424B3
FILED PURSUANT TO RULE 424b(3)
REGISTRATION
NO. 333-101547
PROSPECTUS
ANWORTH MORTGAGE ASSET CORPORATION
2002
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN
Our 2002 Dividend Reinvestment and Stock Purchase Plan (the Plan) provides prospective investors
and existing holders of our common stock with a convenient and economical method to purchase shares of our common stock. By participating in the Plan, you may purchase additional shares of our common stock by reinvesting some or all of the cash
dividends that you receive on your shares of our common stock. If you elect to participate in the Plan, you may also make optional cash purchases of shares of our common stock of between $50 and $10,000 per month and, with our prior approval, in
excess of $10,000 per month. Shares of our common stock purchased under the Plan may be acquired at discounts of up to 5% from the prevailing market price.
Plan highlights include:
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Any registered stockholder may elect to participate in the Plan. |
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Interested prospective investors who are not currently holders of our common stock may make their initial purchase through the Plan.
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Up to a 5% discount on shares of our common stock purchased under the Plan. |
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Full or partial dividend reinvestment options. |
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Optional cash purchases of between $50 and $10,000 per month and, with our prior approval, optional cash purchases in excess of $10,000 per month.
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Available certificate safekeeping in book-entry form at no charge to you. |
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Detailed record keeping and reporting will be provided at no charge to you. |
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Optional automatic investment withdrawals from your bank account. |
This prospectus relates to the offer and sale of up to 4,500,000 authorized but unissued shares of
our common stock under the Plan. Participants should retain this prospectus for future reference.
Our common
stock is listed on the America Stock Exchange under the symbol ANH.
Investing in our securities involves a high degree of risk. You should carefully consider the information under the heading
Risk Factors beginning on page 16 of this prospectus before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The
date of this Prospectus is December 5, 2002.
You should rely only on the information contained in or incorporated by reference into this prospectus. We have not
authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information in this prospectus is current as of the date of this prospectus. Our
business, financial condition, results of operations and prospects may have changed since that date.
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FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference
certain forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements
containing the words will, believe, expect, anticipate, intend, estimate, assume or other similar expressions. You should not rely on our forward-looking statements
because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Statements regarding the following subjects are forward-looking by their nature:
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market trends and risks; |
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assumptions regarding interest rates; and |
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assumptions regarding prepayment rates on the mortgage loans securing our mortgage-backed securities. |
These forward-looking statements are subject to various risks and uncertainties, including those relating to:
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increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities; |
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our ability to use borrowings to finance our assets; |
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risks associated with investing in mortgage-related assets, including changes in business conditions and the general economy; |
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our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; and |
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managements ability to manage our growth and planned expansion. |
Other risks, uncertainties and factors, including those discussed under Risk Factors in this prospectus or described in reports that we file from time to time
with the Securities and Exchange Commission, such as our quarterly and annual reports, could cause our actual results to differ materially from those projected in any forward-looking statements we make. We are not obligated to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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We have amended our 2002 Dividend Reinvestment and Stock Purchase
Plan (as amended, the Plan) to increase the number of shares available thereunder. This prospectus relates to up to 4,500,000 shares of our common stock that we may issue pursuant to the Plan.
Our Business
We are in the business of investing primarily in United States agency and other highly rated single-family adjustable-rate and fixed-rate mortgage-backed securities that we
acquire in the secondary market. United States agency securities are securities that are obligations guaranteed by the United States government or its agencies, such as Fannie Mae or Freddie Mac. We seek attractive long-term investment returns by
investing our equity capital and borrowed funds in such securities. Our returns are earned on the spread between the yield on our earning assets and the interest cost of the funds we borrow. We have elected to be taxed as a real estate investment
trust, or REIT, under the United States Internal Revenue Code. As a REIT, we routinely distribute substantially all of the income generated from our operations to our stockholders. As long as we retain our REIT status, we generally will not be
subject to federal or state taxes on our income to the extent that we distribute our net income to our stockholders.
At September 30, 2002, we had total assets of $2,384 million and all of our mortgage assets were secured by single-family mortgage loans. As of that date, approximately 99% of our assets consisted of mortgage-backed securities
guaranteed by an agency of the United States government such as Fannie Mae or Freddie Mac.
Our Investments
We acquire mortgage-related assets, finance our purchases in the capital markets and use leverage to increase our return on
stockholders equity. Through this strategy we expect to earn income that will enable us to generate dividends for our stockholders.
We acquire mortgage-related assets that we believe will generate attractive returns on capital invested. Before making these investments, we consider the amount and nature of the anticipated returns from the assets, our
ability to pledge the assets to secure collateralized borrowings, and the costs associated with financing, managing, securitizing and reserving for the assets. We have also established a written asset acquisition policy that provides the following
investment guidelines:
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Category IAt least 60% of our total assets will generally be adjustable or fixed-rate mortgage securities and short-term investments. Assets in
this category will be rated within one of the two highest rating categories by at least one nationally recognized statistical rating organization, or if not rated, will be obligations guaranteed by the United States government or its agencies,
Fannie Mae or Freddie Mac. |
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Category IIAt least 90% of our total assets will generally consist of Category I investments plus unrated mortgage loans, mortgage securities rated
at least investment grade by at least one nationally recognized statistical rating organization, or shares of other REITs or mortgage-related companies. |
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Category IIINo more than 10% of our total assets may be of a type not meeting any of the above criteria. Among the types of assets generally
assigned to this category are mortgage securities rated below investment grade and leveraged mortgage derivative securities. |
We finance our acquisition of mortgage-related assets through borrowing at short-term rates using repurchase agreements. We generally borrow between eight and twelve times the amount of our equity. At
September 30, 2002, we had $2,113 million of repurchase agreements outstanding with a weighted average
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current borrowing rate of 2.05% and an average maturity of 196 days. We actively manage the adjustment periods and the selection of the interest rate indices of our borrowings against the
adjustment periods and the selection of indices on our mortgage-related assets in order to limit our liquidity and interest rate related risks.
We also seek to lessen the effects on our income if mortgage loans underlying our securities prepay at a rate materially different than anticipated. We do this by structuring a diversified portfolio
with a variety of prepayment characteristics, investing in mortgage assets or structures with prepayment protections and purchasing mortgage assets at a premium and at a discount. We may choose to engage in various hedging activities designed to
mitigate our exposure to changes in interest rates and prepayment rates. As of the date of this prospectus, we have made only limited use of hedging transactions.
We review credit risk and other risks of loss associated with each potential investment and may diversify our portfolio to avoid undue geographic, insurer, industry and
other types of concentrations. Given the fact that we maintain such a large percentage of our assets in high quality or highly rated assets, many of which include an implied guarantee of the federal government as to payment of principal and
interest, we believe we have limited exposure to losses from credit risk.
In addition to the strategies described
above, we intend to pursue other strategies to grow our earnings and our dividends per share, which may include the following:
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increasing the size of our balance sheet at a rate faster than the rate of increase in our operating expenses; |
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issuing new stock when market opportunities exist to profitably increase the size of our balance sheet through the use of leverage; and
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lowering our effective borrowing costs over time by seeking direct funding with collateralized lenders, rather than using financial intermediaries, possibly
using commercial paper, medium term note programs, preferred stock and other forms of capital. |
Our Executive
Officers
Our executive officers are as follows:
Joseph Lloyd McAdams. Mr. McAdams is our Chairman of the Board, President and Chief Executive Officer. Mr. McAdams is also the Chairman of the
Board, Chief Investment Officer and co-founder of Pacific Income Advisers and is the President of Syndicated Capital, Inc., a registered broker-dealer. Mr. McAdams also serves as a director of Monterey Mutual Fund. Before joining Pacific Income
Advisers, Mr. McAdams was President of Security Pacific Investment Managers, Inc. and served as Senior Vice President of Trust Company of the West. Mr. McAdams is a Chartered Financial Analyst charterholder, Chartered Investment Counselor and a
Certified Employee Benefit Specialist.
Thad M. Brown. Mr. Brown is our Secretary
and acting Chief Financial Officer. Mr. Brown is also the Chief Operating Officer, Corporate Secretary and Treasurer of Pacific Income Advisers. He began his career with Touche Ross & Co., Certified Public Accountants, and in 1987 associated
with Provident Investment Counsel, Pasadena, California becoming its Chief Operating Officer and Senior Vice President where he served in those capacities until 1999. Mr. Brown holds a masters degree in tax law, is a Certified Public
Accountant and received the Personal Financial Specialist designation from the American Institute of Certified Public Accountants.
Joseph E. McAdams. Mr. McAdams is an Executive Vice President and Director of our company with responsibility for managing our portfolio. Mr. McAdams is also Vice President of Pacific Income
Advisers where he serves as Fixed Income Portfolio Manager with a specialty in mortgage securities and is responsible for Pacific Income Advisers fixed income trading. Prior to joining Pacific Income Advisers, Mr. McAdams was a mortgage
security trader and analyst at Donaldson, Lufkin & Jenrette Securities Corp. in New York. Mr. McAdams is also a Chartered Financial Analyst charterholder.
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Heather U. Baines. Ms. Baines is an Executive Vice
President of our company. Ms. Baines is also the President, Chief Executive Officer and co-founder of Pacific Income Advisers. Prior to joining Pacific Income Advisers, Ms. Baines was employed by Security Pacific Investment Managers, Inc.,
ultimately holding the position of Senior Vice President and Director.
Evangelos
Karagiannis. Mr. Karagiannis is a Vice President of our company with responsibility for managing our portfolio. Mr. Karagiannis is also Vice President of Pacific Income Advisers where he serves as Fixed Income
Portfolio Manager with a specialty in mortgage securities and is responsible for Pacific Income Advisers quantitative research. Mr. Karagiannis is a Chartered Financial Analyst charterholder and holds a Ph.D. in physics.
Merger with Our Management Company
On June 13, 2002, our management company, Anworth Mortgage Advisory Corporation, merged with and into our company. The merger was approved by a special committee consisting solely of our independent
directors, our full board of directors and the vote of a majority of our stockholders. The stockholder of our management company received 240,000 shares of our common stock as merger consideration, which was worth approximately $3.2 million on the
closing date of the merger. As a result of the merger, we are now an internally managed company and certain employees of our management company have become our employees. As a condition to the merger, we entered into direct employment contracts with
Joseph Lloyd McAdams, Heather U. Baines and Joseph E. McAdams, adopted an incentive compensation plan for our key executives, increased the size of our 1997 Stock Option and Awards Plan and provided for future automatic increases in the size of that
plan. Upon the closing of the merger, the management agreement with our management company terminated.
The market
value of our common stock issued, valued as of the consummation of the merger, in excess of the fair value of the net tangible assets acquired, will be accounted for as a non-cash charge to operating income. Since we did not acquire tangible net
assets from our management company in the merger, the non-cash charge equaled the value of the consideration paid in the merger, which was approximately $3.2 million.
General Information
We were incorporated on October 20,
1997 under Maryland law. Our office is located at 1299 Ocean Avenue, Suite 250, Santa Monica, California 90401. Our telephone number is (310) 255-4493.
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DIVIDEND AND DISTRIBUTION POLICY
We intend to pay dividends and to make such
distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed so as to qualify for the tax benefits accorded to a REIT under the Code. Taxable
income, if any, not distributed through regular dividends will be distributed annually in a special dividend. Such a special dividend must be declared prior to the timely filing of our tax return for such year and paid not later than the next
regular dividend payment date after such declaration. All distributions will be made by us at the discretion of our board of directors and will depend on our earnings, financial condition, maintenance of REIT status and such other factors as our
board of directors may deem relevant from time to time.
The Plan is described in the following questions and answers:
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Why is the Plan being offered? |
The purpose of the Plan is to provide a convenient and economical method for our current stockholders to automatically reinvest all or a portion of their cash dividends in additional shares of our
common stock. The Plan also provides our current stockholders and new investors with an economical way to acquire shares of our common stock by directly investing additional cash amounts. In these ways, the Plan is intended to benefit our long-term
investors by allowing them to increase their investment in our common stock. The Plan also provides us with a cost-efficient way to raise additional capital through the direct sale of our common stock.
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How does the Plan work? |
The dividend reinvestment component of the Plan permits our stockholders to designate that all or a portion of their cash dividends on our common stock be invested in additional shares of our common stock. The optional cash
purchase component of the Plan permits current stockholders and new investors to purchase shares of our common stock on a monthly basis in amounts, subject to certain exceptions (see Question 16), ranging from $50 to $10,000 or, with our prior
approval, in excess of $10,000 (see Question 17). Funds invested pursuant to the Plan are fully invested through the purchase of both whole and fractional shares of our common stock, and proportionate cash dividends on fractional shares of our
common stock held in a participants account with the Plan Administrator (a Plan Account) are used to purchase additional shares under the Plan.
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What are the advantages of participating in the Plan? |
The Plan provides participants with the opportunity to acquire additional shares of our common stock directly from us without having to pay the trading fees or service
charges associated with an independent purchase. If we issue new shares of our common stock to participants in the Plan, we may sell the shares at a discount of up to 5% from the current market price of our common stock. If the Plan Administrator
acquires our shares in the open market for participants in the Plan, we may discount such shares by paying up to 5% of the purchase price for such shares. For shares acquired in the open market, the purchase price includes all trading fees and
service charges. You should note, however, that we are not required to offer shares at a discount or to pay discounts, fees, commissions or service charges. We may change the discount percentage offered at any time or discontinue this feature of the
Plan at any time.
The Plan also offers a share safekeeping service that allows you to deposit your
share certificates with the Plan Administrator and have your share ownership maintained on the Plan Administrators records as part of your Plan Account. There is no charge for this service.
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What are the disadvantages of participating in the Plan? |
Investing in our common stock through the Plan is no different from, and is subject to the same risks as, investing in our common stock directly. This includes the risk
that the market price for our common stock may decline. See the section entitled Risk Factors below. Neither we nor the Plan Administrator can guarantee that shares of our common stock purchased under the plan will be worth more or less
than their purchase price at any particular time.
Amounts contributed to the Plan will not necessarily be
invested by the Plan Administrator immediately upon receipt. Likewise, there may be delays in the delivery of moneys to be returned to you under the Plan. The Plan will not pay interest to you on funds held pending investment or pending return to
you.
Purchases and sales of our common stock under the Plan will be effected by the Plan Administrator as soon as
practicable after it receives investment instructions. Therefore, if you participate in the Plan, you will not be able to control the specific timing of purchases and sales made for you under the Plan. The market price of our common stock may
fluctuate between the time an investment instruction is received and the time shares are purchased or sold.
You
will not be able to pledge any shares of our common stock held in your Plan Account until a certificate for those shares is issued to you.
If you reinvest your cash dividends, you will be treated as having received dividend income for federal income tax purposes but will not receive a dividend check. There may be other tax-related disadvantages applicable to
your participation in the Plan. See Question 33 and the section entitled Federal Income Tax Considerations below.
There are certain fees that will be charged to you by the Plan Administrator (see Question 27).
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Who is eligible to participate? |
Anyone is potentially eligible to participate in the Plan. You may participate in the Plan if: (i) you are a registered holder of our common stock; that is, your shares are registered in
your name on our stock transfer books; (ii) you are a beneficial owner of our common stock; that is, your shares are registered in a name other than your own name (i.e., in the name of a broker, bank or other nominee); or (iii) you are
not presently a stockholder but wish to acquire shares of our common stock. If you are a registered holder, you may participate in the Plan directly. If you are a beneficial owner, you must either become a registered holder by having your shares
transferred into your own name or make arrangements with your broker, bank or other nominee to participate in the Plan on your behalf (see Question 6).
As a general matter, you cannot participate in the Plan if you (i) are not a U.S. citizen or resident for federal income tax purposes or (ii) own (taking into account the special constructive ownership
provisions of U.S. federal income tax law applicable to real estate investment trusts) 9.8% or more of the outstanding shares of our common stock. In addition, you will not be allowed to participate if you live in a jurisdiction that makes it
unlawful for us to permit your participation in the Plan. Persons who are citizens or residents of a country other than the United States, its territories and possessions should make certain that their participation does not violate local laws
governing such matters as taxes, currency and exchange controls, share registration, foreign investments and related matters. We reserve the right to terminate anyones participation in the Plan if we deem it advisable under any applicable laws
or regulations. We also reserve the right, in our sole discretion, to exclude anyone from the Plan who fails to comply with the requirements of the Plan, including, but not limited to, those seeking to use the Plan to engage in short-term trading
activities that may cause aberrations in the trading volume of our common stock or who use multiple Plan Accounts to circumvent the Plans standard $10,000 per month investment maximum.
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How do I enroll in the Plan? |
If you hold shares of our common stock in your own name, or if you are a new investor, you may enroll in the Plan by obtaining a plan enrollment form by calling the Plan Administrator at (877) 248-6410
and mailing your completed form to the Plan Administrator at American Stock Transfer & Trust Company, Dividend Reinvestment Department, P.O. Box 922, Wall Street Station, New York, New York 10269-0560. Alternatively, you may enroll online
through InvestPower, a division of the Plan Administrator, at www.investpower.com. If your shares are registered in a name other than your own name (i.e., in the name of a broker, bank or other nominee), then you must either (i) have your
shares re-registered in your own name and then enroll as discussed above or (ii) make arrangements with your nominee holder to participate on your behalf. You will need to confirm that your nominee holder is able to accommodate your participation in
the Plan.
An eligible person may elect to become a participant in the Plan at any time, subject to our right to
modify, suspend, terminate or refuse participation in the Plan. Your plan enrollment appoints the Plan Administrator as your agent for purposes of the Plan and permits it to reinvest dividends on the number of shares you designate and to make cash
purchases on your behalf as you direct. You may also specify whether you wish to have your shares held by the Plan Administrator for safekeeping (see Question 21).
If you are enrolling for dividend reinvestment, the Plan Administrator must receive your plan enrollment at least two (2) business days prior to the record date established
for a particular dividend in order for you to be eligible for reinvestment of that dividend payment under the Plan (see Question 13). Otherwise, reinvestment of your dividends will begin with the next dividend payment.
If you are enrolling in the Plan by making an optional cash purchase (see Question 9), the Plan Administrator must receive your plan
enrollment and investment funds at least two (2) business days before the date such funds are to be invested for a particular month (see Question 13 and Question 17). If your plan enrollment and investment funds are received after that date, they
will be held in your Plan Account until the next applicable Small Cash Purchase Investment Date or Large Cash Purchase Investment Date (as defined herein), as the case may be. If you are not a current stockholder, you must submit your initial
investment with your plan enrollment.
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Who is the Plan Administrator? |
The Plan is being administered by American Stock Transfer & Trust Company. Information on how to contact the Plan Administrator is described in Question 6 and Question 35. The Plan Administrator
keeps records, sends statements of account to each participant in the Plan and performs other duties related to the Plan, including the safekeeping of the shares purchased for each participant. The Plan Administrator also acts as the dividend
disbursing agent, transfer agent and registrar for our common stock.
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How will I keep track of my investments? |
The Plan Administrator will send you a transaction notice confirming the details of each Plan transaction you make, including the number of shares purchased and the price paid. You will also receive
annual income tax information on Form 1099. These statements are your record of the cost of your purchases and should be retained for income tax and other purposes.
All notices from the Plan Administrator to you will be mailed to your last address of record. However, if your shares are registered in a name other than your own name,
communications regarding the Plan will be made through your nominee holder.
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What investment options are available under the Plan? |
You can purchase shares of our common stock under the Plan through the following investment options:
Dividend Reinvestment. You can instruct the Plan Administrator to apply the cash dividends paid on all or any portion of the shares of common
stock designated by you for reinvestment. In order to participate in the Plan, you do not have to submit the shares of our common stock currently held by you or on your behalf to your Plan Account in order to elect to reinvest the dividends on all
or a portion of such shares, although share safekeeping is one of the benefits available under the Plan (see Question 21). Shares of common stock purchased for your Plan Account will be automatically enrolled in the Plan in book-entry form, with the
Plan Administrator listed as your nominee, and all dividends paid on these shares will also be reinvested, even if you withdraw the shares from your Plan Account, unless you instruct the Plan Administrator otherwise. Cash dividends paid on shares of
our common stock owned by you that are not held in your Plan Account, and for which you do not elect to reinvest dividends, will continue to be paid directly to you.
Optional Cash Purchases. You can make voluntary cash contributions to your Plan Account at any time, even if you are not currently reinvesting
dividends paid to you on our common stock. Payment for these optional cash purchases can be made by check, money order or electronic funds transfer from a pre-designated bank account. The Plan Administrator will use these funds to purchase shares of
our common stock on a monthly basis. If you are already a stockholder, the minimum optional cash purchase is $50 per month. If you are using this feature to make your initial investment in our common stock, the minimum cash purchase is $1,000. You
may not make optional cash purchases of more than $10,000 per month without our prior written approval (see Question 17). Dividends paid on shares of our common stock that are purchased for your Plan Account with voluntary cash contributions will
automatically be reinvested in our common stock unless you instruct the Plan Administrator otherwise.
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Can I change my investment options? |
Yes. You may change your investment options online at any time through InvestPower at www.investpower.com or by completing a new plan enrollment and submitting it to the Plan Administrator at
least two (2) business days prior to the record date for the next dividend payment.
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What is the source of shares purchased by the Plan? |
We may either issue new shares of our common stock directly to the Plan or instruct the Plan Administrator to acquire currently outstanding shares in the open market. Open
market purchases may be made, at the Plan Administrators option, on the American Stock Exchange or any other securities exchange where our common stock is traded, in the over-the-counter market or in negotiated transactions with third persons.
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At what price will shares be acquired? |
Shares Acquired Directly from Us. All shares of our common stock acquired directly from us pursuant to the Plan will be acquired at a discount rate ranging from 0% to 5%
from the average of the daily high and low sales prices of our common stock, computed up to four decimal places, if necessary, as reported on the American Stock Exchange on the applicable Small Cash Purchase Investment Date (as defined herein).
Shares Acquired on the Open Market. All shares of our common stock purchased by the
Plan Administrator in the open market will be acquired at a discount rate, which will be paid by us, ranging from 0% to 5% from the prevailing market price. The price deemed to be paid by any participant for shares acquired in the open market on any
given day will be the weighted average of the actual prices paid for all shares acquired on that date, computed to four decimal places, if necessary, including all trading fees and service charges. Open market purchases may be made on such terms as
to price, delivery and otherwise as the Plan Administrator determines.
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We are not required to sell shares issued by us at a discount to the Plan or to
pay a discount with respect to shares purchased by the Plan Administrator in the open market or to pay fees, commissions or service charges, and the discount rate we offer is subject to change or discontinuance at our discretion and without prior
notice to participants in the Plan. The discount rate, if any, will be determined by us from time to time based on a review of current market conditions, the level of participation in the Plan, our current and projected capital needs and other
factors that we deem to be relevant.
There are special rules for cash purchases of more than $10,000 per month
(see Question 17).
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When are the shares purchased for the Plan? |
We pay dividends on a quarterly basis. If these dividends are used to acquire new shares directly from us, the Plan Administrator will reinvest dividends on the applicable date on which we pay
dividends (each a Dividend Payment Date). If these dividends are used to acquire shares through open market purchases, the Plan Administrator will purchase all shares within 30 days of the applicable Dividend Payment Date. If the
dividends are not able to be fully invested within 30 days, they will be distributed in full, without interest, by the Plan Administrator to the stockholders participating in the Plan. Payment of dividends are always announced in advance. You may
learn the date of any announced dividend payment by calling the Plan Administrator at (877) 248-6410.
Funds
for optional cash purchases may be deposited into your Plan Account at any time. If the funds you deposit during a particular calendar month are $10,000 or less and are used to acquire new shares directly from us, they will be invested on the tenth
(10th) day of the month (a Small Cash Purchase Investment Date); provided that if those funds are not received at least two (2) business days before the Small Cash Purchase Investment Date for that month, then they will be invested on
the Small Cash Purchase Investment Date of the following month. If these funds are used to acquire shares through open market purchases, the Plan Administrator will purchase all shares within 30 days of the applicable Small Cash Purchase Investment
Date. If any funds deposited for optional cash purchases are not able to be fully invested within 30 days of the applicable Small Cash Purchase Investment Date, they will be returned in full, without interest, by the Plan Administrator to the
applicable stockholders and/or new investors.
There are special rules for cash purchases of more than $10,000 per
month (see Question 17).
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Will I earn interest on funds in my Plan Account prior to investment or return to me? |
No. Interest will not be paid on funds deposited by you in your Plan Account pending investment or return to you.
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What are the procedures for cash purchases? |
If you are not already a stockholder, you are required under the Plan to make an initial investment of at least $1,000, but not more than $10,000, unless you have received our prior approval for larger
purchases (see Question 17). Your initial investment can be made through InvestPower at www.investpower.com or by completing a plan enrollment form and submitting it with your check made payable to American Stock Transfer & Trust
Company/Anworth (see Question 6).
If you are already a stockholder and have enrolled in the Plan and want to make
optional cash purchases, you may send a check to the Plan Administrator for each purchase, or authorize individual or monthly debits from your bank account. If you choose to submit a check, please make sure to include the contribution form from your
Plan statement and mail it in the envelope provided. This feature enables you to make ongoing investments in an amount that is comfortable for you. Ongoing optional cash purchases are subject to a minimum investment of $50 per month and a maximum of
$10,000 per month, unless you have received our prior approval for larger purchases (see Question 17).
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In order for your funds to be invested on a particular Small Cash Purchase
Investment Date, they must be received by the Plan Administrator no later than two (2) business days before that Small Cash Purchase Investment Date. No interest will be paid on funds held by the Plan Administrator pending investment.
You may cancel an optional cash purchase of $10,000 or less by advising the Plan Administrator at least two (2) business days
before the applicable Small Cash Purchase Investment Date. The Plan Administrator will return the funds from a canceled purchase to you without interest as soon as practical. No refund of a check or money order will be made until the funds have been
actually received by the Plan Administrator.
There are special rules for cash purchases of more than $10,000 per
month (see Question 17).
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What limitations apply to optional cash purchases? |
Minimum Investments. If you are already a stockholder, the minimum cash purchase is $50 per month. If you are using this feature to make your
initial investment in our common stock, the minimum cash purchase is $1,000. Cash purchases for less than these minimums will be returned to you without interest, unless we choose to waive these minimum amounts.
Large Cash Purchases. Cash purchases of more than $10,000 per month (Large Cash Purchases) will
not be allowed by the Plan Administrator without our prior written approval. Unless you have complied with the procedures described in Question 17, any amount you submit for investment over this limit will be returned to you without interest. For
purposes of this limitation, we reserve the right to aggregate all cash purchases from any participant with more than one Plan Account using the same name, address or social security or taxpayer identification number. If you do not supply a social
security or taxpayer identification number to the Plan Administrator, your participation may be limited to only one Plan Account. Also for the purpose of this limitation, all Plan Accounts that we believe to be under common control or management or
to have common ultimate beneficial ownership may be aggregated. We may grant or withhold our permission to make Large Cash Purchases in our sole discretion. We may grant such request in whole or in part. We may also grant requests for some Large
Cash Purchases and deny requests for others even though they are made in the same month.
17. |
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What are the procedures for a Large Cash Purchase? |
Large Cash Purchases may be made by either a participant in the Plan or a new investor only upon our written approval. You must obtain our approval of a request for waiver
each calendar month before the beginning of the relevant Pricing Period (as defined herein). To obtain our approval, you must submit a request for waiver form. You may make a request for waiver by contacting the Plan Administrator at (718) 921-8391.
Completed request for waiver forms should be submitted to the Plan Administrator via facsimile at (718) 921-8182 no later than two (2) business days prior to the applicable Pricing Period Start Date. See Appendix I to this prospectus. The Plan
Administrator will notify you as to whether your request has been granted or denied, either in whole or in part, within two (2) business days of the receipt of your request. If your request is granted in part, the Plan Administrator will advise you
of the maximum amount that will be accepted from you as a Large Cash Purchase. If your request is approved, the Plan Administrator must receive the funds for your Large Cash Purchase prior to or on the applicable Pricing Period Start Date provided
in Appendix I to this prospectus. If you do not receive a response from us in connection with your request for waiver, you should assume we have denied your request.
If we approve your request to make a Large Cash Purchase in any month, shares will be purchased directly from us. Large Cash Purchases will be made as soon as practicable
on or after the Large Cash Purchase Investment Date as set forth in Appendix I. Large Cash Purchases will be made at a price equal to the average of the daily high and low sales prices computed up to four decimal places, if necessary, of
our common stock as reported on the American Stock Exchange for the ten (10) Trading Days (as defined below) immediately preceding the applicable Large Cash Purchase Investment Date. A Trading Day means a day on which trades in our
common stock are reported on the American Stock Exchange. The period encompassing the first ten (10) Trading Days immediately preceding the next following Large Cash Purchase Investment Date constitutes the
9
relevant Pricing Period. The Plan Administrator will apply all optional cash investments for which good funds are received on or before the first business day before the Pricing
Period to the purchase of shares of common stock as soon as practicable on or after the next following Large Cash Purchase Investment Date.
We may set a minimum purchase price per share (the Minimum Waiver Price) for Large Cash Purchases made pursuant to a granted request for waiver for any Pricing Period. We will determine
whether to set a Minimum Waiver Price, and, if so, its amount, at least three (3) business days before the first day of the Pricing Period. We will notify the Plan Administrator of the Minimum Waiver Price, if any, for the relevant Pricing Period.
In deciding whether to set a Minimum Waiver Price, we will consider current market conditions, the level of participation in the Plan and our current and projected capital needs, but the Minimum Waiver Price, if any, will be set in our sole
discretion. Participants may ascertain whether a Minimum Waiver Price has been set or waived for any given Pricing Period by calling the Plan Administrator at (718) 921-8391 or such other number as we may establish from time to time.
We will fix the Minimum Waiver Price for a Pricing Period as a dollar amount that the average of the high and low sales prices
as reported by the American Stock Exchange for each trading day of that Pricing Period (not adjusted for discounts, if any) must equal or exceed. We will exclude from the Pricing Period and from the determination of the purchase price any trading
day within the Pricing Period that does not meet the Minimum Waiver Price. We also will exclude from the Pricing Period and from the determination of the purchase price any day in which no trades of common stock are made on the American Stock
Exchange. Thus, for example, if the Minimum Waiver Price is not met or no sales of our common stock are reported for two (2) of the ten (10) trading days in a Pricing Period, then we will base the purchase price upon the remaining eight (8) trading
days in which the Minimum Waiver Price was met.
In addition, we will return a pro rata portion of each Large Cash
Purchase made pursuant to an approved request for waiver for each trading day of a Pricing Period for which the Minimum Waiver Price is not met or for each day in which no trades of common stock are reported on the American Stock Exchange as soon as
reasonably practical after the pricing period, without interest. The returned amount will equal one-tenth (1/10th) of the total amount of that optional cash investment (not just the amount exceeding $10,000) for each trading day that the Minimum
Waiver Price is not met or for each trading day in which sales are not reported. Thus, for example, if the Minimum Waiver Price is not met or no sales of our common stock are reported for two (2) of the ten (10) trading days in a Pricing Period,
then we will return two-tenths (2/10th or 20%) of the optional cash investment to you without interest after conclusion of the Pricing Period. This does not constitute a discount to the purchase price; however, it does reduce the amount of the
offering.
The establishment of the Minimum Waiver Price and the possible return of a portion of the payment
applies only to Large Cash Purchases made pursuant to a granted request for waiver. Setting a Minimum Waiver Price for a pricing period will not affect the setting of a Minimum Waiver Price for any other Pricing Period. We may waive our right to set
a Minimum Waiver Price for any particular Pricing Period. Neither Anworth nor the Plan Administrator is required to give you notice of the Minimum Waiver Price for any Pricing Period. We may alter or amend at our sole discretion these Pricing
Periods at any time and from time to time, prior to the commencement of any Pricing Period and prior to the granting of any waiver with respect to such period.
A discount of 0% up to 5% from the purchase price may be offered, in our sole discretion, with respect to a particular investment date to participants on purchases of our common stock through Large
Cash Purchases. The maximum discount rate, if any, on Large Cash Purchases may be obtained at least three (3) business days before the first day of the applicable Pricing Period, as provided on Appendix I to this prospectus by calling the Plan
Administrator at (718) 921-8391.
We are not required to sell shares issued by us at a discount to the Plan or to
pay a discount with respect to shares purchased by the Plan Administrator in the open market, and the discount rate we offer is subject to change or discontinuance at our discretion and without prior notice to participants in the Plan. The discount
rate,
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if any, will be determined by us from time to time based on a review of current market conditions, the level of participation in the Plan, our current and projected capital needs and other
factors that we deem to be relevant.
18. |
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Does the Plan Administrator credit my shares to a separate account? |
Yes. The Plan Administrator will establish a separate Plan Account for you and credit it with those shares that have been purchased for you under the Plan. In addition, the
Plan Administrator will credit your Plan Account with those shares that you have delivered to the Plan Administrator for safekeeping (see Question 21). All shares in your Plan Account will be registered in book-entry form in the name of the Plan
Administrator or its nominee, but your beneficial ownership will be maintained in your Plan Account. The total number of shares credited to your Plan Account will be shown on each account statement.
In the event that you wish to have any whole shares of our common stock that have been credited to your Plan Account issued in
certificated form to you, you may do so by contacting the Plan Administrator and making such request (see Question 20).
Although the Plan Administrator will maintain a separate Plan Account for you, it is authorized to commingle funds in your Plan Account with those of other Plan participants for purposes of making purchases of our common stock.
19. |
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Are funds held in my Plan Account insured? |
No. Funds held in your Plan Account pending investment or return are not treated as a bank deposit or account and are not insured by the FDIC or any other governmental agency or instrumentality.
20. |
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Will I receive certificates for the shares purchased for me under the Plan? |
No. You will not receive certificates for shares purchased for you under the Plan. For your convenience, the Plan Administrator will maintain the shares purchased for your
Plan Account in non-certificated, i.e. book-entry form. You may, however, request that a stock certificate be issued to you for any or all whole shares of our common stock credited to your Plan Account. No certificates for fractional
shares will be issued. Certificates will be issued free of charge. Cash dividends with respect to participating shares represented by certificates issued to you will continue to be automatically reinvested, unless you instruct the Plan Administrator
otherwise. Any remaining shares will continue to be credited to your Plan Account. You may request certificates by contacting the Plan Administrator at (877) 248-6410.
21. |
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What is share safekeeping? |
If you hold the certificates for shares of our common stock (whether or not you elect to have dividends on these shares reinvested), you may deposit the certificates with the Plan Administrator for
safekeeping in your Plan Account. Share safekeeping protects your shares against loss, theft or accidental destruction and is a convenient way for you to keep track of your shares. There is no fee or other charge for this service. Shares held for
safekeeping will be credited to your Plan Account and the certificates for such shares will be canceled. If at a later time you want to withdraw those shares from share safekeeping in your Plan Account, a new certificate for such shares shall be
issued to you (see Question 20). Only shares held in safekeeping may be sold through the Plan. The Plan Administrator may maintain shares held for safekeeping in its name or in the name of its nominee. Contact the Plan Administrator at (877)
248-6410 for information on how to submit your share certificates for safekeeping.
22. |
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May the shares in my Plan Account be sold or transferred? |
Yes. You may instruct the Plan Administrator to sell any or all of the whole shares held in your Plan Account at any time. You will not, however, be able to direct the date
on which, or the price at which, shares held
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in your Plan Account may be sold. In the case of a request to sell submitted on behalf of a Plan participant who has died or is an adjudicated incompetent, the request must be accompanied by
certified evidence of the representatives authority to request a sale of the participants shares. The Plan Administrator will process sales orders when practicable, normally within 24 hours of receipt. Shares will be sold from your Plan
Account at the prevailing market price and the proceeds of sale, less applicable trading fees, transfer taxes and the Plan Administrators administrative fee, will be remitted to you or your representative.
In addition, you may transfer the ownership of all or part of the shares in your Plan Account to the Plan Account of another person
without requiring the issuance of stock certificates. This could include a gift or private sale. Transfers of less than all of the shares credited to your Plan Account must be made in whole share amounts. No fractional shares may be transferred
unless your entire Plan Account balance is transferred. Requests for these transfers must meet the same requirements as are applicable to the transfer of stock certificates, including the requirement of a medallion stamp guarantee. Shares that are
transferred will be credited in book-entry form to the transferees Plan Account. If the transferee does not have a Plan Account, one will be opened for the transferee using the same investment options as your Plan Account, unless you specify
differently. The transferee may change the investment options after the transfer has been made. After the transfer, the transferee will receive an account statement showing the number of shares transferred to and held in the transferees Plan
Account.
23. |
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May shares in my Plan Account be pledged? |
No. You must first request that certificates for shares credited to your Plan Account be issued to you before you can pledge these shares.
24. |
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Can I vote shares in my Plan Account? |
Yes. You will have the right to vote all whole shares held in your Plan Account. Fractional shares may not be voted. Proxies for whole shares held in your Plan Account will be forwarded to you by the
Plan Administrator. The Plan Administrator may vote your shares in certain cases if you fail to return a proxy to the Plan Administrator.
25. |
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May I transfer my right to participate in the Plan? |
No. Your right to participate in the Plan is not transferable to any other person apart from a transfer of your shares.
26. |
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What happens if the Company issues a stock dividend, declares a stock split or has a rights offering? |
Any stock dividends or stock splits distributed by us on shares of our common stock held in your Plan Account will be credited to your
Plan Account. In the event we make available to our stockholders rights to purchase additional shares of our common stock or other securities, you will receive appropriate instructions in connection with all such rights directly from the Plan
Administrator in order to permit you to determine what action you desire to take. Transaction processing under the Plan may be curtailed or suspended until the completion of any stock dividend, stock split or stockholder rights offering.
27. |
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Is there a cost to participate in the Plan? |
The Plan provides participants with the opportunity to acquire additional shares of our common stock directly from us without having to pay the trading fees or service charges associated with an
independent purchase. If we issue new shares of our common stock to participants in the Plan, we may sell them at a discount of up to 5% from the current market price of our common stock. If the Plan Administrator acquires our shares in the open
market for participants in the Plan, we may discount such shares by paying up to 5% of the purchase price for such shares. For shares acquired in the open market, the purchase price includes all trading fees and service charges. You should note,
however, that we are not required to offer shares at a discount or to pay discounts, fees, commissions and service charges. We may change the discount percentage offered at any time or discontinue this feature of the Plan at any time.
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We will pay the Plan Administrators fees in connection with dividend
reinvestments and cash purchases. There are no fees for the share safekeeping service. The financial institution designated by a participant on its plan enrollment may, however, charge a fee for participating in the electronic fund transfer.
Further, when shares of our common stock are sold by the Plan Administrator for a participant, the participant will be responsible for any trading fees, expenses, service charges or other expenses incurred pursuant to the sale of such shares of
common stock.
The Plan Administrator will charge Plan participants a fee of $20.00 for duplicate account records
and $35.00 for insufficient funds or rejected automatic debits.
28. |
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How and when may I terminate my participation in the Plan? |
You may discontinue the reinvestment of your dividends at any time by giving notice to the Plan Administrator. To be effective for a given dividend payment, the Plan
Administrator must receive notice before the record date of that dividend. You may provide notice through InvestPower at www.investpower.com, by calling the Plan Administrator at (877) 248-6410, or by mailing your request to the Plan
Administrator at American Stock Transfer & Trust Company, Dividend Reinvestment Department, P.O. Box 922, Wall Street Station, New York, New York 10269-0560. The Plan Administrator will continue to hold your Plan shares unless you request a
certificate for any whole shares and a cash payment for any fractional share. You may also request the sale of all or part of such shares or have the Plan Administrator transfer your shares to your brokerage account or another Plan Account. In the
case of a request submitted on behalf of a Plan participant who has died or is an adjudicated incompetent, the request must be accompanied by certified evidence of the representatives authority to make such a request on behalf of the
participant. Shares and cash will be retained in the participants Plan Account until the participants legal representative has been appointed and has furnished proof satisfactory to the Plan Administrator of the legal
representatives right to receive a distribution of these assets.
29. |
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May the Plan be changed or discontinued? |
Yes. We reserve the right to suspend or terminate the Plan in whole or in part at any time. Notice will be sent to participants of any suspension or termination as soon as practicable after such action
by us. Upon termination of the Plan, the Plan Administrator will issue a stock certificate for the total number of whole shares credited to your Plan Account and a cash payment for any fractional share credited to your Plan Account. However, if we
terminate the Plan for the purpose of establishing a new plan, you will be automatically enrolled in the new plan and shares credited to your Plan Account will be credited automatically to the new plan unless, prior to the effective date thereof,
the Plan Administrator receives notice of termination of your Plan Account.
The Plan may also be amended or
supplemented by us at any time, including the period between the dividend record date and the related Dividend Payment Date. Any such amendment may include an appointment by the Plan Administrator of a successor Plan Administrator. Plan participants
will be notified of any amendments as soon as practicable. In addition, the Plan Administrator reserves the right to change its administrative procedures for the Plan.
30. |
|
Who interprets and regulates the Plan? |
We reserve the right, without notice to Plan participants, to interpret and regulate the Plan as we deem necessary or desirable in connection with our operations. Any such interpretation and regulation
shall be conclusive.
31. |
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What law governs the Plan? |
The terms and conditions of the Plan and its operation are governed by the laws of the State of Maryland.
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32. |
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What are the responsibilities of the Company and the Plan Administrator under the Plan? |
The Plan Administrator has had no responsibility with respect to the preparation or contents of this prospectus. Neither we nor the Plan
Administrator, in administering the Plan, shall be liable for any act done in good faith, or for any good faith omission to act, including, without limitation, any claims of liability (i) arising out of failure to terminate any participants
Plan Account upon such participants death or adjudication of incompetence, prior to receipt of notice in writing of such death or adjudication of incompetence, (ii) with respect to the prices at which shares of our common stock are purchased
or sold for the participants Plan Account and the times such purchases or sales are made or (iii) with respect to any loss or fluctuation in the market value after the purchase of shares.
You should recognize that neither we nor the Plan Administrator can assure a profit or protect against a loss in value of the shares of our common stock that you
purchase under the plan.
33. |
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What are the United States federal income tax consequences of participating in the Plan? |
Dividend Reinvestment. The reinvestment of dividends does not relieve you of any income tax which may be
payable on such dividends. When your dividends are reinvested to acquire shares of common stock (including any fractional share), you will be treated as having received a distribution in the amount of the per share fair market value of our common
stock on the Dividend Payment Date (the Fair Market Value), multiplied by the number of shares (including any fractional share) purchased plus any trading fees or service charges that we pay on your behalf.
So long as we continue to qualify as a REIT under the Code, the distribution will be taxable under the provisions of the Code applicable
to REITs and their stockholders, pursuant to which (i) distributions will be taxable to stockholders as ordinary income to the extent of our current or accumulated earnings and profits, (ii) distributions which are designated as capital gain
distributions by us will be taxed as long-term capital gains to stockholders to the extent they do not exceed our net capital gain for the taxable year, (iii) distributions which are not designated as capital gains distributions and which are in
excess of our current or accumulated earnings and profits will be treated as a tax-free return of capital to the stockholders and reduce the adjusted tax basis of a stockholders shares (but not below zero) and (iv) such distributions in excess
of a stockholders adjusted tax basis in its shares will be treated as gain from the sale or exchange of such shares.
You should be aware that, because shares of our common stock purchased with reinvested dividends may be purchased at a discount and because we may pay a portion of the purchase price, trading fees or service charges on your behalf,
the taxable income received by you as a participant in the Plan may be greater than the taxable income that would have resulted from the receipt of the dividend in cash.
The Plan Administrator will report to you for tax purposes the dividends to be credited to your account as well as any discounts or trading fees or service charges incurred
by us. Such information will also be furnished to the Internal Revenue Service (the IRS) to the extent required by law.
Cash Purchases. The IRS has privately ruled that stockholders who participate in the cash purchases under a stock purchase and dividend reinvestment plan of a REIT will not be treated as
receiving a dividend equal to the discount unless such stockholders also participate in the reinvestment of dividends under such plan. Private letter rulings are not precedent and may not be relied upon by any taxpayer other than those to whom the
ruling is addressed. Nevertheless, such rulings often reflect the current thinking of the IRS. Therefore, the tax treatment of a purchase of shares under the Plan with an initial cash purchase by a prospective investor or a cash purchase by an
existing stockholder may differ depending on whether you are participating in the dividend reinvestment feature of the Plan. If you are not participating in the dividend reinvestment feature of the Plan, you may not be treated for federal income tax
purposes as having received a distribution from us upon the purchase of shares with a cash purchase. In that case, your tax basis in the shares purchased will equal the purchase price for such shares.
14
On the other hand, if you participate in the dividend reinvestment feature of the
Plan, you may be treated for federal income tax purposes as having received a distribution from us upon the purchase of shares with a cash purchase in an amount equal to the excess, if any, of (i) the per share Fair Market Value of the shares
multiplied by the number of shares (including any fractional share) purchased, plus any trading fees or service charges that we pay on your behalf, over (ii) the purchase price of such shares, taking into account any discount. If you participate in
the dividend reinvestment feature of the Plan, you will receive a tax basis in shares acquired with a cash purchase equal to the greater of the Fair Market Value or the purchase price of the shares.
The holding period for shares (including a fractional share) acquired under the Plan generally will begin on the day after the shares were
acquired. In the case of participants whose dividends are subject to U.S. backup withholding (see below), the Plan Administrator will reinvest dividends less the amount of tax required to be withheld.
Receipt of Share Certificates and Cash. You will not realize any further taxable income when you receive
certificates for shares of our common stock credited to your Plan Account (see Question 20). Any cash received for a fractional share held in your Plan Account will be treated as an amount realized on the sale of the fractional share. You therefore
will recognize gain or loss equal to any difference between the amount of cash received for a fractional share and your tax basis in the fractional share.
34. |
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What are the effects of the United States federal income tax withholding provisions? |
We or the Plan Administrator may be required to withhold on all dividend payments to a stockholder if (i) such stockholder has failed
to furnish his or her taxpayer identification number, which for an individual is his or her social security number, (ii) the IRS has notified us that the stockholder has failed to properly report interest or dividends or (iii) the stockholder has
failed to certify, under penalties of perjury, that he or she is not subject to back-up withholding. In the case of a stockholder who is subject to back-up withholding tax on dividends under the Plan, the amount of the tax to be withheld will be
deducted from the amount of the cash dividend and only the reduced amount will be reinvested in Plan shares.
The
summary set forth in Questions 33 and 34 is intended only as a general discussion of the current United States federal income tax consequences of participation in the Plan. This discussion does not purport to deal with all aspects of taxation that
may be relevant to particular participant in light of their personal investment circumstances, or certain types of participants (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers or foreign persons)
subject to special treatment under the federal income tax laws. Additionally, this discussion is not binding upon, nor considered authority by, the IRS or any court, and no assurance can be provided that the tax treatment claimed by any participant
in the Plan will not be successfully challenged by the IRS. For a discussion of the federal tax consequences of holding stock in a REIT generally, see the section entitled Federal Income Tax Considerations below.
35. |
|
How do I get more information? |
Enrollment, requests for purchases or sales of shares and other transactions or services offered by the Plan should be directed to the Plan Administrator through InvestPower, a division of the Plan
Administrator, at www.investpower.com, in writing to American Stock Transfer & Trust Company, Dividend Reinvestment Department, P.O. Box 922, Wall Street Station, New York, New York 10269-0560, or by calling (877) 248-6410, 8:00 a.m. to
7:00 p.m., Eastern Time, Monday through Thursday, or 8:00 a.m. to 5:00 p.m., Eastern Time, Fridays. If your shares are not held in your name, contact your brokerage firm, bank, or other nominee for more information. They can contact the Plan
Administrator directly for instructions on how to participate on your behalf.
15
An investment in our stock involves a number of risks. Before making a
decision to purchase our securities, you should carefully consider all of the risks described in this prospectus. If any of the risks discussed in this prospectus actually occur, our business, financial condition and results of operations could be
materially adversely affected. If this were to occur, the trading price of our securities could decline significantly and you may lose all or part of your investment.
Risk Related to Our Business
Interest rate mismatches between our adjustable-rate mortgage-backed securities and our borrowings used to fund our purchases of the assets may reduce our income during periods of changing interest rates.
We fund most of our acquisitions of adjustable-rate mortgage-backed securities with borrowings that have interest rates based
on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of our mortgage-backed securities. Accordingly, if short-term interest rates increase, this may adversely affect our
profitability.
Most of the mortgage-backed securities we acquire are adjustable-rate securities. This means that
their interest rates may vary over time based upon changes in a short-term interest rate index. Therefore, in most cases the interest rate indices and repricing terms of the mortgage-backed securities that we acquire and their funding sources will
not be identical, thereby creating an interest rate mismatch between assets and liabilities. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between
these indices was volatile. During periods of changing interest rates, these mismatches could reduce our net income, dividend yield and the market price of our stock.
The interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate mortgage-backed securities. For example, on September
30, 2002, our adjustable-rate mortgage-backed securities had a weighted average term to next rate adjustment of approximately 18 months, while our borrowings had a weighted average term to next rate adjustment of 196 days. Accordingly, in a period
of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate mortgage-backed securities.
We may experience reduced net interest income from holding fixed-rate investments during periods of rising interest rates.
We generally fund our acquisition of fixed-rate mortgage-backed securities with short-term borrowings.
During periods of rising interest rates, our costs associated with borrowings used to fund acquisition of fixed-rate assets are subject to increases while the income we earn from these assets remains substantially fixed. This reduces or could
eliminate the net interest spread between the fixed-rate mortgage-backed securities that we purchase and our borrowings used to purchase them, which could lower our net interest income or cause us to suffer a loss. On September 30, 2002, 15% of our
mortgage-backed securities were fixed-rate securities.
Increased levels of prepayments from mortgage-backed
securities may decrease our net interest income.
Pools of mortgage loans underlie the mortgage-backed
securities that we acquire. We generally receive payments from principal payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster than expected, this results in prepayments that are faster than
expected on the mortgage-backed securities. Faster than expected prepayments could adversely affect our profitability, including in the following ways:
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We usually purchase mortgage-backed securities that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest
rate, we pay a premium over the par value to acquire
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the security. In accordance with accounting rules, we amortize this premium over the term of the mortgage-backed security. If the mortgage-backed security is prepaid in whole or in part prior to
its maturity date, however, we expense the premium that was prepaid at the time of the prepayment. On September 30, 2002, approximately 99.9% of our mortgage-backed securities were acquired at a premium. |
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We anticipate that a substantial portion of our adjustable-rate mortgage-backed securities may bear interest rates that are lower than their fully indexed
rates, which are equivalent to the applicable index rate plus a margin. If an adjustable-rate mortgage-backed security is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that mortgage-backed security
while it was less profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life. |
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If we are unable to acquire new mortgage-backed securities similar to the prepaid mortgage-backed securities, our financial condition, results of operation and
cash flow would suffer. |
Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general economic conditions and the relative interest rates on
fixed-rate and adjustable-rate mortgage loans.
While we seek to minimize prepayment risk to the extent practical,
in selecting investments we must balance prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us from prepayment risk.
We may incur increased borrowing costs related to repurchase agreements and that would adversely affect our profitability.
Currently, all of our borrowings are collateralized borrowings in the form of repurchase agreements. If the interest rates on these
repurchase agreements increase, that would adversely affect our profitability.
Our borrowing costs under
repurchase agreements generally correspond to short-term interest rates such as LIBOR or a short-term Treasury index, plus or minus a margin. The margins on these borrowings over or under short-term interest rates may vary depending upon:
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the movement of interest rates; |
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the availability of financing in the market; and |
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the value and liquidity of our mortgage-backed securities. |
Interest rate caps on our adjustable-rate mortgage-backed securities may reduce our income or cause us to suffer a loss during periods of rising interest rates.
Our adjustable-rate mortgage-backed securities are typically subject to periodic and lifetime interest
rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through maturity of a mortgage-backed security. Our borrowings
are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while caps would limit the interest rates on our adjustable-rate
mortgage-backed securities. This problem is magnified for our adjustable-rate mortgage-backed securities that are not fully indexed. Further, some adjustable-rate mortgage-backed securities may be subject to periodic payment caps that result in a
portion of the interest being deferred and added to the principal outstanding. As a result, we could receive less cash income on adjustable-rate mortgage-backed securities than we need to pay interest on our related borrowings. These factors could
lower our net interest
17
income or cause us to suffer a loss during periods of rising interest rates. On September 30, 2002, approximately 85% of our mortgage-backed securities were adjustable-rate securities.
Our leveraging strategy increases the risks of our operations.
We generally borrow between eight and twelve times the amount of our equity, although our borrowings may at times be above or below this
amount. We incur this leverage by borrowing against a substantial portion of the market value of our mortgage-backed securities. Use of leverage can enhance our investment returns. Leverage, however, also increases risks. In the following ways, the
use of leverage increases our risk of loss and may reduce our net income by increasing the risks associated with other risk factors, including a decline in the market value of our mortgage-backed securities or a default of a mortgage-related asset:
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The use of leverage increases our risk of loss resulting from various factors including rising interest rates, increased interest rate volatility, downturns in
the economy, and reductions in the availability of financing or deteriorations in the conditions of any of our mortgage-related assets. |
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A majority of our borrowings are secured by our mortgage-backed securities, generally under repurchase agreements. A decline in the market value of the
mortgage-backed securities used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell
mortgage-backed securities under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the mortgage-backed securities, we would experience
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A default of a mortgage-related asset that constitutes collateral for a loan could also result in an involuntary liquidation of the mortgage-related asset,
including any cross-collateralized mortgage-backed securities. This would result in a loss to us of the difference between the value of the mortgage-related asset upon liquidation and the amount borrowed against the mortgage-related asset.
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To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of
income could be negatively affected, which would jeopardize our status as a REIT. Losing our REIT status would cause us to lose tax advantages applicable to REITs and may decrease our overall profitability and distributions to our stockholders.
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We have not extensively used derivatives to mitigate our interest rate and prepayment
risks and this leaves us exposed to certain risks.
Our policies permit us to enter into interest rate
swaps, caps and floors and other derivative transactions to help us reduce our interest rate and prepayment risks described above. We have made only limited use of these types of instruments. We have determined that, generally, the costs of these
transactions outweigh their benefits. This strategy saves us the additional costs of such hedging transactions, but it leaves us exposed to the types of risks that such hedging transactions would be designed to reduce. If we decide to enter into
derivative transactions in the future, these transactions may mitigate our interest rate and prepayment risks but cannot eliminate these risks. Additionally, the use of derivative transactions could have a negative impact on our earnings.
An increase in interest rates may adversely affect our book value.
Increases in interest rates may negatively affect the market value of our mortgage-related assets. Our fixed-rate securities are generally
more negatively affected by these increases. In accordance with accounting rules, we reduce our book value by the amount of any decrease in the market value of our mortgage-related assets.
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We may invest in leveraged mortgage derivative securities that generally
experience greater volatility in market prices, thus exposing us to greater risk with respect to their rate of return.
We may acquire leveraged mortgage derivative securities that may expose us to a high level of interest rate risk. The characteristics of leveraged mortgage derivative securities result in greater volatility in their market prices.
Thus, acquisition of leveraged mortgage derivative securities would expose us to the risk of greater price volatility in our portfolio and that could adversely affect our net income and overall profitability.
We depend on borrowings to purchase mortgage-related assets and reach our desired amount of leverage. If we fail to obtain or renew
sufficient funding on favorable terms, we will be limited in our ability to acquire mortgage-related assets and our earnings and profitability would decline.
We depend on short-term borrowings to fund acquisitions of mortgage-related assets and reach our desired amount of leverage. Accordingly, our ability to achieve our
investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorable terms. In addition, we must be able to renew or replace our maturing short-term borrowings on a continuous basis. Moreover, we depend on
a few lenders to provide the primary credit facilities for our purchases of mortgage-related assets.
If we cannot
renew or replace maturing borrowings, we may have to sell our mortgage-related assets under adverse market conditions and may incur permanent capital losses as a result. Any number of these factors in combination may cause difficulties for us,
including a possible liquidation of a major portion of our portfolio at disadvantageous prices with consequent losses, which may render us insolvent.
Possible market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets are insufficient to meet the collateral requirements, then we may be
compelled to liquidate particular assets at an inopportune time.
Possible market developments, including
a sharp rise in interest rates, a change in prepayment rates or increasing market concern about the value or liquidity of one or more types of mortgage-related assets in which our portfolio is concentrated, may reduce the market value of our
portfolio, which may cause our lenders to require additional collateral. This requirement for additional collateral may compel us to liquidate our assets at a disadvantageous time, thus adversely affecting our operating results and net
profitability.
Our use of repurchase agreements to borrow funds may give our lenders greater rights in the
event that either we or a lender files for bankruptcy.
Our borrowings under repurchase agreements may
qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without
delay in the event that we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that a lender files for bankruptcy. Thus,
the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or us.
Because assets we acquire may experience periods of illiquidity, we may lose profits or be prevented from earning capital gains if we cannot sell mortgage-related assets at an opportune time.
We bear the risk of being unable to dispose of our mortgage-related assets at advantageous times or in a timely manner because
mortgage-related assets generally experience periods of illiquidity. The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale. As a result,
the illiquidity of mortgage-related assets may cause us to lose profits or the ability to earn capital gains.
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We depend on our key personnel and the loss of any of our key personnel
could severely and detrimentally affect our operations.
We depend on the diligence, experience and skill
of our officers and other employees for the selection, structuring and monitoring of our mortgage-related assets and associated borrowings. Our key officers include Joseph Lloyd McAdams, President, Chairman and Chief Executive Officer, Joseph E.
McAdams, Executive Vice President and Director, Thad Brown, acting Chief Financial Officer, and Evangelos Karagiannis, Vice President. The loss of any key person could harm our entire business, financial condition, cash flow and results of
operations.
Our officers devote a portion of their time to another company in capacities that could create
conflicts of interest that may adversely affect our investment opportunities; this lack of a full-time commitment could also adversely affect our operating results.
Joseph Lloyd McAdams, Joseph E. McAdams, Evangelos Karagiannis and others are involved in investing both our assets and approximately $4 billion in mortgage-backed
securities and other fixed income assets for institutional clients and individual investors through Pacific Income Advisers, Inc., or PIA. A trust controlled by Joseph Lloyd McAdams and Heather U. Baines is the principal stockholder of PIA. These
multiple responsibilities may create conflicts of interest if these officers are presented with opportunities that may benefit both us and the clients of PIA. These officers allocate investments among our portfolio and the clients of PIA by
determining the entity or account for which the investment is most suitable. In making this determination, these officers consider the investment strategy and guidelines of each entity or account with respect to acquisition of assets, leverage,
liquidity and other factors that our officers determine appropriate. These officers, however, have no obligation to make any specific investment opportunities available to us and the above mentioned conflicts of interest may result in decisions or
allocations of securities that are not in our best interests.
Each of our officers is also an officer and
employee of PIA and devotes a portion of their time to PIA. Their service to PIA reduces the time and effort that they can dedicate to managing our company and this may adversely affect our overall management and operating results.
Our board of directors may change our operating policies and strategies without prior notice or stockholder approval and
such changes could harm our business, results of operation and stock price.
Our board of directors can
modify or waive our current operating policies and our strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies may have on our business, operating
results and stock price; however, the effects may be adverse.
Competition may prevent us from acquiring
mortgage-related assets at favorable yields and that would negatively impact our profitability.
Our net
income largely depends on our ability to acquire mortgage-related assets at favorable spreads over our borrowing costs. In acquiring mortgage-related assets, we compete with other REITs, investment banking firms, savings and loan associations,
banks, insurance companies, mutual funds, other lenders and other entities that purchase mortgage-related assets, many of which have greater financial resources than us. As a result, we may not in the future be able to acquire sufficient
mortgage-related assets at favorable spreads over our borrowing costs. If that occurs, our profitability will be harmed.
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Our investment policy involves risks associated with the credit quality of
our investments. If the credit quality of our investments declines or if there are defaults on the investments we make, our profitability may decline and we may suffer losses.
Our mortgage-backed securities have primarily been agency certificates that, although not rated, carry an implied AAA rating. Agency certificates are
mortgage-backed securities where either Freddie Mac or Fannie Mae guarantees payments of principal or interest on the certificates. Our capital investment policy, however, provides us with the ability to acquire a material amount of lower
credit quality mortgage-backed securities. If we acquire mortgage-backed securities of lower credit quality, our profitability may decline and we may incur losses if there are defaults on the mortgages backing those securities or if the rating
agencies downgrade the credit quality of those securities or the securities of Fannie Mae and Freddie Mac.
Our earnings per share may decrease now that we have become internally managed.
In
June 2002, we merged with our former manager to become an internally managed company. We cannot assure you that the cost savings we anticipate from no longer paying base and incentive management fees to our former manager will offset the additional
expenses that we will incur as an internally managed REIT. These additional expenses include all of the salaries, incentive compensation and benefits of our executive officers and the other employees we need to operate as an internally managed
company. Even if our earnings are not adversely affected, our earnings per share may decrease because we issued 240,000 shares of our common stock as merger consideration.
The merger with our former manager may cause us to lose our REIT status for tax purposes.
In order to maintain our status as a REIT for federal income tax purposes, we are not permitted to have current or accumulated earnings and profits carried over from our
former manager. If the IRS successfully asserts that we acquired current or accumulated earnings and profits from our former manager and failed to distribute, during the taxable year in which the merger occurred, all of such earnings and profits, we
would lose our REIT qualification for the year of the merger, as well as any other taxable years during which we held such acquired earnings and profits, unless, in the year of such determination, we make an additional distribution of the amount of
earnings and profits determined to be acquired from our former manager. In order to make such an additional distribution, we could be required to borrow funds or sell assets even if prevailing market conditions were not generally favorable. For any
taxable year that we fail to qualify as a REIT, we would not be entitled to a deduction for dividends paid to our stockholders in calculating our taxable income. Consequently, our net assets and distributions to our stockholders would be
substantially reduced because of our increased tax liability. Furthermore, to the extent that distributions had been made in anticipation of our qualification as a REIT, we might also be required to borrow additional funds or to liquidate certain of
our investments in order to pay the applicable tax on our income.
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Risks Related to REIT Compliance and Other Matters
If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.
We believe that since our initial public offering in 1998 we have operated so as to qualify as a REIT
under the Internal Revenue Code of 1986, as amended (the Code), and we intend to continue to meet the requirements for taxation as a REIT. Nevertheless, we may not remain qualified as a REIT in the future. Qualification as a REIT
involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore,
Congress or the IRS might change tax laws or regulations and the courts might issue new rulings, in each case potentially having retroactive effect that could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as
a REIT in any tax year, then:
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we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to stockholders in computing taxable
income and being subject to federal income tax on our taxable income at regular corporate rates; |
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any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and
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unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years
following the year during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we do not qualify as a REIT. |
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our
sources of income, the nature and diversification of our mortgage-backed securities, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to stockholders at disadvantageous times
or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may substantially limit our ability to hedge mortgage-backed securities and related borrowings by requiring us to limit our income in each
year from qualified hedges, together with any other income not generated from qualified REIT real estate assets, to less than 25% of our gross income. In addition, we must limit our aggregate income from hedging and services from all sources, other
than from qualified REIT real estate assets or qualified hedges, to less than 5% of our annual gross income. As a result, although we do not currently engage in hedging transactions, we may in the future have to limit our use of advantageous hedging
techniques. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the amount of income in excess
of those limitations, multiplied by a fraction intended to reflect our profitability. If we fail to satisfy the 25% and 5% limitations, unless our failure was due to reasonable cause and not due to willful neglect, we could lose our REIT status for
federal income tax purposes.
Complying with REIT requirements may force us to liquidate otherwise
attractive investments.
In order to qualify as a REIT, we must also ensure that at the end of each
calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the
outstanding voting
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securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist
of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax
consequences.
Complying with REIT requirements may force us to borrow to make distributions to
stockholders.
As a REIT, we must distribute 90% of our annual taxable income (subject to certain
adjustments) to our stockholders. From time to time, we may generate taxable income greater than our net income for financial reporting purposes from, among other things, amortization of capitalized purchase premiums, or our taxable income may be
greater than our cash flow available for distribution to stockholders. For example, our taxable income would exceed our net income for financial reporting purposes to the extent that compensation paid to our chief executive officer and our other
four highest paid officers exceeds $1,000,000 for any such officer for any calendar year under Section 162(m) of the Code. Since payments under our 2002 Incentive Compensation Plan do not qualify as performance-based compensation under Section
162(m), a portion of the payments made under such plan to certain of such officers would not be deductible for federal income tax purposes under such circumstances. If we do not have other funds available in these situations, we may be unable to
distribute substantially all of our taxable income as required by the REIT provisions of the Code. Thus, we could be required to borrow funds, sell a portion of our mortgage-backed securities at disadvantageous prices or find another alternative
source of funds. These alternatives could increase our costs or reduce our equity.
Failure to maintain an
exemption from the Investment Company Act would adversely affect our results of operations.
We believe
that we conduct our business in a manner that allows us to avoid being regulated as an investment company under the Investment Company Act of 1940, as amended. If we fail to continue to qualify for an exemption from registration as an investment
company, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as planned. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate. Under the SECs current interpretation, qualification for this exemption generally requires us to maintain at least 55% of our assets directly in qualifying real
estate interests. Mortgage-backed securities that do not represent all the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and thus may not qualify for
purposes of the 55% requirement. Therefore, our ownership of these mortgage-backed securities is limited by the Investment Company Act. In meeting the 55% requirement under the Investment Company Act, we treat as qualifying interests mortgage-backed
securities issued with respect to an underlying pool for which we hold all issued certificates. If the SEC or its staff adopts a contrary interpretation, we could be required to sell a substantial amount of our mortgage-backed securities under
potentially adverse market conditions. Further, in order to maintain our exemption from registration as an investment company, we may be precluded from acquiring mortgage-backed securities whose yield is somewhat higher than the yield on
mortgage-backed securities that could be purchased in a manner consistent with the exemption.
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We may not be able to use the money we raise to acquire
investments at favorable prices.
We intend to seek to raise additional capital from time to time if we
determine that it is in our best interests and the best interests of our stockholders, including through public offerings of our stock. The net proceeds of any offering could represent a significant increase in our equity. Depending on the amount of
leverage that we use, the full investment of the net proceeds of any offering might result in a substantial increase in our total assets. There can be no assurance that we will be able to invest all of such additional funds in mortgage-backed
securities at favorable prices. We may not be able to acquire enough mortgage-backed securities to become fully invested after an offering, or we may have to pay more for mortgage-backed securities than we have historically. In either case, the
return that we earn on stockholders equity may be reduced.
We have not established a minimum dividend
payment level and there are no assurances of our ability to pay dividends in the future.
We intend to pay
quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to
qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment level, and our ability to pay dividends may be adversely affected by the risk factors described in this prospectus. All distributions
will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no
assurances of our ability to pay dividends in the future.
If we raise additional capital, our earnings per share
and dividends per share may decline since we may not be able to invest all of the new capital during the quarter in which additional shares are sold and possibly the entire following calendar quarter.
We may incur excess inclusion income that would increase the tax liability of our stockholders.
In general, dividend income that a tax-exempt entity receives from us should not constitute unrelated business taxable income as defined
in Section 512 of the Code. If we were to realize excess inclusion income and allocate it to stockholders, this income could not be offset by net operating losses. If the stockholder were a tax-exempt entity, then this income would be fully taxable
as unrelated business taxable income under Section 512 of the Code. If the stockholder were foreign, then it would be subject to federal income tax withholding on this income without reduction pursuant to any otherwise applicable income-tax treaty.
Excess inclusion income could result if we held a residual interest in a REMIC. Excess inclusion income also
would be generated if we were to issue debt obligations with two or more maturities and the terms of the payments on these obligations bore a relationship to the payments that we received on our mortgage-backed securities securing those debt
obligations. We generally structure our borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion income. We do, however, enter into various repurchase agreements that have differing maturity dates and
afford the lender the right to sell any pledged mortgage securities if we default on our obligations. The IRS may determine that these borrowings give rise to excess inclusion income that should be allocated among stockholders. Furthermore, some
types of tax-exempt entities, including, without limitation, voluntary employee benefit associations and entities that have borrowed funds to acquire their shares of our common stock, may be required to treat a portion of or all of the dividends
they may receive from us as unrelated business taxable income. We also invest in equity securities of other REITs. If we were to receive excess inclusion income from another REIT, we may be required to distribute the excess inclusion income to our
stockholders, which may result in the recognition of unrelated business taxable income.
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Our charter does not permit ownership of over 9.8% of our common or
preferred stock and attempts to acquire our common or preferred stock in excess of the 9.8% limit are void without prior approval from our board of directors.
For the purpose of preserving our REIT qualification and for other reasons, our charter prohibits direct or constructive ownership by any person of more than 9.8% of the
lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. Our charters constructive ownership rules are complex and may cause the outstanding stock
owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual
or entity to own constructively in excess of 9.8% of the outstanding stock and thus to be subject to our charters ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without
the consent of the board of directors shall be void and will result in the shares being transferred by operation of law to a charitable trust. Our board of directors has granted Joseph Lloyd McAdams, our President, Chairman and Chief Executive
Officer, and his family members an exemption from the 9.8% ownership limitation set forth in our charter documents. This exemption permits Joseph Lloyd McAdams, Heather U. Baines and Joseph McAdams collectively to hold up to 19% of our outstanding
shares.
Because provisions contained in Maryland law, our charter and our bylaws may have an anti-takeover
effect, investors may be prevented from receiving a control premium for their shares.
Provisions contained in our charter and bylaws, as well as Maryland corporate law, may have anti-takeover effects that delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a control
premium for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for
their common stock over then-prevailing market prices. These provisions include the following:
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Ownership limit. The ownership limit in our charter limits related investors, including, among other things, any voting group,
from acquiring over 9.8% of our common stock without our permission. |
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Preferred stock. Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish
the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. |
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Maryland business combination statute. Maryland law restricts the ability of holders of more than 10% of the voting power of a
corporations shares to engage in a business combination with the corporation. |
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Maryland control share acquisition statute. Maryland law limits the voting rights of control shares of a corporation
in the event of a control share acquisition. |
Issuances of large amounts of
our stock could cause the price of our stock to decline.
We may issue additional shares of common stock
or shares of preferred stock that are convertible into common stock. If we issue a significant number of shares of common stock or convertible preferred stock in a short period of time, there could be a dilution of the existing common stock and a
decrease in the market price of the common stock.
Future offerings of debt securities, which would be
senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend distributions, may adversely affect the market price of our common
stock.
In the future, we may attempt to increase our capital resources by making additional offerings of
debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of
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preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock, if issued, and lenders with respect to other borrowings will receive a
distribution of our available assets prior to the holders of our common stock. Our preferred stock, if issued, may have a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common
stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders
bear the risk of our future offerings reducing the market price of our common stock.
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FEDERAL INCOME TAX CONSIDERATIONS
Based on various factual representations made by us
regarding our operations, in the opinion of Allen Matkins Leck Gamble & Mallory LLP, our counsel, commencing with our taxable year ended December 31, 1998, we have been organized in conformity with the requirements for qualification as a REIT
under the Code, and our method of operating has enabled us, and will enable us, to meet the requirements for qualification and taxation as a REIT. Our qualification as a REIT depends upon our ability to meet the various requirements imposed under
the Code through actual operations. Allen Matkins will not review our operations, and no assurance can be given that actual operations will meet these requirements. The opinion of Allen Matkins is not binding on the IRS, or any court. The opinion of
Allen Matkins is based upon existing law, Treasury regulations and currently published administrative positions of the IRS and judicial decisions, all of which are subject to change either prospectively or retroactively.
The following discussion summarizes particular United States federal income tax considerations regarding our qualification and taxation as
a REIT and particular United States federal income tax consequences resulting from the acquisition, ownership and disposition of our capital stock. This discussion is based on current law and assumes that we have qualified at all times throughout
our existence, and will continue to qualify, as a REIT for United States federal income tax purposes. The tax law upon which this discussion is based could be changed, and any such change could have retroactive effect. The following discussion is
not exhaustive of all possible tax considerations. This summary neither gives a detailed discussion of any state, local or foreign tax considerations nor discusses all of the aspects of United States federal income taxation that may be relevant to
you in light of your particular circumstances or to particular types of stockholders which are subject to special tax rules, such as insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations or
partnerships, and persons who are not citizens or residents of the United States, stockholders that hold our stock as a hedge, part of a straddle, conversion transaction or other arrangement involving more than one position, or stockholders whose
functional currency is not the United States dollar. This discussion assumes that you will hold our capital stock as a capital asset, generally property held for investment, under the Code.
You are urged to consult with your own tax advisor regarding the specific consequences to you of the purchase, ownership and sale of stock
in an entity electing to be taxed as a REIT, including the federal, state, local, foreign and other tax considerations of such purchase, ownership, sale and election and the potential changes in applicable tax laws.
General
Our
qualification and taxation as a REIT depends upon our ability to continue to meet the various qualification tests imposed under the Code and discussed below relating to our actual annual operating results, asset diversification, distribution levels
and diversity of stock ownership. Accordingly, the actual results of our operations for any particular taxable year may not satisfy these requirements.
We have made an election to be taxed as a REIT under the Code commencing with our taxable year ended December 31, 1998. We currently expect to continue operating in a manner that will permit us to
maintain our qualification as a REIT. All qualification requirements for maintaining our REIT status, however, may not have been or will not continue to be met.
So long as we qualify for taxation as a REIT, we generally will be permitted a deduction for dividends we pay to our stockholders. As a result, we generally will not be required to pay federal
corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the double taxation that ordinarily results from investment in a corporation. Double taxation means taxation once at
the corporate level when income is earned and once again at the stockholder level when this income is distributed. We will be required to pay federal income tax, however, as follows:
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we will be required to pay tax at regular corporate rates on any undistributed real estate investment trust taxable income, including undistributed net capital
gain; |
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we may be required to pay the alternative minimum tax on our items of tax preference; and |
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if we have (a) net income from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of
business, or (b) other nonqualifying income from foreclosure property, we will be required to pay tax at the highest corporate rate on this income. Foreclosure property is generally defined as property acquired through foreclosure or after a default
on a loan secured by the property or on a lease of the property. |
We will be required to pay a
100% tax on any net income from prohibited transactions. Prohibited transactions are, in general, sales or other taxable dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of
business. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business depends on all the facts and circumstances surrounding the particular transaction.
If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our
qualification as a REIT because certain other requirements are met, we will be subject to a tax equal to:
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the greater of (i) the amount by which 75% of our gross income exceeds the amount qualifying under the 75% gross income test described below, and (ii) the
amount by which 90% of our gross income exceeds the amount qualifying under the 95% gross income test described below, multiplied by |
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a fraction intended to reflect our profitability. |
We will be required to pay a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we fail to distribute during each calendar year at least the sum of:
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85% of our real estate investment trust ordinary income for the year; |
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95% of our real estate investment trust capital gain net income for the year; and |
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any undistributed taxable income from prior periods. |
This distribution requirement is in addition to, and different from the distribution requirements discussed below in the section entitled Annual Distribution Requirements.
If we acquire any asset from a corporation which is or has been taxed as a C corporation under the Code in a transaction in
which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we subsequently recognize gain on the disposition of the asset during the ten-year period beginning on the date on
which we acquired the asset, then we will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of the excess of:
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the fair market value of the asset, over |
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our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. |
A C corporation is generally defined as a corporation required to pay full corporate-level tax. The results described in this paragraph
with respect to the recognition of gain will apply unless we make an election under Treasury Regulation Section 1.337(d)-7T(c). Finally, we could be subject to an excise tax if our dealings with any taxable REIT subsidiaries (defined below) are not
at arms length.
Requirements for Qualification as a REIT
The Code defines a REIT as a corporation, trust or association:
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that is managed by one or more trustees or directors; |
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that issues transferable shares or transferable certificates to evidence beneficial ownership; |
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that would be taxable as a domestic corporation but for Code Sections 856 through 859; |
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that is not a financial institution or an insurance company within the meaning of the Code; |
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that is beneficially owned by 100 or more persons; |
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not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals, including specified entities,
during the last half of each taxable year; and |
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that meets other tests, described below, regarding the nature of its income and assets and the amount of its distributions. |
The Code provides that all of the first four conditions stated above must be met during the entire taxable year and that the
fifth condition must be met during at least 335 days of a taxable year of twelve months, or during a proportionate part of a taxable year of less than twelve months. The fifth and sixth conditions do not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
For purposes of the sixth condition, pension trusts and other
specified tax-exempt entities generally are treated as individuals, except that a look-through exception generally applies with respect to pension funds.
Stock Ownership Tests
Our stock must be beneficially held
by at least 100 persons, the 100 Stockholder Rule, and no more than 50% of the value of our stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of the taxable year, the 5/50
Rule. For purposes of the 100 Stockholder Rule only, trusts described in Section 401(a) of the Code and exempt under Section 501(a) of the Code, are generally treated as persons. These stock ownership requirements must be satisfied in each
taxable year other than the first taxable year for which an election is made to be taxed as a REIT. We are required to solicit information from certain of our record stockholders to verify actual stock ownership levels, and our charter provides for
restrictions regarding the transfer of our stock in order to aid in meeting the stock ownership requirements. If we were to fail either of the stock ownership tests, we would generally be disqualified from REIT status.
Income Tests
We
must satisfy two gross income requirements annually to maintain our qualification as a REIT:
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We must derive directly or indirectly at least 75% of our gross income, excluding gross income from prohibited transactions, from specified real estate sources,
including rental income, interest on obligations secured by mortgages on real property or on interests in real property, gain from the disposition of qualified real estate assets, i.e., interests in real property, mortgages secured by
real property or interests in real property, and some other assets, and income from certain types of temporary investments (the 75% gross income test); and |
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We must derive at least 95% of our gross income, excluding gross income from prohibited transactions, from (a) the sources of income that satisfy the 75% gross
income test, (b) dividends, interest and gain from the sale or disposition of stock or securities, including some interest rate swap and cap agreements, options, futures and forward contracts entered into to hedge variable rate debt incurred to
acquire qualified real estate assets, or (c) any combination of the foregoing (the 95% gross income test). |
For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any limited liability company treated as a partnership for federal income
tax purposes, in which it owns an interest, which share is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary (in general, a 100% owned corporate subsidiary
of a REIT).
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Interest earned by a REIT ordinarily does not qualify as income meeting the 75%
or 95% gross income tests if the determination of all or some of the amount of interest depends in any way on the income or profits of any person. Interest will not be disqualified from meeting such tests, however, solely by reason of being based on
a fixed percentage or percentages of receipts or sales. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under the Code.
Generally, we may avail ourselves of the relief provisions if:
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our failure to meet these tests was due to reasonable cause and not due to willful neglect; |
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we attach a schedule of the sources of our income to our federal income tax return; and |
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any incorrect information on the schedule was not due to fraud with intent to evade tax. |
If we are entitled to avail ourselves of the relief provisions, we will maintain our qualification as a REIT but will be subject to
certain penalty taxes as described above. We may not, however, be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions do not apply to a particular set of circumstances, we will not qualify as a REIT.
Asset Tests
At the close of each quarter of our taxable year, we must satisfy four tests relating to the nature and diversification of our assets:
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at least 75% of the value of our total assets must be represented by qualified real estate assets (including mortgage loans), cash, cash items and government
securities; |
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not more than 25% of our total assets may be represented by securities, other than those securities included in the 75% asset test;
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of the investments included in the 25% asset class, the value of any one issuers securities may not exceed 5% of the value of our total assets, and we generally
may not own more than 10% by vote or value of any one issuers outstanding securities, in each case except with respect to stock of any taxable REIT subsidiaries; and |
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the value of the securities we own in any taxable REIT subsidiaries may not exceed 20% of the value of our total assets. |
A taxable REIT subsidiary is any corporation in which we own stock and as to which we and such corporation jointly
elect to treat such subsidiary as a taxable REIT subsidiary. For purposes of the asset tests, we will be deemed to own a proportionate share of the assets of any partnership, or any limited liability company treated as a partnership for federal
income tax purposes, in which we own an interest, which share is determined by reference to our capital interest in the entity, and will be deemed to own the assets owned by any qualified REIT subsidiary and any other entity that is disregarded for
federal income tax purposes.
After initially meeting the asset tests at the close of any quarter, we will not
lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire securities or other property during a quarter, we
can cure this failure by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter. For this purpose, an increase in our interests in any partnership or limited liability company in which we own an interest will be
treated as an acquisition of a portion of the securities or other property owned by that partnership or limited liability company.
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Annual Distribution Requirements
To maintain our qualification as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to the
sum of:
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90% of our REIT taxable income, and |
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90% of our after tax net income, if any, from foreclosure property, minus |
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the excess of the sum of specified items of our non-cash income items over 5% of REIT taxable income, as described below.
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For purposes of these distribution requirements, our REIT taxable income is computed without
regard to the dividends paid deduction (described below) and net capital gain. For purposes of this test, non-cash income means income attributable to leveled stepped rents, certain original issue discount, certain like-kind exchanges that are later
determined to be taxable and income from cancellation of indebtedness. In addition, our taxable income would exceed our net income for financial reporting purposes to the extent that compensation paid to our chief executive officer and our other
four highest paid officers exceeds $1,000,000 for any such officer for any calendar year. Since payments under our 2002 Incentive Compensation Plan do not qualify as performance-based compensation under Section 162(m) of the Code, a portion of the
payments made under such plan to certain of such officers would not be deductible for federal income tax purposes under such circumstances. Moreover, if we disposed of any asset we acquired from a corporation which is or has been a C corporation in
a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of that C corporation and we elected not to recognize gain currently in connection with the acquisition of such asset, we would be
required to distribute at least 90% of the after-tax gain, if any, we recognize on a disposition of the asset within the ten-year period following our acquisition of such asset, to the extent that such gain does not exceed the excess of:
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the fair market value of the asset on the date we acquired the asset, over |
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our adjusted basis in the asset on the date we acquired the asset. |
Only distributions that qualify for the dividends paid deduction available to REITs under the Code are counted in determining whether the distribution
requirements are satisfied. We must make these distributions in the taxable year to which they relate, or in the following taxable year if they are declared before we timely file our tax return for that year, paid on or before the first regular
dividend payment following the declaration and we elect on our tax return to have a specified dollar amount of such distributions treated as if paid in the prior year. For these and other purposes, dividends declared by us in October, November or
December of one taxable year and payable to a stockholder of record on a specific date in any such month shall be treated as both paid by us and received by the stockholder during such taxable year, provided that the dividend is actually paid by us
by January 31 of the following taxable year.
In addition, dividends distributed by us must not be preferential.
If a dividend is preferential, it will not qualify for the dividends paid deduction. To avoid being preferential, every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that
class, and no class of stock may be treated other than according to its dividend rights as a class.
To the extent
that we do not distribute all of our net capital gain, or we distribute at least 90%, but less than 100%, of our REIT taxable income, as described above, we will be required to pay tax on this undistributed income at regular ordinary and
capital gain corporate tax rates.
Failure to Qualify as a REIT
If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions of the Code do not apply, we will be required to pay tax, including any
applicable alternative minimum tax, on our taxable income in that taxable year and all subsequent taxable years at regular corporate rates. Distributions to stockholders in
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any year in which we fail to qualify as a REIT will not be deductible by us and we will not be required to distribute any amounts to our stockholders. As a result, we anticipate that our failure
to qualify as a REIT would reduce the cash available for distribution to our stockholders. In addition, if we fail to qualify as a REIT, all distributions to stockholders will be taxable at ordinary income rates to the extent of our current and
accumulated earnings and profits. In this event, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the
four taxable years following the year in which we lose our qualification.
Taxation of Taxable United States Stockholders
For purposes of the discussion in this prospectus, the term United States stockholder means a holder of our
stock that is, for United States federal income tax purposes:
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a citizen or resident of the United States; |
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a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state thereof or in the District of
Columbia, unless Treasury regulations provide otherwise; |
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an estate the income of which is subject to United States federal income taxation regardless of its source; or |
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a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. |
Distributions Generally
Distributions out of our current or accumulated earnings and profits, other than capital gain dividends, will
be taxable to United States stockholders as ordinary income. Provided that we continue to qualify as a REIT, dividends paid by us will not be eligible for the dividends received deduction generally available to United States stockholders that are
corporations. To the extent that we make distributions in excess of current and accumulated earnings and profits, the distributions will be treated as a tax-free return of capital to each United States stockholder, and will reduce the adjusted tax
basis which each United States stockholder has in our stock by the amount of the distribution, but not below zero. Distributions in excess of a United States stockholders adjusted tax basis in its stock will be taxable as capital gain, and
will be taxable as long-term capital gain if the stock has been held for more than one year. If we declare a dividend in October, November, or December of any calendar year which is payable to stockholders of record on a specified date in such a
month and actually pay the dividend during January of the following calendar year, the dividend is deemed to be paid by us and received by the stockholder on December 31st of the previous year. Stockholders may not include in their own income tax
returns any of our net operating losses or capital losses.
Capital Gain Distributions
Distributions designated by us as capital gain dividends will be taxable to United States stockholders as capital gain income.
We can designate distributions as capital gain dividends to the extent of our net capital gain for the taxable year of the distribution. This capital gain income will generally be taxable to non-corporate United States stockholders at a 20% or 25%
rate based on the characteristics of the asset we sold that produced the gain. United States stockholders that are corporations may be required to treat up to 20% of certain capital gain dividends as ordinary income.
A recently enacted 18% capital gains rate applies to certain assets acquired after December 31, 2000, and to certain assets held on
January 1, 2001, as to which an election is made to treat such assets as having been sold and then reacquired on the same date. If the election is made, the asset will be deemed to be sold at its fair market value and any gain, but not loss, will be
recognized. Although the IRS has yet to issue any official guidance on how the 18% rate would apply to distributions made by us, the IRS has indicated in income tax forms that the
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lower rate will apply to designated capital gain distributions we make to the extent that the gain is derived from the disposition of a capital asset acquired by us after December 31, 2000 and
held for more than five years at the time of disposition.
Retention of Net Capital Gains
We may elect to retain, rather than distribute as a capital gain dividend, our net capital gains. If we were to make this
election, we would pay tax on such retained capital gains. In such a case, our stockholders would generally:
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include their proportionate share of our undistributed net capital gains in their taxable income; |
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receive a credit for their proportionate share of the tax paid by us in respect of such net capital gain; and |
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increase the adjusted basis of their stock by the difference between the amount of their share of our undistributed net capital gain and their share of the tax
paid by us. |
Passive Activity Losses, Investment Interest Limitations and Other
Considerations of Holding Our Stock
Distributions we make and gains arising from the sale or exchange of our
stock by a United States stockholder will not be treated as passive activity income. As a result, United States stockholders will not be able to apply any passive losses against income or gains relating to our stock. Distributions by us,
to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation under the Code. Further, if we, or a portion of our assets, were to be treated as a
taxable mortgage pool, any excess inclusion income that is allocated to you could not be offset by any losses or other deductions you may have.
Dispositions of Stock
A United States stockholder that
sells or disposes of our stock will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the amount of cash or the fair market value of any property the stockholder receives on the sale or other
disposition and the stockholders adjusted tax basis in the stock. This gain or loss will be capital gain or loss and will be long-term capital gain or loss if the stockholder has held the stock for more than one year. In general, any loss
recognized by a United States stockholder upon the sale or other disposition of our stock that the stockholder has held for six months or less will be treated as long-term capital loss to the extent the stockholder received distributions from us
which were required to be treated as long-term capital gains.
Information Reporting and Backup Withholding
We report to our United States stockholders and the IRS the amount of dividends paid during each calendar
year, and the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup withholding with respect to dividends paid and redemption proceeds unless the holder is a corporation or comes within other exempt
categories and, when required, demonstrates this fact, or provides a taxpayer identification number or social security number, certifying as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A United States stockholder that does not provide us with its correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. A United States stockholder can meet this
requirement by providing us with a correct, properly completed and executed copy of IRS Form W-9 or a substantially similar form. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the
stockholders income tax liability, if any, and otherwise be refundable. In addition, we may be required to withhold a portion of capital gain distributions made to any stockholders who fail to certify their non-foreign status.
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Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001, signed
into law on June 7, 2001, the backup withholding tax rate is 30% for amounts distributed after December 31, 2001 and on or before December 31, 2003. After 2003, the backup withholding tax rate will be gradually reduced until 2006, when the
backup-withholding rate will be 28%.
Taxation of Tax-Exempt Stockholders
The IRS has ruled that amounts distributed as a dividend by a REIT will be treated as a dividend by the recipient and excluded from the calculation of unrelated
business taxable income when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder has not held our stock as debt financed property within the meaning of the Code, i.e., property the acquisition or
holding of which is financed through a borrowing by the tax-exempt United States stockholder, the stock is not otherwise used in an unrelated trade or business, and we do not hold a residual interest in a real estate mortgage investment conduit,
REMIC, that gives rise to excess inclusion income, as defined in Section 860E of the Code, dividend income on our stock and income from the sale of our stock should not be unrelated business taxable income to a tax-exempt stockholder.
However, if we were to hold residual interests in a REMIC, or if we or a pool of our assets were to be treated as a taxable mortgage pool, a portion of the dividends paid to a tax-exempt stockholder may be subject to tax as unrelated
business taxable income. Although we do not believe that we, or any portion of our assets, will be treated as a taxable mortgage pool, no assurance can be given that the IRS might not successfully maintain that such a taxable mortgage pool exists.
For tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an investment in our stock will constitute
unrelated business taxable income unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our stock. Any prospective
investors should consult their tax advisors concerning these set aside and reserve requirements.
Notwithstanding the above, however, a substantial portion of the dividends you receive may constitute UBTI, if we are treated as a pension-held REIT and you are a pension trust which:
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is described in Section 401(a) of the Code; and |
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holds more than 10%, by value, of the interests in the REIT. |
Tax-exempt pension funds that are described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code are referred to below as qualified
trusts.
A REIT is a pension-held REIT if:
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it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that stock owned by a qualified trust shall be treated, for
purposes of the 5/50 Rule, described above, as owned by the beneficiaries of the trust, rather than by the trust itself; and |
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either at least one qualified trust holds more than 25%, by value, of the interests in the REIT, or one or more qualified trusts, each of which owns more than
10%, by value, of the interests in the REIT, holds in the aggregate more than 50%, by value, of the interests in the REIT. |
The percentage of any REIT dividend treated as unrelated business taxable income is equal to the ratio of:
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the unrelated business taxable income earned by the REIT, less directly related expenses, treating the REIT as if it were a qualified trust and therefore
subject to tax on unrelated business taxable income, to |
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the total gross income, less directly related expenses, of the REIT. |
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A de minimis exception applies where the percentage is less than 5% for any year.
As a result of the limitations on the transfer and ownership of stock contained in our charter, we do not expect to be classified as a pension-held REIT.
Taxation of Non-United States Stockholders
The rules
governing federal income taxation of non-United States stockholders are complex and no attempt will be made herein to provide more than a summary of these rules. Non-United States stockholders mean beneficial owners of shares
of our stock that are not United States stockholders (as such term is defined in the discussion above under the heading entitled Taxation of Taxable United States Stockholders).
PROSPECTIVE NON-UNITED STATES STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO
AN INVESTMENT IN OUR STOCK AND OF OUR ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to non-United States stockholders that are not attributable to gain from our sale or exchange of United States real property interests and that are not designated by us as capital gain dividends or retained
capital gains will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. These distributions will generally be subject to a withholding tax equal to 30% of the
distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from an investment in our stock is treated as effectively connected with the non-United States stockholders conduct of a United States trade or
business, the non-United States stockholder generally will be subject to federal income tax at graduated rates in the same manner as United States stockholders are taxed with respect to those distributions, and also may be subject to the 30% branch
profits tax in the case of a non-United States stockholder that is a corporation. We expect to withhold tax at the rate of 30% on the gross amount of any distributions made to a non-United States stockholder unless:
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a lower treaty rate applies and any required form, for example IRS Form W-8BEN, evidencing eligibility for that reduced rate is filed by the non-United States
stockholder with us; or |
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the non-United States stockholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.
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Any portion of the dividends paid to non-United States stockholders that is treated as excess inclusion
income will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate.
Distributions in
excess of our current and accumulated earnings and profits will not be taxable to non-United States stockholders to the extent that these distributions do not exceed the adjusted basis of the stockholders stock, but rather will reduce the
adjusted basis of that stock. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a non-United States stockholders stock, these distributions will give rise to tax liability
if the non-United States stockholder would otherwise be subject to tax on any gain from the sale or disposition of its stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such
distribution may 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 creditable against United
States tax liability, if any, or refundable by the IRS to the extent the distribution is subsequently determined to be in excess of our current and accumulated earnings and profits. We are also required to withhold 10% of any distribution in excess
of our current and accumulated earnings and profits if our stock is a United States real property interest because we are not a domestically controlled REIT, as discussed below. Consequently, although we intend to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that we do not do so, any portion of a distribution not subject to withholding at a rate of 30% may be subject to withholding at a rate of 10%.
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Distributions attributable to our capital gains which are not attributable to
gain from the sale or exchange of a United States real property interest generally will not be subject to income taxation, unless (1) investment in our stock is effectively connected with the non-United States stockholders U.S. trade or
business (or, if an income tax treaty applies, is attributable to a U.S. permanent establishment of the non-United States stockholder), in which case the non-United States stockholder will be subject to the same treatment as United States
stockholders with respect to such gain (except that a corporate non-United States stockholder may also be subject to the 30% branch profits tax), or (2) the non-United States stockholder is a non-resident alien individual who is present in the
United States for 183 days or more during the taxable year and certain other conditions are satisfied, in which case the non-resident alien individual will be subject to a 30% tax on the individuals capital gains.
For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real
property interest, which includes some interests in real property, but generally does not include an interest solely as a creditor in mortgage loans or mortgage-backed securities, will be taxed to a non-United States stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA. Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a non-United States stockholder as if that gain were effectively
connected with the stockholders conduct of a United States trade or business. Non-United States stockholders thus would be taxed at the normal capital gain rates applicable to 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-United States corporate stockholder. We are required to withhold
35% of any distribution that we designate (or, if greater, the amount that we could designate) as a capital gains dividend. The amount withheld is creditable against the non-United States stockholders FIRPTA tax liability.
Gains recognized by a non-United States stockholder upon a sale of our stock generally will not be taxed under FIRPTA if we are
a domestically controlled REIT, which is a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by non-United States stockholders. Because our stock is publicly traded, we
cannot assure our investors that we are or will remain a domestically controlled REIT. Even if we are not a domestically-controlled REIT, however, a non-United States stockholder that owns, actually or constructively, 5% or less of our stock
throughout a specified testing period will not recognize taxable gain on the sale of our stock under FIRPTA if the shares are traded on an established securities market.
If gain from the sale of the stock were subject to taxation under FIRPTA, the non-United States stockholder would be subject to the same treatment as United States
stockholders with respect to that 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-United States corporations. In addition, the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.
Gains not subject to FIRPTA will be taxable to a non-United States stockholder if:
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the non-United States stockholders investment in the stock is effectively connected with a trade or business in the United States, in which case the
non-United States stockholder will be subject to the same treatment as United States stockholders with respect to that gain; or |
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the non-United States stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and other
conditions are met, in which case the nonresident alien individual will be subject to a 30% tax on the individuals capital gains. |
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Information Reporting and Backup Withholding
If the proceeds of a disposition of our stock are paid by or through a U.S. office of a broker-dealer, the payment is generally subject to
information reporting and to backup withholding (currently at a rate of 30%, subject to reduction in years after 2003) unless the disposing non-United States stockholder certifies as to his name, address and non-U.S. status or otherwise establishes
an exemption. Generally, U.S. information reporting and backup withholding will not apply to a payment of disposition proceeds if the payment is made outside the U.S. through a foreign office of a foreign broker-dealer. If the proceeds from a
disposition of our stock are paid to or through a foreign office of a U.S. broker-dealer or a non-U .S. office of a foreign broker-dealer that is (i) a controlled foreign corporation for federal income tax purposes, (ii) a foreign person
50% or more of whose gross income from all sources for a three-year period was effectively connected with a U.S. trade or business, (iii) a foreign partnership with one or more partners who are U.S. persons and who in the aggregate hold more than
50% of the income or capital interest in the partnership, or (iv) a foreign partnership engaged in the conduct of a trade or business in the United States, then (i) backup withholding will not apply unless the broker-dealer has actual knowledge that
the owner is not a foreign stockholder, and (ii) information reporting will not apply if the non-United States stockholder satisfies certification requirements regarding its status as a foreign stockholder.
State, Local and Foreign Taxation
We may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which we transact business or make investments, and our stockholders may be required to pay state, local
and foreign taxes in various state, local and foreign jurisdictions, including those in which they reside. Our state, local and foreign tax treatment may not conform to the federal income tax consequences summarized above. In addition, a
stockholders state, local and foreign tax treatment may not conform to the federal income tax consequences summarized above. Consequently, prospective investors should consult their tax advisors regarding the effect of state, local and foreign
tax laws on an investment in our stock.
The net proceeds to us from the sale of shares of common stock offered
by this prospectus will be used for general corporate purposes.
Except to the extent the Plan Administrator purchases our common
stock in open market transactions, our common stock acquired under the Plan will be sold directly by us through the Plan. We may sell our common stock to stockholders (including brokers or dealers) who, in connection with any resales of such shares,
may be deemed to be underwriters. Such shares, including shares acquired pursuant to request for waivers granted with respect to the cash payment feature of the Plan, may be resold in market transactions (including coverage of short positions) on
any national securities exchange on which shares of our common stock trade or in privately negotiated transactions. Our common stock is currently listed on the American Stock Exchange under the symbol ANH. Under certain circumstances, it
is expected that a portion of the shares of our common stock available for issuance under the Plan will be issued pursuant to such waivers. The difference between the price such owners pay to us for our common stock acquired under the Plan, after
deduction of the applicable discount from the Market Price for Cash Purchases, and the price at which such shares are resold, may be deemed to constitute underwriting commissions received by such owners in connection with such transactions.
Subject to the availability of shares of our common stock registered for issuance under the Plan, there is no
total maximum number of shares that can be issued pursuant to the reinvestment of dividends. From time to time, financial intermediaries may engage in positioning transactions in order to benefit from the discount from the Market Price for Dividend
Reinvestments of common stock acquired through the reinvestment of dividends under the Plan.
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Except with respect to open market purchases of our common stock relating to
reinvested dividends or cash purchases, we will pay any and all brokerage commissions and related expenses incurred in connection with purchases of our common stock under the Plan, up to 5% of the Market Price for Dividend Reinvestments and the
Market Price for Cash Purchases of our common stock. Upon withdrawal by a participant from the Plan by the sale of our common stock held under the Plan, the participant will receive the proceeds of such sale less a nominal fee per transaction paid
to the Plan Administrator (if such resale is made by the Plan Administrator at the request of a participant), any related brokerage commissions and any applicable transfer taxes.
Our common stock may not be available under the Plan in all states. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of our
common stock or other securities in any state or any other jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction.
The validity of our securities offered in this prospectus will be passed
upon for us by Allen Matkins Leck Gamble & Mallory LLP, Century City, California. Selected legal matters related to Maryland law will be passed upon for us by Piper Rudnick LLP.
The financial statements as of December 31, 2001 and 2000, and for each of the
three years in the period ended December 31, 2001, incorporated in this prospectus by reference to the Annual Report on Form 10-K of Anworth Mortgage Asset Corporation for the year ended December 31, 2001, have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to incorporate by
reference the information that we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC under the Securities Exchange Act of 1934 (the Exchange
Act). The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information in this prospectus. We have filed with the SEC and incorporate by reference:
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our annual report on Form 10-K for the fiscal year ended December 31, 2001; |
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our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2002; |
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our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2002; |
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our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2002; and |
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the description of our common stock included in our registration statement on Form 8-A. |
Any documents we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and prior to the termination of the offering
of the securities to which this prospectus relates will automatically be deemed to be incorporated by reference in this prospectus and to be part hereof from the date of filing those documents. Any statement contained in this prospectus or in a
document incorporated by reference shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this prospectus or in any other document which is also incorporated by reference modifies or supersedes that
statement.
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We will provide without charge to each person to whom a copy of this prospectus
is delivered, upon such persons written or oral request, a copy of any and all of the information incorporated by reference in this prospectus, other than exhibits to such documents, unless such exhibits are specifically incorporated by
reference into the information that this prospectus incorporates. Requests should be directed to the Secretary at Anworth Mortgage Asset Corporation, 1299 Ocean Avenue, Suite 250, Santa Monica, California 90401, telephone: (310) 255-4493.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange Commission. You may read and copy the materials we file at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the Public Reference Rooms. Our SEC filings are also available to the public from the SECs World Wide Web site on the Internet at http://www.sec.gov. This site contains reports, proxy
and information statements and other information regarding issuers that file electronically with the SEC. You may also read and copy this information at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
We maintain a site on the Internet at http://www.anworth.com. The information contained in our website is
not part of this prospectus and you should not rely on it in deciding whether to invest in our common stock.
We
have filed a registration statement, of which this prospectus is a part, covering the offered securities. As allowed by Commission rules, this prospectus does not include all of the information contained in the registration statement and the
included exhibits, financial statements and schedules. We refer you to the registration statement, the included exhibits, financial statements and schedules for further information. This prospectus is qualified in its entirety by such other
information.
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APPENDIX I
Schedule of Large Cash Purchases
Year
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Threshold Price And Waiver Discount, If Any, Will Be Set By
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Funds For Large Cash Investments Must Be Received By
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Pricing Period Start
Date
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Large Cash Purchase Investment Date
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2002 |
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December 5 |
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December 9 |
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December 10 |
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December 24 |
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2003 |
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January 21 |
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January 22 |
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January 23 |
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February 7 |
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February 10 |
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February 12 |
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February 13 |
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February 28 |
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March 3 |
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March 5 |
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March 6 |
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March 20 |
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March 25 |
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March 27 |
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March 28 |
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April 11 |
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April 21 |
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April 23 |
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April 24 |
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May 8 |
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May 9 |
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May 13 |
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May 14 |
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May 29 |
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May 30 |
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June 3 |
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June 4 |
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June 18 |
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June 24 |
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June 26 |
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June 27 |
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July 14 |
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July 21 |
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July 23 |
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July 24 |
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August 7 |
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August 8 |
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August 12 |
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August 13 |
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August 27 |
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September 2 |
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September 4 |
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September 5 |
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September 19 |
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September 23 |
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September 25 |
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September 26 |
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October 10 |
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October 20 |
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October 22 |
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October 23 |
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November 6 |
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November 7 |
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November 11 |
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November 12 |
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November 26 |
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December 1 |
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December 3 |
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December 4 |
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December 18 |
PRICING PERIODS ARE AT THE DISCRETION OF ANWORTH MORTGAGE ASSET
CORPORATION. INVESTORS SHOULD NOT RELY SOLELY ON THE ABOVE SCHEDULE AS PRICING PERIODS AND INVESTMENT DATES MAY VARY. FOR MORE INFORMATION, PLEASE CONTACT THE PLAN ADMINISTRATOR AT (718) 921-8391.
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