Gundlach. Mr. Gundlach is Chief Investment Officer and Vice Chairman of the Board of the Company. Mr. Gundlach is also a Group Managing Director of the TCW Group and the Manager. Mr. Gundlach has been with the TCW Group since 1985. Previously, Mr. Gundlach was employed by Transamerica Corporation's Property/Casualty Insurance division, where he was a Senior Loss Reserve Analyst responsible for investment discount and funding strategies. Mr. Gundlach is also a member of the TCW Group's MBS Group. Mr. Gundlach is a graduate of Dartmouth College, holding B.A. degrees in Mathematics and Philosophy (summa cum laude). He also attended Yale University as a Ph.D. candidate in Mathematics. Daniel K. Osborne. Mr. Osborne is Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company. Mr. Osborne is also a Senior Vice President of the TCW Group and the Manager. Mr. Osborne joined the TCW Group in 1994 as part of the MBS Group, managing fixed income mutual funds. Prior to joining TCW, from 1992 to 1994, Mr. Osborne was a Vice President of ASR Investments Corporation ("ASR"), a publicly held REIT investing in Mortgage Assets. At ASR, Mr. Osborne was responsible for asset/liability management and the supervision and preparation of public reporting. Prior to his employment with ASR, Mr. Osborne was a Certified Public Accountant with Deloitte & Touche LLP specializing in REITs, mortgage securities and publicly held companies. He holds a B.S. degree in Accounting from Arizona State University. Joseph J. Galligan. Mr. Galligan is Senior Vice President of the Company. Prior to joining the TCW Group in 1991, Mr. Galligan was a Vice President at Smith Barney in the Mortgage-Backed Specialist Group. Prior to that, he spent five years at First Boston as Vice President in the same area. In addition, Mr. Galligan spent over three years at Scudder Stevens & Clark as a Portfolio Manager/Trader. He holds a B.S. degree in Economics with a concentration in Finance from the Wharton School of Business at the University of Pennsylvania. Mr. Galligan is a Chartered Financial Analyst. Michael E. Cahill. Mr. Cahill is the Secretary of the Company. Mr. Cahill is a Managing Director and General Counsel of the Manager, TCW and certain of its Affiliates. Prior to joining the TCW Group in 1991, Mr. Cahill was Senior Vice President and General Counsel of Act III Communications. Previously, he was in private corporate law practice with O'Melveny & Myers and, prior to that, with Shenas, Robbins, Shenas & Shaw in San Diego. He is a member of the State Bar of California and of the Province of Ontario and is admitted to various courts, including the U.S. Supreme Court. Mr. Cahill holds B.A. degrees in Mathematics and Philosophy from Bishops University, Quebec, an LL.M. degree from Harvard University and an LL.B. degree from Osgoode Hall Law School, York University, Toronto. 45 The directors of the Company are as follows:
NAME AGE POSITION ---- --- -------- Marc I. Stern............... 53 Chairman of the Board Jeffrey E. Gundlach(1)...... 39 Vice Chairman of the Board Philip A. Barach(1)......... 45 Director John C. Argue............... 65 Proposed Director Carl C. Gregory, III........ 49 Proposed Director Peter G. Allen.............. 39 Proposed Director John A. Gavin............... 65 Proposed Director
- -------- (1) See above for certain biographical information regarding Messrs. Barach and Gundlach. Marc I. Stern. Mr. Stern is Chairman of the Board of Directors of the Company. Mr. Stern is Vice Chairman of the Board of Directors of the Manager and TCW Asset Management Company and a Director of TCW, Trust Company of the West and TCW Funds Management, Inc. ("TFMI"). Mr. Stern is also President of TCW and TFMI and Executive Vice President and Group Managing Director of Trust Company of the West. Mr. Stern is responsible for the TCW Group's international operations and is Chairman of TCW Americas Development, Inc., TCW Asia, Ltd. and TCW London International, Limited. Mr. Stern joined the TCW Group in 1990. Previously, Mr. Stern was President of Broad, Inc., Managing Director and Chief Administrative Officer of the Henley Group, Inc. and Senior Vice President of Allied-Signal, Inc. and related entities. Prior to holding such positions, Mr. Stern was associated with the law firm of Debevoise & Plimpton. Mr. Stern is also Director of Qualcomm, Inc. and the Los Angeles Music Center Opera, and a member of the Board of Trustees of The Salk Institute and Dickinson College. Mr. Stern is a member of the State Bars of New York and New Hampshire. Mr. Stern received a B.A. degree in Political Science from Dickinson College, an M.A. degree in Political Science from the Columbia University School of Public Law and Government, and a J.D. degree from the Columbia University School of Law. John C. Argue. Mr. Argue has consented to become a Director of the Company upon completion of the Offering. Mr. Argue is Of Counsel to the law firm of Argue Pearson Harbison & Myers. Mr. Argue is also a Director of Avery Dennison Corporation, CalMat Company, Coast Savings Financial Inc. and Coast Federal Bank. He is an advisory director of LAACO Ltd. Mr. Argue is a Trustee of the TCW Galileo Family of Funds, the TCW Convertible Securities Fund, Inc. and the TCW/DW Family of Funds. He is Chairman of the Rose Hills Foundation. Carl C. Gregory, III. Mr. Gregory has consented to become a Director of the Company upon completion of the Offering. Mr. Gregory has been Managing Partner of American Western Partners since 1995. He was Chairman, Chief Executive Officer and a Director of MIP Properties, Inc. from 1991 through 1995. Prior to 1991, Mr. Gregory was President of American Western Realty Corporation. Mr. Gregory has been Chairman of the Board of Directors of West Capital Financial Services Corp. since 1996, a Director of Pacific Gulf Properties, Inc. since 1997 and a Director of House of Fabrics since 1996. Mr. Gregory received a B.A. degree in Accounting from Southern Methodist University and an M.B.A. degree in Finance from the University of Southern California. Peter G. Allen. Mr. Allen has consented to become a Director of the Company upon completion of the Offering. Mr. Allen is an investment banker who now works as an independent investor and advisor. Previously, he worked at Morgan Stanley & Co. Incorporated for 15 years where he was the Managing Director responsible for the firm's investment banking operations in the southwestern United States. During his tenure at Morgan Stanley, Mr. Allen advised a number of companies in a wide variety of strategic and financial transactions. Mr. Allen was also the Managing Partner at Chartwell Partners from January 1997 through July 1997. Mr. Allen received his B.A. degree in economics, summa cum laude, at Yale University in 1980 and his M.B.A. degree at Stanford University in 1984. 46 John A. Gavin. Mr. Gavin has consented to become a Director of the Company upon completion of the Offering. Mr. Gavin is founder and chairman of Gamma Services Corporation and a principal of Gavin, Dailey and Partners, both international capital and consulting firms. Since 1995, he has been affiliated with Hicks, Muse, Tate & Furst (Latin America) as Managing Director. Mr. Gavin is a member of the board of directors of Atlantic Richfield Company (ARCO); Dresser Industries; Pinkerton's, Inc.; International Wire Group; Fedco, Inc; and KAP Resources. Mr. Gavin is also a trustee of Hotchkis & Wiley Funds. From 1981 to 1986, Mr. Gavin was the United States Ambassador to Mexico. Mr. Gavin graduated from Stanford University with a degree in Economic History of Latin America. After the completion of the Offering, the Board of Directors of the Company will be divided into three classes, with the number of directors in each class as nearly equal in number as possible. Each class of directors will contain at least one affiliated director and at least one Unaffiliated Director. After the initial staggering period, each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected. All officers serve at the discretion of the Company's Board of Directors. Although the Company may have salaried employees, it currently has no such employees. The Company will pay an annual director's fee to each Unaffiliated Director of $10,000, a fee of $1,250 for each meeting of the Board of Directors attended by each Unaffiliated Director and reimbursement of costs and expenses of all directors for attending such meetings. Affiliated directors will not be separately compensated by the Company. The Management Agreement provides that the Manager will assume principal responsibility for managing the affairs of the Company. Therefore, the officers of the Company, in their capacities as such, are not expected to devote substantial portions of their time to the affairs of the Company. However, in their capacities as officers or employees of the Manager, or its Affiliates, they will devote such portion of their time to the affairs of the Manager as is required for the performance of the duties of the Manager under the Management Agreement. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates--Conflicts Relating to the Manager Rendering Services to Others." The Bylaws of the Company provide that the Board of Directors shall have not less than three or more than nine members, as determined from time to time by the existing Board of Directors. The Board of Directors will initially have seven members consisting of three directors affiliated with the TCW Group and four Unaffiliated Directors. The Bylaws further provide that except in the case of a vacancy, the majority of the members of the Board of Directors and of any committee of the Board of Directors will at all times after the issuance of the shares of Common Stock in this Offering be Unaffiliated Directors. Vacancies occurring on the Board of Directors among the Unaffiliated Directors will be filled by the vote of a majority of the directors, including a majority of the Unaffiliated Directors. The Charter of the Company provides for the indemnification of the directors and officers of the Company to the fullest extent permitted by Maryland law. Maryland law generally permits indemnification of directors and officers against certain costs, liabilities and expenses that any such person may incur by reason of serving in such positions unless it is proved that: (i) the act or omission of the director or officer was material to the cause of action adjudicated in the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the director or officer actually received an improper personal benefit in money, property or services; or (iii) in the case of criminal proceedings, the director or officer had reasonable cause to believe that the act or omission was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. The Charter of the Company provides that the personal liability of any director or officer of the Company to the Company or its stockholders for money damages is limited to the fullest extent allowed by the statutory or decisional law of the State of Maryland as amended or interpreted. Maryland law authorizes the limitation of liability of directors and officers to corporations and their stockholders for money damages except (i) to the extent that it is proved that the person actually received an improper benefit in money, property, or services for 47 the amount of the benefit or profit in money, property or services actually received, or (ii) to the extent that a judgment or other final adjudication adverse to the person 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. EXECUTIVE COMPENSATION The Company has not paid, and does not intend to pay, any annual compensation to the Company's executive officers for their services as executive officers. However, the Company may from time to time, in the discretion of the Board of Directors, grant options to purchase shares of the Company's Common Stock to the Manager, executive officers and directors of the Company pursuant to the Company's 1997 Stock Option Plan. See "--Stock Options" below. STOCK OPTIONS The Company has adopted a stock option plan (the "1997 Stock Option Plan") that provides for the grant of both qualified incentive stock options ("ISOs") that meet the requirements of Section 422 of the Code, and non-qualified stock options, stock appreciation rights and dividend equivalent rights. ISOs may be granted to the officers and key employees of the Company, if any. Non- qualified stock options may be granted to the Manager, directors, officers and any key employees of the Company and to the directors, officers and key employees of the Manager. The exercise price for any option granted under the 1997 Stock Option Plan may not be less than 100% of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the 1997 Stock Option Plan is to provide a means of performance-based compensation to the Manager in order to attract and retain qualified personnel and to provide an incentive to others whose job performance affects the Company. The 1997 Stock Option Plan will become effective upon the closing of the Offering. Subject to anti-dilution provisions for stock splits, stock dividends and similar events, the 1997 Stock Option Plan authorizes the grant of options to purchase an aggregate of up to 10% of the outstanding shares of the Company's Common Stock, but not more than 1,000,000 shares of Common Stock. If an option granted under the 1997 Stock Option Plan expires or terminates, the shares subject to any unexercised portion of that option will again become available for the issuance of further options under the 1997 Stock Option Plan. Unless previously terminated by the Board of Directors, the 1997 Stock Option Plan will terminate ten years from its effective date, and no options may be granted under the 1997 Stock Option Plan thereafter. The 1997 Stock Option Plan will be administered by a committee of the Board of Directors comprised entirely of Unaffiliated Directors (the "Compensation Committee"). Except for the grant of options issuable upon completion of the Offering described below, options granted under the 1997 Stock Option Plan will become exercisable in accordance with the terms of the grant made by the Compensation Committee. The Compensation Committee has discretionary authority to determine at the time an option is granted whether it is intended to be an ISO or a non-qualified option, and when and in what increments shares of Common Stock covered by the option may be purchased. Under current law, ISOs may not be granted to any director of the Company who is not also a full-time employee or to directors, officers and other employees of entities unrelated to the Company. In addition, no options may be granted under the 1997 Stock Option Plan to any person who, assuming exercise of all options held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of Common Stock of the Company. Each option must terminate no more than ten years from the date it is granted. Options may be granted on terms providing that they will be exercisable in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option. The exercise price of any option granted under the 1997 Stock Option Plan is payable in full (i) by cash, (ii) by surrender of shares of the Company's Common Stock having a market value equal to the aggregate 48 exercise price of all shares to be purchased, (iii) by any combination of the foregoing, or (iv) by a full recourse promissory note executed by the optionholder. The terms of the promissory note may be changed from time to time by the Company's Board of Directors to comply with applicable regulations or other relevant pronouncements of the Service or the Commission. The Company's Board of Directors may, without affecting any outstanding options, from time to time revise or amend the 1997 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may increase the number of shares of Common Stock subject to the 1997 Stock Option Plan (with the exception of adjustments resulting from changes in capitalization), change the class of participants eligible to receive options granted under the 1997 Stock Option Plan or modify the period within which or the terms upon which the options may be exercised without stockholder approval. STOCK OPTIONS OUTSTANDING The following table sets forth the stock options granted under the 1997 Stock Option Plan effective on the closing of the Offering. STOCK OPTION GRANTS IN FISCAL 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM(3) --------------------- --------------------- NUMBER OF PERCENT OF SECURITIES TOTAL UNDERLYING OPTIONS EXERCISE OPTIONS GRANTED TO PRICE(2) EXPIRATION NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($) - ---- ---------- ---------- --------- ---------- ---------- ---------- Philip A. Barach........ 40,000 25.8% $15.00(4) (5) $ 377,337 $ 956,247 Jeffrey E. Gundlach..... 40,000 25.8% 15.00(4) (5) 377,337 956,247 Daniel K. Osborne....... 35,000 22.6% 15.00(4) (5) 330,170 836,715 Joseph J. Galligan...... 25,000 16.1% 15.00(4) (5) 235,835 597,653 Michael E. Cahill....... 15,000 10.0% 15.00(4) (5) 141,501 358,593 Marc I. Stern........... 30,000 -- 15.00(4) (5) 283,003 717,184 Other(6)................ 115,000 -- 15.00(4) (5) 1,084,843 2,749,206
- -------- (1) The options granted are exercisable starting 14 months after the date of grant. (2) The exercise price and tax withholding obligations incurred upon exercise of the options may be paid by the option holder by delivering already owned shares of Company Common Stock, including those which are issuable upon exercise of the options. (3) The dollar amounts under these columns are the result of calculations at 5% and 10% compounded annual rates set by the Commission, and therefore are not intended to forecast future appreciation, if any, in the price of Common Stock. (4) Based on an assumed initial public offering price of $15.00. See "Underwriting." (5) Options will expire ten years after the closing of the Offering. (6) These options will be granted to officers and employees of the Manager. In addition, upon the closing of the Offering, each Unaffiliated Director will receive an initial grant of options to purchase up to 25,000 shares of Common Stock at the initial public offering price. These options will expire ten years from the effective date of the 1997 Stock Option Plan. Any Unaffiliated Director newly elected to the Board of Directors thereafter may receive an identical initial grant at the fair market value on the date of grant. 49 THE MANAGER The Company has no ownership interest in the Manager. The Manager, a California corporation, is a wholly-owned subsidiary of TCW. The Manager was established in 1992 and the TCW Group began operating in 1971 through one of its affiliates. The Manager will be responsible for the day-to-day operations of the Company and will perform such services and activities relating to the Mortgage Assets and operations of the Company as may be appropriate. At all times, the Manager will be subject to the direction and oversight of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. The Manager will be primarily involved in two activities: (i) asset/liability management--acquisition, financing, hedging, management and disposition of Mortgage Assets, including credit and prepayment risk management; and (ii) capital management--structuring, analysis, capital raising and investor relations activities. In conducting these activities, the Manager will formulate operating strategies for the Company, arrange for the acquisition of Mortgage Assets by the Company, arrange for various types of financing for the Company, monitor the performance of the Company's Mortgage Assets and provide certain administrative and managerial services in connection with the operation of the Company. The Manager will be required to manage the business affairs of the Company in conformity with the policies that are approved and monitored by the Company's Board of Directors. The Manager will be required to prepare regular reports for the Company's Board of Directors, which will review the Company's acquisitions of Mortgage Assets, portfolio composition and characteristics, credit quality, performance and compliance with policies previously approved by the Company's Board of Directors. See "--The Management Agreement" below and "Business and Strategy-- Management Policies and Programs." The Manager has not previously managed a REIT. In particular, the Manager has not previously managed a highly-leveraged pool of Mortgage Assets nor does the Manager have experience in complying with the asset limitations imposed by the REIT Provisions of the Code. Although management of the Company and the Manager have experience in managing mortgage capital, there can be no assurance that the past experience of the executive officers of the Company and the Manager will be appropriate to the business of the Company. Further, the experience of the Manager and the TCW Group should not be viewed as a reliable gauge of the potential success of the Company. See "Risk Factors-- Lack of Prior Experience." The directors and senior executive officers of the Manager are as follows:
NAME AGE POSITION ---- --- -------- Chairman of the Board and Chief Executive Robert A. Day............... 53 Officer Thomas E. Larkin, Jr. ...... 57 Vice Chairman of the Board Marc I. Stern(1)............ 53 Vice Chairman of the Board Alvin R. Albe, Jr. ......... 44 Director, Executive Vice President-- Finance and Administration Managing Director and General Counsel, Michael E. Cahill(1)........ 46 Secretary David K. Sandie............. 42 Chief Financial Officer and Managing Director, Assistant Secretary Hilary G. D. Lord........... 41 Chief Compliance Officer and Managing Director, Assistant Secretary Philip A. Barach(1)......... 45 Group Managing Director Jeffrey E. Gundlach(1)...... 39 Group Managing Director Daniel K. Osborne(1)........ 32 Senior Vice President
- -------- (1) See "Management of the Company--Directors and Executive Officers" for certain biographical information regarding Messrs. Stern, Cahill, Barach, Gundlach and Osborne. 50 Robert A. Day. Mr. Day has served as Chairman of the Board and Chief Executive Officer of the Manager since its inception in 1992. Mr. Day is also Chairman of the Board and Chief Executive Officer of TCW, Trust Company of the West and TAMCO, as well as Chairman of the Board of the Oakmont Corporation. Mr. Day founded Trust Company of the West in 1971. Prior to 1971, Mr. Day was associated with the investment banking firm of White, Weld & Company in New York for three years and then formed Cypress Partners. He is Chairman and President of the W.M. Keck Foundation, a Director of Freeport, McMoRan, Inc., and a member of the Board of Trustees of Claremont McKenna College. Mr. Day received a B.A. degree from Claremont McKenna College. Thomas E. Larkin, Jr. Mr. Larkin has served as a Vice Chairman of the Board of the Manager since 1992. Mr. Larkin is also Chairman of the Board of TFMI (since 1987), Vice Chairman of TAMCO, Director and President of Trust Company of the West, and Director, Executive Vice President and Group Managing Director of TCW (all since 1977). Prior to joining the TCW Group in 1977, Mr. Larkin was Vice President and Director of Client Relations for Crocker Investment Management Corporation. Prior to that, he was Senior Vice President and Director of Marketing of Bernstein-Macaulay, Inc. with responsibility for marketing investment management services. He was previously with Blyth Eastman Dillon as a New Business Representative in the Employee Benefit Plan Department. Mr. Larkin is a member of the Board of Trustees of the University of Notre Dame and Mount Saint Mary's College, is a member of the Board of Directors of the California Pediatric & Family Medical Center Foundation, the Los Angeles Orthopaedic Hospital, the Los Angeles Music Center Operating Company, the Heart & Lung Surgery Foundation, the Los Angeles Sports Council, and the Board of Regents of Children's Hospital of Los Angeles. He also serves as a member of the Finance Council of the Archdiocese of Los Angeles and is a member of the Investment Committees of the Archdiocese of Los Angeles and Loyola Marymount University. Mr. Larkin received a B.A. degree in Economics from the University of Notre Dame. Alvin R. Albe, Jr. Mr. Albe has served as a Director and Executive Vice President--Finance and Administration of the Manager and TFMI since 1992, and has held the same positions with TAMCO and Trust Company of the West since 1991. Mr. Albe has also been Executive Vice President--Finance and Administration of TCW since 1991. Prior to joining the TCW Group in 1991, Mr. Albe was President of Oakmont Corporation, a privately held corporation which administers and manages assets for several families and individuals. Mr. Albe was associated with Oakmont Corporation from 1982 to 1991. Before that, he was Manager of Accounting at McMoRan Oil and Gas Co., and a Certified Public Accountant with Arthur Andersen & Co. in New Orleans. Mr. Albe received a B.S. degree in Accounting from the University of New Orleans. David K. Sandie. Mr. Sandie has served as Managing Director, Chief Financial Officer and Assistant Secretary of the Manager since 1992. Mr. Sandie has held similar positions with TFMI since 1987, TCW since 1986, and TAMCO and Trust Company of the West since 1984. Prior to joining the TCW Group in 1984, Mr. Sandie was an Audit Manager with Price Waterhouse & Company, where a significant portion of his audit experience was with financial service organizations. Mr. Sandie is a Certified Public Accountant. Mr Sandie received a B.A. degree in Political Science from the University of California at Los Angeles and an M.B.A. degree from the University of Southern California. Hilary G.D. Lord. Ms. Lord has served as a Managing Director, Chief Compliance Officer and Assistant Secretary of the Manager since 1992. Ms. Lord also holds such positions with TFMI, TAMCO and Trust Company of the West. Ms. Lord joined the TCW Group in 1987, having previously been a corporate and securities attorney with O'Melveny & Myers. Ms. Lord is a member of the Board of Governors of the Investment Counsel Association of America ("ICAA"), is a member of the Legal and Regulatory Committee of the ICAA and is a member of the National Association of Compliance Professionals. Ms. Lord is a member of the State Bar of California. Ms. Lord received a B.S. degree in Accounting and Finance from the University of California at Berkeley and an M.B.A. degree and a J.D. degree from the University of Chicago. The address of the Manager is 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017. 51 THE MANAGEMENT AGREEMENT The Company will enter into the Management Agreement with the Manager at the closing of the Offering for an initial term of two years. The Manager will be primarily involved in two activities: (i) asset/liability management-- acquisition, financing, hedging, management and disposition of Mortgage Assets, including credit and prepayment risk management; and (ii) capital management--oversight of the Company's structuring, analysis, capital raising and investor relations activities. In conducting these activities, the Manager will formulate operating strategies for the Company, arrange for the acquisition of Mortgage Assets by the Company, arrange for various types of financing for the Company, monitor the performance of the Company's Mortgage Assets and provide certain administrative and managerial services in connection with the operation of the Company. The Manager will be required to manage the business affairs of the Company in conformity with the policies that are approved and monitored by the Company's Board of Directors. The Manager will be required to prepare regular reports for the Company's Board of Directors that will review the Company's acquisitions of Mortgage Assets, portfolio composition and characteristics, credit quality, performance and compliance with the policies approved by the Company's Board of Directors. At all times, the Manager will be subject to the direction and oversight of the Company's Board of Directors and will have only such functions and authority as the Company may delegate to it. The Manager will be responsible for the day-to-day operations of the Company and the Company anticipates that the Manager will perform such services and activities relating to the Mortgage Assets and operations of the Company as may be appropriate, including: (i) serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy guidelines by the Company's Board of Directors; (ii) assisting the Company in developing criteria for Mortgage Asset purchase commitments that are specifically tailored to the Company's long- term investment objectives and making available to the Company its knowledge and experience with respect to Mortgage Assets; (iii) representing the Company in connection with the purchase and commitment to purchase or sell Mortgage Assets, including the accumulation of Mortgage Loans for securitization and the incurrence of debt; (iv) arranging for the issuance of Mortgage Securities from a pool of Mortgage Loans; (v) furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; (vi) monitoring and providing to the Company's Board of Directors on an ongoing basis price information and other data, obtained from certain nationally recognized dealers that maintain markets in Mortgage Assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; (vii) investing or reinvesting any money of the Company in accordance with its policies and procedures; (viii) providing the executive and administrative personnel, office space and services required in rendering services to the Company; (ix) administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the Company's Board of Directors, including the collection of revenues and the payment of the Company's debts and obligations and maintenance of appropriate computer systems to perform such administrative functions; (x) providing the Company with general data processing, legal and administrative services to the extent required to implement the business strategy of the Company; 52 (xi) counseling the Company in connection with policy decisions made by the Board of Directors; (xii) communicating on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; (xiii) evaluating and recommending hedging strategies to the Company's Board of Directors and, upon approval by the Board of Directors, engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT; (xiv) supervising compliance with the REIT Provisions of the Code and maintenance of an exemption from the Investment Company Act; (xv) qualifying and causing the Company to qualify to do business in all applicable jurisdictions; (xvi) causing the Company to retain qualified accountants and tax experts to assist in developing appropriate accounting procedures and testing systems and to conduct quarterly compliance reviews; (xvii) providing all actions necessary for compliance by the Company with all federal, state and local regulatory requirements applicable to the Company in respect of its business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Exchange Act; (xviii) providing all actions necessary to enable the Company to make required federal, state and local tax filings and reports and generally enable the Company to maintain its status as a REIT, including soliciting stockholders for required information to the extent provided in the REIT Provisions of the Code; (xix) performing such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances; and (xx) complying with and using commercially reasonable efforts to cause the Company to comply with all applicable laws. Following the initial two-year term, the Management Agreement may be renewed for additional one-year terms at the discretion of the Unaffiliated Directors, unless terminated by the Manager upon written notice. Except in the case of a termination or non-renewal by the Company for cause, upon termination or non- renewal of the Management Agreement by the Company, the Company is obligated to pay the Manager a termination or non-renewal fee, which may be significant. The termination or non-renewal fee shall be equal to the fair market value of the Management Agreement without regard to the Company's termination right, as determined by an independent appraisal. The selection of the independent appraiser shall be subject to the approval of the Unaffiliated Directors. Neither the fair market value of the Management Agreement nor the various factors which the appraiser may find relevant in its determination of the fair market value can be determined at this time. The fair market value of the Management Agreement will be affected by significant variables, including (i) the historical management fees paid to the Manager, (ii) any projections of future management fees to be paid to the Manager determined by the independent appraiser, (iii) the relative valuations of agreements similar to the Management Agreement and (iv) other factors, all of which may be unrelated to the performance of the Manager. For illustrative purposes only, if the Company terminated or did not renew the Management Agreement without cause immediately following a full year of operations in which the Company paid to the Manager total annual compensation equal to $3,500,000, the termination or non-renewal fee could potentially equal between four and eight times the total annual compensation paid to the Manager, or $14,000,000 and $28,000,000, depending on the valuation of the independent appraiser at the time of the termination or non-renewal, which the Company and the Manager expect will be influenced by the valuation of similarly-situated transactions occurring at or about the same time. If the total annual compensation amount or the valuation multiple used by the independent appraiser is higher or lower, the termination or non-renewal fee would be higher or lower, respectively, than the amounts set forth above. 53 Since the fair market value of the Management Agreement would be determined by an independent appraiser at a future date based upon then applicable facts and circumstances, no such termination or non-renewal fee can be estimated with mathematical certainty. Any termination or non-renewal fee paid may be materially greater than the hypothetical examples above and the Company can provide no assurance at this time as to the amount of any such fee. The payment of a significant termination or non-renewal fee by the Company to the Manager would materially adversely affect the cash available for distribution to the Company's stockholders and may result in material net operating losses for the period. See "Risk Factors--Possible Significant Termination Fee Payable to the Manager." The Management Agreement may be assigned by the Manager to an Affiliate of TCW without the consent of the Company. The Management Agreement may be assigned to a non-Affiliate of TCW only with the approval of a majority of the Unaffiliated Directors. MANAGER COMPENSATION The Manager will receive annual base management compensation based on the Average Net Invested Capital of the Company, payable monthly in arrears, equal to 3/4 of 1% of Average Net Invested Capital. The term "Average Net Invested Capital" means for any period (i) the arithmetic average of the sum of the gross proceeds of the offerings of its equity securities by the Company, after deducting any underwriting discounts and commissions and other expenses and costs relating to such offerings, plus the Company's retained earnings (taking into account any losses incurred) and any non-cash charges or reserves, including depreciation, mark-to-market adjustments and unrealized credit loss, computed by taking the average of such values at the end of each month during such period, plus (ii) any unsecured debt approved by the Unaffiliated Directors to be included in Average Net Invested Capital. Accordingly, incurring collateralized debt to finance specific investment purchases does not necessarily increase Average Net Invested Capital. The Manager shall also be entitled to receive as incentive compensation for each fiscal quarter, an amount equal to 30% of the Net Income of the Company, before incentive compensation, in excess of the amount that would produce an annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%. The incentive compensation calculation and payment will be made quarterly in arrears. The term "Return on Equity" is calculated for any quarter by dividing the Company's Net Income for the quarter by its Average Net Worth for the quarter. For purposes of calculating the incentive compensation payable, the definition "Return on Equity" is not related to the actual distributions received by stockholders or to an individual investor's actual return on investment. For such calculations, the "Net Income" of the Company means the taxable income of the Company (including net capital gains, if any) before the Manager's incentive compensation, net operating loss deductions arising from losses in prior periods and deductions permitted by the Code in calculating taxable income for a REIT plus the effects of adjustments, if any, necessary to record hedging and interest transactions in accordance with GAAP. A deduction for all of the Company's interest expenses for borrowed funds is taken into account in calculating Net Income. "Average Net Worth" for any period means the arithmetic average of the sum of the gross proceeds from any offering of its equity securities by the Company, before deducting any underwriting discounts and commissions and other expenses and costs relating to the offerings, plus the Company's retained earnings (without taking into account any losses incurred in prior periods) computed by taking the average of such values at the end of each month during such period. The ability of the Company to achieve an annualized Return on Equity in excess of the Ten-Year U.S. Treasury Rate plus 1%, and of the Manager to earn the incentive compensation described in the preceding paragraph, is dependent upon the level and volatility of interest rates, the Company's ability to react to changes in interest rates and to utilize successfully the operating strategies described herein, and other factors, many of which are not within the Company's or the Manager's control. The Manager's base compensation shall be calculated by the Manager within 15 days after the end of each month, and such calculation shall be promptly delivered to the Company. The Company is obligated to pay the base compensation within 30 days after the end of each month. The Manager shall compute the quarterly incentive compensation within 45 days after the end of each fiscal quarter, and the Company shall pay the incentive compensation with respect to each fiscal quarter within 15 days following the delivery to the Company of the Manager's written statement setting forth the 54 computation of the incentive compensation for such quarter. The Company's Board of Directors shall review and approve the calculation of base and incentive compensations paid to the Manager quarterly, one quarter in arrears, during each scheduled quarterly Board of Directors meeting. Quarterly incentive compensation will be subject to an annual adjustment commencing in the second full year of the Company's operation. The Company believes that this compensation arrangement benefits its stockholders because it ties the Manager's compensation to Return on Equity and, in periods of low earnings, the Manager's incentive compensation is reduced or eliminated, thereby lowering the Company's operating expenses. Although no management fees will be payable to the Manager solely as a result of the Offering, the net proceeds of the Offering will result in an increase in the Company's Average Net Invested Capital, and thus, an increase in the management fees paid to the Manager. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates." Set forth below for illustrative purposes only is a breakdown of management fees that might be paid to the Manager under hypothetical circumstances. For purposes of this illustration, the following is assumed: (i) the net proceeds from the Offering, after all underwriting discounts and other Offering costs, are $138,750,000 and (ii) the Company's Net Income (after payment of base compensation and operating expenses, but prior to the deduction of incentive compensation) exceeded by $1,000,000, $8,000,000 and $12,000,000, respectively, the annualized Return on Equity equal to the average Ten-Year U.S. Treasury Rate plus 1%. ANNUAL MANAGER COMPENSATION
INCENTIVE TOTAL BASE COMPENSATION COMPENSATION COMPENSATION ----------------- ------------ ------------ $1,100,000...................................... $ 300,000 $1,400,000 1,100,000...................................... 2,400,000 3,500,000 1,100,000...................................... 3,600,000 4,700,000
The Company emphasizes that the foregoing information is provided for illustrative purposes only. There will be differences between the Company's actual Net Income and the compensation paid to the Manager, on the one hand, and the Net Income and compensation figures set forth above, on the other, and those differences may be material. There are significant variables in the determination of actual compensation paid to the Manager, including (i) the Company's actual Net Income, which will be affected by the Company's ability to execute its leveraging strategy and interest rate fluctuations, plus other factors and (ii) fluctuations in the average Ten-Year U.S. Treasury Rate, all of which may be affected by factors unrelated to the performance of the Manager. The Company has adopted a 1997 Stock Option Plan. The Manager and the directors, officers and any employees of the Company may be granted options under the Company's 1997 Stock Option Plan. See "Management of the Company-- Stock Options." Except as set forth in this Prospectus, the Company does not currently anticipate paying any other fees or compensation to any Affiliate of the Manager. See "--Certain Relationships; Conflicts of Interest" below. EXPENSES The Company will be required to pay all offering expenses (including accounting, legal, printing, clerical, personnel, filing and other expenses) incurred by the Company, the Manager or its Affiliates on behalf of the Company in connection with the Offering, estimated at $750,000. This payment will not be subject to the limitation on expenses to be borne by the Company as described in the paragraph below. 55 Subject to the limitations set forth below, the Company will also pay all operating expenses, except those specifically required to be borne by the Manager under the Management Agreement, incurred by the Manager under the Management Agreement. The operating expenses required to be borne by the Manager include the compensation of the Company's officers and the cost of office space, equipment and other personnel required for the Company's day-to- day operations. The expenses that will be paid by the Company will include (but not necessarily be limited to) the cost of money borrowed by the Company (including interest), taxes and license fees, issuance and transaction costs incident to the acquisition, disposition and financing of investments, costs related to hedging transactions, legal, investigatory, accounting and auditing fees and expenses, consultants' advisory services with respect to REIT and other compliance matters, the compensation and expenses of the Company's Unaffiliated Directors, the costs of making distributions and printing and mailing proxies and reports to stockholders, costs incurred by employees of the Manager for travel on behalf of the Company, costs incident to the issuance of Mortgage Securities, costs incident to the accumulation and servicing of Mortgage Loans, costs associated with any computer software or hardware that is used solely for the Company, costs to obtain liability insurance to indemnify the Manager, the Company's directors and officers and the Underwriters, the compensations and expenses of the Company's custodian, transfer agent and registrar, and any extraordinary or non-recurring costs or charges incurred by the Company, if any. The following expenses required to be paid by the Company that are attributable to its operations shall be limited to an amount per year equal to the greater of 2% of the Average Net Invested Capital of the Company or 25% of its Net Income for that year: (i) all insurance costs incurred by the Company or any subsidiary of the Company, including any costs to obtain liability or other insurance to indemnify the Manager and underwriters of any securities of the Company; (ii) expenses connected with payments of dividends or interest or distributions in any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; (iii) all expenses of third-parties pertaining to communications to holders of equity securities or debt securities of the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company's or any subsidiary's securities and reports to third-parties required under any indenture to which the Company or any subsidiary of the Company is a party; (iv) custodian's, transfer agent's and registrar's fees and charges; (v) compensation, fees and expenses paid to Unaffiliated Directors of the Company or any subsidiary of the Company, the cost of director and officer liability insurance and premiums for fidelity and errors and omissions insurance; (vi) legal, accounting and auditing fees and expenses relating to the Company's or any subsidiary's operations (excluding litigation-related fees and expenses); (vii) expenses relating to any office or office facilities maintained by the Company or any subsidiary of the Company, exclusive of the office of the Manager; (viii) travel and related expenses of directors, officers and employees of the Manager and of directors, officers and employees of the Company or any subsidiary of the Company who are also directors, officers or employees of the Manager, incurred in connection with attending meetings of the Board of Directors or holders of securities of the Company or any subsidiary of the Company or performing other business activities that relate to the Company or any subsidiary of the Company, including expenses allocable to such meetings or business activities; 56 (ix) costs associated with computer hardware and software, third-party information services and office expenses that relate solely to the business activities of the Company; and (x) all other expenses regarded as ordinary operating expenses in accordance with GAAP, exclusive of certain specifically excluded expenses as described below . Expenses excluded from the expense limitation and wholly payable by the Company are (but are not limited to) those incurred in connection with the accumulation and servicing of Mortgage Loans, the issuance and administration of Mortgage Securities from pools of Mortgage Loans, the raising of capital, the acquisition of Mortgage Assets, interest and hedging expenses, taxes and license fees, non-cash costs, litigation, investigations in connection with litigation or threatened litigation, base and incentive management compensation and extraordinary and non-recurring expenses. The determination of Net Income for purposes of calculating the expense limitation will be the same as for calculating the Manager's incentive compensation except that it will include any incentive compensation payable for such period. Expenses in excess of the expense limitation will be paid and shall not be recoverable (by reclassification as compensation or otherwise) by the Manager, unless the Unaffiliated Directors determine that, based upon unusual or non- recurring factors, a higher level of expenses is justified for such fiscal year. In that event, such expenses may be recovered by the Manager in succeeding years to the extent that expenses in succeeding quarters are below the limitation of expenses. Expense reimbursement will be made monthly, subject to adjustment at the end of each year. CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST In addition to its base management compensation under the Management Agreement, the Manager will have the opportunity to earn incentive compensation for each fiscal quarter in an amount equal to 30% of the Net Income of the Company (before payment of such incentive compensation) in excess of the amount that would produce on annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%. Quarterly incentive compensation will be subject to an annual adjustment commencing in the second full year of the Company's operation. See "--Management Compensation" above. In evaluating Mortgage Assets for investment and in other operating strategies, an undue emphasis on the maximization of income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive fee could result in increased risk to the value of the Company's Mortgage Asset portfolio. However, the Bylaws of the Company provide that the Board of Directors shall evaluate the performance of the Manager before entering into or renewing any management arrangement and that the Unaffiliated Directors shall determine at least annually that the Manager's compensation is reasonable in relation to the nature and quality of services performed. Any changes in the Company's investment and operating policies are required to be approved by the Board of Directors, including a majority of the Unaffiliated Directors. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates" and "--Control by the Company's Board of Directors of the Company's Operating Policies and Investment Strategies." The Company, on the one hand, and the Manager and its Affiliates, on the other, do not presently expect to, but may in the future, enter into a number of relationships other than those governed by the Management Agreement, some of which may give rise to conflicts of interest between the Manager and its Affiliates and the Company. The market in which the Company will seek to purchase Mortgage Assets is characterized by rapid evolution of products and services and, thus, there may in the future be relationships between the Company and the Manager and its Affiliates in addition to those described herein. Any such relationships or transactions will require the approval of the Company's Board of Directors, including a majority of the Unaffiliated Directors. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates." Pursuant to the terms of the Management Agreement, the Manager and its Affiliates will agree on the allocation of Mortgage Securities between the Company and other accounts over which the Manager and its Affiliates have control. Pursuant to such allocation, the Manager will base allocation decisions on the procedures the Manager considers fair and equitable, including, without limitation, such considerations as investment objectives, restrictions and time horizon, availability of cash and the amount of existing holdings. 57 As of the date of this Prospectus, the Company's 100 shares of Common Stock outstanding are held by TAMCO, an Affiliate of the Manager and TCW. The shares of Common Stock were issued for $1,500 cash in the aggregate. TAMCO has represented to the Company that the shares of Common Stock were purchased for investment purposes only and undertaken that they will be sold only pursuant to a registration statement under the Securities Act, or an applicable exemption from the registration requirements thereof. TCW may be deemed to control the Company prior to the closing of the Offering. Directors, officers and employees of the Company, TCW and its Affiliates are expected to purchase up to 500,000 shares of Common Stock at the closing of the Offering at a price equal to the initial public offering price. This will result in directors, officers and employees of TCW and its Affiliates owning up to 500,100 shares of Common Stock, or up to approximately 5.0% of the total shares offered hereby, exclusive of the Underwriters' over-allotment options. The foregoing parties have agreed not to sell any shares of Common Stock or any rights to acquire Common Stock for at least 180 days after the Company's initial public offering of shares of Common Stock without the consent of Merrill Lynch & Co., but may dispose of the shares of Common Stock any time thereafter. See "Underwriting." The Manager and its employees and the Unaffiliated Directors may also receive stock options pursuant to the Company's 1997 Stock Option Plan. See "Management of the Company--Stock Options." TCW Brokerage Services, an Affiliate of the Manager and TCW, will act as a dealer in connection with the Offering and will receive compensation from the Underwriters for the shares of Common Stock sold by it. TCW Brokerage Services has not participated in any negotiations of the Underwriters' compensation or the terms of the Offering. LIMITS OF RESPONSIBILITY Pursuant to the Management Agreement, the Manager will not assume any responsibility other than to undertake the services called for thereunder and will not be responsible for any action of the Company's Board of Directors in following or declining to follow its advice or recommendations. The Manager, its directors and its officers will not be liable to the Company, any issuer of Mortgage Securities, any subsidiary of the Company, the Unaffiliated Directors, the Company's stockholders or any subsidiary's stockholders for acts performed in accordance with and pursuant to the Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. The Manager does not have significant assets and may not have significant assets in the future. Consequently, there can be no assurance that the Company would be able to recover any damages for claims it may have against the Manager. The Company has agreed to indemnify the Manager, its directors and its officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from any acts or omissions of the Manager made in good faith in the performance of its duties under the Management Agreement. The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or Affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of, or rendering advice to others purchasing Mortgage Assets that meet the Company's policies and criteria. Notwithstanding the foregoing, members of the MBS Group of the TCW Group, or any equivalent or successor group of the TCW Group, during their employment by the TCW Group will not provide any active management services to a residential mortgage REIT, other than the Company, that invests primarily in high quality Mortgage Securities comparable to the Mortgage Securities in which the Company will invest. The Manager may also advise or manage other mortgage-related entities, including REITs, that invest in residential and commercial mortgages and other residential and non-residential mortgage securities. The ability of the Manager and its officers and employees to engage in other business activities could reduce the time and effort spent on the Company. The Management Agreement does not specify a minimum amount of time or attention that the Manager or its officers or employees must devote to the Company's business. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates--Conflicts Relating to the Manager Rendering Services to Others." 58 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of October 30, 1997, relating to the beneficial ownership of the Company's Common Stock by (i) all persons known by the Company to beneficially own more than 5% of the outstanding shares of the Company's Common Stock, (ii) each director of the Company, and (iii) all officers and directors of the Company as a group.
PERCENTAGE OF SHARES BENEFICIALLY NUMBER OF OWNED SHARES ----------------- NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER BENEFICIAL OWNER(1)(2)(3) OWNED OFFERING OFFERING ------------------------- ------------ -------- -------- TCW Asset Management Company (4)............ 100 shares 100% * Officers and Directors as a group (10 persons)................................... -- -- -- (5)
- -------- *Less than 1%. (1) Unless otherwise noted, the Company believes that each person named in the table has sole voting and investment power with respect to all shares of Common Stock owned by them. (2) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date of this Prospectus have been exercised. None of the outstanding options to acquire Common Stock of the Company are exercisable within 60 days of this Prospectus. (3) Does not include shares of Common Stock that may be purchased by directors, officers and employees of the Company, TCW and its Affiliates in the Offering. See "The Manager--Certain Relationships; Conflicts of Interest" and "Underwriting." (4) Address is: 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017. (5) Does not include the shares of Common Stock that officers and directors may purchase in the Offering. 59 FEDERAL INCOME TAX CONSEQUENCES THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PROSPECTIVE HOLDER OF SHARES OF COMMON STOCK OF THE COMPANY. THIS DISCUSSION IS BASED ON CURRENT LAW. THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSIDERATIONS. IT DOES NOT GIVE A DETAILED DISCUSSION OF ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS, NOR DOES IT DISCUSS ALL OF THE ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PROSPECTIVE STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR CIRCUMSTANCES OR TO CERTAIN TYPES OF STOCKHOLDERS (INCLUDING INSURANCE COMPANIES, CERTAIN TAX-EXEMPT ENTITIES, FINANCIAL INSTITUTIONS, BROKER/DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL INCOME TAX LAWS. EACH PROSPECTIVE PURCHASER OF COMMON STOCK OF THE COMPANY IS URGED TO CONSULT WITH HIS OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND THE POTENTIAL CHANGES IN APPLICABLE TAX LAWS. GENERAL The Code provides special tax treatment for organizations that qualify and elect to be taxed as REITs. The discussion below summarizes the material provisions applicable to the Company as a REIT for federal income tax purposes and to its stockholders in connection with their ownership of shares of Common Stock. However, it is impractical to set forth in this Prospectus all aspects of federal, state, local and foreign tax law that may have tax consequences with respect to an investor's purchase of the Common Stock. The discussion of various aspects of federal taxation contained herein is based on the Code, administrative regulations, judicial decisions, administrative rulings and practice, all of which are subject to change. In brief, if certain detailed conditions imposed by the Code are met, entities that invest primarily in real estate assets, including Mortgage Loans, and that otherwise would be taxed as corporations are, with certain limited exceptions, not taxed at the corporate level on their taxable income that is currently distributed to their stockholders. This treatment eliminates most of the "double taxation" (at the corporate level and then again at the stockholder level when the income is distributed) that typically results from the use of corporate investment vehicles. A qualifying REIT, however, may be subject to certain excise and other taxes, as well as normal corporate tax, on Taxable Income that is not currently distributed to its stockholders. See "--Taxation of the Company" below. The Company plans to make an election to be taxed as a REIT under the Code commencing with its taxable year ending December 31, 1997. OPINION OF SPECIAL COUNSEL O'Melveny & Myers LLP, special tax counsel ("Counsel") to the Company, has advised the Company in connection with the Offering of the Common Stock and its election to be taxed as a REIT. Based on existing law and certain representations made to Counsel by the Company, including (without limitation) that this Prospectus accurately reflects the proposed method of operation of the Company, and assuming that the Company operates in the manner described in this Prospectus, in the opinion of Counsel, commencing with the Company's taxable year ending December 31, 1997, the Company has been organized in conformity with the requirements for qualification as a REIT under the Code and the Company's actual and proposed method of operation described in this Prospectus and as represented by the Company to Counsel will enable the Company to qualify as a REIT. However, whether the Company will in fact so qualify will depend on actual operating 60 results and compliance with the various tests for qualification as a REIT relating to its income, assets, distributions, ownership and certain administrative matters, the results of which may not be reviewed by Counsel. Moreover, certain aspects of the Company's method of operations have not been considered by the courts or the Service. There can be no assurance that the courts or the Service will agree with this opinion. In addition, qualification as a REIT depends on future transactions and events that cannot be known at this time. Accordingly, Counsel is unable to opine whether the Company will in fact qualify as a REIT under the Code in all events. In the opinion of Counsel, the section of the Prospectus entitled "Federal Income Tax Consequences" identifies and fairly summarizes the federal income tax considerations that are likely to be material to a holder of the Common Stock and to the extent such summaries involve matters of law, such statements of law are correct under the Code. Counsel's opinions are based on various assumptions and on the factual representations of the Company concerning its business and assets. Accordingly, no assurance can be given that the actual results of the Company's operation for any one taxable year will satisfy such requirements. See "--Termination or Revocation of REIT Status" below. The opinions of Counsel are based upon existing law including the Internal Revenue Code of 1986, as amended, existing Treasury Regulations, Revenue Rulings, Revenue Procedures and case law, all of which is subject to change either prospectively or retroactively. Moreover, relevant laws or other legal authorities may change in a manner that could adversely affect the Company or its stockholders. Counsel's opinions also are based in part on the opinion of special Maryland counsel, Ballard Spahr Andrews & Ingersoll, that the Company is duly organized and existing under Maryland law. In the event that the Company does not qualify as a REIT in any year, it will be subject to federal income tax as a domestic corporation and its stockholders will be taxed in the same manner as stockholders of ordinary corporations. To the extent that the Company would, as a consequence, be subject to potentially significant tax liabilities, the amount of earnings and cash available for distribution to its stockholders would be reduced. See "-- Termination or Revocation of REIT Status" below. REQUIREMENTS FOR QUALIFICATION AS A REIT To qualify for tax treatment as a REIT under the Code, the Company must meet certain tests which are described immediately below. Stock Ownership Tests. For all taxable years after the first taxable year for which a REIT election is made, the Company's shares of Common Stock must be transferable and must be held by a minimum of 100 persons for at least 335 days of a 12 month year (or a proportionate part of a short tax year). The Company must also use the calendar year as its taxable year. In addition, at all times during the second half of each taxable year, no more than 50% in value of the shares of any class of the stock of the Company may be owned directly or indirectly by five or fewer individuals. If, for any taxable year, the Company complies with regulations requiring the maintenance of records to ascertain ownership of its outstanding stock and the Company does not know or have reason to know that it failed to satisfy this test, it will be treated as satisfying this test for any such taxable year. In determining whether the Company's shares are held by five or fewer individuals, the attribution rules of Sections 544 of the Code apply. For a description of these attribution rules, see "Description of Capital Stock." The Company's Charter imposes certain repurchase provisions and transfer restrictions to avoid more than 50% by value of any class of the Company's stock being held by five or fewer individuals (directly or constructively) at any time during the last half of any taxable year. Such repurchase and transfer restrictions will not adversely affect the status of the shares of stock as "transferable shares" for purposes of qualification as a REIT. The Company intends to satisfy both the 100 stockholder and 50%/5 stockholder individual ownership limitations described above for as long as it seeks qualification as a REIT. See "Description of Capital Stock." The Company uses the calendar year as its taxable year for income tax purposes. Asset Tests. On the last day of each calendar quarter at least 75% of the value of the Company's assets must consist of Qualified REIT Real Estate Assets, government securities, cash and cash items (the "75% of Assets Test"). The Company expects that substantially all of its assets will be Qualified REIT Real Estate Assets. 61 Qualified REIT Real Estate Assets include Pass-Through Certificates, interests in real property, interests in Mortgage Loans secured by real property and interests in REMICs. On the last day of each calendar quarter, of the investments in securities not included in the 75% of Assets Test, the value of any one issuer's securities may not exceed 5% by value of the Company's total assets and the Company may not own more than 10% of any one issuer's outstanding voting securities. Hedging contracts (other than those which are Qualified REIT Real Estate Assets), and certain types of other Mortgage Assets may be treated as securities of the entity issuing such agreements or interests. The Company will take measures to prevent the value of such contracts, interests or assets issued by any one entity from exceeding 5% of the value of the Company's assets as of the end of each calendar quarter. Moreover, pursuant to its compliance guidelines, the Company intends to monitor closely (on not less than a quarterly basis) the purchase and holding of the Company's assets in order to comply with the above assets tests. In particular, as of the end of each calendar quarter the Company intends to limit and diversify its ownership of hedging contracts and other Mortgage Securities that do not constitute Qualified REIT Real Estate Assets to less than 25%, in the aggregate, by value of its portfolio, to less than 5% by value as to any single issuer, and to less than 10% of the voting stock of any single issuer (collectively the "25% of Assets Test"). If such limits are ever exceeded, the Company intends to take appropriate remedial action to dispose of such excess assets within the 30-day period after the end of the calendar quarter, as permitted under the Code. When purchasing Mortgage Securities, the Company may rely on opinions of counsel for the issuer or sponsor of such securities given in connection with the offering of such securities, or statements made in related offering documents, for purposes of determining whether and to what extent those securities (and the income therefrom) constitute Qualified REIT Real Estate Assets (and income) for purposes of the 75% of Assets Test (and the source of income tests discussed below). If the Company invests in a partnership for purposes of the asset tests and the gross income tests, it will be treated as receiving its share of the income and loss of the partnership and owning a proportionate share of the assets of the partnership and any income from the partnership will retain the character that it had in the hands of the partnership. If the Company forms a taxable affiliate to conduct mortgage origination and other activities, it will obtain an opinion of counsel that the proposed organization and ownership of an interest in the taxable affiliate will not adversely affect the Company's status as a REIT. Where a failure to satisfy any of the asset tests discussed above results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non- qualifying assets within 30 days after the close of such quarter. The Company intends to maintain adequate records of the value of its assets to determine its compliance with the asset tests, and intends to take such action as may be required to cure any failure to satisfy the test within 30 days after the close of any quarter. Gross Income Tests. The Company must meet two separate income-based tests for each year in order to qualify as a REIT. 1. The 75% Test. At least 75% of the Company's gross income (the "75% of Income Test") for the taxable year must be derived from the following sources: (i) rents from real property; (ii) interest (other than interest based in whole or in part on the income or profits of any person) on obligations secured by mortgages on real property or on interests in real property; (iii) gains from the sale or other disposition of interests in real property and real estate mortgages other than gain from stock in trade, inventory or property held primarily for sale to customers in the ordinary course of the Company's trade or business ("Dealer Property"); (iv) dividends or other distributions on shares in other REITs and, provided such shares are not Dealer Property, gain from the sale of such shares; (v) abatements and refunds of real property taxes; (vi) income from the operation, and gain from the sale, of property acquired at or in lieu of a foreclosure of the mortgage secured by such property or as a result of a default under a lease of such property ("Foreclosure Property"); (vii) income received as consideration for entering into agreements to make loans secured by real property or to purchase or lease real property (including interests in real property and interests in mortgages on real property) (for example, commitment fees); and (viii) income attributable to stock or debt instruments acquired with the proceeds from 62 the sale of stock or certain debt obligations ("New Capital") of the Company received during the one-year period beginning on the day such proceeds were received ("Qualified Temporary Investment Income"). The investments that the Company intends to make (as described under "Business and Strategy-- Description of Mortgage Assets") will give rise primarily to mortgage interest qualifying under the 75% of Income Test. 2. The 95% Test. In addition to deriving 75% of its gross income from the sources listed above, at least an additional 20% of the Company's gross income for the taxable year must be derived from those sources, or from dividends, interest or gains from the sale or disposition of stock or other securities that are not Dealer Property (the "95% of Income Test"). Income attributable to Mortgage Warehouse Participations, Mortgage Securities (other than Qualified REIT Real Estate Assets) that the Company holds directly, dividends on stock interest on any other obligations not secured by real property, and gains from the sale or disposition of stock or other securities that are not Qualified REIT Real Estate Assets will constitute qualified income for purposes of the 95% of Income Test only, but will not be qualified income for purposes of the 75% of Income Test. Income from mortgage servicing contracts, loan guarantee fees (or other contracts under which the Company would earn fees for performing services) and hedging (other than from Qualified REIT Real Estate Assets) will not qualify for either the 95% or 75% of Income Tests. The Company intends to severely limit its acquisition of any assets or investments the income from which does not qualify for purposes of the 95% of Income Test. Moreover, in order to help ensure compliance with the 95% of Income Test and the 75% of Income Test, the Company intends to limit substantially all of the assets that it acquires to Qualified REIT Real Estate Assets. The policy of the Company to maintain REIT status may limit the type of assets, including hedging contracts, that the Company otherwise might acquire. For purposes of determining whether the Company complies with the 75% of Income Test and the 95% of Income Test detailed above, gross income does not include gross income from Prohibited Transactions. A "Prohibited Transaction" is one involving a sale of Dealer Property, other than Foreclosure Property. Net income from Prohibited Transactions is subject to a 100% tax. See "-- Taxation of the Company" below. The Company intends to maintain its REIT status by carefully monitoring its income, including income from hedging transactions, futures contracts and sales of Mortgage Assets to comply with the 75% of Income Test and the 95% of Income Test. See "--Taxation of the Company" below for a discussion of the potential tax cost of the Company's selling certain Mortgage Securities on a regular basis. In order to help insure its compliance with the REIT Provisions of the Code, the Company will adopt guidelines the effect of which will be to limit its ability to earn certain types of income, including income from hedging, other than hedging income from Qualified REIT Real Estate Assets. See "Business and Strategy--Asset/Liability Management--Interest Rate Risk Management Policy." If the Company fails to satisfy one or both of the 75% or 95% of Income Tests for any year, it may face either (a) assuming such failure was for reasonable cause and not willful neglect, a 100% tax on the greater of the amounts of income by which it failed to comply with the 75% of Income Test or the 95% of Income Test, reduced by estimated related expenses or (b) loss of REIT status. There can be no assurance that the Company will always be able to maintain compliance with the gross income tests for REIT qualification despite its periodic monitoring procedures. Moreover, there is no assurance that the relief provisions for a failure to satisfy either the 95% or the 75% of Income Tests will be available in any particular circumstance. Distribution Requirement. The Company must distribute to its stockholders on a pro rata basis each year an amount equal to (i) 95% of its Taxable Income before deduction of dividends paid and excluding net capital gain, plus (ii) 95% of the excess of the net income from Foreclosure Property over the tax imposed on such income by the Code, less (iii) any "excess noncash income" (the "95% Distribution Test"). See "Dividend Policy and Distributions." The Company intends to make distributions to its stockholders in amounts sufficient to meet this 95% distribution requirement. Such distributions must be made in the taxable year to which they relate or, if declared before the timely filing of the Company's tax return for such year and paid not later than the first regular dividend payment after such declaration, in the following taxable year. A nondeductible excise tax, equal to 4% of the excess of such required distributions over the amounts actually distributed will be imposed on the Company for each calendar year to the extent that dividends paid during the year (or declared during the last quarter of the year and paid during January of the succeeding year) are less than the sum of 63 (i) 85% of the Company's "ordinary income," (ii) 95% of the Company's capital gain net income, and (iii) income not distributed in earlier years. If the Company fails to meet the 95% Distribution Test as a result of an adjustment to the Company's tax returns by the Service, the Company by following certain requirements set forth in the Code, may pay a deficiency dividend within a specified period that will be permitted as a deduction in the taxable year to which the adjustment is made. The Company would be liable for interest based on the amount of the deficiency dividend. A deficiency dividend is not permitted if the deficiency is due to fraud with intent to evade tax or to a willful failure to file timely tax return. Recordkeeping Requirements. A REIT is required to maintain records regarding the actual and constructive ownership of its shares, and other information, and within 30 days after the end of its taxable year, to demand statements from persons owning above a specified level of the REIT's shares (e.g., if the Company has over 200 but fewer than 2,000 stockholders of record, from persons holding 1% or more of the Company's outstanding shares of stock and if the Company has 200 or fewer stockholders of record, from persons holding 1/2% or more of the stock) regarding their ownership of shares. The Company must maintain, as part of its records, a list of those persons failing or refusing to comply with this demand. Stockholders who fail or refuse to comply with the demand must submit a statement with their tax returns setting forth the actual stock ownership and other information. The Company also is required to maintain permanent records of its assets as of the last day of each calendar quarter. The Company intends to maintain the records and demand statements as required by these regulations. TERMINATION OR REVOCATION OF REIT STATUS The Company's election to be treated as a REIT will be terminated automatically if it fails to meet the requirements described above. In that event, the Company will not be eligible again to elect REIT status until the fifth taxable year that begins after the year for which its election was terminated unless all of the following relief provisions apply: (i) the Company did not willfully fail to file a timely return with respect to the termination taxable year; (ii) inclusion of incorrect information in such return was not due to fraud with intent to evade tax; and (iii) the Company establishes that failure to meet requirements was due to reasonable cause and not willful neglect. The Company may also voluntarily revoke its election, although it has no intention of doing so, in which event it will be prohibited, without exception, from electing REIT status for the year to which the revocation relates and the following four taxable years. If the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Company would be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders of the Company with respect to any year in which it fails to qualify as a REIT would not be deductible by the Company nor would they be required to be made. Failure to qualify as a REIT would result in the Company's reduction of its distributions to stockholders in order to pay the resulting taxes. If, after forfeiting REIT status, the Company later qualifies and elects to be taxed as a REIT again, the Company could face significant adverse tax consequences. TAXATION OF THE COMPANY In any year in which the Company qualifies as a REIT, it generally will not be subject to federal income tax on that portion of its Taxable Income or net capital gain which is distributed to its stockholders. The Company will, however, be subject to tax at normal corporate rates upon any Net Income or net capital gain not distributed. The Company intends to distribute substantially all of its Taxable Income to its stockholders on a pro rata basis in each year. See "Dividend and Distribution Policy." In addition, the Company will also be subject to a tax of 100% of net income from any prohibited transaction and will be subject to a 100% tax on the greater of the amount by which it fails either the 75% or 95% of Income Tests, reduced by approximated expenses, if the failure to satisfy such tests is due to reasonable 64 cause and not willful neglect and if certain other requirements are met. The Company may be subject to the alternative minimum tax on certain items of tax preference. If the Company acquires any real property as a result of foreclosure, or by a deed in lieu of foreclosure, it may elect to treat such real properly as Foreclosure Property. Net income from the sale of Foreclosure Property is taxable at the maximum federal corporate rate, currently 35%. Income from Foreclosure Property will not be subject to the 100% tax on prohibited transactions. The Company will determine whether to treat such real property as Foreclosure Property on the tax return for the fiscal year in which such property is acquired. The Company may securitize Mortgage Loans and sell such Mortgage Securities through a taxable subsidiary. However, if the Company itself were to sell such Mortgage Securities on a regular basis, there is a substantial risk that they would be deemed Dealer Property and that all of the profits from such sales would be subject to tax at the rate of 100% as income from Prohibited Transactions. The Company therefore, intends to make any such sales through a taxable subsidiary. The taxable subsidiary will form mortgage pools and create mortgage-backed securities. See "--Taxable Subsidiaries" below. The taxable subsidiary will not be subject to this 100% tax on income from Prohibited Transactions, which is only applicable to REITs. The Company may elect to retain and pay income tax on all or a portion of its net long-term capital gains for any taxable year, in which case the Company's stockholders would include in their income as long-term capital gains their proportionate share of such undistributed capital gains. The stockholders would be treated as having paid their proportionate share of the capital gains tax paid by the Company, which amounts would be credited or refunded to the stockholders. The Company will also be subject to a nondeductible 4% excise tax if it fails to make timely dividend distributions for each calendar year. See "-- Requirements for Qualification as a REIT--Distribution Requirement" above. The Company intends to declare its fourth regular annual dividend during the final quarter of the year and to make such dividend distribution no later than 31 days after the end of the year in order to avoid imposition of the excise tax. Such a distribution would be taxed to the stockholders in the year that the distribution was declared, not in the year paid. Imposition of the excise tax on the Company would reduce the amount of cash available for distribution to its stockholders. TAXABLE SUBSIDIARIES The Company may, in the future, cause the creation and sale of Mortgage Securities through a taxable corporation. The Company and one or more persons or entities will own all of the capital stock of that taxable corporation, sometimes referred to as a "taxable subsidiary." In order to ensure that the Company will not violate the prohibition on ownership of more than 10% of the voting stock of a single issuer and the prohibition on investing more than 5% of the value of its assets in the stock or securities of a single issuer, the Company will own only shares of nonvoting preferred stock of that taxable subsidiary corporation and will not own any of the taxable subsidiary's common stock. The Company will monitor the value of its investment in the taxable subsidiary on a quarterly basis to limit the risk of violating any of the tests that comprise the 25% of Assets Test. In addition, the dividends that the taxable subsidiary pays to the Company will not qualify as income from Qualified REIT Real Estate Assets for purposes of the 75% of Income Test, and in all events would have to be limited, along with the Company's other interest, dividends, gains on the sale of securities, hedging income, and other income not derived from Qualified REIT Real Estate Assets to less than 25% of the Company's gross revenues in each year. The taxable subsidiary will not elect REIT status, will be subject to income taxation on its net earnings and will generally be able to distribute only its net after-tax earnings to its stockholders, including the Company, as dividend distributions. If the taxable subsidiary creates a taxable mortgage pool, such pool itself will constitute a separate taxable subsidiary of the taxable subsidiary. The taxable subsidiary would be unable to offset the income derived from such a taxable mortgage pool with losses derived from any other activities. 65 TAXATION OF STOCKHOLDERS For any taxable year in which the Company is treated as a REIT for federal income purposes, amounts distributed by the Company to its stockholders out of current or accumulated earnings and profits will be includable by the stockholders as ordinary income for federal income tax purposes unless properly designated by it as capital gain dividends. In the latter case, the distributions will be taxable to the stockholders as long-term capital gains. Distributions of the Company will not be eligible for the dividends received deduction for corporations. Stockholders may not deduct any net operating losses or capital losses of the Company. Any loss on the sale or exchange of shares of the Common Stock held by a stockholder for six months or less will be treated as a long-term capital loss to the extent of any capital gain dividend received on the Common Stock held by such stockholders. If the Company makes distributions to its stockholders in excess of its current and accumulated earnings and profits, those distributions will be considered first a tax-free return of capital, reducing the tax basis of a stockholder's shares until the tax basis is zero. Such distributions in excess of the tax basis will be taxable as gain realized from the sale of the Company's stock. The Company does not expect to acquire Residual interests issued by REMICs. Such Residual interests, if acquired by a REIT, may generate excess inclusion income. Excess inclusion income cannot be offset by net operating losses of a stockholder. If the stockholder is a Tax-Exempt Entity, the excess inclusion income is fully taxable as UBTI. If allocated to a foreign stockholder, the excess inclusion income is subject to federal income tax withholding without reduction pursuant to any otherwise applicable tax treaty. Potential investors, and in particular Tax-Exempt Entities, are urged to consult with their tax advisors concerning this issue. The Company intends to finance the acquisition of Mortgage Assets by entering into reverse repurchase agreements, which are essentially loans secured by the Company's Mortgage Assets. The Company will seek to enter into master repurchase agreements with secured lenders known as "counter-parties." Typically, such master repurchase agreements have cross-collateralization provisions that afford the counter-party the right to foreclose on the Mortgage Assets pledged as collateral. If the Service were to successfully take the position that the cross-collateralization provisions of the master repurchase agreements result in the Company having issued debt instruments (the reverse repurchase agreements) with differing maturity dates secured by a pool of Mortgage Loans, a portion of its income could be characterized as "excess inclusion income." See "Risk Factors--Adverse Tax Treatment of Excess Inclusion Income." The Company will notify stockholders after the close of the Company's taxable year as to the portions of the distributions which constitute ordinary income, return of capital and capital gain. Dividends and distributions declared in the last quarter of any year payable to stockholders of record on a specified date in such month will be deemed to have been received by the stockholders and paid by the Company on December 31 of the record year, provided that such dividends are paid before February 1 of the following year. TAXATION OF TAX-EXEMPT ENTITIES In general, a Tax-Exempt Entity that is a stockholder of the Company is not subject to tax on distributions. The Service has ruled that amounts distributed by a REIT to an exempt employees' pension trust do not constitute UBTI and thus should be nontaxable to such a Tax-Exempt Entity. Based on that ruling, but subject to the discussion of excess inclusion income set forth under "--Taxation of Stockholders" above, indebtedness incurred by the Company in connection with the acquisition of real estate assets such as Mortgage Loans will not cause dividends of the Company paid to a stockholder that is a Tax-Exempt Entity to be UBTI. However, if a Tax-Exempt Entity has financed the acquisition of any of its stock in the Company with "acquisition indebtedness" within the meaning of the Code, distributions on such stock could be treated as UBTI. Under certain conditions, if a tax-exempt employee pension or profit sharing trust were to acquire more than 10% of the Company's stock, a portion of the dividends on such stock could be treated as UBTI. 66 For social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an investment in the Company will constitute UBTI unless the organization is able to properly deduct amounts set aside or placed in reserve for certain purposes so as to offset the UBTI generated by its investment in the Company. Such entities should review Code Section 512(a)(3) and should consult their own tax advisors concerning these "set aside" and reserve requirements. STATE AND LOCAL TAXES The Company and its stockholders may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Common Stock. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO FOREIGN HOLDERS The following discussion summarizes certain United States tax consequences of the acquisition, ownership and disposition of the Common Stock by an initial purchaser of the Common Stock that, for United States income tax purposes, is not a "United States person" (a "Foreign Holder"). For purposes of discussion, a "United States person" means: a citizen or resident of the United States; a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof (unless, in the case of a partnership, the Service provides otherwise by regulations); an estate whose income is includable in gross income for United States income tax purposes regardless of its source; or, a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. This discussion does not consider any specific facts or circumstances that may apply to a particular Foreign Holder. Prospective investors are urged to consult their tax advisors regarding the United States tax consequences of acquiring, holding and disposing of Common Stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. Dividends. Dividends paid by the Company out of earnings and profits, as determined for United States income tax purposes, to a Foreign Holder will generally be subject to withholding of United States federal income tax at the rate of 30%, unless reduced or eliminated by an applicable tax treaty or unless such dividends are treated as effectively connected with a United States trade or business conducted by the Foreign Holder. A Foreign Holder eligible for a reduction in withholding under an applicable treaty must so notify the Company by completing the appropriate IRS form. Distributions paid by the Company in excess of its earnings and profits will be treated as a tax- free return of capital to the extent of the holder's adjusted basis in his Common Stock, and thereafter as gain from the sale or exchange of a capital asset as described below. If it cannot be determined at the time a distribution is made whether such distribution will exceed the Company's earnings and profits (which, under most circumstances, will correspond to the Company's Net Income before the deduction for dividends paid), the distribution will be subject to withholding at the same rate as dividends. Amounts so withheld, however, will be refundable or creditable against the Foreign Holder's United States tax liability if the Company subsequently determines that such distribution was, in fact, in excess of the earnings and profits of the Company. If the receipt of the dividend is treated as being effectively connected with the conduct of a trade or business within the United States by a Foreign Holder, the dividend received by such holder will be subject to the United States federal income tax on net income that applies to United States persons generally (and, in addition with respect to foreign corporate holders and under certain circumstances, the 30% branch profits tax). For any year in which the Company qualifies as a REIT, distributions to a Foreign Holder that are attributable to gain from the sales or exchanges by the Company of "United States real property interests" will be treated as if such gain were effectively connected with a United States business and will thus be subject to tax at the normal capital gain rates applicable to United States stockholders (subject to applicable alternative 67 minimum tax) under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate stockholder not entitled to a treaty exemption. The Company is required to withhold 35% of any distribution that could be designated by the Company as a capital gains dividend. This amount may be credited against the Foreign Holder's FIRPTA tax liability. Gain on Disposition. A Foreign Holder will generally not be subject to United States federal income tax on gain recognized on a sale or other disposition of the Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident alien individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days (computed in part by reference to days present in the 2 prior years) in the taxable year and certain other requirements are met, or (iii) the Foreign Holder is subject to tax under the FIRPTA rules discussed below. Gain that is effectively connected with the conduct of a United States Holder will be subject to the United States federal income tax on net income that applies to United States persons generally (and, with respect to corporate holders and under certain circumstances, the branch profits tax) but will not be subject to withholding. Foreign Holders should consult applicable treaties, which may provide for different rules. Gain recognized by a Foreign Holder upon a sale of its Common Stock will generally not be subject to tax under FIRPTA if the Company is a "domestically controlled REIT," which is defined generally as a REIT in which at all times during a specified testing period less than 50% in value of its shares were held directly or indirectly by non-U.S. persons. Because only a minority of the Company's stockholders are expected to be Foreign Holders, the Company anticipates that it will qualify as a "domestically controlled REIT." Accordingly, a Foreign Holder should not be subject to U.S. tax from gains recognized upon disposition of the Common Stock. However, because the Common Stock will be publicly traded, no assurance can be given that the Company will continue to be a "domestically controlled REIT." Information Reporting and Backup Withholding. Under temporary United States Treasury regulations, United States information reporting requirements and backup withholding tax will generally not apply to dividends paid on the Common Stock to a Foreign Holder at an address outside the United States. Payments by a United States office of a broker of the proceeds of a sale of the Common Stock is subject to both backup withholding at a rate of 31% and information reporting unless the holder certifies its Foreign Holder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to payments of the proceeds of sales of the Common Stock by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the holder is a Foreign Holder and certain other conditions are met, or the holder otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the Foreign Holder's United States federal income tax liability, provided that the required information is furnished to the Service. These information reporting and backup withholding rules are under review by the United States Treasury and their application to the Common Stock could be changed by future regulations. RECENT TAX LEGISLATION On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of 1997 (the "1997 Act"). Effective for taxable years beginning after the date of the enactment of the 1997 Act, the 1997 Act, among other things, (i) extends the current two-year period during which property acquired at or in lieu of foreclosure of the mortgage secured by such property (or as a result of a default under a lease of such property) may be treated as Foreclosure Property to the close of the third taxable year following the taxable year during which such property was acquired, (ii) expands the types of interest rate hedges that may be treated as Qualified Hedges, and (iii) reduces the maximum federal long-term capital gains rate applicable to individuals to 20%. 68 ERISA CONSIDERATIONS In considering an investment in the Common Stock, a fiduciary of a profit- sharing, pension stock bonus plan or individual retirement account ("IRA"), including a plan for self-employed individuals and their employees or any other employee benefit plan subject to Prohibited Transaction provisions of the Code or the fiduciary responsibility provisions of ERISA (an "ERISA Plan") should consider (a) whether the ownership of Common Stock is in accordance with the documents and instruments governing such ERISA Plan, (b) whether the ownership of Common Stock is consistent with the fiduciary's responsibilities and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA (where applicable) and, in particular, the diversification, prudence and liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in improper delegation of control over, or responsibility for, "plan assets" and ERISA's imposition of co-fiduciary liability on a fiduciary who participates in, permits (by action or inaction) the occurrence of, or fails to remedy a known breach of duty by another fiduciary and (d) the need to value the assets of the ERISA Plan annually. In regard to the "plan assets" issue noted in clause (c) above, Counsel is of the opinion that, effective as of the date of the closing of the Offering and the listing of the shares of Common Stock on the New York Stock Exchange, and based on certain representations of the Company, the Common Stock should qualify as a "publicly offered security," and, therefore, the acquisition of such Common Stock by ERISA Plans should not cause the Company's assets to be treated as assets of such investing ERISA Plans for purposes of the fiduciary responsibility provisions of ERISA or the prohibited transaction provisions of the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely upon their own advisors in evaluating the consequences under the fiduciary provisions of ERISA and the Code of an investment in Common Stock in light of their own circumstances. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100 million shares of Common Stock, par value $.01 per share, and 50 million shares of preferred stock, par value $.01 per share, issuable in one or more classes. Each share of Common Stock is entitled to participate equally in dividends when and as declared by the Board of Directors and in the distribution of assets of the Company upon liquidation. Each share of Common Stock is entitled to one vote and will be fully paid and non-assessable by the Company upon issuance. Shares of the Common Stock of the Company have no preference, conversion, exchange, preemptive or cumulative voting rights. The authorized capital stock of the Company may be increased and altered from time to time as permitted by Maryland law. The preferred stock may be issued from time to time in one or more classes or series, with such distinctive designations, rights and preferences as shall be determined by the Company's Board of Directors. Preferred stock would be available for possible future financings of, or acquisitions by, the Company and for general corporate purposes without any legal requirement that further stockholder authorization for issuance be obtained. The issuance of preferred stock could have the effect of making an attempt to gain control of the Company more difficult by means of a merger, tender offer, proxy contest or otherwise. The preferred stock, if issued, would have a preference on dividend payments that could affect the ability of the Company to make dividend distributions to the common stockholders. The Bylaws provide that meetings of the stockholders of the Company are to be held annually and special meetings may be called by the Board of Directors, the Chairman of the Board, the President, a majority of the Unaffiliated Directors or the stockholders. REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER Two of the requirements of qualification for the tax benefits accorded by the REIT Provisions of the Code are that (1) during the last half of each taxable year not more than 50% in value of the outstanding shares may be owned directly or indirectly by five or fewer individuals (the "50%/5 stockholder test") and (2) there must be at least 100 stockholders on 335 days of each taxable year of 12 months. 69 In order that the Company may meet these requirements at all times, the Charter prohibits any person from acquiring or holding, directly or indirectly, shares of Common Stock in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock or in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of preferred stock of the Company. For this purpose, the term "ownership" is defined in accordance with the REIT Provisions of the Code and the constructive ownership provisions of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. Subject to certain limitations, the Company's Board of Directors may increase or decrease the ownership limitations or waive the limitations for individual investors. For purposes of the 50%/5 stockholder test, the constructive ownership provisions applicable under Section 544 of the Code attribute ownership of securities owned by a corporation, partnership, estate or trust proportionately to its stockholders, partners or beneficiaries, attribute ownership of securities owned by family members and partners to other members of the same family, treat securities with respect to which a person has an option to purchase as actually owned by that person, and set forth application of such attribution provisions (i.e., "reattribution"). Thus, for purposes of determining whether a person holds shares of Common Stock in violation of the ownership limitations set forth in the Charter, many types of entities may own directly more than the 9.8% limit because such entities' shares are attributed to its individual stockholders. On the other hand, a person will be treated as owning not only shares of Common Stock actually or beneficially owned, but also any shares of Common Stock attributed to such person under the attribution rules described above. Accordingly, under certain circumstances, shares of Common Stock owned by a person who individually owns less than 9.8% of the shares outstanding may nevertheless be in violation of the ownership limitations set forth in the Charter. Ownership of shares of Common Stock through such attribution is generally referred to as constructive ownership. The 100 stockholder test is determined by actual, and not constructive, ownership. The Company will have greater than 100 stockholders of record. The Charter further provides that if any transfer of shares of Common Stock which, if effective, would result in any person beneficially or constructively owning shares of Common Stock in excess or in violation of the above transfer or ownership limitations, then that number of shares of Common Stock the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole shares) shall be automatically transferred to a trustee (the "Trustee") as trustee of a trust (the "Trust") for the exclusive benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"), and the intended transferee shall not acquire any rights in such shares. Shares of Common Stock held by the Trustee shall be issued and outstanding shares of Common Stock. The intended transferee shall not benefit economically from ownership of any shares held in the Trust, shall have no rights to dividends, and shall not possess any rights to vote or other rights attributable to the shares held in the Trust. The Trustee shall have all voting rights and rights to dividends or other distributions with respect to shares held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid to the intended transferee prior to the discovery by the Company that shares of Common Stock have been transferred to the Trustee shall be paid with respect to such shares to the Trustee by the intended transferee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. The Board of Directors of the Company may, in its discretion, waive these requirements on owning shares in excess of the ownership limitations. Within 20 days of receiving notice from the Company that shares of Common Stock have been transferred to the Trust, the Trustee shall sell the shares 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 the Charter. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the intended transferee and to the Charitable Beneficiary as follows. The intended transferee shall receive the lesser of (1) the price paid by the intended transferee for the shares or, if the intended transferee did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price (as defined below) of the shares on the day of the event causing the shares to be held in the Trust, and (2) the price per share received by the Trustee from the sale or other disposition of the shares held in the Trust. Any net sales proceeds in excess of 70 the amount payable to the intended transferee shall be immediately paid to the Charitable Beneficiary. In addition, shares of Common Stock transferred to the Trustee shall be deemed to have been offered for sale to the Company, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift), and (ii) the Market Price on the date the Company, or its designee, accepts such offer. The Company shall have the right to accept such offer until the Trustee has sold shares held in the Trust. Upon such a sale to the Company, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the intended transferee. The term "Market Price" on any date shall mean, with respect to any class or series of outstanding shares of the Company's stock, the Closing Price (as defined below) for such shares on such date. The "Closing Price" on any date shall mean the last sale price for such shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if such shares are not listed or admitted to trading on the New York Stock Exchange, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such shares are listed or admitted to trading or, if such shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the- counter market, as reported by the National Association of Securities Dealers, Inc., Automated Quotation Systems, or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such shares selected by the Company's Board of Directors or, in the event that no trading price is available for such shares, the fair market value of the shares, as determined in good faith by the Company's Board of Directors. All persons who own, directly or indirectly, more than 5%, in the case of 2,000 or more stockholders of record and 1% in the case of more than 200 but fewer than 2,000 stockholders of record, of all classes or series of the Company's stock, within 30 days after the end of each taxable year, are required to give written notice to the Company stating the name and address of such direct or indirect owner, the number of shares of each class and series of stock of the Company directly or indirectly owned and a description of the manner in which such shares are held. Each such direct or indirect owner shall provide to the Company such additional information as the Company may request in order to determine the effect, if any, of such ownership on the Company's status as a REIT and to ensure compliance with the ownership limitations. 71 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS The following summary of certain provisions of the Maryland General Corporation Law, as amended from time to time (the "MGCL"), and of the Charter and the Bylaws of the Company does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and to the Charter and the Bylaws of the Company, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." For a description of additional restrictions on transfer of the Common Stock, see "Description of Capital Stock--Repurchase of Shares and Restrictions on Transfer." REMOVAL OF DIRECTORS The Charter provides that a director may be removed from office at any time but only by the affirmative vote of the holders of at least two-thirds of the votes of the shares entitled to be cast in the election of directors. BUSINESS COMBINATIONS Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate of such an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. The MGCL does not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. CONTROL SHARE ACQUISITIONS 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 vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then 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. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. 72 If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply (i) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (ii) to acquisitions approved or exempted by the charter or bylaws of the corporation. The Bylaws of the Company contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of the Company's shares of Common Stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. INTERESTED PARTY TRANSACTIONS Pursuant to the Company's Bylaws, the Company will not enter into any transactions or agreements with any director, officer or Affiliate of the Company except as approved by a majority of the Company's Board of Directors, including a majority of the Unaffiliated Directors. The Company has no restrictions on any director, officer or Affiliate of the Company from engaging for their own account in business activities of the types conducted or to be conducted by the Company and its Affiliates. AMENDMENT TO THE CHARTER The Company reserves the right from time to time to make any amendment to its Charter, now or hereafter authorized by law, including any amendment which alters the contract rights, as expressly set forth in the Charter, of any shares of outstanding stock. The Charter may be amended only by the affirmative vote of holders of shares entitled to cast not less than a majority of all the votes entitled to be cast on the matter; provided, however, that provisions on removal of directors and certain other provisions may be amended only by the affirmative vote of holders of shares entitled to cast not less than two-thirds of all the votes entitled to be cast in the election of directors. DURATION OF THE COMPANY The Company's Charter provides that the Company shall have a perpetual duration. DISSOLUTION OF THE COMPANY The dissolution of the Company must be approved by the affirmative vote of holders of shares entitled to cast not less than two-thirds of all the votes entitled to be cast on the matter. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Bylaws provide that (a) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to the Company's notice of the meeting, (2) by the Board of Directors or, (3) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws, and (b) with respect to special meetings of stockholders, only the business specified in the Company's notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to 73 the Board of Directors or (c) provided that the Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the . POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS The business combination provisions and, if the applicable provision in the Bylaws is rescinded, the control share acquisition provisions of the MGCL, the provisions of the Charter on removal of directors and the advance notice provisions of the could delay, defer or prevent a change in control of the Company or other transaction that might involve a premium price for holders of Common Stock or otherwise be in their best interest. TRANSFER AGENT AND REGISTRAR The Company intends to appoint The Bank of New York as its transfer agent and registrar for the Common Stock. REPORTS TO STOCKHOLDERS The Company will furnish its stockholders with annual reports containing audited financial statements and such other periodic reports as it may determine to furnish or as may be required by law. 74 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "U.S. Purchase Agreement"), the Company has agreed to sell to each of the underwriters named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch & Co."), PaineWebber Incorporated, Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated are acting as representatives (the "U.S. Representatives"), has severally agreed to purchase from the Company the number of shares of Common Stock set forth opposite its name below.
NUMBER OF U.S. UNDERWRITER SHARES ---------------- --------- Merrill Lynch, Pierce, Fenner & Smith........................... Incorporated PaineWebber Incorporated........................................ Stifel, Nicolaus & Company, Incorporated........................ Sutro & Co. Incorporated........................................ --------- Total...................................................... 8,000,000 =========
The Company has also entered into an international purchase agreement (the "International Purchase Agreement" and, together with the U.S. Purchase Agreement, the "Purchase Agreements") with Merrill Lynch International, PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters") Subject to the terms and conditions set forth in the International Purchase Agreement, the Company has agreed to sell to the International Managers, and the International Managers have severally agreed to purchase, an aggregate of 2,000,000 shares of Common Stock. The initial public offering price per share and the underwriting discount per share are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In each Purchase Agreement, the Underwriters named therein have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to such Purchase Agreement if any of the shares of Common Stock are purchased. In the event of a default by one or more of the Underwriters, the commitments of the non-defaulting U.S. Underwriters or International Managers, as the case may be, may be increased or the U.S. Purchase Agreement or the International Purchase Agreement, as the case may be, may be terminated. The U.S. Representatives have advised the Company that the U.S. Underwriters propose to offer the shares of Common Stock offered hereby to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share of Common Stock, and that the U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. 75 The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and the International Managers are permitted to sell shares of Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-United States persons or to persons they believe intend to resell to persons who are non-United States persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are United States persons or to persons they believe intend to resell to persons who are United States persons, except in each case for transactions pursuant to the Intersyndicate Agreement. The Company has granted to the U.S. Underwriters an option, exercisable for 30 days after the date hereof, to purchase up to an aggregate of 1,200,000 additional shares of Common Stock and to the International Managers an option, exercisable for 30 days after the date hereof, to purchase up to 300,000 additional shares of Common Stock, in each case solely to cover over- allotments, if any, at the initial public offering price, less the underwriting discount set forth on the cover page of this Prospectus. To the extent that the U.S. Underwriters exercise their option, each of the U.S. Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the foregoing table is of the number of shares of Common Stock initially purchased by the U.S. Underwriters. The Company, the Manager, their respective officers and directors and certain officers, employees and directors of TCW Group and its Affiliates have agreed not to offer, sell, agree or offer to sell, grant any option to purchase or otherwise dispose of, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock directly or indirectly, for a period of 180 days after the date of this Prospectus without the prior written consent of Merrill Lynch & Co. acting on behalf of the Underwriters, except that the Company may, without such consent, grant options or issue shares of Common Stock pursuant to the Company's 1997 Stock Option Plan. At the request of the Company, the U.S. Underwriters have reserved up to 500,000 shares of Common Stock for sale (at the initial public offering price) to directors, officers and employees of the Company, TCW and its Affiliates, who have expressed an interest in purchasing such shares. There is no obligation, however, on the part of any such individuals to purchase any shares of Common Stock. Each such person has agreed to the restrictions on transfer of the shares of Common Stock that are described in the preceding paragraph. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares of Common Stock not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares of Common Stock offered hereby. The U.S. Representatives and the International Managers have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Underwriters. Among the factors considered in such negotiations, in addition to prevailing market conditions, are the Company's future prospects, the experience of its management, the economic condition of the financial services industry in general, the demand for similar securities of companies considered comparable to the Company and other relevant factors. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price will be subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offering at or above the initial public offering price. 76 Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, Merrill Lynch & Co. is permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), Merrill Lynch & Co. may reduce that short position by purchasing Common Stock in the open market. Merrill Lynch & Co. may also elect to reduce any short position through the exercise of all or part of the over-allotment options described above. Merrill Lynch & Co. may also impose a penalty bid on certain Underwriters and selling group members. This means that if Merrill Lynch & Co. purchases shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that Merrill Lynch & Co. will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company and the Manager, subject to certain limitations, have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company intends to purchase insurance that, among other things, provides coverage for the Company and the Manager with respect to the foregoing indemnification and contribution agreement. See "The Manager--Expenses." Certain of the Underwriters have performed, and may continue to perform, investment banking, broker-dealer and financial advisory services for certain Affiliates of the Company and have received and will receive customary compensation therefor. The Underwriters undertake that the minimum distribution, issuance and aggregate market value requirements for listing on the New York Stock Exchange will be achieved in the Offering. In addition, TCW Brokerage Services, an affiliate of the Manager, will act as a dealer in connection with the U.S. Offering and receive compensation from the Underwriters in connection with the shares of Common Stock it sells. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates." 77 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and certain legal matters will be passed upon for the Underwriters by Brown & Wood llp, New York, New York. O'Melveny & Myers LLP and Brown & Wood llp, will rely as to certain matters of Maryland law on the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the description of federal income tax consequences contained in this Prospectus entitled "Federal Income Tax Consequences" is based upon the opinion of O'Melveny & Myers LLP. EXPERTS The balance sheet of Apex Mortgage Capital, Inc. as of September 15, 1997, included in this Prospectus has been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and is included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION Copies of the Registration Statement of which this Prospectus forms a part and the exhibits thereto are on file at the offices of the Commission in Washington, D.C., and may be obtained at rates prescribed by the Commission upon request to the Commission and inspected, without charge, at the offices of the Commission. The Company will be subject to the informational requirements of the Exchange Act, and in accordance therewith, will periodically file reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can also be obtained from the Commission at prescribed rates through its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respect by such reference. The Commission maintains a Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. The Company intends to furnish the holders of Common Stock with annual reports containing financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited financial statements for each of the first three quarters of each year. 78 GLOSSARY As used in this Prospectus, the capitalized and other terms listed below have the meanings indicated. "Affiliate" means, when used with reference to a specified person, any person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the specified person. "Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and FHLMC Certificates. "ARM" means either a (i) a Mortgage Security as to which the underlying mortgage loans feature adjustments of the underlying interest rate at predetermined times based on an agreed margin to an establish index or (ii) a Mortgage Loan or any mortgage loan underlying a Mortgage Security that features adjustments of the underlying interest rate at predetermined times based on an agreed margin to an established index. An ARM is usually subject to periodic and lifetime interest rate and/or payment caps. "ASR" means ASR Investments Corporation. "Average Net Invested Capital" means for any period (i) the arithmetic average of the sum of the gross proceeds of the offerings of its equity securities by the Company, after deducting any underwriting discounts and commissions and other expenses and costs relating to such offerings, plus (A) the Company's retained earnings (taking into account any losses incurred) and (B) any non-cash charges or reserves, including depreciation, mark-to-market adjustments and unrealized credit loss, computed by taking the average of such values at the end of each month during such period, plus (ii) any unsecured debt approved by the Unaffiliated Directors to be included in Average Net Invested Capital. "Average Net Worth" means for any period the arithmetic average of the sum of the gross proceeds from the offerings of its equity securities by the Company, before deducting any underwriting discounts and commissions and other expenses and costs relating to the offerings, plus the Company's retained earnings (without taking into account any losses incurred in prior periods) computed by taking the average of such values at the end of each month during such period. "Bankruptcy Code" means Title 11 of the United States Code, as amended. "Capital and Leverage Policy" means the policy of the Company that limits its ability to acquire additional Mortgage Assets during times when the capital base of the Company is less than a required amount, as described in this Prospectus. "Charitable Beneficiary" means a charitable beneficiary of a Trust. "Charter" means the Company's Articles of Incorporation, as amended. "Closing Price" on any date shall mean the last sale price for such shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if such shares are not listed or admitted to trading on the New York Stock Exchange, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such shares are listed or admitted to trading or, if such shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation Systems, or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such shares selected by the Company's Board of Directors or, in the event that no trading price is available for such shares, the fair market value of the shares, as determined in good faith by the Company's Board of Directors. 79 "CMOs" means debt obligations (bonds) that are collateralized by mortgage loans or mortgage certificates other than Mortgage Derivative Securities and Subordinated Interests. CMOs are structured so that principal and interest payments received on the collateral are sufficient to make principal and interest payments on the bonds. Such bonds may be issued by United States government agencies or private issuers in one or more classes with fixed or variable interest rates, maturities and degrees of subordination that are characteristics designed for the investment objectives of different bond purchasers. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission. "Commitments" means commitments issued by the Company that will obligate the Company to purchase Mortgage Assets from or sell them to the holders of the commitment for a specified period of time, in a specified aggregate principal amount and at a specified price. "Common Stock" means the Company's shares of Common Stock, $0.01 par value per share. "Company" means Apex Mortgage Capital, Inc., a Maryland corporation. "Compensation Committee" means the committee of the Company's Board of Directors comprised entirely of Unaffiliated Directors that will administer the 1997 Stock Option Plan. "Conforming Mortgage Loans" means conventional Mortgage Loans that either comply with requirements for inclusion in credit support programs sponsored by Fannie Mae, FHLMC, or GNMA or are FHA or VA Loans, all of which are secured by first mortgages or deeds of trust on single-family (one to four units) residences. "Control Shares" means voting shares of stock which, if aggregated with all other shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. "Control Share Acquisition" means the acquisition of control shares, subject to certain exceptions. "Counsel" means O'Melveny & Myers LLP. "Counter-party" means a third-party financial institution with which the Company enters into an interest rate cap agreement or similar agreement. "Dealer Property" means real property and real estate mortgages other than stock in trade, inventory or property held primarily for sale to customers in the ordinary course of the Company's trade or business. "Dollar-Roll Agreement" means an agreement to sell a security for delivery on a specified future date and a simultaneous agreement to repurchase the same or substantially similar security on a specified future date. "11th District Cost of Funds Index" means the index made available monthly by the Federal Home Loan Bank Board of the cost of funds to members of the Federal Home Loan Bank 11th District. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Plan" means a pension, profit-sharing, retirement or other employee benefit plan that is subject to ERISA. 80 "Excess Servicing Rights" means contractual rights to receive a portion of monthly mortgage payments of interest remaining after those payments of interest have already been applied, to the extent required, to Pass-Through Certificates and the administration of mortgage servicing. The mortgage interest payments are secured by an interest in real property. "Excess Shares" means the number of shares of capital stock held by any person or group of persons in excess of 9.8% of the outstanding shares. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fannie Mae" means the federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act (12 U.S.C., (S) 1716 et seq.), formerly known as the Federal National Mortgage Association. "Fannie Mae Certificates" means guaranteed mortgage Pass-Through Certificates issued by Fannie Mae either in certified or book-entry form. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "FHA" means the United States Federal Housing Administration. "FHA Loans" means Mortgage Loans insured by the FHA. "FHLMC" means the Federal Home Loan Mortgage Corporation. "FHLMC Certificates" means mortgage participation certificates issued by FHLMC, either in certificated or book-entry form. "50%/5 Stockholder Test" means the requirement for qualification as a REIT that during the last half of each taxable year not more than 50% in value of the outstanding shares may be owned directly or indirectly by five or fewer individuals. "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980. "First Loss Subordinated Bonds" means any bonds that bear the "first loss" from losses incurred in respect of Mortgage Assets upon foreclosure sales and other liquidations of underlying mortgaged properties that result in failure to recover all amounts due on the loans secured thereby. "Foreclosure Property" means property acquired at or in lieu of foreclosure of the mortgage secured by such property or a result of a default under a lease of such property. "Foreign Holder" means an initial purchaser of the Common Stock that, for United States income tax purposes, is not a United States person. "GAAP" means generally accepted accounting principles. "GNMA" means the Government National Mortgage Association. "GNMA Certificates" means fully modified pass-through mortgage-backed certificates guaranteed by GNMA and issued either in certificated or book- entry form. "High Quality" means either (i) securities that are rated A or above by at least one of the Rating Agencies, or (ii) securities that are unrated but are obligations of the United States or obligations guaranteed by the United States government or an agency or instrumentality thereof. "Housing Act" means the National Housing Act of 1934, as amended. 81 "HUD" means the Department of Housing and Urban Development. "ICAA" means the Investment Counsel Association of America. "Interested Stockholder" means any person who beneficially owns 10% or more of the voting power of a corporation's shares or an affiliate of a corporation who, at any time within the ten-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. "Interest Only Derivatives" means Mortgage Derivative Securities representing the right to receive interest only or a disproportionately large amount of interest. "International Purchase Agreement" means the agreement by and between the Company, the Manager and the International Managers whereby the International Managers agree to purchase all of the shares of Common Stock being sold thereunder if any of such shares are purchased, subject to the terms and conditions set forth therein. "Inverse Floaters" means a class of CMOs with a coupon rate that moves inversely to a designated index, such as LIBOR or the 11th District Cost of Funds Index. Income floaters have coupon rates that typically change at a multiple of the changes at the relevant index rate. Any rise in the index rate (as a consequence of an increase in interest rates) causes a drop in the coupon rate of an Inverse Floater while any drop in the index rate causes an increase in the coupon of an Inverse Floater. "Investment Company Act" means the Investment Company Act of 1940, as amended. "International Managers" means Merrill Lynch International, PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated.. "Intersyndicate Agreement" means the agreement by and between the U.S. Underwriters and the International Managers that provides for the coordination of their activities. "IRAs" means Individual Retirement Accounts. "ISOs" means qualified incentive stock options granted under the 1997 Stock Option Plan that meet the requirements of Section 422 of the Code. "Issuers" means those entities that issue Mortgage Securities, including trusts or subsidiaries organized by the Company and Affiliates of the Manager. "Keogh Plans" means H.R. 10 Plans. "LIBOR" means London-Inter-Bank Offered Rate. "MGCL" means the Maryland General Corporation Law. "Management Agreement" means the agreement by and between the Company and the Manager whereby the Manager agrees to perform certain services to the Company in exchange for certain compensation. "Manager" means TCW Investment Management Company, a California corporation. "Market Price" on any date shall mean, with respect to a class or series of outstanding shares of the Company's stock, the Closing Price for such stock on such date. 82 "MBS Group" means the TCW Group's Mortgage-Backed Securities Group. "Merrill Lynch & Co." means Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Moody's" means Moody's Investors Service, Inc. "Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans and (iii) Short-Term Investments. "Mortgage Derivative Securities" means Mortgage Securities that are Interest Only Derivatives or Principal Only Derivatives and may include other derivative instruments. "Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA Loans and VA Loans. "Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs and (iii) Other Mortgage Securities. "Mortgage Warehouse Participations" means participations in lines of credit to mortgage originators that are secured by recently originated Mortgage Loans that are in the process of being either securitized or sold to permanent investors. "Net Income" means the taxable income of the Company before the Manager's incentive compensation, net operating loss deductions arising from losses in prior periods and deductions permitted by the Code in calculating taxable income for a REIT, including a deduction for the Company's interest expenses for borrowed funds, plus the effects of adjustments, if any, necessary to record hedging and interest transactions in accordance with GAAP. "New Capital" means the proceeds from the sale of stock or certain debt obligations. "95% Distribution Test" means the stockholder distribution requirement described in "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Distribution Requirement." "95% of Income Test" means the income-based test that the Company must meet to qualify as a REIT described in paragraph 2 of "Federal Income Tax Consequences--Requirements for Qualification as a REIT-- Gross Income Tests." "Nonconforming Mortgage Loans" means conventional Mortgage Loans that do not conform to one or more requirements of Fannie Mae, FHA, FHLMC, GNMA or VA for participation in one or more of such agencies' mortgage loan credit support programs, such as the principal amounts financed or the underwriting guidelines used in making the loan. "Offering" means the 10,000,000 shares of Common Stock offered through the Underwriters in connection with this Prospectus. "One-Year U.S. Treasury Rate" means the average of the weekly average yield to maturity for U.S. Treasury securities (adjusted to a constant maturity of one year) as published weekly by the Federal Reserve Board during a yearly period. "Other Mortgage Assets" means Mortgage Assets that are unrated or whose ratings have not been updated, including (i) Mortgage Loans, (ii) Pass-Through Certificates and CMOs that are not High Quality but are backed by single- family residential mortgage loans, and (iii) Other Mortgage Securities, that, in each case, are determined to be comparable to a High Quality Mortgage Security (by the standards of at least one of the Rating Agencies) on the basis of credit or other enhancement features that meet the High Quality Credit criteria as determined by the Manager and approved by the Company's Board of Directors, including approval by a majority of the Unaffiliated Directors 83 "Other Mortgage Securities" means securities representing interests in, or secured by mortgages on real property other than Pass-Through Certificates and CMOs and may include non-High Quality certificates and other securities collateralized by single-family loans, Mortgage Warehouse Participations, Mortgage Derivative Securities, Subordinated Interests and other mortgage- backed and mortgage-collateralized obligations. "Pass-Through Certificates" means securities (or interests therein) other than Mortgage Derivative Securities and Subordinated Interests evidencing undivided ownership interests in a pool of mortgage loans, the holders of which receive a "pass-through" of the principal and interest paid in connection with the underlying mortgage loans in accordance with the holders' respective, undivided interests in the pool. Pass-Through Certificates include Agency Certificates, as well as other certificates evidencing interests in loans secured by single-family properties. "Principal Only Derivatives" means Mortgage Derivative Securities representing the right to receive principal only or a disproportionate amount of principal. "Privately Issued Certificates" means mortgage participation certificates issued by certain private institutions. These securities entitle the holder to receive a pass-through of principal and interest payments in the underlying pool of Mortgage Loans and are issued or guaranteed by the private institution. "Prohibited Transaction" means a transaction involving a sale of Dealer Property, other than Foreclosure Property. "Purchase Agreements" means the U.S. Purchase Agreement and International Purchase Agreement. "Qualified Hedges" means bona fide interest rate swap or cap agreements entered into by the Company to hedge variable-rate indebtedness only that the Company incurred to acquire or carry Qualified REIT Real Estate Assets and any futures and options, or other investments (other than Qualified REIT Real Estate Assets) made by the Company to hedge its Mortgage Assets or borrowings that have been determined by the Company to generate qualified income for purposes of the 95% of Income Test applicable to REITs. "Qualifying Interests in Real Estate" means "mortgages and other liens on and interests in real estate," as defined in Section 3(c)(5)(C) under the Investment Company Act. "Qualified REIT Real Estate Assets" means Pass-Through Certificates, Mortgage Loans, Agency Certificates, and other assets of the type described in Section 856(c)(6)(B) of the Code. "Qualified REIT Subsidiary" means a corporation whose stock is entirely owned by the REIT at all times during such corporation's existence. "Qualified Temporary Investment Income" means income attributable to stock or debt instruments acquired with new capital of the Company received during the one-year period beginning on the day such proceeds were received. "Rating Agencies" means Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, and Moody's Investors Service, Inc. "REIT" means a real estate investment trust as defined under Section 856 of the Code. "REIT Provisions of the Code" means Sections 856 through 860 of the Code. "REMIC" means a real estate mortgage investment conduit. "Residuals" means the right to receive the remaining or residual cash flows from a pool of Mortgage Loans or Mortgage Securities after distributing required amounts to the holders of interests in or obligations backed by such loans or securities and after payment of any required pool expenses. 84 "Return on Equity" means an amount calculated for any quarter by dividing the Company's Net Income for the quarter by its Average Net Worth for the quarter. "Securities Act" means the Securities Act of 1933, as amended. "Service" means the Internal Revenue Service. "Servicers" means those entities that perform the servicing functions with respect to Mortgage Loans or Excess Servicing Rights owned by the Company. "Standard & Poor's" means Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies. "75% of Assets Test" means the asset-based test requiring that on the last day of each calendar quarter at least 75% of the Company's assets must consist of Qualified REIT Real Estate Assets, government securities, cash and cash items, as described in "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Asset Tests." "75% of Income Test" means the income-based test that the Company must meet to qualify as a REIT described in paragraph 1 of "Federal Income Tax Consequences--Requirements for Qualification as a REIT-- Gross Income Tests." "Short-Term Investments" means short-term bank certificates of deposit, short-term United States Treasury securities, short-term United States government agency securities, commercial paper, repurchase agreements, short- term CMOs, short-term asset-backed securities and other similar types of short-term investment instruments, all of which will have maturities or average lives of less than one (1) year. "1997 Stock Option Plan" means the stock option plan adopted by the Company. "Subordinated Interests" means a class of Mortgage Securities that is subordinated to one or more other classes of Mortgage Securities, all of which classes share the same collateral. "Suppliers of Mortgage Assets" means mortgage bankers, savings and loan associations, investment banking firms, banks, home builders, insurance companies and other concerns or lenders involved in mortgage finance or originating and packaging mortgage loans, and their Affiliates. "TAMCO" means TCW Asset Management Company. "Tax-Exempt Entity" means a qualified pension, profit-sharing or other employee retirement benefit plans, Keogh plans, bank commingled trust funds for such plans, and IRAs, and other similar entities intended to be exempt from federal income taxation. "Taxable Income" means for any year the taxable income of the Company for such year (excluding any net income derived either from property held primarily for sale to customers or from Foreclosure Property) subject to certain adjustments provided in the REIT Provisions of the Code. "TCW" means The TCW Group, Inc. "TCW Group" means TCW and its subsidiaries and Affiliates. "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to a constant maturity of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, 85 based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. "TFMI" means TCW Funds Management, Inc. "Trust" means a trust that is the transferee of that number of shares of Common Stock the beneficial or constructive ownership of which otherwise would cause a person to acquire or hold, directly or indirectly, shares of Common Stock in an amount that violates the Company's Charter, which trust shall be for the exclusive benefit of one or more Charitable Beneficiaries. "Trustee" means a trustee of a Trust for the exclusive benefit of a Charitable Beneficiary. "25% of Assets Test" means the asset-based tests described in "Federal Income Tax Consequences-- Requirements for Qualification as a REIT--Asset Tests." "UBTI" means "unrelated trade or business income" as defined in Section 512 of the Code. "Unaffiliated Directors" means those directors that are not affiliated, directly or indirectly, with the Manager or the TCW Group, whether by ownership of, ownership interest in, employment by, any material business or professional relationship with, or serving as an officer or director of the Manager or the TCW Group, and are not employed by or officers of the Company. "Underwriters" means the U.S. Underwriters and the International Managers. "United States Holder" means an initial purchaser of the Common Stock that, for United States income tax purposes, is a United States person (i.e., is not a Foreign Holder). "U.S. Purchase Agreement" means the agreement by and between the Company, the Manager and the Underwriters whereby the Underwriters agree to purchase all of the shares of Common Stock being sold thereunder if any of such shares are purchased, subject to the terms and conditions set forth therein. "U.S. Representatives" means Merrill Lynch & Co., PaineWebber Incorporated, Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated. "U.S. Underwriters" means each of the underwriters listed in the U.S. Purchase Agreement. "VA" means the United States Veterans Administration. "VA Loans" means Mortgage Loans partially guaranteed by the VA under the Serviceman's Readjustment Act of 1944, as amended. 86 INDEPENDENT AUDITORS' REPORT To the Stockholder of Apex Mortgage Capital, Inc. We have audited the accompanying balance sheet of Apex Mortgage Capital, Inc. (the "Company") as of September 15, 1997. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of Apex Mortgage Capital, Inc. as of September 15, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Los Angeles, California September 16, 1997 F-1 APEX MORTGAGE CAPITAL, INC. BALANCE SHEET SEPTEMBER 15, 1997
ASSETS ------ Cash ................................................................... $1,500 ====== LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ STOCKHOLDER'S EQUITY Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized; Common Stock, par value $0.01 per share; 100,000,000 shares authorized; 100 Common Stock shares issued and outstanding................................................. $ 1 Additional paid-in-capital.............................................. 1,499 ------ Total Stockholder's Equity............................................ $1,500 ======
See accompanying notes to balance sheet. F-2 APEX MORTGAGE CAPITAL, INC. NOTES TO BALANCE SHEET SEPTEMBER 15, 1997 NOTE 1--THE COMPANY Apex Mortgage Capital, Inc. (the "Company") was incorporated in Maryland and was initially capitalized through the sale of 100 shares of Common Stock for $1,500 on September 15, 1997. The Company will seek to acquire primarily mortgage-backed securities and mortgage loans. The Company has had no operations to date other than matters relating to the organization and start-up of the Company. Accordingly, no statement of operations is presented. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Cash includes cash on hand and deposits in banks. The Company has no cash equivalents. FEDERAL AND STATE INCOME TAXES The Company will elect to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and generally will not be subject to federal and state taxes on its income to the extent it distributes annually 95% of its predistribution taxable income to stockholders and maintains its qualification as a real estate investment trust. INCOME RECOGNITION Income and expenses are to be recorded on the accrual basis of accounting. STOCK OPTIONS The Company accounts for stock options to employees and directors of the Company using the intrinsic value method. All other stock options are accounted for using the fair value method. NOTE 3--TRANSACTIONS WITH AFFILIATES The Company intends to enter into a Management Agreement (the "Management Agreement") with TCW Investment Management Company (the "Manager"), a wholly- owned subsidiary of The TCW Group, Inc., under which the Manager will manage its day-to-day operations, subject to the direction and oversight of the Company's Board of Directors. The Company will pay the Manager annual base management compensation, payable quarterly, equal to 3/4 of 1% of the Average Net Invested Capital, as defined in the Management Agreement. The Company will also pay the Manager, as incentive compensation, an amount equal to 30% of the Net Income of the Company, before incentive compensation, in excess of the amount that would produce an annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%, as defined in the Management Agreement. NOTE 4--PUBLIC OFFERING OF COMMON STOCK The Company is in the process of filing a Registration Statement for the sale of its common stock. Contingent upon the consummation of the public offering, the Company will be liable for organization and offering expenses in connection with the sale of the shares offered. F-3 APEX MORTGAGE CAPITAL, INC. NOTES TO BALANCE SHEET--(CONTINUED) NOTE 5--STOCK OPTION PLAN The Company has adopted a stock option plan (the "1997 Stock Option Plan") that provides for qualified incentive stock options, non-qualified stock options, stock appreciation rights and dividend equivalent rights. Directors, officers and key employees of the Company and the Manager are eligible to participate in the 1997 Stock Option Plan. The exercise price for any option granted under the 1997 Stock Option Plan may not be less than 100% of the fair market value of the shares of the Company's Common Stock at the time the option is granted. The 1997 Stock Option Plan authorizes the grant of options to purchase an aggregate of up to 10% of the outstanding shares of the Company's common stock, but not more than 1,000,000 shares. No options or rights have yet been granted under the 1997 Stock Option Plan. The Company intends to grant options to purchase 400,000 shares of Common Stock, effective on the closing of the public offering of Common Stock. The options will be exercisable starting one year after the date of grant. The fair value of the options cannot be determined until the closing of the public offering. F-4 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 4 Risk Factors.............................................................. 15 Use of Proceeds........................................................... 25 Dividend and Distribution Policy.......................................... 25 Capitalization............................................................ 26 Liquidity and Capital Resources........................................... 26 Business and Strategy..................................................... 27 Management of the Company................................................. 43 The Manager............................................................... 48 Security Ownership of Certain Beneficial Owners and Management............ 57 Federal Income Tax Consequences .......................................... 58 ERISA Considerations...................................................... 67 Description of Capital Stock.............................................. 67 Certain Provisions of Maryland Law and of the Company's Charter and Bylaws................................................................... 70 Underwriting.............................................................. 73 Legal Matters............................................................. 76 Experts................................................................... 76 Additional Information.................................................... 76 Glossary.................................................................. 77
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 10,000,000 SHARES LOGO APEX MORTGAGE CAPITAL, INC. COMMON STOCK ----------------------- PROSPECTUS ----------------------- MERRILL LYNCH & CO. PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY INCORPORATED SUTRO & CO. INCORPORATED , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED NOVEMBER 21, 1997 PROSPECTUS 10,000,000 SHARES APEX MORTGAGE CAPITAL, INC. COMMON STOCK ----------- All of the shares of common stock (the "Common Stock") offered hereby are being sold by Apex Mortgage Capital, Inc. (the "Company"). Of the 10,000,000 shares of Common Stock offered hereby, 2,000,000 shares of Common Stock are being offered initially outside of the United States by the International Managers (the "International Offering") and the remaining 8,000,000 shares of Common Stock are being offered concurrently by the U.S. Underwriters initially in the United States (the "U.S. Offering" and, collectively, the "Offering"). The initial public offering price and the underwriting discount per share are identical for each Offering. At the request of the Company, the Underwriters have reserved an aggregate of up to 500,000 shares of Common Stock for sale at the initial public offering price to directors, officers and employees of the Company, The TCW Group, Inc. and its affiliates. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $14.00 and $16.00 per share. See "Underwriting" for information relating to the determination of the initial public offering price. The Common Stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "AXM." LOGO ----------- SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR MATERIAL RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE RISKS INCLUDE: . The lack of prior . The Manager may be experience in managing entitled to a and operating a REIT significant termination could adversely affect fee which, if paid, the Company's results would materially of operations. adversely affect the cash available for distribution to the Company's stockholders. . The Company does not currently have any borrowing arrangements or commitments from any lenders and may therefore be unable to implement its business strategy. . The Company is recently formed and its current assets consist of $1,500 in cash. . Interest rate fluctuations may decrease net interest income from Mortgage Assets. . The Company's policies and strategies may be changed without the consent of stockholders. . The Company has no . The Company intends to identified Mortgage significantly leverage Assets to purchase and its Mortgage Assets, may be unable to which may result in acquire Mortgage Assets operating losses. on favorable terms. . Failure to maintain REIT status would substantially reduce the amount of cash available for distribution to the Company's stockholders. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------ Per Share............ $ $ $ - ------------------------------------------------------------------------------ Total(3)............. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $750,000, payable by the Company. (3) The Company has granted to the International Managers and the U.S. Underwriters options, exercisable within 30 days of the date hereof, to purchase up to 300,000 and 1,200,000 additional shares of Common Stock, respectively, solely to cover over-allotments, if any. If such over- allotment options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by the Underwriters and subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about December , 1997. ----------- MERRILL LYNCH INTERNATIONAL PAINEWEBBER INTERNATIONAL STIFEL, NICOLAUS & COMPANY INCORPORATED SUTRO & CO. INCORPORATED ----------- The date of this Prospectus is , 1997. X-1 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] UNDERWRITING Subject to the terms and conditions set forth in an international purchase agreement (the "International Purchase Agreement"), the Company has agreed to sell to each of the underwriters named below (the "International Managers"), and each of the International Managers has severally agreed to purchase from the Company the number of shares of Common Stock set forth opposite its name below.
NUMBER OF INTERNATIONAL MANAGER SHARES --------------------- --------- Merrill Lynch International...................................... PaineWebber International (U.K.) Ltd............................. Stifel, Nicolaus & Company, Incorporated......................... Sutro & Co. Incorporated......................................... Total.......................................................... 2,000,000 =========
The Company has also entered into a purchase agreement (the "U.S. Purchase Agreement" and, together with the International Purchase Agreement, the "Purchase Agreements") with certain underwriters in the United States (the "U.S. Underwriters" and, together with the International Managers, the "Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch & Co."), PaineWebber Incorporated, Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated are acting as representatives (the "U.S. Representatives"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase, an aggregate of 8,000,000 shares of Common Stock. The initial public offering price per share and the underwriting discount per share are identical under the International Purchase Agreement and the U.S. Purchase Agreement. In each Purchase Agreement, the Underwriters named therein have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to such Purchase Agreement if any of the shares of Common Stock are purchased. In the event of a default by one or more of the Underwriters, the commitments of the non-defaulting International Managers or U.S. Underwriters, as the case may be, may be increased or the International Purchase Agreement or the U.S. Purchase Agreement, as the case may be, may be terminated. The International Managers have advised the Company that they propose to offer the shares of Common Stock offered hereby to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share of Common Stock, and that the International Managers may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The International Managers and the U.S. Underwriters have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Under the terms of the Intersyndicate Agreement, the International Managers and the U.S. Underwriters are permitted to sell shares of Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are United States persons or to persons they believe intend to resell to persons who are United States persons, and the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-United States persons or to persons they believe intend to resell to persons who are non-United States persons, except in each case for transactions pursuant to the Intersyndicate Agreement. Each International Manager has agreed that (i) it has not offered or sold, and will not for a period of six months from the closing date of the Offering offer to sell, in the United Kingdom, directly or indirectly, by means of any document, any shares of Common Stock offered hereby, other than to persons whose ordinary [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] X-2 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that has not resulted and will not result in an offer to the public within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the shares of Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the shares of Common Stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom the document may otherwise lawfully be issued or passed on. Purchasers of the shares of Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of their country of purchase, in addition to the offering price set forth on the cover page hereof. The Company has granted to the International Managers an option, exercisable for 30 days after the date hereof, to purchase up to an aggregate of 300,000 additional shares of Common Stock and to the U.S. Underwriters an option, exercisable for 30 days after the date hereof, to purchase up to 1,200,000 additional shares of Common Stock solely to cover over-allotments, if any, at the initial public offering price, less the underwriting discount set forth on the cover page of this Prospectus. To the extent that the International Managers exercise their option, each of the International Managers will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the foregoing table is of the number of shares of Common Stock initially purchased by the International Managers. The Company, the Manager, their respective officers and directors and certain officers, employees and directors of TCW Group and its Affiliates have agreed not to offer, sell, agree or offer to sell, grant any option to purchase or otherwise dispose of, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock directly or indirectly, for a period of 180 days after the date of this Prospectus without the prior written consent of Merrill Lynch & Co. acting on behalf of the Underwriters, except that the Company may, without such consent, grant options or issue shares of Common Stock pursuant to the Company's 1997 Stock Option Plan. At the request of the Company, the U.S. Underwriters have reserved up to 500,000 shares of Common Stock for sale (at the initial public offering price) to directors, officers and employees of the Company, TCW and its Affiliates, who have expressed an interest in purchasing such shares. There is no obligation, however, on the part of any such individuals to purchase any shares of Common Stock. Each such person has agreed to the restrictions on transfer of the shares of Common Stock that are described in the preceding paragraph. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares of Common Stock not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares of Common Stock offered hereby. The International Managers and the U.S. Representatives have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Underwriters. Among the factors considered in such negotiations, in addition to prevailing market conditions, are the Company's future prospects, the experience of its management, the economic condition of the financial services industry in general, the demand for similar securities of companies considered comparable to the Company and other relevant factors. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price will be subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offering at or above the initial public offering price. X-3 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, Merrill Lynch & Co. is permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), Merrill Lynch & Co. may reduce that short position by purchasing Common Stock in the open market. Merrill Lynch & Co. may also elect to reduce any short position through the exercise of all or part of the over-allotment options described above. Merrill Lynch & Co. may also impose a penalty bid on certain Underwriters and selling group members. This means that if Merrill Lynch & Co. purchases shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that Merrill Lynch & Co. will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company and the Manager, subject to certain limitations, have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company intends to purchase insurance that, among other things, provides coverage for the Company and the Manager with respect to the foregoing indemnification and contribution agreement. See "The Manager--Expenses." Certain of the Underwriters have performed, and may continue to perform, investment banking, broker-dealer and financial advisory services for the Company and certain of its Affiliates and have received and will receive customary compensation therefor. The Underwriters undertake that the minimum distribution, issuance and aggregate market value requirements for listing on the New York Stock Exchange will be achieved in the Offering. In addition, TCW Brokerage Services, an affiliate of the Manager, will act as a dealer in connection with the U.S. Offering and receive compensation from the Underwriters in connection with the shares of Common Stock it sells. See "Risk Factors--Conflicts of Interest Between the Company and the Manager and Its Affiliates." LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and certain legal matters will be passed upon for the Underwriters by Brown & Wood llp, New York, New York. O'Melveny & Myers LLP and Brown & Wood [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] X-4 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] llp, will rely as to certain matters of Maryland law on the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the description of federal income tax consequences contained in this Prospectus entitled "Federal Income Tax Consequences" is based upon the opinion of O'Melveny & Myers LLP. EXPERTS The balance sheet of Apex Mortgage Capital, Inc. as of September 15, 1997, included in this Prospectus has been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and is included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION Copies of the Registration Statement of which this Prospectus forms a part and the exhibits thereto are on file at the offices of the Commission in Washington, D.C., and may be obtained at rates prescribed by the Commission upon request to the Commission and inspected, without charge, at the offices of the Commission. The Company will be subject to the informational requirements of the Exchange Act, and in accordance therewith, will periodically file reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can also be obtained from the Commission at prescribed rates through its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respect by such reference. The Commission maintains a Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. The Company intends to furnish the holders of Common Stock with annual reports containing financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited financial statements for each of the first three quarters of each year. X-5 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 4 Risk Factors.............................................................. 15 Use of Proceeds........................................................... 25 Dividend and Distribution Policy.......................................... 25 Capitalization............................................................ 26 Liquidity and Capital Resources........................................... 26 Business and Strategy..................................................... 27 Management of the Company................................................. 43 The Manager............................................................... 48 Security Ownership of Certain Beneficial Owners and Management............ 57 Federal Income Tax Consequences .......................................... 58 ERISA Considerations...................................................... 67 Description of Capital Stock.............................................. 67 Certain Provisions of Maryland Law and of the Company's Charter and Bylaws................................................................... 70 Underwriting.............................................................. 73 Legal Matters............................................................. 76 Experts................................................................... 76 Additional Information.................................................... 76 Glossary.................................................................. 77
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 10,000,000 SHARES LOGO [LOGO OF APEX MORTGAGE CAPITAL, INC.] APEX MORTGAGE CAPITAL, INC. COMMON STOCK ---------------------- PROSPECTUS ---------------------- MERRILL LYNCH INTERNATIONAL PAINEWEBBER INTERNATIONAL STIFEL, NICOLAUS & COMPANY INCORPORATED SUTRO & CO. INCORPORATED , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- X-6 PART II [INFORMATION NOT REQUIRED IN PROSPECTUS] ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID -------- SEC Registration Fee............................................. $ 55,758 NYSE listing fee................................................. 110,850 NASD filing fee.................................................. 18,900 Printing and engraving expenses.................................. 200,000 Legal fees and expenses.......................................... 300,000 Accounting fees and expenses..................................... 25,000 Transfer agent and custodian fees................................ 2,500 Miscellaneous.................................................... 55,892 -------- Total ....................................................... $750,000 ========
ITEM 32. SALES TO SPECIAL PARTIES. The securities described in Item 33(a) were initially issued to TCW Capital Investment Corporation in exchange for cash. These shares have been transferred to TCW Asset Management Company. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES. Pursuant to the exemption provided by Section 4(2) of the Securities Act, on September 15, 1997 the Company issued 100 shares of Common Stock for an aggregate purchase price of $1,500 to TCW Capital Investment Corporation. These shares have been transferred to TCW Asset Management Company. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by the MGCL, the Company's Charter obligates the Company to indemnify its present and former directors and officers and to pay or reimburse reasonable expenses for such individuals in advance of the final disposition of a proceeding to the maximum extent permitted from time to time by Maryland law. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities, unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to such 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. The Bylaws implement the provisions relating to indemnification contained in the Company's Charter. 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 II-1 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. The Company's Charter contains a provision providing for elimination of the liability of its directors or officers to the Company or its stockholders for money damages to the maximum extent permitted by Maryland law from time to time. In addition, the officers, directors, and controlling persons of the Company are indemnified against certain liabilities by the Company under the Purchase Agreement relating to this Offering. The Company's Charter and Bylaws provide, in effect, for the indemnification by the Company of its officers and directors to the fullest extent permitted by applicable law. The Company will maintain for the benefit of its officers and directors, officers' and directors' insurance. The U.S. Purchase Agreement (Exhibit 1.1) and the International Purchase Agreement (Exhibit 1.2) also provide for the indemnification by the Underwriters of the Company, its directors and officers and persons who control the Company within the meaning of Section 15 of the Securities Act with respect to certain liabilities, including liabilities arising under the Securities Act. ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED. Not applicable. ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements included in the Prospectus are: Balance sheet at September 15, 1997 Notes to financial statements All other schedules have been omitted because they are not applicable. (b) Exhibits 1.1 Form of U.S. Purchase Agreement 1.2 Form of International Purchase Agreement 3.1 Articles of Amendment and Restatement of the Registrant 3.2 Bylaws of the Registrant 5.1 Opinion of Ballard Spahr Andrews & Ingersoll 8.1 Opinion of O'Melveny & Myers LLP 10.1 Form of Management Agreement between the Registrant and TCW Investment Management Company 10.6 1997 Stock Option Plan 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.1) 23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 8.1) *24.1 Power of Attorney (included on page II-4) 99.1 Consents to be named as a director pursuant to Rule 438
- -------- * Previously filed II-2 ITEM 37. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing of the Offering certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 34 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the 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, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Los Angeles, State of California, on the 20th day of November, 1997. APEX MORTGAGE CAPITAL, INC. /s/ Philip A. Barach By: _________________________________ Philip A. Barach President and Chief Executive Officer PURSUANT TO REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board November 20, 1997 ____________________________________ Marc I. Stern /s/ Philip A. Barach President, Chief Executive November 20, 1997 ____________________________________ Officer and Director Philip A. Barach (Principal Executive Officer) * Vice Chairman of the Board November 20, 1997 ___________________________________ and Chief Investment Jeffrey E. Gundlach Officer * Executive Vice President and November 20, 1997 ____________________________________ Chief Operating Officer and Daniel K. Osborne Chief Financial Officer (Principal Financial Officer and Accounting Officer)
*By/s/ Philip A. Barach ---------------------------- Philip A. Barach (POWER OF ATTORNEY) II-4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of U.S. Purchase Agreement 1.2 Form of International Purchase Agreement 3.1 Articles of Amendment and Restatement of the Registrant 3.2 Bylaws of the Registrant 5.1 Opinion of Ballard Spahr Andrews & Ingersoll 8.1 Opinion of O'Melveny & Myers LLP 10.1 Form of Management Agreement between the Registrant and TCW Investment Management Company 10.6 1997 Stock Option Plan 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.1) 23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 8.1) *24.1 Power of Attorney (included on page II-4) 99.1 Consents to be named as a director pursuant to Rule 438
- -------- * Previously filed. EX-1.1 2 U. S. PURCHASE AGREEMENT ______________________________________________________________________________ APEX MORTGAGE CAPITAL, INC. (a Maryland corporation) 8,000,000 Shares of Common Stock U.S. PURCHASE AGREEMENT ----------------------- Dated: November __, 1997 ______________________________________________________________________________ TABLE OF CONTENTS U.S. PURCHASE AGREEMENT.................................................. 1 SECTION 1. Representations and Warranties........................ 4 ------------------------------ (a) Representations and Warranties by the Company......... 4 (i) Compliance with Registration Requirements...... 4 (ii) Independent Accountants........................ 5 (iii) Financial Statements........................... 5 (iv) No Material Adverse Change in Business......... 5 (v) Good Standing of the Company................... 5 (vi) Qualification as a REIT........................ 5 (vii) Capitalization................................. 5 (viii) Authorization of Agreement..................... 6 (ix) Management Agreement........................... 6 (x) Authorization and Description of Securities.... 6 (xi) Absence of Defaults and Conflicts.............. 6 (xii) Absence of Proceedings......................... 7 (xiii) Accuracy of Exhibits........................... 7 (xiv) Possession of Intellectual Property............ 7 (xv) Absence of Further Requirements................ 8 (xvi) Possession of Licenses and Permits............. 8 (xvii) Title to Property.............................. 8 (xviii)Investment Company Act......................... 8 (xix) Accounting Controls............................ 9 (xx) Registration Rights............................ 9 (b) Representations and Warranties by the Manager......... 9 (i) No Material Misstatements or Omissions......... 9 (ii) Good Standing.................................. 9 (iii) Authorization of Agreements.................... 10 (iv) No Material Adverse Change in Business......... 10 (v) Absence of Defaults and Conflicts.............. 10 (vi) Absence of Proceedings......................... 11 (vii) Absence of Further Requirements................ 11 (viii) Possession of Licenses and Permits............. 11 (ix) Investment Adviser............................. 11 (x) Financial Resources............................ 11 (c) Officer's Certificates................................ 12 SECTION 2. Sale and Delivery to Underwriters; Closing............ 12 (a) Initial Securities.................................... 12 (b) Option Securities..................................... 12 (c) Payment............................................... 12 (d) Denominations; Registration........................... 13 SECTION 3. Covenants............................................. 13 (a) Covenants of the Company.............................. 13 (b) Covenant of the Manager............................... 17 SECTION 4. Payment of Expenses................................... 17
(a) Expenses.............................................. 17 (b) Termination of Agreement.............................. 18 SECTION 5. Conditions of U.S. Underwriters' Obligations.......... 18 (a) Effectiveness of Registration Statement............... 18 (b) Opinions of Counsel for Company and the Manager....... 18 (c) Opinion of Maryland Counsel for the Company........... 18 (d) Opinion of Counsel for U.S. Underwriters.............. 18 (e) Officers' Certificate of the Company.................. 19 (f) Officers' Certificate of the Manager.................. 19 (g) Accountant's Comfort Letter........................... 19 (h) Bring-down Comfort Letter............................. 20 (i) Approval of Listing................................... 20 (j) No Objection.......................................... 20 (k) Lock-up Agreements.................................... 20 (l) Insurance Policy...................................... 20 (m) Conditions to Purchase of U.S. Option Securities...... 20 (n) Additional Documents.................................. 21 (o) Termination of Agreement.............................. 21 SECTION 6. Indemnification....................................... 22 (a) Indemnification of U.S. Underwriters by the Company and the Manager............................... 22 (b) Indemnification of the Company and the Manager, and their Respective Directors and Officers........... 23 (c) Actions against Parties; Notification................. 23 (d) Settlement without Consent if Failure to Reimburse.... 24 SECTION 7. Contribution.......................................... 24 SECTION 8. Representations, Warranties and Agreements to Survive Delivery...................................... 26 SECTION 9. Termination of Agreement.............................. 26 (a) Termination; General.................................. 26 (b) Liabilities........................................... 26 SECTION 10. Default by One or More of the U.S. Underwriters....... 26 SECTION 11. Notices............................................... 27 SECTION 12. Parties............................................... 27 SECTION 13. GOVERNING LAW AND TIME................................ 28 SECTION 14. Effect of Headings.................................... 28
ii SCHEDULES Schedule A - List of Underwriters............................... Sch A-1 Schedule B - Pricing Information................................ Sch B-1 Schedule C - List of Persons Subject to Lock-up................. Sch B-1 EXHIBITS Exhibit A - Form of Opinion of Company's Counsel.................... A-1 Exhibit B - Form of Opinion of Maryland Counsel..................... B-1 Exhibit C - Form of Lock-Up Letter.................................. C-1
1 APEX MORTGAGE CAPITAL, INC. (a Maryland corporation) 8,000,000 Shares of Common Stock (Par Value $.01 Per Share) U.S. PURCHASE AGREEMENT ----------------------- November __, 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated PaineWebber Incorporated Stifel, Nicolaus & Company, Incorporated Sutro & Co. Incorporated as U.S. Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Apex Mortgage Capital, Inc., a Maryland corporation (the "Company") and TCW Investment Management Company, a California corporation (the "Manager"), confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), PaineWebber Incorporated, Stifel, Nicolaus & Company, Incorporated, Sutro & Co. Incorporated and each of the other Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, PaineWebber Incorporated, Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated are acting as representatives (in such capacity, the "U.S. Representatives"), with respect to the issue and sale by the Company and the purchase by the U.S. Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") set forth in said Schedule A, and with respect to the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 1,200,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 8,000,000 shares of Common Stock (the "Initial 1 U.S. Securities") to be purchased by the U.S. Underwriters and all or any part of the 1,200,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called, collectively, the "U.S. Securities". It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Company of an aggregate of 2,000,000 shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States (the "International Managers") for which Merrill Lynch International, PaineWebber International, Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated are acting as lead managers (the "Lead Managers") and the grant by the Company to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to 300,000 shares of additional Common Stock solely to cover overallotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities". The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters", the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities", and the U.S. Securities and the International Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Underwriters agree that up to 500,000 shares of the Securities to be purchased by the Underwriters (the "Reserved Securities") shall be reserved for sale by the Underwriters to directors, officers and employees of the Company, The TCW Group, Inc. ("TCW") and its affiliates as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. (the "NASD") and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not so purchased by such persons, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. In consideration of the Underwriters entering into this Agreement and as a condition to their obligations hereunder, TCW has entered into a representation letter (the "Representation Letter") dated the date hereof with the Underwriters. The Company understands that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered. 2 The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-11 (No. 333-36069) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting". The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form of International Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and final Form of International Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary prospectus dated November 10, 1997 and the preliminary International Prospectus dated November 10, 1997, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time referred to in 3 Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter, as follows: (i) Compliance with Registration Requirements. The Company meets ----------------------------------------- the requirements for use of Form S-11 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any written request to the Company or counsel to the Company, or any oral request to their knowledge, on the part of the Commission for additional information has been complied with or satisfied. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither of the Prospectuses nor any amendments or supplements thereto, at the time the Prospectuses or any such amendment or supplement was issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different", as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or U.S. Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement or U.S. Prospectus. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and, each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. 4 (ii) Independent Accountants. The accountants who certified the ----------------------- balance sheet included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The balance sheet included in the -------------------- Registration Statement and the Prospectuses, together with the related notes, presents fairly the financial position of the Company at the date indicated; said balance sheet has been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis. (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company, other than those in the ordinary course of business, which are material with respect to the Company, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly ---------------------------- organized and is validly existing as a corporation in good standing under the laws of the State of Maryland and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement and the International Purchase Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. The Company has no subsidiaries. (vi) Qualification as a REIT. The Company is organized in ----------------------- accordance with the requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and the rules and regulations thereunder. The contemplated method of operation of the Company's business as described in the Registration Statement will allow the Company to satisfy the operational requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code, and the rules and regulations thereunder. (vii) Capitalization. The authorized, issued and outstanding capital -------------- stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly 5 authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any security holder of the Company. (viii) Authorization of Agreement. This Agreement and the -------------------------- International Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) Management Agreement. The Management Agreement (the -------------------- "Management Agreement") dated as of November __, 1997 between the Company and the Manager has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other laws relating to or affecting enforcement of creditors' rights or by general equity principles. (x) Authorization and Description of Securities. The Securities to ------------------------------------------- be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the U.S. Underwriters pursuant to this Agreement and the International Managers pursuant to the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth herein and in the International Purchase Agreement, respectively, will be validly issued and fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any security holder of the Company. (xi) Absence of Defaults and Conflicts. The Company is not in --------------------------------- violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (collectively, for purposes of this paragraph, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the International Purchase Agreement and the Management Agreement and the consummation of the transactions contemplated in this Agreement, the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and compliance by the Company with its obligations under this Agreement, the International Purchase Agreement and the Management Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or 6 Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not reasonably be expected to result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its assets, properties or operations, except for such violations, which singly or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. As used in this Section, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company. (xii) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement, the International Purchase Agreement, or the Management Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company is a party or of which any of its property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company owns or ----------------------------------- possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on its business as contemplated in the Prospectuses, and the Company has not received any notice and is not otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. 7 (xv) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the International Purchase Agreement or the consummation of the transactions contemplated by this Agreement, the International Purchase Agreement or the Management Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws or the regulations of the NASD. (xvi) Possession of Licenses and Permits. The Company possesses such ---------------------------------- permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectus, the Company is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to possess or comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Company has not received any written notice, or any oral notice to its knowledge, of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Effect. (xvii) Title to Property. The Company owns no real property. The ----------------- Company has good and marketable title to all other properties owned by it, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and all of the leases and subleases material to the business of the Company and under which the Company holds properties described in the Prospectuses, are in full force and effect, and the Company does not have notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as contemplated herein and in the International Purchase Agreement and the application of the net proceeds from the sale of the Securities substantially as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). 8 (xix) Accounting Controls. As of the Closing Time, the Company has ------------------- or will maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with transaction's general or specific authorization and (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets. (xx) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (b) Representations and Warranties by the Manager. As an inducement to each U.S. Underwriter and to the Company to enter into this Agreement and to complete the transactions contemplated hereby in connection with the consummation of the issuance, sale and delivery of the U.S. Securities, the Manager hereby represents and warrants to each U.S. Underwriter and to the Company as follows: (i) No Material Misstatements or Omissions. At the respective -------------------------------------- times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto, did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and neither the Prospectuses, nor any amendments of supplements thereto, at the time the Prospectuses or any such amendment or supplement thereto was issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery) did not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or U.S. Prospectus made in reliance upon and in conformity with information furnished to the Company or the Manager in writing by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement or U.S. Prospectus. (ii) Good Standing. The Manager has been duly organized and is ------------- validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement, the International Purchase Agreement and the Management Agreement; the Manager is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect. All of the issued and outstanding capital stock of the Manager has been duly authorized and validly issued, is fully paid and 9 non-assessable and is owned by TCW, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (iii) Authorization of Agreements. This Agreement, the International --------------------------- Purchase Agreement and the Management Agreement have each been duly authorized, executed and delivered by the Manager. The Management Agreement constitutes the valid and binding agreement of the Manager, enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency or other laws relating to or affecting enforcement of creditors' rights or by general equity principles. (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Manager, whether or not arising in the ordinary course of business and (B) there have been no transactions entered into by the Manager, other than those in the ordinary course of business, which are material in the context of the transactions contemplated in this Agreement, the International Purchase Agreement or the Management Agreement. (v) Absence of Defaults and Conflicts. The Manager is not in --------------------------------- violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound, or to which any of its property or assets is subject (collectively, for purposes of this paragraph, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the International Purchase Agreement and the Management Agreement and the consummation of the transactions contemplated herein, in the International Purchase Agreement, in the Management Agreement and in the Registration Statement, and compliance by the Manager with its obligations hereunder and under the International Purchase Agreement and the Management Agreement, have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Manager pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Manager or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Manager or any of its assets, properties or operations, except for such violations which, singly or in the aggregate, would result in a Material Adverse Effect. As used in this Section, a "Repayment Event" means any event or condition which gives the holder of 10 any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Manager. (vi) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Manager, threatened against or affecting the Manager, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement, the International Purchase Agreement or the Management Agreement or the performance by the Manager of its obligations hereunder or under the International Purchase Agreement or the Management Agreement; the aggregate of all pending legal or governmental proceedings to which the Manager is a party or of which any of its property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (vii) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Manager of its obligations hereunder or under the International Purchase Agreement or the Management Agreement. (viii) Possession of Licenses and Permits. The Manager possesses ---------------------------------- such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectuses; the Manager is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Manager has not received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (ix) Investment Adviser. The Manager is not prohibited by the ------------------ Investment Advisers Act of 1940, as amended (the "Advisers Act"), or the rules and regulations thereunder, from acting under the Management Agreement as contemplated by the Prospectuses. 11 (x) Financial Resources. The Manager has the financial resources ------------------- available to it necessary for the performance of its services and obligations as contemplated in the Prospectuses. (c) Officer's Certificates. Any certificate signed by any officer of the Company or the Manager delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company or the Manager to each U.S. Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. ------------------------------------------ (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule B, the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter, plus any additional number of Initial Securities which such U.S. Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof bears to the total number of Initial U.S. Securities, subject, in each case, to such adjustments among the U.S. Underwriters as the Global Coordinator in its sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional 1,200,000 shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Company setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery for the U.S. Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of [O'Melveny & Myers LLP, Embarcadero Center 12 West, 275 Battery Street, Suite 2600, San Francisco, California 94111, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 7:00 A.M.] (California time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants. --------- (a) Covenants of the Company. The Company covenants with each U.S. Underwriter as follows: (i) Compliance with Securities Regulations and Commission ----------------------------------------------------- Requests. The Company, subject to Section 3(a)(ii), will comply with the -------- requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator as soon as reasonably practicable, and confirm the notice in writing, (A) when any post-effective amendment to the Registration Statement, shall become effective, or any supplement to 13 the Prospectuses or any amended Prospectuses shall have been filed, (B) of the receipt of any comments from the Commission, (C) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the U.S. Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (ii) Filing of Amendments. The Company will give the Global -------------------- Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectuses included in the Registration Statement at the time it became effective or to the Prospectuses and will furnish the U.S. Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the U.S. Representatives or counsel for the U.S. Underwriters shall reasonably object. (iii) Delivery of Registration Statements. The Company has ----------------------------------- furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (iv) Delivery of Prospectuses. The Company has delivered to ------------------------ each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be 14 identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (v) Continued Compliance with Securities Laws. The Company ----------------------------------------- will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the reasonable opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the reasonable opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(a)(ii), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request. (vi) Blue Sky Qualifications. The Company will use its ----------------------- commercially reasonable efforts, in cooperation with the U.S. Underwriters, to take such action as the Global Coordinator may reasonably request to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate in writing to the Company and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (vii) Rule 158. The Company will timely file such reports -------- pursuant to the 1934 Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. 15 (viii) Use of Proceeds. The Company will use the net proceeds --------------- received by it from the sale of the Securities substantially in the manner specified in the Prospectuses under "Use of Proceeds". (ix) Listing. The Company will use its best efforts to effect ------- the listing of the Common Stock (including the Securities) on the New York Stock Exchange. (x) Restriction on Sale of Securities. During a period of 180 --------------------------------- days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, in its discretion reasonably exercised, (A) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (B) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (A) or (B) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan. (xi) Reporting Requirements. The Company, during the period ---------------------- when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (xii) REIT Qualification. The Company will use its best efforts ------------------ to meet the requirements to qualify, commencing with its taxable year ending December 31, 1997, as a "real estate investment trust" under the Code and will continue to meet such requirements unless and until the Board of Directors of the Company determines that revocation of such election is in the best interest of the Company. (xiii) Compliance with NASD Rules. The Company hereby agrees -------------------------- that it will require that the holders of Reserved Securities execute lock- up agreements that provide that such securities will be restricted as required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The U.S. Underwriters will notify the Company in writing as to which persons will need to be so restricted. At the request of 16 the U.S. Underwriters, the Company will direct the transfer agent to place a stop transfer restrictions upon such securities for such period of time. (xiv) Insurance Policy. The Company agrees to provide, without ---------------- expense to the Underwriters, not later than the Closing Date, an insurance policy (the "Insurance Policy") providing for coverage, among other things, of the Company's and the Manager's indemnity and contribution obligations pursuant to Section 6 and Section 7 of this Agreement and the International Purchase Agreement. The form of such policy shall be in the form previously provided to the Underwriters and approved by Merrill Lynch. Such policy shall be for a minimum of three years and shall be prepaid. [The Company and the Manager acknowledge and agree that they shall not change, or permit to be changed, any provision of such policy affecting the Underwriters without the prior written authorization of Merrill Lynch.] [under discussion] (b) Covenant of the Manager. The Manager covenants with each U.S. Underwriter and with the Company that, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act, it shall notify you and the Company of the occurrence of any material events respecting its activities, affairs or condition, financial or otherwise, and, if as a result of any such event it is necessary, in the opinion of counsel, to amend or supplement the Prospectuses in order to make the Prospectuses not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Manager will forthwith supply such information to the Company as shall be necessary for the Company to prepare an amendment or supplement to the Prospectuses so that, as so amended or supplemented, the Prospectuses will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the U.S. Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the U.S. Securities to the U.S. Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the U.S. Securities to the U.S. Underwriters and the transfer of the U.S. Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the U.S. Securities under securities laws in accordance with the provisions of Section 3(a)(vi) hereof, including filing fees and the reasonable fees and disbursements of counsel for the U.S. Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the U.S. Underwriters of copies of each preliminary prospectus, any Term Sheets and of the U.S. Prospectus and any amendments or supplements thereto, (vii) the cost of the Insurance Policy, (viii) the preparation, printing and delivery to the U.S. Underwriters of copies of the Blue Sky Survey and any supplement thereto, (ix) the fees and 17 expenses of any transfer agent or registrar for the Securities and (x) the filing fees incident to, and the reasonable fees and disbursements actually incurred by counsel to the U.S. Underwriters in connection with, the review by the NASD of the terms of the sale of the Securities and (xi) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange and (xii) all costs and expenses of the U.S. Underwriters, including the reasonable fees and disbursements of counsel for the U.S. Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to directors, officers and employees of the Company, TCW and its affiliates. (b) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company or the Manager shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters. SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations -------------------------------------------- of the several U.S. Underwriters hereunder are subject to the accuracy in all material respects of the representations and warranties of the Company and the Manager contained in Section 1 hereof or in certificates of any officer of the Company or the Manager delivered pursuant to the provisions hereof, to the performance by each of the Company or the Manager of its respective covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post- effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinions of Counsel for Company and the Manager. At Closing Time, the U.S. Representatives shall have received the favorable opinions, dated as of Closing Time, of O'Melveny & Myers LLP, as counsel for the Company and of O'Melveny & Myers LLP or _________________, as counsel for the Manager, in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of each such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit A hereto. (c) Opinion of Maryland Counsel for the Company. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Ballard Spahr Andrews & Ingersoll, special Maryland counsel for the Company, in form and substance reasonably satisfactory to counsel for the U.S. 18 Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit B hereto. (d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Brown & Wood llp, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (vii) through (x), inclusive (xii), (xiv) (solely as to the information in the Prospectuses under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion Brown & Wood llp may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the U.S. Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Manager and certificates of public officials. (e) Officers' Certificate of the Company. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, and the U.S. Representatives shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct in all material respects with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has, in all material respects, complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to such persons' knowledge, are pending or are contemplated by the Commission. (f) Officers' Certificate of the Manager. At Closing Time, there shall not have been, since the date hereof or since the respective dates of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Manager, whether or not arising in the ordinary course of business, and the U.S. Representatives shall have received a certificate of the President or a Vice President of the Manager and of the chief financial or chief accounting officer of the Manager, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Manager contained in Section 1(b) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, and (iii) the Manager has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time. 19 (g) Accountant's Comfort Letter. At the time of the execution of this Agreement, the U.S. Representatives shall have received from Deloitte & Touche LLP a letter dated such date, in form and substance reasonably satisfactory to the U.S. Representatives, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letter. At Closing Time, the U.S. Representatives shall have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (h) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance. (j) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (k) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have received an agreement in the form of Exhibit C hereto signed by the persons listed on Schedule C hereto. (l) Insurance Policy. At Closing Time, the Insurance Policy shall be in full force and effect upon the terms and conditions agreed to by the Underwriters prior to the date hereof. (m) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the U.S. Option Securities, the representations and warranties of the Company and the Manager contained herein and the statements in any certificates furnished by the Company or the Manager hereunder shall be true and correct in all material respects as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(f) hereof remains true and correct as of such Date of Delivery. 20 (ii) Officers' Certificates. A certificate, dated such Date of ---------------------- Delivery, of the President or a Vice President of the Manager and of the chief financial or chief accounting officer of the Manager confirming that the certificate delivered at the Closing Time pursuant to Section 5(g) hereof remains true and correct as of such Date of Delivery. (iii) Opinions of Counsel for Company and the Manager. The favorable ------------------------------------------------ opinion of O'Melveny & Myers LLP, as counsel for the Company and O'Melveny & Myers LLP or__________, as counsel for the Manager, in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. (iv) Opinion of Maryland Counsel for the Company. The favorable ------------------------------------------- opinion of Ballard Spahr Andrews & Ingersoll, special Maryland counsel for the Company, in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(c) hereof. (v) Opinion of Counsel for Underwriters. The favorable opinion of ----------------------------------- Brown & Wood llp, counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (vi) Bring-down Comfort Letter. A letter from Deloitte & Touche ------------------------- LLP, in form and substance satisfactory to the U.S. Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the U.S. Representatives pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (n) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the U.S. Underwriters shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained [(provided, however, that neither the Company, the Manager nor their counsel shall be required to provide any further information, documents, assurances or opinions with respect to the Insurance Policy not specified herein)] ; and all proceedings taken by the Company or the Manager in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case 21 of any condition to the purchase of U.S. Option Securities, on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant U.S. Option Securities, may be terminated by the U.S. Representatives by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of U.S. Underwriters by the Company and the Manager. The Company and the Manager (subject to Section 6(e) below), jointly and severally, agree to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; (iv) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of the failure of directors, officers and employees of the Company, TCW and its affiliates to pay for and accept delivery of Reserved Securities, 22 which by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase; and (v) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement of a material fact included in the supplemental material distributed in connection with the reservation and sale of the Reserved Securities to directors, officers and employees of the Company, TCW and its affiliates or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading. provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense (A) to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) or (B) that results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, the preliminary prospectus, which untrue statement or omission was corrected in its entirety in the Prospectuses (as then amended or supplemented). (b) Indemnification of the Company and the Manager, and their Respective Directors and Officers. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company and the Manager, and their respective directors, each of the Company's officers who signed the Registration Statement, and each person, if any, who controls the Company or the Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectuses (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An 23 indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested in writing an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. (e) Recourse Against the Manager. Notwithstanding anything herein to the contrary, the U.S. Underwriters' recourse against the Manager with respect to (i) the matters set forth in this Agreement (including, without limitation, Sections 6 and 7 of this Agreement), (ii) any matters in the Registration Statement, (iii) any matters arising as a matter of law, or (iv) any other matters whatsoever, shall be expressly limited as follows: (i) first, the U.S. Underwriters shall have fully and finally exhausted all of their rights and remedies under the Insurance Policy; (ii) second, the U.S. Underwriters, as their sole and exclusive remedy, may thereafter assert any claims they may have against the Manager directly against the Manager to the limited extent of the gross compensation (not reimbursement of expenses) paid (not payable) 24 by the Company to the Manager solely in respect of the three-year period commencing at the Closing Time; (iii) the Manager shall have no other liability to the U.S. Underwriters whatsoever; and (iv) the U.S. Underwriters' shall have no rights, remedies or claims whatsoever against the Manager, directly or indirectly. provided, however, that the foregoing limitations set forth in this subsection - -------- ------- (e) shall not apply to any claim that the U.S. Underwriters may have against the Manager as to which there is a final adjudication of actual, intentional and deliberate fraud on the part of the Manager. SECTION 7. Contribution. ------------ If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Manager (collectively, the "Company Parties"), on the one hand and the U.S. Underwriters, on the other hand, from the offering of the U.S. Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company Parties, on the one hand, and of the U.S. Underwriters on the other hand, in connection with the statements or omissions. The relative benefits received by the Company Parties, on the one hand, and the U.S. Underwriters, on the other hand, in connection with the offering of the U.S. Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover. The relative fault of the Company Parties, on the one hand, and the U.S. Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company Parties, on the one hand, or by the U.S. Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Manager and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation 25 (even if the U.S. Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company or the Manager, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or the Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company and the Manager, respectively. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or the Manager submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter or controlling person, or by or on behalf of the Company or the Manager, and shall survive delivery of the Securities to the U.S. Underwriters. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The U.S. Representatives may terminate this Agreement, by written notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the U.S. Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, or any such adverse change with respect to the Manager which is material in the context of the transactions contemplated by this Agreement, or (ii) if there has occurred any material adverse change in the financial markets in 26 the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the U.S. Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the U.S. Underwriters. If one or ----------------------------------------------- more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the U.S. Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non- defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the U.S. Underwriters to purchase and of the Company to sell the U.S. Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company to sell 27 the relevant U.S. Option Securities, as the case may be, either the U.S. Representatives or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectuses or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 10. SECTION 11. Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the U.S. Underwriters shall be directed to the U.S. Representatives at North Tower, World Financial Center, 250 Vesey Street, New York, New York 10281-1201 attention of Corporate and Institutional Client Group; and notices to the Company shall be directed to it at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017, attention of Philip A. Barach with a copy to O'Melveny & Myers LLP, 275 Battery Street, San Francisco, California 94111, attention: Peter T. Healy, Esq. SECTION 12. Parties. This Agreement shall each inure to the benefit of ------- and be binding upon the U.S. Underwriters, the Company and the Manager and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters, the Company and the Manager and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters, the Company and the Manager and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 28 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the U.S. Underwriters, the Manager and the Company, in accordance with its terms. Very truly yours, APEX MORTGAGE CAPITAL, INC. By _____________________________________ Title: TCW INVESTMENT MANAGEMENT COMPANY By ____________________________________ Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY, INCORPORATED SUTRO & CO. INCORPORATED By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By _______________________________________ Authorized Signatory For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule A hereto. 29 SCHEDULE A
Number of Initial U.S. Name of U.S. Underwriter Securities ------------------------ ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. PaineWebber Incorporated.................. Stifel, Nicolaus & Company, Incorporated.. Sutro & Co. Incorporated.................. --------- Total..................................... 8,000,000 =========
Sch A - 1 SCHEDULE B APEX MORTGAGE CAPITAL, INC. 8,000,000 Shares of Common Stock (Par Value $.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $.. 2. The purchase price per share for the Securities to be paid by the several U.S. Underwriters shall be $., being an amount equal to the initial public offering price set forth above less $. per share; provided that the purchase price per share for any U.S. Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. Sch B - 1 SCHEDULE C List of persons and entities subject to lock-up Sch C - 1 Exhibit A-1 FORM OF OPINION OF COUNSEL TO THE COMPANY TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland. (ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement, respectively. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. [see examples enclosed] (iv) The Company is organized in accordance with the requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and the rules and regulations thereunder. The contemplated method of operation of the Company's business as described in the Registration Statement will satisfy the operational requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code, and the rules and regulations thereunder. (v) The Company is not, and upon the issuance and sale of the U.S. Securities as contemplated in the U.S. Purchase Agreement and the International Securities as contemplated in the International Purchase Agreement and the application of the net proceeds from the sale of the Securities as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (vi) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the U.S. Purchase Agreement or the International Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of options referred to in the Prospectuses); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable [deletion made subject to confirmation of inclusion in BSA&I opinion]. A-1-1 (vii) The Securities have been duly authorized for issuance and sale to the U.S. Underwriters pursuant to the U.S. Purchase Agreement and to the International Managers pursuant to the International Purchase Agreement and, when issued and delivered by the Company pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth in the U.S. Purchase Agreement and the International Purchase Agreement, respectively, will be validly issued and fully paid and non-assessable [deletion made subject to confirmation of inclusion in BSA&I opinion]. (viii) The issuance of the Securities is not subject to preemptive or other similar rights of any security holder of the Company arising by operation of law, under the charter or by-laws of the Company or, to the best of our knowledge and information, otherwise. (ix) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company. (x) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and Prospectuses as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xii) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. (xiii) All descriptions in the Registration Statement of contracts and other documents to which the Company is a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. [see examples enclosed] (xiv) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or the Manager is a A-1-2 party, or to which the property of the Company or the Manager is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement or the Management Agreements, or the performance by the Company and the Manager of its obligations thereunder. (xv) To the best of our knowledge, the Company is not in violation of its charter or by-laws and no default by the Company exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement. [see examples enclosed] (xvi) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the U.S. Purchase Agreement, the International Purchase Agreement or the Management Agreement by the Company, or for the offering, issuance or sale of the Securities. (xvii) The Company possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectuses that we have, in the exercise of customary professional diligence, recognized as applicable to the Company and, to our knowledge and information, the Company is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect. (xviii) Each of the U.S. Purchase Agreement and the International Purchase Agreement has been duly authorized, executed and delivered by the Company. (xix) The Management Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xx) The execution, delivery and performance of the U.S. Purchase Agreement, the International Purchase Agreement and the Management Agreement, the consummation of the transactions contemplated therein and in the Registration Statement (including the issuance and A-1-3 sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and the compliance by the Company with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement, respectively, do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of the U.S. Purchase Agreement and International Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties, assets or operations, except for such violations, which singly or in the aggregate, would not result in a Material Adverse Effect. (xxi) The information in the Prospectuses under "Business and Strategy--Legal Proceedings," "Federal Income Tax Consequences," "ERISA Considerations," "Description of Capital Stock," "Certain Provisions of Maryland Law and of the Company's Charter and Bylaws" and in Item 33 and Item 34 of Part II of the Registration Statement, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects; and our opinion set forth under "Federal Income Tax Consequences" is confirmed. (xxii) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. [see examples enclosed] (xxiii) To the best of our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectuses were issued or at the Closing Time, included or includes an untrue statement of a material fact or A-1-4 omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely (A) as to matters involving the application of the laws of Maryland, upon the opinion of Ballard Spahr Andrews & Ingersoll, special counsel to the Company (which opinion shall be dated and furnished to the Representatives at the Closing Time, shall be satisfactory in form and substance to counsel for the Underwriters and shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them), provided that O'Melveny & Myers LLP shall state in their opinion that they believe that they and the Underwriters are justified in relying upon such opinion, and (B), as to matters of fact (but not as to legal conclusions) O'Melveny & Myers LLP may rely, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). [Note: comments made to the foregoing paragraph were unclear] A-1-5 Exhibit A-2 FORM OF OPINION OF COUNSEL TO THE MANAGER TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Manager has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California. (ii) The Manager has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement, respectively. (iii) The Manager is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) All of the issued and outstanding capital stock of the Manager has been duly authorized and validly issued, is fully paid and non- assessable and is owned by TCW, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (v) The Manager is duly registered as an "investment adviser," as such term is defined in the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not prohibited by the Advisers Act or the rules and regulations thereunder from acting under the Management Agreement as contemplated by the Prospectuses. (vi) All descriptions in the Registration Statement of contracts and other documents to which the Manager is a party are accurate in all material respects. (vii) To the best of my knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Manager is a party, or to which the property of the Manager is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement or the Management Agreement or the performance by the Manager of its obligations thereunder. A-2-1 (viii) To the best of my knowledge, the Manager is not in violation of its charter or by-laws and no default by the Manager exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement. [see examples] (ix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, is necessary or required in connection with the due authorization, execution and delivery by the Manager of the U.S. Purchase Agreement, the International Purchase Agreement or the Management Agreement. (x) The Manager possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectuses that we have, in the exercise of customary professional diligence, recognized as applicable to the Manager and, to our knowledge and information, the Manager is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect. (xi) Each of the U.S. Purchase Agreement and the International Purchase Agreement has been duly authorized, executed and delivered by the Manager. (xii) The Management Agreement has been duly authorized, executed and delivered by the Manager and constitutes a valid and binding obligation of the Manager enforceable against it in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xiii) The execution, delivery and performance of the U.S. Purchase Agreement, the International Purchase Agreement and the Management Agreement, the consummation of the transactions contemplated therein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and the compliance by the Manager with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement, respectively, do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(b)(v) of the U.S. Purchase Agreement and International Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Manager pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Manager is a party or by which it may be bound, or to which any of the property or assets of the Manager A-2-2 is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Manager or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Manager or any of its properties, assets or operations, except for such violations, which singly or in the aggregate, would not result in a Material Adverse Effect. (xiv) To the best of my knowledge and information, the description of the Manager in the Registration Statement and the Prospectuses does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions) [ ] may rely, to the extent they deem proper, on certificates of responsible officers of the Manager and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-2-3 Exhibit B FORM OF OPINION OF SPECIAL MARYLAND COUNSEL TO THE COMPANY TO BE DELIVERED PURSUANT TO SECTION 5(c) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of Maryland. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement. (iii) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of options referred to in the Prospectus); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company, either pursuant to the charter or by-laws of the Company or Maryland law. (iv) The Securities have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreement and, when issued and delivered by the Company pursuant to the Purchase Agreement against payment of the consideration set forth in the Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (v) The issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Company, either pursuant to the charter or by-laws of the Company or Maryland law. (vi) The Purchase Agreement has been duly authorized, executed and delivered by the Company. (vii) The Management Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). B-1 (viii) The Insurance Policy has been duly authorized, executed and delivered and is in full force and effect and enforceable in accordance with its terms. (ix) The form of certificate used to evidence the Common Stock complies in all material respects with Maryland law and with any applicable requirements of the charter and by-laws of the Company. (x) The information in the Prospectus under "Description of Capital Stock," "Certain Provisions of Maryland Law and of the Company's Charter and Bylaws," and "Federal Income Tax Consequences," to the extent that it constitutes matters of Maryland law or the Company's charter and bylaws, has been reviewed by us and is correct in all material respects. (xi) To the best of our knowledge, there are no statutes or regulations of the State of Maryland that are required to be described in the Prospectus that are not described as required. (xii) To the best of our knowledge, the Company is not in violation of its charter or by-laws and no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed as an exhibit to the Registration Statement. (xiii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency of the State of Maryland is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance or sale of the Securities. (xiv) The execution, delivery and performance of the Purchase Agreement and the Management Agreement, the consummation of the transactions contemplated therein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use Of Proceeds") and the compliance by the Company with its obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company is a party or by which it, or to which any of the property or assets of the Company, is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any applicable Maryland law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court of the State of Maryland or any of its properties, assets or operations, except for such violations, which singly or in the aggregate, would not result in a Material Adverse Effect. B-2 [FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(L)] Exhibit C November __, 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, PaineWebber Incorporated Stifel, Nicolaus & Company, Incorporated Sutro & Company Incorporated as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Apex Mortgage Capital, Inc. ------------------------------------------------------- Dear Sirs: The undersigned, a stockholder [and an officer and/or director] of Apex Mortgage Capital, Inc., a Maryland corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), PaineWebber, Stifel, Nicolaus & Company, Incorporated, Sutro & Company Incorporated propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, par value $.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the U.S. Purchase Agreement that, during a period of 180 days from the date of the U.S. Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in B-3 whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: Print Name: B-4 EX-1.2 3 INTERNATIONAL PURCHASE AGREEMENT EXHIBIT 1.1 B&W Draft 11/19/97 ------------------ ________________________________________________________________________________ APEX MORTGAGE CAPITAL, INC. (a Maryland corporation) 2,000,000 Shares of Common Stock INTERNATIONAL PURCHASE AGREEMENT -------------------------------- Dated: November __, 1997 ________________________________________________________________________________ TABLE OF CONTENTS
INTERNATIONAL PURCHASE AGREEMENT.............................................. 1 SECTION 1. Representations and Warranties............................. 3 (a) Representations and Warranties by the Company.............. 3 (i) Compliance with Registration Requirements.......... 3 (ii) Independent Accountants............................ 4 (iii) Financial Statements............................... 4 (iv) No Material Adverse Change in Business............. 5 (v) Good Standing of the Company....................... 5 (vi) Qualification as a REIT............................ 5 (vii) Capitalization..................................... 5 (viii) Authorization of Agreement......................... 5 (ix) Management Agreement............................... 6 (x) Authorization and Description of Securities........ 6 (xi) Absence of Defaults and Conflicts.................. 6 (xii) Absence of Proceedings............................. 7 (xiii) Accuracy of Exhibits............................... 7 (xiv) Possession of Intellectual Property................ 7 (xv) Absence of Further Requirements.................... 7 (xvi) Possession of Licenses and Permits................. 8 (xvii) Title to Property.................................. 8 (xviii) Investment Company Act............................. 8 (xix) Accounting Controls................................ 8 (xx) Registration Rights................................ 9 (b) Representations and Warranties by the Manager.............. 9 (i) No Material Misstatements or Omissions............. 9 (ii) Good Standing...................................... 9 (iii) Authorization of Agreements........................ 9 (iv) No Material Adverse Change in Business............. 10 (v) Absence of Defaults and Conflicts.................. 10 (vi) Absence of Proceedings............................. 10 (vii) Absence of Further Requirements.................... 11 (viii) Possession of Licenses and Permits................. 11 (ix) Investment Adviser................................. 11 (x) Financial Resources................................ 11 (c) Officer's Certificates..................................... 11 SECTION 2. Sale and Delivery to Underwriters; Closing................. 12 (a) Initial Securities......................................... 12 (b) Option Securities.......................................... 12 (c) Payment.................................................... 12 (d) Denominations; Registration................................ 13 SECTION 3. Covenants.................................................. 13 (a) Covenants of the Company................................... 13 (b) Covenant of the Manager.................................... 17 SECTION 4. Payment of Expenses........................................ 17
(a) Expenses................................................... 17 (b) Termination of Agreement................................... 18 SECTION 5. Conditions of International Managers' Obligations.......... 18 (a) Effectiveness of Registration Statement.................... 18 (b) Opinions of Counsel for Company and the Manager............ 18 (c) Opinion of Maryland Counsel for the Company................ 18 (d) Opinion of Counsel for International Managers.............. 18 (e) Officers' Certificate of the Company....................... 19 (f) Officers' Certificate of the Manager....................... 19 (g) Accountant's Comfort Letter................................ 19 (h) Bring-down Comfort Letter.................................. 19 (i) Approval of Listing........................................ 20 (j) No Objection............................................... 20 (k) Lock-up Agreements......................................... 20 (l) Insurance Policy........................................... 20 (m) Conditions to Purchase of International Option Securities.. 20 (n) Additional Documents....................................... 21 (o) Termination of Agreement................................... 21 SECTION 6. Indemnification............................................ 22 (a) Indemnification of International Managers by the Company and the Manager............................................ 22 (b) Indemnification of the Company and the Manager, and their Respective Directors and Officers.......................... 23 (c) Actions against Parties; Notification...................... 23 (d) Settlement without Consent if Failure to Reimburse......... 24 (e) Recourse Against the Manager............................... 24 SECTION 7. Contribution............................................... 25 SECTION 8. Representations, Warranties and Agreements to Survive Delivery................................................... 26 SECTION 9. Termination of Agreement................................... 26 (a) Termination; General....................................... 26 (b) Liabilities................................................ 27 SECTION 10. Default by One or More of the International Managers....... 27 SECTION 11. Notices.................................................... 28 SECTION 12. Parties.................................................... 28 SECTION 13. GOVERNING LAW AND TIME..................................... 28 SECTION 14. Effect of Headings......................................... 28
ii SCHEDULES Schedule A - List of International Managers............................. Sch A-1 Schedule B - Pricing Information........................................ Sch B-1 Schedule C - List of Persons Subject to Lock-up......................... Sch C-1 EXHIBITS Exhibit A-1 Form of Opinion of Company's Counsel....................... A-1-1 Exhibit A-2 Form of Opinion of Counsel to the Manager.................. A-2-1 Exhibit B - Form of Opinion of Maryland Counsel......................... B-1 Exhibit C - Form of Lock-Up Letter...................................... C-1
1 APEX MORTGAGE CAPITAL, INC. (a Maryland corporation) 2,000,000 Shares of Common Stock (Par Value $.01 Per Share) INTERNATIONAL PURCHASE AGREEMENT -------------------------------- November __, 1997 MERRILL LYNCH INTERNATIONAL PAINEWEBBER INTERNATIONAL (U.K.) LTD. STIFEL, NICOLAUS & COMPANY, INCORPORATED SUTRO & CO. INCORPORATED c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Ladies and Gentlemen: Apex Mortgage Capital, Inc., a Maryland corporation (the "Company") and TCW Investment Management Company, a California corporation (the "Manager"), confirm their respective agreements with Merrill Lynch International ("Merrill Lynch"), PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated, Sutro & Co. Incorporated (collectively, the "International Managers", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), with respect to the issue and sale by the Company and the purchase by the International Managers, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") set forth in said Schedule A, and with respect to the grant by the Company to the International Managers, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 300,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 2,000,000 shares of Common Stock (the "Initial International Securities") to be purchased by the International Managers and all or any part of the 300,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "International Option Securities") are hereinafter called, collectively, the "International Securities". It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "U.S. Purchase Agreement") providing for the offering by the Company of an aggregate of 8,000,000 shares of Common Stock (the "Initial U.S. Securities") through 1 arrangements with certain underwriters in the United States (the "U.S. Underwriters") for which Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, PaineWebber Incorporated, Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated are acting as representatives (the "U.S. Representatives") and the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of an option to purchase all or any part of the U.S. Underwriters' pro rata portion of up to 1,200,000 shares of additional Common Stock solely to cover overallotments, if any (the "U.S. Option Securities" and, together with the International Option Securities, the "Option Securities"). The Initial U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S. Securities". The International Managers and the U.S. Underwriters are hereinafter collectively called the "Underwriters", the Initial International Securities and the Initial U.S. Securities are hereinafter collectively called the "Initial Securities", and the International Securities and the U.S. Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Underwriters agree that up to 500,000 shares of the Securities to be purchased by the Underwriters (the "Reserved Securities") shall be reserved for sale by the Underwriters to directors, officers and employees of the Company, The TCW Group, Inc. ("TCW") and its affiliates as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. (the "NASD") and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not so purchased by such persons, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. In consideration of the Underwriters entering into this Agreement and as a condition to their obligations hereunder, TCW has entered into a representation letter (the "Representation Letter") dated the date hereof with the Underwriters. The Company understands that the International Managers propose to make a public offering of the International Securities as soon as they deem advisable after this Agreement has been executed and delivered. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-11 (No. 333-36069) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 2 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the International Securities (the "Form of International Prospectus") and one relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting". The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of International Prospectus and Form of U.S. Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of International Prospectus and final Form of U.S. Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "International Prospectus" and the "U.S. Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "International Prospectus" and "U.S. Prospectus" shall refer to the preliminary International Prospectus dated November 10, 1997 and the preliminary U.S. Prospectus dated November 10, 1997, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each International Manager as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each International Manager, as follows: (i) Compliance with Registration Requirements. The Company meets the ----------------------------------------- requirements for use of Form S-11 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of 3 the Company, are contemplated by the Commission, and any written request to the Company or counsel to the Company, or any oral request to their knowledge, on the part of the Commission for additional information has been complied with or satisfied. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither of the Prospectuses nor any amendments or supplements thereto, at the time the Prospectuses or any such amendment or supplement was issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectuses shall not be "materially different", as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or International Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any International Manager expressly for use in the Registration Statement or International Prospectus. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and, each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Independent Accountants. The accountants who certified the ----------------------- balance sheet included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) Financial Statements. The balance sheet included in the -------------------- Registration Statement and the Prospectuses, together with the related notes, presents fairly the financial position of the Company at the date indicated; said balance sheet has been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis. (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as 4 otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company, other than those in the ordinary course of business, which are material with respect to the Company, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) Good Standing of the Company. The Company has been duly ---------------------------- organized and is validly existing as a corporation in good standing under the laws of the State of Maryland and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement and the U.S. Purchase Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. The Company has no subsidiaries. (vi) Qualification as a REIT. The Company is organized in ----------------------- accordance with the requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and the rules and regulations thereunder. The contemplated method of operation of the Company's business as described in the Registration Statement will allow the Company to satisfy the operational requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code, and the rules and regulations thereunder. (vii) Capitalization. The authorized, issued and outstanding capital -------------- stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any security holder of the Company. (viii) Authorization of Agreement. This Agreement and the U.S. -------------------------- Purchase Agreement have been duly authorized, executed and delivered by the Company. (ix) Management Agreement. The Management Agreement (the -------------------- "Management Agreement") dated as of November __, 1997 between the Company and the Manager has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, 5 reorganization or other laws relating to or affecting enforcement of creditors' rights or by general equity principles. (x) Authorization and Description of Securities. The Securities to ------------------------------------------- be purchased by the International Managers and the U.S. Underwriters from the Company have been duly authorized for issuance and sale to the International Managers pursuant to this Agreement and the U.S. Underwriters pursuant to the U.S. Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the U.S. Purchase Agreement, respectively, against payment of the consideration set forth herein and in the U.S. Purchase Agreement, respectively, will be validly issued and fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any security holder of the Company. (xi) Absence of Defaults and Conflicts. The Company is not in --------------------------------- violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (collectively, for purposes of this paragraph, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the U.S. Purchase Agreement and the Management Agreement and the consummation of the transactions contemplated in this Agreement, the U.S. Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and compliance by the Company with its obligations under this Agreement, the U.S. Purchase Agreement and the Management Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not reasonably be expected to result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its assets, properties or operations, except for such violations, which singly or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. As used in this Section, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness 6 (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company. (xii) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement, the U.S. Purchase Agreement, or the Management Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company is a party or of which any of its property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiii) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement or the Prospectuses or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) Possession of Intellectual Property. The Company owns or ----------------------------------- possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on its business as contemplated in the Prospectuses, and the Company has not received any notice and is not otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the U.S. Purchase Agreement or the consummation of the transactions contemplated by this Agreement, the U.S. Purchase Agreement or the Management Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws or the regulations of the NASD. (xvi) Possession of Licenses and Permits. The Company possesses such ---------------------------------- permits, licenses, approvals, consents and other authorizations (collectively, "Governmental 7 Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectus, the Company is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to possess or comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Company has not received any written notice, or any oral notice to its knowledge, of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Effect. (xvii) Title to Property. The Company owns no real property. The ----------------- Company has good and marketable title to all other properties owned by it, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and all of the leases and subleases material to the business of the Company and under which the Company holds properties described in the Prospectuses, are in full force and effect, and the Company does not have notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as contemplated herein and in the U.S. Purchase Agreement and the application of the net proceeds from the sale of the Securities substantially as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xix) Accounting Controls. As of the Closing Time, the Company has ------------------- or will maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with transaction's general or specific authorization and (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets. (xx) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (b) Representations and Warranties by the Manager. As an inducement to each International Manager and to the Company to enter into this Agreement and to complete the 8 transactions contemplated hereby in connection with the consummation of the issuance, sale and delivery of the International Securities, the Manager hereby represents and warrants to each International Manager and to the Company as follows: (i) No Material Misstatements or Omissions. At the respective -------------------------------------- times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto, did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and neither the Prospectuses, nor any amendments of supplements thereto, at the time the Prospectuses or any such amendment or supplement thereto was issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery) did not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or International Prospectus made in reliance upon and in conformity with information furnished to the Company or the Manager in writing by any International Manager expressly for use in the Registration Statement or International Prospectus. (ii) Good Standing. The Manager has been duly organized and is ------------- validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement, the U.S. Purchase Agreement and the Management Agreement; the Manager is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect. All of the issued and outstanding capital stock of the Manager has been duly authorized and validly issued, is fully paid and non-assessable and is owned by TCW, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (iii) Authorization of Agreements. This Agreement, the International --------------------------- Purchase Agreement and the Management Agreement have each been duly authorized, executed and delivered by the Manager. The Management Agreement constitutes the valid and binding agreement of the Manager, enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency or other laws relating to or affecting enforcement of creditors' rights or by general equity principles. (iv) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, 9 financial or otherwise, or in the earnings, business affairs or business prospects of the Manager, whether or not arising in the ordinary course of business and (B) there have been no transactions entered into by the Manager, other than those in the ordinary course of business, which are material in the context of the transactions contemplated in this Agreement, the U.S. Purchase Agreement or the Management Agreement. (v) Absence of Defaults and Conflicts. The Manager is not in --------------------------------- violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound, or to which any of its property or assets is subject (collectively, for purposes of this paragraph, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the U.S. Purchase Agreement and the Management Agreement and the consummation of the transactions contemplated herein, in the U.S. Purchase Agreement, in the Management Agreement and in the Registration Statement, and compliance by the Manager with its obligations hereunder and under the U.S. Purchase Agreement and the Management Agreement, have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Manager pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Manager or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Manager or any of its assets, properties or operations, except for such violations which, singly or in the aggregate, would result in a Material Adverse Effect. As used in this Section, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Manager. (vi) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Manager, threatened against or affecting the Manager, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement, the U.S. Purchase Agreement or the Management Agreement or the performance by the Manager of its obligations hereunder or under the U.S. Purchase Agreement or the Management Agreement; the aggregate of all pending legal or governmental proceedings to which the Manager is a party or of which any of its 10 property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (vii) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Manager of its obligations hereunder or under the U.S. Purchase Agreement or the Management Agreement. (viii) Possession of Licenses and Permits. The Manager possesses ---------------------------------- such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectuses; the Manager is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Manager has not received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (ix) Investment Adviser. The Manager is not prohibited by the ------------------ Investment Advisers Act of 1940, as amended (the "Advisers Act"), or the rules and regulations thereunder, from acting under the Management Agreement as contemplated by the Prospectuses. (x) Financial Resources. The Manager has the financial resources ------------------- available to it necessary for the performance of its services and obligations as contemplated in the Prospectuses. (c) Officer's Certificates. Any certificate signed by any officer of the Company or the Manager delivered to the Global Coordinator, the International Managers or to counsel for the International Managers shall be deemed a representation and warranty by the Company or the Manager to each International Manager as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. ------------------------------------------ (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each International Manager, severally and not jointly, and each International Manager, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule B, the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager, plus any additional number of Initial Securities which such International 11 Manager may become obligated to purchase pursuant to the provisions of Section 10 hereof bears to the total number of Initial International Securities, subject, in each case, to such adjustments among the International Managers as the Global Coordinator in its sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the International Managers, severally and not jointly, to purchase up to an additional 300,000 shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial International Securities upon notice by the Global Coordinator to the Company setting forth the number of International Option Securities as to which the several International Managers are then exercising the option and the time and date of payment and delivery for such International Option Securities. Any such time and date of delivery for the International Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the International Option Securities, each of the International Managers, acting severally and not jointly, will purchase that proportion of the total number of International Option Securities then being purchased which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager bears to the total number of Initial International Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of O'Melveny & Myers llp, Embarcadero Center West, 275 Battery Street, Suite 2600, San Francisco, California 94111, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the International Option Securities are purchased by the International Managers, payment of the purchase price for, and delivery of certificates for, such International Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the International Managers for 12 the respective accounts of the International Managers of certificates for the International Securities to be purchased by them. Merrill Lynch, individually and not as representative of the International Managers, may (but shall not be obligated to) make payment of the purchase price for the Initial International Securities or the International Option Securities, if any, to be purchased by any International Manager whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such International Manager from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial International Securities and the International Option Securities, if any, shall be in such denominations and registered in such names as the International Managers may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial International Securities and the International Option Securities, if any, will be made available for examination and packaging by the International Managers in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants. --------- (a) Covenants of the Company. The Company covenants with each International Manager as follows: (i) Compliance with Securities Regulations and Commission ----------------------------------------------------- Requests. The Company, subject to Section 3(a)(ii), will comply with the -------- requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator as soon as reasonably practicable, and confirm the notice in writing, (A) when any post-effective amendment to the Registration Statement, shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (B) of the receipt of any comments from the Commission, (C) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (ii) Filing of Amendments. The Company will give the Global -------------------- Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectuses included in the Registration Statement 13 at the time it became effective or to the Prospectuses and will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the International Managers shall reasonably object. (iii) Delivery of Registration Statements. The Company has ----------------------------------- furnished or will deliver to the International Managers and counsel for the International Managers, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the International Managers, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the International Managers. The copies of the Registration Statement and each amendment thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (iv) Delivery of Prospectuses. The Company has delivered to ------------------------ each International Manager, without charge, as many copies of each preliminary prospectus as such International Manager reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each International Manager, without charge, during the period when the International Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the International Prospectus (as amended or supplemented) as such International Manager may reasonably request. The International Prospectus and any amendments or supplements thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (v) Continued Compliance with Securities Laws. The Company ----------------------------------------- will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the reasonable opinion of counsel for the International Managers or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the reasonable opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(a)(ii), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or 14 the Prospectuses comply with such requirements, and the Company will furnish to the International Managers such number of copies of such amendment or supplement as the International Managers may reasonably request. (vi) Blue Sky Qualifications. The Company will use its ----------------------- commercially reasonable efforts, in cooperation with the International Managers, to take such action as the Global Coordinator may reasonably request to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate in writing to the Company and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (vii) Rule 158. The Company will timely file such reports -------- pursuant to the 1934 Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (viii) Use of Proceeds. The Company will use the net proceeds --------------- received by it from the sale of the Securities substantially in the manner specified in the Prospectuses under "Use of Proceeds". (ix) Listing. The Company will use its best efforts to effect ------- the listing of the Common Stock (including the Securities) on the New York Stock Exchange. (x) Restriction on Sale of Securities. During a period of 180 --------------------------------- days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, in its discretion reasonably exercised, (A) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (B) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (A) or (B) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise 15 of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or (D) any shares of Common Stock issued pursuant to any non- employee director stock plan or dividend reinvestment plan. (xi) Reporting Requirements. The Company, during the period ---------------------- when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (xii) REIT Qualification. The Company will use its best efforts ------------------ to meet the requirements to qualify, commencing with its taxable year ending December 31, 1997, as a "real estate investment trust" under the Code. (xiii) Compliance with NASD Rules. The Company hereby agrees -------------------------- that it will require that the holders of Reserved Securities execute lock- up agreements that provide that such securities will be restricted as required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company in writing as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restrictions upon such securities for such period of time. (xiv) Insurance Policy. The Company agrees to provide, without ---------------- expense to the Underwriters, not later than the Closing Date, an insurance policy (the "Insurance Policy") providing for coverage, among other things, of the Company's and the Manager's indemnity and contribution obligations pursuant to Section 6 and Section 7 of this Agreement and the U.S. Purchase Agreement. The form of such policy shall be in the form previously provided to the Underwriters and approved by Merrill Lynch. Such policy shall be for a minimum of three years and shall be prepaid. The Company and the Manager, on the one hand, and the Underwriters on the other, respectively, acknowledge and agree that they shall not change, or permit to be changed, any provision of such policy negatively affecting the Company and/or the Manager, on the one hand, or the Underwriters, on the other, respectively, without the prior written authorization of Merrill Lynch. (b) Covenant of the Manager. The Manager covenants with each International Manager and with the Company that, during the period when the Prospectuses is required to be delivered under the 1933 Act or the 1934 Act, it shall notify you and the Company of the occurrence of any material events respecting its activities, affairs or condition, financial or otherwise, and, if as a result of any such event it is necessary, in the opinion of counsel, to amend or supplement the Prospectuses in order to make the Prospectuses not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Manager will forthwith supply such information to the Company as shall be necessary for the Company to 16 prepare an amendment or supplement to the Prospectuses so that, as so amended or supplemented, the Prospectuses will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the International Managers of this Agreement, any Agreement among Managers and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the International Securities to the International Managers, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the International Securities to the International Managers and the transfer of the International Securities between the International Managers and the U.S. Underwriters, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the International Securities under securities laws in accordance with the provisions of Section 3(a)(vi) hereof, including filing fees and the reasonable fees and disbursements of counsel for the International Managers in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the International Managers of copies of each preliminary prospectus, any Term Sheets and of the International Prospectus and any amendments or supplements thereto, (vii) the cost of the Insurance Policy, (viii) the preparation, printing and delivery to the International Managers of copies of the Blue Sky Survey and any supplement thereto, (ix) the fees and expenses of any transfer agent or registrar for the Securities and (x) the filing fees incident to, and the reasonable fees and disbursements actually incurred by counsel to the International Managers in connection with, the review by the NASD of the terms of the sale of the Securities, and (xi) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange [and (xii) all costs and expenses of the International Managers, including the fees and disbursements of counsel for the International Managers, in connection with matters related to the Reserved Securities which are designated by the Company for sale to directors, officers and employees of the Company, TCW and its affiliates. (b) Termination of Agreement. If this Agreement is terminated by the Global Coordinator in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company or the Manager shall reimburse the International Managers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the International Managers. SECTION 5. Conditions of International Managers' Obligations. The ------------------------------------------------- obligations of the several International Managers hereunder are subject to the accuracy in all material respects of the representations and warranties of the Company and the Manager contained in Section 1 hereof or in certificates of any officer of the Company or the Manager delivered pursuant to the provisions hereof, to the performance by each of the Company or the Manager of its respective covenants and other obligations hereunder, and to the following further conditions: 17 (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the International Managers. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinions of Counsel for Company and the Manager. At Closing Time, the International Managers shall have received the favorable opinions, dated as of Closing Time, of O'Melveny & Myers LLP, as counsel for the Company and of _________________, as counsel for the Manager, in form and substance reasonably satisfactory to counsel for the International Managers, together with signed or reproduced copies of each such letter for each of the other International Managers to the effect set forth in Exhibit A hereto. (c) Opinion of Maryland Counsel for the Company. At Closing Time, the International Managers shall have received the favorable opinion, dated as of Closing Time, of Ballard Spahr Andrews & Ingersoll, special Maryland counsel for the Company, in form and substance reasonably satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibit B hereto. (d) Opinion of Counsel for International Managers. At Closing Time, the International Managers shall have received the favorable opinion, dated as of Closing Time, of Brown & Wood llp, counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (vii) through (x), inclusive (xii), (xiv) (solely as to the information in the Prospectuses under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion Brown & Wood llp may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the International Managers. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and the Manager and certificates of public officials. (e) Officers' Certificate of the Company. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, 18 whether or not arising in the ordinary course of business, and the International Managers shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct in all material respects with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has, in all material respects, complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to such persons' knowledge, are pending or are contemplated by the Commission. (f) Officers' Certificate of the Manager. At Closing Time, there shall not have been, since the date hereof or since the respective dates of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Manager, whether or not arising in the ordinary course of business, and the International Managers shall have received a certificate of the President or a Vice President of the Manager and of the chief financial or chief accounting officer of the Manager, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Manager contained in Section 1(b) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, and (iii) the Manager has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time. (g) Accountant's Comfort Letter. At the time of the execution of this Agreement, the International Managers shall have received from Deloitte & Touche LLP a letter dated such date, in form and substance reasonably satisfactory to the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letter. At Closing Time, the International Managers shall have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (h) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance. 19 (j) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (k) Lock-up Agreements. At the date of this Agreement, the International Managers shall have received an agreement in the form of Exhibit C hereto signed by the persons listed on Schedule C hereto. (l) Insurance Policy. At Closing Time, the Insurance Policy shall be in full force and effect upon the terms and conditions agreed to by the Underwriters prior to the date hereof. (m) Conditions to Purchase of International Option Securities. In the event that the International Managers exercise their option provided in Section 2(b) hereof to purchase all or any portion of the International Option Securities, the representations and warranties of the Company and the Manager contained herein and the statements in any certificates furnished by the Company or the Manager hereunder shall be true and correct in all material respects as of each Date of Delivery and, at the relevant Date of Delivery, the International Managers shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(f) hereof remains true and correct as of such Date of Delivery. (ii) Officers' Certificates. A certificate, dated such Date of ---------------------- Delivery, of the President or a Vice President of the Manager and of the chief financial or chief accounting officer of the Manager confirming that the certificate delivered at the Closing Time pursuant to Section 5(g) hereof remains true and correct as of such Date of Delivery. (iii) Opinions of Counsel for Company and the Manager. The favorable ------------------------------------------------ opinion of O'Melveny & Myers LLP, as counsel for the Company and __________, as counsel for the Manager, in form and substance satisfactory to counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. (iv) Opinion of Maryland Counsel for the Company. The favorable ------------------------------------------- opinion of Ballard Spahr Andrews & Ingersoll, special Maryland counsel for the Company, in form and substance satisfactory to counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(c) hereof. 20 (v) Opinion of Counsel for the International Managers. The ------------------------------------------------- favorable opinion of Brown & Wood llp, counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (vi) Bring-down Comfort Letter. A letter from Deloitte & Touche ------------------------- LLP, in form and substance satisfactory to the International Managers and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the International Managers pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (n) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the International Managers shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained (provided, however, that neither the Company, the Manager nor their counsel shall be required to provide any further information, documents, assurances or opinions with respect to the Insurance Policy not specified herein); and all proceedings taken by the Company or the Manager in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the International Managers and counsel for the International Managers. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of International Option Securities, on a Date of Delivery which is after the Closing Time, the obligations of the several International Managers to purchase the relevant International Option Securities, may be terminated by the International Managers by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of International Managers by the Company and the Manager. The Company and the Manager (subject to Section 6(e) below), jointly and severally, agree to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material 21 fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; (iv) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of the failure of directors, officers and employees of the Company, TCW and its affiliates to pay for and accept delivery of Reserved Securities, which by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase; and (v) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement of a material fact included in the supplemental material distributed in connection with the reservation and sale of the Reserved Securities to directors, officers and employees of the Company, TCW and its affiliates or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading. provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense (A) to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any International Manager expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) or (B) that results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, the preliminary prospectus, which untrue 22 statement or omission was corrected in its entirety in the Prospectuses (as then amended or supplemented). (b) Indemnification of the Company and the Manager, and their Respective Directors and Officers. Each International Manager severally agrees to indemnify and hold harmless the Company and the Manager, and their respective directors, each of the Company's officers who signed the Registration Statement, and each person, if any, who controls the Company or the Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Manager through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectuses (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested in writing an indemnifying party to reimburse the indemnified party 23 for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. (e) Recourse Against the Manager. Notwithstanding anything herein to the contrary, the International Managers' recourse against the Manager with respect to (i) the matters set forth in this Agreement (including, without limitation, Sections 6 and 7 of this Agreement), (ii) any matters in the Registration Statement, (iii) any matters arising as a matter of law, or (iv) any other matters whatsoever, shall be expressly limited as follows: (i) first, the International Managers shall have fully and finally exhausted all of their rights and remedies under the Insurance Policy; (ii) second, the International Managers, as their sole and exclusive remedy, may thereafter assert any claims they may have against the Manager directly against the Manager to the limited extent of the gross compensation (not reimbursement of expenses) paid (not payable) by the Company to the Manager solely in respect of the three-year period commencing at the Closing Time; (iii) the Manager shall have no other liability to the International Managers whatsoever; and (iv) the International Managers' shall have no rights, remedies or claims whatsoever against the Manager, directly or indirectly. provided, however, that the foregoing limitations set forth in this subsection - -------- ------- (e) shall not apply to any claim that the International Managers may have against the Manager as to which there is a final adjudication of actual, intentional and deliberate fraud on the part of the Manager. SECTION 7. Contribution. ------------ If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such 24 indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Manager (collectively, the "Company Parties"), on the one hand and the International Managers, on the other hand, from the offering of the International Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company Parties, on the one hand, and of the International Managers on the other hand, in connection with the statements or omissions. The relative benefits received by the Company Parties, on the one hand, and the International Managers, on the other hand, in connection with the offering of the International Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the International Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the International Managers, in each case as set forth on the cover of the International Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the International Securities as set forth on such cover. The relative fault of the Company Parties, on the one hand, and the International Managers, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company Parties, on the one hand, or by the International Managers, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Manager and the International Managers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such Notwithstanding the provisions of this Section 7, no International Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Manager has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. 25 No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such International Manager, and each director of the Company or the Manager, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or the Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company and the Manager, respectively. The International Managers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial International Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or the Manager submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any International Manager or controlling person, or by or on behalf of the Company or the Manager, and shall survive delivery of the Securities to the International Managers. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The International Managers may terminate this Agreement, by written notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the International Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, or any such adverse change with respect to the Manager which is material in the context of the transactions contemplated by this Agreement, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the International Managers, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. 26 (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the International Managers. If ---------------------------------------------------- one or more of the International Managers shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the International Managers shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting International Managers, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the International Managers shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non- defaulting International Managers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting International Managers, or (b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the International Managers to purchase and of the Company to sell the International Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non- defaulting International Manager. No action taken pursuant to this Section shall relieve any defaulting International Manager from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the International Managers to purchase and the Company to sell the relevant International Option Securities, as the case may be, either the International Managers or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectuses or in any other documents or arrangements. As used herein, the term "International Manager" includes any person substituted for a International Manager under this Section 10. SECTION 11. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the International Managers shall be directed to the International Managers at Ropemaker Place, 25 Ropemaker Street, London EC2Y 9LY, attention of Equity Capital Markets; and notices to the Company shall be directed to it at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017, attention of Philip A. Barach with 27 a copy to O'Melveny & Myers LLP, 275 Battery Street, San Francisco, California 94111, attention: Peter T. Healy, Esq. SECTION 12. Parties. This Agreement shall each inure to the benefit of ------- and be binding upon the International Managers, the Company and the Manager and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the International Managers, the Company and the Manager and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the International Managers, the Company and the Manager and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any International Manager shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 28 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the International Managers, the Manager and the Company, in accordance with its terms. Very truly yours, APEX MORTGAGE CAPITAL, INC. By____________________________ Title: TCW INVESTMENT MANAGEMENT COMPANY By____________________________ Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH INTERNATIONAL PAINEWEBBER INTERNATIONAL (U.K.) LTD. STIFEL, NICOLAUS & COMPANY, INCORPORATED SUTRO & CO. INCORPORATED By: MERRILL LYNCH INTERNATIONAL By _______________________________________ Authorized Signatory 29 SCHEDULE A
Number of Initial International Name of International Manager Securities ------------------------------ ---------- Merrill Lynch International............... PaineWebber International (U.K.) Ltd...... Stifel, Nicolaus & Company, Incorporated.. Sutro & Co. Incorporated.................. --------- Total..................................... 2,000,000 =========
SCHEDULE B APEX MORTGAGE CAPITAL, INC. 2,000,000 Shares of Common Stock (Par Value $.01 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $.. 2. The purchase price per share for the Securities to be paid by the several International Managers shall be $., being an amount equal to the initial public offering price set forth above less $. per share; provided that the purchase price per share for any International Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. Sch B-1 SCHEDULE C List of persons and entities subject to lock-up Sch C-1 Exhibit A-1 FORM OF OPINION OF COUNSEL TO THE COMPANY TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland. (ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the International Purchase Agreement and the U.S. Purchase Agreement, respectively. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. [see examples enclosed] (iv) The Company is organized in accordance with the requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and the rules and regulations thereunder. The contemplated method of operation of the Company's business as described in the Registration Statement will satisfy the operational requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code, and the rules and regulations thereunder. (v) The Company is not, and upon the issuance and sale of the International Securities as contemplated in the International Purchase Agreement and the U.S. Securities as contemplated in the U.S. Purchase Agreement and the application of the net proceeds from the sale of the Securities as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (vi) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the International Purchase Agreement or the U.S. Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of options referred to in the Prospectuses); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable [deletion made subject to confirmation of inclusion in BSA&I opinion]. A-1-1 (vii) The Securities have been duly authorized for issuance and sale to the International Managers pursuant to the International Purchase Agreement and to the U.S. Underwriters pursuant to the U.S. Purchase Agreement and, when issued and delivered by the Company pursuant to the International Purchase Agreement and the U.S. Purchase Agreement, respectively, against payment of the consideration set forth in the International Purchase Agreement and the U.S. Purchase Agreement, respectively, will be validly issued and fully paid and non-assessable [deletion made subject to confirmation of inclusion in BSA&I opinion]. (viii) The issuance of the Securities is not subject to preemptive or other similar rights of any security holder of the Company arising by operation of law, under the charter or by-laws of the Company or, to the best of our knowledge and information, otherwise. (ix) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company. (x) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectuses and each amendment or supplement to the Registration Statement and Prospectuses as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xii) If Rule 434 has been relied upon, the Prospectuses were not "materially different," as such term is used in Rule 434, from the prospectuses included in the Registration Statement at the time it became effective. (xiii) All descriptions in the Registration Statement of contracts and other documents to which the Company is a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. [see examples enclosed] (xiv) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or the Manager is a party, or to A-1-2 which the property of the Company or the Manager is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the International Purchase Agreement, the U.S. Purchase Agreement or the Management Agreements, or the performance by the Company and the Manager of its obligations thereunder. (xv) To the best of our knowledge, the Company is not in violation of its charter or by-laws and no default by the Company exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement. [see examples enclosed] (xvi) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the International Purchase Agreement, the U.S. Purchase Agreement or the Management Agreement by the Company, or for the offering, issuance or sale of the Securities. (xvii) The Company possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectuses that we have, in the exercise of customary professional diligence, recognized as applicable to the Company and, to our knowledge and information, the Company is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect. (xviii) Each of the International Purchase Agreement and the U.S. Purchase Agreement has been duly authorized, executed and delivered by the Company. (xix) The Management Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xx) The execution, delivery and performance of the International Purchase Agreement, the U.S. Purchase Agreement and the Management Agreement, the consummation of the transactions contemplated therein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in A-1-3 the Prospectuses under the caption "Use Of Proceeds") and the compliance by the Company with its obligations under the International Purchase Agreement and the U.S. Purchase Agreement, respectively, do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of the International Purchase Agreement and U.S. Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties, assets or operations, except for such violations, which singly or in the aggregate, would not result in a Material Adverse Effect. (xxi) The information in the Prospectuses under "Business and Strategy--Legal Proceedings," "Federal Income Tax Consequences," "ERISA Considerations," "Description of Capital Stock," "Certain Provisions of Maryland Law and of the Company's Charter and Bylaws" and in Item 33 and Item 34 of Part II of the Registration Statement, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects; and our opinion set forth under "Federal Income Tax Consequences" is confirmed. (xxii) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectuses that are not described as required. [see examples enclosed] (xxiii) To the best of our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectuses were issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. A-1-4 In rendering such opinion, such counsel may rely (A) as to matters involving the application of the laws of Maryland, upon the opinion of Ballard Spahr Andrews & Ingersoll, special counsel to the Company (which opinion shall be dated and furnished to the Representatives at the Closing Time, shall be satisfactory in form and substance to counsel for the Underwriters and shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them), provided that O'Melveny & Myers LLP shall state in their opinion that they believe that they and the Underwriters are justified in relying upon such opinion, and (B), as to matters of fact (but not as to legal conclusions) O'Melveny & Myers LLP may rely, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). [Note: comments made to the foregoing paragraph were unclear] A-1-5 Exhibit A 2 FORM OF OPINION OF COUNSEL TO THE MANAGER TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Manager has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California. (ii) The Manager has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the International Purchase Agreement and the U.S. Purchase Agreement, respectively. (iii) The Manager is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) All of the issued and outstanding capital stock of the Manager has been duly authorized and validly issued, is fully paid and non- assessable and is owned by TCW, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (v) The Manager is duly registered as an "investment adviser," as such term is defined in the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not prohibited by the Advisers Act or the rules and regulations thereunder from acting under the Management Agreement as contemplated by the Prospectuses. (vi) All descriptions in the Registration Statement of contracts and other documents to which the Manager is a party are accurate in all material respects. (vii) To the best of my knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Manager is a party, or to which the property of the Manager is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the International Purchase Agreement, the U.S. Purchase Agreement or the Management Agreement or the performance by the Manager of its obligations thereunder. A-2-1 (viii) To the best of my knowledge, the Manager is not in violation of its charter or by-laws and no default by the Manager exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement. [see examples] (ix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, is necessary or required in connection with the due authorization, execution and delivery by the Manager of the International Purchase Agreement, the U.S. Purchase Agreement or the Management Agreement. (x) The Manager possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct its business as contemplated in the Prospectuses that we have, in the exercise of customary professional diligence, recognized as applicable to the Manager and, to our knowledge and information, the Manager is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect. (xi) Each of the International Purchase Agreement and the U.S. Purchase Agreement has been duly authorized, executed and delivered by the Manager. (xii) The Management Agreement has been duly authorized, executed and delivered by the Manager and constitutes a valid and binding obligation of the Manager enforceable against it in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (xiii) The execution, delivery and performance of the International Purchase Agreement, the U.S. Purchase Agreement and the Management Agreement, the consummation of the transactions contemplated therein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and the compliance by the Manager with its obligations under the International Purchase Agreement and the U.S. Purchase Agreement, respectively, do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(b)(v) of the U.S. Purchase Agreement and International Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Manager pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Manager is a party or by which it may be bound, or to which any of the property or assets of the Manager is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that A-2-2 would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Manager or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Manager or any of its properties, assets or operations, except for such violations, which singly or in the aggregate, would not result in a Material Adverse Effect. (xiv) To the best of my knowledge and information, the description of the Manager in the Registration Statement and the Prospectuses does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions) [ ] may rely, to the extent they deem proper, on certificates of responsible officers of the Manager and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-2-3 Exhibit B FORM OF OPINION OF SPECIAL MARYLAND COUNSEL TO THE COMPANY TO BE DELIVERED PURSUANT TO SECTION 5(c) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of Maryland. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the International Purchase Agreement and the U.S. Purchase Agreement, respectively. (iii) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the International Purchase Agreement and the U.S. Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of options referred to in the Prospectuses); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company, either pursuant to the charter or by-laws of the Company or Maryland law. (iv) The Securities have been duly authorized for issuance and sale to the Managers pursuant to the International Purchase Agreement and to the U.S. Underwriters pursuant to the U.S. Purchase Agreement and, when issued and delivered by the Company pursuant to the International Purchase Agreement and the U.S. Purchase Agreement, respectively, against payment of the consideration set forth in the International Purchase Agreement and the U.S. Purchase Agreement, respectively, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (v) The issuance of the Securities is not subject to preemptive or other similar rights of any securityholder of the Company, either pursuant to the charter or by-laws of the Company or Maryland law. (vi) Each of the International Purchase Agreement and the U.S. Purchase Agreement has been duly authorized, executed and delivered by the Company. (vii) The Management Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting the B-1 enforcement of creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (viii) The Insurance Policy has been duly authorized, executed and delivered and is in full force and effect and enforceable in accordance with its terms. (ix) The form of certificate used to evidence the Common Stock complies in all material respects with Maryland law and with any applicable requirements of the charter and by-laws of the Company. (x) The information in the Prospectus under "Description of Capital Stock," "Certain Provisions of Maryland Law and of the Company's Charter and Bylaws," and "Federal Income Tax Consequences," to the extent that it constitutes matters of Maryland law or the Company's charter and bylaws, has been reviewed by us and is correct in all material respects. (xi) To the best of our knowledge, there are no statutes or regulations of the State of Maryland that are required to be described in the Prospectuses that are not described as required. (xii) To the best of our knowledge, the Company is not in violation of its charter or by-laws and no default exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed as an exhibit to the Registration Statement. (xiii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency of the State of Maryland is necessary or required in connection with the due authorization, execution and delivery of the International Purchase Agreement, the U.S. Purchase Agreement and the Management Agreement or for the offering, issuance or sale of the Securities. (xiv) The execution, delivery and performance of the International Purchase Agreement, the U.S. Purchase Agreement and the Management Agreement, the consummation of the transactions contemplated therein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and the compliance by the Company with its obligations under the International Purchase Agreement, the U.S. Purchase Agreement and the Management Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of the International Purchase Agreement and the U.S. Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company is a party or by which it, or to which any of the property or assets of the Company, is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the B-2 provisions of the charter or by-laws of the Company or any applicable Maryland law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court of the State of Maryland or any of its properties, assets or operations, except for such violations, which singly or in the aggregate, would not result in a Material Adverse Effect. B-3 [FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(L)] Exhibit C , 1997 MERRILL LYNCH INTERNATIONAL PAINEWEBBER INTERNATIONAL (U.K.) LTD. STIFEL, NICOLAUS & COMPANY, INCORPORATED SUTRO & COMPANY INCORPORATED c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Re: Proposed Public Offering by Apex Mortgage Capital, Inc. ------------------------------------------------------- Dear Sirs: The undersigned, a stockholder [and an officer and/or director] of Apex Mortgage Capital, Inc., a Maryland corporation (the "Company"), understands that Merrill Lynch International ("Merrill Lynch"), PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated, Sutro & Company Incorporated propose to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, par value $.01 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the International Purchase Agreement that, during a period of 180 days from the date of the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, C-1 directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: Print Name: C-2 EX-3.1 4 ARTICLES OF AMENDMENT AND RESTATEMENT ARTICLES OF AMENDMENT AND RESTATEMENT OF APEX MORTGAGE CAPITAL, INC. Apex Mortgage Capital, Inc., a Maryland corporation, having a principal office in Baltimore, Maryland (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: The Charter of the Corporation is hereby amended and restated as ----- follows: ARTICLE I INCORPORATOR The undersigned, Peter T. Healy, whose post office address is 275 Battery Street, Suite 2600, San Francisco, California 94111-3305, being at least eighteen (18) years of age, acting as incorporator does hereby form a corporation under the General Laws of the State of Maryland. ARTICLE II NAME The name of the corporation (hereinafter called the "Corporation") is: Apex Mortgage Capital, Inc. ARTICLE III PURPOSES The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the General Laws of the State of Maryland now or hereafter in force. Subject to, and not in limitation of the authority of the preceding sentence, upon completion of its Initial Public Offering (as defined in Article V), the Corporation shall engage in business as a real estate investment trust (a "REIT") qualifying as such under Sections 856 through 860 of the Code, as defined below, unless and until the Board of Directors shall have determined that it is no longer in the best interests of the Corporation to engage in such business, and shall have taken the action contemplated in such event by Section 3(b) of Article IX hereof. The foregoing enumerated purposes and objects shall be in no way limited or restricted by reference to, or inference from, the terms of any other clause of this or any other Article of the Articles of Incorporation of the Corporation, and each shall be regarded as independent; and they are intended to be and shall be construed as powers as well as purposes and objects of the Corporation and shall be in addition to and not in limitation of the general powers of corporations under the General Laws of the State of Maryland. 1 ARTICLE IV PRINCIPAL OFFICE IN MARYLAND AND RESIDENT AGENT SECTION 1. PRINCIPAL OFFICE. The present address of the principal office of the Corporation in Maryland is: CSC - Lawyers Incorporated Service Company 11 East Chase Street Baltimore, Maryland 21202 SECTION 2. RESIDENT AGENT. The name and address of the resident agent of the Corporation in Maryland is: CSC - Lawyers Incorporated Service Company 11 East Chase Street Baltimore, Maryland 21202 Said resident agent is a Maryland corporation. ARTICLE V CAPITAL STOCK SECTION 1. AUTHORIZED SHARES OF CAPITAL STOCK. (a) Authorized Shares. The total number of shares of capital stock of all classes that the Corporation has authority to issue is one hundred and fifty million (150,000,000) shares of capital stock (par value one cent ($0.01) per share), consisting of: (i) one hundred million (100,000,000) shares of Common Stock, par value one cent ($0.01) per share (the "Common Shares"); and (ii) fifty million (50,000,000) shares of Preferred Stock, par value one cent ($0.01) per share (the "Preferred Shares") which may be issued in one or more classes as described in Section 5 of Article V. The Common Shares and each class of the Preferred Shares shall each constitute a separate class of capital stock of the Corporation. The Board of Directors may classify and reclassify any unissued shares of capital stock in accordance with Section 6 of Article V hereof. (b) Terminology and Aggregate Par Value. The Common Shares and Preferred Shares are collectively referred to herein as the "Equity Shares." The aggregate par value of all the Corporation's authorized Equity Shares having par value is $1,500,000. SECTION 2. RESTRICTIONS AND LIMITATIONS ON THE EQUITY SHARES OF THE CORPORATION. Subsequent to the date of the Initial Public Offering and until the Restriction Termination Date (as defined in Article V), all Equity Shares of the Corporation shall be subject to the following restrictions and limitations: 2 (a) Definitions. For purposes of this Article V and the interpretation of the stock legend set forth herein, the following terms shall have the following meanings: "Acquire" shall mean the acquisition of Beneficial or Constructive Ownership of Equity Shares, whether by a Transfer, Non-Transfer Event of by any other means, including, without limitation, acquisition pursuant to the exercise of the Acquisition Rights or any other option, warrant, pledge or other security interest or similar right to acquire Equity Shares, but shall not include the acquisition of any such rights unless, as a result, the acquiror would be considered a Beneficial Owner, as defined below. "Acquisition Rights" shall mean rights to Acquire Equity Shares pursuant to: (i) the exercise of any option or warrant issued by the Corporation and outstanding at the opening of business on the first business day following the closing of the Initial Public Offering (whether exercisable on that day or not); or (ii) any pledge of Equity Shares made pursuant to an agreement executed on or before the opening of business on the first business day following the closing of the Initial Public Offering. "Beneficial Ownership" shall mean ownership of Equity Shares by a Person who would be treated as an owner of Equity Shares either directly or indirectly under Section 542(a)(2) of the Code, taking into account, for this purpose, constructive ownership determined under Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code (except where expressly provided otherwise). The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings. "Charitable Beneficiary" shall mean, with respect to any Share Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the Share Trustee as the beneficiary or beneficiaries of such Share Trust, in accordance with the provisions of Section 4(a) of this Article V. "Code" shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute thereto, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Constructive Ownership" shall mean ownership of Equity Shares by a Person who would be treated as an owner of such Equity Shares either directly or constructively through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructively Own," "Constructively Owned" and "Constructive Owner" shall have the correlative meanings. "Initial Public Offering" shall mean the closing of the first sale of Common Shares by the Corporation in an underwritten public offering pursuant to an effective registration statement for the sale of such Common Shares filed under the Securities Act of 1933, as amended. "Market Price" on any date shall mean, with respect to any class or series of outstanding shares of the Corporation's stock, the Closing Price for such shares on such date. The "Closing Price" on any date shall mean the last sale price for such shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if such shares are not listed or admitted to trading on the New York Stock Exchange, as reported on the principal consolidated transaction reporting 3 system with respect to securities listed on the principal national securities exchange on which such shares are listed or admitted to trading or, if such shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc., Automated Quotation System, or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such shares selected by the Board of Directors or, in the event that no trading price is available for such shares, the fair market value of the shares, as determined in good faith by the Corporation's Board of Directors. "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit (or would cause the Corporation to fail to qualify as a REIT), including, without limitation, a change in the capital structure of the Corporation. "Ownership Limit" shall initially mean, (i) with respect to the Common Shares, 9.8% of the lesser of (a) the total number, or (b) the value of the total number, of outstanding Common Shares or (ii) with respect to the Preferred Shares, 9.8% of the lesser of (a) the total number, or (b) the value of the total number, of outstanding Preferred Shares (or such other number or value of Preferred Shares as the Board of Directors may determine in fixing the terms of the Preferred Shares). "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section 4(e) of this Article V. "Person" shall mean an individual, corporation, partnership, limited liability company or partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended but does not include (i) an underwriter who participates in the Initial Public Offering or (ii) an underwriter who participates in any public offering of the common Shares and/or Preferred Shares and/or securities convertible into or exchangeable for Common Shares and/or Preferred Shares subsequent to the Initial Public Offering (a "Secondary Offering") for a period of sixty (60) days following the purchase by such underwriter of the Common Shares and/or Preferred Shares and/or securities convertible into or exchangeable for Common Shares and/or Preferred Shares in such Secondary Offering. "Purported Beneficial Transferee" shall mean, with respect to any purported Transfer that results in Shares-in-Trust as defined below in Section 4 of this Article V, the purported beneficial transferee for whom the Purported Record Transferee would have Acquired Equity Shares of the Corporation if such Transfer had been valid under Section 2(b) of this Article V. "Purported Record Transferee" shall mean, with respect to any purported Transfer that results in Shares-in-Trust, the Person who would have been the record holder of the Equity Shares of the Corporation if such Transfer had been valid under Section 2(b) of this Article V. "REIT" shall mean a real estate investment trust under Section 856 et seq. of the Code. 4 "Restriction Termination Date" shall mean the first day after the date of the Initial Public Offering on which the Corporation determines pursuant to Section 3(b) of Article IX and Section 2(i) of this Article V that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT. "Share Trust" shall mean any separate trust created pursuant to Section 4(a) of this Article V and administered in accordance with the terms of Section 4 of this Article V, for the exclusive benefit of any Charitable Beneficiary. "Shares-in-Trust" shall mean any Equity Shares designated Shares-in- Trust pursuant to Section 4(a) of this Article V. "Share Trustee" shall mean the trustee of the Share Trust, which is selected by the Corporation but not affiliated with the Corporation or the Charitable Beneficiary, and any successor trustee appointed by the Corporation. "Transfer" (as a noun) shall mean any sale, transfer, gift, assignment, devise or other disposition of Equity Shares or the right to vote or receive dividends on Equity Shares (including without limitation (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Equity Shares or the right to vote or receive dividends on Equity Shares or (ii) the sale, transfer, assignment or other disposition or grant of any Acquisition Rights or other securities or rights convertible into or exchangeable for Equity Shares, or the right to vote or receive dividends on Equity Shares), whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise. "Transfer" (as a verb) shall have a correlative meaning. (b) Ownership Limitation and Transfer Restrictions. (i) Except as provided in Section 2(f) of this Article V, from and after the date of the Initial Public Offering and prior to the Restriction Termination Date: (w) no Person shall Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit; (x) no Person shall Acquire Equity Shares, if, as a result of such action, the Equity Shares would be beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution under the Code); (y) no Person shall Acquire Equity Shares or any interest therein if, as a result of such acquisition, the Corporation would be "closely held" within the meaning of Section 856(h) of the Code or would otherwise fail to qualify as a REIT, as the case may be; and (z) no Person shall Acquire Equity Shares or any interest therein if, as a result of such acquisition, the Corporation would Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code, or would otherwise fail to qualify as a REIT, as the case may be. (ii) Any Transfer that would result in a violation of the restrictions in Section (b)(i) above, shall be void ab initio as to the -- ------ purported Transfer of such number of Equity Shares that would cause the violation of the applicable restriction in Section (b)(i), and the Purported Record Transferee (and the Purported Beneficial Transferee, if different) shall acquire no rights in such Equity Shares. 5 (c) Automatic Transfer to Share Trust. (i) If, notwithstanding the other provisions contained in this Article V, at any time from and after the date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit, then, except as otherwise provided in Section 2(f) of this Article V, (x) the Purported Record Transferee (and the Purported Beneficial Transferee, if different) shall acquire no right or interest (or, in the case of a Non-Transfer Event, the person holding record title to the Equity Shares Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of Equity Shares which would cause such Purported Record Transferee (and Purported Beneficial Transferee, if different) to Beneficially Own or Constructively Own Equity Shares in excess of the Ownership Limit (rounded up to the nearest whole share), (y) such number of Equity Shares in excess of the Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section 4(a) of this Article V, transferred automatically and by operation of law to the Share Trust to be held in accordance with Section 4 of this Article V and (z) such Purported Record Transferee (and the Purported Beneficial Transferee, if different) shall submit such number of Equity Shares to the Share Trust for registration in the name of the Share Trustee. Any Purported Record Transferee (and Purported Beneficial Transferee, if different) shall acquire no right or interest (or, in the case of a Non-Transfer Event, the person holding title to the Shares Beneficially Owned or Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of Shares which would cause such person to own Shares in excess of the Ownership Limit. Such transfer to a Share Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. (ii) If, notwithstanding the other provisions contained in this Article V, at any time from and after the date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the Equity Shares being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution), (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, (iii) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's real property, within the meaning of Section 856(d)(2)(B) of the Code, or (iv) cause the Corporation to otherwise fail to qualify as a REIT, as the case may be, then (x) the Purported Record Transferee (and the Purported Beneficial Transferee, if different) shall acquire no right or interest (or, in the case of a Non-Transfer Event, the person holding record title to the Equity Shares with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of Equity Shares, the ownership of which by such Purported Record Transfer (and Purported Beneficial Transferee, if different) would (A) result in the Equity Shares being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution), (B) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, (C) cause the Corporation to Constructively Own 10% or more of the ownership interests in a tenant of the Corporation's property, within the meaning of Section 856(d)(2)(B) of the Code, or (D) would otherwise cause the Corporation to fail to qualify as a REIT, as the case may be, (y) such number of Equity Shares (rounded up to the nearest whole share) shall be designated Shares-in-Trust and , in accordance with the provisions of Section 4(a) of this Article V, transferred automatically and by operation of law to the Share Trust to be held in accordance with Section 4 of this Article V and (z) the Purported Record Transferee 6 (and the Purported Beneficial Transferee, if different) shall submit such number of Equity Shares to the Share Trust for registration in the name of the Share Trustee. (d) Remedies for Breach. If the Board of Directors or the Corporation or its designee shall at any time determine in good faith that a purported Transfer of Equity Shares has taken place in violation of Section 2(b) of this Article V or that a Person intends to acquire or has attempted to acquire beneficial ownership (determined without reference to any rules of attribution), Beneficial Ownership or Constructive Ownership of any Equity Shares of the Corporation in violation of Section 2(b) of this Article V, the Board of Directors or the Corporation or its designee shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition, including, but not limited to, refusing to give effect to such Transfer or acquisition on the books of the Corporation or instituting proceedings to enjoin such Transfer or acquisition; provided, however, that any Transfer, attempted Transfer, acquisition or attempted acquisition in violation of Section 2(b)(i) of this Article V shall automatically result in the transfer described in Section 2(c) of this Article V, irrespective of any action (or non- action) by the Board of Directors, except as provided in Section 2(f) of this Article V. (e) Notice of Restricted Transfer. (i) Any Person who acquires or attempts to acquire Equity Shares in violation of Section 2(b) of this Article V, and any Person who is a Purported Record Transferee or a Purported Beneficial Transferee of Equity Shares that are transferred to a Share Trust under Section 2(c) of this Article V, shall immediately give written notice to the Corporation of such event, shall submit to the Corporation such number of Equity Shares to be transferred to the Share Trust and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer or attempted Transfer or such Non-Transfer Event on the Corporation's status as a REIT. (ii) From and after the date of the Initial Public Offering and prior to the Restriction Termination Date every Beneficial Owner or Constructive Owner of more than 5%, in the case of 2,000 or more stockholders of record, or 1%, in the case of more than 200 but fewer than 2,000 stockholders of record, or such other percentage as may be provided from time to time in the pertinent income tax regulations promulgated under the Code, of the number or value of the outstanding Equity Shares of the Corporation shall, within 30 days after January 1 of each year, give written notice to the Corporation stating the name and address of such Beneficial Owner or Constructive Owner, the number of Equity Shares Beneficially or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the Corporation such additional information that the Corporation may reasonably request in order to determine the effect, if any, of such Beneficial or Constructive Ownership on the Corporation's status as a REIT and to ensure compliance with the Ownership Limit; and (iii) From and after the date of the Initial Public Offering and prior to the Restriction Termination Date, each Person who is a Beneficial Owner or Constructive Owner of Equity Shares of the Corporation and each Person (including the stockholder of record) who is holding Equity Shares of the Corporation for a Beneficial Owner or Constructive Owner shall provide to the Corporation such information as the Corporation may reasonably request in order to determine the Corporation's status as a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance and to ensure compliance with the Ownership Limit. 7 (f) Exception. The Board of Directors may, upon receipt of either a certified copy of a ruling from the Internal Revenue Service or an opinion of counsel satisfactory to the Board of Directors, but shall in no case be required to, exempt a Person (the "Exempted Holder") from the Ownership Limit, if the ruling or opinion concludes that no Person who is an individual as defined in Section 542(a)(2) of the Code will, as the result of the ownership of Equity Shares by the Exempted Holder, be considered to have Beneficial Ownership or Constructive Ownership of an amount of Equity Shares that will violate the restrictions contained in Sections 2(b)(i)(x), 2(b)(i)(y) and 2(b)(i)(z) of this Article V; provided, that (i) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial Ownership of Equity Shares will violate the Ownership Limit, and (ii) such Person agrees that any violation or attempted violation will result in such transfer to the Share Trust of Equity Shares pursuant to Section 2(c) of this Article V. Unless and until a Person is exempted from the Ownership Limit by the Board of Directors, the Ownership Limit shall apply to such Person, notwithstanding the fact that if such Person were otherwise to Acquire Equity Shares in excess of the Ownership Limit, such Acquisition would not adversely affect the Corporation's qualification as a REIT under the Code. (g) Legend. Each certificate for shares of Equity Shares shall bear substantially the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO SIGNIFICANT RESTRICTIONS ON OWNERSHIP AND TRANSFER. EXCEPT AS OTHERWISE PROVIDED PURSUANT TO THE CHARTER OF THE CORPORATION, NO PERSON MAY BENEFICIALLY OWN OR CONSTRUCTIVELY OWN (1) COMMON SHARES OF THE CORPORATION IN EXCESS OF 9.8% OF THE LESSER OF THE TOTAL NUMBER OR VALUE OF THE OUTSTANDING COMMON SHARES OF THE CORPORATION, (2) PREFERRED SHARES OF THE CORPORATION IN EXCESS OF 9.8% OF THE LESSER OF THE TOTAL NUMBER OR VALUE OF THE OUTSTANDING PREFERRED SHARES OF THE CORPORATION, (3) EQUITY SHARES IF SUCH ACQUISITION WOULD RESULT IN THE TRUST BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE, (4) EQUITY SHARES IF SUCH ACQUISITION WOULD RESULT IN THE EQUITY SHARES BEING BENEFICIALLY OWNED BY FEWER THAN 100 PERSONS (DETERMINED WITHOUT REFERENCE TO ANY RULES OF ATTRIBUTION), (5) EQUITY SHARES IF SUCH ACQUISITION WOULD CAUSE THE CORPORATION TO FAIL TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR (6) EQUITY SHARES IN VIOLATION OF ANY OF THE FURTHER RESTRICTIONS SET FORTH IN THE CORPORATION'S CHARTER. ANY PERSON WHO ATTEMPTS OR PROPOSES TO BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF EQUITY SHARES IN EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION IN WRITING. IF AN ATTEMPT IS MADE TO VIOLATE OR THERE IS A VIOLATION OF THESE RESTRICTIONS (I) ANY PURPORTED 8 TRANSFER WILL BE VOID AB INITIO AND WILL NOT BE RECOGNIZED BY THE CORPORATION, (II) THE EQUITY SHARES IN VIOLATION OF THESE RESTRICTIONS, WHETHER AS A RESULT OF A TRANSFER OR NON-TRANSFER EVENT, WILL BE TRANSFERRED AUTOMATICALLY AND BY OPERATION OF LAW TO A SHARE TRUST AND SHALL BE DESIGNATED SHARES-IN-TRUST. ALL TERMS USED IN THIS LEGEND AND DEFINED IN THE CORPORATION'S CHARTER HAVE THE MEANINGS PROVIDED IN THE CORPORATION'S CHARTER, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON OWNERSHIP AND TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS." (h) REIT Qualification. From and after the date of the Initial Public Offering, the Board of Directors shall use its reasonable best efforts to cause the Corporation and its stockholders to qualify for United States federal income tax treatment as a REIT in accordance with the provisions of the Code applicable to a REIT and shall not take any action which could adversely affect the ability of the Corporation to qualify as a REIT. In furtherance of the foregoing, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary, and may take such actions as in its sole judgment and discretion are desirable, to preserve the status of the Corporation as a REIT; provided, however that if it is determined that it is no longer in the best interests of the Corporation to continue to have the Corporation qualify as a REIT, the actions required by Article IX Section 3(b) may be taken to terminate the Corporation's REIT election. (i) Remedies Not Limited. Subject to Section 7 of this Article V, nothing contained in this Article shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders in preserving the Corporation's status as a REIT. (j) Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article V, including any definition contained in Section 2(a), the Board of Directors shall have the power to determine the application of the provisions of this Article V with respect to any situation based on the facts known to it. (k) Severability. If any provision of this Article V or any application of any such provision is determined to be invalid by a federal or state court having jurisdiction over the issue, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. SECTION 3. COMMON SHARES. Subject to the provisions of Sections 2, 4 and 5 of this Article V, the Common Shares shall have the following preferences, voting powers, restrictions, limitations as to dividends and such other rights as may be afforded by law. (a) Voting Rights. Except as may otherwise be required by law, each holder of Common Shares shall have one vote in respect of each Common Share on all actions to be taken by the 9 stockholders of the Corporation, and, except as otherwise provided in respect of any class of stock, hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the Common Shares. (b) Dividend Rights. Subject to the provisions of law and any preferences of any class of stock hereafter classified or reclassified, dividends, including dividends payable in shares of another class of the Corporation's stock, may be paid on the Common Shares of the Corporation at such time and in such amounts as the Board of Directors may deem advisable and the holders of the Common Shares shall share ratably in any such dividends, in proportion to the number of Common Shares held by them respectively, on a share for share basis. (c) Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary of involuntary, the holders of the Common Shares shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amount to which the holders of any class of capital stock hereafter classified or reclassified having a preference on distributions in the liquidation, dissolution or winding up on the Corporation are entitled, together with the holders of any other class of capital stock hereafter classified or reclassified not having a preference on distributions in the liquidation, dissolution or winding up of the Corporation, to share ratably in the remaining net assets of the Corporation. (d) Stock Exchange and National Market Transactions. Notwithstanding any provisions contained herein to the contrary, nothing in these Articles of Incorporation shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange, the American Stock Exchange or other national exchange or the Nasdaq National Market or other national market system. SECTION 4. SHARES-IN-TRUST. (a) Share Trust. Any Equity Shares transferred to a Share Trust and designated Shares-in-Trust pursuant to Section 2(c) hereof shall be held for the exclusive benefit of the Charitable Beneficiary. The Corporation shall name a beneficiary and trustee of each Share Trust within five days after discovery of the existence thereof. Any transfer to a Share Trust, and subsequent designation of Equity Shares as Shares-in-Trust, pursuant to Section 2(c) hereof shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Share Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares of the Corporation and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding Equity Shares of the same class and series. When transferred to the Permitted Transferee in accordance with the provisions of Section 4(c) hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. (b) Dividend Rights. The Trustee, as record holder of Shares-in- Trust, shall be entitled to receive all dividends and distributions as may be declared by the Board of Directors on such Equity Shares and shall hold such dividends or distributions in trust for the benefit of the Charitable Beneficiary. The Purported Record Transferee (or Purported Beneficial Transferee, if applicable) with respect to Shares-in-Trust shall repay to the Share Trustee the amount of any dividends or distributions received by it that (i) are attributable to any Equity Shares designated as Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend 10 or distribution paid to the Purported Record Transferee (or Purported Beneficial Transferee, if applicable), including, if necessary, withholding any portion of future dividends or distributions payable on Equity Shares Beneficially Owned or Constructively Owned by the Person who, but for the provisions of Section 2(c) hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Share Trustee for the benefit of the Charitable Beneficiary the dividends so received or withheld, as the case may be. (c) Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of (other than a dividend), the Corporation, each Trustee of Shares- in-Trust shall be entitled to receive, ratably with each other holder of Equity Shares of the same class or series, that portion of the assets of the Corporation which is available for distribution to the holders of such class and series of Equity Shares. The Trustee shall distribute to the Purported Record Transferee the amounts received upon such liquidation, dissolution, or winding up, or distribution, provided, however, that the Purported Record Transferee shall not be entitled to receive amounts pursuant to this Section 4(c) in excess of, in the case of a purported Transfer in which the Purported Record Transferee gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share, if any, such Purported Record Transferee paid for the Equity Shares and, in the case of a Non-Transfer Event or Transfer in which the Purported Record Transferee did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Share Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Share Trust shall be distributed to the Charitable Beneficiary. (d) Voting Rights. The Share Trustee shall be entitled to vote all Shares-in-Trust. Any vote by a Purported Record Transferee as a holder of Equity Shares prior to the discovery by the Corporation that the Equity Shares are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void ab initio with respect to such Shares-in-Trust and the Purported Record -- ------ Transferee shall be deemed to have given, as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event that results in the transfer to the Share Trust of Equity Shares under Section 2(c) hereof, an irrevocable proxy to the Share Trustee to vote the Shares-in- Trust in the manner in which the Share Trustee, in its sole and absolute discretion, desires. (e) Designation of Permitted Transferee. The Share Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any and all Shares-in-Trust. In an orderly fashion so as not materially and adversely to affect the Market Price of the Shares-in-Trust, the Share Trustee shall designate any Person as Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale), at a price as set forth in Section 4(g) hereof, the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Share Trust and the redesignation of such Equity Shares so acquired as Shares-in-Trust under Section 2(c) hereof. Upon the designation by the Share Trustee of a Permitted Transferee in accordance with the provisions of this Section 4(e), the Share Trustee of a Share Trust shall (i) cause to be transferred to the Permitted Transferee that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) cause to be recorded on the books of the Corporation that the Permitted Transferee is the holder of record of such number of Equity Shares, (iii) cause the Shares-in-Trust to be cancelled, and (iv) distribute to the Charitable Beneficiary any and all amounts held with respect to the Shares-in- Trust after making that payment to the Purported Record Transferee pursuant to Section 4(f) hereof. 11 (f) Compensation to Record Holder of Equity Shares that Become Shares- in-Trust. Any Purported Record Transferee shall be entitled (following discovery of the Shares-in-Trust and subsequent designation of the Permitted Transferee in accordance with Section 4(c) hereof) to receive from the Share Trustee upon the sale or other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a purported Transfer in which the Purported Record Transferee (or Purported Beneficial Transferee, if applicable) gave value for Equity Shares and which Transfer resulted in the transfer of the shares to the Share Trust, the price per share, if any, such Purported Record Transferee (or Purported Beneficial Transferee, if applicable) paid for the Equity Shares, or (b) a Non-Transfer Event or Transfer in which the Purported Record Transferee (or Purported Beneficial Transferee, if applicable) did not give value for such shares (e.g., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Share Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the price per share received by the Share Trustee of the Share Trust from the sale or other disposition of such Shares in Trust in accordance with Section 4(e) or (g) hereof. Any amounts received by the Share Trustee in respect of such Shares-in- Trust and in excess of such amounts to be paid the Purported Record Transferee pursuant to this Section 4(f) shall be distributed to the Charitable Beneficiary in accordance with the provisions of Section 4(e) hereof. Each Charitable Beneficiary and Purported Record Transferee (and Purported Beneficial Transferee, if different) waives any and all claims that each may have against the Share Trustee and the Share Trust arising out of the disposition of the Shares-in-Trust, except for claims arising out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section 4 by, such Share Trustee or the Corporation. (g) Purchase Rights in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non- Transfer Event) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period of ninety days after the later of (i) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust and (ii) the date the Corporation determines in good faith that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section 2(e) hereof. SECTION 5. PREFERRED SHARES. The Preferred Shares may be issued from time to time in one or more classes. The Board of Directors is expressly authorized, in the resolution or resolutions providing for the issuance of any wholly unissued class of Preferred Shares, to fix, state and express the powers, rights, designations, preferences, qualifications, limitations and restrictions thereof, including without limitation: the rate of dividends upon which and the times at which dividends on shares of such class shall be payable and the preference, if any, which such dividends shall have relative to dividends on shares of any other class or classes of stock of the Corporation; whether such dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which dividends on shares of such class shall be cumulative; the voting rights, if any, to be provided for shares of such class; the rights, if any, which the holders of shares of such class shall have in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; the rights, if any, which the holders of shares of such class shall have to convert such shares into or exchange such shares for shares of stock of the Corporation, and the terms and conditions, including price and rate of exchange of such conversion or exchange; and the 12 redemption rights (including sinking fund provisions), if any, for shares of such class; and such other powers, rights, designations, preferences, qualifications, limitations and restrictions as the Board of Directors may desire to so fix. The Board of Directors is also expressly authorized to fix the number of shares constituting such class and to increase or decrease the number of shares of any class prior to the issuance of shares of that class and to increase or decrease the number of shares of any class subsequent to the issuance of shares of that class, but not to decrease such number below the number of shares of such class then outstanding. In case the number of shares of any class shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such class. SECTION 6. CLASSIFICATION AND RECLASSIFICATION OF CAPITAL STOCK. (a) Subject to the foregoing provisions of Article V, the power of the Board of Directors to classify and reclassify any of the unissued shares of capital stock shall include, without limitation, subject to the provisions of the Charter, authority to classify or reclassify any unissued shares of such stock into a class or classes of preferred stock, preference stock, special stock or other stock, by determining, fixing, or altering one or more of the following: (i) The distinctive designation of such class and the number of shares to constitute such class, provided that, unless otherwise prohibited by the terms of such or any other class, the number of shares of any class may be decreased by the Board of Directors in connection with any classification or reclassification of unissued shares and the number of shares of such class may be increased by the Board of Directors in connection with any such classification or reclassification, and any shares of any class which have been redeemed, purchased, otherwise acquired or converted into Common Shares or any other class shall become part of the authorized capital stock and be subject to classification and reclassification as provided in this Section. (ii) Whether or not and, if so, the rates, amounts and times at which, and the conditions under which, dividends shall be payable on shares of such class, whether any such dividends shall rank senior or junior to or on a parity with the dividends payable on any other class of stock, and the status of any such dividends as cumulative, cumulative to a limited extent or non- cumulative and as participating or non-participating. (iii) Whether or not shares of such class shall have voting rights, in addition to any voting rights provided by law and, if so, the terms of such voting rights. (iv) Whether or not shares of such class shall have conversion or exchange privileges and, if so, the terms and conditions thereof, including provision for adjustment of the conversion or exchange rate in such events or at such times as the Board of Directors shall determine. (v) Whether or not shares of such class shall be subject to redemption and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; and whether or not there shall be any sinking fund or purchase account in respect thereof, and if so, the terms thereof. (vi) The rights of the holders of shares of such class upon the liquidation, dissolution or winding up of the affairs of, or upon any distribution of the assets of, the Corporation, 13 which rights may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates, and whether such rights shall rank senior or junior to or on a parity with such rights of any other class of stock. (vii) Whether or not there shall be any limitations applicable, while shares of such class are outstanding, upon the payment of dividends or making of distributions on, or the acquisition of, or the use of moneys for purchase or redemption of, any stock of the Corporation, or upon any other action of the Corporation, including action under this Section, and, if so, the terms and conditions thereof. (viii) Any other preferences, rights, restrictions, including restrictions on transferability, and qualifications of shares of such class, not inconsistent with law and the Charter of the Corporation. (b) For the purposes hereof and of any articles supplementary to the Charter providing for the classification or reclassification of any shares of capital stock or of any other charter document of the Corporation (unless otherwise provided in any such articles or document), any class of stock of the Corporation shall be deemed to rank: (i) prior to another class either as to dividends or upon liquidation, if the holders of such class shall be entitled to the receipt of dividends or of amounts distributable on liquidation, dissolution or winding up, as the case may be, in preference or priority to holders of such other class; (ii) on a parity with another class either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation price per share thereof be different from those of such others, if the holders of such class of stock shall be entitled to receipt of dividends or amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or redemption or liquidation prices, without preference or priority over the holders of such other class; and (iii) junior to another class either as to dividends or upon liquidation, if the rights of the holders of such class shall be subject or subordinate to the rights of the holders of such other class in respect of the receipt of dividends or the amounts distributable upon liquidation, dissolution or winding up, as the case may be. SECTION 7. SETTLEMENT. Nothing in this Article V shall be interpreted to preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange, any other national securities exchange or The Nasdaq National Market system, but the Equity Shares which are the subject of such transaction shall continue to be subject to the terms of this Article V subsequent to such settlement. 14 ARTICLE VI THE BOARD OF DIRECTORS SECTION 1. NUMBER AND QUALIFICATION OF DIRECTORS. (a) Authorized Number. The business and affairs of the Corporation shall be managed by a Board of Directors which may exercise all of the powers of the Corporation except those conferred on, or reserved to, the stockholders hereunder, under the Bylaws or by law. The number of directors of the Corporation initially shall be one (1) which number may be increased or decreased pursuant to the Bylaws of the Corporation but in no event shall be less than the minimum number required by the general laws of the State of Maryland. A director need not be a shareholder of the Corporation. Prior to the effective date of the registration statement relating to the Corporation's Initial Public Offering, as defined in Article V, the Board of Directors shall increase the number of directors to three (3) and shall appoint persons to fill such vacancies pursuant to the Bylaws. (b) Initial Director. The name of the director who will serve, together with any subsequently appointed directors, until the first annual meeting of stockholders and until his successors are elected and qualify is as follows: Marc I. Stern. SECTION 2. CLASSIFIED BOARD. On a date (the "Classification Date") after the number of directors is increased to seven but prior to the effective date of the registration statement relating to the Corporation's Initial Public Offering, the Board of Directors shall divide the directors of the Corporation into three classes (each a "Class"), designated "Class I," "Class II" and "Class III," respectively. The number of directors in each Class shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected; provided, however, that at the Classification Date, each director in Class I shall serve for a term ending on the date of the first subsequent annual meeting of stockholders, each director in Class II shall serve for a term ending on the date of the second subsequent annual meeting of stockholders; and each director in Class III shall serve for a term ending on the date of the third subsequent annual meeting of stockholders; provided, further, that, in accordance with Maryland law, if the Classification Date falls prior to the first annual meeting of stockholders, then the initial terms of each initial director shall end on such date and at their first annual meeting the stockholders shall elect or reelect, as the case may be, directors to serve the remainder of each classified term as described above. In accordance with Maryland law, prior to the Classification Date, each director shall hold office until the next annual meeting of stockholders and until his or her successor is elected and qualifies. SECTION 3. REMOVAL OF DIRECTORS. Any director may be removed with or without cause by the affirmative vote of stockholders holding not less than 66-2/3% of all votes entitled to be cast for the election of directors. SECTION 4. FILLING VACANCIES. Except in the case of a vacancy on the Board of Directors among the directors elected by a class of Equity Shares other than Common Shares, any vacancy on the Board of Directors may be filled by the affirmative vote of the remaining directors (except that a vacancy which results from an 15 increase in the number of directors may be filled by a majority of the entire Board of Directors), and, in the case of a vacancy resulting from the removal of a director, by the stockholders by the vote of a majority of the votes entitled to be cast in the election of directors, subject to any rights granted to any class of Preferred Shares. SECTION 5. NO CUMULATIVE VOTING. Stockholders shall not be entitled to cumulative voting rights with respect to the election of directors. SECTION 6. RESERVED POWERS OF THE BOARD OF DIRECTORS. The enumeration and definition of particular powers of the Board of Directors included in the foregoing provisions of Article VI or the provisions of Article VII shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other Article of the Charter of the Corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force. SECTION 7. INDEPENDENT DIRECTORS. At all times (except (i) during a period not to exceed sixty (60) days following the death, resignation, incapacity or removal from office of a director prior to the expiration of the director's term of office or (ii) prior to the closing date of the Initial Public Offering and the consummation of all transactions related thereto), a majority of the directors shall be Independent Directors. An Independent Director shall be a natural person who is not affiliated, directly or indirectly, with the Manager or its Affiliates, whether by ownership of, ownership interest in, employment by, any material business or professional relationship with, or serving as an officer or director of the Manager or its Affiliates and are not employed by or officers of the Company. For purposes of this Section 7 of this Article VII, (A) an "Affiliate" of a person or entity shall mean any person that, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such person, (B) the term "person" means and includes individuals, corporations, general and limited partnerships, stock companies or associations, joint ventures, associations companies, trusts, banks, trust companies, last trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof, and (C) "control" (including the correlative meanings of the terms "controlled by" and "under common control with", as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests. Notwithstanding the foregoing requirement that a majority of the directors be Independent Directors, no action otherwise validly taken by the Board of Directors during a period in which a 16 majority of its members are not Independent Directors shall be invalidated or otherwise affected by such circumstance, nor shall such circumstance subject the directors taking any such action to a higher standard of care or to liability other than that which would have applied to such action had a majority of the members of the Board of Directors been Independent Directors at the time such action was taken. ARTICLE VII PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS The following provisions are hereby adopted for the purpose of defining, limiting, and regulating the powers of the Corporation and of the directors and stockholders: SECTION 1. BOARD AUTHORIZATION OF SHARE ISSUANCES. The Board of Directors is hereby empowered to authorize the issuance from time to time of shares of any class of Equity Shares, whether now or hereafter authorized, or securities convertible into any class of Equity Shares, whether now or hereafter authorized, for such consideration as may be deemed advisable by the Board of Directors and without any action by the stockholders. SECTION 2. NO PREEMPTIVE RIGHTS. Except as provided by the Board of Directors in authorizing the issuance of Preferred Shares pursuant to Section 5 of Article V, no holder of any stock or any other securities of the Corporation, whether now or hereafter authorized, shall have any preemptive right to subscribe to or purchase (i) any shares of capital stock of the Corporation, (ii) any warrants, rights, or options to purchase any such shares, or (ii) any other securities of the Corporation or obligations convertible into any shares of capital stock of the Corporation or such other securities or into warrants, rights or options to purchase any such shares or other securities. SECTION 3. POWERS OF THE BOARD OF DIRECTORS. The Board of Directors of the Corporation shall, consistent with applicable law, have the power in its sole discretion to determine from time to time in accordance with sound accounting practice or other reasonable valuation methods what constitutes annual or other net profits, earnings, surplus, or net assets in excess of capital; to fix and vary from time to time the amount to be reserved as working capital, or determine that retained earnings or surplus shall remain in the hands of the Corporation; to set apart out of any funds of the Corporation such reserve or reserves in such amount or amounts and for such proper purpose or purposes as it shall determine and to abolish any such reserve or any part thereof; to distribute and pay distributions or dividends in stock, cash or other securities or property, out of surplus or any other funds or amounts legally available therefor, at such times and to the stockholders of record on such dates as it may, from time to time, determine; and to determine whether and to what extent and at what times and places and under what conditions and regulations the books, accounts and documents of the Corporation, or any of them, shall be open to the inspection of stockholders, except as otherwise provided by statute or by the Bylaws of the 17 Corporation, and, except as so provided, no stockholder shall have any right to inspect any book, account or document of the Corporation unless authorized so to do by resolution of the Board of Directors. SECTION 4. RELATED PARTY TRANSACTIONS. Without limiting any other procedures available by law, set forth in the Bylaws or otherwise established by the Corporation, the Board of Directors may authorize any agreement or transaction with any Person, corporation, association, company, trust, partnership (limited or general) or other organization, although one or more of the directors or officers of the Corporation may be a party to any such agreement or an officer, director, stockholder or member of such other party (an "Interested Officer/Director"), and no such agreement or transaction shall be invalidated or rendered void or voidable solely by reason of the existence of any such relationship if: (i) the existence is disclosed or known to the Board of Directors, and the contract or transaction is authorized, approved or ratified by the affirmative vote of a majority of the directors, excluding the Interested Officers/Directors; or (ii) the existence is disclosed to the stockholders entitled to vote, and the contract or transaction is authorized, approved or ratified by a majority of the votes entitled to be cast by the stockholders, other than the votes of the shares held of record by the Interested Officers/Directors; or (iii) the contract or transaction is fair and reasonable to the Corporation. Any Interested Officer/Director of the Corporation or the stock owned by them or by a corporation, association, company, trust, partnership (limited or general) or other organization in which an Interested Officer/Director may have an interest, may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee of the Board of Directors or at a meeting of the stockholders, as the case may be, at which the contract or transaction is authorized, approved or ratified. ARTICLE VIII INDEMNIFICATION AND LIMITATION OF LIABILITY SECTION 1. INDEMNIFICATION. (a) Indemnification of Agents. The Corporation shall indemnify, in the manner and to the fullest extent permitted by law, any person (or the estate of any person) who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or such director or officer is or was serving at the request of the Corporation as a director, officer, agent, trustee, partner or employee of another corporation, partnership, joint venture, limited liability company, trust, real estate investment trust, employee benefit plan or other enterprise. To the fullest extent permitted by law, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement and any such expenses may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding. The Corporation shall indemnify other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation's Bylaws and be permitted by law. Any repeal or modification of this Section 1(a) by the stockholders of the 18 Corporation shall be prospective only, and shall not adversely affect any right to indemnification or advancement of expenses hereunder existing at the time of such repeal or modification. (b) Insurance. The Corporation may, to the fullest extent permitted by law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person. (c) Indemnification Non-Exclusive. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the fullest extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. SECTION 2. LIMITATION OF LIABILITY. To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted from time to time, no director or officer of this Corporation shall be personally liable to the Corporation or its stockholders, or any of them, for money damages. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal. ARTICLE IX AMENDMENT SECTION 1. RIGHT TO AMEND CHARTER. The Corporation reserves the right from time to time to make any amendments to the Charter which may now or hereafter be authorized by law, including any amendments changing the terms or contract rights, as expressly set forth in the Charter, of any of its outstanding stock by classification, reclassification or otherwise. SECTION 2. AMENDMENT TO THE CHARTER OF THE CORPORATION. Notwithstanding any provision of law to the contrary, except as otherwise specifically provided in Section 3 of this Article IX, the affirmative vote of a majority of all votes entitled to be cast by the stockholders of the Corporation shall be sufficient, valid and effective, after due authorization, approval or advice by the Board of Directors, to approve and authorize any amendment to the Charter of the Corporation. SECTION 3. CERTAIN AMENDMENTS REQUIRING SPECIAL STOCKHOLDER VOTE. (a) Notwithstanding any other provisions of the Charter or Bylaws of the Corporation (and in addition to any other vote, approval, authorization or advice (including that of the Board of Directors) that may be required by law, the Charter or the Bylaws of the Corporation), the 19 affirmative vote of stockholders holding at least two-thirds (66-2/3%) of all of the votes entitled to be cast thereon shall be required to amend, alter, change, repeal, or adopt any provisions inconsistent with, the provisions of this Article IX, Section 2 (classified Board) and Section 3 (removal of directors) of Article VI, Section 5 (no cumulative voting) of Article VI, Section 7 (Independent Directors) of Article VI, Article VIII (indemnification of directors, officers, employees and agents and limitation of liability of officers and directors) and Section 2 (preemptive rights) of Article VII. In addition, no term or provisions of the Charter may be added, amended or repealed in any respect that would, in the determination of the Board of Directors, cause the Corporation not to qualify as a REIT under the Code unless, in each such case, such action is approved (in addition to any other vote, approval, authorization or advice (including that of the Board of Directors) that may otherwise be required) by the affirmative vote of the holders of not less than two-thirds (66-2/3%) of all the votes entitled to be cast on the matter. (b) The Board of Directors shall take no action to terminate the Corporation's status as a REIT or to amend the provisions of Article V until such time as (i) the Board of Directors adopts a resolution recommending that the Corporation terminate its status as a REIT or amend Article V, as the case may be, (ii) the Board of Directors presents the resolution at an annual or special meeting of the stockholders and (iii) such resolution is approved by at least two-thirds (66-2/3%) of all of the votes entitled to be cast on the matter. ARTICLE X DURATION OF CORPORATION The duration of the Corporation shall be perpetual. SECOND: The amendment to and restatement of the Charter of the ------ Corporation as hereinabove set forth has been duly authorized by the Board of Directors and approved by the sole holder of stock entitled to be voted on the matter at the time of approval. THIRD: The amendment and restatement of the Charter of the ----- Corporation does not increase the authorized stock of the Corporation. FOURTH: The undersigned President acknowledges that these Articles of ------ Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information, and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. 20 IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its President and attested by its Secretary as of the 21st day of November, 1997. By: /s/ Philip A. Barach Philip A. Barach President and Chief Executive Officer ATTEST: By: /s/ Michael E. Cahill Michael E. Cahill Secretary 21 EX-3.2 5 BYLAWS OF APEX MORTGAGE CAPITAL, INC. EXHIBIT 3.2 THE BYLAWS OF APEX MORTGAGE CAPITAL, INC. TABLE OF CONTENTS
Page ---- ARTICLE I Offices............................................................ 1 Section 1. Principal Office............................................... 1 Section 2. Additional Offices............................................. 1 Section 3. Fiscal and Taxable Years....................................... 1 ARTICLE II Definitions........................................................ 1 ARTICLE III Meetings of Stockholders........................................... 1 Section 1. Place.......................................................... 1 Section 2. Annual Meeting................................................. 2 Section 3. Special Meetings............................................... 3 Section 4. Notice......................................................... 4 Section 5. Organization................................................... 4 Section 6. Quorum......................................................... 4 Section 7. Voting......................................................... 5 Section 8. Proxies........................................................ 5 Section 9. Voting of Shares by Certain Holders............................ 5 Section 10. Inspectors..................................................... 5 Section 11. Determination of Stockholders of Record........................ 6 Section 12. Action Without a Meeting....................................... 6 Section 13. Voting by Ballot............................................... 6 Section 14. Control Share Acquisition Statute.............................. 6 ARTICLE IV Directors.......................................................... 6 Section 1. General Powers................................................. 6 Section 2. Number, Tenure and Qualifications.............................. 6 Section 3. Changes in Number; Vacancies................................... 7 Section 4. Resignations................................................... 7 Section 5. Removal of Directors........................................... 7 Section 6. Annual and Regular Meetings.................................... 8 Section 7. Special Meetings............................................... 8 Section 8. Notice......................................................... 8 Section 9. Quorum......................................................... 8 Section 10. Voting......................................................... 8 Section 11. Telephone Meetings............................................. 9 Section 12. Action Without a Meeting....................................... 9 Section 13. Compensation................................................... 9 Section 14. Policies and Resolutions....................................... 9 Section 15. External Management............................................ 9 ARTICLE V Committees......................................................... 10 Section 1. Committees of the Board........................................ 10 Section 2. Telephone Meetings............................................. 11 Section 3. Action By Committees Without a Meeting......................... 11 ARTICLE VI Officers........................................................... 11 Section 1. General Provisions............................................. 11 Section 2. Subordinate Officers, Committees and Agents.................... 12
i Section 3. Removal and Resignation........................................ 12 Section 4. Vacancies...................................................... 12 Section 5. General Powers................................................. 12 Section 6. Chief Executive Officer........................................ 12 Section 7. Chief Operating Officer........................................ 12 Section 8. Chairman and Vice Chairman of the Board........................ 12 Section 9. President...................................................... 12 Section 10. Vice Presidents................................................ 13 Section 11. Secretary...................................................... 13 Section 12. Chief Financial Officer or Treasurer........................... 13 Section 13. Assistant Secretaries and Assistant Treasurers................. 13 Section 14. Salaries....................................................... 13 ARTICLE VII Execution of Corporate Instruments and Voting Securities........... 13 Section 1. Contracts...................................................... 13 Section 2. Checks and Drafts.............................................. 14 Section 3. Deposits....................................................... 14 Section 4. Voting Securities Owned by the Corporation..................... 14 ARTICLE VIII Capital Stock...................................................... 14 Section 1. Certificates of Shares......................................... 14 Section 2. Lost Certificate............................................... 14 Section 3. Transfer Agents and Registrars................................. 14 Section 4. Transfer of Shares............................................. 15 Section 5. Share Ledger................................................... 15 ARTICLE IX Dividends.......................................................... 15 Section 1. Declaration.................................................... 15 Section 2. Contingencies.................................................. 15 ARTICLE X Indemnification and Limitation of Liability........................ 15 Section 1. Indemnification of Agents...................................... 15 Section 2. Authority to Advance Expenses.................................. 16 Section 3. Right of Claimant to Bring Suit................................ 16 Section 4. Insurance...................................................... 16 Section 5. Indemnification Non-Exclusive.................................. 16 Section 6. Subrogation.................................................... 16 Section 7. No Duplication of Payments..................................... 16 Section 8. Limitation of Liability........................................ 16 ARTICLE XI Seal............................................................... 17 Section 1. Seal........................................................... 17 Section 2. Affixing Seal.................................................. 17 ARTICLE XII Waiver of Notice................................................... 17 ARTICLE XIII Amendment of Bylaws................................................ 17
ii ARTICLE I OFFICES ------- SECTION 1. PRINCIPAL OFFICE. The principal office of Apex Mortgage ---------------- Capital, Inc. (the "Corporation") shall be located at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017 or at any other place or places as the Board of Directors may designate. SECTION 2. ADDITIONAL OFFICES. The Corporation may have additional ------------------ offices at such places as the Board of Directors may from time to time determine or the business of the Corporation may require. SECTION 3. FISCAL AND TAXABLE YEARS. The fiscal and taxable years of ------------------------ the Corporation shall begin on January 1 and end on December 31. ARTICLE II DEFINITIONS ----------- For purposes of these Bylaws, the following words shall have the meanings set forth below: (a) "Affiliate" of a person shall mean any person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with such person. The term "person" means and includes individuals, corporations, general and limited partnerships, stock companies, land trusts, business trusts or other entities and governments and agencies and political subdivisions thereof. For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests. (b) "Independent Director" shall mean a Director of the Corporation who is not affiliated, directly or indirectly, with the Manager or its Affiliates, whether by ownership of, ownership interest in, employment by, any material business or professional relationship with, or serving as an officer or director of the Manager or its Affiliates. (c) "Initial Public Offering" shall mean the initial public offering of shares of common stock, par value $0.01 per share, of the Corporation. (d) "Manager" shall mean TCW Investment Management Company or such other person that manages the affairs of the Corporation pursuant to a written management agreement. ARTICLE III MEETINGS OF STOCKHOLDERS ------------------------ SECTION 1. PLACE. All meetings of stockholders shall be held at 865 ----- South Figueroa Street, Suite 1800, Los Angeles, California, or at such other place within the United States as shall be stated in the notice of the meeting. SECTION 2. ANNUAL MEETING. The President or the Board of Directors -------------- may fix the time of the annual meeting of the stockholders for the election of Directors and the transaction of any business as may be properly brought before the meeting, but if no such date and time is fixed by the President or the Board of Directors, the meeting for any calendar year shall be held on the fourth Thursday in May, if that day is not a legal holiday. If that day is a legal holiday, the annual meeting shall be held on the next succeeding business day that is not a legal holiday. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation that are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2. The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Only persons who are nominated in accordance with the procedures set forth in this Section 2 shall be eligible for election as Directors at an annual meeting of stockholders. Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice provisions set forth in this Section 2. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice of the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of Directors, or as otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such persons' written consent to being named in the proxy statement as a nominee or to serving as a Director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination that pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set 2 forth in this Section 2. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. SPECIAL MEETINGS. The President, the Chairman of the ---------------- Board of Directors, a majority of the Directors or a majority of the Independent Directors may call special meetings of the stockholders. Special meetings of stockholders also shall be called by the Secretary upon the written request of the holders of shares entitled to cast not less than fifty percent (50%) of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The Secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation of such costs by such stockholders, the Secretary shall give notice to each stockholder entitled to notice of the meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting, a special meeting need not be called to consider any matter that is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding twelve months. At a special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a special meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or (b) otherwise properly brought before the meeting by holders of shares entitled to cast not less than fifty percent (50%) of the votes entitled to be cast at such meeting. For business to be properly brought before a special meeting by such stockholders, such stockholders must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, such stockholders' notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by such stockholders to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made. A stockholders' notice to the Secretary shall set forth as to each matter such stockholders propose to bring before the special meeting (a) a brief description of the business desired to be brought before the special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholders proposing such business, (c) the class and number of shares of the Corporation that are beneficially owned by the stockholders, and (d) any material interest of the stockholders in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any special meeting except in accordance with the procedures set forth in this Section 3. The Chairman of the special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 3, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. The Board of Directors shall determine whether Directors will be elected at any special meeting of the stockholders. Only persons who are nominated in accordance with the procedures set forth in this Section 3 shall be eligible for election as Directors at a special meeting of stockholders. Nominations of persons for election to the Board of Directors of the Corporation may be made at a special meeting of stockholders by or at the direction of the Board of Directors or by holders of shares entitled to cast not less than fifty percent (50%) of the votes entitled to be cast at such meeting who comply with the notice provisions set forth in this Section 3. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, such stockholders' notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by such stockholders to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholders' notice shall set forth (a) as to each person whom the stockholders 3 propose to nominate for election or reelection as a Director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation that are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of Directors, or as otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such persons' written consent to being named in the proxy statement as a nominee or to serving as a Director if elected); and (b) as to the stockholders giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholders and (ii) the class and number of shares of the Corporation that are beneficially owned by such stockholders. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholders' notice of nomination that pertains to the nominee. No person shall be eligible for election as a Director of the Corporation at a special meeting of stockholders unless nominated in accordance with the procedures set forth in this Section 3. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 4. NOTICE. (a) Not less than fifteen (15) nor more than ------ ninety (90) days before each meeting of stockholders, the Secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting, written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. (b) If any meeting action is proposed to be taken which, if taken, would entitle stockholders fulfilling the requirements of Section 3-207 et seq. -- --- of the Maryland General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that right and shall be accompanied by a copy of that statutory section. SECTION 5. ORGANIZATION. At every meeting of the stockholders, the ------------ Chairman of the Board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the Chairman of the Board, one of the following officers present shall conduct the meeting in the order stated: the Vice Chairman of the Board, if there be one, the President, the Vice Presidents in their order of rank and seniority, or a Chairman chosen by the stockholders entitled to cast a majority of the votes that all stockholders present in person or by proxy are entitled to cast, shall act as Chairman, and the Secretary, or, in his absence, an assistant secretary, or in the absence of both the Secretary and assistant secretaries, a person appointed by the Chairman, shall act as Secretary. SECTION 6. QUORUM. At any meeting of stockholders, the presence in ------ person or by proxy of stockholders entitled to cast fifty percent (50%) of all the votes entitled to be cast at such meeting shall constitute a quorum; but this Section 6 shall not affect any requirement under any statute, the Articles of Incorporation or these Bylaws for the vote necessary for the adoption of any measure. If such quorum shall not be present at any meeting of the stockholders, no business may be transacted, except that the stockholders representing a majority of the shares entitled to vote at such meeting, present in person or by proxy, may vote to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting until such quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted that might have been transacted at the meeting as originally notified. SECTION 7. VOTING. A plurality of all the votes cast at a meeting of ------ stockholders duly called and at which a quorum is present shall be sufficient to elect a Director. There shall be no cumulative voting. 4 Each common share may be voted for as many individuals as there are Directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter that may properly come before the meeting, unless more than a majority of the votes cast is required by statute, by the Articles of Incorporation or by these Bylaws. Each stockholder of record shall have the right, at every meeting of stockholders, to one vote for each share held, except shares that are the subject of a redemption notice as provided in the Articles of Incorporation. SECTION 8. PROXIES. A stockholder may vote the common shares owned ------- of record by him, either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. SECTION 9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares registered in ----------------------------------- the name of a trust or another corporation, if entitled to be voted, may be voted by the president, a vice president or a proxy appointed by the president or a vice president of such trust or other corporation, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the board of such trust or other corporation presents a certified copy of such bylaw or resolution, in which case such person may vote such shares. Any fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. Shares indirectly owned by the Corporation shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall all be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified shares in place of the stockholder who makes the certification. SECTION 10. INSPECTORS. At any meeting of stockholders, the Chairman ---------- of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. SECTION 11. DETERMINATION OF STOCKHOLDERS OF RECORD. The Board of --------------------------------------- Directors shall fix a date, not more than ninety (90) nor less than fifteen (15) days preceding the date of any meeting of stockholders, and not more than ninety (90) days preceding the date fixed for the payment of any dividend or 5 distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the stockholders entitled to notice of, or to vote at, any such meeting, or entitled to receive any such dividend or distribution or allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section 11, such determination shall apply to any adjournment thereof unless the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting, in which case the Board of Directors shall fix a new record date. SECTION 12. ACTION WITHOUT A MEETING. Any action required or ------------------------ permitted to be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by each stockholder entitled to vote on the matter and any other stockholder entitled to notice of a meeting of stockholders (but not to vote thereat) has waived in writing any right to dissent from such action, and such consent and waiver are filed with the minutes of proceedings of the stockholders. SECTION 13. VOTING BY BALLOT. Voting on any question or in any ---------------- election may be viva voce unless the presiding officer shall order or any stockholder shall demand that voting be by ballot. SECTION 14. CONTROL SHARE ACQUISITION STATUTE. Subtitle 7 of Title 3 --------------------------------- of the Maryland General Corporation Law does not apply to any acquisition of shares of capital stock of the Corporation. ARTICLE IV DIRECTORS --------- SECTION 1. GENERAL POWERS. The Board of Directors shall have full -------------- power to conduct, manage and direct the business and affairs of the Corporation, and all powers of the Corporation, except those specifically reserved or granted to the stockholders by statute or by the Articles of Incorporation or these Bylaws, shall be exercised by, or under the authority of, the Board of Directors. Except as otherwise agreed between the Corporation and the Director, each individual Director, including each Independent Director, may engage in other business activities of the type conducted by the Corporation and is not required to present to the Corporation any investment opportunities presented to them even though the investment opportunities may be within the scope of the Corporation's investment policies. SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting --------------------------------- or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of Directors, provided that the number thereof shall not be less than three (3) (or, if greater, the minimum number required by the General Laws of the State of Maryland now or hereafter in force and provided that if there is only one (1) stockholder of the Corporation, there may be one (1) Director), nor more than nine (9), and further provided that the tenure of office of a Director shall not be affected by any decrease in the number of Directors. Pursuant to the Articles of Incorporation of the Corporation, at all times subsequent to the closing of the Initial Public Offering when there shall be at least seven (7) Directors, the Directors shall be divided into three (3) classes with terms of office of three years each, as nearly equal in numbers as the then total number of Directors constituting the entire Board permits, with the term of office of one class expiring at the annual meeting of stockholders in each year. Each class of Directors shall contain at least one Independent Director and at least one Director who is not an Independent Director. At the initial annual meeting of stockholders, Directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, Directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and Directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies 6 in the Board of Directors for any reason, and any directorships resulting from any increase in the number of Directors, may be filled as set forth in Section 3 of this Article, and any Directors so chosen shall hold office until the next election of the class for which such Directors shall have been chosen and until their successors shall be elected and qualified, or until his or her resignation, removal (in accordance with the Articles of Incorporation and these Bylaws) or death. At all times (except (i) during a period not to exceed sixty (60) days following the death, resignation, incapacity or removal from office of a Director prior to the expiration of the Director's term of office or (ii) prior to the closing date of the Initial Public Offering), a majority of the Directors shall be Independent Directors. Notwithstanding the foregoing requirement that a majority of the Directors be Independent Directors, no action otherwise validly taken by the Board of Directors during a period in which it is permitted in accordance with the preceding paragraph that a majority of its members are not Independent Directors shall be invalidated or otherwise affected by such circumstance, nor shall such circumstance subject the Directors taking any such action to a higher standard of care or to liability other than that which would have applied to such action had a majority of the members of the Board of Directors been Independent Directors at the time such action was taken. SECTION 3. CHANGES IN NUMBER; VACANCIES. Except in the case of a ---------------------------- vacancy on the Board of Directors among the Directors elected by a class of equity shares other than common shares or as provided in Section 5 of this Article, any vacancy on the Board of Directors (including a vacancy resulting from an increase in the number of Directors) shall be filled by the affirmative vote of a majority of the remaining Directors. Any vacancy on the Board of Directors among the Directors elected by a class of equity shares (other than common shares) may be filled by a majority of the remaining Directors elected by that class or the sole remaining Director elected by that class, or by the stockholders by a majority of the votes of that class. If the stockholders of any class or series are entitled separately to elect one or more Directors, a majority of the remaining Directors elected by that class or series or the sole remaining Director elected by that class or series may fill any vacancy among the number of Directors elected by that class or series. Notwithstanding anything herein to the contrary, the vacancy for any reason of any Independent Director shall be filled by a majority vote of the remaining members of the Board of Directors, including a majority vote of the remaining Independent Directors. A Director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual meeting of stockholders or until his successor is elected and qualified. The Board of Directors may declare unqualified a Director who has been declared of unsound mind by an order of court who has pled guilty or nolo contendere to, or been convicted of, a felony involving moral turpitude, or who has wilfully violated the Corporation's Articles of Incorporation or these Bylaws. The office of a Director declared unqualified shall be considered vacant until filled as herein provided. SECTION 4. RESIGNATIONS. Any Director or member of a committee may ------------ resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of the receipt by the Chairman of the Board, the President or the Secretary. SECTION 5. REMOVAL OF DIRECTORS. Any Director may be removed, with -------------------- or without cause, by the affirmative vote of the stockholders holding not less than two-thirds (66 2/3%) of all the votes entitled to be cast for the election of Directors; provided, however, that in the case of any Director elected by holders of a class of equity shares, other than common shares, such Directors may be removed, with or without cause, by the affirmative vote of not less than two-thirds (66 2/3%) of all the votes entitled to be cast by that class of equity shares. In the case of a vacancy resulting from the removal of a Director, such vacancy may be filled by the stockholders by the vote of a majority of the votes entitled to be cast in the election of Directors, provided that a vacancy resulting from the removal of a Director elected by a class of equity shares, other than common shares, may be filled by the vote of a majority of the votes of such class entitled to be cast in the election of Directors. 7 SECTION 6. ANNUAL AND REGULAR MEETINGS. An annual meeting of the --------------------------- Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this bylaw being necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of California, for the holding of regular meeting of the Board of Directors without other notice than such resolution. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of ---------------- Directors may be called by or at the request of the President, a majority of the Board of Directors or a majority of the Independent Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of California, as the place for holding any special meeting of the Board of Directors called by them. SECTION 8. NOTICE. Notice of any special meeting of the Board of ------ Directors shall be given by written notice delivered personally, telegraphed or mailed to each Director at his business or resident address. Personally delivered or telegraphed notices shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless required by statute or these Bylaws. SECTION 9. QUORUM. A majority of the entire Board of Directors shall ------ constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a quorum is present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. The Directors present at a meeting that has been duly called and convened may continue to transact business until adjournment notwithstanding the withdrawal of enough Directors to leave less than a majority of the entire Board, provided that at least one-third of the entire Board of Directors remains present at that meeting, in which case a quorum will still be deemed present. SECTION 10. VOTING. (a) Except as provided in subsection (b) of this ------ Section 10, the action of the majority of the Directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by the Articles of Incorporation, these Bylaws, or applicable statute. (b) Notwithstanding anything in these Bylaws to the contrary, any action pertaining to a transaction involving the Corporation in which the Manager, any Director or officer of the Corporation or any Affiliate of any of the foregoing persons has any direct or indirect interest other than solely as a result of such person's status as Manager, Director or officer of the Corporation, shall be approved by a majority of the Directors and a majority of the disinterested Independent Directors, even if the disinterested Independent Directors constitutes less than a quorum. In approving any such transaction or series of transactions, the Directors and the disinterested Independent Directors must determine that: (i) the transaction as contemplated is fair as to the Corporation and its stockholders at the time it is authorized, approved and ratified; (ii) if an acquisition of property other than mortgage securities or mortgage loans is involved, the total consideration is not in excess of the appraised value of such property being acquired; and (iii) if the transaction involves compensation to the Manager or its Affiliates for services rendered in a capacity other than that contemplated by the management arrangements, to the knowledge of the 8 Directors such compensation is not greater than the customary charges for comparable services generally available from other competent unaffiliated persons. SECTION 11. TELEPHONE MEETINGS. Members of the Board of Directors ------------------ may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. SECTION 12. ACTION WITHOUT A MEETING. Any action required or ------------------------ permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each Director and such written consent is filed with the minutes of proceedings of the Board of Directors. SECTION 13. COMPENSATION. Independent Directors shall receive such ------------ reasonable compensation for their services as Directors as the Board of Directors may fix or determine from time to time; such compensation may include a fixed sum, capital stock of the Corporation or options to purchase capital stock of the Corporation and Directors shall receive reimbursement of reasonable expenses incurred in traveling to and from or attending regular or special meetings of the Board of Directors or of any committee thereof. SECTION 14. POLICIES AND RESOLUTIONS. The investment policies of the ------------------------ Corporation and the restrictions thereon shall be established from time to time by the Board of Directors, including a majority of the Independent Directors. The Independent Directors shall review the investment policies of the Corporation at least annually to determine that the policies then being followed by the Corporation are in the best interests of its stockholders. Each such determination and the basis therefor shall be set forth in the minutes of the Board of Directors. It shall be the duty of the Board of Directors to insure that the purchase, sale, retention and disposal of the Corporation's assets, the investment policies, operating policies and the borrowing policies of the Corporation and the limitations thereon or amendment thereof are at all times: (a) consistent with such policies, limitations and restrictions as are contained in these Bylaws, or in the Corporation's Articles of Incorporation, subject to revision from time to time at the discretion of the Board of Directors (including approval by a majority of the Independent Directors) without stockholder approval unless otherwise required by law; and (b) in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as amended. SECTION 15. EXTERNAL MANAGEMENT. ------------------- (a) AUTHORIZATION. The Board of Directors may authorize, subject to such ------------- conditions, if any, as may be required by an applicable statute, rule, regulation or another by-law of the Corporation, the execution and performance by the Corporation of one or more agreements with a Manager whereby, subject to the supervision and control of the Board of Directors, the Manager shall render or make available to the Corporation managerial, investment, advisory and/or related services, office space and other services and facilities (including the management or supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements (including the compensation payable thereunder by the Corporation). (b) TERM OF MANAGEMENT AGREEMENT; COMPENSATION REVIEW. Upon completion of ------------------------------------------------- any initial term, each contract for the services of a Manager entered into by the Board of Directors shall be terminable by a majority of the Directors upon sixty (60) days' written notice without cause. Such termination right may, at the discretion of the Independent Directors, include a termination fee. During the term of any Management Agreement, the Board of Directors shall review and approve the mathematical calculation of any base and 9 incentive compensation paid to any Manager on a quarterly basis, one quarter in arrears, during each scheduled quarterly Board of Directors meeting, as well as any annual reconciliation thereof. (c) REVIEW OF MANAGEMENT ARRANGEMENTS. The Board of Directors (including --------------------------------- a majority of the Independent Directors) shall evaluate the performance of the Manager at least annually and prior to any entry into or renewal of any management agreement, provided that no such evaluation shall be necessary prior to the Corporation's entry into its initial management agreement with its initial Manager. The Board of Directors (including a majority of the Independent Directors) shall further determine whether the compensation of the Manager is reasonable in relation to the nature and quality of services performed. The evaluation of the Board of Directors shall be based on such factors as the Directors may deem relevant, which may include the following (it being understood that the Independent Directors shall have no obligation to use the following factors in developing their findings): (i) The size of the management fee in relation to the size, compensation and profitability of the investment portfolio of the Corporation; (ii) The success of the Manager in generating opportunities that meet the investment objectives of the Corporation; (iii) The rates charged to other corporations similar to the Corporation and to other investors by advisers performing similar services; and (iv) The quality and extent of service and advice furnished to the Corporation. (d) QUALIFICATIONS OF SUCCESSOR MANAGER. Upon any termination of the ----------------------------------- initial management arrangements with the initial Manager, the Board of Directors (including a majority of the Independent Directors) shall determine that any successor Manager possesses sufficient qualifications (a) to perform the management function for the Corporation and (b) to justify the compensation provided for in its contract with the Corporation. SECTION 16. LIMITATION ON UNSECURED DEBT. The amount of the ---------------------------- Corporation's unsecured debt (excluding collateralized borrowings such as reverse repurchase agreements, dollar-roll agreements, warehouse lines of credit and collateralized mortgage obligations) shall be limited to three hundred percent (300%) of the aggregate amount of the Corporation's equity on a consolidated basis, unless a greater percentage or amount is specifically approved by a majority of the Independent Directors. ARTICLE V COMMITTEES ---------- SECTION 1. COMMITTEES OF THE BOARD. The Board of Directors may ----------------------- appoint from among its members an executive committee and other committees comprised of one or more Directors. The Board of Directors shall appoint an audit committee comprised of not less than two members, a majority of whom are Independent Directors. The Board of Directors shall appoint a compensation committee comprised of not less than three Independent Directors. The Board of Directors may delegate to any committee any of the powers of the Board of Directors except the power to elect Directors, declare dividends or distributions on shares, recommend to the stockholders any action that requires stockholder approval, amend or repeal these Bylaws, approve any merger or share exchange which does not require stockholder approval or issue shares. However, if the Board of Directors has given general authorization for the issuance of shares, a committee of the Board of Directors, in accordance with a general formula or method specified by the Board of Directors by resolution or by adoption of a share option plan, may fix the terms of shares, subject to classification or reclassification, and 10 the terms on which any shares may be issued. At least a majority of the members of any such committee shall be Independent Directors. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. One-third, but not less than two (unless the committee has less than two members), of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or any two members of any committee (unless the committee has less than two members, in which case one member of such committee) may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any such committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of such absent or disqualified members; provided, however, that in the event of the absence or disqualification of an Independent Director, such appointee shall be an Independent Director. Each committee shall keep minutes of its proceedings and shall report the same to the Board of Directors at the meeting next succeeding, and any action by the committees shall be subject to revision and alteration by the Board of Directors, provided that no rights of third persons shall be affected by any such revision or altercation. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternative members to replace any absent or disqualified members or to dissolve any such committee. SECTION 2. TELEPHONE MEETINGS. Members of a committee of the Board ------------------ of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in a person at the meeting. SECTION 3. ACTION BY COMMITTEES WITHOUT A MEETING. Any action -------------------------------------- required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. ARTICLE VI OFFICERS -------- SECTION 1. GENERAL PROVISIONS. The officers of the Corporation may ------------------ consist of a Chairman of the Board, a Vice Chairman of the Board, a President, a Chief Executive Officer, a Chief Operating Officer, one or more Vice Presidents, a Chief Financial Officer or Treasurer, one or more assistant treasurers, a Secretary, and one or more assistant secretaries and such other officers as may be elected in accordance with the provisions of Section 2 of this Article VI. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of President and Secretary. Election or appointment of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent. 11 SECTION 2. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The Board of ------------------------------------------- Directors may from time to time elect such other officers and appoint such committees, employees, and other agents as the business of the Corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws, or as the Board of Directors may from time to time determine. The Directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents. SECTION 3. REMOVAL AND RESIGNATION. Any officer or agent of the ----------------------- Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary. Any resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. SECTION 4. VACANCIES. A vacancy in any office may be filled by the --------- Board of Directors for the balance of the term. SECTION 5. GENERAL POWERS. All officers of the Corporation as -------------- between themselves and the Corporation shall, respectively, have such authority and perform such duties in the management of the property and affairs of the Corporation as may be determined by resolution of the Board of Directors, or in the absence of controlling provisions in a resolution of the Board of Directors, as may be provided in these Bylaws. SECTION 6. CHIEF EXECUTIVE OFFICER. The Board of Directors may ----------------------- designate a Chief Executive Officer from among the elected officers. The Chief Executive Officer shall have responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the administration of the business affairs of the Corporation. SECTION 7. CHIEF OPERATING OFFICER. The Board of Directors may ----------------------- designate a Chief Operating Officer from among the elected officers. Said officer will have the responsibility and duties as set forth by the Board of Directors or the Chief Executive Officer. SECTION 8. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The Chairman of --------------------------------------- the Board, if there be one, shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if there be one, shall preside at such meetings at which he shall be present. The Chairman of the Board and the Vice Chairman of the Board shall, respectively, perform such other duties as may be assigned to him or them by the Board of Directors. SECTION 9. PRESIDENT. The President shall in general supervise and --------- control all of the business and affairs of the Corporation. Unless the President is not a member of the Board of Directors, in the absence of both the Chairman and Vice Chairman of the Board, he shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. In the absence of a designation of a Chief Executive Officer by the Board of Directors, the President shall be the Chief Executive Officer and shall be ex officio a member of all committees that may, from time to time, be constituted by the Board of Directors. He may execute any deed, mortgage, bond, contract or other instrument to which the Corporation is a party, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. 12 SECTION 10. VICE PRESIDENTS. In the absence of the President or in --------------- the event of a vacancy in such office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of the election) shall perform the duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President, and shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors. The Board of Directors may designate one or more Vice Presidents as executive or senior Vice President or as Vice President for particular areas of responsibility. SECTION 11. SECRETARY. The Secretary shall (a) keep the minutes of --------- the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (e) have general charge of the share transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors. SECTION 12. CHIEF FINANCIAL OFFICER OR TREASURER. The Chief ------------------------------------ Financial Officer or Treasurer shall have the custody of the corporate funds and securities and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and Board of Directors, at the regular meetings of the Board of Directors or whenever they may require it, an account of all his transactions as Chief Financial Officer or Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Corporation. SECTION 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The ---------------------------------------------- assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Chief Financial Officer Treasurer, respectively, or by the President or the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors. SECTION 14. SALARIES. The salaries of the officers, if any, shall be -------- fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation. ARTICLE VII EXECUTION OF CORPORATE INSTRUMENTS AND VOTING SECURITIES -------------------------------------------------------- SECTION 1. CONTRACTS. The Board of Directors may authorize any --------- officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. 13 SECTION 2. CHECKS AND DRAFTS. All checks, drafts or other orders for ----------------- the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agents or agents of the Corporation and in such manner as shall from time to time be determined by the Board of Directors. SECTION 3. DEPOSITS. All funds of the Corporation not otherwise -------- employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate. SECTION 4. VOTING SECURITIES OWNED BY THE CORPORATION. All stock and ------------------------------------------ other securities of other corporations owned or held by the Corporation for itself or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized to do so by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board or by the Chief Executive Officer. ARTICLE VIII CAPITAL STOCK ------------- SECTION 1. CERTIFICATES OF SHARES. Each stockholder shall be ---------------------- entitled to a certificate or certificates which shall represent and certify the number of shares of each kind and class of shares held by him in the Corporation. Each certificate shall be signed by the Chairman of the Board or the President or a Vice President and countersigned by the Secretary or an assistant secretary of the Treasurer or an assistant treasurer and may be sealed with the corporate seal. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of shares, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which is restricted as to its transferability or voting powers, which is preferred or limited as to its dividends or as to its share of the assets upon liquidation or which is redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement or summary, the Corporation may set forth upon the face or back of the certificate a statement that the Corporation will furnish to any stockholder, upon request and without charge, a full statement of such information. SECTION 2. LOST CERTIFICATE. The Board of Directors may direct a new ---------------- certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the shares certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or his legal representative to advertise the same in such manner as it shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. SECTION 3. TRANSFER AGENTS AND REGISTRARS. At such time as the ------------------------------ Corporation lists its securities on a national securities exchange or qualifies for trading in the over the counter market, the Board of Directors shall appoint one or more banks or trust companies in such city or cities as the Board of Directors may deem advisable, from time to time, to act as transfer agents and/or registrars of the shares of the Corporation; and, upon such appointments being made, no certificate representing shares shall be valid until countersigned by one of such transfer agents and registered by one of such registrars. 14 SECTION 4. TRANSFER OF SHARES. No transfers of shares of the ------------------ Corporation shall be made if (i) void ab initio pursuant to any provision of the Corporation's Articles of Incorporation or (ii) the Board of Directors, pursuant to any provision of the Corporation's Articles of Incorporation, shall have refused to permit the transfer of such shares. Permitted transfers of shares of the Corporation shall be made on the share records of the Corporation only upon the instruction of the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed share transfer power and the payment of all taxes thereon. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, as to any transfers not prohibited by any provision of the Corporation's Articles of Incorporation by action of the Board of Directors thereunder, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 5. SHARE LEDGER. The Corporation shall maintain at its ------------ principal office or at the office of its counsel, accountants or transfer agents an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder. ARTICLE IX DIVIDENDS --------- SECTION 1. DECLARATION. Dividends upon the shares of the Corporation ----------- may be declared by the Board of Directors, subject to applicable provisions of law and the Articles of Incorporation. Dividends may be paid in cash, property or shares of the Corporation, subject to applicable provisions of law and the Articles of Incorporation. SECTION 2. CONTINGENCIES. Before payment of any dividends, there may ------------- be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining the property of the Corporation, its subsidiaries or any partnership for which it serves as general partner, or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INDEMNIFICATION AND LIMITATION OF LIABILITY ------------------------------------------- SECTION 1. INDEMNIFICATION OF AGENTS. The Corporation shall ------------------------- indemnify, in the manner and to the fullest extent permitted by law, any person (or the estate of any person) who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a Director or officer of the Corporation, or such Director or officer is or was serving at the request of the Corporation as a Director, officer, agent or employee of another corporation, partnership, joint venture, trust or other enterprise. To the fullest extent permitted by law, but subject to the provisions of this Article, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement. The Corporation shall indemnify other employees and agents to such extent as shall be authorized by the Board of Directors or these Bylaws and be permitted by law. Any repeal or modification of this Article X by the stockholders of the Corporation shall be 15 prospective only, and shall not adversely affect any right to indemnification or advancement of expenses hereunder existing at the time of such repeal or modification. The right to indemnification conferred in this Article shall be a contract right. SECTION 2. AUTHORITY TO ADVANCE EXPENSES. Expenses incurred by an ----------------------------- officer or Director (acting in his or her capacity as such) in defending an action, suit or proceeding shall be paid by the Corporation in advance of the final disposition thereof; provided, however, that such expenses shall be advanced only upon delivery to the Corporation of an undertaking by or on behalf of such Director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to indemnification by the Corporation as authorized in this Article or otherwise. Expenses incurred by other agents of the Corporation (or by the Directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon such terms and conditions as the Board of Directors, including a majority of the Independent Directors, deems appropriate. Any obligation to reimburse the Corporation for expense advances shall be unsecured and no interest shall be charged thereon. SECTION 3. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section ------------------------------- 1 or 2 of this Article is not paid in full by the Corporation within 90 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses (including attorneys' fees) of prosecuting such claims. SECTION 4. INSURANCE. The Corporation may to the fullest extent --------- permitted by law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person. SECTION 5. INDEMNIFICATION NON-EXCLUSIVE. The indemnification ----------------------------- provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the fullest extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, vote of stockholders or disinterested Directors, or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. SECTION 6. SUBROGATION. In the event of payment under this Article, ----------- the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified person, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation to effectively bring suit to enforce such rights. SECTION 7. NO DUPLICATION OF PAYMENTS. The Corporation shall not be -------------------------- liable under this Article to make any payment in connection with any claim against the indemnified person to the extent such person has actually received payment (under any insurance policy, agreement, vote or otherwise) of the amounts otherwise indemnifiable hereunder. SECTION 8. LIMITATION OF LIABILITY. To the fullest extent permitted ----------------------- by Maryland statutory or decisional law, as amended or interpreted from time to time, no Director or officer of the Corporation shall be personally liable to the Corporation or its stockholders, or any of them, for money damages. No amendment of these Bylaws 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. 16 ARTICLE XI SEAL ---- SECTION 1. SEAL. The Corporation may have a corporate seal, which ---- may be altered at will by the Board of Directors. The Board of Directors may authorize one or more duplicate or facsimile seals and provide for the custody thereof. Unless specifically required by law, a corporate seal is not required for the due execution of any document. SECTION 2. AFFIXING SEAL. Whenever the Corporation is required to ------------- place its corporate seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a corporate seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. ARTICLE XII WAIVER OF NOTICE ---------------- Whenever any notice is required to be given pursuant to the Articles of Incorporation or these Bylaws of the Corporation or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. ARTICLE XIII AMENDMENT OF BYLAWS ------------------- The Board of Directors shall have the exclusive power to alter, modify or repeal any Bylaws of the Corporation and to make new Bylaws not inconsistent with the Articles of Incorporation of the Corporation and applicable law, except that the Board of Directors shall not alter, modify or repeal any of the following provisions of the Bylaws without the approval of a majority of the stockholders: (a) Article II, subsection (b); (b) The third sentence of Article IV, Section 2; (c) The third paragraph of Article IV, Section 2; (d) The fourth sentence of Article IV, Section 3; (e) Article IV, Section 10(b); (f) The first paragraph of Article IV, Section 14; (g) Article IV, Section 15; and (h) This Article XIII. 17 EX-5.1 6 OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL November 18, 1997 Apex Mortgage Capital, Inc. 865 South Figueroa Street, Suite 1800 Los Angeles, California 90017 Re: Apex Mortgage Capital, Inc., a Maryland corporation (the "Company") - Registration Statement on Form S-11 (Registration No. 333-36069) pertaining to eleven million five hundred thousand (11,500,000) shares (the "Shares") of common stock, par value one cent ($0.01) per share --------- (the "Common Stock") -------------------------------------------- Ladies and Gentlemen: In connection with the registration of the Shares under the Securities Act of 1933, as amended (the "Act"), by the Company on Form S-11 filed with the Securities and Exchange Commission (the "Commission") on or about September 23, 1997 (Registration No. 333-36069), as amended (the "Registration Statement"), you have requested our opinion with respect to the matters set forth below. We have acted as special Maryland corporate counsel for the Company in connection with the matters described herein. In our capacity as special Maryland corporate counsel to the Company, we have reviewed and are familiar with proceedings taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Shares, and for purposes of this opinion have assumed such proceedings will be timely completed in the manner presently proposed. In addition, we have relied upon certificates and advice from the officers of the Company upon which we believe we are justified in relying and on various certificates from and documents recorded with, the State Department of Assessments and Taxation of Maryland (the "Department"), including the charter of the Company (the "Charter"), consisting of Articles of Incorporation filed with the Department on September 15, 1997. We have also examined the Bylaws of the Company adopted as of September 15, 1997 (the "Bylaws") and in full force and effect on the date hereof and resolutions of the Board of Directors of the Company adopted on Apex Mortgage Capital, Inc. November 18, 1997 Page 2 October 1, 1997 and in full force and effect on the date hereof; and such laws, records, documents, certificates, opinions and instruments as we deem necessary to render this opinion. We have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as certified, photostatic or conformed copies. In addition, we have assumed that each person executing any instrument, document or certificate referred to herein on behalf of any party is duly authorized to do so. We have also assumed that none of the Shares will be issued or transferred in violation of Article V, Section 2 of the Charter. Based on the foregoing, and subject to the assumptions and qualifications set forth herein, it is our opinion that, as of the date of this letter, all of the Shares have been duly authorized and the Shares will, upon issuance and delivery in accordance with the terms and conditions described in the Registration Statement against payment of the purchase price therefor as determined by the Board of Directors of the Company or a committee thereof, be validly issued, fully paid and non-assessable. We consent to your filing this opinion as an exhibit to the Registration Statement, and further consent to the filing of this opinion as an exhibit to the applications to securities commissioners for the various states of the United States for registration of the Shares. We also consent to the filing of this opinion, as may be necessary, pursuant to Rule 462(b) of the Securities Act of 1933. We also consent to the identification of our firm as Maryland counsel to the Company in the section of the Prospectus (which is part of the Registration Statement) entitled "Legal Matters." The opinions expressed herein are limited to the laws of the State of Maryland and we express no opinion concerning any laws other than the laws of the State of Maryland. Furthermore, the opinions presented in this letter are limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. Very truly yours, /s/ Ballard Spahr Andrews & Ingersoll Ballard Spahr Andrews & Ingersoll EX-8.1 7 OPINION OF O'MELVENY & MYERS LLP O'MELVENY & MYERS LLP November 20th 1997 Apex Mortgage Capital, Inc. 865 South Figueroa Street Suite 1800 Los Angeles, CA 90017 NY1-538168 Re: Tax Opinion Regarding REIT Status --------------------------------- Ladies and Gentlemen: We have acted as special tax counsel to Apex Mortgage Capital, Inc., a Maryland Corporation (the "COMPANY"), in connection with the preparation of the Company's Registration Statement on Form S-11, Registration No. 333-36069, filed with the Securities and Exchange Commission under the Securities Act on September 22, 1997 (as thereafter amended to the date hereof and together with all exhibits thereto, the "REGISTRATION STATEMENT"), relating to the offering and sale (the "OFFERING") of up to 11,500,000 shares of the Company's Common Stock (inclusive of 1,500,000 shares that may be sold pursuant to an over- allotment option), par value $.01 per share (the "COMMON STOCK"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Registration Statement. In formulating our opinions herein we have reviewed the Registration Statement and such certificates, including the Officer's Certificate (the "OFFICER'S CERTIFICATE"), records, and other documents, and statutes, rules, and regulations as we have deemed necessary or appropriate as a basis for the opinions set forth below. In conducting such review for purposes of rendering our opinions we have not conducted an independent investigation of any of the facts set forth in the Registration Statement, Officer's Certificate, or any other documents, records, or certificates, and have, consequently, relied upon the Company's representations that the information presented in such documents, records, or certificates or otherwise furnished to us accurately represent and completely describe all material facts relevant to our opinions herein, and upon the authenticity of documents submitted to us as originals or certified copies, the accuracy of copies, the genuineness of all signatures and the legal capacity of all natural persons. No facts have come to our attention, however, that would cause us to question the accuracy and completeness of such facts or documents in a material way. We have also relied upon the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, dated November 20, 1997, with respect to all matters of Maryland law. In rendering these opinions we have assumed that (i) the transactions described in or contemplated by any of the aforementioned documents have been or will be consummated in accordance with the operative documents, (ii) the Company has been Apex Mortgage Capital, Inc. November 20, 1997 Page 2 and will continue to be organized and operated in the manner described in the Officer's Certificate, the Registration Statement, and the other relevant documents referred to above, and (iii) there have been no changes in the applicable laws of the State of maryland, the Internal Revenue Code of 1986, as amended (the "CODE"), the regulations promulgated thereunder by the Treasury Department (the "TREASURY REGULATIONS"), and the interpretations of the Code and Treasury Regulations by the courts and the Internal Revenue Service ("IRS"), all as they exist on the date of this letter. Any material change that is made after the date hereof in any of the foregoing bases for our opinions could affect our conclusions. Based upon and subject to the foregoing, we are of the opinion that: 1. The Company is organized in conformity with the requirements for qualification as a real estate investment trust ("REIT") under Sections 856 through 860 of the Code, and the Company's contemplated method of operations will enable it to satisfy the requirements for such qualification commencing with the Company's taxable year ending December 31, 1997. 2. The section of the Registration Statement entitled "Federal Income Tax Considerations" identifies and fairly summarizes the federal income tax considerations to a holder of Common Stock, and to the extent such summaries involve matters of law, such statement of law are correct. However, such section is not exhaustive and does not purport to discuss any state or local tax considerations or all possible Federal income tax considerations of the purchase, ownership, and disposition of the Common Stock. Additionally, the Company's qualification as a REIT under the Code will depend upon the Company's ability to meet, through actual operating results, distribution levels, diversity of stock ownership, and the various income and asset qualification tests imposed under the Code. Such operating results may not be reviewed by us, and accordingly, no assurance can be given that the actual results of the Company's operations for any one taxable year will satisfy the requirements for REIT qualification. Moreover, certain aspects of the Company's method of operations have not been considered by the courts or the IRS. There can be no assurance that the courts or the IRS will agree with this opinion. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the references to O'Melveny & Myers LLP under the caption "Federal Income Tax Considerations" in the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required by Section 7 of the Securities Act or the rules and regulations promulgated thereunder by the Securities and Exchange Commission. Other than as expressly stated above, we express no opinion on any issue relating to the Company or to any investment therein, or under any other law. This opinion letter is solely for the information and use of the Company, and it may not be distributed, relied Apex Mortgage Capital, Inc. November 20, 1997 Page 3 upon for any purpose by any other person, quoted in whole or in part or otherwise reproduced in any document, or filed with any governmental agency, without our express written consent. Respectfully submitted, /s/ O'Melveny & Myers LLP O'Melveny & Myers LLP EX-10.1 8 MANAGEMENT AGREEMENT MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (this "Agreement") is made as of the __ day of _______________, 1997 (the "Effective Date"), by and between (i) APEX MORTGAGE CAPITAL, INC., a Maryland corporation (the "Company"), and (ii) TCW INVESTMENT MANAGEMENT COMPANY, a California corporation (the "Manager"). THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts, understandings and intentions: A. The Company intends to invest in Mortgage Assets (defined herein) using the proceeds of borrowings and equity offerings and to qualify as a "real estate investment trust" under the Internal Revenue Code of 1986, as amended (the "Code"). B. The Company desires to have the Manager undertake, on the Company's behalf, the duties and responsibilities set forth in this Agreement, subject to the direction and oversight of the Board of Directors of the Company (the "Board of Directors") on the terms and conditions set forth in this Agreement. C. The Manager desires to undertake, on the Company's behalf, the duties and responsibilities set forth in this Agreement, subject to the direction and oversight of the Board of Directors, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, IN CONSIDERATION of the mutual agreements set forth in this Agreement, the Company and the Manager agree as follows: 1. Definitions. Capitalized terms used but not defined in this Agreement ----------- shall have the respective meanings assigned to them below: 1.1 "Affiliate" means, when used with reference to a specified person, any person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the specified person. For purposes of this definition, the term "person" means and includes individuals, corporations, general and limited partnerships, stock companies, land trusts, business trusts and other entities and governments and agencies and political subdivisions thereof. For purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests. 1.2 "Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and FHLMC Certificates. 1.3 "Agreement" means this Management Agreement. 1.4 "Average Net Invested Capital" means for any period (i) the arithmetic average of the sum of the gross proceeds of the offerings of its equity securities by the Company, after deducting any underwriting discounts and commissions and other expenses and costs relating to such offerings, plus (A) the Company's retained earnings (taking into account any losses incurred) and (B) any non-cash charges or reserves, including depreciation, mark-to-market adjustments and unrealized credit loss, computed by taking the average of such values at the end of each month during such period, plus (ii) any unsecured debt approved by a majority of the Unaffiliated Directors to be included in Average Net Invested Capital. 1.5 "Average Net Worth" means for any period the arithmetic average of the sum of the gross proceeds from the offerings of its equity securities by the Company, before deducting any underwriting discounts and commissions and other expenses and costs relating to the offerings, plus the Company's retained earnings (without taking into account any losses incurred in prior periods) computed by taking the average of such values at the end of each month during such period. 1.6 "Base Management Compensation" has the meaning set forth in Section 6.1 of this Agreement. 1.7 "Board of Directors" has the meaning set forth in Recital B of this Agreement. 1.8 "Code" has the meaning set forth in Recital A of this Agreement. 1.9 "Company" means Apex Mortgage Capital, Inc., a Maryland corporation, and its successors. 1.10 "Conforming Mortgage Loans" means conventional Mortgage Loans that either comply with requirements for inclusion in credit support programs sponsored by FHLMC, Fannie Mae or GNMA or are FHA or VA Loans, all of which are secured by first mortgages or deeds of trust on single-family (one to four units) residences. 1.11 "CMOs" means debt obligations (bonds) that are collateralized by mortgage loans or mortgage certificates other than Mortgage Derivative Securities and Subordinated Interests. CMOs are structured so that principal and interest payments received on the collateral are sufficient to make principal and interest payments on the bonds. Such bonds may be issued by United States government agencies or private issuers in one or more classes with fixed or variable interest rates, maturities and degrees of subordination that are characteristics designed for the investment objectives of different bond purchasers. 1.12 "FHLMC" means the Federal Home Loan Mortgage Corporation. 1.13 "FHLMC Certificates" means mortgage participation certificates issued by FHLMC, either in certificated or book-entry form. 2 1.14 "Fannie Mae" means the federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act (12 U.S.C. (S)1716 et seq.), formerly known as the Federal National Mortgage Association. 1.15 "Fannie Mae Certificates" means guaranteed mortgage pass-through certificates issued by Fannie Mae either in certified or book-entry form. 1.16 "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. 1.17 "FHA Loans" means Mortgage Loans insured by the United States Federal Housing Administration. 1.18 "GAAP" means generally accepted accounting principles. 1.19 "GNMA" means the Governmental National Mortgage Association. 1.20 "GNMA Certificates" means fully modified pass-through mortgage-backed certificates guaranteed by GNMA and issued either in certificated or book-entry form. 1.21 "Governing Instruments" means the articles or certificate of incorporation or charter, as the case may be, and the bylaws of the Company and its subsidiaries. 1.22 "Incentive Management Compensation" has the meaning set forth in Section 6.2 of this Agreement. 1.23 "Investment Advisers Act" means the Investment Advisers Act of 1940, as amended from time to time. 1.24 "Limited Expenses" means the following expenses of the Company or any subsidiary of the Company: 1.24.1 all insurance costs incurred by the Company or any subsidiary of the Company, including any costs to obtain liability or other insurance to indemnify the Manager and underwriters of any securities of the Company; 1.24.2 expenses connected with payments of dividends or interest or distributions in any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; 1.24.3 all expenses of third parties connected with communications to holders of equity securities or debt securities of the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with 3 this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company's or any subsidiary's securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party; 1.24.4 custodian's, transfer agent's and registrar's fees and charges; 1.24.5 compensation, fees and expenses paid to trustees or Unaffiliated Directors of the Company or any subsidiary of the Company, the cost of director and officer liability insurance and premiums for fidelity and errors and omissions insurance; 1.24.6 legal, accounting and auditing fees and expenses relating to the Company's or any subsidiary's operations (excluding litigation-related fees and expenses described in Section 7.2.15 hereof); 1.24.7 expenses relating to any office or office facilities maintained by the Company or any subsidiary of the Company exclusive of the office of the Manager and its Affiliates; 1.24.8 travel and related expenses of directors, officers and employees of the Manager and of directors, officers and employees of the Company or any subsidiary of the Company who are also directors, officers or employees of the Manager, incurred in connection with attending meetings of the Board of Directors or holders of securities of the Company or any subsidiary of the Company or performing other business activities that relate to the Company or any subsidiary of the Company, including expenses allocable to such meetings or business activities; 1.24.9 costs associated with computer hardware and software, third party information services and office expenses that relate solely to the business activities of the Company; and 1.24.10 all other expenses of every character regarded as ordinary operating expenses in accordance with generally accepted accounting principles, exclusive of those expenses referred to in Sections 7.2.1, 7.2.2, 7.2.3, 7.2.4, 7.2.5, 7.2.6, 7.2.7, 7.2.9, 7.2.10, 7.2.15, 7.2.16 and 7.2.21. 1.25 "Manager" means TCW Investment Management Company, a California corporation, and its successors hereunder. 1.26 "Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans and (iii) Short-Term Investments. 1.27 "Mortgage Derivative Securities" means Mortgage Securities that provide for the holder to receive interest only, principal only, or interest and principal in amounts that 4 are disproportionate to those payable on the underlying Mortgage Loans and may include other derivative instruments. 1.28 "Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA Loans and VA Loans. 1.29 "Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs, and (iii) Other Mortgage Securities. 1.30 "Mortgage Warehouse Participations" means participations in lines of credit to mortgage originators that are secured by recently originated Mortgage Loans that are in the process of being either securitized or sold to permanent investors. 1.31 "Net Income" means the taxable income of the Company (including net capital gains, if any) before the Manager's incentive compensation, net operating loss deductions arising from losses in prior periods and deductions permitted by the Code in calculating taxable income for a REIT plus the effects of adjustments, if any, necessary to record hedging and interest transactions in accordance with GAAP. A deduction for all of the Company's interest expenses for borrowed funds is taken into account in calculating Net Income. 1.32 "Nonconforming Mortgage Loans" means conventional Mortgage Loans that do not conform to one or more requirements of United States Federal Housing Administration, FHLMC, Fannie Mae, GNMA or United States Veterans Administration for participation in one or more of such agencies' mortgage loan credit support programs, such as the principal amounts financed or the underwriting guidelines used in making the loan. 1.33 "Other Mortgage Securities" means securities representing interests in, or secured by mortgages on real property other than Pass-Through Certificates and CMOs and may include certificates and other securities collateralized by single-family loans, Mortgage Warehouse Participations, Mortgage Derivative Securities, Subordinated Interests and other mortgage-backed and mortgage-collateralized obligations. 1.34 "Pass-Through Certificates" means securities (or interests therein) other than Mortgage Derivative Securities and Subordinated Interests evidencing undivided ownership interests in a pool of mortgage loans, the holders of which receive a "pass-through" of the principal and interest paid in connection with the underlying mortgage loans in accordance with the holders' respective, undivided interests in the pool. Pass-Through Certificates include Agency Certificates, as well as other certificates evidencing interests in loans secured by single-family properties. 1.35 "Qualified REIT Real Estate Assets" means Pass-Through Certificates, Mortgage Loans, Agency Certificates and other assets of the type described in Section 856(c)(6)(B) of the Code. 5 1.36 "REIT" means real estate investment trust as defined under Section 856 of the Code. 1.37 "REIT Provisions of the Code" means Sections 856 through 860 of the Code. 1.38 "Return on Equity" means an amount calculated for any quarter by dividing the Company's Net Income for the quarter by its Average Net Worth for the quarter. 1.39 "Short-Term Investments" means short-term bank certificates of deposit, short-term United States Treasury securities, short-term United States government agency securities, commercial paper, repurchase agreements, short- term CMOs, short-term asset-backed securities and other similar types of short- term investment instruments, all of which will have maturities or average lives of less than one (1) year. 1.40 "Subordinated Interests" means a class of Mortgage Securities that is subordinated to one or more other classes of Mortgage Securities, all of which classes share the same collateral. 1.41 "TCW" means The TCW Group, Inc. 1.42 "TCW Group" means TCW and its subsidiaries and Affiliates. 1.43 "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to a constant maturity of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. 1.44 "Unaffiliated Directors" means a director who is not affiliated, directly or indirectly, with the Manager or the TCW Group, whether by ownership of, ownership interest in, employment by, any material business or professional relationship with, or serving as an officer or director of the Manager or the TCW Group, and are not employed by or officers of the Company. 1.45 "VA Loans" means Mortgage Loans partially guaranteed by the United States Veterans Administration under the Serviceman's Readjustment Act of 1944, as amended. 6 2. General Duties of the Manager. ----------------------------- 2.1 Services to be Provided by the Manager. Subject to the direction and -------------------------------------- oversight of the Board of Directors and in accordance with the Governing Instruments, the Manager shall manage and provide services to the Company, and to the extent directed by the Board of Directors, shall provide similar services to any subsidiary of the Company. Without limiting the foregoing, the Manager shall perform other services as may be required from time to time for management and other activities relating to the assets of the Company as the Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances, including the following: 2.1.1 serving as the Company's consultant with respect to formulation of investment criteria and preparation of policy guidelines by the Board of Directors; 2.1.2 assisting the Company in developing criteria for Mortgage Asset purchase commitments that are specifically tailored to the Company's long- term investment objectives and making available to the Company its knowledge and experience with respect to Mortgage Assets; 2.1.3 representing the Company in connection with the purchase and commitment to purchase or sell Mortgage Assets, including the accumulation of Mortgage Loans for securitization and the incurrence of debt; 2.1.4 arranging for the issuance of Mortgage Securities from a pool of Mortgage Loans; 2.1.5 furnishing reports and statistical and economic research to the Company regarding the Company's activities and the services performed for the Company by the Manager; 2.1.6 monitoring and providing to the Board of Directors on an ongoing basis price information and other data, obtained from certain nationally recognized dealers that maintain markets in Mortgage Assets identified by the Board of Directors from time to time, and providing data and advice to the Board of Directors in connection with the identification of such dealers; 2.1.7 investing or reinvesting any money of the Company in accordance with its policies and procedures; 2.1.8 providing the executive and administrative personnel, office space and services required in rendering services to the Company; 2.1.9 administering the day-to-day operations of the Company and performing and supervising the performance of such other administrative functions necessary in the management of the Company as may be agreed upon by the Manager and the 7 Board of Directors, including the collection of revenues and the payment of the Company's debts and obligations and maintenance of appropriate computer systems to perform such administrative functions; 2.1.10 providing the Company with general data processing, legal and administrative services to the extent required to implement the business strategy of the Company; 2.1.11 counseling the Company in connection with policy decisions made by the Board of Directors; 2.1.12 communicating on behalf of the Company with the holders of the equity and debt securities of the Company as required to satisfy the reporting and other requirements of any governmental bodies or agencies and to maintain effective relations with such holders; 2.1.13 evaluating and recommending hedging strategies to the Board of Directors and, upon approval by the Board of Directors, engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT; 2.1.14 supervising compliance with the REIT Provisions of the Code and maintenance of an exemption from the Investment Company Act; 2.1.15 qualifying and causing the Company to qualify to do business in all applicable jurisdictions; 2.1.16 causing the Company to retain qualified accountants and tax experts to assist in developing appropriate accounting procedures and testing systems and to conduct quarterly compliance reviews; 2.1.17 providing all actions necessary for compliance by the Company with all federal, state and local regulatory requirements applicable to the Company in respect of its business activities, including preparing or causing to be prepared all financial statements required under applicable regulations and contractual undertakings and all reports and documents, if any, required under the Securities Exchange Act of 1934, as amended; 2.1.18 providing all actions necessary to enable the Company to make required federal, state and local tax filings and reports and generally enable the Company to maintain its status as a REIT, including soliciting stockholders for required information to the extent provided in the REIT Provisions of the Code; 2.1.19 performing such other services as may be required from time to time for management and other activities relating to the assets of the Company as the 8 Board of Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances; and 2.1.20 complying with and using commercially reasonable efforts to cause the Company to comply with all applicable laws. 2.2 Obligations of the Manager. -------------------------- 2.2.1 Verify Conformity with Acquisition Criteria. The Manager shall ------------------------------------------- use commercially reasonable efforts to provide that each Mortgage Asset conforms to the acquisition criteria of the Company and shall require each seller or transferor of Mortgage Assets to the Company to make such representations and warranties regarding such Mortgage Assets as may, in the judgment of the Manager, be necessary and appropriate. With respect to Mortgage Loans and consistent with prevailing industry practices, the Manager shall use commercially reasonable efforts to require the seller or transferor to repurchase any Mortgage Loan with respect to which there is fraud or misrepresentation. In addition, the Manager shall take such other action as it deems necessary or appropriate with regard to the protection of the Company's investments. 2.2.2 Conduct Activities in Conformity with REIT Status and All --------------------------------------------------------- Applicable Restrictions. The Manager shall refrain from any action which, in - ----------------------- its sole judgment made in good faith, would adversely affect the status of the Company or, if applicable, any subsidiary of the Company as a REIT or which, in its sole judgment made in good faith, would violate any material law, rule or regulation of any governmental body or agency having jurisdiction over the Company or any such subsidiary or which would otherwise not be permitted by the Company's or such subsidiary's Governing Instruments; any operating policies adopted by the Company; or any agreements provided to the Manager. If the Manager is ordered to take any such action by the Board of Directors, the Manager shall promptly notify the Board of Directors of the Manager's judgment that such action would adversely affect such status or violate any such law, rule or regulation or the Governing Instruments; operating policies adopted by the Company; or any agreements provided to the Manager. Notwithstanding the foregoing, the Manager, its directors, officers, stockholders and employees shall not be liable to the Company, any subsidiary of the Company, the Unaffiliated Directors or any Stockholders of the Company or any of its subsidiaries for any act or omission by the Manager, its directors, officers, stockholders or employees except as provided in Section 8 of this Agreement. 2.2.3 Reports. The Manager shall cause an annual compliance report ------- to be prepared for the first two fiscal years of the Company, commencing with fiscal year 1997, by a firm independent of the Manager and its Affiliates and having the proper expertise to determine compliance with the REIT Provisions of the Code and related matters. The Manager shall deliver each report for a fiscal year to the Company no later than March 31 of the following year. In addition, the Manager will prepare regular reports for the Company's Board of Directors that will review the Company's acquisitions of Mortgage Assets, portfolio 9 composition and characteristics, credit quality, performance and compliance with the policies approved by the Company's Board of Directors. 2.2.4 Portfolio Transactions. In placing portfolio transactions and ---------------------- selecting brokers or dealers, the Manager shall endeavor to obtain on behalf of the Company commercially reasonable terms. In assessing commercially reasonable terms for any transaction, the Manager shall consider all factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. 2.3 Compliance with the Investment Advisers Act. The Manager shall ------------------------------------------- operate in compliance with the provisions of the Investment Advisers Act applicable to the performance of the Manager's duties hereunder. 2.4 Cooperation of the Company. The Company agrees to take all actions -------------------------- reasonably required to permit the Manager to carry out its duties and obligations under this Agreement. The Company further agrees to make available to Manager all materials reasonably requested by Manager to enable the Manager to satisfy its obligations to deliver financial statements and any other information or reports with respect to the Company. 2.5 Fidelity Bond. During the term of this Agreement the Manager shall ------------- obtain and maintain a fidelity bond in such amount and with an issuer as the Manager shall determine, which shall cover, among other things, losses resulting directly from dishonest or fraudulent acts committed by an employee of the Manager and certain other losses. The premium for such bond is to be paid by the Manager or its Affiliates. 3. Additional Activities of the Manager and its Affiliates. ------------------------------------------------------- 3.1 Other Activities of the Manager. Nothing in this Agreement shall ------------------------------- prevent the Manager, its Affiliates, or any of the officers, directors or employees of the Manager or its Affiliates, from engaging in other businesses or from rendering services of any kind to any other person or entity, including the purchase of, or advisory service to others investing in, any type of real estate investment, including investments that meet the principal investment objectives of the Company. Notwithstanding the foregoing, members of the Mortgage Backed Securities Group of the TCW Group or any equivalent or successor group of the TCW Group during their employment by the TCW Group will not provide any direct management services to a residential mortgage REIT that invests primarily in high quality Mortgage Securities other than the Company. Directors, officers, employees and agents of the Manager and of Affiliates of the Manager may serve as trustees, directors, officers, employees, agents, nominees or signatories for the Company or any subsidiary of the Company, to the extent permitted by their Governing Instruments, as from time to time amended, or by any resolutions duly adopted by the Board of Directors pursuant to the Company's Governing Instruments. When executing documents or otherwise acting in such capacities for the Company, such persons shall use their respective titles in the Company. 10 3.2 Other Investment Advisory Activities of the Manager. Except as --------------------------------------------------- provided in Section 3.1 of this Agreement, nothing contained in this Agreement shall prevent the Manager, or any Affiliate of the Manager, from acting as investment advisor or manager for any other person, firm or corporation (including any investment company), whether or not the investment objectives or policies of any such other person, firm or corporation are similar to those of the Company, and shall not in any way bind or restrict the Manager or any such Affiliate from buying, selling or trading any securities or commodities for their own accounts or for the account of others for whom the Manager or any such Affiliate may be acting. The Company acknowledges that the Manager will base allocation decisions on the procedures the Manager considers fair and equitable, including, without limitation, such considerations as investment objectives, restrictions and time horizon, availability of cash and the amount of existing holdings. While information and recommendations supplied to the Company shall, in the Manager's judgment, be appropriate under the circumstances and in light of the investment objectives and policies of the Company, they may be different from the information and recommendations supplied by the Manager or its Affiliates to investment companies, funds and advisory accounts. The Company shall be entitled to equitable treatment under the circumstances in receiving information, recommendations and any other services, but the Company recognizes that it is not entitled to receive preferential treatment as compared with the treatment given by the Manager to any investment company, fund or advisory account. 4. Bank Accounts. At the direction of the Board of Directors, the Manager ------------- may establish and maintain one or more bank accounts in the name of the Company or any subsidiary of the Company, and may collect and deposit into any such account or accounts, and disburse funds from any such account or accounts, under such terms and conditions as the Board of Directors may approve. The Manager shall from time to time render appropriate accountings of such collections and payments to the Board of Directors and, upon request, to the auditors of the Company or any subsidiary of the Company. 5. Records; Confidentiality. The Manager shall maintain appropriate books ------------------------ of account and records relating to services performed under this Agreement, and such books of account and records shall be accessible for inspection by representatives of the Company or any subsidiary of the Company at any time during normal business hours. Except in the ordinary course of business of the Company, the Manager shall keep confidential any and all information it obtains from time to time in connection with the services it renders under this Agreement and shall not disclose any portion thereof to non-affiliated third- parties (other than lenders to, and holders of stock or warrants of, the Manager) except with the prior written consent of the Company. 6. Compensation of the Manager. --------------------------- 6.1 Base Management Compensation. For services rendered under this ---------------------------- Agreement, the Company shall pay to the Manager, commencing on the Effective Date and payable as described below, base management compensation equal to 3/4 of 1% of the Average Net Invested Capital of the Company (the "Base Management Compensation"). The 11 Base Management Compensation for each month shall be calculated by the Manager within 15 days after the end of such month, and such calculation shall be promptly delivered to the Company. The Company shall pay any amount payable pursuant to this Section 6.1 for such month within 15 days after the receipt of Manager's written statement setting forth the computation of the Base Management Compensation. 6.2 Incentive Management Compensation. In addition to the Base Management --------------------------------- Compensation, the Manager shall receive as incentive compensation for each fiscal quarter an amount equal to 30% of the Net Income of the Company, before incentive compensation, for such fiscal quarter in excess of the amount that would produce an annualized Return on Equity (calculated by multiplying the Return on Equity for such fiscal quarter by four) equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1% (the "Incentive Management Compensation"). The Incentive Management Compensation calculation and payment shall be made quarterly in arrears. The Manager shall compute the quarterly Incentive Management Compensation within 45 days after the end of each fiscal quarter. The Company shall pay the Incentive Management Compensation with respect to each fiscal quarter within 15 days following the delivery to the Company of the Manager's written statement setting forth the computation of the Incentive Management Compensation for such quarter. In connection with the Company's annual audit, the Manager shall compute any final adjustments to the Incentive Management Compensation payable under this Section 6.2 within 45 days after the end of each fiscal year and any required adjustments shall be paid by the Company within 15 days after delivery of such computation to the Company by the Manager and any amounts payable by the Manager shall be deducted from the next succeeding payment(s) of Base Management Compensation or Incentive Management Compensation payable to Manager, unless the Agreement has terminated, in which case the payment shall be made by Manager within 15 days following delivery of such statement. 6.3 Annual Reconciliation Beginning in 1999. Beginning in calendar year --------------------------------------- 1999, the quarterly Incentive Management Compensation will be subject to annual reconciliation so that the Incentive Management Compensation is based on the Manager's performance for a calendar year rather than on a quarter-by-quarter basis. Such reconciliation shall be determined as part of the Company's annual audit and any reconciling payments shall be paid as provided in Section 6.2. 7. Expenses of the Manager and the Company. --------------------------------------- 7.1 Expenses of the Manager. Without regard to the compensation received ----------------------- under this Agreement by the Manager, the Manager shall bear the following expenses: 7.1.1 employment expenses of the personnel employed by the Manager and/or its Affiliates (including, but not limited to, officers of the Company employed by the Manager and/or its Affiliates), including, but not limited to, salaries, wages, payroll taxes and the cost of employee benefit plans of such personnel; 12 7.1.2 rent, telephone, utilities, office furniture, equipment, machinery, and other office expenses of the Manager and/or its Affiliates required for the Company's day-to-day operations, including bookkeeping, clerical and back-office services provided by the Manager or its Affiliates; 7.2 Expenses of the Company. The Company or any subsidiary of the Company ----------------------- shall pay all of its expenses except those that are the responsibility of the Manager pursuant to Section 7.1 of this Agreement, and without limiting the generality of the foregoing, it is specifically agreed that the following expenses of the Company or any subsidiary of the Company shall be paid by the Company and shall not be paid by the Manager or Affiliates of the Manager: 7.2.1 the cost of money borrowed by the Company, including interest; 7.2.2 all taxes and license fees applicable to the Company or any subsidiary of the Company, including interest and penalties thereon; 7.2.3 legal, audit, accounting, underwriting, brokerage, listing, filing, rating agency, registration and other fees, printing, engraving, clerical, personnel and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of the Company's or any subsidiary's equity securities or debt securities; 7.2.4 fees and expenses paid to advisors and independent contractors, consultants, managers, and other agents engaged directly by the Company or any subsidiary of the Company or by the Manager at the Company's or such subsidiary's request for the account of the Company or any subsidiary of the Company (other than the Manager or its Affiliates); 7.2.5 expenses connected with the acquisition, disposition, financing and ownership of the Company's or any subsidiary's investment assets, including, but not limited to, commitment fees, brokerage fees, guaranty fees, ad valorem taxes, costs of foreclosure, maintenance, repair and improvement of property and premiums for insurance on property owned by the Company or any subsidiary of the Company; 7.2.6 costs related to hedging transactions; 7.2.7 the expenses of organizing, modifying or dissolving the Company or any subsidiary of the Company; 7.2.8 all insurance costs incurred by the Company or any subsidiary of the Company, including any costs to obtain liability or other insurance to indemnify the Manager and underwriters of any securities of the Company; 13 7.2.9 expenses connected with payments of dividends or interest or distributions in any other form made or caused to be made by the Board of Directors to holders of the securities of the Company or any subsidiary of the Company; 7.2.10 expenses connected with the structuring, issuance and administration of Mortgage Securities by the Company or any subsidiary of the Company, including, but not limited to, legal fees, trustee's fees, insurance premiums, and costs of required credit enhancements; 7.2.11 all expenses of third parties connected with communications to holders of equity securities or debt securities issued by the Company or any subsidiary of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of such securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including any costs of computer services in connection with this function, the cost of printing and mailing certificates for such securities and proxy solicitation materials and reports to holders of the Company's or any subsidiary's securities and reports to third parties required under any indenture to which the Company or any subsidiary of the Company is a party; 7.2.12 custodian's, transfer agent's and registrar's fees and charges; 7.2.13 compensation, fees and expenses paid to trustees or Unaffiliated Directors of the Company or any subsidiary of the Company, the cost of director and officer liability insurance and premiums for errors and omissions insurance; 7.2.14 legal, accounting and auditing fees and expenses relating to the Company's or any subsidiary's operations (excluding litigation-related fees and expenses described in Section 7.2.15); 7.2.15 legal, expert and other fees and expenses relating to any actions, proceedings, lawsuits, demands, causes of action and claims, whether actual or threatened, made by or against the Company, or which the Company is authorized or obligated to pay under applicable law or its Governing Instruments or by the Board of Directors; 7.2.16 any judgment rendered against the Company or any subsidiary of the Company, or against any trustee, director or officer of the Company or any subsidiary of the Company in his capacity as such for which the Company or any subsidiary of the Company is required to indemnify such trustee, director, or officer by any court or governmental agency, or settlement of pending or threatened litigation; 7.2.17 expenses relating to any office or office facilities maintained by the Company or any subsidiary of the Company exclusive of the office of the Manager and/or its Affiliates; 14 7.2.18 expenses related to the accumulation, servicing and subservicing of Mortgage Loans; 7.2.19 travel and related expenses of directors, officers and employees of the Manager and of directors, officers and employees of the Company or any subsidiary of the Company who are also directors, officers or employees of the Manager, incurred in connection with attending meetings of the Board of Directors or holders of securities of the Company or any subsidiary of the Company or performing other business activities that relate to the Company or any subsidiary of the Company, including, where applicable, a proportionate share of such expenses as reasonably determined by Manager where such expenses were not incurred solely for the benefit of the Company; 7.2.20 costs associated with computer hardware and software, third party information services and office expenses that relate solely to the business activities of the Company; 7.2.21 any extraordinary or non-recurring costs or charges incurred by the Company; and 7.2.22 other expenses of the Company or any subsidiary of the Company that are not expenses of the Manager under Section 7.1 of this Agreement. 7.3 Limitation on Expenses Payable by the Company. Notwithstanding --------------------------------------------- Sections 7.1 and 7.2 of this Agreement, the Limited Expenses required to be paid by the Company shall be limited to an aggregate amount per year equal to the greater of (i) 2% of the Average Net Invested Capital of the Company and (ii) 25% of its Net Income for that year. The determination of Net Income for purposes of calculating such expense limitation will be the same as for calculating the Manager's Incentive Management Compensation, except that it will include any Incentive Management Compensation payable for such period. Expenses of the Company that are not Limited Expenses shall be payable by the Company regardless of the foregoing limit. Limited Expenses in excess of such limit will be paid by the Manager, unless the Unaffiliated Directors determine that, based upon extraordinary or non-recurring factors, a higher level of expenses is justified for such fiscal year. In that event, such expenses may be recovered by the Manager in succeeding years to the extent that Limited Expenses in succeeding quarters are below the limitation on Limited Expenses for such quarters. 7.4 Expense Reimbursement to the Manager. Expenses incurred by the ------------------------------------ Manager on behalf of the Company shall be reimbursed monthly to the Manager within 30 days after the end of each month. The Manager shall prepare a statement documenting the expenses of the Company and those incurred by the Manager on behalf of the Company during each month, and shall deliver such statement to the Company within 15 days after the end of each month. Expense reimbursement to the Manager shall be subject to Section 7.3 hereof and adjustment at the end of each fiscal year in connection with the annual audit of the Company. Any amount that may become payable by the Manager pursuant to such an annual adjustment 15 shall be offset against future amounts payable to the Manager as provided in Section 6.2 hereof. 8. Limits of Manager Responsibility. The Manager assumes no -------------------------------- responsibility under this Agreement other than to render the services specifically called for under this Agreement and shall not be responsible for any action of the Board of Directors in following or declining to follow any advice or recommendations of the Manager, including as set forth in Section 2.2.2 of this Agreement. The Manager, its directors, officers, stockholders and employees will not be liable to the Company, any issuer of Mortgage Securities, any subsidiary of the Company, its subsidiary's stockholders or the Unaffiliated Directors for any acts or omissions, errors of judgment or mistakes of law by the Manager, its directors, officers, stockholders or employees under or in connection with this Agreement, except by reason of acts or omissions, errors of judgment or mistakes of law constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under this Agreement. The Company and its subsidiaries shall reimburse, indemnify and hold harmless the Manager, its directors, officers, stockholders and employees of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including, without limitation, attorneys' fees) in respect of or arising from any acts or omissions, errors of judgment or mistakes of law of the Manager, its stockholders, directors, officers and employees made in good faith in the performance of the Manager's duties under this Agreement or pursuant to any underwriting agreement or similar agreement to which Manager is a party in connection with any debt or equity sales of the Company's securities and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under this Agreement or any such underwriting agreement. The Manager shall be indemnified by the Company as an agent of the Company in accordance with the terms of the Company's Governing Instruments. 9. No Joint Venture. The Company and the Manager are not partners or ---------------- joint venturers with each other, and nothing in this Agreement shall be construed to make them such partners or joint venturers or impose any liability as such on any of them. The Manager is an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Company. 10. Term; Termination; Termination Fee. ---------------------------------- 10.1 Term. This Agreement shall commence on the Effective Date and shall ---- continue in force until December 31, 1999 and thereafter it shall be subject to successive one-year renewal periods upon the review and approval of the Unaffiliated Directors. If the Unaffiliated Directors do not resolve to renew or terminate this Agreement, within at least 60 days prior to the end of the then-current period of this Agreement, this Agreement shall be automatically extended for a one-year period. The Company, subject to Section 10.2, and the Manager shall have the right, following the initial term of this Agreement, to terminate this Agreement at any time upon not less than 60 days prior written notice. 16 10.2 Termination; Termination Fee. In addition to such further liability ---------------------------- or obligation of either party to the other provided in Section 13 of this Agreement, if this Agreement is terminated without cause (as "cause" is defined in Section 12 of this Agreement) by delivery of a notice of non-renewal pursuant to Section 10.1 or because the Company does not consent to an assignment of this Agreement by the Manager in connection with any acquisition, consolidation or merger of TCW (to the extent such consent is required pursuant to the Investment Advisers Act), the Company, in addition to its obligations under Section 13, shall pay the Manager a termination fee in an amount equal to the fair market value of this Agreement determined by an independent appraisal. For the purposes of determining the fair market value of this Agreement, it will be assumed that this Agreement is unlimited in term and not subject to termination or non-renewal. Such appraisal shall be conducted by a nationally recognized appraisal firm selected (but not previously engaged) by the Manager, subject to the approval by a majority of the Unaffiliated Directors, which approval shall not be unreasonably withheld or delayed, and the costs of such appraisal shall be borne equally by the parties. Any appraisal conducted under this Agreement shall be performed no later than 45 days following selection of the appraiser or appraisers. The termination fee payable by the Company shall be paid within 30 days following receipt of the final appraisal to be obtained under this Agreement. 11. Assignments. Upon not less than sixty (60) days prior written notice ----------- to the Board of Directors of the Company, this Agreement may be assigned by the Manager to an Affiliate of TCW without the consent of the Company. Except in the event of an assignment by the Manager to an Affiliate of TCW or as otherwise set forth in this Section 11, this Agreement shall terminate automatically in the event of its assignment, in whole or in part, by the Manager (other than the pledge of amounts payable to the Manager under this Agreement to secure the Manager's obligations to its lenders), unless such assignment is consented to in writing by the Company with the consent of a majority of the Unaffiliated Directors. The Company shall not withhold its consent to any assignment of this Agreement by the Manager in connection with any acquisition, consolidation or merger of TCW, to the extent such consent is required by the Investment Advisers Act. Any assignment shall bind the assignee under this Agreement in the same manner as the Manager is bound. In addition, the assignee shall execute and deliver to the Company a counterpart of this Agreement naming such assignee as Manager. This Agreement shall not be assigned by the Company without the prior written consent of the Manager, except in the case of assignment by the Company to a REIT or other organization which is a successor (by merger, consolidation or purchase of assets) to the Company, in which case such successor organization shall be bound under this Agreement and by the terms of such assignment in the same manner as the Company is bound under this Agreement. 12. Termination by Company for Cause. At the option of the Company, this -------------------------------- Agreement shall be and become terminated upon 60 days' written notice of termination from the Board of Directors to the Manager if any of the following events shall occur (termination for any of such events shall constitute termination for "cause"): 17 12.1 if a majority of the Unaffiliated Directors determines that the Manager has violated this Agreement in any material respect and, after written notice of such violation, the Manager has failed to cure such violation within 30 days, unless during such 30-day period the Manager has commenced to cure such violation and thereafter diligently prosecutes to cure such violation; or 12.2 there is entered an order for relief or similar decree or order with respect to the Manager by a court having competent jurisdiction in an involuntary case under the federal bankruptcy laws as now or hereafter constituted or under any applicable federal or state bankruptcy, insolvency or other similar laws; or the Manager (i) ceases, or admits in writing its inability, to pay its debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors; (ii) applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (iii) authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against the Manager without such authorization, application or consent and are approved as properly instituted and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or (iv) permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days; provided, however, that in the event the Manager becomes the subject of a case under federal bankruptcy or similar federal or state laws and remains in possession of its property and continues to operate its business (as a debtor in possession or otherwise), the Company shall not have the option to terminate this Agreement unless the Unaffiliated Directors determine in good faith that as a result of such proceeding the Manager cannot reasonably be expected to fulfill its obligations under this Agreement. If any of the events specified in Section 12.2 of this Agreement shall occur, the Manager shall give prompt written notice thereof to the Board of Directors upon the happening of such event. 13. Action Upon Termination. From and after the effective date of ----------------------- termination of this Agreement, pursuant to Sections 10, 11 or 12 of this Agreement, except as otherwise specified in Section 10.2 of this Agreement, the Manager shall not be entitled to compensation for further services under this Agreement, but shall be paid all Base and Incentive Management Compensation accruing to the date of termination. Upon such termination, the Manager shall forthwith: 13.1 after deducting any accrued Base and Incentive Management Compensation and reimbursement for its expenses to which it is then entitled, pay over to the Company or 18 any subsidiary of the Company all money collected and held for the account of the Company or any subsidiary of the Company pursuant to this Agreement; 13.2 deliver to the Board of Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board of Directors with respect to the Company or any subsidiary of the Company; and 13.3 deliver to the Board of Directors all property and documents of the Company or any subsidiary of the Company then in the custody of the Manager. 14. Release of Money or Other Property Upon Written Request. The Manager ------------------------------------------------------- agrees that any money or other property of the Company or any subsidiary of the Company held by the Manager under this Agreement shall be held by the Manager as custodian for the Company or such subsidiary, and the Manager's records shall be appropriately marked clearly to reflect the ownership of such money or other property by the Company or such subsidiary. Upon the receipt by the Manager of a written request signed by a duly authorized officer of the Company requesting the Manager to release to the Company or any subsidiary of the Company any money or other property then held by the Manager for the account of the Company or any subsidiary of the Company under this Agreement, the Manager shall release such money or other property to the Company or such subsidiary of the Company within a reasonable period of time, but in no event later than the later to occur of (i) 30 days following such request and (ii) the earliest time following such request that remittance will not cause the Manager to violate any law or breach any agreement to which it or the Company is a party. The Manager shall not be liable to the Company, any subsidiaries of the Company, the Unaffiliated Directors, or the Company's or its subsidiaries' stockholders for any acts performed or omissions to act by the Company or any subsidiary of the Company in connection with the money or other property released to the Company or any subsidiary of the Company in accordance with this Section 14 and not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under this Agreement. The Company and any subsidiary of the Company shall indemnify the Manager, its directors, officers, stockholders and employees against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, which arise in connection with the Manager's release of such money or other property to the Company or any subsidiary of the Company in accordance with the terms of this Section 14 unless such expenses, losses, damages, liabilities, demands, charges and claims arise in connection with acts or omissions which constitute bad faith, willful misconduct, gross negligence or reckless disregard of its duties under this Agreement. Indemnification pursuant to this provision shall be in addition to any right of the Manager to indemnification under Section 8 of this Agreement. 15. Representations and Warranties. ------------------------------ 15.1 Company in Favor of the Manager. The Company hereby represents and ------------------------------- warrants to the Manager as follows: 19 15.1.1 Due Formation. The Company is duly organized, validly existing ------------- and in good standing under the laws of Maryland, has the power to own its assets and to transact the business in which it is now engaged and is duly qualified and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole. The Company does not do business under any fictitious business name. 15.1.2 Power and Authority. The Company has the power and authority ------------------- to execute, deliver and perform this Agreement and all obligations required under this Agreement and has taken all necessary action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required under this Agreement. Except as shall have been obtained, no consent of any other person, including, without limitation, stockholders and creditors of the Company, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Company in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required under this Agreement. This Agreement has been, and each instrument or document required under this Agreement will be, executed and delivered by a duly authorized officer of the Company, and this Agreement constitutes, and each instrument or document required under this Agreement when executed and delivered under this Agreement will constitute, the legally valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 15.1.3 Execution, Delivery and Performance. The execution, delivery ----------------------------------- and performance of this Agreement and the documents or instruments required under this Agreement will not violate any provision of any existing law or regulation binding on the Company, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Company, or the Governing Instruments of, or any securities issued by, the Company or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Company is a party or by which the Company or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets or financial condition of the Company and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking (other than the pledge of amounts payable to the Manager under this Agreement to secure the Manager's obligations to its lenders). 15.2 Manager In Favor of the Company. The Manager hereby represents and ------------------------------- warrants to the Company as follows: 20 15.2.1 Due Formation. The Manager is duly organized, validly existing ------------- and in good standing under the laws of California, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified to do business and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that could not in the aggregate have a material adverse effect on the business operations, assets or financial condition of the Manager and its subsidiaries, taken as a whole. The Manager does not do business under any fictitious business name. 15.2.2 Power and Authority. The Manager has the corporate power and ------------------- authority to execute, deliver and perform this Agreement and all obligations required under this Agreement and has taken all necessary corporate action to authorize this Agreement on the terms and conditions hereof and the execution, delivery and performance of this Agreement and all obligations required under this Agreement. Except as shall have been obtained, no consent of any other person including, without limitation, stockholders and creditors of the Manager, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by the Manager in connection with this Agreement or the execution, delivery, performance, validity or enforceability of this Agreement and all obligations required under this Agreement. This Agreement has been and each instrument or document required under this Agreement will be executed and delivered by a duly authorized officer of the Manager, and this Agreement constitutes, and each instrument or document required under this Agreement when executed and delivered under this Agreement will constitute, the legally valid and binding obligation of the Manager enforceable against the Manager in accordance with its terms. 15.2.3 Execution, Delivery and Performance. The execution, delivery ----------------------------------- and performance of this Agreement and the documents or instruments required under this Agreement will not violate any provision of any existing law or regulation binding on the Manager, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on the Manager, or the governing instruments of, or any securities issued by, the Manager or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which the Manager is a party or by which the Manager or any of its assets may be bound, the violation of which would have a material adverse effect on the business operations, assets, or financial condition of the Manager and its subsidiaries, taken as a whole, and will not result in, or require, the creation or imposition of any lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage indenture, lease, contract or other agreement, instrument or undertaking. 16. Notices. Unless expressly provided otherwise in this Agreement, all ------- notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when (1) delivered by hand, (2) otherwise delivered against receipt therefor, or (3) upon actual receipt of registered or certified mail, postage prepaid, return receipt requested. The parties may deliver to each other notice by electronically transmitted facsimile copies, provided that 21 such facsimile notice is followed within 24 hours by any type of notice otherwise provided for in this Section 16. Any notice shall be duly addressed to the parties as follows: (a) If to the Company: 865 South Figueroa Street Suite 1800 Los Angeles, California 90017 Attn: Daniel K. Osborne Telecopy: (213) 488-3366 with a copy given in the manner prescribed above, to: (b) If to the Manager: 865 South Figueroa Street Suite 1800 Los Angeles, California 90017 Attn: Michael E. Cahill Telecopy: (213) 244-0705 with a copy given in the manner prescribed above, to: 865 South Figueroa Street Suite 1800 Los Angeles, California 90017 Attn: Michael E. Cahill, Esq. Telecopy: (213) 244-0780 Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 16 for the giving of notice. 17. Binding Nature of Agreement; Successors and Assigns. This Agreement --------------------------------------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns as provided in this Agreement. 18. Entire Agreement. This Agreement contains the entire agreement and ---------------- understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. 22 19. Controlling Law. This Agreement and all questions relating to its --------------- validity, interpretation, performance and enforcement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of California, notwithstanding any California or other conflict of law provisions to the contrary. 20. Indulgences, Not Waivers. Neither the failure nor any delay on the ------------------------ part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 21. Titles Not to Affect Interpretation. The titles of paragraphs and ----------------------------------- subparagraphs contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. 22. Execution in Counterparts. This Agreement may be executed in any ------------------------- number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 23. Provisions Separable. The provisions of this Agreement are -------------------- independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 24. Gender. Words used herein regardless of the number and gender ------ specifically used shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. 25. Attorneys' Fees. Should any action or other proceeding be necessary --------------- to enforce any of the provisions of this Agreement or the various transactions contemplated hereby, the prevailing party will be entitled to recover its actual reasonable attorneys' fees and expenses from the non-prevailing party. 26. Amendments. This Agreement may not be amended, modified or changed ---------- (in whole or in part), except by a formal, definitive written agreement expressly referring to this 23 Agreement, which agreement is executed by all of the parties. The parties hereto expressly acknowledge that no consent or approval of the Company's stockholders is required in connection with any amendment, modification or change to this Agreement. 27. Authority. Each signatory to this Agreement warrants and represents --------- that he is authorized to sign on behalf of and to bind the party on whose behalf he, she or it is signing. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the effective date. "COMPANY" APEX MORTGAGE CAPITAL, INC., a Maryland corporation By:______________________________________ Its:______________________________ "MANAGER" TCW INVESTMENT MANAGEMENT COMPANY, a California corporation By:______________________________________ Its:______________________________ 24 EX-10.6 9 1997 STOCK OPTION PLAN APEX MORTGAGE CAPITAL, INC. 1997 STOCK OPTION PLAN TABLE OF CONTENTS
Page ---- 1. The Plan................................................................... 1 1.1 Purpose............................................................... 1 1.2 Administration and Authorization; Power and Procedure................. 1 1.2.1 Committee...................................................... 1 1.2.2 Plan Awards; Interpretation; Powers of Committee................ 1 1.2.3 Binding Determinations......................................... 2 1.2.4 Reliance on Experts............................................ 2 1.2.5 Delegation..................................................... 2 1.3 Participation......................................................... 3 1.4 Shares Available for Awards; Share Limits............................. 3 1.4.1 Shares Available............................................... 3 1.4.2 Share Limits................................................... 3 1.4.3 Limitation on Ownership........................................ 3 1.4.4 Share Reservation; Replenishment and Reissue of Unvested Awards......................................................... 3 1.5 Grant of Awards....................................................... 4 1.6 Award Period.......................................................... 4 1.7 Limitations on Exercise and Vesting of Awards......................... 4 1.7.1 Provisions for Exercise........................................ 4 1.7.2 Procedure...................................................... 4 1.7.3 Fractional Shares/Minimum Issue................................ 4 1.8 Acceptance of Notes to Finance Exercise............................... 5 1.8.1 Principal...................................................... 5 1.8.2 Term........................................................... 5 1.8.3 Recourse; Security; Compliance................................. 5 1.8.4 Termination of Employment...................................... 5 1.9 No Transferability; Limited Exception to Transfer Restrictions........ 5 1.9.1 Limit On Exercise and Transfer................................. 5 1.9.2 Exceptions..................................................... 6 1.9.3 Further Exceptions to Limits On Transfer....................... 6 2. Options.................................................................... 6 2.1 Grants................................................................ 6 2.2 Option Price.......................................................... 7 2.2.1 Pricing Limits................................................. 7 2.2.2 Payment Provisions............................................. 7 2.3 Limitations on Grant and Terms of Incentive Stock Options............. 7 2.3.1 $100,000 Limit................................................. 7
i TABLE OF CONTENTS
Page ---- 2.3.2 Option Period.................................................. 8 2.3.3 Other Code Limits.............................................. 8 2.4 Limits on 10% Holders................................................. 8 2.5 Option Repricing/Cancellation and Regrant/Waiver of Restrictions...... 8 2.6 Effects of Termination of Employment; Termination of Subsidiary Status; Discretionary Provisions...................................... 9 2.6.1 Options - Resignation or Dismissal............................. 9 2.6.2 Options - Death or Disability.................................. 9 2.6.3 Options - Retirement........................................... 9 2.6.4 Certain SARs................................................... 9 2.6.5 Other Awards................................................... 10 2.6.6 Committee Discretion........................................... 10 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations.................................................... 10 3. Stock Appreciation Rights (Including Limited Stock Appreciation Rights)................... 10 3.1 Grants................................................................ 10 3.2 Exercise of Stock Appreciation Rights................................. 10 3.2.1 Exercisability................................................. 10 3.2.2 Effect on Available Shares..................................... 10 3.2.3 Stand-Alone SARs............................................... 11 3.2.4 Proportionate Reduction........................................ 11 3.3 Payment............................................................... 11 3.3.1 Amount......................................................... 11 3.3.2 Form of Payment................................................ 11 3.4 Limited Stock Appreciation Rights..................................... 12 4. Restricted Stock Awards.................................................... 12 4.1 Grants................................................................ 12 4.2 Restrictions.......................................................... 12 4.2.1 Pre-Vesting Restraints......................................... 12 4.2.2 Dividend and Voting Rights..................................... 12 4.2.3 Cash Payments.................................................. 13 4.3 Return to the Corporation............................................. 13 5. Performance Share Awards; Stock Units and Stock Bonuses.................... 13 5.1 Grants of Performance Share Awards.................................... 13 5.2 Special Performance-Based Share Awards................................ 14
ii TABLE OF CONTENTS
Page ---- 5.2.1 Eligible Class................................................. 14 5.2.2 Maximum Award.................................................. 14 5.2.3 Committee Certification........................................ 14 5.2.4 Terms and Conditions of Awards................................. 14 5.2.5 Stock Payout Features.......................................... 15 5.2.6 Adjustments for Material Changes............................... 15 5.3 Grants of Stock Bonuses............................................... 15 5.4 Deferred Payments..................................................... 15 5.5 Cash Bonus Awards..................................................... 16 5.5.1 Performance Goals.............................................. 16 5.6 Alternative Payments.................................................. 16 6. Other Provisions........................................................... 16 6.1 Rights of Eligible Persons, Participants and Beneficiaries............ 16 6.1.1 Employment Status.............................................. 16 6.1.2 No Employment Contract......................................... 16 6.1.3 Plan Not Funded................................................ 16 6.2 Adjustments; Acceleration............................................. 17 6.2.1 Adjustments.................................................... 17 6.2.2 Acceleration of Awards Upon Change in Control.................. 18 6.2.3 Possible Early Termination of Accelerated Awards............... 19 6.2.4 Golden Parachute Limitations................................... 19 6.3 Effect of Termination of Employment................................... 19 6.4 Compliance with Laws.................................................. 19 6.4.1 General........................................................ 20 6.4.2 Restrictions on Transfer....................................... 20 6.5 Tax Withholding....................................................... 21 6.5.1 Provision for Tax Withholding Offset........................... 21 6.5.2 Tax Loans...................................................... 21 6.6 Plan Amendment, Termination and Suspension............................ 22 6.6.1 Board Authorization............................................ 22 6.6.2 Stockholder Approval........................................... 22 6.6.3 Amendments to Awards........................................... 22 6.6.4 Limitations on Amendments to Plan and Awards................... 22 6.7 Privileges of Stock Ownership......................................... 22 6.8 Effective Date of the Plan............................................ 22 6.9 Term of the Plan...................................................... 23 6.10 Governing Law/Construction/Severability............................... 23 6.10.1 Choice of Law.................................................. 23 6.10.2 Severability................................................... 23
iii TABLE OF CONTENTS
Page ---- 6.10.3 Plan Construction.............................................. 23 6.11 Captions.............................................................. 24 6.12 Effect of Change of Subsidiary Status................................. 24 6.13 Non-Exclusivity of Plan............................................... 24 7. Definitions................................................................. 24 8. Non-Employee Director Options............................................... 29 8.1 Participation......................................................... 29 8.2 Option Grants......................................................... 29 8.2.1 Time of Initial Award.......................................... 29 8.2.2 Subsequent Awards.............................................. 30 8.3 Option Price.......................................................... 30 8.4 Option Period and Exercisability...................................... 30 8.5 Termination of Directorship........................................... 30 8.6 Adjustments; Accelerations; Terminations.............................. 30 8.7 Acceleration Upon a Change in Control Event........................... 31
iv APEX MORTGAGE CAPITAL, INC. --------------------------- 1997 STOCK OPTION PLAN ---------------------- 1. THE PLAN -------- 1.1 PURPOSE. The purpose of this Plan is to promote the success of the Company ------- and the interests of its stockholders by attracting, motivating, retaining and rewarding directors, officers and employees and other eligible persons associated with the management of the Company with awards and incentives for high levels of performance and improving the financial performance of the Company, by aligning the interests of the those persons and the Company's stockholders, and by attracting, motivating and retaining experienced and knowledgeable independent directors through the benefits provided under Section 8. "CORPORATION" means Apex Mortgage Capital, Inc. and "COMPANY" means the Corporation and its Subsidiaries, collectively. These terms and other capitalized terms are defined in Section 7. 1.2 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE. ----------------------------------------------------- 1.2.1 COMMITTEE. This Plan will be administered by and all Awards to --------- Eligible Persons will be authorized by the Committee, other than the Initial Awards which have been authorized by the Corporation's stockholders in connection with approving this Plan. Action of the Committee with respect to the administration of this Plan will be taken pursuant to a majority vote or by written consent of its members. 1.2.2 PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE. Subject to the ------------------------------------------------ express provisions of this Plan, the Committee will have the authority to: (a) determine the particular Eligible Persons who will receive Awards; (b) grant Awards to Eligible Persons, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such Eligible Persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards will become exercisable or will vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; (c) approve the forms of Award Agreements (which need not be identical either as to type of Award or among Participants); (d) construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Eligible Persons under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (e) cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Persons, subject to any required consent under Section 6.6; (f) accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum 10 year term of Awards under Section 1.6; and (g) make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. Notwithstanding the foregoing, the provisions of Section 8 relating to Non-Employee Director Awards will be automatic and, to the maximum extent possible, self-effectuating. 1.2.3 BINDING DETERMINATIONS. Any action taken by, or inaction of, the ---------------------- Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan will be within the absolute discretion of that entity or body and will be conclusive and binding upon all persons. No member of the Board or Committee, or officer of the Corporation or any Subsidiary, will be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their absolute discretion in matters within their authority related to this Plan. 1.2.4 RELIANCE ON EXPERTS. In making any determination or in taking or ------------------- not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No director, officer or agent of the Company will be liable for any such action or determination taken or made or omitted in good faith. 1.2.5 DELEGATION. The Committee may delegate ministerial, non- ---------- discretionary functions to individuals who are officers or employees of the Company. 2 1.3 PARTICIPATION. Awards may be granted by the Committee only to those ------------- persons that the Committee determines to be Eligible Persons. An Eligible Person who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee so determines. 1.4 SHARES AVAILABLE FOR AWARDS; SHARE LIMITS. ----------------------------------------- 1.4.1 SHARES AVAILABLE. Subject to the provisions of Section 6.2, the ---------------- capital stock that may be delivered under this Plan will be shares of the Corporation's authorized but unissued Common Stock and any shares of its Common Stock held as treasury shares. The shares may be delivered for any lawful consideration. 1.4.2 SHARE LIMITS. The maximum number of shares of Common Stock that may ------------ be delivered pursuant to Awards granted to Eligible Persons under this Plan will not exceed 1,000,000 shares (the "SHARE LIMIT"). The number of shares of Common Stock subject to Awards outstanding at any time will not exceed the number of shares remaining available for issuance under the Plan. The maximum number of shares subject to those Options and Stock Appreciation Rights that are granted during any calendar year to any one individual, subject to Section 1.4.3, will be limited to 200,000 shares. Each of the foregoing numerical limits is subject to adjustment as contemplated by this Section 1.4 and Section 6.2. 1.4.3 LIMITATION ON OWNERSHIP. No Awards will be granted under the Plan ----------------------- to any person who, after the grant of such Award, would be deemed to beneficially own more than 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of Common Stock of the Corporation. For purposes of this Section 1.4.3, the terms "ownership" is defined in accordance with the Real Estate Investment Trust provisions of the Code, the constructive ownership provisions of Section 544 of the Code (as modified by Section 856(1)(b) of the Code), and Rule 13d-3 promulgated under the Exchange Act. 1.4.4 SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS. No --------------------------------------------------------------- Award may be granted under this Plan unless, on the date of grant, the sum of (a) the maximum number of shares issuable at any time pursuant to such Award, plus (b) the number of shares that have previously been issued pursuant to Awards granted under this Plan, other than reacquired shares available for reissue consistent with any applicable legal limitations, plus (c) the maximum number of shares that may be issued at any time after such date of grant pursuant to Awards that are outstanding on such date, does not exceed the Share Limit. Shares that are subject to or underlie Awards that expire or for any reason are 3 canceled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under this Plan, as well as reacquired shares, will again, except to the extent prohibited by law, be available for subsequent Awards under the Plan. Except as limited by law, if an Award is or may be settled only in cash, such Award need not be counted against any of the limits under this Section 1.4. 1.5 GRANT OF AWARDS. Subject to the express provisions of this Plan, the --------------- Committee will determine the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award and, in the case of performance share awards, in addition to matters addressed in Section 1.2.2, the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the performance share award. Each Award will be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. 1.6 AWARD PERIOD. The Award Period of any Option, SAR, warrant or similar ------------ right shall expire and any other Award shall either vest or be forfeited not more than 10 years after the date of grant; provided, however, that any -------- ------- payment of cash or delivery of stock pursuant to an Award may be delayed until a future date if specifically authorized by the Committee in writing. 1.7 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS. --------------------------------------------- 1.7.1 PROVISIONS FOR EXERCISE. Unless the Committee otherwise expressly ----------------------- provides, no Award will be exercisable or will vest until at least six months after the initial Award Date, and once exercisable an Award will remain exercisable until the expiration or earlier termination of the Award. 1.7.2 PROCEDURE. Any exercisable Award will be deemed to be exercised --------- when the Corporation receives written notice of such exercise from the Participant, together with any required payment made in accordance with Section 2.2.2 or 8.4, as the case may be, and any other requirements of exercise, including any document required by Section 6.4 are satisfied. 1.7.3 FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests will be ------------------------------- disregarded, but may be accumulated. The Committee, however, may determine in the case of Eligible Persons that cash, other securities, or other property will be paid or transferred in lieu of any fractional share interests. No fewer than 100 shares may be purchased on exercise of any Award at one time unless the number purchased is the total number at the time available for purchase under the Award. 4 1.8 ACCEPTANCE OF NOTES TO FINANCE EXERCISE. The Corporation, in its sole --------------------------------------- discretion, may accept one or more notes from any Eligible Person in connection with the exercise or receipt of any outstanding Award; but any such note will be subject to the following terms and conditions: 1.8.1 PRINCIPAL. The principal of the note will not exceed the amount --------- required to be paid to the Corporation upon the exercise or receipt of one or more Awards under the Plan and the note will be delivered directly to the Corporation in consideration of such exercise or receipt. 1.8.2 TERM. The initial term of the note will be determined by the ---- Committee; but the term of the note, including extensions, will not exceed a period of five years. 1.8.3 RECOURSE; SECURITY; COMPLIANCE. The note will provide for full ------------------------------ recourse to the Participant and will bear interest at a rate determined by the Committee but not less than the interest rate necessary to avoid the imputation of interest under the Code. If required by the Committee or by applicable law, the note will be secured by a pledge of any shares or rights financed thereby in compliance with applicable law. The terms, repayment provisions, and collateral release provisions of the note and the pledge securing the note will conform with applicable rules and regulations of the Federal Reserve Board as then in effect. 1.8.4 TERMINATION OF EMPLOYMENT. If the employment of the Participant ------------------------- terminates, the unpaid principal balance of the note will become due and payable on the 10th business day after such termination; but if a sale of such shares would cause the Participant to incur liability under Section 16(b) of the Exchange Act, the unpaid balance will become due and payable on the 10th business day after the first day on which a sale of such shares could have been made without incurring such liability assuming for these purposes that there are no other transactions (or deemed transactions) in securities of this Corporation by the Participant after such termination. 1.9 NO TRANSFERABILITY; LIMITED EXCEPTION TO TRANSFER RESTRICTIONS. -------------------------------------------------------------- 1.9.1 LIMIT ON EXERCISE AND TRANSFER. Unless otherwise expressly provided ------------------------------ in (or pursuant to) this Section 1.9, by applicable law and by the Award Agreement, as the same may be amended, (a) all Awards are non- transferable and will not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge, (b) Awards may be exercised only by the Participant, and (c) amounts payable or shares issuable pursuant to an Award will be delivered only to (or for the account of) the Participant. 5 1.9.2 EXCEPTIONS. The Committee may permit Awards to be exercised by and ---------- paid only to certain persons or entities related to the Participant pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer will be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made to related persons for estate and/or tax planning purposes and without consideration (other than nominal consideration). Incentive Stock Options and Restricted Stock Awards, however, will be subject to any and all additional transfer restrictions under the Code. 1.9.3 FURTHER EXCEPTIONS TO LIMITS ON TRANSFER. The exercise and transfer ---------------------------------------- restrictions in Section 1.9.1 will not apply to: (a) transfers to the Corporation, (b) the designation of a beneficiary to receive benefits if the Participant dies or, if the Participant has died, transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (c) transfers pursuant to a QDRO if approved or ratified by the Committee, (d) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by the Participant's legal representative, or (e) the authorization by the Committee of "cashless exercise" procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. 2. OPTIONS ------- 2.1 GRANTS. One or more Options may be granted under this Section to any ------ Eligible Person. Each Option granted will be designated by the Committee in the applicable Award Agreement as either an Incentive Stock Option, subject to Section 2.3, or a Non-Qualified Stock Option. 6 2.2 OPTION PRICE. ------------ 2.2.1 PRICING LIMITS. The purchase price per share of the Common Stock -------------- covered by each Option will be not be less than 100% (110% in the case of a Participant described in Section 2.4) of the Fair Market Value of the Common Stock on the date of grant. 2.2.2 PAYMENT PROVISIONS. The purchase price of any shares purchased on ------------------ exercise of an Option granted under this Section will be paid in full at the time of each purchase in one or a combination of the following methods: (a) in cash or by electronic funds transfer; (b) by certified or cashier's check payable to the order of the Corporation; (c) if permitted by the Committee, by a promissory note of the Participant consistent with the requirements of Sections 1.8 and 6.4; (d) by notice and third party payment in such manner as may be authorized by the Committee; or (e) by the delivery of shares of Common Stock of the Corporation already owned by the Participant, but the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by delivering such shares, and any shares delivered that were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option will be valued at their Fair Market Value on the date of exercise. Without limiting the generality of the foregoing, the Committee may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Corporation the amount of sale proceeds necessary to pay the exercise price and, unless otherwise prohibited by the Committee or applicable law, any applicable tax withholding under Section 6.5. The Corporation will not be obligated to deliver certificates for the shares unless and until it receives full payment of the exercise price therefor and any related withholding obligations have been satisfied. 2.3 LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS. --------------------------------------------------------- 2.3.1 $100,000 LIMIT. To the extent that the aggregate "FAIR MARKET -------------- VALUE" of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company or any parent corporation, such options will be treated as Nonqualified Stock Options. For this purpose, the "FAIR MARKET VALUE" of the stock subject to options will be determined as of the date the options were awarded. In reducing the number of options treated as incentive stock options to meet the 7 $100,000 limit, the most recently granted options will be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. 2.3.2 OPTION PERIOD. Except as provided in Section 1.6, each Option and ------------- all rights thereunder will expire no later than 10 years after the Award Date. 2.3.3 OTHER CODE LIMITS. Incentive Stock Options may only be granted to ----------------- Eligible Employees of the Corporation or a Subsidiary that satisfies the eligibility requirements of the Code. There will be imposed in any Award Agreement relating to Incentive Stock Options such other terms and conditions as from time to time are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. 2.4 LIMITS ON 10% HOLDERS. No Incentive Stock Option may be granted to any --------------------- person who, at the time the Option is granted, owns (or is deemed to own under Section 424(d) of the Code) shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.5 OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. Subject ---------------------------------------------------------------- to Section 1.4 and Section 6.6 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Person any adjustment in the exercise or purchase price, the vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Section by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result among other changes in an exercise or purchase price that is higher or lower than the exercise or purchase price of the original or prior Award, provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. 8 2.6 EFFECTS OF TERMINATION OF EMPLOYMENT; TERMINATION OF SUBSIDIARY STATUS; ----------------------------------------------------------------------- DISCRETIONARY PROVISIONS. ------------------------ 2.6.1 OPTIONS - RESIGNATION OR DISMISSAL. If the Participant's employment ---------------------------------- by (or other service specified in the Award Agreement to) the Company or the Manager, as the case may be, terminates for any reason (the date of such termination being referred to as the "SEVERANCE DATE") other than Retirement, Total Disability or death, or "FOR CAUSE" (as determined in the discretion of the Committee), the Participant will have, unless otherwise provided in the Award Agreement and subject to earlier termination pursuant to or as contemplated by Section 1.6 or 6.2, three months after the Severance Date to exercise any Option to the extent exercisable on the Severance Date. In the case of a termination "for cause", the Option will terminate on the Severance Date. The Option, to the extent not exercisable on the Severance Date, will terminate in all cases, unless the Award Agreement or the Committee otherwise provides. 2.6.2 OPTIONS - DEATH OR DISABILITY. If the Participant's employment by ----------------------------- (or specified service to) the Company or the Manager, as the case may be, terminates as a result of Total Disability or death, the Participant, Participant's Personal Representative or the Participant's Beneficiary, as the case may be, will have, unless otherwise provided in the Award Agreement and subject to earlier termination pursuant to or as contemplated by Section 1.6 or 6.2, until 12 months after the Severance Date to exercise any Option to the extent exercisable on the Severance Date. Any Option to the extent not exercisable on the Severance Date will terminate. 2.6.3 OPTIONS - RETIREMENT. If the Participant's employment by (or -------------------- specified service to) the Company or the Manager, as the case may be, terminates as a result of Retirement, the Participant, Participant's Personal Representative or the Participant's Beneficiary, as the case may be, will have, unless otherwise provided in the Award Agreement and subject to earlier termination pursuant to or as contemplated by Section 1.6 or 6.2, until 12 months after the Severance Date to exercise any Nonqualified Stock Option (three months after the Severance Date if an Incentive Stock Option states it is it be retained) to the extent exercisable on the Severance Date. The Option, to the extent not exercisable on the Severance Date, will terminate. 2.6.4 CERTAIN SARS. Any SAR granted concurrently or in tandem with an ------------ Option will have the same post-Severance Date provisions and exercisability periods as the Option to which it relates, unless the Committee otherwise provides. 9 2.6.5 OTHER AWARDS. The Committee will establish in respect of each other ------------ Award granted hereunder the Participant's rights and benefits (if any) if the Participant's employment is terminated and in so doing may make distinctions based upon the cause of termination and the nature of the Award. 2.6.6 COMMITTEE DISCRETION. Notwithstanding the foregoing provisions of -------------------- this Section 2.6, in the event of, or in anticipation of, a termination of employment with the Company or the Manager, as the case may be, for any reason, other than a discharge for cause, the Committee, by express provisions in or by amendment to the Award Agreement, may increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, and/or, subject to the provisions of Section 1.6, extend the exercisability period, upon such terms as the Committee deems appropriate. 2.7 OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER --------------------------------------------------------------------- CORPORATIONS. Options and Stock Appreciation Rights may be granted to ------------ Eligible Persons under this Plan in substitution for employee stock options granted by other entities to persons who are or who will become Eligible Persons in respect of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the employing entity. 3. STOCK APPRECIATION RIGHTS -------------------------- (INCLUDING LIMITED STOCK APPRECIATION RIGHTS) --------------------------------------------- 3.1 GRANTS. The Committee may grant to any Eligible Person Stock Appreciation ------ Rights either concurrently with the grant of another Award or in respect of an outstanding Award, in whole or in part, or independently of any other Award. Any Stock Appreciation Right granted in connection with an Incentive Stock Option will contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder, unless the holder otherwise agrees. 3.2 EXERCISE OF STOCK APPRECIATION RIGHTS. ------------------------------------- 3.2.1 EXERCISABILITY. Unless the Award Agreement or the Committee -------------- otherwise provides, a Stock Appreciation Right related to another Award will be exercisable at such time or times, and to the extent, that the related Award will be exercisable. 3.2.2 EFFECT ON AVAILABLE SHARES. To the extent that a Stock Appreciation -------------------------- Right is exercised, only the actual number of delivered shares of 10 Common Stock will be charged against the maximum amount of Common Stock that may be delivered pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant will, however, be reduced by the number of underlying shares as to which the exercise related, unless the Award Agreement otherwise expressly provides. 3.2.3 STAND-ALONE SARS. A Stock Appreciation Right granted independently ---------------- of any other Award will be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.2.4 PROPORTIONATE REDUCTION If an SAR extends to less than all the ----------------------- shares covered by the related Award and if a portion of the related Award is thereafter exercised, the number of shares subject to the unexercised SAR shall be reduced only if and to the extent that the remaining number of shares covered by the related Award is less than the remaining number of shares subject to such SAR. 3.3 PAYMENT. ------- 3.3.1 AMOUNT. Unless the Committee otherwise provides, upon exercise of a ------ Stock Appreciation Right and the attendant surrender of an exercisable portion of any related Award, the Participant will be entitled to receive subject to Section 6.5 payment of an amount determined by multiplying (a) the difference obtained by subtracting the exercise price per share of Common Stock under the related Award (if applicable) or the initial share value specified in the Award from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (b) the number of shares with respect to which the Stock Appreciation Right has been exercised. 3.3.2 FORM OF PAYMENT. The Committee, in its sole discretion, will --------------- determine the form in which payment will be made of the amount determined under Section 3.3.1 above, either solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee has determined that such exercise and payment are consistent with applicable law. If the Committee permits the Participant to elect to receive cash or shares (or a combination thereof) upon exercise, the election will be subject to such conditions as the Committee may impose. 11 3.4 LIMITED STOCK APPRECIATION RIGHTS. The Committee may grant to any Eligible --------------------------------- Person Stock Appreciation Rights exercisable only upon or in respect of a change in control or any other specified event ("LIMITED SARS") and such Limited SARs may relate to or operate in tandem or combination with or substitution for Options, other SARs or other Awards (or any combination thereof), and may be payable in cash or shares based on the spread between the base price of the SAR and a price based upon or equal to the Fair Market Value of the Shares during a specified period or at a specified time before, after or including the date of such event. 4. RESTRICTED STOCK AWARDS ----------------------- 4.1 GRANTS. The Committee may grant one or more Restricted Stock Awards to any ------ Eligible Person. Each Restricted Stock Award Agreement will specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the consideration for such shares (but not less than the minimum lawful consideration under applicable state law) payable by the Participant, the extent (if any) to which and the time (if ever) at which the Participant will be entitled to dividends, voting and other rights in respect of the shares prior to vesting, and the restrictions (which may be based on performance criteria, passage of time or other factors or any combination thereof) imposed on such shares and the conditions of release or lapse of such restrictions. Such restrictions will not lapse earlier than six months after the Award Date, except to the extent the Committee may otherwise expressly provide. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions ("RESTRICTED SHARES") will bear a legend making appropriate reference to the restrictions hereunder and will be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares have lapsed and the shares have vested in accordance with the provisions of the Award and Section 1.7. Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 RESTRICTIONS. ------------ 4.2.1 PRE-VESTING RESTRAINTS. Except as provided in Sections 4.1 and ---------------------- 1.9, restricted shares comprising any Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until the restrictions on such shares have lapsed and the shares have become vested. 4.2.2 DIVIDEND AND VOTING RIGHTS. Unless otherwise provided in the -------------------------- applicable Award Agreement, a Participant receiving a Restricted 12 Stock Award will be entitled to cash dividend and voting rights for all shares issued even though they are not vested, but such rights will terminate immediately as to any Restricted Shares which cease to be eligible for vesting. 4.2.3 CASH PAYMENTS. If the Participant has been paid or received ------------- cash (including any dividends) in connection with the Restricted Stock Award, the Award Agreement will specify the extent (if any) the which the cash must be returned (with or without an earnings factor) as to any restricted shares that cease to be eligible for vesting. 4.3 RETURN TO THE CORPORATION. Unless the Committee otherwise expressly ------------------------- provides, Restricted Shares that remain subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that have not been satisfied by the time specified in the applicable Award Agreement will not vest and will be returned to the Corporation in such manner and on such terms as set forth in the Award Agreement or as the Committee otherwise expressly provides. 5. PERFORMANCE SHARE AWARDS; STOCK UNITS AND STOCK BONUSES ------------------------------------------------------- 5.1 GRANTS OF PERFORMANCE SHARE AWARDS. The Committee may grant ---------------------------------- Performance Share Awards to Eligible Employees based upon such factors as the Committee deems relevant in light of the specific type and terms of the award. An Award Agreement will specify the maximum number of shares of Common Stock (if any) subject to the Performance Share Award, the consideration (but not less than the minimum lawful consideration) to be paid for any such shares as may be issuable to the Participant, the duration of the Award and the conditions upon which delivery of any shares or cash to the Participant will be based. The amount of cash or shares or other property that may be deliverable pursuant to such Award will be based upon the degree of attainment over a specified period of not more than 10 years (a "PERFORMANCE CYCLE") as may be established by the Committee of such measure(s) of the performance of the Company (or any part thereof) or the Participant as may be established by the Committee. The Committee may provide for full or partial credit, prior to completion of such performance cycle or the attainment of the performance achievement specified in the Award, in the event of the Participant's death, Retirement, or Total Disability, a Change in Control Event or in such other circumstances as the Committee (consistent with Section 6.10.3(b), if applicable) may determine. 13 5.2 SPECIAL PERFORMANCE-BASED SHARE AWARDS. Options or SAR's granted with -------------------------------------- an exercise price not less than Fair Market Value at the applicable date of grant for Section 162(m) purposes to Eligible Employees which otherwise satisfy the conditions to deductibility under Section 162(m) of the Code are deemed "Qualifying Awards". Without limiting the generality of the foregoing, and in addition to Qualifying Awards granted under other provisions of this Plan, other performance-based awards within the meaning of Section 162(m) of the Code ("PERFORMANCE- BASED AWARDS"), whether in the form of restricted stock, performance stock, phantom stock or other rights, the vesting of which depends on the performance of the Company on a consolidated, segment, subsidiary, or division basis, with reference to revenue growth, net earnings (before or after taxes or before or after taxes, interest, depreciation, and/or amortization), cash flow, return on equity, return on assets or return on net investment, or cost containment or reduction, or any combination thereof (the "BUSINESS CRITERIA") relative to preestablished performance goals, may be granted under this Plan. To the extent so applicable, these terms are used as applied under generally accepted accounting principles and in the Company's financial reporting. The applicable business criterion or criteria and the specific performance goals must be approved by the Committee in advance of any applicable deadlines under the Code and while the performance relating to such goals remains substantially uncertain. The applicable performance measurement period may be not less than one (except as provided in Section 1.6) nor more than 10 years. Other types of performance and non-performance awards may also be granted under the other provisions of this Plan. The following provisions relate to all Performance-Based Awards (other than Qualifying Awards) granted under this Plan: 5.2.1 ELIGIBLE CLASS. The eligible class of persons for Awards under -------------- this Section is executive officers of the Corporation. 5.2.2 MAXIMUM AWARD. Subject to Section 1.4.2, in no event will ------------- grants in any calendar year to any one individual under this Section 5.2 relate to more than 250,000 shares or, (if payable solely in cash) a cash amount of more than $1,000,000. 5.2.3 COMMITTEE CERTIFICATION. To the extent required by Section ----------------------- 162(m), before any Performance-Based Award under this Section 5.2 is paid, the Committee must certify that the material terms of the Performance-Based Award were satisfied. 5.2.4 TERMS AND CONDITIONS OF AWARDS. The Committee will have ------------------------------ discretion to determine the restrictions or other limitations of the individual Awards under this Section 5.2 (including the authority 14 to reduce Awards, payouts or vesting or to pay no Awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise). 5.2.5 STOCK PAYOUT FEATURES. In lieu of cash payment of an Award, --------------------- the Committee may require or allow all or a portion of the Award to be paid in the form of stock, Restricted Shares, an Option, or another Award. 5.2.6 ADJUSTMENTS FOR MATERIAL CHANGES. Performance goals or other --------------------------------- features of an Award under this Section 5.2 may provide that they (a) shall be adjusted to reflect a change in corporate capitalization, a corporate transaction (such as a reorganization, combination, separation, or merger) or a complete or partial corporate liquidation, or (b) shall be calculated either without regard for or to reflect any change in accounting policies or practices affecting the Company and/or the business criteria or performance goals or targets, or (c) shall be adjusted for any other circumstance or event, or (d) any combination of (a) through (c), but only to the extent in each case that such adjustment or determination in respect of Performance-Based Awards would be consistent with the requirements of Section 162(m) to qualify as performance- based compensation. 5.3 GRANTS OF STOCK BONUSES. The Committee may grant a Stock Bonus to any ----------------------- Eligible Person to reward exceptional or special services, contributions or achievements in the manner and on such terms and conditions (including any restrictions on such shares) as determined from time to time by the Committee. The number of shares so awarded will be determined by the Committee. The Award may be granted independently or in lieu of a cash bonus. 5.4 DEFERRED PAYMENTS; STOCK UNITS. The Committee may authorize for the ------------------------------ benefit of any Eligible Person the deferral of any payment of cash or shares that may otherwise become due or of cash otherwise payable under this Plan or otherwise, in the form of stock units payable in cash or shares or by other means, and may provide for accretion thereof based upon such deferment, at the election or at the request of the Participant, subject to any other applicable terms of this Plan. Such deferral will be subject to such further conditions, restrictions or requirements as the Committee may impose, subject to any then vested rights of Participants. 15 5.5 CASH BONUS AWARDS. ----------------- 5.5.1 PERFORMANCE GOALS. The Committee may establish a program of ----------------- annual incentive awards that are payable in cash to Eligible Persons based upon the extent to which performance goals are met during the performance period. The performance goals may depend upon the performance of the Company on a consolidated, subsidiary division basis with reference to revenues, net earnings (before or after interest, taxes, depreciation, or amortization), cash flow, return on equity or on assets or net investment, cost containment or reduction, or achievement of strategic goals (or any combination of such factors). In addition, the award may depend upon the Eligible Employee's individual performance. 5.6 ALTERNATIVE PAYMENTS. In lieu of cash payment of an Award, the -------------------- Committee may require or allow all or a portion of the Award to be paid or credited in the form of Common Stock, Restricted Stock, an Option or other Award. 6. OTHER PROVISIONS ---------------- 6.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES. ---------------------------------------------------------- 6.1.1 EMPLOYMENT STATUS. Status as an Eligible Person will not be ----------------- construed as a commitment that any Award will be made under this Plan to an Eligible Person or to Eligible Persons generally. 6.1.2 NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in ---------------------- any other documents related to this Plan or to any Award) will confer upon any Eligible Person or other Participant any right to continue in the employ or other service of the Company or the Manager, as the case may be, or constitute any management or other contract or agreement of employment or other service, nor will interfere in any way with the right of the Company or the Manager, as the case may be, to otherwise change a person's compensation or other benefits or to terminate the employment or service of such person, with or without cause. This Plan or any related document will not, however, adversely affect any independent contractual right of such person without the Participant's consent. 6.1.3 PLAN NOT FUNDED. Awards payable under this Plan will be --------------- payable in shares or from the general assets of the Corporation, and (except as provided in Section 1.4.3) no special or separate reserve, fund or deposit will be made to assure payment of such 16 Awards. No Participant, Beneficiary or other person will have any right, title or interest in any fund or in any specific asset (including shares of Common Stock) of the Company by reason of any Award hereunder. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan will create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive payment pursuant to any Award hereunder, such right will be no greater than the right of any unsecured general creditor of the Company. 6.2 ADJUSTMENTS; ACCELERATION. ------------------------- 6.2.1 ADJUSTMENTS. The following provisions will apply in the case ----------- of (i) any extraordinary dividend or other extraordinary distribution occurs in respect of the Common Stock (whether in the form of cash, Common Stock, other securities, or other property), (ii) any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend), or reverse stock split, (iii) any reorganization, merger, combination, consolidation, split-up, spin-off, combination, material repurchase, or exchange of Common Stock or other securities of the Corporation, (iv) any similar, unusual or extraordinary corporate transaction (or event in respect of the Common Stock) or (v) a sale of substantially all the assets of the Corporation as an entirety. In such event, the Committee will, in such manner and to such extent (if any) as it deems appropriate and equitable (a) proportionately adjust any or all of (i) the number and type of shares of Common Stock (or other securities) that thereafter may be made the subject of Awards (including the specific maximum and numbers of shares set forth elsewhere in this Plan), (ii) the number, amount and type of shares of Common Stock (or other securities or property) subject to any or all outstanding Awards,(iii) the grant, purchase, or exercise price of any or all outstanding Awards, (iv) the securities, cash or other property deliverable upon exercise of any outstanding Awards, or (v) the performance standards appropriate to any outstanding Awards, or (b) in the case of an extraordinary dividend or other distribution, recapitalization, reclassification, merger, 17 reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a cash payment or for the substitution or exchange of any or all outstanding Awards or the cash, securities or property deliverable to the holder of any or all outstanding Awards based upon the distribution or consideration payable to holders of the Common Stock of the Corporation upon or in respect of such event. (c) In each case, with respect to Awards of Incentive Stock Options, no such adjustment will be made that would cause the Plan to violate Section 424(a) of the Code or any successor provisions without the written consent of holders materially adversely affected thereby. (d) In any of such events, the Committee may take such action sufficiently prior to such event if necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is available to stockholders generally. 6.2.2 ACCELERATION OF AWARDS UPON CHANGE IN CONTROL. Unless prior to --------------------------------------------- a Change in Control Event the Committee determines that, upon its occurrence, benefits under any or all Awards will not accelerate or determines that only certain or limited benefits under any or all Awards will be accelerated and the extent to which they will be accelerated, and/or establishes a different time in respect of such Event for such acceleration, then upon the occurrence of a Change in Control Event (a) each Option and Stock Appreciation Right will become immediately exercisable, (b) Restricted Stock will immediately vest free of restrictions, and (c) each Performance Share Award will become payable to the Participant. However, in the case of a transaction intended to be accounted for as a pooling of interests transaction, the Committee shall have no discretion with respect to the foregoing acceleration of Awards. The Committee may override the limitations on acceleration in this Section 6.2.2 by express provision in the Award Agreement and may accord any Eligible Person a right to 18 refuse any acceleration, whether pursuant to the Award Agreement or otherwise, in such circumstances as the Committee may approve. Any acceleration of Awards will comply with applicable legal requirements and, if the circumstances require, may be deemed by the Committee to occur an instant before the event. 6.2.3 POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option ------------------------------------------------ or other right to acquire Common Stock under this Plan (other than under Section 8) has been fully accelerated as required or permitted by Section 6.2.2 but is not exercised at or prior to (a) a dissolution of the Corporation, or (b) an event described in Section 6.2.1 that the Corporation does not survive, or (c) the consummation of an event described in Section 6.1 involving a Change of Control approved by the Board, the Option or right will terminate, subject to any provision that has been expressly made by the Committee through a plan of reorganization approved by the Board or otherwise for the survival, substitution, assumption, exchange or other settlement of the Option or right. 6.2.4 GOLDEN PARACHUTE LIMITATIONS. Unless otherwise specified in an ---------------------------- Award Agreement or expressly approved by the Committee, no Award will be accelerated under this Plan to an extent or in a manner that would not be fully deductible by the Company for federal income tax purposes because of Section 280G of the Code, nor will any payment hereunder be accelerated if any portion of such accelerated payment would not be deductible by the Company because of Section 280G of the Code. If a holder would be entitled to benefits or payments hereunder and under any other plan or program that would constitute "parachute payments" as defined in Section 280G of the Code, then the holder may by written notice to the Company designate the order in which such parachute payments will be reduced or modified so that the Company is not denied federal income tax deductions for any "parachute payments" because of Section 280G of the Code. 6.3 EFFECT OF TERMINATION OF EMPLOYMENT. The Committee will establish in ----------------------------------- respect of each Award granted to an Eligible Person the effect of a termination of employment or service on the rights and benefits thereunder and in so doing may make distinctions based upon the cause of termination. 6.4 COMPLIANCE WITH LAWS. -------------------- 19 6.4.1 GENERAL. This Plan, the granting, vesting and exercise of ------- Awards under this Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under Awards granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law, federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan will be subject to such restrictions, and to any restrictions the Committee may require to preserve a pooling of interests under generally accepted accounting principles, and the person acquiring such securities will, if requested by the Corporation, provide such assurances and representations to the Corporation as the Corporation may deem necessary or desirable, to assure compliance with all applicable legal requirements. 6.4.2 RESTRICTIONS ON TRANSFER. If the offer or sale of any shares ------------------------ of Common Stock under the Plan is not registered under the Securities Act, but an exemption is available which requires an investment representation or other representation, each Participant will be required to represent that the shares of Common Stock are being acquired for investment, and not with a view to the sale or distribution thereof, and to make such other representations as are deemed necessary or appropriate in the opinion of the Committee and its counsel. Any determination by the Company and its counsel in connection with any other the matters set forth in this Section 6.4 will be conclusive and binding on all persons. Stock certificates evidencing shares acquired under the Plan pursuant to an unregistered transaction will bear the following restrictive legend and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law: "THE SALE OF THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT." 20 If, in the opinion of the Company and its counsel, any legend placed on a stock certificate representing shares sold under the Plan is no longer required, the holder of such certificate may exchange such certificate for a certificate representing the same number of shares without such legend. 6.5 TAX WITHHOLDING. --------------- 6.5.1 PROVISION FOR TAX WITHHOLDING OFFSET. Upon any exercise, ------------------------------------ vesting, or payment of any Award or upon the disposition of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, the Company shall have the right at its option to (a) require the Participant (or Personal Representative or Beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes which the Company may be required to withhold with respect to such Award event or payment or (b) deduct from any amount payable in cash the amount of any taxes which the Company may be required to withhold with respect to such cash payment. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may in its sole discretion (subject to Section 6.4) grant (either at the time of the Award or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then Fair Market Value, to satisfy such withholding obligation. 6.5.2 TAX LOANS. If so provided in the Award Agreement, the Company --------- may, to the extent permitted by law, authorize a loan to an Eligible Person in the amount of any taxes that the Company may be required to withhold with respect to shares of Common Stock received (or disposed of, as the case may be) pursuant to a transaction described in Section 6.5.1. Such a loan will be for a term, at a rate of interest and pursuant to such other terms and conditions as the Company, under applicable law may establish and such loan need not comply with the provisions of Section 1.8. 21 6.6 PLAN AMENDMENT, TERMINATION AND SUSPENSION. ------------------------------------------ 6.6.1 BOARD AUTHORIZATION. The Board may, at any time, terminate or, ------------------- from time to time, amend, modify or suspend this Plan, in whole or in part. No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee will retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. 6.6.2 STOCKHOLDER APPROVAL. To the extent then required under -------------------- Sections 422 and 424 of the Code or any other applicable law, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to stockholder approval. 6.6.3 AMENDMENTS TO AWARDS. Without limiting any other express -------------------- authority of the Committee under but subject to the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Participants that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner materially adverse to the Participant, the Participant's rights and benefits under an Award. 6.6.4 LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment, -------------------------------------------- suspension or termination of this Plan or change of or affecting any outstanding Award will, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Corporation under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 will not be deemed to constitute changes or amendments for purposes of this Section 6.6. 6.7 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly ----------------------------- authorized by the Committee or this Plan, a Participant will not be entitled to any privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by the Participant. No adjustment will be made for dividends or other rights as a stockholder for which a record date is prior to such date of delivery. 6.8 EFFECTIVE DATE OF THE PLAN. This Plan is effective as of ___________ -------------------------- __, 1997 (the "EFFECTIVE DATE"). The Plan was approved by the Corporation's stockholders on __________ __, 1997. 22 6.9 TERM OF THE PLAN. No Award may be granted under this Plan more than ---------------- ten years after the Effective Date (the "TERMINATION DATE"). Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the termination date may extend beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, will continue during any suspension of this Plan and in respect of Awards outstanding on the termination date. 6.10 GOVERNING LAW/CONSTRUCTION/SEVERABILITY. --------------------------------------- 6.10.1 CHOICE OF LAW. This Plan, the Awards, all documents ------------- evidencing Awards and all other related documents will be governed by, and construed in accordance with the laws of the State of California. 6.10.2 SEVERABILITY. If a court of competent jurisdiction holds any ------------ provision invalid and unenforceable, the remaining provisions of this Plan will continue in effect. 6.10.3 PLAN CONSTRUCTION. ----------------- (A) RULE 16B-3. It is the intent of the Corporation that the ---------- Awards hereunder satisfy and be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, satisfies the applicable requirements of Rule 16b-3 so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act in respect of those transactions and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed above, that provision to the extent reasonable will be interpreted as to avoid such conflict. If the conflict remains irreconcilable, the Committee may disregard the provision if it concludes that to do so furthers the interest of the Corporation, is fair to the affected Participant and is consistent with the purposes of this Plan as to such persons in the circumstances. (B) SECTION 162(M). It is the further intent of the Company -------------- that, to the extent the Corporation or Awards under this Plan may be or become subject to Section 162(m), Options or SARs with an exercise or base price not less than Fair 23 Market Value on the date of grant and performance awards under Section 5.2 of this Plan that are granted to or held by a person subject to Section 162(m) of the Code will qualify as performance-based compensation under Section 162(m) of the Code, and this Plan will be interpreted consistent with such intent. 6.11 CAPTIONS. Captions and headings are given to the sections and -------- subsections of this Plan solely as a convenience to facilitate reference. Such headings will not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof. 6.12 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan and ------------------------------------- any Award hereunder, if an entity ceases to be a Subsidiary a termination of employment and service will be deemed to have occurred with respect to each Eligible Person in respect of such Subsidiary who does not continue as an Eligible Person in respect of another entity within the Company. 6.13 NON-EXCLUSIVITY OF PLAN. Nothing in this Plan will limit or be ----------------------- deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 7. DEFINITIONS ----------- "AWARD" means an award of any Option, Stock Appreciation Right, Restricted Stock, Stock Bonus, performance share award, stock unit, dividend equivalent or deferred payment right or other right or security that would constitute a "derivative security" under Rule 16a-1(c) of the Exchange Act, or any combination thereof, whether alternative or cumulative, authorized by and granted under this Plan. "AWARD AGREEMENT" means any writing setting forth the terms of an Award that has been authorized by the Committee. "AWARD DATE" means the date upon which the Committee took the action granting an Award or such later date as the Committee designates as the Award Date at the time of the Award or, in the case of Awards under Section 8, the applicable dates set forth therein. "AWARD PERIOD" means the period beginning on an Award Date and ending on the expiration date of such Award. 24 "BENEFICIARY" means the person, persons, trust or trusts designated by a Participant or, in the absence of a designation, entitled by will or the laws of descent and distribution, to receive the benefits specified in the Award Agreement and under this Plan if the Participant dies, and means the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. "BOARD" means the Board of Directors of the Corporation. "CHANGE IN CONTROL EVENT" means any of the following: (a) Approval by the stockholders of the Corporation of the dissolution or liquidation of the Corporation; (b) Approval by the stockholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries or other affiliates, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned, directly or indirectly, by stockholders of the Corporation immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Corporation's securities from the record date for such approval until such reorganization and that such record owners hold no securities of the other parties to such reorganization), but including in such determination any securities of the other parties to such reorganization held by affiliates of the Corporation); (c) Approval by the stockholders of the Corporation of the sale of substantially all of the Corporation's business and/or assets as an entity to a person or entity that is not a Subsidiary or other affiliate; or; (d) Any "PERSON" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act but excluding any person described in and satisfying the conditions of Rule 13d-1(b)(1) thereunder) becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 50% of the combined voting power of the Corporation's then outstanding securities entitled to then vote generally in the election of directors of the Corporation; or (e) During any period not longer than two consecutive years, individuals who at the beginning of such period constituted the Board cease to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's stockholders, of each new Board member was approved by a vote of at least three-fourths of the 25 Board members then still in office who were Board members at the beginning of such period (including for these purposes, new members whose election or nomination was so approved). "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMISSION" means the Securities and Exchange Commission. "COMMITTEE" means one or more committees appointed by the Board to administer this Plan, each of which will be comprised of two or more directors meeting such criteria as the Board may establish from time to time in order to satisfy any applicable legal or regulatory requirements. "COMMON STOCK" means the Common Stock of the Corporation and such other securities or property as may become the subject of Awards, or become subject to Awards, pursuant to an adjustment made under Section 6.2 of this Plan. "COMPANY" means, collectively, the Corporation and its Subsidiaries. "CORPORATION" means Apex Mortgage Capital, Inc., a Maryland corporation, and its successors. "ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or employee of the Company. "ELIGIBLE PERSON" means an Eligible Employee, or any Other Eligible Person, as determined by the Committee. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time. "FAIR MARKET VALUE" on any date means (a) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (b) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (c) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD or a similar organization; or (d) if the stock is not listed or 26 admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the value as established by the Committee at such time for purposes of this Plan. "INCENTIVE STOCK OPTION" means an Option that is designated and intended as an incentive stock option within the meaning of Section 422 of the Code, the award of that contains such provisions (including but not limited to the receipt of stockholder approval of this Plan, if the award is made prior to such approval) and is made under such circumstances and to such persons as may be necessary to comply with that section. "INITIAL AWARDS" means the Options granted immediately prior to the effectiveness of the registration statement relating to the Corporation's initial public offering, which Options are granted to officers and employees of the Manager and which are exercisable for an aggregate of 300,000 shares of Common Stock. "MANAGER" means TCW Investment Management Company. "NONQUALIFIED STOCK OPTION" means an Option that is designated as a Nonqualified Stock Option and will include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. Any Option granted hereunder that is not designated as an incentive stock option will be deemed to be designated a nonqualified stock option under this Plan and not an incentive stock option under the Code. "NON-EMPLOYEE DIRECTOR" means a member of the Board of Directors of the Corporation who is not an officer or employee of the Company. For purposes of this Plan, the Chairman of the Board will be deemed an officer of the Company. "OPTION" means an option to purchase Common Stock granted under this Plan. The Committee will designate any Option granted to an Eligible Person as a Nonqualified Stock Option or an Incentive Stock Option. "OTHER ELIGIBLE PERSON" means any Non-Employee Director, the Manager, any director, officer or employee of the Manager, or any other individual consultant or advisor who renders or has rendered bona fide services (other than services ---- ---- in connection with the offering or sale of securities of the Company in a capital raising transaction) to the Company. If the Corporation's officers and directors are or become subject to Section 16 of the Exchange Act, a Non- Employee Director will not thereafter be selected as an Other Eligible Person. A non-employee providing bona fide services to the Company may only be selected ---- ---- as an Other Eligible Person if such person's participation in this Plan would not adversely affect (a) the Corporation's eligibility to use Form S-8 or Form S-3 to register under the Securities Act the offering of shares issuable under this Plan by the Company or (b) the Corporation's compliance with any 27 other applicable laws; provided, however, in the case of clause (a) above, such -------- ------- person may be selected as an Other Eligible Person if the Committee determines that the offering and issuance of shares to such person in the circumstances satisfies the requirements of any applicable exemption from registration under federal and state securities laws and regulations. "PARTICIPANT" means an Eligible Person who has been granted an Award under this Plan and a Non-Employee Director who has been received an Award under Section 8 of this Plan. "PERFORMANCE SHARE AWARD" means an Award of a right to receive shares of Common Stock under Section 5.1, or to receive shares of Common Stock or other compensation (including cash) under Section 5.2, the issuance or payment of that is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. "PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability or incompetence of a Participant, has acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Plan by virtue of having become the legal representative of the Participant. "PLAN" means this Apex Mortgage Capital, Inc. 1997 Stock Option Plan, as amended from time to time. "QDRO" means a qualified domestic relations order. "RESTRICTED SHARES" or "RESTRICTED STOCK" means shares of Common Stock awarded to a Participant under this Plan, subject to payment of such consideration, if any, and such conditions on vesting (which may include, among others, the passage of time, specified performance objectives or other factors) and such transfer and other restrictions as are established in or pursuant to this Plan and the related Award Agreement, for so long as such shares remain unvested under the terms of the applicable Award Agreement. "RETIREMENT" means retirement with the consent of the Company or the Manager, as the case may be, or, from active service as an employee or officer of the Company or the Manager, as the case may be, on or after attaining age 55 with ten or more years of service or age 65. "RULE 16B-3" means Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act, as amended from time to time. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. 28 "STOCK APPRECIATION RIGHT" OR "SAR" means a right authorized under this Plan to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, the aggregate amount or value of which is determined by reference to a change in the Fair Market Value of the Common Stock. "STOCK BONUS" means an Award of shares of Common Stock granted under this Plan for no consideration other than past services and without restriction other than such transfer or other restrictions as the Committee may deem advisable to assure compliance with law. "STOCK UNIT" means a bookkeeping entry which serves a unit of measurement relative to a share of Common Stock for purposes of determining the payment of a deferred benefit or right under the Plan. "SUBSIDIARY" means any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. "TOTAL DISABILITY" means a disability where Participant is unable to effectively engage in the material activities required for Participant's position with the Company or the Manager, as the case may be, by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a period of 90 consecutive days or for shorter periods aggregating 180 days in any consecutive 12 month period. 8. NON-EMPLOYEE DIRECTOR OPTIONS 8.1 PARTICIPATION. Awards under this Section 8 will be made only to Non- ------------- Employee Directors and will be evidenced by Award Agreements in the form adopted by the Committee. 8.2 OPTION GRANTS. ------------- 8.2.1 TIME OF INITIAL AWARD. After approval of this Plan by the --------------------- stockholders of the Corporation, and upon the closing of the Corporation's initial public offering, each person who is then a Non-Employee Director will automatically be granted (without any action by the Board or Committee) a Non-qualified Stock Option (the Award Date of which will be the date of the closing of such initial public offering) to purchase 25,000 shares of Common Stock at the price that the Corporations Common Stock is offered in such intitial public offering. 29 8.2.2 SUBSEQUENT AWARDS. If any person who is not then an officer or ----------------- employee of the Company becomes a director of the Corporation, such person will automatically be granted (without any action by the Board or Committee) a Non-qualified Stock Option (the Award Date of which will be the date such person takes office) to purchase 25,000 shares of Common Stock. 8.3 OPTION PRICE. The purchase price per share of the Common Stock ------------ covered by each Option granted pursuant to Section 8.2.2 will be 100% of the Fair Market Value of the Common Stock on the Award Date. The exercise price of any Option granted under this Section will be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at the Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, but any such shares used in payment must be owned by the Participant at least six months prior to the date of exercise. 8.4 OPTION PERIOD AND EXERCISABILITY. Each Option granted under this -------------------------------- Section 8 and all rights or obligations thereunder will expire on the day before the 10th anniversary of the Award Date and will be subject to earlier termination as provided below. Each Option granted under Section 8.2 will become exercisable on the first anniversary of the Award Date. 8.5 TERMINATION OF DIRECTORSHIP. If a Non-Employee Director's services as --------------------------- a member of the Board of Directors terminate by reason of death, Disability or Retirement, an Option granted pursuant to this Section 8 held by such Participant will immediately become and will remain exercisable for nine months after the date of such termination or until the expiration of the stated term of such Option, whichever first occurs. If a Non-Employee Director's services as a member of the Board of Directors terminate for any other reason, any portion of an Option granted pursuant to this Section that is not then exercisable will terminate and any portion of such Option that is then exercisable may be exercised for six months after the date of such termination or until the expiration of the stated term whichever first occurs. 8.6 ADJUSTMENTS; ACCELERATIONS; TERMINATIONS. Options granted under this ---------------------------------------- Section 8 will be subject to adjustments, accelerations and terminations as provided in Section 6.2, but only to the extent that in the case of a Change in Control Event such effect and any Board or Committee action in respect thereof is effected pursuant to the terms of a reorganization agreement approved by stockholders of the Corporation or is otherwise consistent with the effect on Options held by persons other than executive officers or directors of the Corporation (or, if there are none, 30 consistent in respect of the underlying shares with the effect on stockholders generally). 8.7 ACCELERATION UPON A CHANGE IN CONTROL EVENT. Upon the occurrence of a ------------------------------------------- Change in Control Event and acceleration under Section 6.2.2, each Option granted under Section 8.2 hereof will become immediately exercisable in full. To the extent that any Option granted under this Section 8 is not exercised prior to (a) a dissolution of the Corporation or (b) a merger or other corporate event that the Corporation does not survive, and no provision is (or consistent with the provisions of this Plan can be) made for the assumption, conversion, substitution or exchange of the Option, the Option will terminate upon the occurrence of such event. 31 EX-23.1 10 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Pre-effective Amendment No. 3 to Registration Statement No. 333-36069 of Apex Mortgage Capital, Inc. on Form S-11 of our report dated September 16, 1997, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Los Angeles, California November 20, 1997 EX-99.1 11 CONSENT OF DIRECTOR EXHIBIT 99.1 CONSENT OF DIRECTOR PURSUANT TO RULE 438 OF THE SECURITIES ACT OF 1933 I hereby consent to serve as a Director of Apex Mortgage Capital, Inc., a Maryland corporation (the "Company"), upon completion of its initial public offering of Common Stock. I further consent to being named as a future director of the Company in the Company's Registration Statement on Form S-11 to be filed with the Securities and Exchange Commission on or about November 20, 1997. November 20, 1997 John A. Gavin Dated:_______________________________ /s/__________________________________ John A. Gavin EXHIBIT 99.1 CONSENT OF DIRECTOR PURSUANT TO RULE 438 OF THE SECURITIES ACT OF 1933 I hereby consent to serve as a Director of Apex Mortgage Capital, Inc., a Maryland corporation (the "Company"), upon completion of its initial public offering of Common Stock. I further consent to being named as a future director of the Company in the Company's Registration Statement on Form S-11 to be filed with the Securities and Exchange Commission on or about November 20, 1997. November 20, 1997 Peter G. Allen Dated:_______________________________ /s/__________________________________ Peter G. Allen -----END PRIVACY-ENHANCED MESSAGE-----