-----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, UgnXL+HRes913sA0OfEeM/s79y0n97QPku9NpN9jI7SzZA+h3fG/xhnRYV6euwXx ZtUKIU8o0HEwqRFZW/9Sbg== 0001047469-98-010388.txt : 19980319 0001047469-98-010388.hdr.sgml : 19980319 ACCESSION NUMBER: 0001047469-98-010388 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANTHRACITE CAPITAL INC CENTRAL INDEX KEY: 0001050112 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: SEC FILE NUMBER: 333-40813 FILM NUMBER: 98568342 BUSINESS ADDRESS: STREET 1: 345 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10154 BUSINESS PHONE: 2127545560 MAIL ADDRESS: STREET 1: 345 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10154 FORMER COMPANY: FORMER CONFORMED NAME: ANTHRACITE MORTGAGE CAPITAL INC DATE OF NAME CHANGE: 19971121 S-11/A 1 S-11/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 18, 1998 REGISTRATION NO. 333-40813 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 6 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- ANTHRACITE CAPITAL, INC. (Exact Name of Registrant as Specified in its Governing Instruments) ------------------------------ 345 PARK AVENUE, 29TH FLOOR, NEW YORK, NEW YORK 10154 (212) 754-5560 (Address, Including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices) ------------------------------ HUGH R. FRATER PRESIDENT ANTHRACITE CAPITAL, INC. 345 PARK AVENUE, 29TH FLOOR NEW YORK, NEW YORK 10154 (212) 754-5560 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------------------------ COPIES TO: VINCENT J. PISANO, ESQ. GEORGE C. HOWELL III, ESQ. SKADDEN, ARPS, SLATE RANDOLPH F. TOTTEN, ESQ. MEAGHER & FLOM LLP HUNTON & WILLIAMS 919 THIRD AVENUE 951 EAST BYRD STREET NEW YORK, NEW YORK 10022 RICHMOND, VIRGINIA 23219 TELEPHONE: (212) 735-2790 TELEPHONE: (804) 788-8200 FACSIMILE: (212) 735-2000 FACSIMILE: (804) 788-8218
-------------------------- 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. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF BEING REGISTERED REGISTERED (1) SHARE PRICE(2) REGISTRATION FEE Common Stock, par value $0.001 per share 23,000,000 shares $16.00 $368,000,000 $108,560(3)
(1) Includes 3,000,000 shares of Common Stock which may be purchased by the Underwriters to cover over-allotments, if any (the "Underwriting"). (2) Estimated based on a bona fide estimate of the maximum offering price $16.00 solely for the purpose of calculating the registration fee pursuant to Rule 457(a) of the Securities Act of 1933. (3) Previously paid. -------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MARCH 18, 1998 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. PROSPECTUS 20,000,000 SHARES ANTHRACITE CAPITAL, INC. COMMON STOCK ------------------ Anthracite Capital, Inc. (the "Company"), a Maryland corporation, was organized in November 1997 to invest in a diversified portfolio of multifamily, commercial and residential mortgage loans, mortgage-backed securities and other real estate related assets in U.S. and non-U.S. markets. The Company will seek to achieve strong investment returns by maximizing the spread of investment income (net of credit losses) earned on its real estate assets over the cost of financing and hedging these assets and/or liabilities. The Company's business decisions will depend on changing market factors, and the Company will pursue various strategies and opportunities in different market environments. 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"), and generally will not be subject to federal income tax to the extent that it distributes its net income to stockholders and maintains its qualification as a REIT. The Company's operations will be managed by BlackRock Financial Management, Inc. (the "Manager" or "BlackRock"), an indirect subsidiary of PNC Bank Corp. ("PNC"). The Company has no ownership interest in the Manager. -------------------------- SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF MATERIAL RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY, INCLUDING: - The Company intends to invest in assets that are risky and suitable only for sophisticated investors; - The Manager has never managed a REIT, and there can be no assurance that the past experience of the Manager will be sufficient to successfully manage the business of the Company; - The Company's operations are expected to be highly leveraged and there are no limitations on borrowings, which is likely to increase the volatility of the Company's income and net asset value and could result in operating or capital losses; - The Company and the Manager have common officers and directors, which may present conflicts of interest in the Company's dealings with the Manager and its Affiliates, including the Company's purchase of assets from the Manager's Affiliates and the Manager's allocation of investment opportunities to the Company; - The Manager is a subsidiary of PNC Bank, National Association ("PNC Bank"), and therefore PNC Bank will be able to influence the affairs of the Manager and the investment decisions of the Company; - The Company was organized in November 1997, had no assets at December 31, 1997, has no operating history, and there is no prior market for the Common Stock; - None of the Company's assets have been identified and delays in investing the net proceeds of the Offering will result in reduced income; - The Company has no established financing sources, and there can be no assurance that financing will be available on favorable terms; - The Company will face substantial competition in acquiring suitable investments, which could increase its costs; (CONTINUED ON NEXT PAGE) THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(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 $1,000,000, payable by the Company. (3) The Company has granted to the underwriters a 30-day option to purchase up to an aggregate number of 3,000,000 additional shares of Common Stock on the same terms and conditions as set forth above. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, 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 , 1998. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED The date of this Prospectus is , 1998. (CONTINUED FROM PREVIOUS PAGE) - The Company intends to acquire significant amounts of mortgage loans and non-investment grade mortgage-backed securities, which may be subject to significant credit risk of loss of principal and non-payment of interest; - The yield on the Company's investments, including interest only securities ("IOs"), and the value of the Company's Common Stock, will be sensitive to changes in prevailing interest rates and changes in prepayment rates, which may result in a mismatch between the Company's borrowing rates and asset yields and consequently reduce or eliminate the net income from the Company's investments; - The Company intends to use hedging strategies that involve risk and that may not be successful in insulating the Company from exposure to changing interest and prepayment rates; - The Company will be taxed as a regular corporation if it fails to qualify or maintain its qualification as a REIT, which will be equal to the value of the Management Agreement for a period of four years and such payment could reduce earnings and cash available for distribution to stockholders; - The Company's investment and operating policies and strategies may be changed at any time without the consent of stockholders; - The Management Agreement provides for base management fees payable to the Manager without consideration of the performance of the Company's portfolio and also provides for incentive fees based on certain performance criteria, which could result in the Manager recommending riskier or more speculative investments; - Termination of the Management Agreement by the Company may result in the payment of a substantial termination fee, which could adversely affect the Company's financial condition; - Stockholders will be subject to significant potential dilution from future equity offerings, including offerings of preferred stock; and - The Company's activities, structure and operations may be adversely affected by changes in the tax laws applicable to REITs. All of the shares of common stock (the "Common Stock") offered hereby are being sold by the Company. The Common Stock offered to the public hereby will represent all of the equity ownership of the Company, except as follows. PNC has agreed to purchase directly from the Company, in a private placement at a price equal to the initial public offering price, net of underwriting discounts and commissions, a number of shares of Common Stock such that following completion of the offering made hereby (the "Offering") and the Underwriters' exercise of the over-allotment option, if any, PNC will own 3% of the shares of Common Stock outstanding. In addition, FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc., one of the Representatives of the Underwriters, has agreed to acquire $10 million of Common Stock in a private placement that will close concurrently with the Offering at the initial public offering price, net of underwriting discounts and commissions. Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price for the Common Stock will be between $14 and $16 per share. See "Underwriting" for information relating to the determination of the initial public offering price. The Common Stock has been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "AHR." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THE MARKET PRICE, 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 AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN 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. THIS PROSPECTUS MAY CONTAIN PROJECTIONS, FORECASTS OR ESTIMATES OF FUTURE PERFORMANCE OR CASH FLOWS OF THE COMPANY. PROJECTIONS, FORECASTS AND ESTIMATES ARE ALSO FORWARD-LOOKING STATEMENTS AND WILL BE BASED UPON CERTAIN ASSUMPTIONS. ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE BEYOND THE COMPANY'S CONTROL. ACTUAL EVENTS MAY DIFFER FROM THOSE ASSUMED. 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. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT ANY ESTIMATED RETURNS OR PROJECTIONS CAN BE REALIZED OR THAT ACTUAL RETURNS OR RESULTS WILL NOT BE MATERIALLY LOWER THAN THOSE THAT MAY BE ESTIMATED. TABLE OF CONTENTS
PAGE ----- PROSPECTUS SUMMARY............................. 1 The Company.................................... 1 General...................................... 1 Investment Strategy.......................... 1 Summary Risk Factors........................... 3 Relationship With PNC........................ 4 Credit Risk Management......................... 5 The Manager.................................... 5 General...................................... 5 Organization and Relationships................. 6 The Management Agreement....................... 6 Management Compensation...................... 7 Conflicts of Interest of the Manager......... 8 Tax Status of the Company...................... 9 Certain Benefits to Related Parties............ 9 Industry Trends................................ 10 Dividend Policy and Distributions.............. 11 The Offering................................... 11 RISK FACTORS................................... 12 Conflicts of Interest of the Manager May Result in Decisions That Do Not Fully Reflect Stockholders' Best Interests................. 12 No Operating History; No Established Financing; No Prior Market For Common Stock............. 13 Dependence on The Manager; Termination of Management Agreement......................... 13 Interest Rate Fluctuations Will Affect Value of Mortgage Assets, Net Income and Common Stock........................................ 14 General...................................... 14 Interest Rate Mismatch Could Occur Between Asset Yields and Borrowing Rates Resulting in Decreased Yield......................... 14 Inverted Yield Curve Adversely Affects Income..................................... 14 Prepayment Rates Can Increase, Thus Adversely Affecting Yields........................... 14 Ownership of Non-Investment Grade Mortgage Assets Subject To Increased Risk of Loss..... 15 Risk of Loss on Mortgage Loans................. 16 Multifamily and Commercial Loans Involve a Greater Risk of Loss than Single Family Loans...................................... 16 Limited Recourse Loans May Limit the Company's Recovery to the Value of the Mortgaged Property......................... 16 Volatility of Values of Mortgaged Properties May Affect Adversely the Company's Mortgage Loans...................................... 16 Construction, Bridge and Mezzanine Loans Involve Greater Risks of Loss than Loans Secured by Income Producing Properties..... 17 Distressed Mortgage Loans May Have Greater Default Risks than Performing Loans........ 17 Foreign Mortgage Loans and Real Properties are Subject to Currency Conversion Risks, Foreign Tax Laws and Uncertainty of Foreign Laws....................................... 17 Risks Related to Investments in Real Property................................... 17 PAGE ----- Reverse Repurchase Agreements and Dollar Roll Agreements................................... 18 Leverage Increases Exposure to Loss............ 18 Hedging Transactions Can Limit Gains and Increase Exposure to Losses.................. 19 Tax, Legal and Other Risks..................... 20 Failure to Maintain REIT Status would have Adverse Tax Consequences................... 20 Risk of Changes in the Tax Law Applicable to REITs...................................... 21 Risk of Adverse Tax Treatment of Excess Inclusion Income........................... 21 Risk that Potential Future Offerings Could Dilute the Interest of Holders of Common Stock...................................... 21 Future Revisions in Policies and Strategies Without Stockholder Consent Create Uncertainty for Investors.................. 21 Significant Competition May Adversely Affect the Company's Ability to Acquire Assets.... 21 Failure to Maintain Exemption from the Investment Company Act Would Restrict the Company's Operating Flexibility............ 22 Failure to Develop a Public Market May Result in a Decrease in Market Price.............. 22 Temporary Investment in Short-term Investments Will Reduce the Earnings of the Company.................................... 22 Restrictions on Ownership of the Common Stock...................................... 23 Possible Environmental Liabilities........... 23 Limitation on Liability of Manager........... 24 Investments May Be Illiquid and Their Value May Decrease............................... 24 Plans Should Consider ERISA Risks of Investing in Common Stock.................. 24 Year 2000 Compliance......................... 24 USE OF PROCEEDS................................ 25 DIVIDEND AND DISTRIBUTION POLICY............... 25 CAPITALIZATION................................. 26 CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST... 26 THE COMPANY.................................... 28 General...................................... 28 Investment Strategy.......................... 28 Operating Policies and Strategies............ 29 Operating Policies......................... 29 Capital and Leverage Policies.............. 29 Liabilities................................ 30 Relationship With PNC...................... 30 Securitization............................. 32 Credit Risk Management..................... 33 Asset/Liability Management................. 33 Hedging Activities......................... 33 Other Policies............................. 34 Future Revisions in Policies and Strategies............................... 35 DESCRIPTION OF REAL ESTATE RELATED ASSETS...... 35 Mortgage Loans............................... 35 Distressed Mortgage Loans.................... 36
i
PAGE ----- Construction Financing, Bridge Financing and Loans Subject to Prior Liens............... 36 Commitments to Mortgage Loan Sellers......... 36 Bridge Loans................................. 38 Mortgage Backed Securities................... 38 Commercial Mortgage Backed Securities........ 40 Foreign Mortgage Investments................. 41 FHA and GNMA Project Loans................... 41 Pass-Through Certificates.................... 42 Privately Issued Pass-Through Certificates... 42 FNMA Certificates............................ 42 FHLMC Certificates........................... 43 GNMA Certificates............................ 43 CMOs......................................... 43 Mortgage Derivatives......................... 44 Multifamily and Commercial Real Properties... 44 Real Properties With Known Environmental Problems................................... 46 Net Leased Real Estate....................... 46 SECURITIES OF OR INTERESTS IN COMPANIES PRIMARILY ENGAGED IN REAL ESTATE ACTIVITIES AND INVESTMENTS IN OTHER SECURITIES.......... 46 EMPLOYEES...................................... 47 FACILITIES..................................... 47 LEGAL PROCEEDINGS.............................. 47 MANAGEMENT OF THE COMPANY...................... 48 Directors and Executive Officers of the Company.................................... 48 Directors and Executive Officers............. 48 Executive Compensation....................... 53 Stock Options................................ 53 Stock Options Outstanding.................... 54 THE MANAGER.................................... 55 The Management Agreement..................... 55 Management Compensation...................... 57 Expenses..................................... 59 Conflicts of Interest........................ 60 Limits of Responsibility..................... 60 FEDERAL INCOME TAX CONSEQUENCES................ 61 Taxation of the Company...................... 61 Requirements for Qualification............... 62 Income Tests............................... 63 Asset Tests................................ 66 PAGE ----- Distribution Requirements.................. 67 Recordkeeping Requirements................. 69 Failure to Qualify........................... 69 Taxation of Taxable U.S. Stockholders........ 69 Taxation of Stockholders on the Disposition of the Common Stock........................ 71 Capital Gains and Losses..................... 71 Information Reporting Requirements and Backup Withholding................................ 71 Taxation of Tax-exempt Stockholders.......... 72 Taxation of Non-U.S. Stockholders............ 73 State and Local Taxes........................ 74 Taxation of ASC.............................. 74 Proposed Tax Legislation..................... 75 ERISA CONSIDERATIONS........................... 75 DESCRIPTION OF CAPITAL STOCK................... 76 Repurchase of Shares and Restrictions on Transfer................................... 76 DIVIDEND REINVESTMENT PLAN..................... 78 MATERIAL PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS....................................... 78 Removal of Directors......................... 78 Staggered Board.............................. 79 Business Combinations........................ 79 Control Share Acquisitions................... 79 Amendment to the Articles of Incorporation... 80 Dissolution of the Company................... 80 Advance Notice of Director Nominations and New Business............................... 80 Possible Anti-Takeover Effect of Material Provisions of Maryland Law and of the Articles of Incorporation and Bylaws....... 81 TRANSFER AGENT AND REGISTRAR................... 81 REPORTS TO STOCKHOLDERS........................ 81 UNDERWRITING................................... 82 LEGAL MATTERS.................................. 83 EXPERTS........................................ 83 ADDITIONAL INFORMATION......................... 84 GLOSSARY....................................... G-1 FINANCIAL STATEMENT............................ F-1
ii 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. CAPITALIZED AND OTHER TERMS USED HEREIN SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE GLOSSARY, WHICH STARTS AT PAGE G-1. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE 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 GENERAL Anthracite Capital, Inc. (the "Company"), a Maryland corporation, was formed in November 1997 to invest in multifamily, commercial and residential mortgage loans, mortgage-backed securities and other real estate related assets in both U.S. and non-U.S. markets. The Company will use its equity capital and borrowed funds to seek to achieve strong investment returns by maximizing the spread of investment income (net of credit losses) earned on its real estate assets over the cost of financing and hedging these assets. 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 generally will not be subject to federal income tax 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--Distribution Requirements." The day-to-day operations of the Company will be managed by BlackRock Financial Management, Inc. (the "Manager" or "BlackRock"), subject to the direction and oversight of the Company's Board of Directors, which shall initially consist of six members, four of whom will be unaffiliated with the Manager or its Affiliates. The Manager, a Delaware corporation, is a subsidiary of PNC Bank, National Association ("PNC Bank"). INVESTMENT STRATEGY The Company intends to purchase and originate multifamily, commercial and residential term loans ("Mortgage Loans") and interests in multifamily and commercial mortgage-backed securities ("CMBS"). The Company also may invest in interests in residential mortgage-backed securities ("RMBS" and, together with CMBS, "MBS"). The Company may hold its Mortgage Loans or utilize them as collateral to create its own MBS. Initially, one of the Company's primary investment focuses will be the acquisition of non-investment grade CMBS. Non-investment grade CMBS offer the potential of higher yields than relatively more senior classes of CMBS, but carry greater credit and prepayment risk. The Company believes that a prudently managed portfolio of non-investment grade CMBS can produce attractive returns in a variety of interest rate environments, but no assurance can be given that such returns will be achieved. The Company will take an opportunistic approach to its investments and, accordingly, the Company may invest in assets other than Mortgage Loans and MBS. The Company may invest in or provide loans used to finance construction ("Construction Loans"), loans secured by real property and used as temporary financing ("Bridge Loans") and loans secured by junior liens on real property ("Mezzanine Loans"). The Company may invest in multifamily and commercial Mortgage Loans that are in default ("Nonperforming Mortgage Loans") or for which default is likely or imminent or for which the borrower is making monthly payments in accordance with a forbearance plan ("Subperforming Mortgage Loans" and, 1 together with Nonperforming Mortgage Loans, "Distressed Mortgage Loans"). The Company may also invest, for hedging and other purposes, in derivative mortgage securities such as interest only ("IO") strips, principal only ("PO") strips, and other securities with significant exposure to changes in mortgage prepayment rates. The Company expects that a portion of its mortgage assets will consist of foreign MBS and Mortgage Loans that the Company believes can provide attractive returns. The Company may invest in multifamily, commercial and other real property, including Net Leased Real Estate, properties acquired at foreclosure or by deed-in-lieu of foreclosure ("REO Property") and other underperforming or otherwise distressed real property (all of such underperforming and distressed real property, together with REO Property, being referred to collectively as "Distressed Real Property"). In addition, the Company may invest in real property located outside the United States. The Company may invest in registered investment companies, partnerships and other investment funds and other types of non-mortgage related assets and intends to engage in hedging transactions to reduce interest rate, prepayment and currency exchange rate risks, subject to the REIT Provisions of the Code and the requirements for exemption from the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company will finance its assets with the net proceeds of this Offering, future offerings of equity securities and borrowings, and expects that it will employ leverage consistent with the type of assets acquired and the desired level of risk in various investment environments, in general. The Company's governing documents do not explicitly limit the amount of leverage that the Company may employ. Instead, the Board of Directors will adopt an indebtedness policy for the Company that will give the Manager extensive discretion as to the amount of leverage to be employed, depending on the Manager's assessment of acceptable risk and consistent with the nature of the assets then held by the Company, subject to periodic review by the Company's Board of Directors. Once fully invested, the Company anticipates maintaining a debt-to-equity ratio of between 3.5:1 and 4.5:1; although this ratio may be higher or lower from time to time. Moreover, the Company's indebtedness policy may be changed by the Board of Directors in the future. The Company will leverage its assets primarily with reverse repurchase agreements, dollar rolls, securitizations of its Mortgage Loans and secured and unsecured loans, including the issuance of commercial paper. The Company also expects to issue preferred stock as a source of longer term capital to finance asset growth. The Company's policy is to acquire those mortgage assets that it believes are likely to generate the highest returns on capital invested, after considering the amount and nature of anticipated cash flows from the asset, the credit risk of the borrower, the Company's ability to pledge the asset to secure collateralized borrowings, the capital requirements resulting from the purchase and financing of the asset, the potential for appreciations and the costs of financing, hedging and managing the asset. Prior to acquisition, potential returns on capital employed will be assessed over the expected life of the asset and in a variety of interest rate, yield spread, financing cost, credit loss and prepayment scenarios. In managing the Company's portfolio, the Manager will establish stringent credit standards and credit monitoring procedures and will also consider balance sheet management and risk diversification issues. The Company will employ proprietary risk management tools developed by the Manager to continually monitor the risks of its assets and liabilities. Similar proprietary tools will also help the Company achieve its goal of having its annual income, determined in accordance with generally accepted accounting principles, equal or exceed its annual Taxable Income. The Company also intends to minimize its Excess Inclusion Income. See "Federal Income Tax Consequences." Except as set forth herein, the Company has not yet established specific investment guidelines or standards, but its investments will be made based on the Manager's assessment of prevailing market conditions and the relative risks and returns available at the time. An investor in the Common Stock offered hereby is therefore subject to the risk that the Company's investment strategy will differ from that which would be selected by such investor at any given time. 2 SUMMARY RISK FACTORS Each prospective purchaser of the Common Stock offered hereby should review "Risk Factors" beginning on page 14 for a discussion of material risks that should be considered before investing in the Common Stock, including the following: - The Company intends to invest in assets that are risky and suitable only for sophisticated investors. - The Manager has never managed a REIT. There can be no assurance that the past experience of the Manager will be sufficient to successfully manage the business of the Company. - The Company's Articles of Incorporation do not expressly limit borrowings. The Company intends to leverage its investments in an amount to be determined by the Manager and, ultimately, by the Board of Directors. Such leverage is likely to increase the volatility of the Company's income and net asset value and could result in operating or capital losses. If borrowing costs increase, or if the cash flow generated by the Company's assets decreases, the Company's use of leverage will increase the likelihood that the Company will experience reduced or negative cash flow and reduced liquidity. - The Company and the Manager have common officers and directors, which may present conflicts of interest in the Company's dealings with the Manager and its Affiliates, including the Company's purchase of assets originated by such Affiliates. For example, the Company may purchase certain mortgage assets from PNC Bank, which owns 70% of the outstanding capital stock of the Manager. Because PNC Bank will be able to influence the affairs of the Manager there is a risk that PNC Bank will be able to influence the investment decisions of the Company. - The Company was organized in November 1997 and has only limited assets and no operating history. There is no prior market for the Common Stock, and the Company has no established financing sources. - The Company intends to acquire significant amounts of Mortgage Loans and non-investment grade MBS, which are subject to greater risk of credit loss of principal and non-payment of interest than investments in senior investment grade securities. - No specific assets have been identified for purchase by the Company, and delays in investing the proceeds of the Offering would result in reduced income. The Company will face substantial competition in acquiring suitable investments, which could increase its costs. Stockholders will not have the opportunity to evaluate the manner in which the proceeds of the Offering are to be invested or the economic merits of particular assets to be acquired. The Manager will exercise significant discretion in investing and allocating the proceeds of the Offering. - Assets to be purchased by the Company from PNC Bank and its Affiliates may in some cases not have a readily determinable fair market value. Depending on the circumstances, the investment guidelines approved by the Board of Directors may not require independent valuations. - The yield on investments in Mortgage Loans and MBS, particularly IOs and POs, and thus the value of the Company's Common Stock, will be sensitive to changes in prevailing interest rates and changes in prepayment rates, which may result in a mismatch between the Company's borrowing rates and asset yields and consequently reduce or eliminate income derived from the Company's investments. - The Company may invest in real property, or mortgage loans secured by real property, located outside the United States, which may expose the Company to currency conversion risks, foreign tax laws and the uncertainty of foreign laws. 3 - Delinquency and loss ratios on the Company's Mortgage Loans will be affected by the performance of third-party servicers and special servicers. - The Company intends to use hedging strategies that involve risk and that may not be successful in insulating the Company from exposure to changing interest and prepayment rates. - The Company will be taxed as a regular corporation if it fails to maintain its qualification as a REIT, which would reduce earnings and cash available for distribution to stockholders. - The Company's investment and operating policies and the strategies that the Manager uses to implement those policies may be changed at any time without the consent of stockholders. - The Management Agreement provides for base management fees payable to the Manager without consideration of the performance of the Company's portfolio and also provides for incentive fees based on certain performance criteria, which could result in the Manager recommending riskier or more speculative investments. Termination of the Management Agreement by the Manager could adversely affect the Company if the Company were unable to find a suitable replacement. - Termination of the Management Agreement by the Company may result in the payment of a substantial termination fee, which will be equal to the value of the Management Agreement for a period of the next four years and such payment could adversely affect the Company's financial condition. - Stockholders will be subject to significant potential dilution from future equity offerings, including offerings of preferred stock, which may have an adverse effect on the market price of the Common Stock. - The Company's activities, structure and operations may be adversely affected by changes in the tax laws applicable to REITs. - Failure to maintain an exemption from the Investment Company Act would adversely affect results of operations. - The Manager manages funds that are authorized to invest in certain of the assets in which the Company may invest. There may be investment opportunities that are favorable to each of the Company and certain other funds managed by the Manager. In that case, the Manager will allocate investment opportunities among the potential investors based upon the investors' primary investment objectives, applicable investment restrictions, and such other factors as the Manager deems appropriate and fair under the circumstances. - The Manager is not prohibited from managing or advising REITs or other entities that may compete with the Company for assets, including entities that may have similar investment objectives to the Company's. RELATIONSHIP WITH PNC PNC Bank, a subsidiary of PNC Bank Corp. ("PNC"), originated approximately $5.8 billion, on a gross basis, in commercial and multifamily loans in 1997 through its network of offices and correspondent relationships. PNC Bank will enter into an agreement granting the Company, so long as the Management Agreement (as hereinafter defined) with the Manager remains in effect, a right of first offer to purchase, at fair market value, not less than $1 billion annually of multifamily and commercial Mortgage Loans originated by PNC Bank and which PNC Bank has determined to make available for sale, which may include loans eligible for sale to securitization conduits and loans that are ineligible for securitization, such as Mezzanine Loans. Although not contractually committed to do so, the Company intends to purchase 4 pools of Mortgage Loans offered to it pursuant to the foregoing right of first offer, provided such purchase would comply with the Company's investment guidelines and underwriting criteria as established and modified from time to time. The Company also expects in certain circumstances to "table fund" loans originated by PNC Bank. That is, the Company will fund the loan directly to the borrower at closing and will pay PNC Bank an origination fee for sourcing and originating the loan. This arrangement will enable PNC Bank to originate loans that it might not wish to retain, either because of regulatory capital rules applicable to PNC Bank or for other similar reasons. In some cases, the Company may pay part or all of the fees with securities of the Company. The Company believes that pools of PNC Bank's Mortgage Loans will be appropriate investments for the Company given the Company's investment strategy. On January 28, 1998, PNC Bank announced an agreement to acquire the assets of Midland Loan Services, L.P. ("Midland"), headquartered in Kansas City, Missouri. This transaction is expected to close in the second quarter of 1998. Midland specializes in commercial loan servicing and loan origination. At December 31, 1997, Midland had a total servicing portfolio of approximately $23 billion. In 1997, Midland originated approximately $714 million in commercial and multifamily mortgage loans. Although no formal agreement exists, if the acquisition by PNC Bank occurs, the Company anticipates that Midland will service all or a portion of the commercial loans for which the Company acquires servicing rights pursuant to standard agreements that are expected to be approved by the Unaffiliated Directors. Midland is also expected to serve as an additional source of assets to be acquired. CREDIT RISK MANAGEMENT The Company intends to manage the credit risk associated with its investment portfolio by regularly monitoring the individual credit exposure associated with each asset in its investment portfolio, diversifying its portfolio of non-investment grade investments and maintaining a portion of its assets in high quality investments. The Company will implement various hedging strategies, primarily to protect itself from the effects of interest rate fluctuations on its variable rate liabilities. However, no hedging strategy will insulate the Company completely from such risks, and the Company's ability to enter into hedging transactions may be limited by the REIT Provisions of the Code and the transaction costs associated with entering into such transactions. THE MANAGER GENERAL The Manager is a subsidiary of PNC Bank, which is a wholly owned subsidiary of PNC. Established in 1988, the Manager is a registered investment adviser under the Investment Advisers Act of 1940 and is one of the largest fixed income investment management firms in the United States. The Manager engages in investment and risk management as its sole business and specializes in the management of domestic and offshore fixed income assets for pension and profit sharing plans, financial institutions, such as banking and insurance companies, and mutual funds for retail and institutional investors. 5 ORGANIZATION AND RELATIONSHIPS The material relationships among the Company, its Affiliates and the Manager are depicted in the organization chart below. [LOGO] Anthracite Securitization Corp. ("ASC"), a Delaware corporation, is a taxable subsidiary of the Company, formed for the purpose of future securitizations of the Company's mortgage loans and other assets. In order to comply with the REIT Provisions of the Code, the Company will own 100% of the non-voting common stock and 5% of the voting common stock of ASC. The other 95% of the voting common stock of ASC will be owned by the Manager. See "Federal Income Tax Consequences--Taxation of ASC" and "--Proposed Tax Legislation." The Company may from time to time form additional taxable subsidiaries for purposes of carrying out its investment activities. See "Federal Income Tax Consequences--Proposed Tax Legislation" for a discussion of recent proposals that could affect the ability of the Company to obtain the benefits of certain of such subsidiaries. THE MANAGEMENT AGREEMENT The Company will enter into the Management Agreement with the Manager at the closing of the Offering. Pursuant to the Management Agreement, the Manager will be responsible for the day-to-day operations of the Company and will perform such services and activities relating to the assets and operations of the Company as may be appropriate. The Manager will be primarily involved in three activities: (i) underwriting, originating and acquiring Mortgage Loans and other real estate related assets; (ii) asset/liability and risk management, hedging of floating rate liabilities, and financing, management and disposition of assets, including credit and prepayment risk management; and (iii) 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 assets by the 6 Company, arrange for various types of financing and hedging strategies for the Company, monitor the performance of the Company's assets and provide certain administrative and managerial services in connection with the operation of the Company. At all times, the Manager will be subject to the direction and oversight of the Company's Board of Directors. The Company may terminate, or decline to renew the term of, the Management Agreement without cause at any time after the first two years upon 60 days written notice by a majority vote of the Unaffiliated Directors. Although no termination fee is payable in connection with a termination for cause, in connection with a termination without cause, the Company must pay the Manager a termination fee, which could be substantial. The amount of the termination fee will be determined by independent appraisal of the value of the Management Agreement for the next four years. Such appraisal is to be conducted by a nationally-recognized appraisal firm mutually agreed upon by the Company and the Manager. If the Company and the Manager are unable to agree upon an appraisal firm, then each of the Company and the Manager is to choose an independent appraisal firm to conduct an appraisal. In such event, (i) if the appraisals prepared by the two appraisers so selected are the same or differ by an amount that does not exceed 20% of the higher of the two appraisals, the termination fee is to be deemed to be the average of the appraisals as prepared by each party's chosen appraiser, and (ii) if the two appraisals differ by more than 20% of such higher amount, the two appraisers together are to select a third appraisal firm to conduct an appraisal. If the two appraisers are unable to agree as to the identity of such third appraiser, either the Manager or the Company may request that the American Arbitration Association ("AAA") select the third appraiser. The termination fee then is to be an amount determined by such third appraiser, but in no event less than the lower of the two initial appraisals or more than the higher of such two initial appraisals. In addition, the Company has the right at any time during the term of the Management Agreement to terminate the Management Agreement without the payment of any termination fee upon, among other things, a material breach by the Manager of any provision contained in the Management Agreement that remains uncured at the end of the applicable cure period (including the failure of the Manager to use reasonable efforts to comply with the Company's investment policy and guidelines). MANAGEMENT COMPENSATION The following table presents all compensation, fees and other benefits (including reimbursement of out-of-pocket expenses) that the Manager may earn or receive under the terms of the Management Agreement.
RECIPIENT PAYOR AMOUNT - ---------- ----------- ----------------------------------------------------------------------------------------- Manager Company Base management fee equal to a percentage of the Average Invested Assets by rating category of the Company(1) Manager Company Incentive compensation based on the amount, if any, by which the Company's Funds From Operations and certain net gains exceed a hurdle rate(2) Manager Company Out-of-pocket expenses of Manager paid to third parties(3)
- ------------------------ (1) The base management fee is equal to 1% per annum of Average Invested Assets rated less than BB-or not rated, 0.75% of Average Invested Assets rated BB- through BB+, and 0.35% of Average Invested Assets rated above BB+. (2) For a detailed explanation of the calculation of the incentive compensation payable to the Manager, see "The Manager--Management Compensation." (3) The Manager may engage PNC Bank, Midland or unaffiliated third parties to conduct due diligence with respect to potential portfolio investments and to provide certain other services. Accordingly, a portion of the out-of-pocket expenses may be paid to PNC Bank or Midland in such capacities. The Company's guidelines will require the contract for such engagement to be conducted at arm's length, as evidenced by documentation provided by the Manager to the Board of Directors. PNC Bank and 7 Midland will be paid fees and out-of-pocket expenses as would customarily be paid to unaffiliated third parties for such services. See "The Manager--Expenses." Thus, if the Company had total Average Invested Assets for a full year of $1.2 billion (representing the proceeds of the Offering and a leverage ratio of 3.1), the base management fee would equal $12 million if all of such Average Invested Assets were rated less than BB- or not rated, and would equal $4.2 million if all of such Average Invested Assets were rated above BB+. These fees are for illustrative purposes only, however, since the mix and amount of assets will vary. The Manager will not receive any management fee for the period prior to the sale of the shares of Common Stock offered hereby. The base management fee is intended to compensate the Manager for its costs in providing management services to the Company. The Board of Directors of the Company may adjust the base management fee with the consent of the Manager in the future if necessary to align the fee more closely with the costs of such services. The Manager will be entitled to receive incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds From Operations of the Company (before the incentive fee) per share of Common Stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share of the initial offering and the prices per share of any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus three and one-half percent per annum (expressed as a quarterly percentage) multiplied by (B) the weighted average number of shares of Common Stock outstanding during such quarter. Notwithstanding the foregoing, accrual and payment of any portion of the incentive compensation that is attributable to net capital gains of the Company will be delayed to the extent, if any, required by the Investment Advisers Act of 1940, as amended. "Funds From Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with generally accepted accounting principles ("GAAP") excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds From Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. As used in calculating the Manager's compensation, the term "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 constant maturities 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. See "The Manager--Management Compensation" for a more detailed explanation of the management compensation arrangements. CONFLICTS OF INTEREST OF THE MANAGER The Company is subject to conflicts of interest involving the Manager and its Affiliates because, among other reasons, (i) the Manager and its Affiliates are permitted to purchase mortgage assets for their own account and to advise accounts of other clients, and many investments appropriate for the Company also will be appropriate for these accounts, (ii) the incentive fee, which is based on the Company's income, may create an incentive for the Manager to recommend investments with greater income potential, which generally are riskier or more speculative, than would be the case if its fee did not include a "performance" component, and (iii) the executive officers and certain of the directors of the Company will be directors, officers and employees of the Manager. The Company is also subject to conflicts of interest because of the expected purchase of substantial assets from PNC Bank and its Affiliates. Many of such assets do not have a readily determinable fair 8 market value and independent valuations may not be sought. Nevertheless, the Company intends to adopt operating policies to minimize the effect of such conflicts. These policies will require that any acquisition of assets from PNC Bank or its Affiliates be fair and reasonable to the Company. The Unaffiliated Directors will adopt a policy that will require the Manager to document the fair market value of all affiliated purchases, and to provide copies of that documentation to the Board on a quarterly basis. In addition, the Board of Directors intends to approve certain operating and investing guidelines, which may be amended from time to time. TAX STATUS OF THE COMPANY The Company intends to qualify and will elect to be taxed as a REIT under the REIT Provisions of the Code commencing with its taxable year ending December 31, 1998. Provided the Company qualifies as a REIT, the Company generally will not be subject to federal corporate income tax on taxable income that is distributed to its stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that they currently distribute at least 95% of their annual Taxable Income. Although the Company does not intend to request a ruling from the Internal Revenue Service (the "IRS") as to its REIT status, the Company will receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to the qualification of the Company as a REIT, which opinion is based on certain assumptions and representations about the Company's ongoing businesses and investment activities and other matters. No assurance can be given that the Company will be able to comply with such assumptions and representations in the future. Furthermore, such opinion is not binding on the IRS or any court. Failure to qualify as a REIT would render the Company subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and distributions to its stockholders would not be deductible. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain federal, state, local and foreign taxes on its income and property. In connection with the Company's election to be taxed as a REIT, the Company's Articles of Incorporation impose restrictions on the transfer and ownership of its stock. See "Risk Factors--Failure to Maintain REIT Status would have Adverse Tax Consequences," "Federal Income Tax Consequences--Taxation of the Company" and "Description of Capital Stock--Repurchase of Shares and Restrictions on Transfer." CERTAIN BENEFITS TO RELATED PARTIES The Company will authorize the issuance of options to purchase shares of Common Stock equal to 10% of the shares to be outstanding after the Offering and will grant to the Manager, as of the initial public offering, options to purchase an aggregate of 1,711,525 shares of Common Stock (which the Manager may allocate to its directors, officers and employees) at an exercise price equal to the initial public offering price. See "The Manager--Management Compensation" and "Management of the Company--Stock Options." PNC has agreed that it will purchase from the Company, at a price equal to the initial public offering price net of underwriting discounts and commissions, a number of shares of Common Stock of the Company such that the shares owned by it will constitute 3% of the shares of the Company's Common Stock then outstanding. Certain officers, directors and employees of the Company and the Manager will be granted options to purchase approximately 144,000 of the shares of Common Stock at the price to the public as set forth on the cover hereto, net of underwriting discounts and commissions. Such options will be exercisable in September 1998 and will expire in March 1999. In addition, FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc., one of the Representatives of the Underwriters, has agreed to acquire $10 million of Common Stock in a private placement that will close concurrently with the Offering at the initial public offering price, net of underwriting discounts and commissions. The Company has granted certain "demand" and "piggyback" registration rights to FBR Asset Investment Corporation and PNC with respect to the Common Stock acquired by them in the Offering. Subject to certain conditions, the demand registration rights permit holders of such shares to require the 9 Company to register their shares. Subject to certain conditions, the piggyback registration rights permit the holders of such shares to include their Common Stock in the registration by the Company of its equity securities other than in connection with the registration by the company under the Securities Act of any of its securities, (i) in connection with any corporate reorganization, or (ii) in connection with an employee benefit plan. The Company will enter into the Management Agreement with the Manager pursuant to which the Manager will be entitled to receive an annual base management fee, a quarterly incentive fee and a termination fee in the event of termination without cause or nonrenewal. Certain officers and directors of the Manager are also officers and directors of the Company, as shown in the following table:
NAME POSITION WITH MANAGER POSITION WITH COMPANY -------------------------- --------------------------- Laurence D. Fink Chairman of Board, Chief Chairman of Board Executive Officer Hugh R. Frater Managing Director President, Chief Executive Officer Richard M. Shea Director Chief Operating Officer and Chief Financial Officer Edwin O. Bergman Vice President Vice President Chris A. Milner Vice President Vice President Andrew Siwulec Vice President Vice President Mark S. Warner Director Vice President Susan L. Wagner Managing Director Secretary
See "The Manager--The Management Agreement." INDUSTRY TRENDS Management believes fundamental changes are occurring in the U.S. mortgage market, resulting in the 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 mortgage investment firms, including those that qualify as REITs under the Code. Management 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, infrastructure, 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 GNMA, FNMA and FHLMC), 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 allowing the Company to pay higher dividends than institutions with similar investments that are subject to federal income tax on their earnings. In addition, recent changes to federal tax laws provide REITs with greater flexibility to manage and hedge their floating rate liabilities. See "Federal Income Tax Consequences--Taxation of the Company." The U.S. residential and commercial mortgage markets have experienced considerable growth over the past 15 years, with total U.S. 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, and total U.S. commercial mortgage debt outstanding growing from approximately $955 billion in 1993 to approximately $1.1 trillion in 1996, according to The Federal Reserve. In addition, according to the same sources, the total amount of U.S. residential mortgage debt securitized into MBS has grown from 10 approximately $110 billion in 1980 to approximately $1.9 trillion in 1996, and the total amount of U.S. commercial MBS outstanding has grown from approximately $34.2 billion in 1993 to approximately $97.2 billion in 1996. Foreign mortgage loan and securitization markets have also grown rapidly in recent years. For example, in Europe, commercial and residential Mortgage Loans outstanding have grown by over $200 billion since 1993, to approximately $1.6 trillion in 1996. This global growth of the supply and demand for mortgage capital is expected to continue and the REIT investment structure is expected to be the most efficient vehicle for financing such growth. DIVIDEND POLICY AND DISTRIBUTIONS To avoid corporate income and excise tax and to maintain its qualification as a REIT, the Company intends to make annual distributions to its stockholders of at least 95% of the Company's Taxable Income (which does not necessarily equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and by excluding any net capital gains. 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 OFFERING Common Stock Offered......................... 20,000,000 shares(1) Common Stock to be Outstanding after the 21,357,573 shares(1)(2)(3) offering................................... Use of Proceeds.............................. To purchase the Company's initial portfolio of mortgage and other assets. The Company intends to temporarily invest the balance of the proceeds of the Offering in readily marketable interest bearing assets consistent with its intention to qualify as a REIT until appropriate real estate assets are identified and acquired. See "Use of Proceeds."
- ------------------------ (1) Assumes that the Underwriters' option to purchase up to an additional 3,000,000 shares to cover over-allotments will not be exercised. See "Underwriting." (2) Excludes 2,445,036 shares of Common Stock reserved for issuance under the Company's 1998 Stock Option Plan. Options to acquire 1,711,525 shares of Common Stock will be granted to the Manager and Unaffiliated Directors of the Company. See "Management of the Company--Stock Options." Also excludes 144,000 options to be granted, at the initial public offering price, net of underwriting discounts and commissions, to certain officers, directors and employees of the Company and the Manager. See "--Certain Benefits to Related Parties." Includes 716,846 shares to be purchased by FBR Asset Investment Corporation (regardless of whether the overallotment option is exercised) and 640,727 shares to be purchased by PNC (assuming that the overallotment option is not exercised) in private placements that will close concurrently with the Offering. (3) The Company intends to redeem the 13,333 shares held by the initial stockholder on the date of the Offering for $200,000. 11 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 its investment. While the Company will strive to attain its objectives through, among other things, the Manager's research and portfolio management skills, there is no guarantee of successful performance and no guarantee that such objectives can be reached or that a positive return can be achieved. In addition to the information set forth elsewhere in this Prospectus, the following risk factors should be considered. CONFLICTS OF INTEREST OF THE MANAGER MAY RESULT IN DECISIONS THAT DO NOT FULLY REFLECT STOCKHOLDERS' BEST INTERESTS. The Company is subject to conflicts of interest involving the Manager. The executive officers and certain of the directors of the Company will be directors, officers and employees of the Manager. A majority of the Board of Directors, however, will consist of Unaffiliated Directors. The Company expects to acquire mortgage assets from the Manager's Affiliates and will have a right of first offer to purchase up to $1 billion annually in multifamily and commercial Mortgage Loans originated by PNC Bank and which PNC Bank has determined to make available for sale. The Mortgage Loans will be made available for purchase at fair market value. Certain of such purchases could involve the issuance of equity securities of the Company. In addition, the Company expects to acquire other mortgage assets, including subordinated interests, from the Manager's Affiliates, and the Company may, but has no current plans to, invest as a co-participant with Affiliates of the Manager in loans originated or acquired by such Affiliates. Although such investments will be subject to review by Unaffiliated Directors, it is anticipated that the Unaffiliated Directors will rely primarily on information provided by the Manager in reviewing such transactions. Because the Manager is a majority-owned subsidiary of PNC Bank, there is a risk that PNC Bank will be able to exert influence over these investment decisions. Although the Company anticipates purchasing various mortgage assets from the Affiliates of the Manager from time to time, other than the right of first offer to PNC loans, the Manager and its Affiliates will have no obligation to make any particular investment opportunities available to the Company. The Manager has informed the Company that it expects to continue to purchase and manage mortgage assets and other real estate related assets in the future for third-party accounts. The Manager and its Affiliates currently provide investment services to more than 200 accounts, with assets of more than $100 billion, for which assets suitable for the Company could also be appropriate. The Manager also provides services to REITs not affiliated with the Company. As a result, there may be a conflict of interest between the operations of the Manager and its Affiliates in the acquisition and disposition of mortgage assets. In addition, the Manager and its Affiliates may from time to time purchase mortgage assets for their own account and may purchase or sell assets from or to the Company. Such conflicts may result in decisions and allocations of mortgage assets by the Manager that are not in the best interests of the Company, although the Manager seeks to allocate investment opportunities in a fair manner among accounts for which particular opportunities are suitable and to achieve the most favorable price in all transactions. 12 Although the Company has adopted investment guidelines, those guidelines give the Manager significant discretion in investing the proceeds of the Offering. Moreover, in the future, the Board of Directors may change the investment guidelines without the consent of the shareholders. 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 25% of the Funds From Operations of the Company (before payment of such incentive compensation) plus gains (or minus losses) from certain transactions in excess of the amount that would produce an annualized return on invested common stock capital equal to the Ten-Year U.S. Treasury Rate plus 3.5%, expressed as a quarterly rate. In evaluating mortgage assets for investment and in other management strategies, the opportunity to earn a performance fee based on net income may lead the Manager to place 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, which could result in increased risk to the value of the Company's portfolio. The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or Affiliates to engage in any business or render services of any kind to any other person, including other REITs. The ability of the Manager and its employees to engage in other business activities could reduce the time and effort spent on the management of the Company. NO OPERATING HISTORY; NO ESTABLISHED FINANCING; NO PRIOR MARKET FOR COMMON STOCK. The Company was organized in November 1997, has only limited assets at the date hereof, has no operating history and will commence operations only if the shares of Common Stock offered hereby are sold. No prior market exists for the Common Stock of the Company. The results of the Company's operations will depend on many factors, including the availability of opportunities for the acquisition of assets, the level and volatility of interest rates, readily accessible short and long term funding alternative conditions in the financial markets and economic conditions. The Company will face substantial competition in acquiring suitable investments, which could increase its costs. Moreover, delays in investing the proceeds of the offering would result in reduced income to the Company. Stockholders will not have the opportunity to evaluate the manner in which the proceeds are to be invested or the economic merits of particular assets to be acquired. The Company has not established any lines of credit or collateralized financing and, if such financing is available, there is no assurance that it will be available on favorable terms. Furthermore, no assurance can be given that the Company will be able to successfully operate its business as described in this Prospectus. DEPENDENCE ON THE MANAGER; TERMINATION OF MANAGEMENT AGREEMENT. The Company will be heavily dependent for the selection, structuring and monitoring of its mortgage assets and associated borrowings on the diligence and skill of the officers and employees of the Manager, primarily those named under "Management" elsewhere herein. 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. The Manager in turn is dependent on the efforts of senior management personnel. While the Company believes that the Manager could find replacements for its key executives, the loss of their services could have an adverse effect on the operations of the Manager and the Company. The Manager has no experience in managing a REIT. There can be no assurance that the past experience of the Manager will be sufficient to successfully manage the business of the Company. Further, the past performance of the Manager is not indicative of future results of the Company. The Company may terminate, or decline to renew the term of, the Management Agreement without cause after the first two years upon 60 days' written notice. The Company will be obligated to pay the Manager a substantial termination fee in the event the Company terminates the Management Agreement, 13 except in the case of a termination for cause. Payment of this termination fee, which will be equal to the value of the Management Agreement for a period of four years, could have an adverse effect on the Company's financial condition, cash flows and results of operations and would reduce the amount of funds available for distribution to stockholders. INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS, NET INCOME AND COMMON STOCK. GENERAL. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the control of the Company. Interest rate fluctuations can adversely affect the income and value of the Company's Common Stock in many ways and present a variety of risks, including the risk of a mismatch between asset yields and borrowing rates, variances in the yield curve and changing prepayment rates. INTEREST RATE MISMATCH COULD OCCUR BETWEEN ASSET YIELDS AND BORROWING RATES RESULTING IN DECREASED YIELD. The Company's operating results will depend in large part on differences between the income from its assets (net of credit losses) and its borrowing costs. The Company intends to fund a substantial portion of its assets with borrowings which have interest rates that reset relatively rapidly, such as monthly or quarterly. The Company anticipates that, in most cases, the income from its assets will respond more slowly to interest rate fluctuations than the cost of its borrowings, creating a potential mismatch between asset yields and borrowing rates. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence the Company's net income. Increases in these rates will tend to decrease the Company's net income and market value of the Company's net assets. Interest rate fluctuations resulting in the Company's interest expense exceeding interest income would result in the Company incurring operating losses. INVERTED YIELD CURVE ADVERSELY AFFECTS INCOME. The relationship between short-term and long-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than long-term interest rates. If short-term interest rates rise disproportionately relative to long-term interest rates (a flattening of the yield curve), the borrowing costs of the Company may increase more rapidly than the interest income earned on its assets. Because the Company's borrowings will primarily bear interest at short-term rates and its assets will primarily bear interest at medium-term to long-term rates, a flattening of the yield curve will tend to decrease the Company's net income and market value of its net assets. Additionally, to the extent cash flows from long-term assets that return scheduled and unscheduled principal are reinvested, the spread between the yields of the new assets and available borrowing rates may decline and also may tend to decrease the net income and market value of the Company's net assets. It is also possible that short-term interest rates may adjust relative to long-term interest rates such that the level of short-term rates exceeds the level of long-term rates (a yield curve inversion). In this case, borrowing costs may exceed the interest income and operating losses could be incurred. PREPAYMENT RATES CAN INCREASE, THUS ADVERSELY AFFECTING YIELDS. The value of the Company's assets may be affected substantially by prepayment rates on mortgage assets. Prepayment rates on mortgage assets are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond the control of the Company, and consequently, such prepayment rates cannot be predicted with certainty. In periods of declining mortgage interest rates, prepayments on mortgage assets generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by the Company in assets yielding less than the yields on the mortgage assets that were prepaid. In addition, the market value of the mortgage assets may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates. Conversely, in periods of rising interest rates, prepayments on mortgage assets generally decrease, in which case the Company would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios the Company may fail to recoup fully its cost of acquisition of certain investments. 14 The Company may acquire IOs, which are classes of MBS that are entitled to payments of interest, but not to (or only to nominal) payments of principal. The yield to maturity of IOs is very sensitive to the rate of prepayments on the underlying mortgage loans. If the rate of prepayments is faster than anticipated, the yield on IOs will be negatively affected, and, in extreme cases, the initial investment amount may not be recovered and the IO investment could become worthless. Some IOs bear interest at a floating rate that varies inversely with (and often at a multiple of) changes in a specified interest rate index ("Inverse IOs"). Therefore, the yield to maturity of an Inverse IO is extremely sensitive to changes in the related index. The Company also expects to invest in subordinated IOs ("Sub IOs"). Interest amounts otherwise allocable to Sub IOs generally are used to make payments on more senior classes or to fund a reserve account for the protection of senior classes until over collateralization occurs or the balance in the reserve account reaches a specified level. The yield to maturity of Sub IOs is very sensitive not only to default losses but also to the rate and timing of prepayment on the underlying loans. Under certain interest rate and prepayment scenarios, the Company may fail to recoup fully the cost of acquiring IOs, Inverse IOs and Sub IOs. The Company also may acquire POs, which are classes of MBS that are entitled to payments of principal, but not to payments of interest. The yield to maturity of POs and on classes of MBS, such as the Initial Investment, that are purchased at a discount to their principal balance, is very sensitive to changes in the weighted average life of such securities, which in turn is dictated by the rate of prepayments on the underlying Mortgage Collateral. In periods of declining interest rates, rates of prepayment on mortgage loans generally increase, and if the rate of prepayments is faster than anticipated, the yield on POs and securities purchased at a discount will be positively affected. Conversely, the yield on POs and securities purchased at a discount will be affected adversely by slower than anticipated prepayment rates, which generally are associated with a rising interest rate environment. See "--Tax, Legal and Other Risks-- Failure to Maintain REIT Status would have Adverse Tax Consequences." OWNERSHIP OF NON-INVESTMENT GRADE MORTGAGE ASSETS SUBJECT TO INCREASED RISK OF LOSS. The Company intends to acquire a significant amount of non-investment grade mortgage assets, including unrated "first loss" credit support subordinated interests. A first loss security is the most subordinate class in a structure and accordingly is the first to bear the loss upon a default on restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Such classes are subject to special risks, including a substantially greater risk of loss of principal and non-payment of interest than more senior, rated classes. The market values of subordinated interests tend to be more sensitive to changes in economic conditions than more senior, rated classes. As a result of these and other factors, subordinated interests generally are not actively traded and may not provide holders thereof with liquidity of investment. The yield to maturity on subordinated interests of the type the Company intends to acquire will be extremely sensitive to the default and loss experience of the underlying mortgage loans and the timing of any such defaults or losses. Because these types of subordinated interests generally have no credit support, to the extent there are realized losses on the mortgage loans, the Company may not recover the full amount or, in extreme cases, any of its initial investment in such subordinated interests. See "Initial Investment Subordination." When the Company acquires a subordinated MBS, it typically will be unable to obtain the right to service the underlying performing mortgage loans (the "Mortgage Collateral"). To minimize its losses, the Company will seek to obtain the rights to service the underlying Mortgage Collateral in default (the servicing of defaulted mortgage loans is referred to as "Special Servicing"), although in many cases it will not be able to obtain Special Servicing rights on acceptable terms. If the Company does acquire Special Servicing rights, then it will contract with a third-party special servicer, such as PNC Bank or Midland, to perform the Special Servicing functions, and thus the performance of the Company's investments will be dependent upon such third party's performance. If PNC Bank or Midland is hired, then the Manager will 15 endeavor to ensure that the contract provides a market price, and evidence of the Manager's analysis in this regard will be provided to the Board of Directors at the next quarterly Board meeting. To the extent the Company does not obtain Special Servicing rights with respect to the Mortgage Collateral underlying its MBS, the servicer of the Mortgage Collateral generally would be responsible to holders of the senior classes of MBS, whose interests may not be the same as those of the holders of the subordinated classes. Accordingly, the Mortgage Collateral may not be serviced in a manner that is most advantageous to the Company as the holder of a subordinated class. RISK OF LOSS ON MORTGAGE LOANS. The Company intends to acquire, accumulate and securitize Mortgage Loans as part of its investment strategy. While holding Mortgage Loans, the Company will be subject to risks of borrower defaults, bankruptcies, fraud and losses and special hazard losses that are not covered by standard hazard insurance. Also, the costs of financing and hedging the Mortgage Loans could exceed the interest income on the Mortgage Loans. 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. It may not be possible or economical for the Company to securitize all of the Mortgage Loans which it acquires, in which case the Company will continue to hold the Mortgage Loans and bear the risks of borrower defaults, bankruptcies, fraud losses and special hazard losses. Furthermore, the Company would expect to retain a subordinate interest in securitizations of such mortgage loans, in which case it would retain substantially all of these risks in a more concentrated form up to the amount of its subordinated interest. MULTIFAMILY AND COMMERCIAL LOANS INVOLVE A GREATER RISK OF LOSS THAN SINGLE FAMILY LOANS. Multifamily and commercial real estate lending is considered to involve a higher degree of risk than single family residential lending because of a variety of factors, including generally larger loan balances, dependency for repayment on successful operation of the mortgaged property and tenant businesses operating therein, and loan terms that include amortization schedules longer than the stated maturity which provide for balloon payments at stated maturity rather than periodic principal payments. In addition, the value of multifamily and commercial real estate can be affected significantly by the supply and demand in the market for that type of property. LIMITED RECOURSE LOANS MAY LIMIT THE COMPANY'S RECOVERY TO THE VALUE OF THE MORTGAGED PROPERTY. The Company anticipates that a substantial portion of the Mortgage Loans that it will acquire may contain limitations on the mortgagee's recourse against the borrower. In other cases, the mortgagee's recourse against the borrower may be limited by applicable provisions of the laws of the jurisdictions in which the Mortgaged Properties are located or by the mortgagee's's selection of remedies and the impact of those laws on that selection. In those cases, in the event of a borrower default, recourse may be limited to only the specific Mortgaged Property and other assets, if any, pledged to secure the relevant Mortgage Loan. As to those Mortgage Loans that provide for recourse against the borrower and its assets generally, there can be no assurance that such recourse will provide a recovery in respect of a defaulted Mortgage Loan greater than the liquidation value of the Mortgaged Property securing that Mortgage Loan. VOLATILITY OF VALUES OF MORTGAGED PROPERTIES MAY AFFECT ADVERSELY THE COMPANY'S MORTGAGE LOANS. Commercial and multifamily property values and net operating income derived therefrom are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by plant closings, industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; perceptions by prospective tenants, retailers and shoppers of the safety, convenience, services and attractiveness of the property; the willingness and ability of the property's owner to provide capable management and adequate maintenance; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). 16 CONSTRUCTION, BRIDGE AND MEZZANINE LOANS INVOLVE GREATER RISKS OF LOSS THAN LOANS SECURED BY INCOME PRODUCING PROPERTIES. The Company may acquire Construction Loans, Bridge Loans and Mezzanine Loans. These types of Mortgage Loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property. This is because of a variety of factors, including, in the case of Construction Loans, dependency on successful completion and operation of the project for repayment, difficulties in estimating construction or rehabilitation costs and loan terms that often require little or no amortization, providing instead for additional advances to be made and for a balloon payment at a stated maturity date. In the case of Mezzanine Loans, the factors would include, among other things, that a foreclosure by the holder of the senior loan could result in a Mezzanine Loan becoming unsecured. Accordingly, the Company may not recover some or all of its investment in such Mezzanine Loan. In addition, Construction Loans, Bridge Loans and Mezzanine Loans may have higher loan to value ratios than conventional Mortgage Loans because of shared appreciation provisions. DISTRESSED MORTGAGE LOANS MAY HAVE GREATER DEFAULT RISKS THAN PERFORMING LOANS. The Company may acquire Nonperfoming and Subperforming Mortgage Loans, as well as Mortgage Loans that have had a history of delinquencies. These Mortgage Loans presently may be in default or may have a greater than normal risk of future defaults and delinquencies, as compared to newly originated, high quality loans. Returns on an investment of this type depend on the borrower's ability to make required payments or, in the event of default, the ability of the loan's servicer to foreclose and liquidate the mortgaged property underlying the Mortgage Loan. There can be no assurance that the servicer can liquidate a defaulted Mortgage Loan successfully or in a timely fashion. FOREIGN MORTGAGE LOANS AND REAL PROPERTIES ARE SUBJECT TO CURRENCY CONVERSION RISKS, FOREIGN TAX LAWS AND UNCERTAINTY OF FOREIGN LAWS. The Company may invest in real property, or Mortgage Loans secured by real property, located outside the United States. Investing in real property located in foreign countries creates risks associated with the uncertainty of foreign laws and markets. Moreover, investments in foreign assets may be subject to currency conversion risks. In addition, income from investment in foreign real property and, in some instances, foreign Mortgage Loans may be subject to tax by foreign jurisdictions, which would reduce the economic benefit of such investments. The Manager has limited experience in investing in foreign real property. RISKS RELATED TO INVESTMENTS IN REAL PROPERTY. Distressed Real Properties may have significant amounts of unleased space and thus may not generate revenues sufficient to pay operating expenses and meet debt service obligations. The value of the Company's investments in real property and the Company's income and ability to make distributions to its stockholders will be dependent upon the ability of the Manager to hire and supervise capable property managers to operate the real property in a manner that maintains or increases revenues in excess of operating expenses and debt service. Revenues from real property may be affected adversely by changes in national or local economic conditions, competition from other properties offering the same or similar attributes, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements (particularly in older structures), changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters (which may result in uninsured or underinsured losses), acts of war, adverse changes in zoning laws, and other factors that will be beyond the control of the Company. Although the Company's insurance will not cover all losses, the Company intends to maintain comprehensive casualty insurance on its real property, including liability and fire and extended coverage, in amounts sufficient to permit replacement in the event of a total loss, subject to applicable deductibles. The Company will endeavor to obtain coverage of the type and in the amount customarily obtained by owners of properties similar to its real property. There are certain types of losses, however, generally of a 17 catastrophic nature, such as earthquakes, floods and hurricanes, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations, provisions in loan documents encumbering properties that have been pledged as collateral security for loans, and other factors also might make it economically impractical to use insurance proceeds to replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company, if any, might not be adequate to restore the Company's investment with respect to the affected property. All real property owned by the Company will be subject to real property taxes and, in some instances, personal property taxes. Such real and personal property taxes may increase or decrease as property tax rates change and as the properties are assessed or reassessed by taxing authorities. An increase in property taxes on the Company's real property could adversely affect the Company's income and ability to make distributions to its stockholders and could decrease the value of that real property. REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS. Reverse repurchase agreements involve sales by the Company of portfolio assets, concurrently with an agreement by the Company to repurchase such assets at a later date at a fixed price. During the reverse repurchase agreement period, the Company continues to receive principal and interest payments on such portfolio assets and also has the opportunity to earn a return on the collateral furnished by the counterparty to secure its obligation to redeliver the securities. Dollar rolls are transactions in which the Company sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type of coupon) securities on a specified future date. During the roll period, the Company forgoes principal and interest paid on the securities. The Company is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. Reverse repurchase agreements and dollar roll agreements involve the risk that the market value of the securities retained by the Company may decline below the price of the securities the Company has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement or dollar roll agreement files for bankruptcy or becomes insolvent, the Company's use of the proceeds of the agreement may be restricted pending a determination by the other party or its trustee or receiver whether to enforce the Company's obligation to repurchase the securities. LEVERAGE INCREASES EXPOSURE TO LOSS. The Company expects to employ leverage consistent with the type of assets acquired and the desired level of interest rate risk in various investment environments. The Company's Articles of Incorporation and Bylaws do not limit the amount of indebtedness the Company may incur. Instead, the Board of Directors will adopt an indebtedness policy that will give the Manager discretion as to the amount of leverage to be employed depending on the Manager's assessment of acceptable risk consistent with the nature of the assets then held by the Company. The Company will leverage its assets primarily with reverse repurchase agreements, dollar rolls, securitizations of its Mortgage Loans and secured and unsecured loans, including the issuance of commercial paper. The terms of such borrowings may provide for the Company to pay a fixed or adjustable rate of interest, and may provide for any term to maturity that the Company deems appropriate. Leverage can reduce the net income available for distributions to stockholders. If the interest income on the assets purchased with borrowed funds fails to cover the cost of the borrowings, the Company will experience net interest losses and may experience net losses and erosion or elimination of its equity. 18 The ability of the Company to achieve its investment objectives depends to a significant extent on its ability to borrow money in sufficient amounts and on sufficiently favorable terms to earn incremental returns. The Company may not be able to achieve the degree of leverage it believes to be optimal due to decreases in the proportion of the value of its assets that it can borrow against, decreases in the market value of the Company's assets, increases in interest rates, changes in the availability of financing in the market, conditions then applicable in the lending market and other factors. This may cause the Company to experience losses or less profits than would otherwise be the case. A substantial portion of the Company's borrowings are expected to be in the form of collateralized borrowings. If the value of the assets pledged to secure such borrowings were to decline, the Company would be required to post additional collateral, reduce the amount borrowed or suffer forced sales of the collateral. If sales were made at prices lower than the carrying value of the collateral, the Company would experience additional losses. If the Company is forced to liquidate Qualified REIT Real Estate Assets to repay borrowings, there can be no assurance that it will be able to maintain compliance with the REIT provisions of the Code regarding asset and source of income requirements. HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES. The Company intends to enter into hedging transactions primarily to protect itself from the effect of interest rate fluctuations on its floating rate debt and also to protect its portfolio of mortgage assets from interest rate and prepayment rate fluctuations. There can be no assurance that the Company's hedging activities will have the desired beneficial impact on the Company's results of operations or financial condition. Moreover, no hedging activity can completely insulate the Company from the risks associated with changes in interest rates and prepayment rates. Hedging involves risk and typically involves costs, including transaction costs. Such costs increase dramatically as the period covered by the hedging increases and during periods of rising and volatile interest rates. The Company may increase its hedging activity and, thus, increase its hedging costs, during such periods when interest rates are volatile or rising. The incurrence of such costs will limit the amount of cash available for distributions to stockholders. The Company intends generally to hedge as much of the interest rate risk as the Manager determines is in the best interests of the stockholders of the Company given the cost of such hedging transactions and the need to maintain the Company's status as a REIT. The Company has not established specific policies as to the extent of the hedging transactions in which it will engage; however, the Unaffiliated Directors will be responsible for reviewing at their regular meetings the extent and effect of hedging activities. The amount of income the Company may earn from its hedging instruments is subject to certain limitations under the REIT Provisions of the Code. See "Federal Income Tax Consequences--Requirements for Qualification--Income Test." These limitations may result in the Manager electing to have the Company bear a level of interest rate risk that could otherwise be hedged when the Manager believes, based on all relevant facts, that bearing such risk is advisable to maintain the Company's status as a REIT. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. The business failure of a counterparty with which the Company has entered into a hedging transaction will most likely result in a default. Default by a party with which the Company has entered into a hedging transaction may result in the loss of unrealized profits and force the Company to cover its resale commitments, if any, at the then current market price. Although generally the Company will seek to reserve for itself the right to terminate its hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the counterparty, and the Company may not be able to enter into an offsetting contract in order to cover its risk. There can be no assurance that a liquid 19 secondary market will exist for hedging instruments purchased or sold, and the Company may be required to maintain a position until exercise or expiration, which could result in losses. There can be no assurance that the Company will be able to obtain financing at borrowing rates below the asset yields of its mortgage assets. The Company will face competition for financing sources that may limit the availability of, and adversely affect the cost of funds to, the Company. TAX, LEGAL AND OTHER RISKS. FAILURE TO MAINTAIN REIT STATUS WOULD HAVE ADVERSE TAX CONSEQUENCES. 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 of its assets, the amount of its distributions to stockholders and the ownership of its stock. If the Company fails to qualify as a REIT in any tax year, it would be taxed as a regular domestic corporation. In that event, the Company would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates, and distributions to the Company's stockholders would not be deductible by the Company in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to the Company's stockholders, which in turn could have an adverse effect on the value of, and trading prices for, the Company's Common Stock. 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 the four subsequent years. The REIT Provisions of the Code may limit the ability of the Company to hedge its assets and the related Company borrowings. Under the REIT Provisions, the Company must limit its income in each year from "Qualified Hedges" (together with any other income generated from other than qualifying real estate assets) to less than 25% of the Company's gross income. As a result, the Company may have to limit its use of certain hedging techniques that might otherwise be 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 from Qualified Hedges in excess of the 25% 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 tax purposes. 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 equivalents, government securities and qualifying 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. The Company must generally distribute at least 95% of its Taxable Income each year. The Company's operations may from time to time generate Taxable Income in excess of cash flows. For example, subordinated MBS often are originally issued at a discount to their redemption price, which discount is generally equal to the difference between an obligation's issue price and its redemption price ("OID"). Mezzanine Loans also may be deemed to have OID for federal income tax purposes. OID generally will be accrued using a constant yield methodology that does not allow credit losses to be reflected until they are actually incurred. The Company will be required to recognize as income each year the portion of the OID that accrues during that year, which will increase the amount that the Company must distribute for that year in order to avoid a corporate-level income tax, notwithstanding the fact that there may be no corresponding contemporaneous receipt of cash by the Company. In addition, the Company may recognize taxable market discount income upon the receipt of proceeds from the disposition of, or principal payments on, Mortgage Loans and MBS that are "market discount bonds" (i.e., obligations with an adjusted issue price that is greater than the Company's tax basis in such obligations), although such 20 proceeds often will be used to make non-deductible principal payments on related borrowings. Finally, the Company may recognize taxable income without receiving a corresponding cash distribution if it forecloses on or makes a "significant modification" (as specifically defined in the Treasury Regulations) to a Mortgage Loan, to the extent that the fair market value of the underlying property or the principal amount of the modified loan, as applicable, exceeds the Company's basis in the original loan. Consequently, the Company's investment activities could have the effect of requiring the Company to incur borrowings or to liquidate a portion of its portfolio at rates or times that the Company regards as unfavorable in order to distribute all of its taxable income and thereby avoid corporate-level income tax and maintain its qualification as a REIT. RISK OF CHANGES IN THE TAX LAW APPLICABLE TO REITS. The rules dealing with federal income taxation are constantly under review by the IRS, the Treasury Department and Congress. New federal tax legislation or other provisions may be enacted into law or new interpretations, rulings or Treasury Regulations could be adopted, all of which could adversely affect the taxation of the Company or its stockholders, possibly with retroactive effect. No prediction can be made as to the likelihood of passage of any new tax legislation or other provisions either directly or indirectly affecting the Company or its stockholders. RISK OF ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME. In general, dividend income that a Tax-Exempt Entity receives from the Company should not constitute unrelated business taxable 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 and, as to foreign stockholders, would be subject to federal income tax withholding without reduction pursuant to any otherwise applicable income tax treaty. Excess Inclusion income would be generated if the Company were to acquire residual interests in one or more REMICs. Although there is no Excess Inclusion income currently generated by a non-REMIC securitization, this result may change if Treasury Regulations are issued regarding the application of the taxable mortgage pool rules of the Code to REITs. The Company intends to arrange its securitizations in a manner to avoid generating significant amounts of Excess Inclusion income. RISK THAT POTENTIAL FUTURE OFFERINGS COULD DILUTE THE INTEREST OF HOLDERS OF COMMON STOCK. The Company expects in the future to 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, as well as all 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. FUTURE REVISIONS IN POLICIES AND STRATEGIES WITHOUT STOCKHOLDER CONSENT CREATE UNCERTAINTY FOR INVESTORS. The Company's Board of Directors has established the investment policies, the operating policies, and the strategies set forth in this Prospectus as the investment policies, operating policies and strategies of the Company. However, these policies and strategies may be modified or waived by the Board of Directors of the Company without stockholder consent, subject, in certain cases, to approval by a majority of the Unaffiliated Directors. SIGNIFICANT COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO ACQUIRE ASSETS. The Company's net income depends, in large part, on the Company's ability to acquire mortgage assets at favorable spreads over the Company's borrowing costs. In acquiring mortgage assets, the Company competes with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other 21 lenders, governmental bodies and other entities. In addition, there are numerous mortgage REITs with asset acquisition objectives 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. Many of the Company's anticipated competitors are significantly larger than the Company, have access to greater capital and other resources and may have other advantages over the Company. 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 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 markets or significant operating failures of competitors may adversely affect the market price of the Common Stock. FAILURE TO MAINTAIN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD RESTRICT THE COMPANY'S OPERATING FLEXIBILITY. 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 excludes from regulation entities that are primarily engaged in the business of purchasing or otherwise acquiring "mortgages and other liens on and interests in real estate." Under the current interpretations 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 and an additional 25% of its assets in real estate related assets. In addition, unless certain MBS represent all the certificates issued with respect to an underlying pool of mortgage loans, such 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 many mortgage assets, therefore, will be limited by the provisions of the Investment Company Act. 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. FAILURE TO DEVELOP A PUBLIC MARKET MAY RESULT IN A DECREASE IN MARKET PRICE. Prior to the Offering, there has been no 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 his 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." While there can be no assurance that a market for the Common Stock will develop, the Common Stock has been approved for listing on the NYSE. 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 strongly influenced by any variation between the gross yield on the Company's assets (net of credit losses) and prevailing market interest rates, with any narrowing of the spread between yield and cost adversely affecting the price of the Common Stock. In addition, since any positive spread between the yield on its assets and the cost of its borrowings will not necessarily be larger in high interest rate environments than in low interest rate environments, the Net Income of the Company and, therefore, the dividend yield on its Common Stock, may be less attractive compared with alternative investments, which could negatively affect the price of the Common Stock. TEMPORARY INVESTMENT IN SHORT-TERM INVESTMENTS WILL REDUCE THE EARNINGS OF THE COMPANY. The Company's results of operations may be adversely affected during the period in which the Company is 22 initially implementing its investment, leveraging and hedging strategies since during this time the Company will be primarily invested in short-term investments. RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK. In order for the Company to meet the requirements for qualification as a REIT at all times, the Articles of Incorporation prohibit any person from acquiring or holding, directly or indirectly, shares of capital 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 any class of capital stock of the Company ("Excess Shares"). The Articles of Incorporation further prohibit (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 would 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 beneficially owned by fewer than 100 persons. If any transfer of shares of capital stock occurs which, if effective, would result in a violation of one or more ownership limitations, then that number of shares of capital 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 of a Trust for the exclusive benefit of one or more Charitable Beneficiaries, and the Intended Transferee may not acquire any rights in such shares; provided, however, that if any transfer occurs which, if effective, would result in shares of capital stock being owned by fewer than 100 persons, then the transfer shall be null and void and the Intended Transferee shall acquire no rights to the stock. Subject to certain limitations, the Company's Board of Directors may waive the limitations for certain investors. See "Description of Capital Stock--Repurchase of Shares and Restrictions on Transfer." 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. The provisions of the Company's Articles of Incorporation or relevant Maryland law 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. Material provisions of the Maryland General Corporation Law ("MGCL") relating to "business combinations" and a "control share acquisition" and of the Articles of Incorporation 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. POSSIBLE ENVIRONMENTAL LIABILITIES. The Company may become subject to environmental risks when it acquires interests in properties with material environmental problems. Such environmental risks include the risk that operating costs and values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. Such laws often impose liability regardless of whether the owner or operator knows of, or was responsible for, the presence of such hazardous or toxic substances. The costs of investigation, remediation or removal of hazardous substances could exceed the value of the property. The Company's income and ability to make distributions to its stockholders could be affected adversely by the existence of an environmental liability with respect to its properties. 23 The Company may invest in real property with known material environmental problems or Mortgage Loans secured by such real property. If it does so, the Company may take certain steps to limit its liability for such environmental problems, such as creating a special purpose entity to own such real property. Despite these steps, there are risks associated with such an investment. The Manager has only limited experience in investing in real property with environmental problems. LIMITATION ON LIABILITY OF MANAGER. Pursuant to the Management Agreement, the Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of the Board of Directors in following or declining to follow its advice or recommendations. The Manager and its directors and officers will not be liable to the Company, 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 Company has agreed to indemnify the Manager and its directors and officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of the Manager not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement. INVESTMENTS MAY BE ILLIQUID AND THEIR VALUE MAY DECREASE. Many of the Company's assets are and will be relatively illiquid. In addition, certain of the MBS that the Company will acquire will include interests that have not been registered under the relevant securities laws, resulting in a prohibition against transfer, sale, pledge or other disposition of those MBS except in a transaction that are exempt from the registration requirements of, or otherwise in accordance with, those laws. The ability of the Company to vary its portfolio in response to changes in economic and other conditions may be relatively limited. No assurances can be given that the fair market value of any of the Company's assets will not decrease in the future. PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK. Fiduciaries of employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), should consider the ERISA fiduciary investment standards before authorizing an investment by a plan in the Common Stock. In addition, fiduciaries of employee benefit plans or other retirement arrangements (such as an individual retirement account ("IRA") or certain H.R. 10 Plans or Keogh plans) which are subject to Title I of ERISA, and/or Section 4975 of the Code, as well as any entity, including an insurance company general account, whose underlying assets include plan assets by reason of a plan or account investing in such entity, should consult with their legal counsel to determine whether an investment in the Common Stock will cause the assets of the Company to be considered plan assets pursuant to the plan asset regulations set forth at 29 C.F.R. Section 2510.3-101, thereby subjecting the Plan to the prohibited transaction rules and the Company's assets to the fiduciary investment standards of ERISA, or cause the excise tax provisions of Section 4975 of the Code, to apply to the Company's assets, unless some exception or exemption granted by the Department of Labor applies to the acquisition, holding or transfer of the Common Stock. See "ERISA Considerations." YEAR 2000 COMPLIANCE. As the year 2000 approaches, an issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. Failure to adequately address this issue could have potentially serious repercussions. The Manager is in the process of working with the Company's service providers to prepare for the year 2000. Based on information currently available, the Company does not expect that it will incur significant operating expenses or be required to incur material costs to be year 2000 compliant. 24 USE OF PROCEEDS The Company has not identified any initial assets and intends temporarily to invest the net proceeds of the Offering, approximately $ million ($ million if the Underwriters' over-allotment option is exercised), in readily marketable interest bearing assets until appropriate real estate assets are identified and acquired. The Company may require up to six months to have the net proceeds of the Offering fully invested in long-term 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 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 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 to be paid out of funds readily available for the payment of dividends. The Company's 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, applicable provisions of the MGCL and such other factors as the Company's Board of Directors deems relevant. In order to avoid corporate income and excise tax and to maintain its qualification 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 and not including 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 noncash 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. 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 Taxable U.S. Stockholders." 25 CAPITALIZATION The capitalization of the Company, as of March 6, 1998, and as adjusted to reflect the sale of the shares of Common Stock offered hereby and to PNC and FBR Asset Investment Corporation 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:
ACTUAL AS (IN ADJUSTED(1)(2) THOUSANDS) (IN THOUSANDS) ------------- ---------------- Preferred Stock, par value $.001 Authorized -- 100,000,000 shares None outstanding.............................................................. $ 0 $ 0 Common Stock, par value $.001................................................... $ $ Authorized -- 400,000,000 shares Outstanding -- 13,333 shares (as adjusted 21,357,573 shares(3))............... 0 21 Additional Paid-in Capital.................................................. $ 200 296,717 ------------- -------- Total..................................................................... $ 200 $ 296,738 ------------- -------- ------------- --------
- ------------------------ (1) After deducting offering expenses estimated to be $1,000,000, payable by the Company, and assuming no exercise of the Underwriters' overallotment option to purchase up to an additional 3,000,000 shares of Common Stock. Includes shares of Common Stock to be purchased by PNC and FBR Asset Investment Corporation. (2) Does not include 2,445,036 shares of Common Stock reserved for issuance upon exercise of options granted under the Company's 1998 Stock Option Plan. See "Management of the Company--Stock Options." Does not include 144,000 options to be granted at the initial public offering price, net of underwriting discounts and commissions, to certain officers, directors and employees of the Company and the Manager. See "Prospectus Summary--Certain Benefits to Related Parties." (3) The Company intends to redeem the 13,333 shares held by the initial stockholder on the date of the Offering for $200,000. CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST 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 portfolio. However, the Board of Directors will evaluate the performance of the Manager before entering into or renewing any management arrangement and the Unaffiliated Directors will review in connection with each renewal of the Management Agreement that the Manager's compensation is reasonable in relation to the nature and quality of services performed. Any material changes in the Company's investment and operating policies are required to be approved by the Board of Directors. See "Risk Factors--Conflicts of Interest of the Manager May Result in Decisions That Do Not Fully Reflect Stockholders' Best Interests"; and "--Future Revisions of Policies and Strategies Without Stockholder Consent Create Uncertainty for Investors." The Company, on the one hand, and the Manager and its Affiliates, on the other, may in the future, enter into a number of relationships other than those governed by the Management Agreement and other than the right of first offer, 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 Affiliates of the Manager in addition to those described herein. The Company's Board of Directors, including a majority of the Unaffiliated Directors intends to approve investment guidelines, including guidelines for affiliate transactions, that would permit most affiliate transactions to be closed without prior Board approval. The Manager will be required to provide a 26 detailed report of such transactions, including evidence that the term of such transactions are fair, to the Board on a quarterly basis. The Manager has informed the Company that it expects to continue to purchase and manage mortgage assets and other real estate related assets in the future for third-party accounts. In addition, the Manager and its Affiliates may from time to time purchase mortgage assets for their own account. Except for the right of first offer on PNC loans, the Manager and its Affiliates will have no obligation to make any particular investment opportunities available to the Company. As a result, there may be a conflict of interest between the operations of the Manager and its Affiliates and the Company in the acquisition and disposition of mortgage assets. The Company expects to acquire mortgage assets from the Manager's Affiliates. In addition, the Company may, but has no current plans to, invest as a co-participant with Affiliates of the Manager in loans originated or acquired by such Affiliates. Although such investments will be subject to review by a committee of Unaffiliated Directors, it is anticipated that they will rely primarily on information provided by the Manager. Such conflicts may result in decisions and/or allocations of mortgage assets by the Manager that are not in the best interests of the Company, although the Manager seeks to allocate investment opportunities in a fair manner among accounts for which particular opportunities are suitable and to achieve the most favorable price in all transactions. Pursuant to the terms of the Management Agreement, the Manager will allocate investment and disposition opportunities in accordance with policies and 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. From time to time, mortgage lenders offer for sale large pools of mortgage loans and REO properties pursuant to a competitive bidding process. In such a case, the Manager may choose an unaffiliated entity with which to submit a joint bid for the pool, as long as the Company takes title only to the mortgage loans and not the real estate. Many investments appropriate for the Company also will be appropriate for accounts of other clients the Manager advises. Situations may arise in which the investment activities of the Manager or the other accounts may disadvantage the Company, such as the inability of the market to fully absorb orders for the purchase or sale of particular securities placed by the Manager for the Company and its other accounts at prices and in quantities which would be obtained if the orders were being placed only for the Company. The Manager may aggregate orders of the Company with orders for its other accounts. Such aggregation of orders may not always be to the benefit of the Company with regard to the price or quantity executed. 27 THE COMPANY GENERAL The Company was recently organized to invest in a diversified portfolio consisting of multifamily, commercial and residential Mortgage Loans, mortgage backed securities and other real estate related assets. The Company expects to use its equity and borrowed funds to seek to generate net income for distribution to stockholders based primarily on the spread between the yield on its assets (net of credit losses) and the cost of its borrowings and hedging activities. The Company will endeavor to qualify and will elect to be taxed as a REIT under the Code. If the Company so qualifies, the Company generally will not be subject to federal income tax to the extent that it distributes its income to its stockholders. See "Federal Income Tax Consequences." 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 PNC and the Manager. INVESTMENT STRATEGY The Company's investment strategy will be to maximize its net income by investing in a diversified portfolio of Mortgage Loans, MBS and other real estate related assets. In creating and managing its investment portfolio, the Company will utilize the Manager's expertise and significant business relationships between the Manager and its Affiliates, as well as unrelated participants in the real estate industry. The Manager, in its discretion, subject to the supervision of the Board of Directors and to the REIT Provisions of the Code, will evaluate and monitor the Company's assets and how long such assets should be held in the Company's portfolio. Thus, the Manager will actively manage the Company's assets, and such assets may not be held to maturity. Although the Company intends to manage its assets actively, it does not intend to acquire, hold or sell assets in such a manner that such assets would be characterized as dealer property for federal income tax purposes. The Company intends to acquire the following types of investments: (i) Mortgage Loans; (ii) MBS, including CMBS and RMBS, fixed and adjustable rate Privately-Issued Certificates and Agency Certificates, CMOs and REMIC interests, and Mortgage Derivatives, including IOs; (iii) multifamily and commercial real properties; (iv) Non-U.S. Mortgage Loans, Non-U.S. MBS and real properties; and (v) other assets. Consistent with the Company's policy of maintaining its status as a REIT for federal income tax purposes, substantially all of the Company's assets will consist of Qualified REIT Real Estate Assets under the REIT Provisions of the Code. See "Description of Mortgage Assets" for a description of these instruments. The Company will finance its assets with the net proceeds of the Offering, future equity offerings and borrowings and expects that it will maintain a debt-to-equity ratio of between 3.5:1 and 4.5:1, although the actual ratio may be higher or lower than this range from time to time. The Company will leverage primarily with reverse repurchase agreements, dollar roll agreements, securitizations of its Mortgage Loans, secured and unsecured borrowings, commercial paper and issuance of Preferred Stock. The Company's policy is to acquire those mortgage assets which it believes are likely to generate the highest returns on capital invested, after considering the amount and nature of anticipated cash flows from the asset, the Company's ability to pledge the asset to secure collateralized borrowings, the capital requirements resulting from the purchase and financing of the asset, the potential for appreciation and the costs of financing, hedging and managing the asset. Prior to acquisition, potential returns on capital employed will be assessed over the expected life of the asset and in a variety of interest rate, yield spread, financing cost, credit loss and prepayment scenarios. In managing the Company's portfolio, the Manager also will consider balance sheet management and risk diversification issues. 28 Although the Company intends to invest primarily in Mortgage Loans and CMBS, the Company's business decisions will depend on changing market factors. Thus, the Company cannot anticipate with any certainty the percentage of its assets that will be invested in each category of real estate related assets. The Company has a great deal of discretion as to the manner in which it may invest, leverage and hedge its assets. The Company may change its policies without stockholder approval, but subject to approval by a majority of the Unaffiliated Directors of the Company. OPERATING POLICIES AND STRATEGIES OPERATING POLICIES. The Board of Directors (including a majority of the Unaffiliated Directors) must approve operating policies for the Company. The Board of Directors may, in its discretion, revise such policies from time to time in response to changes in market conditions or opportunities without stockholder approval. The Company will also adopt compliance guidelines, including restrictions on acquiring, holding and selling assets, to ensure that the Company establishes and maintains its qualification as a REIT and is excluded from regulation as an investment company. Before acquiring any asset, the Manager will determine whether such asset would constitute a Qualified REIT Real Estate Asset under the REIT Provisions of the Code. Substantially all of the assets that the Company intends to acquire are expected to be Qualified REIT Real Estate Assets. The Company will regularly monitor purchases of mortgage assets and the income generated from such assets, including income from its hedging activities, in an effort to ensure that at all times the Company maintains its qualification as a REIT and its exclusion under the Investment Company Act. The Unaffiliated Directors will review all transactions of the Company on a quarterly basis to ensure compliance with the operating policies and to ratify all transactions with PNC and its Affiliates, except that the purchase of securities from PNC and its Affiliates will require prior approval. The Unaffiliated Directors are likely to rely substantially on information and analysis provided by the Manager to evaluate the Company's operating policies, compliance therewith and other matters relating to the Company's investments. In order to maintain the Company's REIT status, the Company generally intends to distribute to stockholders aggregate dividends equaling at least 95% of its Taxable Income each year. See "Federal Income Tax Consequences." CAPITAL AND LEVERAGE POLICIES. The Company's operations are expected to be highly leveraged. Initially, the Company intends to finance its acquisition of mortgage assets through the proceeds of the Offering and, thereafter, primarily by borrowing against or "leveraging" its existing portfolio and using the proceeds to acquire additional mortgage assets. See "Risk Factors--Leverage Increases Exposure to Loss." The Company expects to incur debt such that, once fully invested, it will maintain a debt-to-equity ratio of between 3.5:1 to 4.5:1, although the actual ratio may be higher or lower from time to time depending on market conditions and other factors deemed relevant by the Manager. The actual debt-to-equity ratio will depend on the Manager's assessment of acceptable risk consistent with the nature of the assets then held by the Company. For example, immediately following the Offering, a significant portion of the proceeds is expected to be invested in short-term high quality assets and the Company's debt-to-equity ratio is likely to be high. The Company's Articles of Incorporation and Bylaws do not limit the amount of indebtedness the Company can incur. Instead, the Board of Directors will establish an indebtedness policy that gives the Manager a great deal of flexibility. Moreover, the Board of Directors has discretion to deviate from or change the Company's indebtedness policy at any time. However, the Company intends to maintain an adequate capital base to protect against various business conditions in which the Company's financing and hedging costs might exceed interest income (net of credit losses) from its mortgage assets. These conditions could occur, for example, due to credit losses or when, due to interest rate fluctuations, interest income on the Company's mortgage assets lags behind interest rate increases in the Company's 29 borrowings, which are expected to be predominantly variable rate. See "Risk Factors--Interest Rate Fluctuations Will Affect Value of Mortgage Assets, Net Income and Common Stock." LIABILITIES. Mortgage assets, other than securitized Mortgage Loans, will be financed primarily at short-term borrowing rates through reverse repurchase agreements, dollar roll agreements, loan agreements, lines of credit, commercial paper borrowings and other credit facilities with institutional lenders. The Company may also borrow long-term and issue preferred stock. Reverse repurchase agreements are structured as sale and repurchase obligations and have the economic effect of allowing a borrower to pledge purchased mortgage assets as collateral securing short-term loans to finance the purchase of such mortgage assets. Typically, the lender in a reverse repurchase arrangement makes a loan in an amount equal to a percentage of the market value of the pledged collateral. At maturity, the borrower is required to repay the loan and the pledged collateral is released. Pledged mortgage assets continue to pay principal and interest to the borrower. A dollar roll agreement provides for the sale and delayed delivery of mortgage assets and a simultaneous forward repurchase commitment by the borrower to repurchase the same or a substantially similar security on a future date. During the roll period, the borrower forgoes principal and interest payments on the mortgage assets, but is compensated by the interest earned on the cash proceeds of the initial sale of the mortgage assets and the spread on the forward repurchase price. Because the dollar roll provides a borrower with funds for the roll period, its value may be expressed as an "implied financing rate." Dollar rolls are a favorable means of financing when the forward repurchase price is low compared to the initial sale price, making the implied financing rate lower than alternative short-term borrowing rates. The Company's ability to enter into dollar roll agreements may be limited in order to maintain the Company's status as a REIT or to avoid the imposition of tax on the Company. The Company expects that reverse repurchase agreements and, to the extent consistent with the REIT Provisions of the Code, dollar roll agreements will be, together with Mortgage Loan securitizations, the principal means of leveraging its mortgage assets. However, the Company may also utilize warehouse lines of credit or issue secured or unsecured notes of any maturity if it appears advantageous to do so. The Company expects to issue shares of preferred stock, including in connection with the acquisition of assets. The Company intends to enter into reverse repurchase agreements with financially sound institutions, including broker/dealers, commercial banks and other lenders, which meet credit standards approved by the Board of Directors. Upon repayment of a reverse repurchase agreement, or a repurchase pursuant to a dollar roll agreement, the Company intends to pledge the same collateral promptly to secure a new reverse repurchase agreement or will sell similar collateral pursuant to a new dollar roll agreement. Since the Company is newly-formed and has not commenced operations, it has not yet established any lines of credit or collateralized financing facilities. The Company has conducted preliminary discussions with potential lenders and believes, on the basis of these discussions, that it will be able to obtain financing in amounts and at interest rates consistent with the Company's financing objectives. The reverse repurchase and dollar roll agreements also would require the Company to deposit additional collateral (a "margin call") or reduce its borrowings thereunder, if the market value of the pledged collateral declines. This may require the Company to sell mortgage assets to provide such additional collateral or to reduce its borrowings. The Company intends to maintain an equity cushion sufficient to provide liquidity in the event of interest rate movements and other market conditions affecting the market value of the pledged mortgage assets. However, there can be no assurance that the Company will be able to safeguard against being required to sell mortgage assets in the event of a change in market conditions. RELATIONSHIP WITH PNC. PNC Bank will enter into an agreement granting to the Company, for as long as the Management Agreement with the Manager remains in effect, a right of first offer to purchase not less than $1 billion annually of multifamily and commercial Mortgage Loans originated by PNC Bank and which PNC Bank has determined to make available for sale. Such Mortgage Loans may be 30 of the type suitable to be sold to conduits ("Conduit Loans") or ineligible for sale to conduits ("Non-Conduit Loans"). In general, Non-Conduit Loans potentially have greater yields than Conduit Loans, but they also carry greater risks. Although not contractually committed to do so, the Company presently intends to purchase the Mortgage Loans offered to it pursuant to the foregoing right of first offer, subject to compliance with the Company's policy guidelines and underwriting criteria as established and modified from time to time. The parties anticipate that the Non-Conduit Loans will be funded by the Company directly to the borrower at closing of the loan transaction, and that the Company will pay PNC Bank an origination fee. Some or all of such origination fees could, in some circumstances, consist of securities of the Company. Most mortgage loans the Company expects to purchase from PNC Bank will fit the following descriptions. The Company does not intend, however, to restrict its purchases to loans that meet these criteria. Multifamily and commercial Mortgage Loans originated for securitization by PNC Bank typically are evidenced by a promissory note and secured by a mortgage, deed of trust or other similar security instrument that creates a security interest in real property. The Mortgage Loans originated by PNC Bank include acquisition, renovation, construction and term loans as well as secured and unsecured lines of credit. PNC has also allocated $100 million to the mezzanine debt sector. PNC Bank generally requires that mortgaged properties be subject to a "Phase I" environmental assessment or an update of a previously conducted assessment conducted in accordance with industry-wide standards. In addition, PNC Bank examines whether the use and operation of the mortgaged properties were in compliance in all material respects with all applicable zoning, land-use, environmental, building, fire and health ordinances, rules, regulations and orders applicable to such properties. In almost all cases, the Mortgage Loans require that each mortgaged property be insured by a hazard insurance policy in a specified amount. The Company expects that the Mortgage Loans purchased from PNC Bank as whole loans or participations generally will have (i) terms to stated maturity ranging from 12 to 120 months, (ii) amortization terms ranging from interest only to 360 months and (iii) loan-to-value ratios at origination ranging from 35% to 85%. The Company expects to maintain a relationship with PNC Bank in which the Company will be a ready, willing and able purchaser of not only Mortgage Loans, but also other assets that may be offered from time to time by PNC Bank (such home equity and single family mortgage financings). Although no binding commitment will exist on the part of PNC Bank or the Company regarding the sale and purchase of such other assets, the Company expects to be able to purchase such other assets from PNC Bank on terms and at prices that will be fair to both parties and that meet the Company's investment policy for transactions with affiliates. If an asset that otherwise meets all of the Company's criteria for asset acquisition is being offered to the Company by PNC Bank or one of its Affiliates at a price that is greater, or on terms that are less favorable, than would be available from third parties for similar assets in bona fide arm's length transactions, the Manager would be expected to recommend that the Company decline to acquire that asset at the quoted price and terms, notwithstanding the relationship among the Company, PNC Bank and its Affiliates. The Manager will determine fair transfer prices for the Company's acquisitions of assets from PNC Bank and its Affiliates based on guidelines approved by the Unaffiliated Directors. The Unaffiliated Directors will review those transactions on a quarterly basis to insure compliance with the guidelines. In deciding whether to approve an acquisition of any assets, including acquisitions of Mortgage Loans, MBS and other assets from PNC Bank or its Affiliates, including Midland, the Manager may consider such information as it deems appropriate to determine whether the acquisition is consistent with the guidelines, such as whether the price is fair and the investment otherwise is suitable and in the best interests of the Company. In addition, the Manager may consider, among other factors, whether the acquisition of that asset will enhance the Company's ability to achieve or exceed the Company's risk adjusted target rate of 31 return, if any, whether the asset otherwise is well-suited for the Company and whether the Company financially is able to take advantage of the investment opportunity presented thereby. There is no geographic limitation or requirement of geographic diversification (either as to size, jurisdictional boundary, zip code or other geographic measure) as to the properties that secure repayment of the Mortgage Loans or underlying the MBS contemplated to be acquired or created by the Company; the only limitations as to the type of assets that the Company may acquire and the characteristics thereof being limitations either (i) imposed by law, (ii) set forth in the Guidelines or (iii) with which the Company must comply as a condition of maintaining both its status as a REIT and its exemption from regulation under the Investment Company Act. When possible, the price that the Company will pay for Mortgage Loans, MBS and other assets acquired from PNC Bank or its Affiliates will be determined by reference to the prices most recently paid to PNC Bank or its Affiliates for similar assets, adjusted for differences in the terms of such transactions and for changes in market conditions between the dates of the relevant transactions. If no previous sales of similar assets have occurred, the Company will attempt to determine a market price for the asset by an alternative method, such as obtaining a broker's price opinion or an appraisal, if it can do so at a reasonable cost. Investors should understand, however, that such determinations are estimates and are not bona fide third-party offers to buy or sell. Although no formal agreement exists, it is anticipated that if the acquisition by PNC occurs, Midland will act as servicer for those mortgage loans for which the Company acquires servicing rights for a market servicing fee. In addition, the Company would expect that Midland would be a significant source of assets for the Company. It is the intention of the Company that the agreements and transactions, including the sale of pools of Mortgage Loans, MBS and real property, between the Company on the one hand, and PNC Bank and its Affiliates, on the other hand will be fair to both parties. However, there can be no assurance that each of such agreements and transactions will be on terms at least as favorable to the Company as it could have obtained from unaffiliated third parties. SECURITIZATION. The Company intends to acquire and accumulate Mortgage Loans for securitization and may use ASC for such purposes. Moreover, the Company may issue non-REMIC CMOs collateralized by previously issued CMOs or MBS in transactions known as "resecuritizations." The Company will structure a resecuritization in the same manner as a securitization. The collateral (whether whole mortgage loans or MBS) will be transferred into a qualified REIT subsidiary, and that entity will issue non-REMIC CMOs. The transaction will be structured as debt, with the issuer retaining an equity interest in the collateral. In a debt transaction, the principal balance of the collateral (whether whole loans or MBS) will exceed the principal balance of the CMOs. Thus, once the CMOs are paid in full, the issuer will own the collateral free of the lien of the CMO debt. During the period in which the Company is acquiring mortgage loans for securitization, the Company is likely to borrow funds secured by such loans pursuant to warehouse lines of credit. The Company intends to securitize Mortgage Loans primarily by issuing structured debt in non-REMIC transactions. Under this approach, for accounting purposes, the securitized Mortgage Loans will remain on the Company's balance sheet as assets and the debt obligations (the CMOs) will appear as liabilities. The proceeds of securitizations by the Company will be used to reduce preexisting borrowings relating to such assets and to purchase additional assets. Issuing structured debt in this manner locks in potentially less expensive, long-term, non-recourse financing that better matches the terms of the Mortgage Loans and fixed-income instruments serving as collateral for such debt. The Company also may employ, from time to time to the extent consistent with the REIT Provisions of the Code, other forms of securitization under which a "sale" of an interest in the Mortgage Loans occurs, and a resulting gain or loss is recorded on the Company's balance sheet for accounting purposes at the time of sale. In a "sale" securitization, only the net retained interest in the securitized Mortgage Loans 32 will remain on the Company's balance sheet. The Company may elect to conduct certain of its securitization activities, including such sales, through one or more taxable subsidiaries or through "Qualified REIT Subsidiaries", as defined under the REIT Provisions of the Code, formed for such purpose. To the extent consistent with the REIT Provisions of the Code, such entity would elect to be taxed as a Real Estate Mortgage Investment Conduit ("REMIC") or a Financial Asset Securitization Investment Trust ("FASIT"). The Company expects that it will retain interests in the underlying Mortgage Loans which will be subordinated with respect to payments of principal and interest on the underlying Mortgage Loans to the classes of securities issued to investors in such securitizations. Accordingly, any losses incurred on the underlying Mortgage Loans will be applied first to reduce the remaining amount of the Company's retained interest, until reduced to zero. Thereafter, the Company would have no further exposure to losses. Typically, in connection with the creation of a new Mortgage Loan securitization, the issuer generally will be required to enter into a master servicing agreement with respect to such series of mortgage securities with an entity acceptable to the Rating Agencies, that regularly engages in the business of servicing Mortgage Loans (a "Master Servicer"). In order to assist the Company in maintaining its exclusion from investment company regulation, the Company expects that it will acquire or retain the right to initiate, direct or forbear foreclosure proceedings in connection with defaults on any of the underlying Mortgage Loans and may retain special servicers, including Midland, to maintain borrower performance and to exercise available remedies, including foreclosure, at the direction of the Company. Exercise of such rights may require the Company to be responsible for advancing payments to investors in such securitizations as if such default has not occurred. The Company intends to structure its securitizations so as to avoid the attribution of any Excess Inclusion Income to the Company's stockholders. See "Federal Income Tax Consequences--Taxation of Taxable U.S. Stockholders." CREDIT RISK MANAGEMENT. With respect to its assets, the Company will be exposed to various levels of credit and special hazard risk, depending on the nature of the underlying assets and the nature and level of credit enhancements supporting such assets. The Company will originate or purchase mortgage loans which meet minimum debt service coverage standards established by the Company. The Manager will review and monitor credit risk and other risks of loss associated with each investment. In addition, the Manager will seek to diversify the Company's portfolio of assets to avoid undue geographic, issuer, industry and certain other types of concentrations. The Company's Board of Directors will monitor the overall portfolio risk and review levels of provision for loss. ASSET/LIABILITY MANAGEMENT. 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 both through hedging activities and by attempting to structure the key terms of its borrowings to generally correspond (in the aggregate for the entire portfolio, and not on an asset-by-asset basis) to the interest rate and maturity parameters of its assets. HEDGING ACTIVITIES. The Company intends to enter into hedging transactions to protect its investment portfolio from interest rate fluctuations and other changes in market conditions. These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, Mortgage Derivatives and other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as the Manager determines is in the best interest of the Company's stockholders, given the cost of such hedges and the need to maintain the Company's status as a REIT. The Manager may elect to have the Company bear a level of interest rate risk that could otherwise be hedged when the Manager believes, based on all relevant facts, that bearing such risk is advisable. The Manager has extensive experience in hedging real estate assets with these types of instruments. 33 Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there may be no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. The Company will enter into these transactions only with counterparties with long term debt rated "A" or better by at least one of the Rating Agencies. The business failure of a counterparty with which the Company has entered into a hedging transaction will most likely result in a default, which may result in the loss of unrealized profits and force the company to cover its resale commitments, if any, at the then current market price. Although generally the Company will seek to reserve for itself the right to terminate its hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the counterparty, and the Company may not be able to enter into an offsetting contract in order to cover its risk. There can be no assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and the Company may be required to maintain a position until exercise or expiration, which could result in losses. The Company intends to protect its investment portfolio against the effects of significant interest rate fluctuations and to preserve the net income and capital value of the Company. Specifically, the Company's asset acquisition and borrowing strategies are intended to offset the potential adverse effects resulting from the differences between fixed rates or other limitations on coupon rate adjustment, such as interest rate caps, associated with its mortgage assets and the shorter term predominantly variable nature of the Company's related borrowings. The Company's hedging activities are intended to address both income and capital preservation. Income preservation refers to maintaining a stable spread between yields from mortgage assets and the Company's borrowing costs across a reasonable range of adverse interest rate environments. Capital preservation refers to maintaining a relatively steady level in the market value of the Company's capital across a reasonable range of adverse interest rate scenarios. To monitor and manage capital preservation risk, the Company will model and measure the sensitivity of the market value of its capital (i.e., the combination of its assets, liabilities and hedging positions) to various changes in interest rates in various economic scenarios. The Company will not enter into these types of transactions for speculative purposes. The Company will focus its hedging activities on providing a level of income and capital protection against reasonable interest rate risks. However, no strategy can insulate the Company completely from changes in interest rates. The Company has not established specific policies as to the extent of the hedging transactions in which it will engage; however, the Unaffiliated Directors will be responsible for reviewing at their regular meetings the extent and effect of hedging activities. OTHER POLICIES. The Company intends to invest and operate in a manner consistent with the requirements of the Code to establish and maintain its qualification as a REIT for federal income tax purposes (see "Federal Income Tax Consequences -- Taxation of the Company"), unless, due to changes in the tax laws, changes in economic conditions or other fundamental changes in the Company's business environment, the Board of Directors, with the consent of the holders of a majority of the shares of Common Stock outstanding and entitled to vote on the question, determines that it is no longer in the best interest of the Company to qualify as a REIT. The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act. The Company has the authority to offer shares of its capital stock and to repurchase or otherwise reacquire such shares or any other of its securities. Under certain circumstances the Company may purchase shares of its Common Stock in the open market or otherwise. The Board of Directors has no present intention to cause the Company to repurchase any of its shares and any such action would be taken 34 only in conformity with applicable federal and state laws and the requirements for qualification as a REIT for federal income tax purposes. Except in connection with its formation, the Company has not, to date, issued shares of Common Stock or other securities. The Company has not made loans to officers and directors and does not intend to do so. The Company does not intend to engage in trading, underwriting or agency distribution or sale of securities of other issuers. The Company has no present intention to invest in the securities of other issuers for the purpose of exercising control. The decision to do so is vested solely in the Board of Directors and may be changed without a vote of the shareholders. FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of Directors (including the Unaffiliated Directors) will approve 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 determines that such modification or waiver is in the best interest of the Company or its 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. DESCRIPTION OF REAL ESTATE RELATED ASSETS The Company intends to invest principally in the following types of mortgage assets subject to the operating restrictions described in "Operating Policies and Strategies" above and the additional policies described below. MORTGAGE LOANS. The Company intends to acquire and accumulate fixed and adjustable-rate Mortgage Loans senior or subordinate liens on multifamily residential, commercial, single-family (one-to-four unit) residential or other real property as a significant part of its investment strategy. The Mortgage Loans may be originated by or purchased from various suppliers of mortgage assets throughout the United States and abroad, 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 Company may also originate its own Mortgage Loans, particularly bridge financing of Mortgage Loan and real property portfolios. 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. In considering whether to acquire a pool of Mortgage Loans, the Company's policy is to request that the Manager perform certain due diligence tasks on behalf of the Company that reasonably may be expected to provide relevant and material information as to the value of the Mortgage Loans within that pool and whether the Company should acquire that pool. 35 The Company's policy is to acquire Mortgage Loans only at prices that are fair to the Company and that meet the Company's investment criteria. In determining the price of a Mortgage Loan, the Company may request that the Manager review and analyze a number of factors. These factors include market conditions (market interest rates, the availability of mortgage credit and economic, demographic, geographic, tax, legal and other factors). They also include a yield to maturity of the Mortgage Loan, the liquidity of the Mortgage Loan, the limitations on the obligations of the seller with respect to the Mortgage Loan, the rate and timing of payments to be made with respect to the Mortgage Loan, the mortgaged property underlying the Mortgage Loan, the risk of adverse fluctuations in the market values of that mortgaged property as a result of economic events or governmental regulations, the historical performance and other attributes of the property manager responsible for managing the mortgaged property, relevant laws limiting actions that may be taken with respect to loans secured by real property and limitations on recourse against the obligors following realization on the collateral through various means, risks of timing with respect to Mortgage Loan prepayments, risks associated with geographic concentration of underlying assets constituting the mortgaged property for the relevant Mortgage Loan, environmental risks, pending and threatened litigation, junior liens and other issues relating to title, a prior history of defaults by affiliated parties on similar and dissimilar obligations, and other factors. DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming or Subperforming Mortgage Loans secured by multifamily and commercial properties. In general, the Company expects to foreclose on such Mortgage Loans in an attempt to acquire title to the underlying Distressed Real Properties. If the Company acquires pools of Distressed Mortgage Loans (or pools of Mortgage Loans that are primarily Distressed Mortgage Loans), the Company's policy is that the due diligence to be performed before acquiring such Distressed Mortgage Loans or pools is to be substantially similar to the due diligence process described above in connection with the acquisition of performing Term Loans and the due diligence process described below to be performed in connection with the acquisition of Distressed Real Properties. CONSTRUCTION FINANCING, BRIDGE FINANCING AND LOANS SUBJECT TO PRIOR LIENS. The Company may invest in or provide Construction Loans. The Company will be permitted to make a Construction Loan of up to 90% of total project costs if the Construction Loan is secured by a first lien mortgage, deed of trust or deed to secure debt, as collateral security for the borrower's obligations with respect to the Construction Loan. In addition, the Company may invest in or provide Mezzanine Loans to owners of real properties that are encumbered by first lien mortgages, deeds of trust or deeds to secure debt, in which case the Company's Mezzanine Loans generally will be secured by junior liens on the subject properties. The policy of the Company is that, at the time of origination of a Mezzanine Loan, the value of the subject property should exceed the sum of the outstanding balances of the debt secured by the first lien and the maximum amount contemplated to be advanced by the Company under the Mezzanine Loan. With respect to both Construction Loans and Mezzanine Loans, the Company may receive not only a stated fixed or variable interest rate on the loan, but also a percentage of gross revenues and/or a percentage of the increase in the fair market value of the property securing repayment of that Construction Loan or Mezzanine Loan, payable upon maturity or refinancing of the applicable Construction Loan or Mezzanine Loan or upon the sale of the property. The Company may also provide bridge financing, generally in the form of secured loans, for the acquisition of Mortgage Loan portfolios, real properties or other real estate related assets. COMMITMENTS TO MORTGAGE LOAN SELLERS. The Company may issue commitments ("Commitments") to originators and other sellers of Mortgage Loans and MBS, including PNC Bank and Midland, who follow policies and procedures that comply with all applicable federal and state laws and regulations and satisfy the Company's underwriting criteria. 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 loans are required to be fully funded prior to their 36 acquisition by the Company. Following the issuance of Commitments, the Company will be exposed to risks of interest rate fluctuations. Mortgage Loans acquired by the Company will generally be 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, floods or windstorms) 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. The Company may obtain commitments for mortgage pool insurance on the Mortgage Loans it acquires 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 overcollateralization. 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 loan prior to its securitization. In addition to credit enhancement, the Company may also obtain a commitment for special hazard insurance on the Mortgage Loans, if available at reasonable cost, to mitigate casualty losses that are not usually covered by standard hazard insurance, such as vandalism, war, earthquake, floods and windstorm. This special hazard insurance is generally 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. Accordingly, the risks associated with such special hazard losses exist only between the times the Company purchases a Mortgage Loan and the inclusion of such Mortgage Loan within a newly created issue of mortgage securities. It is expected that when the Company acquires Mortgage Loans, the seller will represent and warrant to the Company that there has been no fraud or misrepresentation during the origination of the Mortgage Loans. It will agree to repurchase any 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 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. 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 37 future acquire mortgage assets by offering its debt or equity securities in order to acquire such mortgage assets. The Company intends to retain a subordinate interest in the pools of Mortgage Loans it securitizes and to acquire subordinate interests in pools of Mortgage Loans securitized by others. The credit quality of Mortgage Loans and the mortgage securities utilizing Mortgage Loans as the underlying collateral, depends on a number of factors, including their loan-to-value ratio, their terms and the geographic diversification of the location of the properties securing the Mortgage Loans and, in the case of multi-family and commercial properties, the creditworthiness of tenants and debt service coverage ratios. BRIDGE LOANS. Bridge loans are short-term loans (generally 2-4 years) secured by liens on real property or by a pledge of partnership interests in a portfolio of properties. Bridge loans are not intended to be permanent debt capital but rather, interim financing prior to the sale of the property or its refinancing with bank debt or mortgage loans. The loans generally pay a floating rate of interest based on LIBOR or a similar floating rate index. Bridge loans carry a high sensitivity to default or extension of principal repayment terms due to the need for refinancing and minimal principal amortization. As they are associated with transfers of equity ownership, property repositioning and tenant lease-up, bridge loans bear the risk that operating strategies may not be successful, economic conditions may deteriorate and competitors may undertake competing strategies. MORTGAGE BACKED SECURITIES. The Company intends to acquire MBS, primarily non-investment grade classes, from various sources. MBS typically are divided into two or more interests, sometimes called "tranches" or "classes." The Senior classes are often securities which, if rated, would have ratings ranging from low investment grade "BBB" to higher investment grades "A," "AA" or "AAA." The junior, subordinated classes typically would include one or more non-investment grade classes which, if rated, would have ratings below investment grade "BBB." Such subordinated classes also typically include an unrated higher-yielding, credit support class (which generally is required to absorb the first losses on the underlying Mortgage Loans). MBS generally are issued either as CMOs or Pass-Through Certificates. "CMOs" are debt obligations of special purpose corporations, owner trusts or other special purpose entities secured by commercial Mortgage Loans or MBS. Pass-Through Certificates evidence interests in trusts, the primary assets of which are Mortgage Loans. CMO Bonds and Pass-Through Certificates may be issued or sponsored by agencies or instrumentalities of the United States Government or private originators of, or investors in, Mortgage Loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and other entities. MBS may not be guaranteed by an entity having the credit status of a governmental agency or instrumentality and in this instance are generally structured with one or more of the types of credit enhancement described below. In addition, MBS may be illiquid. In most non-government mortgage loan securitizations, MBS are issued in multiple classes in order to obtain investment-grade credit ratings for the senior classes and thus increase their marketability. Each class of MBS may be issued with a specific fixed or variable coupon rate and has a stated maturity or final scheduled distribution date. Principal prepayments on the Mortgage Loans comprising the mortgage collateral may cause the MBS to be retired substantially earlier than their stated maturities or final scheduled distribution dates, although, with respect to commercial Mortgage Loans, there generally are penalties for or limitations on the ability of the borrower to prepay the loan. Interest is paid or accrued on MBS on a periodic basis, typically monthly. The credit quality of MBS depends on the credit quality of the underlying mortgage collateral. Among the factors determining the credit quality of the mortgage collateral will be a government or agency guarantee ratio of the Mortgage Loan balances to the value of the properties securing the Mortgage Loans, the purpose of the Mortgage Loans (e.g., refinancing or new purchase), the amount of the 38 Mortgage Loans, their terms, the geographic diversification of the location of the properties securing the Mortgage Loans, and, in the case of commercial Mortgage Loans, the credit-worthiness of tenants. The principal of and interest on the underlying Mortgage Loans may be allocated among the several classes of a MBS in many ways, and the credit quality of a particular class results primarily from the order and timing of the receipt of cash flow generated from the underlying Mortgage Loans. Subordinated interests in MBS carry significant credit risks. Typically, in a "senior-subordinated" structure, the subordinated interest provide credit protection to the senior classes by absorbing losses from loan defaults or foreclosures before such losses are allocated to senior classes. As long as the more senior classes of securities are outstanding, all prepayments on the Mortgage Loans generally are paid to those senior classes, at least until the end of a lock-out period, which typically is five years or more. In some instances, particularly with respect to subordinated interests in commercial mortgage securitizations, the holders of subordinated interests are not entitled to receive scheduled payments of principal until the more senior classes are paid in full or until the end of a lock-out period. Because of this structuring of the cash flows from the underlying Mortgage Loans, subordinated interests in a typical securitization are subject to a substantially greater risk of non-payment than are the more senior classes. Accordingly, the subordinated interests are assigned lower credit ratings, or no ratings at all. As a result of the typical "senior-subordinated" structure, the subordinated classes of MBS, including the Initial Investment, will be extremely sensitive to losses on the underlying Mortgage Loans. For example, if the Company owns a $20 million first loss subordinated class of MBS consisting of $100 million of underlying Mortgage Loans, a 7% loss on the underlying Mortgage Loans generally will result in a 70% loss of the stated principal amount of the subordinated interest. Accordingly, the holder of the subordinated interest is particularly interested in minimizing the loss frequency (the percentage of the loan balances that default over the life of the mortgage collateral) and the loss severity (the amount of loss on defaulted Mortgage Loans, i.e., the principal amount of the Mortgage Loan unrecovered after applying any recovery to the expenses of foreclosure and accrued interest) on the underlying Mortgage Loans. Losses on the mortgage collateral underlying the Company's MBS will depend upon a number of factors, many of which will be beyond the control of the Company or the applicable servicer. Among other things, the default frequency on the mortgage collateral will reflect broad conditions in the economy generally and real property, particularly economic conditions in the local area in which the underlying mortgaged property is located, the loan-to-value ratio of the Mortgage Loan, the purpose of the loan, and the debt service coverage ratio (with respect to commercial and multifamily Mortgage Loans). The loss severity on the mortgage collateral will depend upon many of the same factors described above, and will also be influenced by certain legal aspects of Mortgage Loans that underlie the MBS acquired by the Company, including the servicer's ability to foreclose on the defaulted Mortgage Loan and sell the underlying mortgaged property. Various legal issues affect the ability to foreclose on a Mortgage Loan or sell the mortgaged property. These legal issues may extend the time of foreclosure proceedings or may require the expenditure of additional sums to sell the underlying Mortgaged Property, in either case increasing the amount of loss with respect to the Mortgage Loans. In considering whether to acquire a MBS, the Company's policy is to determine, in consultation with the Manager, the scope of review to be performed before the Company acquires that MBS, which will be designed to provide to the Company such information regarding that MBS as the Company and Manager determine to be relevant and material to the Company's decision regarding the acquisition of that MBS. The Company's policy generally is to request that the Manager perform due diligence substantially similar to that described above in connection with the acquisition of performing Mortgage Loans. The due diligence may include an analysis of (i) the underlying collateral pool, (ii) the prepayment and default history of the originator's prior loans, (iii) cash flow analyses under various prepayment and interest rate scenarios (including sensitivity analyses) and (iv) an analysis of various default scenarios. The Company also may request that the Manager determine and advise the Company as to the price at which the Manager would recommend acquisition of the MBS by the Company, and the Manager's reasons for such 39 advice. However, which of these characteristics (if any) are important and how important each characteristic may be to the evaluation of a particular MBS depends on the individual circumstances. Because there are so many characteristics to consider, each MBS must be analyzed individually, taking into consideration both objective data as well as subjective analysis. Many of the MBS to be acquired by the Company will not have been registered under the Securities Act, but instead initially will have been sold in private placements. These MBS will be subject to restrictions on resale and, accordingly, will have substantially more limited marketability and liquidity. CMO Residuals are derivative mortgage securities issued by agencies of the U.S. Government or by private originators of, or investors in, Mortgage Loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Many special purpose trusts or corporations that issue multi-class MBS elect to be treated, for federal income tax purposes, as REMICs. The Company may acquire not only MBS that are treated as regular interests in REMICs, but also those that are designated as REMIC Residual Interests or as Non-REMIC Residual Interests. The cash flow generated by the Mortgage Loans underlying a series of CMOs is first applied to the required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The Residual Interests generally receive excess cash flows, if any, after making the foregoing payments. The amount of Residual Interest cash flow will depend on, among other things, the characteristics of the Mortgage Loans, the coupon rate of the CMOs, prevailing interest rates, and particularly the prepayment experience of the Mortgage Loans. Regular Interests in a REMIC are treated as debt for tax purposes. Unlike regular interests, REMIC Residual Interests typically generate Excess Inclusion or other forms of taxable income (including the accretion of market discount) that bear no relationship to the actual economic income that is generated by a REMIC. REMIC Residual Interests that are required to report taxable income or loss but receive no cash flow from the Mortgage Loans are called "Non-Economic Residuals." Any purchases and sales of REMIC Residual Interests will be conducted by a fully taxable corporate subsidiary to prevent the liability for Excess Inclusion Income from being passed to the Company's stockholders. See "Federal Income Tax Consequences--Taxation of Taxable U.S. Stockholders." Any REMIC securitizations carried out by the Company will generally create a REMIC Residual Interest. If the residual interest is a Non-Economic Residual, the Company may incur a negative purchase price to dispose of it, or the Company may retain it in a fully taxable corporate subsidiary. See "Operating Policies and Strategies--Securitizations." Subordinated MBS generally are issued at a significant discount to their outstanding principal balance, which gives rise to OID for federal income tax purposes. The Company will be required to accrue the OID as taxable income over the life of the related subordinated MBS on a level-yield method whether or not the Company receives the related cash flow. The OID income attributable to a subordinated MBS generally will increase the amount the Company must distribute to its stockholders in order to avoid corporate income tax on its retained income in the early years of the Company's ownership of the MBS even though the Company may not receive the related cash flow from the MBS until a later taxable year. As a result, the Company could be required to borrow funds, to issue capital stock or to liquidate assets in order to distribute all of its taxable income and thereby avoid corporate income tax in any taxable year. COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that many of the MBS acquired by the Company will be interests in CMBS. The mortgage collateral supporting CMBS may be pools of whole loans or other MBS, or both. Of the interests in CMBS that the Company acquires, most will be subordinated or IO classes of MBS Interests, but the Company also may acquire more senior classes or combined classes of first-loss and more senior CMBS. 40 Unlike RMBS, which typically are collateralized by thousands of single family Mortgage Loans, CMBS are collateralized generally by a more limited number of commercial or multifamily Mortgage Loans with larger principal balances than those of single family Mortgage Loans. As a result, a loss on a single Mortgage Loan underlying a CMBS will have a greater negative effect on the yield of such CMBS, especially the subordinated MBS in such CMBS. With respect to CMBS, the Company will use sampling and other appropriate analytical techniques to determine on a loan-by-loan basis which loans will undergo a full-scope review and which loans will undergo a more streamlined review process. Although the choice is a subjective one, considerations that influence the choice for scope of review often include loan size, debt service coverage ratio, loan-to-value ratio, loan maturity, lease rollover, property type and geographic location. A full-scope review may include, among other factors, a property site inspection, tenant-by-tenant rent roll analysis, review of historical income and expenses for each property securing the loan, a review of major leases for each property (if available); recent appraisals (if available), engineering and environmental reports (if available), and the price paid for similar CMBS by unrelated third parties in arm's length purchases and sales (if available) or a review of broker price opinions (if the price paid by a bona fide third party for similar CMBS is not available and such price opinions are available). For those loans that are selected for the more streamlined review process, the Manager's evaluation may include a review of the property operating statements, summary loan level data, third party reports, and a review of prices paid for similar CMBS by bona fide third parties or broker price opinions, each as available. If the Manager's review of such information does not reveal any unusual or unexpected characteristics or factors, no further due diligence is performed. FOREIGN MORTGAGE INVESTMENTS. The Company may acquire or originate Mortgage Loans secured by real property located outside the United States or acquire such real property. The Company has no limitations on the geographic scope of its investments in foreign real properties and such investments may be made in a single foreign country or among several foreign countries as the Board of Directors may deem appropriate. Investing in real estate related assets located in foreign countries creates risks associated with the uncertainty of foreign laws and markets and risks related to currency conversion. The Company may be subject to foreign income tax with respect to its investments in foreign real estate related assets. However, any foreign tax credit that otherwise would be available to the Company for U.S. federal income tax purposes will not flow through to the Company's stockholders. When acquiring real properties located outside the United States or Mortgage Loans secured by foreign real properties, the Company will perform, or request that the Manager perform, a due diligence review and analysis of such foreign Mortgage Loans or real properties substantially similar to that described above in connection with the acquisition of performing Mortgage Loans and real properties. In addition, the Company will hire, or request that the Manager hire, a local law firm to advise the Company concerning the applicable laws, including real property laws, of the local jurisdiction and to provide a legal opinion about the Company's rights with respect to the Mortgage Loans or real properties. If the country in which the relevant real property is located is subject to political instability, the Company may request that the Manager investigate the availability of, cost of, and benefits that reasonably can be expected to be provided to the Company by, obtaining insurance against such political risks. The Company's policy is to purchase such insurance only if the Manager advises the Company that based on the Manager's analysis of the relevant factors, the Manager has determined that the Company should purchase such insurance. The Company may request that the Manager consider ways to minimize currency conversion risks that may be associated with the investment in foreign Mortgage Loans or foreign real properties, such as the purchase of currency swaps, and make a recommendation to the Company with respect thereto. FHA AND GNMA PROJECT LOANS. The Company intends to invest in loan participations and pools of loans insured under a variety of programs administered by the Department of Housing and Urban Development ("HUD"). These loans will be insured under the National Housing Act and will provide financing for the purchase, construction or substantial rehabilitation of multifamily housing, nursing homes and intermediate care facilities, elderly and handicapped housing, and hospitals. 41 Similar to CMBS, investments in FHA and GNMA Project Loans will be collateralized by a more limited number of loans, with larger average principal balances, than RMBS, and will therefore be subject to greater performance variability. Loan participations are most often backed by a single FHA-insured loan. Pools of insured loans, while more diverse, still provide much less diversification than pools of single family loans. FHA insured loans will be reviewed on a case by case basis to identify and analyze risk factors which may materially impact investment performance. Property specific data such as debt service coverage ratio, loan-to-value ratio, HUD inspection reports, HUD financial statements and rental subsidies will be analyzed in determining the appropriateness of a loan for investment purposes. The Manager will also rely on the FHA insurance contracts and their anticipated impact on investment performance in evaluating and managing the investment risks. FHA insurance covers 99% of the principal balance of the underlying project loans. Additional GNMA credit enhancement may cover 100% of the principal balance. PASS-THROUGH CERTIFICATES. 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 FNMA, FHLMC and GNMA, as well as privately issued adjustable-rate and fixed-rate mortgage pass-through certificates. The Pass-Through Certificates to be acquired by the Company will represent interests in mortgages that will be secured by liens on single-family (one-to-four units) residential properties, multifamily residential properties and commercial properties. 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 adjustment features of the Mortgage Assets owned by the Company, the maturity schedules of the Company's borrowings and related hedging. PRIVATELY ISSUED PASS-THROUGH CERTIFICATES. Privately issued Pass-Through Certificates are structured similarly to the FNMA, 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, investment banks and special purpose subsidiaries of such institutions. Privately issued Pass-Through Certificates are usually backed by a pool of conventional Mortgage Loans and are generally structured with credit enhancement such as pool insurance or subordination. However, privately issued Pass-Through Certificates are typically not guaranteed by an entity having the credit status of FNMA, FHLMC or GNMA guaranteed obligations. FNMA CERTIFICATES. FNMA is a federally chartered and privately owned corporation. FNMA provides funds to the mortgage market primarily by purchasing Mortgage Loans on homes from local lenders, thereby replenishing their funds for additional lending. FNMA Certificates may be backed by pools of Mortgage Loans secured by single-family or multi-family residential properties. The original terms to maturities of the Mortgage Loans generally do not exceed 40 years. FNMA Certificates may pay interest at a fixed rate or adjustable rate. Each series of FNMA ARM certificates bears an initial interest rate and margin tied to an index based on all loans in the related pool, less a fixed percentage representing servicing compensation and FNMA's guarantee fee. The specified index used in each such series has included the Treasury Index, the 11(th) District Index, LIBOR and other indices. Interest rates paid on fully-indexed FNMA ARM certificates equal the applicable index rate plus a specified number of basis points ranging typically from 125 to 250 basis points. In addition, the majority of series of FNMA ARM certificates issued to date have evidenced pools of Mortgage Loans with monthly, semi-annual or annual interest rate adjustments. Adjustments in the interest rates paid are 42 generally limited to an annual increase or decrease of either 100 or 200 basis points and to a lifetime cap of 500 or 600 basis points over the initial interest rate. Certain FNMA programs include Mortgage Loans which allow the borrower to convert the adjustable mortgage interest rate of its ARM to a fixed rate. ARMs which are converted into fixed rate Mortgage Loans are repurchased by FNMA, or by the seller of such loans to FNMA, at the unpaid principal balance thereof plus accrued interest to the due date of the last adjustable rate interest payment. FNMA guarantees to the registered holder of a FNMA Certificate that it will distribute amounts representing scheduled principal and interest (at the rate provided by the FNMA Certificate) on the Mortgage Loans in the pool underlying the FNMA Certificate, whether or not received, and the full principal amount of any such Mortgage Loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. The obligations of FNMA under its guarantees are solely those of FNMA and are not backed by the full faith and credit of the United States. If FNMA were unable to satisfy such obligations, distributions to holders of FNMA Certificates would consist solely of payments and other recoveries on the underlying Mortgage Loans and, accordingly, monthly distributions to holders of FNMA Certificates would be affected by delinquent payments and defaults on such Mortgage Loans. FHLMC CERTIFICATES. FHLMC is a privately owned corporate instrumentality of the United States created pursuant to an Act of Congress. 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 MBS. 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 Mortgage Loans purchased by FHLMC. The Mortgage Loans 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. FHLMC guarantees to each holder of its certificates the timely payment of interest at the applicable pass-through rate and ultimate collection of all principal on the holder's pro rata share of the unpaid principal balance of the related Mortgage Loans, but does not guarantee the timely payment of scheduled principal of the underlying Mortgage Loans. The obligations of FHLMC under its guarantees are solely those of FHLMC and are not backed by the full faith and credit of the United States. If FHLMC were unable to satisfy such obligations, distributions to holders of FHLMC Certificates would consist solely of payments and other recoveries on the underlying Mortgage Loans and, accordingly, monthly distributions to holders of FHLMC Certificates would be affected by delinquent payments and defaults on such Mortgage Loans. GNMA CERTIFICATES. GNMA is a wholly owned corporate instrumentality of the United States within HUD. GNMA guarantees 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 and other loans eligible for inclusion in mortgage pools underlying GNMA Certificates. GNMA Certificates constitute general obligations of the United States backed by its full faith and credit. CMOs. The Company may invest, from time to time, in adjustable rate and fixed rate CMOs issued by private issuers or FHLMC, FNMA or GNMA. CMOs are a series of bonds or certificates ordinarily issued in multiple classes, each of which consists of several classes with different maturities and often complex priorities of payment, secured by a single pool of Mortgage Loans, Pass-Through Certificates, other CMOs or other mortgage assets. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than the stated maturities or final distribution dates. Interest is paid or accrues on all interest bearing classes of a CMO on a monthly, quarterly or semi-annual basis. The principal and interest on underlying Mortgages Loans may be allocated among the several classes of a series of a CMO in many ways, including pursuant to complex internal leverage formulas that may make the CMO class especially sensitive to interest rate or prepayment risk. 43 CMOs may be subject to certain rights of issuers thereof to redeem such CMOs prior to their stated maturity dates, which may have the effect of diminishing the Company's anticipated return on its investment. Privately-issued single-family, multi-family and commercial CMOs are supported by private credit enhancements similar to those used for Privately-Issued Certificates and are often issued as senior-subordinated mortgage securities. In general, the Company intends to only acquire CMOs or multi-class Pass-Through certificates that represent beneficial ownership in grantor trusts holding Mortgage Loans, or regular interests and residual interests in REMICs, or that otherwise constitute Qualified REIT Real Estate Assets. MORTGAGE DERIVATIVES. The Company may acquire Mortgage Derivatives, including IOs, Inverse IOs, Sub IOs and floating rate derivatives, as market conditions warrant. Mortgage Derivatives 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 Derivatives are highly sensitive to the rate of prepayments on the underlying Mortgage Loans. In the event that prepayments on such Mortgage Loans occur more frequently than anticipated, the rates of return on Mortgage Derivatives representing the right to receive interest only or a disproportionately large amount of interest, i.e., IOs, would be likely to decline. Conversely, the rates of return on Mortgage Derivatives representing the right to receive principal only or a disproportional amount of principal, i.e., POs, would be likely to increase in the event of rapid prepayments. Some IOs in which the Company may invest, such as Inverse IOs, bear interest at a floating rate that varies inversely with (and often at a multiple of) changes in a specific index. The yield to maturity of an Inverse IO is extremely sensitive to changes in the related index. The Company also may invest in inverse floating rate Mortgage Derivatives which are similar in structure and risk to Inverse IOs, except they generally are issued with a greater stated principal amount than Inverse IOs. Other IOs in which the Company may invest, such as Sub IOs, have the characteristics of a Subordinated Interest. A Sub IO is entitled to no payments of principal; moreover, interest on a Sub IO often is withheld in a reserve fund or spread account to fund required payments of principal and interest on more senior trenches of mortgage securities. Once the balance in the spread account reaches a certain level, excess funds are paid to the holders of the Sub IO. These Sub IOs provide credit support to the senior classes and thus bear substantial credit risks. In addition, because a Sub IO receives only interest payments, its yield is extremely sensitive to the rate of prepayments (including prepayments as a result of defaults) on the underlying Mortgage Loans. IOs can be effective hedging devices because they generally increase in value as fixed-rate mortgage securities decrease in value. The Company also may invest in other types of derivatives currently available in the market and other Mortgage Derivatives that may be developed in the future if the Manager determines that such investments would be advantageous to the Company. MULTIFAMILY AND COMMERCIAL REAL PROPERTIES. The Company believes that under appropriate circumstances the acquisition of multifamily and commercial real properties, including REO Properties and other Distressed Real Properties, may offer significant opportunities to the Company. The Company's policy will be to conduct an investigation and evaluation of the real properties in a portfolio of real properties before purchasing such a portfolio. Prior to purchasing real estate related assets, the Manager generally will identify and contact real estate brokers and/or appraisers in the relevant market areas to obtain rent and sale comparables for the assets in a portfolio contemplated to be acquired. This information will be used to supplement due diligence that will be performed by the Manager's employees. The Company's policy is to conduct an investigation and evaluation of the properties in a portfolio of real properties before acquiring such a portfolio. Prior to acquiring such a portfolio, the Company's policy generally is to request that the Manager identify and contact real estate brokers and appraisers in the market area of the real properties within the portfolio to obtain information regarding rental rates and sales prices of comparable real property. The Company's policy is to determine, in consultation with the 44 Manager, whether to obtain a Phase I environmental assessment (or, if available to the Company or the Manager, to request that the Manager review a previously obtained Phase I environmental assessment) for each real property, certain real properties, or none of the real properties within the portfolio prior to its acquisition by the Company. The policy of the Company is to use the information contained in such comparables and environmental assessments to supplement the due diligence that is to be performed by the Manager with respect to that portfolio. The Company's policy generally is to request that the Manager include within its due diligence review and analysis of those real properties contemplated to be acquired by the Company a review of market studies for each geographic market designated by the Company in which the real properties within a portfolio are concentrated. The Company may request that such studies include area economic data, employment trends, absorption rates and market rental rates. The Company's policy is that such due diligence analyses generally also include (i) site inspections of the most significant properties in a portfolio of real properties (and, if the Company determines that such a review will be cost-effective, a random sampling of the less significant properties), and (ii) a review of all property files and documentation that are made available to the Company or the Manager. The Company generally will require that such reviews include, to the extent possible, examinations of available legal documents, litigation files, correspondence, title reports, operating statements, appraisals and engineering and environmental reports. The Company's policy is that the process of determining the fair market value of a real property is to utilize those procedures that the Company and the Manager deem relevant for the specific real property being evaluated, which procedures need not be the same for each real property being evaluated. Sources of information that may be examined in determining the fair market value of a real property may include one or more of the following: (a) current and historical operating statements; (b) existing or new appraisals; (c) sales comparables; (d) industry statistics and reports regarding operating expenses, such as those compiled by the Institute of Real Estate Management and the Building Owners and Managers Association; (e) existing leases and market rates for comparable leases; (f) deferred maintenance observed during site inspections or described in structural and engineering reports; and (g) correspondence and other documents and memoranda found in the files of the seller of that Real Property or other relevant parties. The Manager is expected to develop projections of net operating income and cash flows taking into account lease rollovers, tenant improvement costs and leasing commissions. The Manager will compare its estimates of revenue and expenses to historical operating statements and estimates provided in appraisals and general industry and regional statistics. Market capitalization rates and discount rates are then applied to the cash flow projections to estimate values. These values are then compared to available appraisals and market sale comparables to determine recommended bid prices for each asset. The amount offered by the Company generally will take into account projected holding periods, capital costs and projected profit expectations, and will be the price that the Manager estimates is sufficient to generate an acceptable risk-adjusted return on the Company's investment. After the Company acquires Distressed Real Property, the Company's goal will be to improve management of that real property so as to increase its cash flow. If cash flows can be increased and the net operating income stabilized, the Company may seek an opportunity to sell the real property. The length of time the Company will hold Distressed Real Properties may vary considerably from asset to asset, and will be based on the Manager's analysis and conclusions as to the best time to sell some or all of them. If the Company is offered the opportunity to acquire real property that is likely to be held for fewer than four years, the Company intends to establish a taxable corporation in which the Company will hold a 95% non-voting ownership interest to make the acquisition. Such a corporation will not be eligible for taxation as a Qualified REIT Subsidiary, and any profits that it earns on its activities will be subject to federal corporate income tax before they are distributable to the Company. If the Company acquires real property with the intent to hold it for more than four years, but an opportunity arises to sell the property 45 sooner, the Company will consider certain strategies, such as a like-kind exchange, to reduce any negative tax consequences relating to the sale. REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS. The Company may acquire real properties with known material environmental problems and Mortgage Loans secured by such real properties subsequent to an environmental assessment that would reasonably indicate that the present value of the cost of clean-up or remediation would not exceed the realizable value from the disposition of the mortgage property. In considering whether to acquire real properties with known material environmental problems and Mortgage loans secured by such real properties, the Company will perform, or request that the Manager perform, a due diligence review and analysis substantially similar to that described above in connection with the acquisition of Distressed Mortgage Loans and real property. In addition, the Company will hire, or request that the Manager hire, an environmental engineering consultant to estimate the extent and cost of possible environmental remediation or monitoring if title was acquired to a property with a material environmental problem and the time required to effect such remediation or complete such monitoring. The Manager has no experience in investing in Mortgage Loans secured by environmental distressed real property, or in such environmentally distressed real property. The Company's policy is generally to avoid acquiring in its own name real property with known material environmental problems (other than such real property acquired by the Company through foreclosure, or deed-in-lieu of foreclosure, when an "innocent lender" defense appears to be available to the Company). The Company's policy instead is to establish a special purpose entity to hold such real property. If the Company determines that to do so would be appropriate, such special purpose entity could hold other real properties with known material environmental problems that the Company thereafter may wish to acquire. There can be no assurance that acquiring or holding properties in the name of a special purpose entity would insulate the Company from any environmental liabilities associated with such properties. The Company may acquire environmental risk hazard insurance from time to time when commercially available. NET LEASED REAL ESTATE. The Company intends to invest in net leased real estate on a leveraged basis. Net leased real estate is generally defined as real estate that is net leased on a long-term basis (ten years or more) to tenants who are customarily responsible for paying all costs of owning, operating, and maintaining the leased property during the term of the lease, in addition to the payment of a monthly net rent to the landlord for the use and occupancy of the premises ("Net Leased Real Estate"). The Company expects to acquire Net Leased Real Estate on a leveraged basis with triple-net rents that will provide sufficient cash flow to provide an attractive cash return on its investment therein after debt service. Although the time during which the Company will hold Net Leased Real Estate will vary, the Company anticipates holding most Net Leased Real Estate for more than ten years. The Company will focus on Net Leased Real Estate that is either leased to creditworthy tenants or is real estate that can be leased to other tenants in the event of a default of the initial tenant. The Company expects to have the tax depreciation associated with such investments to offset the non-cash accrual of interest on certain MBS Interests and Mortgage Loans, including the OID generally associated with either MBS Interests that are issued at a discount from par or participating Mortgage Loans and the "phantom" taxable income associated with other mortgage derivatives. SECURITIES OF OR INTERESTS IN COMPANIES PRIMARILY ENGAGED IN REAL ESTATE ACTIVITIES AND INVESTMENTS IN OTHER SECURITIES The Company may invest in fixed-income securities that are not mortgage assets, including securities issued by corporations or issued or guaranteed by U.S. or sovereign foreign entities, loan participations, emerging market debt, high yield debt and collateralized bond obligations, denominated in U.S. dollars. 46 The Company may also purchase the stock of other mortgage REITS or similar companies when Management believes that such purchase will yield attractive returns on capital employed. When the stock market valuations of such companies are low in relation to the market value of their assets, such stock purchases can be a way for the Company to acquire an interest in a pool of mortgage assets at an attractive price. The Company may also invest in securities issued by investment companies or other investment funds. EMPLOYEES The Company initially expects not to have any employees other than officers, each of whom will be full-time employees of the Manager, whose duties will include performing administrative activities for the Company. FACILITIES The Company's executive offices are located at 345 Park Avenue, New York, New York 10154. LEGAL PROCEEDINGS There are no pending legal proceedings to which the Company is a party or to which any property of the Company is subject. 47 MANAGEMENT OF THE COMPANY DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following tables set forth certain information about the directors and executive officers of the Company.
NAME AGE POSITION - ----------------------------------------------------- --------- ----------------------------------------------------- INSIDE DIRECTORS Laurence D. Fink 45 Chairman of the Board of Directors Hugh R. Frater 42 President and Chief Executive Officer and Director UNAFFILIATED DIRECTORS Donald G. Drapkin 50 Director Carl Guether 51 Director Jeffrey C. Keil 54 Director Kendrick R. Wilson, III 51 Director EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS Richard M. Shea 38 Chief Operating Officer and Chief Financial Officer Edwin O. Bergman 32 Vice President Chris A. Milner 31 Vice President Andrew Siwulec 49 Vice President Mark Warner 36 Vice President Susan Wagner 36 Secretary
Because the Manager will assume principal responsibility for managing the affairs of the Company, the Company does not expect to employ full-time personnel and the officers listed above are expected to perform only ministeral functions as officers of the Company, such as executing contracts and filing reports with regulatory agencies. Notwithstanding the foregoing, the persons listed above, who are officers of the Manager and will be compensated by the Manager, are expected in their capacities as officers of the Manager, fulfilling duties of the Manager under the Management Agreement, to devote a substantial amount of their time to the affairs of the Company. As officers of the Manager, such persons will not have fiduciary obligations to the Company and its stockholders. DIRECTORS AND EXECUTIVE OFFICERS LAURENCE D. FINK, Chairman, is also Chairman and Chief Executive Officer of the Manager, Chairman of the Manager's Management Committee and Co-Chair of the Manager's Investment Strategy Group. Mr. Fink serves on the Asset Liability Committee of PNC Bank. He is also Chairman of the Board and a Director of BlackRock's family of closed-end mutual funds, and a Director of BlackRock's offshore funds. Prior to founding BlackRock in 1988, Mr. Fink was a member of the Management Committee and a Managing Director of First Boston. Mr. Fink joined First Boston in 1976. During his tenure at First Boston, Mr. Fink was co-head of the Taxable Fixed Income Division, which was responsible for trading and distribution of all government, mortgage and corporate securities. In 1989, Mr. Fink was featured in THE WALL STREET JOURNAL CENTENNIAL EDITION as one of 28 "business leaders of tomorrow," and in 1987, Mr. Fink was featured in INVESTMENT DEALERS' DIGEST as head of the mortgage-related securities group of "The 48 Ultimate Brokerage Firm." Mr. Fink also started the Financial Futures and Options Department and headed the Mortgage and Real Estate Products Group. Currently, Mr. Fink is a member of the Boards of Trustees of New York University Medical Center, Dwight-Englewood School in Englewood, New Jersey, the National Outdoor Leadership School (NOLS) and Phoenix House, and a member of the Boards of Directors of VIMRx Pharmaceuticals Inc. and Innovir Laboratories, Inc. Previously, Mr. Fink was a member of Fannie Mae's Advisory Council. Mr. Fink earned a B.A. degree in political science from the University of California at Los Angeles in 1974 and an M.B.A. degree with a concentration in real estate from U.C.L.A. in 1976. HUGH R. FRATER, President and Chief Executive Officer, is a Managing Director of the Manager, where he is co-head of the BlackRock Account Management Group and a member of the firm's Management Committee. Mr. Frater's primary responsibilities include providing strategic and risk management advice to BlackRock's financial services clients and developing and marketing portfolio management services for tax-exempt and taxable clients. His areas of expertise include general corporate finance and bank and insurance company regulatory, accounting and investment issues. Prior to joining BlackRock in 1988, Mr. Frater was a Vice President in Investment Banking at Lehman Brothers in the financial institutions department. Mr. Frater joined Lehman Brothers in 1985 as a generalist in the Mortgage and Savings Institutions Group. From 1980 to 1983, Mr. Frater was Director of Programming for The Learning Channel, an educational cable television network. Mr. Frater earned a B.A. degree in English from Dartmouth College in 1978 and an M.B.A. degree in finance from Columbia University in 1985. DONALD G. DRAPKIN, Director, has been Vice Chairman and Director of McAndrews & Forbes Holdings Inc. and various of its affiliates since March 1987. Prior to joining MacAndrews and Forbes, Mr. Drapkin was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom for more than five years. Mr. Drapkin also is a Director of the following corporations which file reports pursuant to the Exchange Act: Algos Pharmaceutical Corporation, The Cosmetic Center, Inc., The Coleman Company, Inc., Coleman Holdings Inc., Coleman Worldwide Inc., Playboy Enterprises, Inc., Cardio Technologies, Inc., Genta, Inc., Welder Nutrition International Inc., and VIMRx Pharmaceuticals Inc. (On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel Entertainment Group, Inc., of which Mr. Drapkin is a Director, and several of their respective subsidiaries, and Marvel III Holdings Inc., of which Mr. Drapkin is a Director, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code.). CARL GUETHER. Since November 1997, Mr. Guether has been Executive Vice President and Chief Financial Officer of WMC Mortgage Corp., a mortgage banking company. Mr. Guether had been Vice Chairman and Chief Financial Officer, and previously Executive Vice President, of Great Western Financial Corporation and Great Western Bank since 1987. Mr. Guether had joined Great Western following its acquisition of Aristar, Inc., a consumer finance and insurance company in 1983, where he served as Executive Vice President and Chief Financial Officer and previous financial management positions since 1974. From 1972 to 1974 Mr. Guether held financial management positions with Associates Financial Services Company, an international consumer finance company. From 1968 to 1972 he was an accountant with Deloitte, Haskins and Sells. Mr. Guether is a Director of John Alden Financial Corp. He received an M.B.A. from Lehigh University in 1968 and a B.A. from Ursinus College in 1967. JEFFREY C. KEIL, Director, has been Chairman of the Executive Committee of International Real Returns, LLC, investment advisor to an investment company organized by Lazard Freres & Co., since January 1998. From 1996 to January 1998, Mr. Keil was a General Partner of Keil Investment Partners, a private fund which invested in the financial sector in Israel. From 1984 to 1996, Mr. Keil was President, Director and Chairman of the Finance Committee of Republic New York Corporation and Vice Chairman and a Member of the Executive Committee of Republic National Bank of New York. Mr. Keil earned a B.S. degree in economics at the University of Pennsylvania in 1965, pursued graduate studies in mathematical 49 statistics, operations research and international economics from the London School of Economics, and earned an M.B.A. degree with a concentration in Finance from Harvard Graduate School of Business Administration in 1968. KENDRICK R. WILSON, III, Director, has been Vice Chairman of Lazard Freres & Co. LLC, a member of the firm's Management Committee and head of the firm's merger and acquisition activities within the banking and financial services industries since 1989. Prior to joining Lazard in 1989, Mr. Wilson was President and Chief Operating Officer of Ranieri Wilson & Co. Prior to joining Ranieri Wilson & Co., Mr. Wilson was a Senior Executive Vice President and member of the Board of Directors of E.F. Hutton & Co. and prior thereto he was a Managing Director in the financial institutions group of Salomon Brothers Inc. Mr. Wilson is a director of ITT Corporation, Bank United, American Buildings Company, Inc., Meigher Communications, Inc., BlackRock Asset Investors and American Marine Holdings, Inc. Mr. Wilson received a B.A. from Dartmouth College and an M.B.A. From Harvard Business School. He served as an officer in the U.S. Army Special Forces in Vietnam. RICHARD M. SHEA, ESQ., Chief Operating Officer and Chief Financial Officer, is a Director of the Manager and a member of the Risk Management and Analytics Group. Mr. Shea is responsible for the overall management of BlackRock's eight taxable term trusts with total assets of approximately $5.3 billion as of December 31, 1997. The term trusts are fixed-income closed-end mutual funds that terminate on a specific date with a specific targeted net asset value at termination. Mr. Shea is also responsible for tax and regulatory issues for all of BlackRock's funds and partnerships. Mr. Shea has established tax analytics, including a proactive CMO tax model, and procedures to optimize fund performance within the framework of relevant tax laws. He currently uses these systems to trade REMIC residuals and to support trading of other MBS derivatives. He also works with clients that have special tax situations and assists in designing investment strategies that take these special needs into account. Prior to joining BlackRock in 1993, Mr. Shea was an Associate Vice President and tax counsel at Prudential Securities, Inc. Mr. Shea joined Prudential in 1988 and was responsible for corporate tax planning, tax-oriented investment strategies and tax issues of CMOs and original issue discount obligations. Mr. Shea previously worked as a Senior Tax Specialist at Laventhol and Horwath for over four years where he structured real estate limited partnership investments for the private placement market. Mr. Shea earned a B.S. degree, in accounting from the State University of New York at Plattsburgh in 1981 and a J.D. degree from New York Law School in 1984. EDWIN O. BERGMAN, Vice President -- Risk Management, is also a Vice President in BlackRock's Risk Management and Analytics group. Since joining BlackRock in October 1996 Mr. Bergman has performed a variety of functions throughout the Risk Management area. Mr. Bergman serves as a team leader within the firm's Risk Management advisory practice. Mr. Bergman has also developed capabilities which allow enhanced prepayment and loss analysis of commercial mortgage backed securities, provide analysis and pricing of money market securities and enhance the stratification and pricing of the firm's mortgage holdings. Prior to working at BlackRock, Mr. Bergman worked as an associate in Booz, Allen & Hamilton's Financial Services and Technology Practice where he developed credit pricing, pipeline hedging and information management strategies for several large mortgage finance institutions in the United States and Australia. Prior to working at Booz, Allen & Hamilton, Mr. Bergman was a Vice President in Goldman, Sachs & Co.'s Mortgage Research area from December 1992 to February 1995 where he developed models supporting the structuring and analysis of commercial and residential mortgage-backed securities and a variety of other asset-backed securities. Prior to working at Goldman Sachs & Co., Mr. Bergman was a Senior Associate at Morgan Stanley from July 1987 to December 1992 where he led teams exploring applications of emerging technology and developing applications supporting Fixed Income Compliance, Commodities Trading and Brokerage Accounting. 50 Mr. Bergman received a B.A. in Economics and the Natural Sciences from The Johns Hopkins University in May of 1987 with departmental honors in Economics. CHRIS A. MILNER, Vice President--Acquisitions, is also a Vice President and Manager of PNC Real Estate Capital Markets, where he is responsible for managing PNC's Commercial Mortgage-Backed Securities Program and is a member of the Real Estate Executive Committee. Areas under Mr. Milner's direction include CMBS loan origination, underwriting and closing as well as securitization. Prior to co-founding PNC's CMBS Program in 1995, Mr. Milner was a Vice President in PNC's real estate asset management subsidiary. In this capacity, Mr. Milner was responsible for the restructure or sale of distressed commercial real estate loans and the coordination of PNC's special servicer ratings and sub-performing/non-performing loan sales. Mr. Milner joined PNC in 1990 upon completion of his graduate work (M.B.A. in Finance), MAGNA CUM LAUDE with a concentration in Real Estate Finance at Indiana University. While attending graduate school, Mr. Milner worked at Melvin Simon & Associates--the predecessor to the Simon/DeBartolo REIT--performing cashflow/refinance analyses on regional mall properties. Mr. Milner earned a liberal arts B.A. degree from DePauw University in 1988. ANDREW SIWULEC, Vice President -- Loan Underwriting, is Senior Vice President and Co-Manager of Institutional Real Estate for PNC Bank. Institutional Real Estate encompasses public real estate companies, real estate investment funds, and large private owners/developers throughout the U.S. His responsibilities include business strategy and the management of PNC's New York, New Jersey, Philadelphia, and Washington, D.C. offices. He is a member of the Real Estate Executive Committee which serves as the management committee for all commercial real estate activities at PNC. Prior to joining PNC in 1996, Mr. Siwulec served as Senior Vice President for commercial real estate workouts at Midlantic Bank where he started in November 1991. During that period, he managed six teams of professionals that worked out problem credits and sold performing and non-performing real estate assets through eight portfolio sales. Mr. Siwulec previously worked for a Washington, D.C. commercial mortgage banking firm where he worked on developing a conduit for commercial mortgages and managed non-performing assets for the firm and under contract with GNMA. Mr. Siwulec began his real estate finance career at Continental Illinois National Bank where he most recently managed commercial construction lending nationwide. Mr. Siwulec earned his A.B. in 1970 from The Johns Hopkins University in Liberal Arts and his M.B.A. from The University of Pennsylvania, Wharton School of Business in 1976 in finance. MARK S. WARNER, CFA, Vice President, is a Director and portfolio manager of the Manager, where his primary responsibility is managing client portfolios, specializing in the commercial mortgage (CMBS) and non-agency residential mortgage sectors. Prior to joining BlackRock in 1993, Mr. Warner was a Director in the Capital Markets Unit of the Prudential Mortgage Capital Company. Mr. Warner joined Prudential in 1987, and was initially responsible for asset/liability strategies for the participating annuity segment. Mr. Warner joined Prudential's Commercial Real Estate Division in 1989, where he was responsible for the sale of commercial whole loans, purchases of private placement mortgage-backed securities and securitization opportunities within Prudential's non-residential portfolio. Mr. Warner previously worked in the fixed income department at PaineWebber. Mr. Warner authored the chapter entitled "Commercial Mortgage-Backed Securities Portfolio Management" in WHOLE-LOAN CMOS, published by Frank J. Fabozzi Associates in 1995 and, most recently, co-authored with Wesley Edens, a Managing Director of BlackRock, the article entitled "The ABC's of CMBS" for the PENSION REAL ESTATE ASSOCIATION'S FOURTH QUARTER 1996 magazine. Mr. Warner earned a B.A. degree in political science from Columbia University in 1983 and an M.B.A. degree in finance and 51 marketing from Columbia Business School in 1987. Mr. Warner received his Chartered Financial Analyst (CFA) designation in 1993. SUSAN L. WAGNER, Secretary, is a Managing Director of the Manager, where she heads the International Business and Strategic Product Development Departments and is a member of the Management Committee. Ms. Wagner is primarily responsible for creating asset management products for international investors and developing and maintaining relationships with international clients. Ms. Wagner has also been responsible for several special advisory assignments. Ms. Wagner serves as a Director of BlackRock's offshore funds. Prior to founding BlackRock in 1988, Ms. Wagner was a vice president in the Mortgage and Savings Institutions Group at Lehman Brothers. Ms. Wagner joined Lehman in 1984 in the Capital Markets Division and in 1986 was given responsibility for oversight of all subsidiaries through which Lehman issued structured mortgage securities. During her tenure at Lehman, Ms. Wagner worked on a wide variety of projects including structured financings, portfolio restructuring, conventional debt and equity offerings, and merger and acquisition transactions. Ms. Wagner earned a B.A. degree, MAGNA CUM LAUDE, in economics and English from Wellesley College in 1982 and an M.B.A. degree in finance from the University of Chicago in 1984. Directors will be elected for a term of three years, and hold office until their successors are elected and qualified. 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 $20,000, a fee of $1,000 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 other than through the Company's stock option plan. 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 six members consisting of two directors affiliated with the Manager 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 must at all times after the issuance of the shares of Common Stock in this Offering be Unaffiliated Directors. A vacancy on the Board of Directors resulting from the removal of a Director by the stockholders will be filled by a vote of the stockholders. Except in the case of a removal of a Director by the stockholders, vacancies occurring on the Board of Directors among the Unaffiliated Directors will be filled by the vote of a majority of the directors, including the Unaffiliated Directors. The term "Unaffiliated Directors" refers to those directors that are not affiliated, directly, or indirectly, with the Manager or PNC, 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 PNC or an Affiliated business entity of the Manager or PNC. The Articles of Incorporation of the Company also provide for three classes of directors with staggered terms, such that one class shall be elected each year. Two of the classes of directors will contain one affiliated director and one Unaffiliated Director and one class will contain two Unaffiliated Directors. After the initial staggered period (the first three years), all directors will serve for a term of three years. The Articles of Incorporation of the Company provide for the indemnification of the directors and officers of the Company to the fullest extent permitted by Maryland law. Other employees and agents of the Company may be indemnified to such extent as shall be authorized by the Board of Directors or the Bylaws. Maryland law generally permits indemnification of directors, officers, employees and agents against certain judgments, penalties, fines, settlements and reasonable expenses that any such person actually incurred in connection with any proceeding to which such person may be made a party by reason of serving in such positions unless it is established that: (i) an act or omission of the director, officer, employee or agent was material to the matter giving rise to the proceeding and was committed in bad faith 52 or was the result of active and deliberate dishonesty; (ii) such person actually received an improper personal benefit in money, property or services; or (iii) in the case of criminal proceedings, such person 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 Articles of Incorporation of the Company provide that the personal liability of any director or officer of the Company to the Company or its stockholders for money damages is limited to the fullest extent allowed by the statutory or decisional law of the State of Maryland as amended or interpreted. 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 personal benefit, 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, but may in the future pay, annual compensation to the Company's executive officers for their services as executive officers. The Company may from time to time, in the discretion of the Compensation Committee (as defined below) of the Board of Directors, grant options to purchase shares of the Company's Common Stock to the Manager, executive officers and directors pursuant to the Company's 1998 Stock Option Plan. See "Stock Options" below. STOCK OPTIONS The Company has adopted a stock option plan (the "1998 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. ISOs may be granted to the officers and key employees of the Company, if any. Nonqualified stock options may be granted to the Manager, directors, officers, any key employees of the Company and to the directors, officers and key employees of the Manager. The exercise price for any qualified option granted under the 1998 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 1998 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 1998 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 1998 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. If an option granted under the 1998 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 1998 Stock Option Plan. Unless previously terminated by the Board of Directors, the 1998 Stock Option Plan will terminate ten years from its effective date, and no options may be granted under the 1998 Stock Option Plan thereafter. The 1998 Stock Option Plan will be administered by a committee of the Board of Directors comprised entirely of Unaffiliated Directors (the "Compensation Committee") options granted under the 1998 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. If stock options are to be granted to the Unaffiliated Directors, then the full Board of Directors will approve such grants. 53 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 1998 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 1998 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 exercise price of all shares to be purchased, (iii) by cancellation of indebtedness owed by the Company to the option holder, (iv) by any combination of the foregoing, or (v) by a full recourse promissory note executed by the option holder. 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 1998 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 1998 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 1998 Stock Option Plan or modify the period within which or the terms stated in the 1998 Stock Option Plan upon which the options may be exercised without stockholder approval. STOCK OPTIONS OUTSTANDING The following table sets forth the stock options to be granted under the 1998 Stock Option Plan effective on the closing of the Offering.
INDIVIDUAL GRANTS ------------------------------------ OPTIONS EXERCISE OPTIONS GRANTED TO PRICE(2) EXPIRATION NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE - ------------------------------------------------ ----------------- ----------------- --------------- ----------------- ................................................ $ POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM ----------------- NAME 5%($) 10%(S) - ------------------------------------------------ ------ ------- ................................................
- ------------------------ (1) The options granted are exercisable starting one year 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. 54 THE MANAGER The Manager is a subsidiary of PNC Bank, National Association ("PNC Bank"), which is itself a wholly owned subsidiary of PNC Bank Corp. Established in 1988, the Manager is a registered investment adviser under the Investment Advisers Act of 1940 and is one of the largest fixed-income investment management firms in the United States. The Manager engages in investment and risk management as its sole businesses and specializes in the management of domestic and offshore fixed-income assets for pension and profit sharing plans, financial institutions such as banking and insurance companies and mutual funds for retail and institutional investors. The address of the Manager is 345 Park Avenue, New York, New York 10154. THE MANAGEMENT AGREEMENT The Company will enter into the Management Agreement with the Manager for an initial term expiring on the second anniversary of the closing of the Offering. Thereafter, successive extensions, each for a period not to exceed two years, may be made by agreement between the Company and the Manager, with the approval of a majority of the Unaffiliated Directors. The Manager will be primarily involved in three activities: (i) underwriting, originating and acquiring Mortgage Loans and other real estate related assets; (ii) asset/liability management, financing, hedging, management and disposition of mortgage assets, including credit and prepayment risk management; and (iii) 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 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 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 will perform such services and activities relating to the Mortgage Assets and operations of the Company as may be appropriate, including: - providing a complete program of investing and reinvesting the capital and assets of the Company in pursuit of its investment objectives and in accordance with policies adopted by the Company's Board of Directors from time to time; - 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; - assisting the Company in developing criteria for mortgage asset purchase commitments that are specifically tailored to the Company's investment objectives and making available to the Company its knowledge and experience with respect to mortgage assets and other real estate related assets; - counseling the Company in connection with policy decisions made by the Board of Directors; - evaluating and recommending hedging strategies to the Company's Board of Directors in accordance with hedging guidelines and policies adopted by the Board of Directors, engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT; - maintenance of the Company's exemption from regulation as an investment company; - 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; - arranging for the issuance of MBS from pools of Mortgage Loans owned by the Company; 55 - 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; - 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; - 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; - contracting, as necessary, with third parties for master and special servicing of assets acquired by the Company; - 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; - causing the Company to qualify to do business in all applicable jurisdictions; - causing the Company to retain qualified accountants and legal counsel to assist in developing appropriate accounting procedures, compliance procedures and testing systems and to conduct quarterly compliance reviews; - assisting the Company in complying with all 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; - assisting the Company in making required tax filings and reports and maintaining its status as a REIT, including soliciting stockholders for required information to the extent provided in the REIT Provisions of the Code; - 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 - using all reasonable efforts to cause the Company to comply with all applicable laws. Upon a majority vote of the Unaffiliated Directors, the Company may terminate, or decline to renew the term of, the Management Agreement without cause at any time after the first two years upon 60 days written notice. Upon such termination, in connection with any termination without cause, the Company shall pay the Manager a termination fee. The amount of the termination fee shall be determined by independent appraisal of the value of the Management Agreement for the next four years. Such appraisal is to be conducted by a nationally-recognized appraisal firm mutually agreed upon by the Company and the Manager. If the Company and the Manager are unable to agree upon an appraisal firm, then each of the Company and the Manager is to choose an independent appraisal firm to conduct an appraisal. In such event, (i) if the appraisals prepared by the two appraisers so selected are the same or differ by an amount that does not exceed 20% of the higher of the two appraisals, the termination fee is to be deemed to be the average of the appraisals as prepared by each party's chosen appraiser, and (ii) if the two appraisals differ by more than 20% of such higher amount, the two appraisers together are to select a third appraisal firm to conduct an appraisal. If the two appraisers are unable to agree as to the identity of such third appraiser, either of the Manager and the Company may request that the American Arbitration Association ("AAA") select the third appraiser. The termination fee then is to be an amount determined by such third appraiser, but in no event less than the lower of the two initial appraisals or more than the higher of such two initial appraisals. In addition, the Company has the right at any time during the term of the Management Agreement to terminate the Management Agreement without the payment of any termination fee upon, among other 56 things, a material breach by the Manager of any provision contained in the Management Agreement that remains uncured at the end of the applicable cure period (including the failure of the Manager to use reasonable efforts to comply with the Company's investment policy and guidelines). The Management Agreement may not be assigned (within the meaning of the Investment Advisers Act of 1940 and the rules thereunder) by either party without the consent of the other party. MANAGEMENT COMPENSATION The following table presents all compensation, fees and other benefits (including reimbursement of out-of-pocket expenses) that the Manager may earn or receive under the terms of the Management Agreement.
RECIPIENT PAYOR AMOUNT - ---------- ----------- ----------------------------------------------------------------------------------------- Manager Company Base management fee equal to a percentage of the Average Invested Assets by rating category of the Company(1) Manager Company Incentive compensation based on the amount, if any, by which the Company's Funds From Operations and certain net gains exceed a hurdle rate(2) Manager Company Out-of-pocket expenses of Manager paid to third parties(3)
- ------------------------ (1) The base management fee is equal to 1% per annum of Average Invested Assets rated lower than BB-or not rated, 0.75% of Average Invested Assets rated BB- through BB+, and 0.35% of Average Invested Assets rated above BB+. (2) A detailed explanation of the calculation of the incentive compensation is provided below. (3) The Manager may engage PNC Bank, Midland or unaffiliated third parties to conduct due diligence with respect to potential portfolio investments and to provide certain other services. Accordingly, a portion of the out-of-pocket expenses may be paid to PNC Bank or Midland in such capacities. The contracting for such engagement will be conducted at arm's length. PNC Bank and Midland will be paid fees and out-of-pocket expenses as would customarily be paid to unaffiliated third parties for such services. See "The Manager--Expenses." The term "Average Invested Assets" for any period means the average of the aggregate book value of the assets (other than cash or cash equivalents) of the Company, including the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period and shall be determined as follows: (i) Average Invested Assets with a rating of less than BB- or not rated means, for any quarter, the Average Invested Assets in such quarter that have received a credit rating of less than BB- from Standard & Poor's Corporation ("S&P") or less than Ba3 from Moody's Investors Service, Inc. ("Moody's") or have received an equivalent rating from an NRSRO or that have not been rated by either Moody's, S&P or an NRSRO and are not guaranteed by the U.S. government or any agency or instrumentality thereof, (ii) Average Invested Assets with a rating of BB- to BB+ shall mean the Average Invested Assets that have received a credit rating of BB- to BB+ from S&P or Ba3 to Ba1 from Moody's or have received an equivalent rating from an NRSRO and that are not covered by clause (i) above, and (iii) Average Invested Assets with a credit rating above BB+ shall mean the Average Invested Assets that have received a credit rating above BB+ from S&P or above Ba1 from Moody's or have received an equivalent rating from an NRSRO and that are not covered by clause (i) or (ii) above or that are not rated but are guaranteed by the U.S. government or any agency or instrumentality thereof. The Manager will not receive any management fee for the period prior to the sale of the shares of Common Stock offered hereby. The base management fee is intended to compensate the Manager for its costs in providing management services to the Company. The Board of Directors may adjust the base management fee with the consent of the Manager in the future if necessary to align the fee more closely with the costs of such services. 57 Thus, if the Company had total Average Invested Assets for a full year of $1.2 billion (representing the proceeds of the Offering and a leverage ratio of 3.1), the base management fee would equal $12 million if all of such Average Invested Assets were rated less than BB- or not rated, and would equal $4.2 million if all of such Average Invested Assets were rated above BB+. These fees are for illustrative purposes only, however, since the mix and amount of assets will vary. The Manager will be entitled to receive incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds From Operations of the Company (before the incentive fee) per share of Common Stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus loses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share of the initial offering and the prices per share of any secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus three and one-half percent per annum (expressed as a quarterly percentage) multiplied by (B) the weighted average number of shares of Common Stock outstanding during such quarter. Notwithstanding the foregoing, no payment of any portion of the incentive compensation that is attributable to net capital gains of the Company prior to the end of the first full fiscal quarter of the Company's operations following any minimum calculation period longer than a quarter required by Rule 205-3 of the Investment Advisers Act of 1940 at the time of such calculation, will accrue or be payable until completion of such fiscal quarter, at which time the cumulative net capital gains of the Company through the end of such quarter will be computed and incentive compensation will be paid on such net gains at the rate provided above and after which time the net capital gains includible above for each quarter will be the excess of such net capital gains for such minimum calculation period through the end of such quarter (the "Total Period") over the net capital gains (if any) for the portion of the Total Period other than such quarter. For any period less than a quarter during which the Management Agreement is in effect, the incentive fee will be prorated according to the proportion which such period bears to a full quarter of 90, 91 or 92 days, as the case may be. "Funds From Operations" as defined by NAREIT means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds From Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions. As used in calculating the Manager's compensation, the term "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 constant maturities 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 will 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. The ability of the Company to generate Funds From Operations in excess of the Ten Year U.S. Treasury Rate, and of the Manager to earn the incentive compensation described in the preceding paragraph, is dependent upon the level of credit losses, 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 control. 58 The Manager is expected to use the proceeds from its base management fee and incentive compensation in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are officers of the Company, will receive no cash compensation directly from the Company. The Company expects to rely primarily on the facilities, personnel and resources of the Manager to conduct its operations. The Manager will be reimbursed for (or charge the Company directly for) the Manager's costs and expenses in employing third-parties to perform professional services (including legal and accounting) for the Company and to perform due diligence tasks on assets purchased or considered for purchase by the Company. Further, the Manager will be reimbursed for any expenses incurred in contracting with third-parties for the master or special servicing of assets acquired by the Company. The Manager may engage PNC Bank or Midland to conduct due diligence with respect to potential portfolio investments and to provide other services. Accordingly, a portion of the out-of-pocket expenses may be paid to PNC Bank or Midland in such capacities. The contracting for such engagement will be conducted at arm's length and PNC Bank and Midland will be paid fees and out-of-pocket expenses as would customarily be paid to unaffiliated third-parties for such services. Such arrangements may also be made using an income sharing arrangement such as a joint venture. Expense reimbursement will be made quarterly. The management fees are payable in arrears. The Manager's base and incentive fees and reimbursable costs and expenses will be calculated by the Manager within 45 days after the end of each quarter, and such calculation will be promptly delivered to the Company. The Company is obligated to pay such fees, costs and expenses within 60 days after the end of each fiscal quarter. If requested by the Manager, the Company will make advance payments of the base management fee as often as semi-monthly at the rate of 75% of such fee estimated by the Manager. The Company has adopted the 1998 Stock Option Plan. The Manager and the directors, officers and any employees of the Company and the Manager may be granted options under the Company's 1998 Stock Option Plan. See "Management of the Company--Stock Options." 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 $1,000,000. This payment will not be subject to the limitation on expenses to be borne by the Company as described in the paragraph below. 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. The operating expenses required to be borne by the Manager include costs and expenses of its officers and employees and any overhead incurred in connection with its duties under the Management Agreement, the cost of office space and equipment required for the Company's day-to-day operations and the costs of any salaries or directors fees of any officers or directors of the Company who are affiliated persons of the Manager except that the Board of Directors of the Company may approve reimbursement to the Manager of the Company's pro rata portion of the salaries, bonuses, health insurance, retirement benefits and similar employment costs for the time spent on Company operations and administration other than for the provision of investment advisory services. The expenses that will be paid by the Company will include (but not necessarily be limited to issuance and transaction costs incident to the acquisition, disposition and financing of investments, legal, accounting and auditing fees and expenses, the compensation and expenses of the Company's Unaffiliated Directors, the costs of printing and mailing proxies and reports to stockholders, costs incurred by employees of the Manager for travel on behalf of the Company, costs associated with any computer software or hardware that is used solely for the Company, costs to obtain liability insurance to indemnify the Company's directors and officers, the Manager and its employees and directors and the Underwriters, and the compensation and expenses of the Company's custodian and transfer agent, if any. The Company will also be required to pay all expenses incurred in connection with due diligence, the accumulation of Mortgage Loans, the master and special servicing of Mortgage Loans, 59 the issuance and administration of MBS from pools of Mortgage Loans or otherwise, the raising of capital, incurrence of debt, the acquisition of assets, interest expenses, taxes and license fees, non-cash costs, litigation, the base and incentive management fee and extraordinary or non-recurring expenses. Such services may be provided to the Company by Affiliates of the Manager if the Manager believes such services are of comparable or superior quality to those provided by third-parties and can be provided at comparable cost. The Board of Directors will periodically review the Company's expenses levels, the division of expenses between the Company and the Manager and reimbursements of expenses advanced by the Manager. The Manager and its employees and the Unaffiliated Directors may also receive stock options pursuant to the Company's 1998 Stock Option Plan. See "Management of the Company--Stock Options." CONFLICTS OF INTEREST The Company is subject to conflicts of interest involving the Manager and its Affiliates because, among other reasons, (i) the Manager and its Affiliates are permitted to purchase mortgage assets for their own account and to advise accounts of other clients, and many investments appropriate for the Company also will be appropriate for these accounts and (ii) the incentive fee, which is based on income of the Company, may create an incentive for the Manager to recommend investments with greater income potential, which generally are riskier or more speculative, than would be the case if its fee did not include a "performance" component. The Company is also subject to conflicts of interest because of the expected purchase of substantial assets from PNC and its Affiliates. Many of such assets do not have a readily determinable fair market value and independent valuations may not be sought. Nevertheless, the Company intends to adopt operating policies to minimize the effect of such conflicts. These policies will require that any acquisition of assets from PNC or its Affiliates be made for fair market value. The Unaffiliated Directors will adopt a policy requiring documentation of the fair market value of all affiliated purchases. The policy will require the reporting of all such documentation quarterly. In addition, the Board of Directors intends to approve certain operating and investing guidelines which may be amended from time to time in response to market conditions, but only with the approval of a majority of the Unaffiliated Directors. The Unaffiliated Directors are likely to rely substantially on information and analysis provided by the Manager. 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 MBS, 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. There can be no assurance that the Company would be able to recover any damages for claims it may have against the Manager. Although certain officers and directors of the Manager are also officers and directors of the Company, and therefore have fiduciary duties to the Company and its stockholders in that capacity, the Manager and the officers and directors of the Manager, in their capacities as such, have no fiduciary duties to the Company or its stockholders. The Company has agreed to indemnify the Manager and its directors, officers, employees and controlling persons with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from any acts or omissions of the Manager or its employees made in good faith in the performance of the Manager's 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. See "Risk Factors--Conflicts of Interest." 60 FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material federal income tax consequences that may be relevant to the Company and to a prospective holder of the Common Stock. Skadden, Arps, Slate, Meagher & Flom LLP ("Counsel") has acted as counsel to the Company and has reviewed this summary and has rendered an opinion that the descriptions of the law and the legal conclusions contained herein are correct in all material respects, and the discussions hereunder fairly summarize the material federal income tax consequences to the Company and a holder of the Common Stock. The discussion contained herein does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders (including insurance companies, tax-exempt organizations (except as discussed below), financial institutions or broker-dealers and, except as discussed below, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. The statements in this discussion and the opinion of Counsel are based on current provisions of the Code, existing, temporary, and currently proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, existing administrative rulings and practices of the Internal Revenue Service (the "IRS"), and judicial decisions. EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY The Company plans to make an election to be taxed as a REIT under the Code, commencing with its taxable year ending on December 31, 1998. The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code sections and Treasury Regulations that govern the federal income tax treatment of a REIT and its stockholders. The discussion is qualified in its entirety by the applicable Code provisions, Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change prospectively or retroactively. Counsel has advised the Company in connection with the Offering and the Company's election to be taxed as a REIT. Counsel has provided the Company with an opinion that, provided the Company makes a timely election to be taxed as a REIT, the Company will be organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT under Section 856 through 860 of the Code (the "REIT Provisions of the Code"). Investors should be aware, however, that opinions of counsel are not binding upon the IRS or any court. It must be emphasized that Counsel's opinion is based on and is conditioned upon certain assumptions and representations made by the Company as to factual matters, including assumptions and representations regarding the nature of the Company's properties and the future conduct of its business in accordance with the descriptions of the requirements to qualify as a REIT, which are as described in this Prospectus. The Company's qualification and taxation as a REIT depends upon its ability to meet, through actual annual operating results, asset ownership, distribution levels, and diversity of Stock ownership, and the various qualification tests imposed under the Code discussed below. Counsel will not review the Company's compliance with those tests on a continuing basis. Accordingly, no assurance can be given that the actual results of the Company's operations for any particular taxable year will satisfy such requirements. For a discussion of the tax consequences of failure to qualify as a REIT, see "--Failure to Qualify." 61 If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its Net Income that is distributed currently to its stockholders. This treatment substantially eliminates the "double taxation" (i.e., taxation at both the corporate and stockholder levels) that generally results from an investment in a corporation. However, the Company will be subject to federal income tax in the following circumstances. First, the Company will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on its undistributed items of tax preference, if any. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and nonetheless has maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the gross income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income test, multiplied by a fraction intended to reflect the Company's profitability. Sixth, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than long-term capital gains that the Company elects to retain and pay the tax thereon), and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. To the extent that the Company elects to retain and pay income tax on its net capital gain, such retained amounts will be treated as having been distributed for purposes of the 4% excise tax. Seventh, if the Company acquires any asset from a C corporation (i.e., a corporation generally subject to full corporate-level tax) in a merger or other transaction in which the basis of the asset in the Company's hands is determined by reference to the basis of the asset (or any other asset) in the hands of the C corporation and the Company recognizes gain on the disposition of such asset during the 10-year period beginning on the date on which it acquired such asset, then to the extent of such asset's net unrealized "built-in-gain" (i.e., the excess of the fair market value of such asset at the time of acquisition by the Company over the adjusted basis in such asset at such time), the Company will be subject to tax at the highest regular corporate rate applicable (as provided in Treasury Regulations that have not yet been promulgated). The results described above with respect to the tax on net unrealized "built-in-gain" assume that the Company will elect pursuant to IRS Notice 88-19 to be subject to the rules described in the preceding sentence if it were to make any such acquisition. See "--Proposed Tax Legislation." Finally, the Company will be subject to tax at the highest marginal corporate rate on the portion of any Excess Inclusion derived by the Company from REMIC Residual Interests equal to the percentage of the Stock of the Company held by the United States, any state or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any of the foregoing, any other tax-exempt organization (other than a farmer's cooperative described in Section 521 of the Code) that is exempt from taxation under the unrelated business taxable income provisions of the Code, or any rural electrical or telephone cooperative (each, a "Disqualified Organization"). Any such tax on the portion of any Excess Inclusion allocable to Stock of the Company held by a Disqualified Organization will reduce the cash available for distribution from the Company to all stockholders. REQUIREMENTS FOR QUALIFICATION The Code defines a REIT as a corporation, trust, or association (i) that is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but the REIT Provisions of the Code; (iv) that is neither a financial institution nor an insurance company subject 62 to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) not more than 50% in value of the outstanding shares of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Service that must be met in order to elect and maintain REIT status; (viii) that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets. Conditions (i) to (iv), inclusive, must be met during the entire taxable year and condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made by the Company to be taxed as a REIT. For purposes of determining Stock ownership under the 5/50 Rule, a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. A trust that is a qualified trust under Code Section 401(a), however, generally is not considered an individual and beneficiaries of such trust are treated as holding shares of a REIT in proportion to their actuarial interests in such trust for purposes of the 5/50 Rule. Prior to the consummation of the Offering, the Company did not satisfy conditions (v) and (vi) in the preceding paragraph. The Company anticipates issuing sufficient Common Stock with sufficient diversity of ownership pursuant to the Offering to allow it to satisfy requirements (v) and (vi). In addition, the Charter provides for restrictions regarding the transfer of the Common Stock that are intended to assist the Company in continuing to satisfy the share ownership requirements described in clauses (v) and (vi) above. See "Description of Capital Stock--Repurchase of Shares and Restrictions on Transfer." The Code provides that a corporation that is a "Qualified REIT Subsidiary" shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a "Qualified REIT Subsidiary" shall be treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A "Qualified REIT Subsidiary" is a corporation, all of the capital Stock of which is owned by the REIT. Thus, in applying the requirements described herein, any "Qualified REIT Subsidiaries" of the Company will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiaries will be treated as assets, liabilities, and items of income, deduction, and credit of the Company. In the case of a REIT that is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the gross income of the partnership attributable to such share. In addition, the assets and gross income of the partnership will retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income and asset tests described below. INCOME TESTS. In order for the Company to qualify and to maintain its qualification as a REIT, two requirements relating to the Company's gross income must be satisfied annually. First, at least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and interest on obligations secured by mortgages on real property or on interests in real property) or temporary investment income. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property, mortgages on real property, or temporary investments, and from dividends, other types of interest, and gain from the sale or disposition of Stock or securities, or from any combination of the foregoing. The term "interest," as defined for purposes of the 75% and 95% gross income tests, generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount 63 depends in whole or in part on net income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. In addition, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on the income or profits of a debtor if the debtor derives substantially all of its gross income from the related property through the leasing of substantially all of its interests in the property, to the extent the amounts received by the debtor would be characterized as rents from real property if received by a REIT. Interest on obligations secured by mortgages on real property or on interests in real property is qualifying income for purposes of the 75% gross income test. Any amount includible in gross income with respect to a regular or residual interest in a REMIC generally is treated as interest on an obligation secured by a mortgage on real property. If, however, less than 95% of the assets of a REMIC consists of real estate assets (determined as if the Company held such assets), the Company will be treated as receiving directly its proportionate share of the income of the REMIC. In addition, if the Company receives interest income with respect to a mortgage loan that is secured by both real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date the Company purchased the mortgage loan, the interest income will be apportioned between the real property and the other property, which apportionment may cause the Company to recognize income that is not qualifying income for purposes of the 75% gross income test. In general, the interest, original issue discount, and market discount income that the Company derives from its investments in MBS Interests, and Mortgage Loans will be qualifying interest income for purposes of both the 75% and the 95% gross income tests, except to the extent that less than 95% of the assets of a REMIC in which the Company holds an interest consists of real estate assets (determined as if the Company held such assets), and the Company's proportionate share of the income of the REMIC includes income that is not qualifying income for purposes of the 75% and 95% gross income tests. In some cases, however, the loan amount of a Mortgage Loan may exceed the value of the real property securing the loan, which will result in a portion of the interest income from the loan being classified as qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. It is also possible that, in some instances, the interest income from a Distressed Mortgage Loan may be based in part on the borrower's profits or net income, which generally will disqualify the income from the loan for purposes of both the 75% and the 95% gross income tests. The Company may acquire Construction Loans or Mezzanine Loans that have shared appreciation provisions. To the extent interest from a loan that is based on the cash proceeds from the sale of property constitutes a "shared appreciation provision" (as defined in the Code), income attributable to such participation feature will be treated as gain from the sale of the secured property, which generally is qualifying income for purposes of the 75% and 95% gross income tests. The Company also may employ, to the extent consistent with the REIT Provisions of the Code, other forms of securitization under which a "sale" of an interest in the Mortgage Loans occurs, and a resulting gain or loss is recorded on the Company's balance sheet for accounting purposes at the time of sale. In a "sale" securitization, only the net retained interest in the securitized Mortgage Loans would remain on the Company's balance sheet. The Company may elect to conduct certain of its securitization activities, including such sales, through one or more taxable subsidiaries or through "Qualified REIT Subsidiaries", as defined under the REIT Provisions of the Code, formed for such purpose. To the extent consistent with the REIT Provisions of the Code, such entity would elect to be taxed as a Real Estate Mortgage Investment Conduit ("REMIC") or a Financial Asset Securitization Investment Trust ("FASIT"). The rent received by the Company from the tenants of its real property ("Rent") will qualify as "rents from real property" in satisfying the gross income tests for a REIT described above only if several conditions are met. First, the amount of Rent must not be based, in whole or in part, on the income or 64 profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Code provides that the Rent received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the Company, or a direct or indirect owner of 10% or more of the Company, owns 10% or more of the ownership interests in such tenant, taking into account both direct and constructive ownership (a "Related Party Tenant"). Third, if Rent attributable to personal property, leased in connection with a lease of Real Property, is greater than 15% of the total Rent received under the lease, then the portion of Rent attributable to such personal property will not qualify as "rents from real property." Finally, for the Rent to qualify as "rents from real property," the Company generally must not operate or manage the Real Property or furnish or render services to the tenants of such Real Property, other than through an "independent contractor" who is adequately compensated and from whom the Company derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by the Company are "usually or customarily rendered" in connection with the rental or space for occupancy only and are not otherwise considered "rendered to the occupant." In addition, the Company may render a "DE MINIMIS" amount of impermissible services without violating the independent contractor requirement. The Company has represented that it will not charge Rent for any portion of any real property that is based, in whole or in part, on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts or sales, as described above) to the extent that the receipt of such Rent would jeopardize the Company's status as a REIT. In addition, the Company has represented that, to the extent that it receives Rent from a Related Party Tenant, such Rent will not cause the Company to fail to satisfy either the 75% or 95% gross income test. The Company also has represented that it will not allow the Rent attributable to personal property leased in connection with any lease of real property to exceed 15% of the total Rent received under the lease, if the receipt of such Rent would cause the Company to fail to satisfy either the 75% or 95% gross income test. Furthermore, as a result of restrictions on the ownership of Stock in the Company, no person may own, directly or indirectly, more than 9.8% of the outstanding stock of the Company so that no tenant of the Company should be a Related Party Tenant. Finally, the Company has represented that it will not operate or manage its real property or furnish or render noncustomary services to the tenants of its real property other than through an "independent contractor," to the extent that such operation or the provision of such services would jeopardize the Company's status as a REIT. REITS generally are subject to tax at the maximum corporate rate on any income from foreclosure property (other than income that would be qualifying income for purpose of the 75% gross income test), less expenses directly connected with the production of such income. "Foreclosure property" is defined as any real property (including interests in real property) and any personal property incident to such real property (i) that is acquired by a REIT as the result of such REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness owed to the REIT that such property secured, (ii) for which the related loan was acquired by the REIT at a time when default was not imminent or anticipated, and (iii) for which such REIT makes a proper election to treat such property as foreclosure property. The Company does not anticipate that it will receive any income from foreclosure property that is not qualifying income for purposes of the 75% gross income test, but, if the Company does receive any such income, the Company will make an election to treat the related property as foreclosure property. If property is not eligible for the election to be treated as foreclosure property because the related loan was acquired by the REIT at a time when default was imminent or anticipated, income received with respect to such Ineligible Property may not be qualifying income for purposes of the 75% or 95% gross income test. The Company will generally be subject to a 100% tax on net income derived from a prohibited transaction. The term "prohibited transaction" generally includes a sale or other disposition of property 65 (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. In general, the assets owned by the Company should not be considered held for sale to customers and any such sale should not be in the ordinary course of the Company's business. Whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends, however, on the facts and circumstances in effect from time to time, including those related to a particular property. Complete assurance cannot be given that the Company will comply with the safe-harbor provisions of the Code or avoid owning property that may be characterized as property held "primarily for sale to customers in the ordinary course of a trade or business." In addition, it should be noted that a REMIC or FASIT securitization by the Company of its whole loans could be considered a "prohibited transaction." It is possible that the Company will enter into hedging transactions with respect to one or more of its assets or liabilities. Any such hedging transactions could take a variety of forms, including an interest rate swap or cap agreement, option, futures contract, forward rate agreement, or similar financial instrument (collectively, a "Qualified Hedge"). To the extent that the Company enters into a Qualified Hedge to reduce the interest rate risk on indebtedness incurred or to be incurred to acquire or carry Real Estate Assets, any periodic income or gain from the disposition of such Qualified Hedge should be qualifying income for purposes of the 95% gross income test, but not the 75% gross income test. The Company may receive income not described above that is not qualifying income for purposes of the 75% and 95% gross income tests. The Company will monitor the amount of nonqualifying income produced by its assets and has represented that it will manage its portfolio in order to comply at all times with the gross income tests. If the Company fails to satisfy one or both of the 75% and 95% gross income tests for any taxable year, it nevertheless may qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. Those relief provisions generally will be available if the Company's failure to meet such tests is due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its return, and the Company anticipates that any incorrect information on the schedule will not be due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of such relief provisions. As discussed above in "Federal Income Tax Consequences--Taxation of the Company," even if such relief provisions apply, a 100% tax would be imposed on the gross income attributable to the greater of the amount by which the Company fails the 75% or 95% gross income test, multiplied by a fraction intended to reflect the Company's profitability. ASSET TESTS. The Company, at the close of each quarter of each taxable year, also must satisfy, either directly or through partnerships in which it has an interest, two tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must be represented by cash or cash items (including certain receivables), government securities, "Real Estate Assets," or, in cases where the Company raises new capital through Stock or long-term (at least five-year) debt offerings, temporary investments in Stock or debt instruments during the one-year period following the Company's receipt of such capital. The term "Real Estate Assets" includes interests in real property, interests in mortgages on real property to the extent the principal balance of a mortgage does not exceed the fair market value of the associated real property, regular or residual interests in a REMIC (except that, if less than 95% of the assets of a REMIC consists of "real estate assets" (determined as if the Company held such assets), the Company will be treated as holding directly its proportionate share of the assets of such REMIC), and shares of other REITS. For purposes of the 75% asset test, the term "interest in real property" includes an interest in mortgage loans or land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold of real property, and an option to acquire real property (or a leasehold of real property). An "interest in real property" also generally includes an interest in mortgage loans secured by controlling equity interests in entities treated as partnerships for federal income tax purposes that own real property, 66 to the extent that the principal balance of the mortgage does not exceed the fair market value of the real property that is allocable to the equity interest. Second, of the investments not included in the 75% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities (except for its interests in any partnership and any Qualified REIT Subsidiary). See "Proposed Tax Legislation." The Company expects that any MBS, Distressed Real Property and temporary investments that it acquires generally will be qualifying assets for purposes of the 75% asset test, except to the extent that less than 95% of the assets of a REMIC in which the Company owns an interest consists of "Real Estate Assets" and the Company's proportionate share of those assets includes assets that are nonqualifying assets for purposes of the 75% asset test. Mortgage Loans (including Distressed Mortgage Loans, Construction Loans, Bridge Loans and Mezzanine Loans) also will be qualifying assets for purposes of the 75% asset test to the extent that the principal balance of each mortgage loan does not exceed the value of the associated real property. The Company will own 100% of the non-voting common stock and 5% of the voting common stock of ASC. The remaining voting common stock of ASC will be owned by the Manager. As long as the Manager owns, directly or indirectly, less than 10% of the stock of the Company, the Company will not be deemed to own more than 10% of the voting stock of ASC. In addition, the Company believes that the value of its ASC stock will not exceed 5% of the total value of the Company's assets. The Company will monitor the status of the assets that it acquires for purposes of the various asset tests and has represented that it will manage its portfolio in order to comply at all times with such tests. The Company anticipates that it may securitize all or a portion of the Mortgage Loans which it acquires, in which event the Company will likely retain certain of the subordinated and IO classes of MBS Interests which may be created as a result of such securitization. The securitization of the Mortgage Loans may be accomplished through one or more REMICs established by the Company or, if a non-REMIC securitization is desired, through one or more Qualified REIT Subsidiaries established by the Company. The securitization of the Mortgage Loans through either one or more REMICs or one or more Qualified REIT Subsidiaries should not affect the qualification of the Company as a REIT or result in the imposition of corporate income tax under the taxable mortgage pool rules. Income realized by the Company from a REMIC securitization could, however, be subject to a 100% tax as a "prohibited transaction." If the Company should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause it to lose its REIT status if (i) it satisfied the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of the Company's assets and the asset test requirements arose from changes in the market values of its assets and was not wholly or partly caused by the acquisition of one or more nonqualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, the Company still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. DISTRIBUTION REQUIREMENTS. The Company, in order to avoid corporate income taxation of its earnings, is required to distribute with respect to each taxable year dividends (other than capital gain dividends and retained capital gains) to its stockholders in an aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its federal income tax return for such year and if paid on or before the first regular dividend payment date after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. Furthermore, if the Company should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of the January immediately following such 67 year) at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed. However, the Company may elect to retain, rather than distribute, all or a portion of its net long-term capital gains and pay the tax on such undistributed gains, in which case the Company's stockholders would include their proportionate share of such undistributed long-term capital gains in income and receive a credit for their share of the tax paid by the Company. For purposes of the 4% excise tax described above, any such retained amounts would be treated as having been distributed. The Company intends to make timely distributions sufficient to satisfy the annual distribution requirements. It is possible that, from time to time, the Company may experience timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of that income and deduction of such expenses in arriving at its REIT taxable income. For example, the Company will recognize taxable income in excess of its cash receipts when, as frequently happens, OID accrues with respect to certain of its subordinated MBS Interests, including POs and certain IOs. Mezzanine Loans may also be deemed to have OID for Federal income tax purposes. OID generally will be accrued using a methodology that does not allow credit losses to be reflected until they are actually incurred. The Company may also be required to accrue interest income from Distressed Mortgage Loans even though the borrowers fail to pay the full amounts due. In addition, the Company may recognize taxable market discount income upon the receipt of proceeds from the disposition of, or principal payments on, MBS and Distressed Mortgage Loans that are "market discount bonds" (i.e., obligations with an adjusted issue price that is greater than the Company's tax basis in such obligations), but not have any cash because such proceeds may be used to make non-deductible principal payments on related borrowings. Market discount income is treated as ordinary income and not as capital gain and, thus, is subject to the 95% distribution requirement. Furthermore, the Company would have income without the receipt of cash to the extent of the market discount attributable to debt securities held by a REMIC in which the Company holds a residual interest. The Company also may recognize Excess Inclusion or other taxable income in excess of cash flow from REMIC Residual Interests or its retained interests from non-REMIC securitization transactions. It is also possible that, from time to time, the Company may recognize net capital gain attributable to the sale of depreciated property that exceeds its cash receipts from the sale. In addition, pursuant to certain Treasury Regulations, the Company may be required to recognize the amount of any payment to be made pursuant to a shared appreciation provision over the term of the related loan using the constant yield method. Finally, the Company may recognize taxable income without receiving a corresponding cash distribution if it forecloses on or makes a "significant modification" (as specifically defined in the Treasury Regulations) to a loan, to the extent that the fair market value of the underlying property or the principal amount of the modified loan, as applicable, exceeds the Company's basis in the original loan. Therefore, the Company may have less cash than is necessary to meet its annual 95% distribution requirement, or because Excess Inclusion and OID are not taken into account in calculating the Company's REIT taxable income for purposes of the distribution requirement, to avoid corporate income tax or the excise tax imposed on certain undistributed income. In such a situation, the Company may find it necessary to arrange for short-term (or possibly long-term) borrowings or to raise funds through the issuance of Preferred Stock or additional Common Stock, or through the sale of assets. Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirements for a year by paying "deficiency dividends" to it stockholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. Although the Company may be able to avoid being taxed on amounts distributed as deficiency dividends, it will be required to pay to the IRS interest based upon the amount of any deduction taken for deficiency dividends. 68 RECORDKEEPING REQUIREMENTS. Under the Treasury Regulations, the Company must maintain certain records and request on an annual basis certain information from its stockholders designed to disclose the actual ownership of its outstanding Stock. The Company intends to comply with such requirements. FAILURE TO QUALIFY If the Company fails to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to the Company's stockholders in any year in which the Company fails to qualify as a REIT will not be deductible by the Company nor will they be required to be made. In such event, to the extent of the Company's current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be disqualified from taxation as a REIT for the four taxable years following the year during which the Company ceased to qualify as a REIT. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. TAXATION OF TAXABLE U.S. STOCKHOLDERS As long as the Company qualifies as a REIT, distributions made to the Company's taxable U.S. stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends or retained capital gains) will be taken into account by such U.S. stockholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. As used herein, the term "U.S. stockholder" means a holder of Common Stock that for U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii) a corporation, partnership, or other entity created or organized in or under the laws of the U.S. or of any political subdivision thereof, (iii) an estate whose income from sources without the United States is includible in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States, or (iv) any trust with respect to which (a) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. fiduciaries have the authority to control all substantial decisions of the trust. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the stockholder has held his Common Stock. However, corporate stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such Stock. To the extent that such distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a stockholder's Common Stock, such distributions will be included in income as long-term capital gain (or short-term capital gain if the Common Stock had been held for one year or less), assuming the Common Stock is a capital asset in the hands of the stockholder. In addition, any distribution declared by the Company in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the distribution is actually paid by the Company during January of the following calendar year. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Instead, such losses would be carried over by the Company for potential offset against its future income (subject to certain limitations). Taxable distributions from the Company and gain 69 from the disposition of the Common Stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any "passive activity losses" (such as losses from certain types of limited partnerships in which a stockholder is a limited partner) against such income. Taxable distributions from the Company generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of Common Stock (or distributions treated as such), however, will be treated as investment income only if the stockholder so elects, in which case such capital gains will be taxed at ordinary income rates. The Company will notify stockholders after the close of the Company's taxable year as to the portions of the distributions attributable to that year that constitute ordinary income or capital gain dividends. The Company may elect to retain and pay income tax on its net long-term capital gains. If the Company makes this election, the Company's stockholders would include in their income as long-term capital gain their proportionate share of the long-term capital gain as designated by the Company. Each stockholder will be deemed to have paid the stockholder's share of the tax, which could be credited or refunded to the stockholder. The basis of the stockholder's shares is increased by the amount of the undistributed long-term capital gains (less the amount of capital gains tax paid). The Company's investment in MBS may cause it under certain circumstances to recognize phantom income and to experience an offsetting excess of economic income over its taxable income in later years. As a result, stockholders may from time to time be required to pay federal income tax on distributions that economically represent a return of capital, rather than a dividend. Such distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Accordingly, if the Company receives phantom income, its stockholders may be required to pay federal income tax with respect to such income on an accelerated basis, i.e., before such income is realized by the stockholders in an economic sense. If one takes into account the time value of money, such an acceleration of federal income tax liabilities would cause stockholders to receive an after-tax rate of return on an investment in the Company that would be less than the after-tax rate of return on an investment with an identical before-tax rate of return that did not generate phantom income. In general, as the ratio of the Company's phantom income to its total income increases, the after-tax rate of return received by a taxable stockholder of the Company will decrease. The Company will consider the potential effects of phantom income on its taxable stockholders in managing its investments. If the Company owns REMIC Residual Interests, it is possible that stockholders would not be permitted to offset certain portions of the dividend income they derive from the Company with their current deductions or net operating loss carryovers or carrybacks. The portion of a stockholder's dividends that would be subject to this limitation would equal his allocable share of any Excess Inclusion income derived by the Company with respect to the REMIC Residual Interests. The Company's Excess Inclusion income for any calendar quarter will equal the excess of its income from REMIC Residual Interests over its "daily accruals" with respect to such REMIC Residual Interests for the calendar quarter. Daily accruals for a calendar quarter are computed by allocating to each day on which a REMIC Residual Interest is owned a ratable portion of the product of (i) the "adjusted issue price" of the REMIC Residual Interest at the beginning of the quarter and (ii) 120% of the long-term federal interest rate (adjusted for quarterly compounding) on the date of issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC Residual Interest at the beginning of a calendar quarter equals the original issue price of the REMIC Residual Interest, increased by the amount of daily accruals for prior quarters and decreased by all prior distributions to the Company with respect to the REMIC Residual Interest. To the extent provided in future Treasury Regulations, the Excess Inclusion income with respect to any REMIC Residual Interests owned by the Company that do not have significant value will equal the entire amount of the income derived from such REMIC Residual Interests. Furthermore, to the extent that the Company (or a Qualified REIT Subsidiary) acquires or originates Mortgage Loans and uses those loans to collateralize one or more multiple-class offerings of MBS for which no REMIC election is made ("Non-REMIC 70 Transactions"), it is possible that, to the extent provided in future Treasury Regulations, stockholders will not be permitted to offset certain portions of the dividend income that they derive from the Company that are attributable to Non-REMIC Transactions with current deductions or net operating loss carryovers or carrybacks. Although no applicable Treasury Regulations have yet been issued, no assurance can be provided that such regulations will not be issued in the future or that, if issued, such regulations will not prevent the Company's stockholders from offsetting some portion of their dividend income with deductions or losses from other sources. TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK In general, any gain or loss realized upon a taxable disposition of the Common Stock by a stockholder who is not a dealer in securities will be treated as long-term capital gain or loss if the Common Stock has been held for more than one year and otherwise as short-term capital gain or loss. However, any loss upon a sale or exchange of Common Stock by a stockholder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from the Company required to be treated by such stockholder as long-term capital gain. All or portion of any loss realized upon a taxable disposition of the Common Stock may be disallowed if other shares of Common Stock are purchased within 30 days before or after the disposition. CAPITAL GAINS AND LOSSES The highest marginal individual income tax rate (which applies to ordinary income and gain from the sale or exchange of capital assets held for one year or less) is 39.6%. The maximum regular income tax rate on capital gains derived by non-corporate taxpayers is 28% for sales and exchanges of capital assets held for more than one year but not more than eighteen months, and 20% for sales and exchanges of capital assets held for more than eighteen months. However, any long-term capital gains from the sale or exchange of depreciable real property that would be subject to ordinary income taxation (i.e., "depreciation recapture") if treated as personal property will be subject to a maximum tax rate of 25% instead of the 20% maximum rate. For taxable years beginning after December 31, 2000, the maximum regular capital gains rate for assets which are held more than 5 years is 18%. This rate will generally only apply to assets for which the holding period begins after December 31, 2000. With respect to distributions designated by the Company as capital gain dividends and any retained capital gains that the Company is deemed to distribute, the Company may designate (subject to certain limits) whether such a distribution is taxable to its individual stockholders at a federal income tax rate of 20%, 25% or 28%. Thus, the tax rate differential between capital gains and ordinary income for non-corporate taxpayers may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. Capital losses not offset by capital gains my be deducted against a non-corporate taxpayer's ordinary income only up to a maximum annual amount of $3,000. Unused capital losses may be carried forward indefinitely by non-corporate taxpayers. All net capital gain of a corporate taxpayer is subject to tax at ordinary corporate income tax rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING The Company will report to its U.S. stockholders and to the IRS the amount of distributions paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup 71 withholding rules. A stockholder who does not provide the Company with his correct taxpayer identification number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, the Company may be required to withhold a portion of capital gain distribution to any stockholders who fail to certify their non-foreign status to the Company. The IRS has issued final Treasury Regulations regarding the back up withholding rules as applied to non-U.S. stockholders. Those regulations alter the current system of back up withholding compliance and will be effective for payments made after December 31, 1998. TAXATION OF TAX-EXEMPT STOCKHOLDERS Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the IRS has ruled that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, amounts distributed by the Company to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from the Company will constitute UBTI pursuant to the "debt-financed property" rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of Code Section 501(c) are subject to different UBTI rules, which generally will require them to characterize distributions from the Company as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of the Company's Stock is required to treat a percentage of the dividends from the Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by the Company from an unrelated trade or business (determined as if the Company were a pension trust) divided by the gross income of the Company for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of the Company's Stock only if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT be reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of the Company in proportion to their actuarial interest in the pension trust, and (iii) either (A) one pension trust owns more than 25% of the value of the Company's Stock or (B) a group of pension trusts, each individually holding more than 10% of the value of the Company's Stock, collectively owns more than 50% of the value of the Company's Stock. The restrictions on ownership and transfer of the Company's Stock should prevent an Exempt Organization from owning more than 10% of the value of the Company's Stock. Any dividends received by an Exempt Organization that are allocable to Excess Inclusion will be treated as UBTI. In addition, the Company will be subject to tax at the highest marginal corporate rate on the portion of any Excess Inclusion Income derived by the Company from REMIC Residual Interests that is allocable to Stock of the Company held by Disqualified Organizations. Any such tax would be deductible by the Company against its income that is not Excess Inclusion income. If the Company derives Excess Inclusion income from REMIC Residual Interests, a tax similar to the tax on the Company described in the preceding paragraph may be imposed on stockholders who are (i) pass-through entities (i.e., partnerships, estates, trusts, regulated investment companies, REITS, common trust funds, and certain types of cooperatives (including farmers' cooperatives described in Section 521 of the Code)) in which a Disqualified Organization is a record holder of shares or interests and (ii) nominees who hold Common Stock on behalf of Disqualified Organizations. Consequently, a brokerage firm that holds shares of Common Stock in a "street name" account for a Disqualified Organization may be subject to federal income tax on the Excess Inclusion income derived from those shares. 72 The Treasury Department has been authorized to issue regulations regarding issuances by a REIT of multiple-class mortgage-backed securities in non-REMIC transactions. If such Treasury Regulations are issued in the future allocating the Company's Excess Inclusion Income from non-REMIC transactions pro rata among its stockholders, some percentage of the dividends paid by the Company would be treated as UBTI in the hands of stockholders that are Exempt Organizations. See "--Taxation of Taxable U.S. Stockholders." TAXATION OF NON-U.S. STOCKHOLDERS The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS. Distributions to Non-U.S. Stockholders that are not attributable to gain from sales or exchanges by the Company of U.S. real property interests and are not designated by the Company as capital gain dividends or retained capital gains will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the Common Stock is treated as effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder generally will be subject to federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such distributions (and also may be subject to the 30% branch profits tax in the case of a Non-U.S. Stockholder that is a corporation). The Company expects to withhold U.S. income tax at the rate of 30% on the gross amount of any such distributions made to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and any required form evidencing eligibility for that reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that the distribution is effectively connected income. Any portion of the dividends paid to Non-U.S. Stockholders that is treated as Excess Inclusion income will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate. In addition, if Treasury regulations are issued in the future allocating the Company's Excess Inclusion income from non-REMIC transactions among its stockholders, some percentage of the Company's dividends would not be eligible for exemption from the 30% withholding tax or a reduced treaty withholding tax rate in the hands of Non-U.S. Stockholders. See "--Taxation of Taxable U.S. Stockholders." Distributions in excess of current and accumulated earnings and profits of the Company will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder's Common Stock, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of his Common Stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the entire amount of any distribution normally will be subject to withholding at the same rate as a dividend. However, amounts so withheld are refundable to the extent it is subsequently determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of the Company. The Company is required to withhold 10% of any distribution in excess of the Company's current and 73 accumulated earnings and profits. Consequently, although the Company intends to withhold at a rate of 30% on the entire amount of any distribution, to the extent that the Company does not do so, any portion of a distribution not subject to withholding at a rate of 30% will be subject to withholding at a rate of 10%. For any year in which the Company qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by the Company of a U.S. real property interest (which includes certain interests in Real Property but does not include Mortgage Loans or MBS) will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to the 30% branch profits tax in the hands of a Non-U.S. corporate stockholder not entitled to treaty relief or exemption. The Company is required to withhold 35% of any distribution that is designated by the Company as a U.S. real property capital gains dividend. The amount withheld is creditable against the Non-U.S. Stockholder's FIRPTA tax liability. Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock generally will not be taxed under FIRPTA if the Company is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the Stock was held directly or indirectly by non-U.S. persons. Because the Common Stock will be publicly traded, no assurance can be given that the Company will be or remain a "domestically controlled REIT." In addition, a Non-US Stockholder that owns, actually or constructively, 5% or less of the Company's Stock throughout a specified "look-back" period will not recognize taxable gain on the sale of his Stock under FIRPTA if the shares are traded on an established securities market. Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the Common Stock is effectively connected with the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and certain other conditions apply, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. If the gain on the sale of the Common Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain (subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations). STATE AND LOCAL TAXES The Company or the Company's stockholders may be subject to state and local tax in various states and localities, including those states and localities in which it or they transact business, own property, or reside. The state and local tax treatment of the Company and its stockholders in such jurisdictions may differ from the federal income tax treatment described above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws upon an investment in the Common Stock. TAXATION OF ASC The Company owns 100% of the non-voting common stock and 5% of the voting common stock of ASC. The remaining voting stock of ASC is owned by the Manager. As noted above, for the Company to qualify as a REIT, the value of the equity and debt securities of ASC held, directly or indirectly, by the Company may not exceed 5% of the total value of the Company's assets. In addition, the Company may 74 not own, directly or indirectly, more than 10% of the voting stock of ASC. As long as the Manager owns, directly and indirectly, less than 10% of the stock of the Company, the Company should not be deemed to own more than 10% of the voting stock of ASC. In addition, the Company believes that the value of its ASC stock does not exceed 5% of the total value of its assets. If the Service were to challenge successfully these determinations, however, the Company likely would fail to qualify as a REIT. ASC is organized as a corporation and will pay federal, state and local income taxes on its taxable income at normal corporate rates. Any such taxes will reduce amounts available for distribution by ASC, which in turn reduce amounts available for distribution to the Company's stockholders. PROPOSED TAX LEGISLATION On February 2, 1998 President Clinton released his budget proposal for fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal could affect the Company if enacted in final form. First, the Proposal would prohibit a REIT from owning, directly or indirectly, more than 10% of the voting power or value of all classes of a C corporation's stock (other than the stock of a qualified REIT subsidiary). Currently, a REIT may own no more than 10% of the voting stock of a C corporation (other than a qualified REIT subsidiary), but its ownership of the nonvoting stock of a C corporation is not limited (other than by the rule that the value of a REIT's combined equity and debt interest in a C corporation may not exceed 5% of the value of a REIT's total assets). That provision is proposed to be effective with respect to stock in a C corporation acquired by a REIT on or after the date of "first committee action" (i.e., first action by the House Ways and Means Committee with respect to the provision) ("First Committee Action"). A REIT that owns stock in a C corporation in excess of the new ownership limit prior to First Committee Action would be "grandfathered," but only to the extent that the corporation does not engage in a new trade or business or acquire substantial new assets on or after the date of First Committee Action. If enacted as presently written, that provision would limit the Company's use of ASC and other taxable subsidiaries to conduct businesses the income from which would be nonqualifying income if received directly by the Company. Second, the Proposal would require recognition of any net unrealized built-in gain associated with the assets of a "large" C corporation (i.e., a C corporation whose stock has a fair market value of more than $5 million) upon its conversion to REIT status or merger into a REIT. That provision is proposed to be effective for conversions to REIT status effective for taxable years beginning January 1, 1999 and mergers of C corporations into REITs that occur after December 31, 1998. This provision would require immediate recognition of gain if, at any time after December 31, 1998, a "large" C corporation merges into the Company. 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. 75 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 all classes of the Company consists of 400 million shares of Common Stock, $.001 par value, and 100 million shares of Preferred Stock, $.001 par value, issuable in one or more series. 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. Preferred Stock may be issued from time to time in one or more classes or series, with such preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption 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 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. 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 by the Secretary of the Company on the written request of stockholders constituting a majority of the votes entitled to be cast at such meeting. The Articles of Incorporation reserve to the Company the right to amend any provision thereof in the manner prescribed by law. REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER Two of the requirements for qualification as a REIT are that (1) during the last half of each taxable year (other than the first taxable year for which a REIT election is made) for which a REIT election is made, not more than 50% in value of the outstanding shares may be owned directly or indirectly by five or fewer individuals (the "5/50 Rule") and (2) there must be at least 100 stockholders on 335 days of each taxable year (other than the first taxable year for which a REIT election is made) of 12 months. In order that the Company may meet these requirements at all times, the Articles of Incorporation prohibit any person from acquiring or holding, directly or indirectly, in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the number of outstanding shares of Common Stock or any class 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 to the extent such action does not affect the Company's qualification as a REIT. For purposes of the 5/50 Rule, the constructive ownership provisions applicable under Section 544 of the Code (i) attribute ownership of securities owned by a corporation, partnership, estate or trust proportionately to its stockholders, partners or beneficiaries, (ii) attribute ownership of securities owned 76 by certain family members to other members of the same family, and (iii) treat securities with respect to which a person has an option to purchase as actually owned by that person. These rules will be applied in determining whether a person holds shares of Common Stock in violation of the ownership limitations set forth in the Articles of Incorporation. 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 Articles of Incorporation. 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 Articles of Incorporation further provide that if any transfer of shares of Common Stock which, if effective, would (i) result in any person beneficially or constructively owning shares of Common Stock in excess or in violation of the 9.8% ownership limitations described above, (ii) result in the Company's stock being beneficially owned by fewer than 100 persons (determined without reference to any rules of attribution), or (iii) result in the Company being "closely held" under Section 856(h) of the Code, then that number of shares of Common or Preferred 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 or Preferred Stock held by the Trustee shall be issued and outstanding shares of Common or Preferred 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 or Preferred 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 with respect to a stockholder's ownership of Common Stock, to the extent such waiver does not affect the Company's qualification as a REIT. Within 20 days of receiving notice from the Company that shares of Common or Preferred 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 Articles of Incorporation. 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 the amount payable to the Intended Transferee shall be immediately paid to the Charitable Beneficiary. In addition, shares of Common or Preferred 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. 77 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. Every owner of more than 5%, (or such lower percentage as required by the Code or the Regulations promulgated thereunder) of the outstanding shares or any class or series of the Company's 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 of the Company 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. DIVIDEND REINVESTMENT PLAN The Company may implement a dividend reinvestment plan whereby stockholders may automatically reinvest their dividends in the Company's Common Stock. Details about any such plan would be sent to the Company's stockholders following adoption thereof by the Board of Directors. MATERIAL PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS The following is a summary of the material provisions of the Maryland General Corporation Law, as amended from time to time, and of the Articles of Incorporation and the Bylaws of the Company. Such summary does not purport to be complete and is subject to and qualified in its entirety by reference to the Articles of Incorporation 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 Articles of Incorporation provide that a director may be removed from office at any time for cause 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. 78 STAGGERED BOARD The Articles of Incorporation and the Bylaws divide the Board of Directors into three classes of directors, each class constituting approximately one-third of the total number of directors, with the classes serving staggered three-year terms. The classification of the Board of Directors will make it more difficult for stockholders to change the composition of the Board of Directors because only a minority of the directors can be elected at once. The classification provisions could also discourage a third party from accumulating the Company's stock or attempting to obtain control of the Company, even though this attempt might be beneficial to the Company and some, or a majority, of its stockholders. Accordingly, under certain circumstances stockholders could be deprived of opportunities to sell their shares of Common Stock at a higher price than might otherwise be available. 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 acquirer, 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 acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer 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. 79 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 acquirer 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 acquirer 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 acquirer 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 Articles of Incorporation 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. AMENDMENT TO THE ARTICLES OF INCORPORATION The Company reserves the right from time to time to make any amendment to its Articles of Incorporation, now or hereafter authorized by law, including any amendment which alters the contract rights as expressly set forth in the Articles of Incorporation, of any shares of outstanding stock. The Articles of Incorporation 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 relating to the indemnification of the Company's present and former directors and officers, the Company's election to be taxed as a REIT, the removal of directors and dissolution of the Company may be amended only by the affirmative vote of two thirds of the Board of Directors and the holders of shares entitled to cast not less than two-thirds of all the votes entitled to be cast in the election of directors. DISSOLUTION OF THE COMPANY The dissolution of the Company must be approved by the affirmative vote of not less than two-thirds of all of the votes ordinarily entitled to be cast in the election of directors, voting together as a single class, and the affirmative vote of holders of not less than two-thirds of any series or class of stock expressly granted a series or class vote on the dissolution of the Company in the resolutions providing for such series or class. Prior to such vote, the dissolution must be approved by a majority of the Board of Directors. 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 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 Bylaws. 80 POSSIBLE ANTI-TAKEOVER EFFECT OF MATERIAL PROVISIONS OF MARYLAND LAW AND OF THE ARTICLES OF INCORPORATION 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 Articles of Incorporation creating a staggered board and the advance notice provisions of the Bylaws 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 of the Company or otherwise be in their best interest. TRANSFER AGENT AND REGISTRAR The Company intends to appoint a 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. 81 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell to each of the underwriters named below (the "Underwriters") and each of the Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc., Lehman Brothers Inc., and Prudential Securities Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company, the number of shares of Common Stock offered hereby set forth below opposite its name.
UNDERWRITER NUMBER OF SHARES - ----------------------------------------------------------------------------------------------- ----------------- Friedman, Billings, Ramsey & Co., Inc.......................................................... Lehman Brothers Inc. Prudential Securities Incorporated ----------------- ----------------- Total.................................................................................. 20,000,000
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to purchase all the shares of Common Stock offered hereby if any are purchased. The Company has agreed to indemnify the several Underwriters against certain civil liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Underwriters propose initially to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such offering price less a concession not to exceed $ per share of Common Stock. The Underwriters may allow and such dealers may reallow a concession not to exceed $ per share of Common Stock to certain other dealers. After the shares of Common Stock are released for sale to the public, the initial public offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option exercisable during the 30-day period beginning after the date hereof to purchase, at the initial public offering price net of any underwriting discounts and commissions, up to an additional 3,000,000 shares of Common Stock for the sole purpose of covering over-allotments, if any. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase that number of additional shares of Common Stock that is proportionate to such Underwriter's initial commitment. PNC Bank indirectly owns 70% of the Manager's capital stock. PNC, the parent company of PNC Bank, has agreed to purchase a number of shares of the Company's Common Stock, such that, assuming that the Underwriters exercise their over-allotment option in full, PNC will own 3% of the shares of Common Stock outstanding. PNC has formed a strategic alliance with Friedman, Billings, Ramsey Group, Inc. ("FBR Group"), pursuant to which PNC and FBR Group have agreed to work together on an arm's-length basis to refer potential business to each other. PNC owns 4.9% of the shares of common stock of FBR Group. Friedman, Billings, Ramsey & Co., Inc., one of the Representatives, is an indirect, wholly-owned subsidiary of FBR Group. FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey and Co., Inc., one of the Representatives, has agreed to acquire $10 million of Common Stock in a private placement that will close concurrently with the Offering at the initial public offering price, net of underwriting discounts and commissions. The portfolio of FBR Asset Investment Corporation is, in part, managed by the Manager of the Company. FBR Asset Investment Corporation may not dispose of or otherwise transfer the Common Stock acquired in this private placement for a period of 180 days following the date of the Offering. The Common Stock has been approved for listing on the NYSE under the symbol "AHR." In order to meet one of the requirements for listing, the Underwriters have undertaken to sell (i) lots of 100 or more 82 shares to a minimum of 2,000 beneficial holders, (ii) a minimum of 1.1 million shares and (iii) shares with a minimum aggregate market value of $40.0 million. Prior to this Offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in making such determination will be the history of, and the prospects for, the industry in which the Company will compete, an assessment of the skills of the Manager and the Company's prospects for future earnings, the general conditions of the economy and the securities market and the prices of offerings by similar issuers. There can, however, be no assurance that the price at which the shares of Common Stock will sell in the public market after this Offering will not be lower than the price at which they are sold by the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of the Common Stock to any accounts over which they exercise discretionary authority. 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 or purchase the Common Stock. As an exception to these rules, the Representatives may engage in transactions that stabilize, maintain, or otherwise affect the price of the Common Stock. Specifically, the Representatives may overallot this Offering, creating a syndicate short position. In addition, the Representatives may bid for and purchase shares of Common Stock in the open market to cover syndicate short positions or to stabilize the price of the shares. Finally, the Representatives may impose a penalty bid on syndicate members. This means that the Representatives may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed shares of Common Stock in syndicate covering transactions, stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The imposition of a penalty bid also might affect the price of a security in that it may discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Company, the Manager, PNC, and certain of their respective officers and directors have agreed not to, directly or indirectly, offer, sell, contract to sell, or otherwise dispose of any shares of Common Stock or any securities convertible or exchangeable for shares of Common Stock for a period of 180 days from the date of this Prospectus without the prior written consent of the Friedman, Billings, Ramsey & Co., Inc., 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 1998 Stock Option Plan. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Miles & Stockbridge, a Professional Corporation, Baltimore, Maryland and certain legal matters will be passed upon for the Underwriters by Hunton & Williams, Richmond, Virginia. In addition, the description of federal income tax consequences contained in this Prospectus entitled "Federal Income Tax Consequences" is based upon the opinion of Skadden, Arps, Slate, Meagher & Flom LLP. EXPERTS The balance sheet of Anthracite Capital, Inc., as of March 5, 1998, 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. 83 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. 84 GLOSSARY There follows an abbreviated definition of certain capitalized terms used in this Prospectus. "Affiliate" means, when used with reference to a specified person, (i) any person that directly or indirectly controls or is controlled by or is under common control with the specified person, (ii) any person that is an officer of, partner in or trustee of, or serves in a similar capacity with respect to, the specified person or of which the specified person is an officer, partner or trustee, or with respect to which the specified person serves in a similar capacity, and (iii) any person that, directly or indirectly, is the beneficial owner of 5% or more of any class of equity securities of the specified person or of which the specified person is directly or indirectly the owner of 5% or more of any class of equity securities; provided, however, that the Company and its subsidiaries will not be treated as an Affiliate of the Manager and its Affiliates. "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. "Articles of Incorporation" shall mean the Articles of Incorporation of the Company. "Average Invested Assets" means the average of the aggregate book value of the assets (other than cash or cash equivalents) of the Company, including the assets of all of its direct and indirect subsidiaries before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period and shall be determined as follows: (i) Average Invested Assets with a rating of less than BB- or not rated means, for any quarter, the Average Invested Assets in such quarter that have received a credit rating of less than BB- from Standard & Poor's Corporation ("S&P") or less than Ba3 from Moody's Investors Service, Inc. ("Moody's") or have received an equivalent rating from an NRSRO or that have not been rated by either Moody's, S&P or an NRSRO and are not guaranteed by the U.S. government or any agency or instrumentality thereof, (ii) Average Invested Assets with a rating of BB- to BB+ shall mean the Average Invested Assets that have received a credit rating of BB- to BB+ from S&P or Ba3 to Ba1 from Moody's or have received an equivalent rating from an NRSRO and that are not covered by clause (i) above, and (iii) Average Invested Assets with a credit rating above BB+ shall mean the Average Invested Assets that have received a credit rating above BB+ from S&P or above Ba1 from Moody's or have received an equivalent rating from an NRSRO and that are not covered by clause (i) or (ii) above or that are not rated but are guaranteed by the U.S. government or any agency or instrumentality thereof. "Average Net Worth" means for any period the arithmetic average of the sum of the 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. "BlackRock" means BlackRock Financial Management, Inc., a Delaware corporation. "Board of Directors" and "Board" shall mean the Board of Directors of the Company. "Bridge Loans" means loans secured by real property and used for temporary financing. "Business Combinations" shall have the meaning specified in the MGCL. "Bylaws" shall mean the Bylaws of the Company. G-1 "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. "Certificate Balance" means the maximum amount that the holders of any Class of Sequential Pay Certificates outstanding at any time are entitled to receive as distributions allocable to principal from the cash flow on the Mortgage Loans and other assets in the Trust Fund. "Charitable Beneficiary" means a charitable beneficiary of a Trust. "Closely Held" shall have the meaning specified in the MGCL. "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 transaction prices are not reported, 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. "CMBS" shall mean commercial or multi-family MBS. "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. "CMO Residuals" means derivative mortgage securities issued by agencies of the U.S. Government or by private originators of, or investors in, Mortgage Loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. "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, $.001 par value per share. "Company" means Anthracite 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 1998 Stock Option Plan. "Condemnation Proceeds" means all proceeds received in connection with the condemnation of the taking by right of eminent domain of a Mortgaged Property, collectively with any comparable amounts received with respect to an REO Property. G-2 "Construction Loans" shall mean a loan, the proceeds of which are used to finance the costs of construction or rehabilitation of real property. "Control Shares" means voting shares of Stock which, if aggregated with all other shares of Stock previously acquired by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer 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 if 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. "Conforming Mortgage Loans" means conventional Mortgage Loans that either comply with requirements 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. "Counsel" means Skadden, Arps, Slate, Meagher & Flom LLP. "Counterparty" means a third-party financial institution with which the Company enters into an agreement. "Dealer Property" means real property and real estate mortgages that constitute stock in trade, inventory or property held primarily for sale to customers in the ordinary course of the Company's trade or business. "Disqualified Organization" means the United States, any state or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any of the foregoing, any other tax-exempt organization (other than a farmer's cooperative described in Section 521 of the Code) that is exempt from taxation under UBTI provisions of the Code, or any rural, electrical or telephone cooperative. "Distressed Mortgage Loans" shall mean Subperforming Mortgage Loans and Nonperforming Mortgage Loans. "Distressed Real Properties" shall mean REO Properties and other underperforming or otherwise distressed real property. "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. "Equity Stock" shall mean the capital stock of the Company. "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. "Excess Inclusion" shall have the meaning specified in Section 860E(c) of the Code. "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 of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exempt Organization" shall mean a Tax Exempt Entity. "FASIT" means Financial Asset Securitization Investment Trust. G-3 "FNMA" or "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. "FNMA Certificates" or "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. "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980. "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. "Funds From Operations" means net income (computed in accordance with GAAP) excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization on real estate assets and after adjustments for unconsolidated partnerships and joint ventures. "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. "Housing Act" means the National Housing Act of 1934, as amended. "HUD" means the Department of Housing and Urban Development. "Insurance Proceeds" means all proceeds received under any hazard, flood, title or other insurance policy that provides coverage with respect to a Mortgaged Property or the related Mortgage Loan, together with any comparable amounts received with respect to any REO Property. "Intended Transferee" means, with respect to any purported Transfer or Non-Transfer Event, any Person who, but for any restrictions on the transfer or ownership of Equity Stock, would own record title to shares of Equity Stock. "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. "Inverse IOs" means IOs that bear interest rate at a floating rate that varies inversely with (and often at a multiple of) changes in a specific index. "Investment Company Act" means the Investment Company Act of 1940, as amended. "IO" means Mortgage Derivative Securities representing the right to receive interest only or a disproportionately large amount of interest in relation to principal payments. "IRAs" means Individual Retirement Accounts. "IRS" means Internal Revenue Service. G-4 "ISOs" means qualified incentive Stock options granted under the 1998 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. "MBS" shall mean CMBS and RMBS. "MGCL" means the Maryland General Corporation Law, as amended from time to time. "Management Agreement" means the investment advisory agreement by and between the Company and the Manager whereby the Manager agrees to perform certain services for the Company in exchange for certain compensation. "Manager" means BlackRock. "Market Discount Bonds" means obligations with an adjusted issue price that is greater than the Company's tax basis in such obligations. "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. "Mezzanine Loan" shall mean a loan that is subordinate to a lien on the related real property. "Mortgage Backed Securities" means debt obligations (bonds) that are secured by Mortgage Loans or mortgage certificates. "Mortgage Derivative Securities" means mortgage securities that 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 and may include other derivative instruments. "Mortgage Loans" means multifamily, residential and commercial term loans secured by real property. "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. "NAREIT" shall mean the National Association of Real Estate Investment Trusts, Inc. "Net Cash Flow" means the "net cash flow" of a Mortgaged Property as set forth in, or determined on the basis of, Mortgaged Property Operating Statements, generally unaudited supplied by the related borrower and, in the case of multifamily, retail, mobile home park, industrial warehouse, self-storage and office properties, certified rent rolls (as applicable) supplied by the related borrower. "Net Income" means the taxable income of the Company. "Net Leased Real Estate" means real estate that is net leased on a long-term basis (ten years or more) to tenants who are customarily responsible for paying all costs of owning, operating, and maintaining the leased property during the term of the lease, in addition to the payment of a monthly net rent to the landlord for the use and occupancy of the premises. "1997 Act" means The Taxpayer Relief Act of 1997. "95% of Income Test" means the income-based test that the Company must meet to qualify as a REIT described in "Federal Income Tax Consequences--Requirements for Qualification as a REIT--Gross Income Tests." G-5 "Non-Economic Residual" shall mean CMO Residuals that are required to report taxable income or loss but receive no cash flow from the Mortgage Loans. "Non-Investment Grade" means a credit rating from a Rating Agency of "BBB" or less. "Nonperforming Mortgage Loans" shall mean multifamily and commercial mortgage loans for which the payment of Principal and interest is more than 90 days delinquent. "Non-REMIC Residual Interests" shall mean the retained interest in a securitization transaction for which no REMIC or FASIT election is made. "Non-U.S. Stockholders" means nonresident alien individuals, foreign corporations, foreign partnerships and other foreign stockholders. "Offering" means the shares of Common Stock offered through the Underwriters in connection with this Prospectus. "Offering Price" shall mean the offering price of $ per Common Share offered hereby. "OID" shall mean original issue discount. "One-Year U.S. Treasury Rate" means average of 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. "Pass-Through Certificates" means securities (or interests therein) other than Mortgage Derivative Securities and Subordinate 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. "PNC" means PNC Bank Corp., a Delaware corporation. "PNC Bank" means PNC Bank, National Association, a national association chartered by the OCC. "PO" means Mortgage Derivative Securities representing the right to receive principal only or a disproportionate amount of principal. "Preferred Stock" shall mean the preferred stock of the Company. "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 Agreement" shall mean the agreement pursuant to which the Underwriters will underwrite the Common Stock. "Qualified Hedges" means any interest rate swap or cap agreement, option, futures contract, forward rate agreement, or similar financial instrument entered into by the Company to reduce interest rate risk with respect to any indebtedness incurred or to be incurred by the Company to acquire or carry Real Estate Assets. "Qualified REIT Real Estate Assets" means Pass-Through Certificates, Mortgage Loans, Agency Certificates, real property 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. G-6 "Qualified Temporary Investment Income" means income attributable to stock or debt instruments acquired with new capital of the Company (other than the proceeds of debt obligations with a term of less than five years) received during the one-year period beginning on the day such proceeds were received. "Rating Agency" means, with respect to securities of U.S. issuers, any nationally recognized statistical rating organization and, with respect to non-U.S. issuers, any of the foregoing or any equivalent organization operating in the jurisdiction where the issuer's principal operations are located either Standard & Poor's and Moody's Investors Service, Inc. "Real Estate Asset" shall mean interests in real property, mortgages on real property to the extent the principal balance of the mortgage does not exceed the fair market value of the associated real property, regular or residual interests in a REMIC, (except that, if less than 95% of the assets of a REMIC consists of "real estate assets" (determined as if the Company held such assets), the Company will be treated as holding directly its proportionate share of the assets of such REMIC), shares of other REITs and certain temporary investments. "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. "REMIC Residual Interests" shall mean a class of MBS that is designated as the residual interest in one or more REMICS. "Rent" shall mean the rent received by the Company from tenants of Real Property owned by the Company. "Rental Property" means multifamily, retail, mobile home park, industrial/warehouse, self storage and office properties. "REO Property" shall mean real property acquired at foreclosure or by deed in lieu of foreclosure. "Representatives" shall mean each Underwriter that is acting as a representative for other Underwriters. "Residual Interests" shall mean REMIC and non-REMIC Residual Interests collectively. "RMBS" shall mean a series of one- to four-family residential MBS. "Securities Act" means the Securities Act of 1933, as amended. "Servicers" means those entities that perform the servicing functions with respect to Mortgage Loans or Excess Servicing Rights owned by the Company. "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." "Special Servicing" shall mean servicing of defaulted mortgage loans, including oversight and management of the resolution of such mortgage loans by modification, foreclosure, deed in lieu of foreclosure or otherwise. "1998 Stock Option Plan" means the stock option plan adopted by the Company in 1998. "Sub IOs" shall mean an IO with characteristics of a Subordinated Interest. "Subperforming Mortgage Loans" shall mean multifamily and commercial mortgage loans for which default is likely or imminent or for which the borrower is making monthly payments in accordance with a forbearance plan. G-7 "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. "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. "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. "Treasury Regulations" shall mean the income tax regulations promulgated under the Code. "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 Articles of Incorporation, 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. "UBTI" means "unrelated trade or business income" as defined in Section 512 of the Code. "UBTI Percentage" shall mean the gross income derived by the Company from UBTI (determined as if the Company was a pension trust) divided by gross income of the Company for the year in which the dividends are paid. "Unaffiliated Directors" shall mean a director who (a) does not own greater than a DE MINIMIS interest in the Manager or any of its Affiliates, and (b) within the last two years, has not (i) directly or indirectly been employed by the Manager or any of its Affiliates, (ii) been an officer or director of the Manager or any of its Affiliates, (iii) performed services for the Manager or any of its Affiliates, or (iv) had any material business or professional relationship with the Manager or any of its Affiliates. "Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc., Lehman Brothers Inc. and Prudential Securities Incorporated as well as others in the future and each of the underwriters for whom they are acting as representatives. "United States Stockholder" 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). "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. G-8 INDEPENDENT AUDITORS' REPORT To the Stockholder of Anthracite Capital, Inc.: We have audited the accompanying balance sheet of Anthracite Capital, Inc. (the "Company") as of March 5, 1998. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet 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 provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of Anthracite Capital, Inc. as of March 5, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York March 6, 1998 F-1 ANTHRACITE CAPITAL, INC. BALANCE SHEET MARCH 5, 1998 ASSETS Cash.............................................................................. $ 200,000 --------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY Stockholder's Equity Preferred Stock, par value $0.001 per share; 100,000,000 shares authorized, no shares issued............................. Common Stock, par value $0.001 per share; 400,000,000 shares authorized; 13,333 shares issued and outstanding......... $ 13 Additional Paid-in-Capital........................................................ 199,987 --------- Total Stockholder's Equity.................................................... $ 200,000 --------- ---------
See accompanying notes to balance sheet. F-2 ANTHRACITE CAPITAL, INC. NOTES TO BALANCE SHEET MARCH 5, 1998 NOTE 1--THE COMPANY Anthracite Capital, Inc. (the "Company") was incorporated in Maryland in November of 1997 and was initially capitalized through the sale of 13,333 shares of Common Stock to its initial Stockholder for $200,000 on March 5, 1998. The Company will seek to acquire primarily mortgage-backed securities and may also invest in other real estate related assets, including 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 BASIS OF ACCOUNTING The books and records of the Company are maintained on an accrual basis, in accordance with generally accepted accounting principles. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results may differ from those estimates. 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. NOTE 3--TRANSACTIONS WITH AFFILIATES The Company intends to enter into a Management Agreement (the "Management Agreement") with BlackRock Financial Management, Inc. (the "Manager"), a majority owned indirect subsidiary of PNC Bank Corp., under which the Manager will manage the Company's day-to-day operations, subject to the direction and oversight of the Company's Board of Directors. The Company will pay the Manager an annual base management fee equal to a percentage of the Average Invested Assets of the Company as further defined in the Management Agreement. The base management fee is equal to 1% per annum of the Average Invested Assets rated less than BB- or not rated, 0.75% of Average Invested Assets rated BB- to BB+, and 0.35% of Average Invested Assets rated above BB+. The Company will also pay the Manager, as incentive compensation, an amount equal to 25% of the Funds from Operations of the Company plus gains (minus losses), before incentive compensation, in excess of the amount that would produce an annualized Return on Equity on the invested amount of Common Stock equal to 3.5% over the Ten-Year U.S. Treasury Rate as further defined in the Management Agreement. The Company intends to adopt a Stock Option Plan that provides for the grant of qualified Stock Options, non-qualified Stock Options, Stock appreciation rights and dividend equivalent rights ("Options") under which 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. 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. The Company intends to redeem the 13,333 shares held by the initial stockholder on the date of the Offering for $200,000. F-3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK BY ANYONE IN ANY JURISDICTION WHERE, 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 AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------
Prospectus Summary............................ 1 Risk Factors.................................. 12 Use of Proceeds............................... 25 Dividend and Distribution Policy.............. 25 Capitalization................................ 26 Certain Relationships, Conflicts of Interest.................................... 26 The Company................................... 28 Description of Real Estate Related Assets..... 35 Management of the Company..................... 48 The Manager................................... 55 Federal Income Tax Consequences............... 61 ERISA Considerations.......................... 75 Description of Capital Stock.................. 76 Dividend Reinvestment Plan.................... 78 Material Provisions of Maryland Law and of the Company's Articles of Incorporation and ByLaws...................................... 78 Underwriting.................................. 82 Legal Matters................................. 83 Experts....................................... 83 Additional Information........................ 84 Glossary...................................... G-1 Financial Statement........................... F-1
------------------------ UNTIL , 1998 (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 WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 20,000,000 SHARES ANTHRACITE CAPITAL, INC. COMMON STOCK --------------------- PROSPECTUS --------------------- FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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...................................................................... $ 108,560 NYSE listing fee.......................................................................... 147,600 NASD filing fee........................................................................... 30,500 Printing and engraving expenses........................................................... 200,000 Legal fees and expenses................................................................... 400,000 Blue sky fees and expenses................................................................ 5,000 Accounting fees and expenses.............................................................. 40,000 Transfer agent and Registrar fees......................................................... 10,000 Miscellaneous............................................................................. 63,340 Total..................................................................................... 1,000,000
* To be provided by amendment. ITEM 32. SALES TO SPECIAL PARTIES None. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES. None ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by the MGCL, the Company's Articles of Incorporation obligate the Company to indemnify its present and former directors and officers and the Manager and its employees, officers, directors and controlling persons and to pay or reimburse reasonable expenses for such persons 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 of the Company implement the provisions relating to indemnification contained in the Company's Articles of Incorporation. The MCGL permits the charter of a Maryland corporation to include a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages, except to the extent that (i) the person actually received an improper benefit or profit in money, property or services, or (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Company's Articles of Incorporation contain a provision providing for II-1 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 will maintain for the benefit of its officers and directors, officers' and directors' insurance. The Underwriting Agreement (Exhibit 1.1) also provides 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 March 5, 1998 Notes to financial statements All schedules have been omitted because they are not applicable. (b) Exhibits 1.1 Form of Underwriting Agreement ** 3.1 Articles of Incorporation of the Registrant 3.2 Bylaws of the Registrant 5.1 Opinion of Miles & Stockbridge 8.1 Opinion of Skadden, Arps, Slate. Meagher & Flom LLP 10.1 Management Agreement between the Registrant and BlackRock Financial Management, Inc. 10.6 Form of 1998 Stock Option Incentive Plan 21.1 Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP **23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1) 23.3 Consent of Miles & Stockbridge (included in Exhibit 5.1) **24.1 Power of Attorney (included on page II-5) **99.1 Consents to be named as a director pursuant to Rule 438
* To be filed by amendment. ** Previously filed. 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 person of the Registrant pursuant to the provisions referenced in Item 34 of this Registration Statement or otherwise, the Registrant has been advised that in II-2 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: 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. 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. The registrant undertakes to file a sticker supplement pursuant to Rule 424(c) under the Act during the distribution period describing each property not identified in the prospectus at such time as there arises a reasonable probability that such property will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three months, with the information contained in such amendment provided simultaneously to the existing stockholders. The post-effective amendment shall include audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X only for properties acquired during the distribution period. The registrant undertakes to send to each stockholder at least on an annual basis a detailed statement of transactions with the Manager or its affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to the Manager or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed. The registrant undertakes to provide to the stockholders the financial statements required by Form 10-K for the first full year of operations of the Company. The registrant also undertakes to file, after the end of the distribution period, a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the signing of a binding purchase agreement) made after the end of the distribution period involving the use of 10% or more (on a cumulative basis) of the net proceeds of the offering and to provide the information contained in such report to stockholders at least once each quarter after the distribution period of the offering has ended. 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 to the Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of New York, State of New York, on the 18th day of March, 1998. ANTHRACITE CAPITAL, INC. BY: /S/ RICHARD SHEA ----------------------------------------- Richard Shea CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ LAURENCE D. FINK Chairman of the Board - ------------------------------ 3/18/98 Laurence D. Fink /s/ HUGH R. FRATER President (Principal - ------------------------------ Executive Officer) 3/18/98 Hugh R. Frater Chief Operating Officer and /s/ RICHARD SHEA Chief Financial Officer - ------------------------------ (Principal Financial and 3/18/98 Richard Shea Accounting Officer) II-4 EXHIBIT INDEX 1.1 Form of Underwriting Agreement. **3.1 Articles of Incorporation of the Registrant is incorporated by reference to Exhibit 3.1 of the Registration Statement filed with the Securities and Exchange Commission on November 21, 1997. 3.2 Bylaws of the Registrant. 5.1 Opinion of Miles & Stockbridge. 8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP. 10.1 Management Agreement between the Registrant and BlackRock Financial Management, Inc. 10.6 Form of 1998 Stock Option Incentive Plan. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP. **23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1). 23.3 Consent of Miles & Stockbridge (included in Exhibit 5.1). **24.1 Power of Attorney (included on page II-5) is incorporated by reference to Exhibit 24.1 of the Registration Statement filed with the Securities and Exchange Commission on November 21, 1997. **99.1 Consents to be named as a director pursuant to Rule 438. * To be filed by amendment. ** Previously filed.
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT ANTHRACITE CAPITAL, INC. 20,000,000 Shares of Common Stock UNDERWRITING AGREEMENT March __, 1998 FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LEHMAN BROTHERS INC. PRUDENTIAL SECURITIES INCORPORATED as Representatives of the several Underwriters c/o Friedman, Billings, Ramsey & Co., Inc. 1001 19th Street North Arlington, Virginia 22209 Dear Sirs: Anthracite Capital, Inc., a Maryland corporation that intends to elect to be taxed as a real estate investment trust (the "Company"), confirms its agreement with Friedman, Billings, Ramsey & Co., Inc., Lehman Brothers Inc., Prudential Securities Incorporated, and each of the other Underwriters listed on Schedule I hereto (collectively, the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc., Lehman Brothers Inc., and Prudential Securities Incorporated are acting as representatives (in such capacity, the "Representatives"), with respect to (i) the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of common stock of the Company, $.001 par value per share (the "Common Shares "), set forth in Schedule I hereto and (ii) the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 1(b) hereof to purchase all or any part of 3,000,000 additional Common Shares to cover over-allotments, if any. The 20,000,000 Common Shares to be purchased by the Underwriters (the "Initial Shares") and all or any part of the 3,000,000 Common Shares subject to the option described in Section 1(b) hereof (the "Option Shares") are hereinafter called, collectively, the "Shares." The Company understands that the Underwriters propose to make a public offering of the Shares as soon as the Underwriters 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. 333-40813) and a related preliminary prospectus for the registration of the Shares under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder (the "Securities Act Regulations"). The Company has prepared and filed such amendments thereto, if any, and such amended preliminary prospectuses, if any, as may have been required to the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. The registration statement has been declared effective under the Securities Act by the Commission. The registration statement as amended at the time it became effective (including all information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Securities Act Regulations) is hereinafter called the "Registration Statement," except that, if the Company files a post-effective amendment to such registration statement that becomes effective prior to the Closing Time (as defined below), "Registration Statement" shall refer to such registration statement as so amended. Any registration statement filed pursuant to Rule 462(b) of the Securities Act Regulations is hereinafter called the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the 462(b) Registration Statement. Each prospectus included in the registration statement, or amendments thereof or supplements thereto, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Underwriters pursuant to Rule 424(a) of the Securities Act Regulations is hereinafter called the "Preliminary Prospectus." The term "Prospectus" means the final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act Regulations, and any amendments thereof or supplements thereto. The Company and the Underwriters agree as follows: 1. Sale and Purchase: (a)Initial Shares. Upon the basis of the warranties and representations and other terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter agrees, severally and not jointly, to purchase from the Company at the purchase price per share of $_____, the number of Initial Shares set forth in Schedule I opposite such Underwriter's name, plus any additional number of Initial Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 8 hereof subject, in each case, to such adjustments among the Underwriters as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional shares. (b)Option Shares. In addition, upon the basis of the warranties and representations and other terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase from the Company all or any part of the Option Shares at the purchase price per share set forth in paragraph (a) above plus any additional number of Option Shares that such Underwriter may become obligated to purchase pursuant to the provisions of Section 8 hereof. 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 2 covering over-allotments, which may be made in connection with the offering and distribution of the Initial Shares, upon notice by the Representatives to the Company setting forth the number of Option Shares as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Shares. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full business days nor earlier than two full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined, unless otherwise agreed by the Representatives and the Company. If the option is exercised as to all or any portion of the Option Shares, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Shares then being purchased which the number of Initial Shares set forth in Schedule I opposite the name of such Underwriter bears to the total number of Initial Shares, subject in each case to such adjustments as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional shares. (c)Terms of Public Offering. The Company is advised by you that the Shares are to be offered to the public initially at $_____ per share (the "Public Offering Price") and to certain dealers selected by you at a price that represents a concession not in excess of $0.__ per share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $0.__ per share, to any Underwriter or to certain other dealers. The Underwriters may from time to time increase or decrease the Public Offering Price of the Shares after the initial public offering to such extent as the Underwriters may determine. 2. Payment and Delivery: (a)Initial Shares. Payment of the purchase price for the Initial Shares shall be made to the Company by wire transfer of immediately available funds or certified or official bank check payable in federal (same-day) funds at the offices of Skadden, Arps, Slate, Meagher & Flom, LLP, located at 919 Third Avenue, New York, New York 10022-3897 (unless another place shall be agreed upon by the Representatives and the Company) against delivery of the certificates for the Initial Shares to the Representatives for the respective accounts of the Underwriters. Such payment and delivery shall be made at 9:30 a.m., New York City time, on the third (fourth, if pricing occurs after 4:30 p.m., New York City time) business day after the date hereof (unless another time, not later than ten business days after such date, shall be agreed to by the Representatives and the Company). The time at which such payment and delivery are actually made is hereinafter sometimes called the "Closing Time." Unless the Representatives elect to take delivery of the Initial Shares by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives, certificates for the Initial Shares shall be delivered to the Representatives in definitive form registered in such names and in such denominations as the Representatives shall specify. For the purpose of expediting the checking of the certificates for the Initial Shares by the Representatives, the Company agrees to make such certificates available to the Representatives for such purpose at least one full business day preceding the Closing Time. (b)Option Shares. In addition, payment of the purchase price for the Option Shares shall be made to the Company by wire transfer of immediately available funds or certified or 3 official bank check payable in federal (same-day) funds at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, located at 919 Third Avenue, New York, New York 10022-3897 (unless another place shall be agreed upon by the Representatives and the Company), against delivery of the certificates for the Option Shares to the Representatives for the respective accounts of the Underwriters. Such payment and delivery shall be made at 9:30 a.m., New York City time, on each Date of Delivery. Unless the Representatives elect to take delivery of the Option Shares by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives, certificates for the Option Shares shall be delivered to the Representatives in definitive form registered in such names and in such denominations as the Representatives shall specify. For the purpose of expediting the checking of the certificates for the Option Shares by the Representatives, the Company agrees to make such certificates available to the Representatives for such purpose at least one full business day preceding the relevant Date of Delivery. 3. Representations and Warranties of the Company: The Company represents and warrants to the Underwriters that: (a) each of the Company, each Subsidiary of the Company set forth on Schedule II hereto (each a "Subsidiary" and, collectively, the "Subsidiaries") and the Manager has been duly formed or incorporated, as the case may be, and is validly existing and in good standing under the laws of its respective jurisdiction of formation or incorporation with all requisite corporate power and authority to own, lease and operate its respective properties and to conduct its respective business as now conducted and as proposed to be conducted as described in the Registration Statement and Prospectus and, in the case of the Company, to authorize, execute and deliver this Agreement, the Management Agreement to be entered into at or prior to the Closing Time between the Company and the Manager, the form of which has been filed as an exhibit to the Registration Statement (the "Management Agreement") and the other agreements described in the Prospectus and listed on Schedule III attached hereto (the "Other Transaction Documents") and to consummate the transactions described in each such agreement, and, in the case of the Manager, to execute and deliver the Management Agreement and to consummate the transactions described in the Management Agreement; (b) the Company and the Subsidiaries are duly qualified or registered to transact business in each jurisdiction in which they conduct their respective businesses as now conducted and as proposed to be conducted as described in the Registration Statement and the Prospectus and in which the failure, individually or in the aggregate, to be so qualified or registered could reasonably be expected to have a material adverse effect on the assets, operations or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole; and the Company and the Subsidiaries are in good standing in each jurisdiction in which they own or lease real property or maintain an office or in which the nature or conduct of their respective businesses as now conducted or proposed to be conducted as described in the Registration Statement and the Prospectus requires such qualification, except where the failure to be in good standing could be reasonably expected to not have a material adverse effect on the assets, 4 operations, business or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole; (c) the Company and the Subsidiaries are in compliance in all material respects with all applicable laws, rules, regulations, orders, decrees and judgments; (d) neither the Company nor any of the Subsidiaries is in breach of, or in default under (nor has any event occurred which with notice, lapse of time, or both would constitute a breach of, or default under), its respective charter or by-laws, or in the performance or observance of any obligation, agreement, covenant or condition contained in any license, indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which any of them or their respective properties is bound, except for such breaches or defaults that could be reasonably expected not to have a material adverse effect on the assets, operations, business or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole, and the issuance, sale and delivery by the Company of the Shares, the execution, delivery and performance of this Agreement, the Management Agreement and the Other Transaction Documents (as such term is defined in Section 3(a) hereof), by the Company, and the execution, delivery and performance of the Management Agreement by the Manager, and consummation of the transactions contemplated hereby and thereby will not conflict with, or result in any breach of, or constitute a default under (nor constitute any event which with notice, lapse of time, or both would constitute a breach of, or default under), (i) any provision of the charter or by-laws, of the Company, any of the Subsidiaries or the Manager, (ii) any provision of any license, indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Company, any of the Subsidiaries or the Manager is a party or by which any of them or their respective properties may be bound or affected, or (iii) any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company, any of the Subsidiaries or the Manager, except in the case of clause (ii) for such breaches or defaults which could be reasonably expected not to have a material adverse effect, with respect to the Company or the Subsidiary, on the assets, operations, business or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole or result in the creation or imposition of any material lien, charge, claim or encumbrance upon any property or asset of the Company or the Subsidiaries, or, with respect to the Manager, not to have a material adverse effect on the Manager's abilities to execute and perform its obligations under the Management Agreement; (e) the Company has full legal right, power and authority to enter into and perform this Agreement, the Management Agreement and the Other Transaction Documents and to consummate the transactions contemplated herein; this Agreement, the Management Agreement and the Other Transaction Documents have been duly authorized, executed and delivered by the Company and each is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting 5 creditors' rights generally, and by general principles of equity, and except to the extent that the indemnification and contribution provisions of Section 9 hereof may be limited by federal or state securities laws and public policy considerations in respect thereof; (f) the Manager has full legal right, power and authority to enter into and perform the Management Agreement and to consummate the transactions contemplated therein; the Management Agreement has been duly authorized, executed and delivered by the Manager and constitutes a valid and binding agreement of the Manager, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by general principles of equity; (g) the issuance and sale of the Shares to the Underwriters hereunder have been duly authorized by the Company; when issued and delivered against payment therefor as provided in this Agreement, the Shares will be validly issued, fully paid and non assessable and the issuance of the Shares will not be subject to any preemptive or similar rights; except as contemplated herein, no person or entity holds a right to require or participate in the registration under the Securities Act of the Shares pursuant to the Registration Statement; no person or entity has a right of participation or first refusal with respect to the sale of the Shares by the Company; except as set forth in the Prospectus, there are no contracts, agreements or understandings between the Company and any person or entity granting such person or entity the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement; the form of certificates evidencing the Shares complies with all applicable legal requirements and, in all material respects, with all applicable requirements of the charter and bylaws of the Company and the requirements of the New York Stock Exchange; (h) no approval, authorization, consent or order of or filing with any federal, state or local governmental or regulatory commission, board, body, authority or agency is required in connection with (i) the execution, delivery and performance by the Company of this Agreement, the Management Agreement and the Other Transaction Documents, the consummation of the transaction contemplated hereby and thereby, (ii) the execution, delivery and performance by the Manager of the Management Agreement or the consummation of the transactions contemplated thereby, or (iii) the sale and delivery of the Shares, other than (x) such as have been obtained, or will have been obtained at the Closing Time or the relevant Date of Delivery, as the case may be, under the Securities Act or the Securities Exchange Act of 1934, (y) such approvals as have been obtained in connection with the approval of the listing of the Shares on the New York Stock Exchange and (z) any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters; (i) each of the Company and the Subsidiaries has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under 6 any federal, state or local law, regulation or rule, and has obtained all necessary authorizations, consents and approvals from other persons required in order to conduct their respective businesses as described in the Registration Statement and Prospectus, except to the extent that any failure to have any such licenses, authorizations, consents or approvals, to make any such filings or to obtain any such authorizations, consents or approvals could reasonably be expected to not have, individually or in the aggregate, a material adverse effect on the assets, operations, business or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole; neither the Company nor any of the Subsidiaries is in violation of, in default under, or has received any notice regarding a possible violation, default or revocation of any such license, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company or any of the Subsidiaries, the effect of which could reasonably be expected to be material and adverse to the assets, operations, business or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole; and no such license, authorization, consent or approval contains a materially burdensome restriction that is not adequately disclosed in the Registration Statement and the Prospectus; (j) each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the Securities Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are threatened by the Commission, and any request on the part of the Commission for additional information has been complied with; (k) the Company and the transactions contemplated by this Agreement meet the requirements and conditions for using a registration statement on Form S-11 under the Securities Act, set forth in the General Instructions to Form S-11; the Preliminary Prospectus and the Registration Statement comply and the Prospectus and any further amendments or supplements thereto will comply, when they have become effective or are filed with the Commission, as the case may be, in all material respects with the requirements of the Securities Act and the Securities Act Regulations and, in each case, present, or will present, fairly the information required to be shown; the Registration Statement did not, and any amendment thereto will not, in each case as of the applicable effective date, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Preliminary Prospectus does not, and the Prospectus or any amendment or supplement thereto will not, as of the applicable filing date and at the Closing Time and on each Date of Delivery (if any), contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Registration Statement or the Prospectus in reliance upon and in 7 conformity with the information concerning the Underwriters and furnished in writing by or on behalf of the Underwriters through the Representatives to the Company expressly for use in the Registration Statement or the Prospectus (that information being limited to that described in the last sentence of the first paragraph of Section 9(b) hereof); (l) the Preliminary Prospectus in paper format was and the Prospectus in paper format delivered to the Underwriters for use in connection with this offering will be identical to the versions of the Preliminary Prospectus and Prospectus created to be transmitted to the Commission for filing via the Electronic Data Gathering Analysis and Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T; (m) all legal or governmental proceedings, contracts or documents that are material and of a character required to be filed as exhibits to the Registration Statement or to be summarized or described in the Prospectus have been so filed, summarized or described as required; (n) there are no actions, suits, proceedings, inquiries or investigations pending or, to the Company's knowledge, threatened against the Company or any of the Subsidiaries or any of their respective officers and directors or to which the properties, assets or rights of any such entity is subject, at law or in equity, before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority, arbital panel or agency which could reasonably be expected to result in a judgment, decree, award or order having a material adverse effect on the assets, operations, business or condition (financial or otherwise) of the Company and the Subsidiaries taken as a whole, or which could adversely affect the consummation of the transactions contemplated by this Agreement in any material respect; (o) the financial statements, including the notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of the Company and the Subsidiaries as of the dates indicated and the results of operations and changes in financial position and cash flows of the Company and the Subsidiaries for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved (except as indicated in the notes thereto); the financial statement schedules included in the Registration Statement and the Prospectus fairly present the information required to be shown therein; no other financial statements or schedules are required by Form S-11 or otherwise to be included in the Registration Statement or Prospectus; (p) Deloitte & Touche, LLP, whose reports on the audited financial statements of the Company and the Subsidiaries are included as part of the Registration Statement and Prospectus, are and were during the periods covered by their reports independent public accountants within the meaning of the Securities Act and the Securities Act Regulations; (q) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may be otherwise stated in the 8 Registration Statement or Prospectus, there has not been (i) any material adverse change in the assets, operations, business or condition (financial or otherwise), present or prospective, of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any transaction, which is material to the Company and the Subsidiaries taken as a whole, planned or entered into by the Company or any of the Subsidiaries, (iii) any obligation, contingent or otherwise, directly or indirectly incurred by the Company or any of the Subsidiaries, which is material to the Company and the Subsidiaries taken as a whole or (iv) any dividend or distribution of any kind declared, paid or made with respect to the capital stock of the Company; (r) the authorized shares of Common Shares of the Company conform in all material respects to the description thereof contained in the Prospectus; the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus under the caption "Capitalization"; immediately after the Closing Time, 21,357,573 Common Shares will be issued and outstanding (subject to the Underwriter's option described in Section 1(b) hereof) and no shares of any other class of Common Shares or preferred stock will be issued and outstanding. All of the issued and outstanding shares of Common Shares of the Company have been duly authorized and are validly issued, fully paid and non assessable, and have been offered, sold and issued by the Company in compliance with all applicable laws (including, without limitation, federal and state securities laws); none of the issued shares of Common Shares of the Company have been issued in violation of any preemptive or similar rights granted by the Company; except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of Common Shares of the Company or any security convertible into or exchangeable for shares of Common Shares of the Company; (s) all of the issued and outstanding shares of capital stock of each Subsidiary have been duly authorized and are validly issued, fully paid and non assessable, and 95% are owned of record and beneficially by the Company, and have been offered, sold and issued by the Subsidiaries in compliance with all applicable laws (including, but not limited to, federal and state securities laws); none of the issued shares of capital stock of the Subsidiaries have been issued in violation of any preemptive or similar rights; except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of capital stock of either Subsidiary or any security convertible into or exchangeable for capital stock of either Subsidiary; (t) each of the Company, the Subsidiaries, and each of their respective officers, directors and controlling persons has not taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; 9 (u) the Company (i) is not required to register as a "broker" or "dealer" in accordance with the provisions of the Securities Exchange Act of 1934 or the rules and regulations thereunder, and (ii) directly, or indirectly through one or more intermediaries, does not control or have any other association with (within the meaning of Article 1 of the By-laws of the National Association of Securities Dealers, Inc. (the "NASD")) any member firm of the NASD; (v) the Company has not relied upon the Representatives or legal counsel for the Representatives for any legal, tax or accounting advice in connection with the offering and sale of the Shares; (w) any certificate signed by any officer of the Company or any Subsidiary delivered to the Representatives or to counsel for the Underwriters pursuant to or in connection with this Agreement shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; (x) there are no statutes or regulations applicable to the Company or any of the Subsidiaries or certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by the Company or any of the Subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and properly described therein; all agreements between the Company or any of the Subsidiaries and third parties expressly referenced in the Prospectus are legal, valid and binding obligations of the Company or one or more of the Subsidiaries, enforceable in accordance with their respective terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity; (y) no relationship, direct or indirect, exists between or among the Company or any of the Subsidiaries, on the one hand, and the directors, officers, shareholders, customers or suppliers of the Company, the Subsidiary or the Manager, on the other hand, which is required by the Act to be described in the Registration Statement and the Prospectus that is not so described; (z) neither the Company nor the Subsidiary own any real property; and, except as described in the Prospectus, neither the Company nor the Subsidiary has conducted any business; (aa) neither the Company nor any of the Subsidiaries nor, to the best of the Company's knowledge, any officer or director purporting to act on behalf of the Company or any of the Subsidiaries has at any time; (i) made any contributions to any candidate for political office, or failed to disclose fully any such contributions, in violation of law, (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law, (iii) made any payment outside the ordinary course of business to any investment officer or loan broker or person 10 charged with similar duties of any entity to which the Company or any of the Subsidiaries sells or from which the Company or any of the Subsidiaries buys loans or servicing arrangements for the purpose of influencing such agent, officer, broker or person to buy loans or servicing arrangements from or sell loans to the Company or any of the Subsidiaries, or (iv) engaged in any transactions, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company and the Subsidiaries; (bb) except as otherwise disclosed in the Prospectus, there are no material outstanding loans or advances or material guarantees of indebtedness by the Company or any of the Subsidiaries to or for the benefit of any of the officers or directors of the Company or any of the Subsidiaries or any of the members of the families of any of them; (cc) neither the Company nor any of the Subsidiaries nor, to the Company's knowledge, any agent of the Company or any of the Subsidiaries, has made any payment of funds of the Company or of any Subsidiary or received or retained any funds in violation of any law, rule or regulation or of a character required to be disclosed in the Prospectus; (dd) neither the Company nor any of the Subsidiaries have any employees; (ee) the Company is organized in conformity with the requirements for qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"), and the Company's proposed method of operation will enable it to meet the requirements for taxation as a real estate investment trust under the Code; (ff) the Shares have been approved for listing, upon official notice of issuance, on the New York Stock Exchange; (gg) in connection with this offering, the Company has not offered and will not offer its Common Shares or any other securities convertible into or exchangeable or exercisable for Common Shares in a manner in violation of the Securities Act or the Securities Act Regulations; the Company has not distributed and will not distribute any offering material in connection with the offer and sale of the Shares, other than the Prospectus, Registration Statement and other materials permitted by the Act; (hh) the Company has complied and will comply with all the provisions of Florida Statutes, Section 517.075 (Chapter 92-198, Laws of Florida); neither the Company nor any of the Subsidiaries or their respective affiliates does business with the government of Cuba or with any person or affiliate located in Cuba; (ii) neither the Company nor any of the Subsidiaries is, or solely as a result of transactions contemplated hereby and the application of the proceeds from the sale of the Shares, will become an "investment company" or a company "controlled" by an 11 "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"); and (jj) the Company has not incurred any liability for any finder's fees or similar payments in connection with the transactions herein contemplated. 4. Certain Covenants of the Company: The Company hereby covenants with each Underwriter: (a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states as the Representatives may designate and to maintain such qualifications in effect as long as required for the distribution of the Shares, provided that the Company shall not be required to maintain such qualification for more than 90 days from the date hereof or to qualify as a foreign corporation or to consent to the service of process under the laws of any such state (except service of process with respect to the offering and sale of the Shares); (b) if, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective before the offering of the Shares may commence, the Company will endeavor to cause such post-effective amendment to become effective as soon as possible and will advise the Representatives promptly and, if requested by the Representatives, will confirm such advice in writing, when such post-effective amendment has become effective; (c) to prepare the Prospectus in a form approved by the Underwriters and file such Prospectus with the Commission pursuant to Rule 424(b) within the time period prescribed by law, on the day following the execution and delivery of this Agreement and to furnish promptly (and with respect to the initial delivery of such Prospectus, not later than 10:00 a.m. (New York City time) on the day following the execution and delivery of this Agreement) to the Underwriters as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may reasonably request for the purposes contemplated by the Securities Act Regulations, which Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the version created to be transmitted to the Commission for filing via EDGAR, except to the extent permitted by Regulation S-T; (d) to advise the Representatives promptly and (if requested by the Representatives) to confirm such advice in writing, when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective under the Securities Act Regulations; (e) to advise the Representatives promptly, confirming such advice in writing, of (i) the receipt of any comments from, or any request by, the Commission for 12 amendments or supplements to the Registration Statement or Prospectus or for additional information with respect thereto, or (ii) 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 the Prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes and, if the Commission or any other government agency or authority should issue any such order, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise the Representatives promptly of any proposal to amend or supplement the Registration Statement or Prospectus and to file no such amendment or supplement to which the Representatives shall reasonably object in writing; (f) before amending or supplementing the Registration Statement or the Prospectus, or, during any period of time in which a Prospectus relating to the Shares is required to be delivered under the Securities Act Regulations, to furnish to the Representatives a copy of each such proposed amendment or supplement before filing any such amendment or supplement with the Commission; (g) to furnish to the Representatives and, upon request of the Representatives, to each of the other Underwriters, for a period of five years from the date of this Agreement (i) as soon as available, copies of all annual, quarterly and current reports or other communications supplied to holders of Common Shares, (ii) as soon as practicable after the filing thereof, copies of all reports publicly filed by the Company with the Commission, the NASD, New York Stock Exchange or any securities exchange and (iii) such other publicly available information as the Representatives may reasonably request regarding the Company and its Subsidiaries; (h) to advise the Underwriters promptly during any period of time in which a Prospectus relating to the Shares is required to be delivered under the Securities Act Regulations (i) of any material change in the Company's assets, operations, business or condition (financial or otherwise) or (ii) of the happening of any event which would require the making of any change in the Prospectus then being used so that the Prospectus would not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, during such time, to prepare and furnish, at the Company's expense, to the Underwriters promptly such amendments or supplements to the Prospectus as may be necessary to reflect any such change; provided that the requirements of this paragraph shall not extend beyond 90 days after the date of this Agreement; (i) to furnish promptly to the Representatives a signed copy of the Registration Statement, as initially filed with the Commission, and of all amendments or supplements thereto (including all exhibits filed therewith) and such number of conformed copies of the foregoing as the Underwriters may reasonably request; 13 (j) to furnish to the Representatives, not less than two business days before filing with the Commission subsequent to the effective date of the Prospectus and during the period referred to in paragraph (h) above, a copy of any document proposed to be filed with the Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (k) to apply the net proceeds of the sale of the Shares substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus; (l) to make generally available to its security holders as soon as practicable, but in any event not later than the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement complying with the provisions of Section 11(a) of the Securities Act (in form, at the option of the Company, complying with the provisions of Rule 158 of the Securities Act Regulations) covering a period of 12 months beginning on the effective date of the Registration Statement; (m) to use its best efforts to effect and maintain the listing of the Shares on the New York Stock Exchange and to file with the New York Stock Exchange all documents and notices required by the New York Stock Exchange of companies that have securities that are listed on the New York Stock Exchange; (n) to refrain during a period of 180 days from the date of the Prospectus, without the prior written consent of the Representatives, from (i) offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option for the sale of, or otherwise disposing of or transferring, directly or indirectly, any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares, or filing any registration statement under the Securities Act with respect to any of the foregoing or (ii) entering 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 Shares, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Shares or such other securities, in cash or otherwise; the foregoing sentence shall not apply to (A) the Shares to be sold hereunder, (B) any Common Shares issued by the Company upon the exercise of an option outstanding on the date hereof or upon the exercise of option pursuant to any management option plan described in the prospectus or pursuant to a dividend reinvestment plan adopted hereafter and referred to in the Prospectus; (o) the Company shall not, and shall use its best efforts to cause its officers, directors and affiliates not to, (i) take, directly or indirectly prior to termination of the underwriting syndicate contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which could be reasonably likely to cause or result in, or which could be reasonably likely to in the future reasonably be to cause or result in, the stabilization or manipulation of the price of any security of the 14 Company, to facilitate the sale or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of the Shares other than pursuant to this Agreement or (iii) pay or agree to pay to any person any compensation for soliciting any order to purchase any other securities of the Company; (p) the Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Shares; (q) the Company will use its best efforts to meet the requirements to qualify as a real estate investment trust under the Code; (r) the Company will comply with all of the provisions of any undertakings in the Registration Statement; (s) the Company and the Subsidiaries will conduct their affairs in such a manner so as to ensure that neither the Company nor any Subsidiary will be an "investment company" or an entity subject to regulation as an investment company within the meaning of the 1940 Act; (t) if at any time during the 25-day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in the Representatives' reasonable opinion the market price of the Common Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus) and after written notice from the Representatives advising the Company to the effect set forth above, to forthwith prepare, consult with the Representatives concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to the Representatives, responding to or commenting on such rumor, publication or event; and (u) to maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 5. Payment of Expenses (a) The Company agrees to pay all costs and expenses incident to the performance of the Company's obligations under this Agreement, whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, including, but not limited to, all fees and expenses of and filing with the Commission, the New York Stock Exchange and the 15 NASD; all Blue Sky fees and expenses (in the United States and Canada), including filing fees and reasonable legal fees and disbursements of the Representatives' Blue Sky counsel (for United States and Canadian Blue Sky), fees and disbursements of counsel and accountants for the Company, and printing costs, including costs of printing the prospectus, and any amendments thereto; all underwriting documents, Blue Sky Memoranda, a reasonable quantity of prospectuses requested by the Representatives, and the Company's road show costs and expenses. (b) If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the reasonable fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the transactions contemplated herein. 6. Conditions of the Underwriters' Obligations: The obligations of the Underwriters hereunder are subject to (i) the accuracy of the representations and warranties on the part of the Company in all material respects on the date hereof and at the Closing Time and on each Date of Delivery, (ii) the performance by the Company of its obligations hereunder in all material respects, and (iii) the following further conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective before the offering of the Shares may commence, such post-effective amendment shall have become effective not later than 5:30 p.m., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by the Representatives. (b) The Company shall furnish to the Underwriters at the Closing Time and on each Date of Delivery an opinion of Skadden, Arps, Slate, Meagher & Flom, LLP, counsel for the Company, addressed to the Underwriters and dated the Closing Time and each Date of Delivery and in form and substance satisfactory to the Representatives. In rendering their opinion, Skadden, Arps, Slate, Meagher & Flom LLP may rely as to matters of Maryland law upon the opinion of Miles & Stockbridge, a Professional Corporation ("Miles & Stockbridge"). In addition, Skadden, Arps, Slate, Meagher & Flom, LLP shall state that they have participated in conferences with officers and other representatives of the Company, independent public accountants of the Company and Underwriters at which the contents of the Registration Statement and Prospectus were discussed and, although such counsel is not passing upon and does not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus (except as and to the extent stated in subparagraphs (i) and (xvii) above), nothing has caused them to believe that the Registration Statement, the Preliminary Prospectus or the Prospectus, as of their respective effective or issue dates and as of the date of such counsel's opinion, contained or contains any untrue statement of a material fact or omitted or omits to state a material 16 fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that, in each case, such counsel need express no view with respect to the financial statements and other financial and statistical data included in the Registration Statement, Preliminary Prospectus or Prospectus). (c) The Company shall furnish to the Underwriters at the Closing Time and on each Date of Delivery an opinion of Miles & Stockbridge, special counsel for the Company, addressed to the Underwriters and dated the Closing Time and each Date of Delivery and in form and substance satisfactory to the Representatives, covering matters of Maryland law. (d) The Representatives shall have received from Deloitte & Touche LLP, letters dated, respectively, as of the date of this Agreement, the Closing Time and each Date of Delivery, as the case may be, addressed to the Representatives, as representatives, of the Underwriters and in form and substance satisfactory to the Representatives. (e) The Representatives shall have received from Ernst & Young, a letter dated as of the date of this Agreement, addressed to the Representatives, as representatives, of the Underwriters and in form and substance satisfactory to the Representatives. (f) The Underwriters shall have received at the Closing Time and on each Date of Delivery the favorable opinion of Hunton & Williams, dated the Closing Time or such Date of Delivery, addressed to the Representatives and in form and substance satisfactory to the Representatives. (g) No amendment or supplement to the Registration Statement or Prospectus shall have been filed to which the Underwriters shall have objected in writing. (h) Prior to the Closing Time and each Date of Delivery (i) no stop order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any Preliminary Prospectus or Prospectus has been issued by the Commission, and no suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes, has occurred; and (ii) the Registration Statement and the Prospectus shall not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) Between the time of execution of this Agreement and the Closing Time or the relevant Date of Delivery (i) no material and unfavorable change in the assets, results of operations, business, or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole shall occur or become known (whether or not arising in the ordinary course of business) or that makes it, in the judgment of the Representatives, impracticable to market the Shares on the terms and in the manner contemplated in the 17 Prospectus, or (ii) no transaction which is material and unfavorable to the Company shall have been entered into by the Company or any of the Subsidiaries. (j) At the Closing Time, the Management Agreement and the Other Transaction Documents shall have been entered into and delivered by all required parties. (k) At the Closing Time, the Shares shall have been approved for listing on the New York Stock Exchange. (l) The Representatives shall have received letters (each, a "Lock-up Agreement") from each person listed on Schedule IV hereto, in form and substance satisfactory to the Representatives, confirming that for a period of 180 days after the Closing Time, such persons will not directly or indirectly (i) offer, pledge to secure any obligation due on or within 180 days after the Closing Time, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option for the sale of, or otherwise dispose of or transfer, directly or indirectly, any Common Shares (other than by participating as selling stockholders in a registered offering of Common Shares offered by the Company with the consent of the Representatives) or any securities convertible into or exercisable or exchangeable for Common Shares or (ii) 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 Shares, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Shares or such other securities, in cash or otherwise, without the prior written consent of Friedman, Billings, Ramsey & Co., Inc., which consent may be withheld in its sole discretion. (m) The Company will, at the Closing Time and on each Date of Delivery, deliver to the Underwriters a certificate of two principal executive officers, to the effect that, to each of such officer's knowledge, the representations and warranties of the Company set forth in this Agreement and the conditions set forth in paragraphs (i), (j), (k) and (l) have been met and are true and correct as of such date. (n) The Company shall have furnished to the Underwriters such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement and the Prospectus, the representations, warranties and statement of the Company contained herein and in the Management Agreement, and the performance by the Company of its covenants contained herein and therein, and the fulfillment of any conditions contained herein or therein, as of the Closing Time or any Date of Delivery as the Underwriters may reasonably request. (o) The Manager shall have furnished the Underwriters such documents and certificates as of the Closing Time or any Date of Delivery as the Underwriters may reasonably request, including the letter agreement attached as Schedule V hereto. (p) PNC Bank Corp. ("PNC") shall have furnished the Underwriters such documents and certificates as to the description of PNC contained in the Registration 18 Statement, as of the Closing Time or any Date of Delivery as the Underwriters may reasonably request. (q) All filings with the Commission required by Rule 424 under the Securities Act to have been filed by the Closing Date shall have been made within the applicable time period prescribed for such filing by such Rule. (r) The Company shall perform such of its obligations under this Agreement as are to be performed by the terms hereof and thereof at or before the Closing Time or the relevant Date of Delivery. The several obligations of the Underwriters to purchase Option Shares hereunder are subject to the delivery to the Representatives on the Date if Delivery of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Option Shares and other matters related to the issuance of the Option Shares. 7. Termination: The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of the Representatives, at any time prior to the Closing Time or any Date of Delivery, (i) if any of the conditions specified in Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, or (ii) if there has been since the respective dates as of which information is given in the Registration Statement, any material adverse change, or any development involving a prospective material adverse change, in or affecting the assets, operations, business or condition (financial or otherwise) of the Company, whether or not arising in the ordinary course of business, or (iii) if there has occurred outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic, political or other conditions the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representatives, impracticable to market or deliver the Shares or enforce contracts for the sale of the Shares, or (iv) if trading in any securities of the Company has been suspended by the Commission or by the New York Stock Exchange or if trading generally on the New York Stock Exchange, the American Stock Exchange or in the Nasdaq over-the-counter market has been suspended (including automatic halt in trading pursuant to market-decline triggers other than those in which solely program trading is temporarily halted), or limitations on prices for trading (other than limitations on hours or numbers of days of trading) have been fixed, or maximum ranges for prices for securities have been required, by such exchange or the NASD or by order of the Commission or any other governmental authority, or (v) if there has been any downgrading in the rating of any of the Company's debt securities or preferred stock by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act), or (vi) any federal or state statute, regulation, rule or order of any court or other governmental authority has been enacted, published, decreed or otherwise promulgated which in the reasonable opinion of the Representatives has a material adverse affect or will have a material adverse affect on the 19 assets, operations, business or condition (financial or otherwise) of the Company, (vii) any action has been taken by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the reasonable opinion of the Representatives has a material adverse effect on the securities markets in the United States, and (viii) in the case of any of the events specified in clauses (i) through (vii), such event, singly or together with any other such events, makes it, in the judgment of the Representatives, impracticable to market or deliver the Shares on the terms and in the manner contemplated in the Prospectus. If the Representatives elect to terminate this Agreement as provided in this Section 7, the Company and the Underwriters shall be notified promptly by telephone, promptly confirmed by facsimile. If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Company shall be unable to comply in all material respects with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 5 and 9 hereof) and the Underwriters shall be under no obligation or liability to the Company under this Agreement (except to the extent provided in Section 9 hereof) or to one another hereunder. 8. Increase in Underwriters' Commitments: If any Underwriter shall default at the Closing Time or on a Date of Delivery in its obligation to take up and pay for the Shares to be purchased by it under this Agreement on such date, the Representatives shall have the right, within 36 hours after such default, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Shares which such Underwriter shall have agreed but failed to take up and pay for (the "Defaulted Shares"). Absent the completion of such arrangements within such 36 hour period, (i) if the total number of Defaulted Shares does not exceed 10% of the total number of Shares to be purchased on such date, each non-defaulting Underwriter shall take up and pay for (in addition to the number of Shares which it is otherwise obligated to purchase on such date pursuant to this Agreement) the portion of the total number of Shares agreed to be purchased by the defaulting Underwriter on such date in the proportion that its underwriting obligations hereunder bears to the underwriting obligations of all non-defaulting Underwriters; and (ii) if the total number of Defaulted Shares exceeds 10% of such total, the Representatives may terminate this Agreement by notice to the Company, without liability to any non-defaulting Underwriter. Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that it will not sell any Shares hereunder on such date unless all of the Shares to be purchased on such date are purchased on such date by the Underwriters (or by substituted Underwriters selected by the Representatives with the approval of the Company or selected by the Company with the approval of the Representatives). If a new Underwriter or Underwriters are substituted for a defaulting Underwriter in accordance with the foregoing provision, the Company or the non-defaulting Underwriters shall have the right to postpone the Closing Time or the relevant Date of Delivery for a period not 20 exceeding five business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected. The term Underwriter as used in this Agreement shall refer to and include any Underwriter substituted under this Section 8 with the like effect as if such substituted Underwriter had originally been named in this Agreement. 9. Indemnity and Contribution by the Company and the Underwriters: (a)The Company agrees to indemnify, defend and hold harmless each Underwriter and any person who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, expense, liability, damage or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or controlling person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability, damage or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except insofar as any such loss, expense, liability, damage or claim arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in and in conformity with information furnished in writing by the Underwriters through the Representatives to the Company expressly for use in such Registration Statement or such Prospectus, provided, however, that the indemnity agreement contained in this subsection (a) with respect to the Preliminary Prospectus or the Prospectus shall not inure to the benefit of an Underwriter (or to the benefit of any person controlling such Underwriter) with respect to any person asserting any such loss, expense, liability, damage or claim which is the subject thereof if the Prospectus or any supplement thereto prepared with the consent of the Representatives and furnished to the Underwriters prior to the Closing Time corrected any such alleged untrue statement or omission and if such Underwriter failed to send or give a copy of the Prospectus or supplement thereto to such person at or prior to the written confirmation of the sale of Shares to such person, unless such failure resulted from noncompliance by the Company with Section 4(a) of this Agreement. If any action is brought against an Underwriter or controlling person in respect of which indemnity may be sought against the Company pursuant to the preceding paragraph, such Underwriter shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment of counsel and payment of expenses, provided, however, that any failure or delay to so notify the Company will not relieve the Company of any obligation hereunder, except to the extent that its ability to defend is actually impaired by such failure or delay. Such Underwriter or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses 21 of such counsel shall be at the expense of such Underwriter or such controlling person unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have employed counsel to have charge of the defense of such action within a reasonable time or such indemnified party or parties shall have reasonably concluded (based on the advice of counsel) that there may be defenses available to it or them which are different from or additional to those available to the Company and which counsel to the Underwriter believes may present a conflict for counsel representing the Company and the Underwriter (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the Company and paid as incurred (it being understood, however, that the Company shall not be liable for the expenses of more than one separate firm of attorneys for the Underwriters or controlling persons in any one action or series of related actions in the same jurisdiction representing the indemnified parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. (b)Each Underwriter agrees, severally and not jointly, to indemnify, defend and hold harmless the Company, the Subsidiaries, their trustees and directors, the officers that signed the Registration Statement and any person who controls the Company or any Subsidiary within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any loss, expense, liability, damage or claim (including the reasonable cost of investigation) which, jointly or severally, the Company or any such person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability, damage or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by such Underwriter through the Representatives to the Company expressly for use in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated either in the Registration Statement or Prospectus or necessary to make such information, in the light of the circumstances under which made, not misleading. The statements set forth in the last paragraph on the cover page and in paragraphs 3, 6, 9, 10 and 11 under the caption "Underwriting", the information regarding "Stabilizing" in the Preliminary Prospectus and the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by or on behalf of any Underwriter through the Representatives to the Company for purposes of Section 3(o) and this Section 9. If any action is brought against the Company or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Company or such person shall promptly notify the Representatives in writing of the institution of such action and the Representatives, on behalf of the Underwriters, shall assume the defense of such action, including the employment of counsel and payment of expenses. The Company or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company or such person unless the 22 employment of such counsel shall have been authorized in writing by the Representatives in connection with the defense of such action or the Representatives shall not have employed counsel to have charge of the defense of such action within a reasonable time or such indemnified party or parties shall have reasonably concluded (based on the advice of counsel) that there may be defenses available to it or them which are different from or additional to those available to the Underwriters (in which case the Representatives shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that the Underwriters shall not be liable for the expenses of more than one separate firm of attorneys in any one action or series of related actions in the same jurisdiction representing the indemnified parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, no Underwriter shall be liable for any settlement of any such claim or action effected without the written consent of the Representatives. (c)If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 in respect of any losses, expenses, liabilities, damages or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, expenses, liabilities, damages or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if (but only if) the allocation provided by clause (i) above 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 on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, expenses, liabilities, damages or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company bear to the underwriting discounts and commissions received by the Underwriters. The relative fault of the Company on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any claim or action. (d)The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the 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 in subsection (c)(i) and, if applicable (ii), above. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the total price at which the securities underwritten 23 by such Underwriter exceeds the amount of damages that it has been required to pay be reason of 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 Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. 10. Survival: The indemnity and contribution agreements contained in Section 9 and the covenants, warranties and representations of the Company and the Subsidiaries contained in Sections 3, 4 and 5 of this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, or any person who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the Company, the Subsidiaries, their directors and officers or any person who controls the Company or any Subsidiary within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the sale and delivery of the Shares. The Company and each Underwriter agree promptly to notify the others of the commencement of any litigation or proceeding against it and, in the case of the Company, against any of the Company's officers and directors, in connection with the sale and delivery of the Shares, or in connection with the Registration Statement or Prospectus. 11. Notices: Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram and, if to the Underwriters, shall be sufficient in all respects if delivered to Friedman, Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia 22209, Attention: Syndicate Department; if to the Company, shall be sufficient in all respects if delivered to the Company at the offices of the Company at 345 Park Avenue, 29th Floor, New York, New York 10154. 12. Governing Law; Consent to Jurisdiction; Headings: THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES; provided that Sections 5-1401 and 5-1402 of the New York General Obligations Law shall apply to this Agreement. The parties hereto agree to be subject to, and hereby irrevocably submit to, the nonexclusive jurisdiction of any United States federal or New York state court sitting in New York, New York, in respect of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated herein, and irrevocably agree that all claims in respect of any such suit, action or proceeding may be heard and determined in any such court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by applicable law, any objection to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding has been brought in an inconvenient forum. The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 13. Parties in Interest: The Agreement herein set forth has been and is made solely for the benefit of the Underwriters, the Company and the controlling persons, directors and 24 officers referred to in Sections 9 and 10 hereof, and their respective successors, assigns, executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement. 14. Counterparts: This Agreement may be signed by the parties in counterparts which together shall constitute one and the same agreement among the parties. If the foregoing correctly sets forth the understanding among the Company and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this Agreement shall constitute a binding agreement among the Company and the Underwriters. Very truly yours, ANTHRACITE CAPITAL, INC. _______________________________ By: Its: 25 Accepted and agreed to as of the date first above written: FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LEHMAN BROTHERS INC. PRUDENTIAL SERVICES INCORPORATED For themselves and as Representatives of the other Underwriters named on Schedule I hereto. By: Friedman, Billings, Ramsey & Co., Inc. _____________________________________ James R. Kleeblatt Managing Director 26 Schedule I
Underwriter Number of Initial Shares to be Purchased Friedman, Billings, Ramsey & Co., Inc. _________ Lehman Brothers Inc. _________ Prudential Securities Incorporated _________ Total 20,000,000
Schedule II Subsidiaries of the Company Anthracite Securitization Corp. Schedule III Other Transaction Documents Lock-up Agreements Stock Option Plan Rights of First Offer Agreement between the Company and PNC Bank National Association Purchase Agreement between the Company and Lehman Brothers Inc. relating to the Initial Investment Share Purchase Agreements between the Company and PNC Bank Corp., and between the Company and FBR Asset Investment Corp. Registration Rights Agreements between the Company and PNC Bank Corp., and between the Company and FBR Asset Investment Corp. Schedule IV Persons From Whom the Underwriters Have Received Lock-Up Agreements PNC Bank Corp. BlackRock Financial Management, Inc. FBR Asset Investment Corporation Laurence D. Fink Hugh R. Frater Donald G. Drapkin Carl Guether Jeffrey C. Keil Kendrick R. Wilson, III Richard M. Shea Edwin O. Bergman Chris A. Milner Andrew Siwulec Mark Warner Susan Wagner Schedule V [Letter Agreement between Manager and Underwriters] EX-3.2 3 BYLAWS OF REGISTRANT EXHIBIT 3.2 ADOPTED March [ ], 1998 ANTHRACITE CAPITAL, INC. BYLAWS ARTICLE I OFFICES Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office of the Corporation shall be located at such 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. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. PLACE. All meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place within the United States as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETING. The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, at such other time on such other day as shall be set by the Board of Directors. Except as otherwise provided by the Corporation's Articles of Incorporation or statute, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. Section 3. SPECIAL MEETINGS. The president, chief executive officer, Board of Directors or a majority of the Unaffiliated Directors may call special meetings of the stockholders. Special meetings of stockholders shall also be called by the secretary of the Corporation upon the written request of the holders of shares entitled to cast not less than a majority 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 by such stockholders of such costs, the secretary shall give notice to each stockholder entitled to notice of the meeting. Section 4. NOTICE. Not less than ten nor more than 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 any 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. Section 5. SCOPE OF NOTICE. Any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. Section 6. ORGANIZATION. At every meeting of stockholders, the chairman of the board of directors, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the chairman of the board of directors, one of the following officers present shall conduct the meeting in the order stated: the chief executive officer, 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 which 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 7. QUORUM. Unless the Corporation's Articles of Incorporation provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting shall constitute a quorum. Whether or not a quorum is present, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice by a majority vote of the stockholders present in person or by proxy to a date not more than 120 days after the original record date. Any business which might have been transacted at the meeting as originally notified may be deferred and transacted at any such adjourned meeting at which a quorum shall be present. Section 8. VOTING; PROXIES. Unless the Corporation's Articles of Incorporation provides otherwise, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders and majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director. In all elections for directors, each share of stock may be 2 voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person to act as proxy. Signing may be accomplished by the stockholder or the stockholder's authorized agent signing the writing or causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, a telegram, cablegram, datagram, or other means of electronic transmission to the person authorized to act as proxy or to a proxy solicitation firm, proxy support service organization, or other person authorized by the person who will act as proxy to receive the transmission. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states that it is irrevocable and the proxy is coupled with an interest. A proxy may be made irrevocable for so long as it is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the proxy or another general interest in the Corporation or its assets or liabilities. Section 9. VOTING OF STOCK BY CERTAIN HOLDERS. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock 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 stock transfer books, the time after the record date or closing of the stock 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 stock in place of the stockholder who makes the certification. Section 10. INSPECTORS. At any meeting of stockholders, the chairman of the meeting may 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. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS. (a) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be 3 made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 11(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 11(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees 4 for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 11(b) and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 11(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a)(2) of this Section 11 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. (c) GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 11 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 11. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 11 and, if any proposed nomination or business is not in compliance with this Section 11, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 11, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and 5 regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 12. 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. ARTICLE III DIRECTORS Section 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors, which may exercise all of the powers of the Corporation, except such as are by law or by the Corporation's Articles of Incorporation or by these Bylaws conferred upon or reserved to the stockholders. Section 2. UNAFFILIATED MAJORITY. A majority of the members of the Board of Directors, or any committee of the Board of Directors, shall at all times after the first annual meeting of stockholders be Unaffiliated Directors. Section 3. TENURE AND QUALIFICATIONS. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, at each annual meeting the stockholders shall elect directors to hold office until the next annual meeting and until their successors are elected and qualified. 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 never be less than three, but never less than the minimum number required by the General Laws of the State of Maryland, nor more than nine, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. The directors shall be divided into three classes as follows: (1) the term of office of Class I shall be until the 1998 annual meeting of stockholders and until their successors shall be elected and have qualified and thereafter shall be for three years and until their successors shall be elected and have qualified; (2) the term of office of Class II shall be until the 1999 annual meeting of stockholders and until their successors shall be elected and have qualified and thereafter shall be for three years and until their successors shall be elected and have qualified; and (3) the term of office of Class III shall be until the 2000 annual meeting of stockholders and until their successors shall be elected and have qualified and thereafter shall be for three years and until their successors shall be elected and have qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the 6 number of directors in each class as nearly equal as possible. A director elected by stockholders shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Section 4. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held not less frequently than once per calendar quarter, with one such regular meeting of the Board of Directors being 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 Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution. Section 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board of directors, president or by a majority of the 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 Maryland, as the place for holding any special meeting of the Board of Directors called by them. Section 6. CHAIRMAN OF THE BOARD OF DIRECTORS. The chairman of the board of directors shall preside, if present, at all meetings of the Board of Directors (if the chairman of the board of directors is not present at a meeting, then the chief executive officer of the Corporation shall preside at such meeting). The chairman of the board of directors shall see that all orders and resolutions of the Board of Directors are carried into effect and shall from time to time report to the Board of Directors all matters within his or her knowledge which the interests of the Corporation may require to be brought to their notice. The chairman of the board of directors shall also perform such other duties and he or she may exercise such other powers as from time to time may be delegated to him or her by the Board of Directors. Section 7. NOTICE. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, facsimile transmission, United States mail or courier to each director at his business or residence address. Notice by personal delivery, by telephone or a facsimile transmission 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 and shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be deemed to be given when the director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. 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 specifically required by statute or these Bylaws. Section 8. QUORUM. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present by 7 majority vote and without notice other than by announcement may adjourn the meeting from time to time until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 9. VOTING. Unless applicable law, the Corporation's Articles of Incorporation or these Bylaws requires a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is the action of the Board of Directors. Section 10. TELEPHONE MEETINGS. 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 11. ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if an unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board of Directors. Section 12. VACANCIES. If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, the stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A director elected by the stockholders to fill a vacancy which results from the removal of a director serves for the balance of the term of the removed director. Subject to the rights of the holders of any class of stock separately entitled to elect one or more directors, a majority of the remaining directors, whether or not sufficient to constitute quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors; provided, however, that Unaffiliated Directors shall nominate replacements for vacancies among the Unaffiliated Directors, which must be elected by a majority of the directors, including a majority of the Unaffiliated Directors. A majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his or her successor is elected and qualifies. No decrease in the number of directors constituting the Board of Directors shall affect the tenure of office of any director. Section 13. COMPENSATION. The Corporation will pay an annual director's fee to each Unaffiliated Director equal to $20,000, with no additional fee to be paid for the first four meetings of the Board of Directors. Each Unaffiliated Director will be paid a fee of $1,000 for each additional meeting of the Board of Directors attended in person by such Unaffiliated Director. Affiliated Directors shall not receive any stated salary for their services as directors. 8 All Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Section 14. COMMITTEES. The Board of Directors may from time to time, by resolution adopted by a majority of the Board, designate one or more committees of the Board, each such committee to consist of three or more directors, the majority of which shall be Unaffiliated Directors, and to have such powers and duties as the Board of Directors may, by resolution, prescribe. One-third, but not less than two, of the members of any committee shall be present in person at any meeting of such committee and a majority of the members present shall be Unaffiliated Directors in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present at such meeting shall be the act of such committee. The Board may designate a chairman of any committee and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member, provided a majority of the present directors are Unaffiliated Directors. The Board shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority or power of the Board in the management of the business or affairs of the corporation. Section 15. LOSS OF DEPOSITS. No director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited. Section 16. SURETY BONDS. Unless required by law, no director shall be obligated to give any bond or surety or other security for the performance of any of his duties. Section 17. RELIANCE. Each director, officer, employee and agent of the Corporation shall, in the performance of his duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director. Section 18. INVESTMENT POLICIES AND RESTRICTIONS. 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 Unaffiliated Directors; provided, however, that the investment policies of the Corporation and the limitations thereon shall be at all times in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as it be amended from time to time. The Unaffiliated Directors shall review the investment policies of the Corporation at least quarterly 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. Section 19. MANAGEMENT AGREEMENTS. The Board of Directors may engage a Manager to advise the Board of Directors and be responsible for directing the day-to-day business affairs of the Corporation under the supervision of the Board of Directors pursuant to a written agreement or agreements. The approval of any such management agreement and the renewal or termination thereof shall require the affirmative vote of a majority of the Unaffiliated Directors. The Board of Directors shall evaluate the performance of the Manager before entering into or renewing any management agreement. The minutes of the meetings with respect to such evaluation shall reflect the criteria used by the Board of Directors in making such evaluation. Upon any termination of the management agreement described in the initial registration 9 statement of this Corporation's initial public offering of securities, the Board of 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. Each extension of the contract for the services of a Manager entered into by the Board of Directors shall have a term of no more than two years. In determining whether to enter into or renew any management agreement, the Unaffiliated Directors shall consider the following factors and all other factors that they may deem relevant and their findings on each of such factors shall be recorded in the minutes of the Board of Directors: (a) The size of management fee in relation to the size and profitability of the investment portfolio of the Corporation; (b) The success of the Manager in generating opportunities that meet the investment objectives of the Corporation; (c) The quality and extent of service and advice furnished by the Manager to the Corporation; (d) The rates charged to other corporations similar to the Corporation and to other investors by advisers performing similar services; and (e) Additional revenues realized by the Manager and its Affiliates through their relationship with the Corporation, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the Corporation or by others with whom the Corporation does business. Section 20. RELATED PARTY TRANSACTIONS. A majority of the Unaffiliated Directors shall approve general guidelines ("Guidelines") for the Corporation's investments, borrowings and operations, and the Unaffiliated Directors shall conduct a quarterly review of all transactions engaged in by the Corporation, including transactions with the Manager or any Affiliate of the Manager, to insure compliance with the Guidelines. Except as provided in the Guidelines, the Unaffiliated Directors shall not be required to approve transactions between the Corporation and the Manager or any Affiliate of the Manager. Section 21. MANAGEMENT BY DIRECTORS. Should the Board of Directors elect to delegate the duty of management of the Corporation's assets and administration of the Corporation's day-to-day operations to a Manager the directors of the Corporation will not be required to devote their full time to the affairs of the Corporation; provided that the directors devote so much of their time to the Corporation's affairs as is necessary or required for the effective conduct and operation of the Corporation's business. 10 ARTICLE IV OFFICERS Section 1. GENERAL PROVISIONS. The officers of the Corporation shall include a president and a secretary and may include a chairman of the board, a vice chairman of the board, a chief executive officer, one or more senior vice presidents or vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. 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, except that the chief executive officer or president may appoint one or more vice presidents, assistant secretaries and assistant treasurers. 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 except president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of president, treasurer 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. Section 2. 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 any time subsequent to 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. Such resignation shall be without prejudice to the contract rights, if any, of the officer, agent or Corporation. Section 3. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, may be filled by the Board of Directors or by the officer to which the power to fill such office has been delegated for the balance of the term. Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a chief executive officer. In the absence of such designation, the president shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. If the chairman of the board of directors is not present at a meeting of the Board of Directors then the 11 chief executive officer of the Corporation shall act as the chairman of the board of directors at such meeting and shall preside over such meeting. Section 5. CHIEF OPERATING OFFICER. The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 7. PRESIDENT. The president or chief executive officer, as the case may be, subject to the control of the directors, shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He may execute any deed, mortgage, bond, contract or other instrument, 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. Section 8. VICE PRESIDENTS. In the absence of the president, in the event of a vacancy in such office or in event of his death, inability or refusal to act, 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 appointment or election or, in the absence of any designation, then in the order of their appointment or 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 vice president or as vice president for particular areas of responsibility. Section 9. 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 chief executive officer, the president or by the Board of Directors. Section 10. TREASURER. The treasurer shall have the custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and 12 disbursements in books belonging to the Corporation 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. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation. The treasurer 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 it may so require, an account of all his transactions as treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the treasurer 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, of all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 11. 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 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 12. SALARIES. The salaries and other compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director. ARTICLE V CONTRACTS, LOANS, CHECKS AND DEPOSITS 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. Any agreement, deed, mortgage, lease or other document executed by one or more of the directors or by an authorized person shall be valid and binding upon the Board of Directors and upon the Corporation when authorized or ratified by action of the Board of Directors. 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 13 Corporation shall be signed by such officer or agent of the Corporation 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. ARTICLE VI STOCK Section 1. CERTIFICATES. Each stockholder is entitled to certificates which represent and certify the shares of stock he or she holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall also include on its face or back (a) a statement of any restrictions on transferability and (b) a statement which provides in substance that the Corporation will furnish to any stockholder on request and without charge a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue, of the difference in the relative rights and preferences between the shares of each series of a preferred or special class in series which the Corporation is authorized to issue, to the extent they have been set, and of the authority of the Board of Directors to set the relative rights and preferences of subsequent series of a preferred or special class of stock and any restrictions on transferability. Such request may be made to the secretary or to its transfer agent. It shall be in such form, not inconsistent with law or with the Corporation's Articles of Incorporation, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the chairman of the board, the president, or a senior vice-president, and countersigned by the secretary, an assistant secretary, the treasurer, or an assistant treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. A certificate may not be issued until the stock represented by it is fully paid. Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other 14 claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the Corporation's Articles of Incorporation and all of the terms and conditions contained therein. Section 3. REPLACEMENT CERTIFICATE. Any officer designated by 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 certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Directors may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he 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 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted. 15 When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein. Section 5. STOCK LEDGER. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, 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. Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the Corporation's Articles of Incorporation or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit. Section 7. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. To the fullest extent permitted by Maryland law, the capital stock of the Corporation shall be exempt from the provisions of Sections 3-701 to 3-709 of the Corporations and Associations Article of the Annotated Code of Maryland (as the same may be amended) and any successor statutes. ARTICLE VII ACCOUNTING YEAR The fiscal year of the Corporation shall end on December 31st of each year. The Board of Directors shall have the power from time to time to change the fiscal year provided that such change does not cause the Corporation to fail to qualify as a REIT. ARTICLE VIII DISTRIBUTIONS Section 1. AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation may be authorized and declared by the Board of Directors and may be paid in 16 cash, property or stock of the Corporation, subject to the provisions of law, the Corporation's Articles of Incorporation and the provisions of any marketing obligations or guarantees thereof, incurred by the Corporation, to insure that the Corporation satisfies the requirements for qualification as a REIT. Section 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions 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 or other distributions, for repairing or maintaining any property of the Corporation 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 IX INVESTMENT POLICY Subject to the provisions of the Corporation's Articles of Incorporation, the Board of Directors, including a majority of the Unaffiliated Directors, may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion; provided, however, that an affirmative vote of a super majority of the Unaffiliated Directors and of the Board of Directors, and an affirmative vote of at least two-thirds of the outstanding shares entitled to vote thereon will be required to change the Company's status as a REIT. ARTICLE X SEAL Section 1. SEAL. The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words "Incorporated in Maryland." The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. 17 ARTICLE XI INDEMNIFICATION AND ADVANCE OF EXPENSES The Corporation shall indemnify and hold harmless and, without requiring a determination of the ultimate entitlement to indemnification, pay reasonable expenses in advance of the final disposition of any proceeding to (A) its present and former directors and officers, whether serving the Corporation or at its request any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law and (B) other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation's Articles of Incorporation and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. Any indemnification, or payment of expenses in advance of the final disposition of any proceeding, shall be made promptly, and in any event within 60 days, upon the written request of the director or officer entitled to seek indemnification (the "Indemnified Party"). The right to indemnification and advances hereunder shall be enforceable by the Indemnified Party in any court of competent jurisdiction, if (i) the Corporation denies such request, in whole or in part, or (ii) no disposition thereof is made within 60 days. The Indemnified Party's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be reimbursed by the Corporation. It shall be a defense to any action for advance for expenses that (a) a determination has been made that the facts then known to those making the determination would preclude indemnification or (b) the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the Indemnified Party of such Indemnified Party's good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. The indemnification and advance of expenses provided by the Corporation's Articles of Incorporation and these By-Laws shall not be deemed exclusive of any other rights to which a person seeking indemnification or advance of expenses may be entitled under any law (common or statutory), or any agreement, vote of stockholders or unaffiliated directors or other provision that is consistent with law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, shall continue in respect of all events occurring while a person was a director or 18 officer after such person has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. The Corporation shall not be liable for any payment under this Bylaw in connection with a claim made by a director or officer to the extent such director or officer has otherwise actually received payment under insurance policy, agreement, vote or otherwise, of the amounts otherwise indemnifiable hereunder. All rights to indemnification and advance of expenses under the Corporation's Articles of Incorporation and hereunder shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this Bylaw is in effect. Nothing herein shall prevent the amendment of this Bylaw, provided that no such amendment shall diminish the rights of any person hereunder with respect to events occurring or claims made before its adoption or as to claims made after its adoption in respect of events occurring before its adoption. Any repeal or modification of this Bylaw shall not in any way diminish any rights to indemnification or advance of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Bylaw or any provision hereof is in force. Neither the amendment nor repeal of this Article XI, nor the adoption or amendment of any other provision of these Bylaws or the Corporation's Articles of Incorporation inconsistent with this Article XI, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. 19 ARTICLE XII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the Corporation's Articles of Incorporation or these Bylaws 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. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XIII AMENDMENT OF BYLAWS In accordance with the Corporation's Articles of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the stockholders of the Corporation only by vote of not less than two-thirds of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting); provided, however, that without the approval of stockholders of the Corporation, the Board of Directors may amend these Bylaws to make any change necessary or, in the opinion of the Board of Directors, advisable to comply with changes in the Code imposing additional or different transfer restrictions on stockholders of any entity seeking to qualify as a REIT. In addition, except as otherwise provided in the Corporation's Articles of Incorporation and in these Bylaws, the Board of Directors may repeal, alter, amend or rescind these Bylaws by vote of a majority of the Board of Directors at a meeting held in accordance with the provisions of these Bylaws; provided, however, that Sections 19 and 20 of Article III hereof may be repealed, altered, amended or rescinded only by a majority of the Unaffiliated Directors. 20 EX-5.1 4 CONSENT OF MILES & STOCKBRIDGE P.C. [MILES & STOCKBRIDGE LETTERHEAD] EXHIBIT 5.1 March 17, 1998 Anthracite Capital, Inc. 345 Park Avenue, 29th Floor New York, New York 10154 Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933 (the "Act") of 23,000,000 shares of the Common Stock, par value $.001 per share (the "Common Stock") of Anthracite Capital, Inc., a Maryland corporation (the "Company"), on its Registration Statement on Form S-11 (Registration No. 333-40813) filed with the Securities and Exchange Commission on the date hereof (the "Registration Statement"), we have examined such corporate records, certificates and documents as we deemed necessary for the purpose of this opinion. Based on that examination, we advise you that in our opinion the Common Stock to be offered by the Company has been duly authorized and, when sold under the circumstances contemplated in the Registration Statement, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder. The opinion expressed herein is limited to the matters set forth in this letter and no other opinion should be inferred beyond the matters expressly stated. Very truly yours, MILES & STOCKBRIDGE P.C. By:___________________________________ Principal EX-8.1 5 OPINION OF SKADDEN ARPS Exhibit 8.1 SASM&F LLP TAX OPINION 3/18/98 March 18, 1998 ANTHRACITE CAPITAL, INC. 345 Park Avenue, 29th Floor New York, New York 10154 Re: Certain Federal Income Tax Consequences --------------------------------------- Ladies and Gentlemen: You have requested our opinion concerning certain U.S. federal income tax consequences in connection with the underwritten public offering (the "Offering") of Common Stock , par value $.01 per share of Anthracite Capital, Inc., a Maryland corporation (the "Company"), pursuant to the Registration Statement on Form S-11 (File no. 333-40813) (the "Registration Statement") filed with the Securities and Exchange Commission on March 18, 1998. Unless otherwise specifically defined herein, all capitalized terms have the meanings assigned to them in the Registration Statement. In connection with the Offering we have acted as counsel to the Company, and we have assisted in the preparation of the Registration Statement and certain other documents. In formulating our opinion, we have reviewed the Registration Statement, the Articles of Incorporation and the Bylaws (including any amendments thereto) of the Company, and such other documents and information provided by you as is relevant to the Offering. In addition, you have provided us with certain representations of officers of the Company relating to, among other things, the proposed operation of the Company. For purposes of our opinion, we have not made an independent investigation of the facts set forth in such representations, the Registration Statement or any other documents. We have, consequently, relied on your representations that the information presented in such documents or otherwise furnished to us accurately and completely describes all material facts relevant to our opinion. No facts have come to our attention, however, that would cause us to question the accuracy and completeness of such information, facts or documents in a material way. In addition, to the extent that any of the representations provided to us by officers of the Company relates to matters set forth in the Internal Revenue Code of 1986, as amended (the "Code"), or the regulations promulgated thereunder by the U.S. Treasury Department (the "Regulations"), we have reviewed with such officers the relevant portions of the Code and the applicable Regulations. We have also relied upon the opinion of Miles & Stockbridge dated March 18, 1998 filed as Exhibit 5.1 to the Registration Statement with respect to certain matters of Maryland law. In rendering our opinion, we have assumed that the transactions contemplated by the foregoing documents have been or will be consummated in accordance with their terms, and that such documents accurately reflect the material facts of such transactions. In rendering our opinion, we have also considered and relied upon the Code, the Regulations, pertinent judicial authorities, rulings of the U.S. Internal Revenue Service and such other authorities as we have considered relevant. It should be noted that such laws, Code, Regulations, judicial decisions, administrative interpretations and other authorities are subject to change at any time and, in some circumstances, with retroactive effect. A change in any of the authorities upon which our opinion is based could affect our conclusions herein. Based on the foregoing, we are of the opinion that, provided the Company makes all elections and conforms with the procedural steps required for qualification and taxation as a real estate investment trust ("REIT"), beginning with its taxable year ending December 31, 1998, the Company will be organized in conformity with the requirements for qualification as a REIT under the Code, and the Company's proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT under the Code. We are also of the opinion that the descriptions of the law contained in the Registration Statement under the caption "Federal Income Tax Consequences" are correct in all material respects, and the discussion thereunder fairly summarizes the material federal income tax consequences to a holder of an investment in the Common Stock. As noted in the Registration Statement, the Company's qualification and taxation as a REIT depends upon its ability to meet, through actual annual operating results, certain requirements, including requirements relating to distribution levels and diversity of stock ownership, and the various qualification tests imposed under the Code, the results of which will not be reviewed by us. Accordingly, no assurance can be given that the actual 2 results of the Company's operation for any one taxable year will enable the Company to satisfy the requirements for qualification and taxation as a REIT under the Code. Other than as expressly stated above, we express no other opinion. This opinion is intended for the exclusive use of the person to whom it is addressed and investors purchasing Common Stock in the Offering and it may not be used, circulated, quoted or relied upon for any other purpose without our prior written consent; provided, however, that we consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to Skadden, Arps, Slate, Meagher & Flom LLP in the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules or regulations of the Securities and Exchange Commission thereunder. This opinion is expressed as of the date hereof, and we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented, or assumed herein or any subsequent changes in applicable law. Very truly yours, /s/ SKADDEN, ARPS, SLATE MEAGHER & FLOM LLP ------------------------------------------- SKADDEN, ARPS, SLATE MEAGHER & FLOM LLP 3 EX-10.1 6 FORM OF INVESTMENT ADVISORY AGREEMENT EXHIBIT 10.1 FORM OF INVESTMENT ADVISORY AGREEMENT AGREEMENT, dated March , 1998, between Anthracite Capital, Inc. (the "Company"), a Maryland corporation, and BlackRock Financial Management, Inc. (the "Manager"), a Delaware corporation. WHEREAS, the Company intends to invest in a diversified portfolio of multifamily, commercial and residential mortgage loans, mortgage backed securities and other real estate related assets in U.S. and non-U.S. markets ("REIT Investments") and expects to qualify for the tax benefits accorded by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Company desires to retain the Manager to acquire, sell and otherwise manage the investments of the Company and to perform certain supervisory services for the Company in the manner and on the terms set forth herein; NOW THEREFORE, in consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is agreed by and between the parties hereto as follows: 1. DEFINITIONS Capitalized terms used but not defined herein shall have the respective meanings assigned them in the Prospectus of the Company dated March , 1998. In addition, the following terms have the meanings assigned them. (a)"Affiliate" means, when used with reference to a specified person, (i) any person that directly or indirectly controls or is controlled by or is under common control with the specified person, (ii) any person that is an officer of, partner in or trustee of, or serves in a similar capacity with respect to, the specified person or of which the specified person is an officer, partner or trustee, or with respect to which the specified person serves in a similar capacity, and (iii) any person that, directly or indirectly, is the beneficial owner of 5% or more of any class of equity securities of the specified person or of which the specified person is directly or indirectly the owner of 5% or more of any class of equity securities; provided, however, that neither the Company nor any of its [controlled Affiliates] will be treated as an Affiliate of the Manager or any of its Affiliates. (b)"Agreement" means this Investment Advisory Agreement, as amended from time to time. (c)"Average Invested Assets" for any period means the average of the aggregate book value of the assets of the Company, including the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar noncash reserves, computed by taking the daily average of such values during such period, and shall be determined as follows: (i) Average Invested Assets with a rating of less than BB- or not rated means, for any quarter, the Average Invested Assets in such quarter that have received a credit rating of less than BB- from Standard & Poor's Corporation ("S&P") or less than Ba3 from Moody's Investors Service, Inc. ("Moody's") or have received an equivalent rating from a nationally recognized securities rating organization ("NRSRO") or that have not been rated by either Moody's, S&P or an NRSRO and are not guaranteed by the U.S. government or any agency or instrumentality thereof, (ii) Average Invested Assets with a rating of BB- to BB+ shall mean the Average Invested Assets that have received a credit rating of BB- to BB+ from S&P or Ba3 to Ba1 from Moody's or have received an equivalent rating from an NRSRO and that are not covered by clause (i) above, and (iii) Average Invested Assets with a credit rating above BB+ shall mean the Average Invested Assets that have received a credit rating above BB+ from S&P or above Ba1 from Moody's or have received an equivalent rating from an NRSRO and that are not covered by clause (i) or (ii) above or that are not rated but are guaranteed by the U.S. government or any agency or instrumentality thereof. (d)"Board of Directors" means the Board of Directors of the Company. (e)"Closing Date" means the date of closing of the Company's initial public offering of Common Stock. 2 (f)"Code" means the Internal Revenue Code of 1986, as amended. (g)"Funds From Operations" means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. (h)"Mortgage Backed Securities" means debt obligations (bonds) that are secured by Mortgage Loans or mortgage certificates. (i)"Mortgage Loans" means multifamily, residential and commercial term loans secured by real property. (j)"REIT Provisions of the Code" means Sections 856 through 860 of the Code. (k)"Ten-Year 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 constant maturities 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. (l)"Unaffiliated Directors" shall mean those directors who (a) do not own greater than a de minimis interest in the Manager or any of its Affiliates, and (b) within the last two years, have not (i) directly or indirectly been employed by the Manager or any of its Affiliates, (ii) been 3 an officer or director of the Manager or any of its Affiliates, (iii) performed services for the Manager or any of its Affiliates, or (iv) had any material business or professional relationship with the Manager or any of its Affiliates. 2. IN GENERAL The Manager agrees, as more fully set forth herein, to act as investment adviser to the Company with respect to the investment of the Company's assets and to supervise and arrange the purchase of securities and loans for and the sale of securities and loans held in the investment portfolio of the Company. The Manager shall 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 shall prepare regular reports for the Company's Board of Directors that will review the Company's acquisitions of assets, portfolio composition and characteristics, credit quality, performance and compliance with the policies approved by the Company's Board of Directors. The Manager shall allocate investment and disposition opportunities in accordance with policies and procedures the Manager considers fair and equitable, including, without limitation, such considerations as investment objectives, restrictions and time horizons, availability of cash and the amount of existing holdings. 3. DUTIES AND OBLIGATIONS OF THE MANAGER WITH RESPECT TO INVESTMENT OF ASSETS OF THE COMPANY (a) Subject to the succeeding provisions of this section and subject to the direction and control of the Company's Board of Directors, the Manager will be responsible for the day-to-day operations of the Company and will perform (or cause to be performed) such services and activities relating to the assets and operations of the Company as may be appropriate, including: (i) providing a complete program of investing and reinvesting the capital and assets of the Company in pursuit of its investment objectives and in accordance with policies 4 adopted by the Company's Board of Directors from time to time; (ii) 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; (iii) assisting the Company in developing criteria for mortgage asset purchase commitments that are specifically tailored to the Company's investment objectives and making available to the Company its knowledge and experience with respect to mortgage assets and other real estate related assets; (iv) counseling the Company in connection with policy decisions made by the Board of Directors; (v) evaluating and recommending hedging strategies to the Company's Board of Directors in accordance with hedging guidelines and policies adopted by the Board of Directors, engaging in hedging activities on behalf of the Company, consistent with the Company's status as a REIT; (vi) maintenance of the Company's exemption from regulation as an investment company; (vii) 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; (viii) arranging for the issuance of Mortgage Backed Securities from pools of Mortgage Loans or other mortgage backed securities owned by the Company; (ix) 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; (x) 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 5 advice to the Board of Directors in connection with the identification of such dealers; (xi) 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; (xii) contracting, as necessary, with third parties for master servicing and special servicing of assets acquired by the Company; (xiii) 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; (xiv) causing the Company to qualify to do business in all applicable jurisdictions; (xv) causing the Company to retain qualified accountants and legal counsel to assist in developing appropriate accounting procedures, compliance procedures and testing systems and to conduct quarterly compliance reviews; (xvi) assisting the Company in complying with all 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 and Exchange Act of 1934, as amended (the "Exchange Act"); (xvii) assisting the Company in making required tax filings and reports and maintaining its status as a REIT, including soliciting stockholders for required information to the extent provided in the REIT Provisions of the Code; (xviii) 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 6 Directors shall reasonably request or the Manager shall deem appropriate under the particular circumstances; and (xix) using all reasonable efforts to cause the Company to comply with all applicable laws. (b) In the performance of its duties under this Agreement, the Manager shall at all times use all reasonable efforts to conform to and act in accordance with any requirements imposed by (i) the status of the Company as a REIT as defined in the REIT Provisions of the Code; (ii) the Company's status as an entity exempt from regulation under the Investment Company Act of 1940; (iii) any other applicable provision of law; (iv) the provisions of the Articles of Incorporation and By-Laws of the Company, as such documents are amended from time to time; (v) the investment objectives and policies of the Company as set forth in its Registration Statement on Form S-11; and (vi) any policies and determinations of the Board of Directors of the Company. (c) The Manager will bear all costs and expenses of its officers and employees and any overhead incurred in connection with its duties hereunder, the cost of office space and equipment required for performance of its duties and shall bear the costs of any salaries or directors fees of any officers or directors of the Company who are Affiliated persons of the Manager except that the Board of Directors of the Company may approve reimbursement to the Manager of the Company's pro rata portion of the salaries, bonuses, health insurance, retirement benefits and all similar employment costs for the time spent on Company operations and administration (other than the provision of services covered by Section 3(a) above) of all personnel employed by the Manager who devote substantial time to Company operations and administration or the operations and administration of other companies advised by the Manager; provided that the Manager shall not be expected to bear the following expenses: issuance and transaction costs incident to the acquisition, disposition and financing of investments, legal, accounting and auditing fees and expenses, the compensation and expenses of the Company's Unaffiliated Directors, the costs of printing and mailing proxies and reports to stockholders, costs incurred by employees of the Manager for travel on behalf of the Company, costs associated with any computer software or 7 hardware that is used solely for the Company, costs to obtain liability insurance to indemnify the Company's directors and officers, the Manager and its employees and directors and the Underwriters, and the compensation and expenses of the Company's custodian and transfer agent, if any. The Company will also be required to pay all expenses incurred in connection with due diligence, the accumulation of Mortgage Loans, the master and special servicing of Mortgage Loans, the issuance and administration of MBS from pools of Mortgage Loans or otherwise, the raising of capital, incurrence of debt, the acquisition of assets, interest expenses, taxes and license fees, non-cash costs, litigation, the base and incentive management fee and extraordinary or non-recurring expenses. (d) The Manager shall give the Company the benefit of its best judgment and effort in rendering services hereunder. (e) Nothing in this Agreement shall prevent the Manager or any partner, officer, employee or other Affiliate thereof from acting as investment adviser for any other person, firm or corporation, or from engaging in any other lawful activity, and shall not in any way limit or restrict the Manager or any of its shareholders, officers, employees or agents from buying, selling or trading any securities for its or their own accounts or for the accounts of others for whom it or they may be acting; provided, however that the Manager will not undertake activities which, in its judgment, will substantially and adversely affect the performance of its obligations under this Agreement. (f) The Manager shall maintain appropriate books of accounts and records relating to services performed hereunder, and such books of accounts and records shall be accessible for inspection by representatives of the Company or any of its Subsidiaries at any time during normal business hours. The Manager shall keep confidential any and all information obtained in connection with the services rendered hereunder and shall not disclose any such information to nonaffiliated third parties except with the prior written consent of the Board of Directors or as may be required by law or order of a court or other tribunal having requisite jurisdiction. 8 (g) The Manager shall require each seller or transferor of assets to be acquired by the Company to make such representations and warranties regarding such assets as may be directed by the Board of Directors, or, if no such directions are given, as may, in the judgment of the Manager, be necessary and appropriate. In addition, the Manager shall take such other action as may be directed by the Board of Directors, or, if no such directions are given, as it deems necessary or appropriate with regard to the protection of the Company's assets. 4. PORTFOLIO TRANSACTIONS AND BROKERAGE The Manager is authorized, for the purchase and sale of the Company's assets, to employ such securities dealers as may, in the judgment of the Manager, implement the policy of the Company to obtain the best net results taking into account such factors as price, including dealer spread, the size, type and difficulty of the transaction involved, the firm's general execution and operational facilities and the firm's risk in positioning the securities involved. Consistent with this policy, the Manager is authorized to direct the execution of the Company's portfolio transactions to dealers and brokers furnishing statistical information or research deemed by the Manager to be useful or valuable to the performance of its investment advisory functions for the Company. 5. COMPENSATION OF THE MANAGER (a) Commencing with the first fiscal quarter after the Closing Date, the Company agrees to pay to the Manager and the Manager agrees to accept as full compensation for all services rendered by the Manager as such, (i) a quarterly base management fee calculated as a percentage of the Average Invested Assets of the Company on the last business day for which market quotations are available of each calendar quarter and equal to 1% per annum of such Average Invested Assets rated lower than BB- or not rated, 0.75% of such Average Invested Assets rated BB- through BB+, and 0.35% of such Average Invested Assets that are rated above BB+ and (ii) incentive compensation for each fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) Funds From Operations of the Company (before incentive 9 fee) per share of Common Stock (based on the weighted average number of shares outstanding) plus (b) gains (or minus losses) from debt restructuring and sales of property per share of Common Stock (based on the weighted average number of shares outstanding), exceed (2) an amount equal to (a) the weighted average of the price per share of the initial offering and the prices per share of any secondary offerings of Common Stock by the Company multiplied by (b) the Ten- Year U.S. Treasury Rate plus 3.5% per annum (expressed as a quarterly percentage) multiplied by (B) the weighted average number of shares of Common Stock outstanding during such quarter. Notwithstanding the foregoing, no payment of any portion of the incentive compensation provided for in clause (ii) above that is attributable to net capital gains of the Company prior to the end of the first full fiscal quarter of the Company's operations following any minimum calculation period longer than a quarter or other time period required by Rule 205-3 of the Investment Advisers Act of 1940 at the time of such calculation, shall accrue or be payable until completion of such fiscal quarter, at which time the cumulative net capital gains of the Company through the end of such quarter shall be computed and incentive compensation shall be paid on such net gains at the rate provided in clause (ii) above and after which time the net capital gains includible in clause (ii) above for each quarter shall be the excess of such net capital gains for such minimum calculation period through the end of such quarter (the "Total Period") over the net capital gains (if any) for the portion of the Total Period other than such quarter. For any period less than a quarter during which this Agreement is in effect, the fee shall be prorated according to the proportion which such period bears to a full quarter of 90, 91 or 92 days, as the case may be. (b) The Management Fees earned under Section 5(a)(i) will be payable in arrears. The Manager shall compute the compensation payable under Section 5(a) of this Agreement within 45 days after the end of each calendar quarter. A copy of the computations made by the Manager to calculate its compensation shall thereafter promptly be delivered to the Board of Directors and, upon such delivery, payment of the compensation earned under Section 5(a) of this Agreement shown therein shall be due and payable within 60 days after the end of such fiscal quarter. If requested by 10 the Manager, the Company will make advance payments of the base management fee in Section 5(a)(i) above as often as semi-monthly at the rate of 75% of such fee estimated by the Manager. (c) The base management fee is intended to compensate the Manager for its costs in providing management services to the Company. The Board of Directors may adjust the base management fee with consent of the Manager in the future if necessary to align the fee more closely with the costs of such services. 6. INDEMNITY (a) The Company hereby agrees to indemnify the Manager and each of the Manager's shareholders, officers, employees, agents, associates and controlling persons and the shareholders, officers, employees and agents thereof (including any individual who serves at the Manager's request as director, officer, partner, trustee or the like of another corporation)(each such person being an "indemnitee") against any liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees (all as provided in accordance with applicable corporate law) reasonably incurred by such indemnitee in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while acting in any capacity set forth above in this Section 6 or thereafter by reason of his having acted in any such capacity, except with respect to any matter as to which he shall have been adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interest of the Company and furthermore, in the case of any criminal proceeding, so long as he had no reasonable cause to believe that the conduct was unlawful; provided, however, that (1) no indemnitee shall be indemnified hereunder against any liability to the Company or its shareholders or any expense of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties 11 involved in the conduct of his position (the conduct referred to in such clauses (i) through (iv) being sometimes referred to herein as "disabling conduct", (2) as to any matter disposed of by settlement or a compromise payment by such indemnitee, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such settlement or compromise is in the best interests of the Company and that such indemnitee appears to have acted in good faith in the reasonable belief that his action was in the best interest of the Company and did not involve disabling conduct by such indemnitee and (3) with respect to any action, suit or other proceeding voluntarily prosecuted by any indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action, suit or other proceeding by such indemnitee was authorized by a majority of the Board of Directors of the Company. (b) The Company shall make advance payments in connection with the expenses of defending any action with respect to which indemnification might be sought hereunder if the Company receives a written affirmation of the indemnitee's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to reimburse the Company unless it is subsequently determined that he is entitled to such indemnification and if a majority of the Board of Directors of the Company determine that the facts then known to them would not preclude indemnification. In addition, at least one of the following conditions must be met: (A) the indemnitee shall provide a security for his undertaking, (B) the Company shall be insured against losses arising by reason of any lawful advances, or (C) a majority of a quorum consisting of directors of the Company who are neither affiliated persons of the Company nor parties to the proceeding ("Disinterested Non-Party Directors") or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the indemnitee ultimately will be found entitled to indemnification. (c) All determinations with respect to indemnification hereunder shall be made (1) by a final decision on the 12 merits by a court or other body before whom the proceeding was brought that such indemnitee is not liable by reason of disabling conduct or, (2) in the absence of such a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party Directors of the Company, or (ii) if a majority vote of such quorum so directs, independent legal counsel in a written opinion. All determinations that advance payments in connection with the expense of defending any proceeding shall be authorized shall be made in accordance with the immediately preceding clause (2) above. The rights accruing to any indemnitee under these provisions shall not exclude any other right to which he may be lawfully entitled. 7. DURATION AND TERMINATION This Agreement shall commence on the date hereof for an initial term expiring on the second anniversary of the Closing Date. Thereafter, successive extensions, each for a period not to exceed two years, may be made by agreement between the Company and the Manager, with the approval of a majority of the Unaffiliated Directors until terminated or assigned under the provisions of this Section 7 or Section 9, as the case may be, of this Agreement. Upon termination of this Agreement by the Company, the Company is obligated to pay the Manager a termination fee which will be determined by independent appraisal other than in the case of termination by the Company for cause (as described below). The Company may terminate, or decline to renew the term of, this Agreement without cause at any time after the first two years upon 60 days written notice by a majority vote of the Unaffiliated Directors; provided that the Company shall pay the Manager a termination fee determined by independent appraisal of the value of this Agreement for a period of four years following the date of termination. Such appraisal is to be conducted by a nationally recognized appraisal firm mutually agreed upon by the Company and the Manager. If the Company and the Manager are unable to agree upon an appraisal firm, then each of the Company and the Manager is to choose an independent appraisal firm to conduct an appraisal. In such event, (i) if the appraisals prepared by the two appraisers so selected are the 13 same or differ by an amount that does not exceed 20% of the higher of the two appraisals, the termination fee is to be deemed to be the average of the appraisals as prepared by each party's chosen appraiser, and (ii) if these two appraisals differ by more than 20% of such higher amount, the two appraisers together are to select a third appraisal firm to conduct an appraisal. If the two appraisers are unable to agree as to the identity of such third appraiser, either of the Manager and the Company may request that the American Arbitration Association ("AAA") select the third appraiser. The termination fee then is to be the amount determined by such third appraiser, but in no event less than the lower of the two initial appraisals or more than the higher of such two initial appraisals. Each party shall pay the costs of the appraisers chosen by it, and each party shall pay one half of the costs of the third appraiser. Any appraisal hereunder shall be performed no later than 45 days following selection of the appraiser or appraisers. At the option of the Company, this Agreement, or any extension hereof, shall be and become terminated with cause upon 60 days' prior written notice of termination from the Board of Directors to the Manager, without payment of any termination fee, if any of the following events occur: (i) the Manager commits a material breach of any provision of this Agreement (including any material breach of the provisions of Section 3(a) and (b) herein) and, after notice of such violation, shall not cure such violation within 30 days; or (ii) 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 (A) 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; (B) 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 14 appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days; (C) 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, of proceedings to such end are instituted against 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 (D) 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. The Manager agrees that if any of the events specified above occur, it will give prompt written notice thereof to the Company's Board of Directors after the occurrence of such event. Upon written request from the Company, the Manager shall prepare, execute and deliver to a successor manager any and all documents and other instruments, place in such successor manager's possession all files and do or cause to be done all other acts or things necessary or appropriate to effect the purposes of such notice of termination, to the successor manager at the Manager's sole expense; provided, however, that the Manager shall be entitled to retain copies of all such documents and other instruments as it may be required by federal or state law. The Manager agrees to cooperate with Company and such successor manager in effecting the termination of Manager's responsibilities and rights hereunder. 8. ACTION UPON TERMINATION. From and after the effective date of termination of this Agreement pursuant to Section 7 hereof, the Manager shall not be entitled to compensation for further services hereunder, but shall be paid all compensation accruing to the date of termination and, if such termination is not for cause, the termination fee determined pursuant to Section 7. The Manager shall 15 forthwith upon such termination deliver to the Board of Directors all funds and property, documents, corporate records, reports and software of the Company or any Subsidiary of the Company then in the custody of Manager; provided, however, that the Manager shall be entitled to retain copies of all such documents and other instruments as it may be required by federal or state law. 9. ASSIGNMENT This Agreement may not be assigned without the consent of all the parties to this Agreement. For the foregoing purposes, "assigned" shall have the meaning ascribed to it under the Investment Advisers Act of 1940, as amended and the rules promulgated thereunder. 10. NOTICES Any notice under this Agreement shall be in writing to the other party at such address as the other party may designate from time to time for the receipt of such notice and shall be deemed to be received on the earlier of the date actually received or on the fourth day after the postmark if such notice is mailed first class postage prepaid. 11. GOVERNING LAW This Agreement shall be construed in accordance with the laws of the State of New York for contracts to be performed entirely therein without reference to choice of law principles thereof. 12. AMENDMENTS This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties hereto, or their respective successors or assigns, or otherwise as provided herein. 13. SEVERABILITY 16 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provisions shall remain in full force and effect. 14. ENTIRE AGREEMENT This instrument contains the entire agreement between the parties as to the rights granted and the obligations assumed in this instrument. 15. COUNTERPARTS This Agreement may be signed by the parties in counterparts which together shall constitute one and the same agreement among the parties. 17 IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers, all as of the date and the year first above written. ANTHRACITE CAPITAL, INC. [SEAL] By --------------------------------- Name ------------------------------- Title ------------------------------ BLACKROCK FINANCIAL MANAGEMENT, INC. By --------------------------------- Name ------------------------------- Title ------------------------------ EX-10.6 7 FORM OF "98" STOCK OPTION Exhibit 10.6 ANTHRACITE CAPITAL, INC. 1998 STOCK OPTION PLAN ---------------------- SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. (a) This plan is the 1998 Stock Option Plan (the "Plan") of Anthracite Capital, Inc., a Maryland corporation (the "Company"). This Plan was adopted by the Board on March , 1998, subject to the approval of the Company's stockholders. The purpose of this Plan is to enable the Company and its Subsidiaries to obtain and retain competent employees, directors and others who will contribute to the Company's success by their ability and ingenuity, and to provide incentives to such individuals and entities that are linked directly to increases in stockholder value which will, therefore, inure to the benefit of all stockholders of the Company. (b) For purposes of this Plan, the following terms shall have the meanings set forth below: (1) "Award" means any grant of a Stock Option. (2) "Board" means the Board of Directors of the Company. (3) "Cause" means any one or more of the following: (A) a Participant's conviction of a crime which, in the judgment of the Committee, is likely to result in injury to an Employer; (B) a Participant's material violation of written policies of an Employer; (C) a Participant's habitual neglect in the performance of his duties to an Employer; (D) a Participant's action or inaction in connection with his duties to an Employer intended to result, in the judgment of the Committee, in material injury to an Employer; or (E) a Participant's termination from employment by an Employer for "cause", as that term is defined or used in such Participant's employment agreement, if any, with such Employer. (4) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. (5) "Committee" means the Compensation Committee of the Board, or, if there is no Compensation Committee of the Board, the entire Board. (6) "Company" means Anthracite Capital, Inc., a corporation organized under the laws of the State of Maryland (or any corporation into which it is merged or with which it is consolidated). (7) "Disability" means permanent and total disability as determined under the Employer's disability program or policy. (8) "Effective Date" shall mean the date of the closing of the public offering of Company's Common Stock. (9) "Eligible Recipient" means (i) any employee (including any officer) of an Employer, (ii) any director of an Employer, (iii) the Manager, or (iv) any other individual or entity performing services for the Company or a subsidiary. (10) "Employer" means the Company, any Subsidiary or the Manager. (11)"Exercise Price" means the price per share at which the Stock subject to a Stock Option may be purchased. (12) "Fair Market Value" means with respect to any Awards hereunder, as of any given date (other than on the IPO Pricing Date), (A) the closing sale price of the Stock on such date as reported in the Wall Street Journal Composite Tape (or, if no sale of the Stock was reported for such date, on the next preceding date on which a sale of the Stock was reported) or (B) if on such date the Stock is not listed on any securities exchange or quoted on the National Association of Securities Dealers, Inc.'s NASDAQ National Market System, the highest price per share which the Company then could obtain from a willing buyer of authorized but unissued shares of Stock if the Company were selling such shares of Stock, as determined in good faith by the Board. Solely on the IPO Pricing Date, Fair Market Value of the Stock means the price per share at which the Stock first is offered for sale to the public pursuant to the prospectus used in connection with the IPO, as that price is indicated in such prospectus. (13) "First Exercise Date" means the first date on which a Stock Option is exercisable. 2 (14) "Immediate Family" means, with respect to a Participant who is an individual, such Participant's spouse, siblings, parents, children or grandchildren or a trust established for the benefit of such Participant's spouse, siblings, parents, children or grandchildren. (15) "Incentive Stock Option" means any Stock Option designated and qualifying as an "incentive stock option" within the meaning of Section 422 of the Code. (16) "IPO" means the initial public offering of the Stock of the Company. (17) "IPO Pricing Date" means the date on which Stock first is priced for sale to the public pursuant to the prospectus used in connection with the IPO, as that date is indicated in such prospectus. (18) "IPO Stock Option" means any Stock Option that is granted as of the IPO Pricing Date. (19) "Last Exercise Date" means the last date on which a Stock Option is exercisable. (20) "Manager" means BlackRock Financial Management, Inc., a Delaware corporation, or any successor thereto or assignee of its [Management Agreement] with the Company. (21) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, including any Stock Option that provides (as of the time of its Award) that it will not be treated as an Incentive Stock Option. (22) "Option Term" means the period of time beginning on the date of Award of a Stock Option and ending on the Last Exercise Date. (23) "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations in the unbroken chain (other than the Company) owns stock possessing 50% or more of the combined voting power of all classes of stock in one of the other corporations in the chain. 3 (24) "Participant" means any Eligible Recipient selected to receive an Award of a Stock Option pursuant to the authority granted to the Committee in Section 2. (25) "Permitted Transferee" means, with respect to a Participant who is an individual, a member of such Participant's Immediate Family to whom a Stock Option has been transferred with the approval of the Committee pursuant to Section 5(h). (26) "Stock" means the Common Stock, par value $.001 per share, of the Company. (27) "Stock Option" means any option to purchase shares of Stock granted pursuant to this Plan. (28) "Stock Option Agreement" means the written agreement by which a Stock Option and the Award thereof shall be evidenced. (29) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations in the unbroken chain (other than the last corporation in the chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (30) "Termination of Affiliation" means the first day on which an individual or entity for any reason no longer is performing services for the Company or any Subsidiary. (31) "Unexercised Stock Option" means any Stock Option which has not been exercised. (32) "Voluntary Termination of Affiliation" means a Termination of Affiliation resulting from the resignation, retirement, quitting or other voluntary cessation of all affiliations with an Employer. SECTION 2. ADMINISTRATION; DELEGATION OF AUTHORITY. (a) This Plan shall be administered by the Committee. 4 (b) The Committee shall have the power and authority to make Awards of Stock Options to Eligible Recipients pursuant to the terms of this Plan. In particular, subject to Section 4, the Committee shall have the authority: (1) to select those Eligible Recipients who will become Participants; (2) to determine whether, when and to what extent Awards of Stock Options are to be made to Participants hereunder; (3) to determine the number of shares of Stock to be the subject of each Award; (4) to determine the terms and conditions of any Award consistent with this Plan including, but not limited to, the First Exercise Date and Last Exercise Date when all or a portion of the shares of Stock that are subject to a Stock Option may be purchased; and (5) to determine the terms and conditions, consistent with this Plan, that shall be set forth in the Stock Option Agreement evidencing the Award of a Stock Option made pursuant to this Plan. (c) The Committee shall have the power and authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan as the Committee from time to time shall deem advisable; to interpret the terms and provisions of this Plan and any Award made under this Plan; and to supervise the administration of this Plan. (d) All decisions made by the Committee pursuant to the provisions of this Plan shall be final and binding on all persons, including the Company, its Subsidiaries and the Participants. 5 SECTION 3. STOCK SUBJECT TO PLAN. (a) The total number of shares of Stock reserved and available for issuance under Awards of Stock Options pursuant to this Plan shall be in the aggregate up to 10% of the shares of the Company's Common Stock outstanding on the date hereof. Such shares shall consist of treasury or authorized but unissued shares of Stock. (b) If a Stock Option expires or otherwise is terminated without being exercised, the shares of Stock that were subject to such expired or terminated Stock Option again shall be available for issuance in connection with future Awards made under this Plan. If any shares of Stock have been pledged as collateral for indebtedness incurred by a Participant in connection with the exercise of a Stock Option and certificates representing such shares of Stock are surrendered to the Company in satisfaction of such indebtedness, such shares of Stock again shall be available for issuance in connection with future Awards made under this Plan. (c) If any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in the Company's corporate structure occurs that affects or could affect the Stock, a substitution or adjustment may be made in (i) the aggregate number of shares of Stock reserved for issuance under this Plan, and (ii) the kind, number and option price of shares of Stock subject to outstanding Awards of Stock Options made under this Plan, in each case as determined by the Committee in its reasonable discretion to be appropriate under the circumstances, provided that the number of shares of Stock subject to any Award always shall be a whole number. SECTION 4. ELIGIBILITY; AWARD DETERMINATION. Eligible Recipients who are responsible for or contribute to the management, growth and/or profitability of the business of the Company or a Subsidiary shall be eligible for Awards of Non-Qualified Stock Options hereunder. Eligible Recipients who are employees of the Company or a Subsidiary also shall be eligible for Awards of Incentive Stock Options hereunder. No person who is a member of the Board of Directors may be granted stock options under this Plan unless such person is also an employee of the Company or a Subsidiary. 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 directors, officers and key employees of the Manager. No ISOs may be granted to any director who is not also a full-time employee or to directors, officers and other employees of entities unrelated to the Company. The Committee shall determine the total 6 number of shares of Stock subject to Awards of Stock Options to be made as of any date. SECTION 5. STOCK OPTIONS FOR ELIGIBLE RECIPIENTS. (a) GENERAL. Any Award of Stock Options under this Plan shall be in such form as the Committee may from time to time approve, and the terms and conditions of each Stock Option need not be the same with respect to each Participant. A Participant shall enter into a Stock Option Agreement with the Company, in such form as the Committee shall determine, which agreement shall set forth, among other things, the Exercise Price, the First Exercise Date and the Last Exercise Date, the Option Term and other provisions regarding exercisability of the Stock Options granted thereunder. (b) TYPES OF STOCK OPTIONS. An award of Stock Options made under this Plan may consist of either or both of two types of Stock Options: (i) Incentive Stock Options (provided the Participant receiving such Incentive Stock Options is an employee of the Company or a Subsidiary), and (ii) Non-Qualified Stock Options. To the extent any Stock Option does not qualify as an Incentive Stock Option, it shall be deemed to be a Non-Qualified Stock Option. (c) CERTAIN TERMS AND CONDITIONS. An Award of Stock Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, consistent with this Plan, as the Committee shall deem desirable: (1) EXERCISE PRICE. The Exercise Price shall be determined by the Committee at the time of Award, but shall be not less than 100% of the Fair Market Value of the Stock on the date of such Award; provided, however, that prior to the first anniversary of the IPO Pricing Date the Committee may make Awards of Stock Options pursuant to Section 4 at an Exercise Price equal to the Fair Market Value of the Stock on the IPO Pricing Date. If an employee of the Company or a Subsidiary owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 9.8% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Award of an Incentive Stock Option is made to such employee, the Exercise Price of such Incentive Stock Option (to the extent required by the Code at the time of Award) shall be not less than 110% of the Fair Market Value of the Stock on the date of the Award of such Incentive Stock Option. (2) OPTION TERM. The Option Term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than 7 ten (10) years after the date of the Award of such Stock Option; provided, however, that if an employee of the Company or a Subsidiary owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 9.8% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Award of an Incentive Stock Option is made to such employee, the Option Term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five (5) years. (d) EXERCISABILITY. A Stock Option shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at the time of Award; provided that, except as otherwise provided in this Plan, or unless otherwise determined by the Committee, a Stock Option shall be exercisable not earlier than one (1) year following the date of its Award. If a Stock Option Agreement provides that a Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time in whole or in part based on such factors as the Committee may determine in its reasonable discretion to be appropriate under the circumstances. (e) METHOD OF EXERCISE. Subject to Section 5(d) above and the terms and conditions of the relevant Stock Option Agreement, a Stock Option may be exercised, subject to and in accordance with the vesting schedule as set forth in the Stock Option Agreement between the First Exercise Date and Last Exercise Date by giving written notice of exercise to the Company specifying the number of shares of Stock to be purchased, accompanied by payment in full of the purchase price in cash or its equivalent, as determined by the Committee. Payment in whole or in part also may be made (i) in cash or cash equivalents, (ii) in the form of Stock already owned by the Participant (based on the Fair Market Value of the Stock on the date the Stock Option is exercised), (iii) by cancellation of any indebtedness owed by the Company to the Participant, (iv) if approved by the Committee, by a full recourse promissory note executed by the Participant, (v) pursuant to procedures approved by the Company, through the sale of shares of Stock acquired on exercise of the Stock Option through a broker-dealer to whom the Participant has submitted an irrevocable notice of exercise and irrevocable instructions to deliver to the Company the amount of sale or loan proceeds sufficient to pay for the shares of Stock, together with, if requested by the Company, the amount of federal, state or local taxes payable by the Participant by reason of such exercise, (vi) pursuant to procedures approved by the Company, and with the prior approval of the Committee, by pyramiding (i.e., making payment to the Company with shares of Stock simultaneously acquired on exercise of the Stock Option (based on the Fair Market Value of the Stock on the date the Stock Option is exercised)) or (vii) by any combination of the foregoing. A Participant generally shall have the right to dividends and other rights of a stockholder with respect to shares of 8 Stock subject to a Stock Option only after the Participant has given written notice of exercise, has paid in full for such shares of Stock and, if requested to do so by the Committee, has given the representation described in Section 8(a), below. (f) ELECTIVE SHARES TAX WITHHOLDING. Subject to the conditions specified in the following sentence, and with the Committee's prior approval, a Participant may, upon the exercise of a Stock Option, elect that the Company withhold a portion of the shares of Stock otherwise deliverable to such Participant having a Fair Market Value equal to either (i) the minimum amount necessary to satisfy all federal, state and local tax withholding requirements related to such exercise, or (ii) a greater amount, not to exceed the estimated total amount of such Participant's tax liability with respect to such exercise. Each such share withholding election shall be subject to the following conditions: (i) the Participant's election shall be subject to the Committee's reasonable discretion to revoke the Participant's right to elect share withholding at any time before exercise of the Stock Option; (ii) the Participant's election must be made before the date on which the amount of tax to be withheld is determined; and (iii) the Participant's election shall be irrevocable. (g) REQUIREMENT OF SURRENDER IN CERTAIN CASES. The Committee may require that a Participant surrender all or a portion of any Stock Option as a condition precedent to a grant of a new Stock Option. Subject to the provisions of this Plan, such new Stock Option shall be exercisable at the price, during such period and on such other terms and conditions as are specified in the Stock Option Agreement presented to the Participant at the time the new Stock Option is granted; provided, however, should the Committee so require, the number of shares of Stock subject to such new Stock Option shall not be greater than the number of shares of Stock subject to the surrendered Stock Option. The Stock Options so surrendered shall be canceled and the shares of Stock previously subject to such canceled Stock Options again shall be available for Awards of Stock Options hereunder. (h) LIMITED TRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be transferable by a Participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable during a Participant's lifetime only by the Participant, except that (i) a Participant may, in a manner permitted by the Committee and by law, transfer a Non-Qualified Stock Option to a member of his or her Immediate Family, and (ii) the Manager may, in a manner and to the extent permitted by the Committee and by law, transfer a Non-Qualified Stock Option previously granted to it to any other Eligible Recipient. The Committee's approval of a proposed transfer may be subject to the satisfaction of such conditions as the Committee deems appropriate, including (A) that the Stock Options that are the subject of such proposed transfer and the Stock subject thereto be registered or exempt from registra- 9 tion under the Securities Act of 1933, and (B) in the case of a proposed transfer by the Manager pursuant to clause (ii) of the preceding sentence, that the Eligible Recipient to whom such proposed transfer is to be made executes an agreement in form satisfactory to the Committee to the effect that the Stock Options to be transferred to him will be subject to the terms and conditions that would be applicable to those Stock Options pursuant to this Plan (including without limitation the provisions of this Section 5(h) and Sections 5(i), 5(j) and 5(k), below) if those Stock Options had been granted directly to such Eligible Recipient, rather than to the Manager, pursuant to this Plan. (i) VOLUNTARY TERMINATION. If a Participant has a Voluntary Termination of Affiliation, all Unexercised Stock Options granted to such Participant, whether or not such Stock Options have been transferred by such Participant to a Permitted Transferee or otherwise, shall, unless otherwise determined by the Committee, terminate immediately upon such Voluntary Termination of Affiliation. (j) TERMINATION FOR CAUSE. If a Participant has a Termination of Affiliation for Cause, all Unexercised Stock Options granted to such Participant, whether or not such Stock Options have been transferred by such Participant to a Permitted Transferee or otherwise, shall, unless otherwise determined by the Committee, terminate immediately upon such Termination of Affiliation. (k) OTHER TERMINATION. Except as otherwise determined by the Committee, if a Participant has a Termination of Affiliation because of death or Disability or for any other reason other than a Voluntary Termination of Affiliation and other than a Termination of Affiliation for Cause, any Unexercised Stock Option then held by such Participant or a Permitted Transferee thereafter may be exercised if and to the extent such Unexercised Stock Option is or thereafter becomes exercisable in accordance with the terms of the related Stock Option Agreement (or on such accelerated basis as the Committee may determine at or after the date of Award), by the Participant or Permitted Transferee (or, if the Participant or Permitted Transferee has died or shall thereafter die, by the legal representative of the estate of that Participant or Permitted Transferee or by the legatee of that Participant or Permitted Transferee under the will of that Participant or Permitted Transferee), (i) for a period of twelve months from the date of the Participant's Termination of Affiliation or (ii) until the expiration of the Option Term, whichever period is shorter. In the event of a Termination of Affiliation to which this Section 5(k) applies, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option thereafter will be treated as a Non-Qualified Stock Option. (l) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent that the aggregate Fair Market Value (determined as of the date the Incentive Stock Option is 10 granted) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and all other option plans of the Company or any Parent Corporation or Subsidiary become exercisable for the first time by a Participant during any calendar year exceeds $100,000, such options shall be treated as Non-Qualified Stock Options. The preceding sentence shall be applied by taking options into account in the order in which they were granted. (m) ANNUAL LIMIT ON ALL STOCK OPTIONS. More than one (1) Stock Option may be granted to an Eligible Recipient during any fiscal year of the Company, but the aggregate number of shares of Stock underlying all Stock Options granted to any Eligible Recipient during any such fiscal year shall not exceed fifty percent (50%) of the shares of Stock reserved for issuance under this Plan pursuant to Section 3 of this Plan. (n) DISQUALIFYING DISPOSITION. If a Participant makes a disqualifying disposition (within the meaning of Section 421(b) of the Code) of shares of Stock acquired pursuant to the exercise of an Incentive Stock Option, such Participant shall provide written notice thereof to the Company within 10 days after such disqualifying disposition. (o) NOTICE OF SECTION 83(b) ELECTION. If a Participant, in connection with the exercise of a Stock Option, makes the election permitted under Section 83(b) of the Code to include in such Participant's gross income in the year of transfer the amounts specified in Section 83(b) of the Code, then such Participant shall notify the Company of such election within 10 days after filing the notice of such election with the Internal Revenue Service. SECTION 6. AMENDMENT AND TERMINATION. (a) The Board may amend, alter or discontinue this Plan, provided that no such action shall be taken by the Board that would impair the economic or legal rights of a Participant under any Award previously granted without such Participant's consent, and provided that, without the approval of the Company's stockholders, no such action shall increase the total number of shares of Stock reserved and available for issuance under Awards of Stock Options pursuant to this Plan, except as otherwise provided in Section 3. (b) The Committee may amend the terms of any Award previously granted, prospectively or retroactively, but notwithstanding any other provision of this Agreement, no such amendment shall impair the rights of any Participant without his consent. 11 SECTION 7. UNFUNDED STATUS OF PLAN. This Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. SECTION 8. GENERAL PROVISIONS. (a) The Committee may require each person purchasing shares of Stock pursuant to a Stock Option to represent to the Company in writing that such person is acquiring those shares of Stock without a view towards distribution thereof. All certificates for shares of Stock delivered under this Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock then is listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each Participant shall, no later than the date as of which the value of an Award first becomes includable in the gross income of the Participant for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such Award. The obligations of the Company under this Plan shall be conditional on such payment or arrangements, and the Company (and, where applicable, its Subsidiaries) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. (d) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be 12 liable personally for any action, determination, or interpretation taken or made in good faith with respect to this Plan, and all members of the Board and the Committee and each and every officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be exculpated, indemnified and protected fully by the Company in respect of any such action, determination or interpretation. SECTION 9. SPECIFIC PERFORMANCE. The Stock Options granted under this Plan and the shares of Stock issued pursuant to the exercise of such Stock Options may not be readily purchased or sold in the open market and, for that reason among others, the Company and its stockholders will be damaged irreparably if this Plan is not specifically enforced. If any controversy arises concerning the right to purchase or obligation to sell any shares of Stock subject to a Stock Option, such right or obligation shall be enforceable in a court of equity by a decree of a specific performance. Such remedy shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy that the parties may have. SECTION 10. INVALID PROVISIONS; CONSTRUCTION OF PLAN. If any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein. Headings at the beginning of each Section of this Plan are solely for convenience and are not a part of this Plan. Whenever required by the context of this Plan, the singular shall include the plural and the masculine shall include the feminine and neuter, and vice versa. SECTION 11. APPLICABLE LAW. This Plan shall be governed by and construed in accordance with the laws of the State of New York. SECTION 12. SUCCESSORS AND ASSIGNS. This Plan shall be binding on and inure to the benefit of the Company and the Participants to whom a Stock Option is granted hereunder, and such Participants' heirs, executors, administrators, successors, legatees, personal representatives, assignees and transferees. 13 SECTION 13. EFFECTIVE DATE OF PLAN. This Plan shall be effective as of the Effective Date. SECTION 14. TERM OF PLAN. No Award of a Stock Option shall be granted pursuant to this Plan on or after the tenth anniversary of the earlier of the date this Plan is adopted by the Board or approved by the Company's stockholders, but Awards previously made may extend beyond that date. IN WITNESS WHEREOF, and pursuant to a resolution of the Board adopting this Plan and authorizing its execution, the Company has caused this Plan to be duly executed by its duly authorized signatory on the day and year first above written. ANTHRACITE CAPITAL, INC. By: ---------------------------- Name: Title: 14 ANTHRACITE CAPITAL, INC. STOCK OPTION AGREEMENT ---------------------- This AGREEMENT is made effective as of the _______ day of ___________________, (the "Award Date"), by and between Anthracite Capital, Inc., a Maryland corporation (the "Company") and _________________ (the "Optionee"). RECITALS WHEREAS, the Board of Directors of the Company has established the 1998 Stock Option Plan (the "Plan") effective as of the closing of the public offering of Common Stock of the Company, and WHEREAS, pursuant to the provisions of said Plan, the Committee established pursuant to the Plan, by action duly taken on ______________, 199__, granted to the Optionee an option or options (the "Option(s)") to purchase shares of the Common Stock of the Company (the "Optioned Shares") on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows: Section 1. The Option(s). The Optionee may, at his option, purchase all or any part of an aggregate of _____________ shares of Common Stock, at the price of $_________ per share (the "Exercise Price"), on the terms and conditions set forth herein. Section 2. Option Type; Exercise Dates and Method of Exercise. Options intended to qualify as Incentive Stock Options are designated by "ISO" under the category "Type." Options intended as Non-Qualified Stock Options are designated by "NQO" under the category "Type." 1 The Option(s) shall be exercisable as to the specified number of Optioned Shares on and after the "First" dates and on or before the "Last" dates set forth below: Number of Optioned Type Shares Exercise Dates First Last - ------------- -------------- -------------- -------------- -------------- - ------------- -------------- -------------- -------------- -------------- - ------------- -------------- -------------- -------------- -------------- - ------------- -------------- -------------- -------------- -------------- - ------------- -------------- -------------- -------------- -------------- Optionee acknowledges, understands and agrees that he has no right whatsoever to exercise the Option(s) granted hereunder with respect to any Optioned Shares until the First Exercise Date of such Optioned Shares as provided above. Optionee further understands that the Option(s) granted hereunder shall expire and become unexercisable after the Last Exercise Date and otherwise as provided in Section 3(c) below. This Option shall be deemed exercised as to the Optioned Shares to be purchased when written notice of such exercise has been given to the Company at its principal business office by the Optionee. Such notice shall be accompanied by full payment (i) in cash or cash equivalents, (ii) in Stock already owned by the Optionee (based on the Fair Market Value of the Stock on the date the Option is exercised), (iii) if approved by the Committee, by a full recourse promissory note executed by the Optionee in such form, and with such terms and conditions, as the Committee may require, (iv) by cancellation of any indebtedness owed by the Company to the Optionee, (v) pursuant to procedures approved by the Company, through the sale of Optioned Shares acquired on exercise of the Option through a broker-dealer to whom the Optionee has submitted an irrevocable notice of exercise and irrevocable instructions to deliver to the Company the amount of sale or loan proceeds sufficient to pay for the Optioned Shares to be purchased, together with, if requested by the Company, the amount of federal, state or local taxes payable by the Participant by reason of such exercise; (vi) pursuant to procedures approved by the Company, and with the prior approval of the Committee, by pyramiding (i.e., making payment to the Company with Optioned Shares simultaneously acquired on exercise of the Option (based on the Fair Market Value of the Stock on the date the Option is exercised)), or 2 (vii) by any combination of the foregoing as may be approved by the Committee with respect to the Optioned Shares to be purchased. The approval of the Committee may be granted, withheld or conditioned as determined appropriate by the Committee in its sole discretion. Section 3. Governing Plan. This Agreement hereby incorporates by reference the Plan and all of the terms and conditions of the Plan as heretofore amended and as the same may be amended from time to time hereafter, but no such subsequent amendment shall adversely affect the Optionee's rights under this Agreement and the Plan as it existed before such subsequent amendment except as may be required by applicable law or as expressly agreed to by the Optionee. The Optionee expressly acknowledges and agrees that the provisions of this Agreement are subject to the Plan; the terms of this Agreement shall not limit or modify the Plan; and in case of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall be controlling and binding upon the parties hereto. All capitalized terms used but not defined herein shall have the meaning ascribed to them in the Plan. The Optionee also hereby expressly acknowledges, represents and agrees as follows: (a) The Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto and by reference incorporated herein, and represents that he is familiar with the terms and conditions of the Plan and hereby accepts this Agreement subject to all of the terms and provisions of the Plan. (b) The Optionee agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan. (c) The Optionee acknowledges and represents that he is familiar with Sections of the Plan regarding the exercise of the Option(s) and that he understands that said Option(s) must be exercised on or before the earliest of the following dates, whichever is applicable: (i) the "Last" exercise date noted above in Section 2 of this Agreement; (ii) the day prior to the [fifth][tenth][_____] anniversary of the Award Date with respect to Options granted as Incentive Stock Options and the day prior to the tenth anniversary of the Award Date with respect to Options granted as Non-Qualified Stock Options; or (iii) if the Optionee has a "Termination of Affiliation" (as that term is defined in the Plan), the last date for exercise, or date prior to termination of the Option(s), specified in Subsection 5(i), (j) or (k), as applicable, of the Plan. (d) The Optionee acknowledges, understands and agrees that the existence of the Plan and the execution of this Agreement are not sufficient by 3 themselves to cause the exercise of any Option(s) granted as an Incentive Stock Option to qualify for favorable tax treatment through the application of Section 422 of the Internal Revenue Code; that Optionee must, in order to so qualify, individually meet by his own action all applicable requirements of Section 422, including without limitation the following holding period and employment requirements: (1) HOLDING PERIOD REQUIREMENT: no disposition of an Optioned Share may be made by Optionee within two (2) years from the date of the granting of the Option(s) nor within one (1) year after the transfer of such Optioned Share to him, and (2) EMPLOYMENT REQUIREMENT: at all times during the period beginning on the date of the granting of the Option(s) and ending on the day three (3) months before the date of exercise, the Optionee must have been an employee of the Company, the parent or a subsidiary of the Company, or a corporation or a parent or subsidiary of such corporation issuing or assuming the Option(s) in a transaction to which Section 424(a) of the Internal Revenue Code applies, except where the termination of employment is by means of the employee's disability, in which case said three (3) month period may be extended to one (1) year, as provided under Internal Revenue Code Section 422. Section 4. ADDITIONAL REPRESENTATIONS AND WARRANTIES. As a condition to the exercise of any Option(s), the Company may require the person exercising such Option(s) to make any representation and/or warranty to the Company that may, in the judgment of counsel to the Company, be required under any applicable law or regulation, including but not limited to a representation and warranty that the shares are being acquired only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation or rule of any governmental agency. Optionee hereby represents to the Company that each of the Option(s) evidenced hereby and the shares of Stock purchasable upon exercise thereof is being acquired only for investment and without any present intention to sell or distribute such securities. Section 5. LIMITED TRANSFERABILITY OF OPTIONS. The Option(s) may be exercised during the lifetime of the Optionee only by the Optionee or, to the extent permitted by the Committee in its discretion, a member of the Optionee's Immediate Family (as that term is defined in the Plan). The Optionee's rights and interests under this Agreement and in and to the Option(s) may not be sold, pledged, hypothecated, assigned, encumbered, gifted or otherwise transferred in any manner, either voluntarily or involuntarily by operation of law, except by will or the laws of descent or distribution, 4 and except that (i) the Optionee may, in a manner and to the extent permitted by the Committee in its reasonable discretion, transfer the Option(s) to a member of the Optionee's Immediate Family, and (ii) the Manager may, in a manner and to the extent permitted by the Committee and the Plan, transfer a Non-Qualified Stock Option previously granted to it to any other Eligible Recipient. Section 6. NO ENLARGEMENT OF EMPLOYEE RIGHTS. Nothing in this Agreement shall be construed to confer upon an Optionee who is an employee of the Company or any Subsidiary any right to continued employment with the Company or any Subsidiary, or to restrict in any way the right of the Company or any Subsidiary to terminate his employment. The Optionee acknowledges that in the absence of an express written employment agreement to the contrary, Optionee's employment with the Company or a Subsidiary may be terminated by the Company or Subsidiary at any time, with or without Cause. Section 7. WITHHOLDING OF TAXES. The Optionee authorizes the Company to withhold from any compensation payable to him any taxes required to be withheld by federal, state or local law as a result of the Award of the Option(s) or the issuance of stock pursuant to the exercise of such Option(s). Section 8. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 9. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall be binding upon the heirs, executors, administrators, successors, legatees, assignees and transferees of the Optionee. Section 10. COSTS OF LITIGATION. In any action at law or in equity to enforce any of the provisions or rights under this Agreement or the Plan, the unsuccessful party to such litigation, as determined by the court in a final judgment or decree, shall pay to the successful party all costs, expenses and reasonable attorneys' fees incurred by the successful party (including, without limitation, costs, expenses and fees on any appeals), which shall be included as part of the judgment. Section 11. NECESSARY ACTS. The Optionee agrees to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws. Section 12. COUNTERPARTS. For convenience, this Agreement may be executed in any number of identical counterparts, each of which shall be deemed a complete 5 original in itself and each of which may be introduced in evidence or used for any other purpose without the production of any other counterparts. Section 13. INVALID PROVISIONS. If any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. Section 14. LIMITATION ON VALUE OF CERTAIN OPTIONED SHARES. Optionee acknowledges that the Plan provides that the aggregate fair market value (determined as of the date hereof) of the shares of Common Stock as to which options granted as Incentive Stock Options are exercisable for the first time by Optionee during any calendar year under all incentive stock option plans of the Company and any Subsidiary shall not exceed $100,000. It is understood and agreed that if it is determined that Option(s) granted as an Incentive Stock Option hereunder would exceed such limitation, such Option(s) shall be considered granted as Non-Qualified Stock Option(s) to the extent of such excess. The preceding sentence shall be applied by taking the Incentive Stock Options granted under this Plan and the incentive stock options granted under all other plans of the Company and any Subsidiary into account in the order in which they were granted. This limitation does not apply to any Option(s) granted as a Non-Qualified Stock Option. NOTICE: IF AN OPTIONEE (A) MAKES A DISQUALIFYING DISPOSITION (WITHIN THE MEANING OF SECTION 421(B) OF THE INTERNAL REVENUE CODE) OF SHARES OF STOCK ACQUIRED PURSUANT TO THE EXERCISE OF AN INCENTIVE STOCK OPTION, OR (B) MAKES, IN CONNECTION WITH THE EXERCISE OF A STOCK OPTION, THE ELECTION PERMITTED UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE TO INCLUDE IN SUCH OPTIONEE'S GROSS INCOME IN THE YEAR OF TRANSFER THE AMOUNTS SPECIFIED IN SAID SECTION 83(B), SUCH OPTIONEE MUST PROVIDE WRITTEN NOTICE TO THE COMPANY OF SUCH DISQUALIFYING DISPOSITION OR ELECTION, AS APPLICABLE, WITHIN 10 DAYS AFTER SUCH DISQUALIFYING DISPOSITION OR FILING OF THE NOTICE OF THE SECTION 83(B) ELECTION WITH THE INTERNAL REVENUE SERVICE, RESPECTIVELY. 6 IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement effective as of the date first written above. ANTHRACITE CAPITAL, INC. By: --------------------------- Name: Title: OPTIONEE By: --------------------------- Name: Title: ------------------------------------ Street Address ------------------------------------ City and State ------------------------------------ Social Security Number By his or her signature below, the spouse of the Optionee to whom such Optionee is legally married as of the date of execution of this Agreement acknowledges that he or she has read, understands and agrees to be bound by all of the terms and conditions of this Agreement and the Plan. ------------------------------------ Spouse ------------------------------------ Social Security Number Dated: ------------------------------ 7 By his or her signature below, the Optionee represents that he or she is not legally married as of the date of execution of this Agreement. ------------------------------------ Optionee Dated: ------------------------------ 8 EX-21.1 8 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Antracite Securitization Corp. a Delaware corporation EX-23.1 9 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement on Form S-11 (File No. 333-40813) of Anthracite Capital, Inc. of our report dated March 6, 1998 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. DELOITTE & TOUCHE LLP New York, New York March 18, 1998 -----END PRIVACY-ENHANCED MESSAGE-----